TUTORIAL QUESTIONS FOR

ACCOUNTING FOR INVESTMENT

IN ASSOCIATE AND JOINT
VENTURE

UGBS
BSc -Accounting
ACCOUNTING FOR INVESTMENT IN ASSOCIATE AND JOINT VENTURE
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LEARNING OBJECTIVES
On completion of this chapter, you should be able to:
 Prepare consolidated financial statements for a group of companies involving one or more
subsidiaries and an associate;
 Explain the accounting treatment of associates and joint ventures using the equity method.

1 Accounting for Investment in Associate

1.1 Regulatory Framework

Accounting for investment in Associates is regulated by IAS 28 ‘Investments in Associates and Joint
Venture

1.2 Definitions
The following terms are used in this Standards with the meanings specified:

An associate is an entity, including an unincorporated entity such as a partnership, over which the
investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

Consolidated financial statements are the financial statements of a group presented as those of a
single economic entity.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities.

The equity method is a method of accounting whereby the investment is initially recognised at cost
and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the
investee. The investor’s profit or loss includes the investor’s share of the profit or loss of the investee
and the investor’s other comprehensive income includes its share of the investee’s other
comprehensive income.

Joint control is the contractually agreed sharing of control over an economic activity, and exists only
when the strategic financial and operating decisions relating to the activity require the unanimous
consent of the parties sharing control (the venturers).

Joint Venture: is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement.

Joint arrangement is an arrangement of which two or moreparties have joint control.

Joint venturer is a party to a joint venture that has joint control of that joint venture.

Separate financial statements are those presented by a parent, an investor in an associate or a venturer
in a jointly controlled entity, in which the investments are accounted for on the basis of the direct
equity interest rather than on the basis of the reported results and net assets of the investees.

Significant influence is the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies.

If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting
power of the investee, it is presumed that the investor has significant influence, unless it can be clearly
demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (eg

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through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the
investor does not have significant influence, unless such influence can be clearly demonstrated. A
substantial or majority ownership by another investor does not necessarily preclude an investor from
having significant influence.

The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
(a) representation on the board of directors or equivalent governing body of the investee;

(b) participation in policy-making processes, including participation in decisions about dividends or

other distributions;

(c) material transactions between the investor and the investee;

(d) interchange of managerial personnel; or

(e) provision of essential technical information.

An entity may own share warrants, share call options, debt or equity instruments that are convertible
into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to
give the entity additional voting power or reduce another party’s voting power over the financial and
operating policies of another entity (ie potential voting rights). The existence and effect of potential
voting rights that are currently exercisable or convertible, including potential voting rights held by
other entities, are considered when assessing whether an entity has significant influence. Potential
voting rights are not currently exercisable or convertible when, for example, they cannot be exercised
or converted until a future date or until the occurrence of a future event.

In assessing whether potential voting rights contribute to significant influence, the entity examines all
facts and circumstances (including the terms of exercise of the potential voting rights and any other
contractual arrangements whether considered individually or in combination) that affect potential
rights, except the intention of management and the financial ability to exercise or convert.

An entity loses significant influence over an investee when it loses the power to participate in the
financial and operating policy decisions of that investee. The loss of significant influence can occur
with or without a change in absolute or relative ownership levels. It could occur, for example, when
an associate becomes subject to the control of a government, court, administrator or regulator. It could
also occur as a result of a contractual agreement.

Financial statements in which the equity method is applied are not separate financial statements, nor
are the financial statements of an entity that does not have a subsidiary, associate or venturer’s
interest in a joint venture.

Separate financial statements are those presented in addition to consolidated financial statements,
financial statements in which investments are accounted for using the equity method and financial
statements in which venturers’ interests in joint ventures are proportionately consolidated. Separate
financial statements may or may not be appended to, or accompany, those financial statements.

1.3 Equity method

Under the equity method, the investment in an associate or a joint venture is initially recognised at
cost and the carrying amount is increased or decreased to recognise the investor’s share of the profit
or loss of the investee after the date of acquisition.

The investor’s share of the profit or loss of the investee is recognised in the investor’s profit or loss.

Distributions received from an investee reduce the carrying amount of the investment.

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Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate
interest in the investee arising from changes in the investee’s equity that have not been recognised in
the investee’s profit or loss. Such changes include those arising from the revaluation of property, plant
and equipment and from foreign exchange translation differences. The investor’s share of those
changes is recognised directly in equity of the investor.

When potential voting rights exist, the investor’s share of profit or loss of the investee and of changes
in the investee’s equity is determined on the basis of present ownership interests and does not reflect
the possible exercise or conversion of potential voting rights.

When an investment in an associate or joint venture previously classified as held for sale no longer
meets the criteria to be so classified, it shall be accounted for using the equity method as from the date
of its classification as held for sale. Financial statements for the periods since classification as held for
sale shall be amended accordingly.

The recognition of income on the basis of distributions received may not be an adequate measure of
the income earned by an investor on an investment in an associate because the distributions received
may bear little relation to the performance of the associate. Because the investor has significant
influence over the associate, the investor has an interest in the associate’s performance and, as a
result, the return on its investment. The investor accounts for this interest by extending the scope of its
financial statements to include its share of profits or losses of such an associate. As a result,
application of the equity method provides more informative reporting of the net assets and profit or
loss of the investor.

An investor shall discontinue the use of the equity method from the date that it ceases to have
significant influence over an associate and shall account for the investment in accordance with IAS 39
from that date, provided the associate does not become a subsidiary or a joint venture as defined in
IAS 31.

The carrying amount of the investment at the date that it ceases to be an associate shall be regarded as
its cost on initial measurement as a financial asset.

1.3.1 Application of the Equity Method

An entity with joint control of, or significant influence over, an investee shall account for its
investment in an associate or joint venture using the equity method except when that investment
qualifies for exemption as spelt out below.

1.3.2 Exemptions from applying the equity method.

An entity need not apply the equity method to its investment in an associate or a joint venture if the
entity is a parent that is exempt from preparing consolidated financial statements by the scope
exception of IFRS 10, or if all the following apply:

(i) The entity is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity

and all its other owners, including those not otherwise entitled to vote, have been informed about, and
do not object to, the entity not applying the equity method. statements;
(ii) The entity’s debt or equity instruments are not traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local and regional markets);
(iii) The entity did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any class of
instruments in a public market; and
iv) The ultimate or any intermediate parent produces consolidated financial statements that are
available for public use and comply with IFRSs

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v) The investment is classified as held for sale in accordance with IFRS 5

When an investment in an associate or a joint venture is held by, or is held indirectly through, an
entity that is a venture capital organization, or a mutual fund, unit trust and similar entities including
investment-linked insurance funds, the entity may elect to measaure investments in those
associates and joint ventures at fair value through profit or loss.

1.3.3 Equity Method Procedures

Many of the procedures appropriate for the application of the equity method are similar to the
consolidation procedures described in IAS 27. Furthermore, the concepts underlying the procedures
used in accounting for the acquisition of a subsidiary are also adopted in accounting for the
acquisition of an investment in an associate.

A group’s share in an associate or joint venture is the aggregate of the holdings in that associate by the
parent and its subsidiaries. The holdings of the group’s other associates or joint ventures are ignored
for this purpose. When an associate has subsidiaries, associates, or joint ventures, the profits or losses
and net assets taken into account in applying the equity method are those recognised in the associate’s
financial statements (including the associate’s share of the profits or losses and net assets of its
associates and joint ventures), after any adjustments necessary to give effect to uniform accounting
policies .

Gains and losses resulting from ‘upstream’ and ‘downstream’ transactions between an investor
(including its consolidated subsidiaries) and an associate are recognised in the investor’s financial
statements only to the extent of unrelated investors’ interests in the associate. ‘Upstream’ transactions
are, for example, sales of assets from an associate to the investor. ‘Downstream’ transactions are, for
example, sales of assets from the investor to an associate. The investor’s share in the associate’s
profits and losses resulting from these transactions is eliminated.

An investment in an associate is accounted for using the equity method from the date on which it
becomes an associate. On acquisition of the investment any difference between the cost of the
investment and the investor’s share of the net fair value of the associate ’s identifiable assets,
liabilities and contingent liabilities is accounted for in accordance with IFRS 3 Business
Combinations. Therefore:

(a) Goodwill relating to an associate is included in the carrying amount of the investment.
However, amortisation of that goodwill is not permitted and is therefore not included in the
determination of the investor’s share of the associate’s profits or losses.

b) Any excess of the investor’s share of the net fair value of the associate’s identifiable assets,
liabilities and contingent liabilities over the cost of the investment is excluded from the
carrying amount of the investment and is instead included as income in the determination of
the investor’s share of the associate’s profit or loss in the period in which the investment is
acquired.

Appropriate adjustments to the investor’s share of the associate’s profits or losses after acquisition are
also made to the account, for example, for depreciation of the depreciable assets based on their fair
values at the acquisition date. Similarly, appropriate adjustments to the investor’s share of the
associate’s profits or losses after acquisition are made for impairment losses recognised by the
associate, such as for goodwill or property, plant and equipment.

The most recent available financial statements of the associate are used by the investor in applying the
equity method. When the reporting dates of the investor and the associate are different, the associate
prepares, for the use of the investor, financial statements as of the same date as the financial
statements of the investor unless it is impracticable to do so.

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 When, the financial statements of an associate used in applying the equity method are prepared as of
a different reporting date from that of the investor, adjustments shall be made for the effects of
significant transactions or events that occur between that date and the date of the investor’s financial
statements. In any case, the difference between the reporting date of the associate and that of the
investor shall be no more than three months. The length of the reporting periods and any difference in
the reporting dates shall be the same from period to period.

The investor’s financial statements shall be prepared using uniform accounting policies for like
transactions and events in similar circumstances. If an associate or joint venture uses accounting
policies other than those of the investor for like transactions and events in similar circumstances,
adjustments shall be made to conform the associate’s accounting policies to those of the investor
when the associate’s financial statements are used by the investor in applying the equity method.

If an associate or joint venture has outstanding cumulative preference shares that are held by parties
other than the investor and classified as equity, the investor computes its share of profits or losses
after adjusting for the dividends on such shares, whether or not the dividends have been declared.

If an investor’s share of losses of an associate or joint venture equals or exceeds its interest in the
associate, the investor discontinues recognising its share of further losses. The interest in an associate
or joint venture is the carrying amount of the investment in the associate or joint venture under the
equity method together with any long-term interests that, in substance, form part of the investor’s net
investment in the associate or joint venture. For example, an item for which settlement is neither
planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity’s
investment in that associate or joint venture. Such items may include preference shares and long-term
receivables or loans but do not include trade receivables, trade payables or any long-term receivables
for which adequate collateral exists, such as secured loans. Losses recognised under the equity
method in excess of the investor’s investment in ordinary shares are applied to the other components
of the investor’s interest in an associate or joint venture in the reverse order of their seniority (ie
priority in liquidation).

After the investor’s interest is reduced to zero, additional losses are provided for, and a liability is
recognised, only to the extent that the investor has incurred legal or constructive obligations or made
payments on behalf of the associate or joint venture. If the associate or joint venture subsequently
reports profits, the investor resumes recognising its share of those profits only after its share of the
profits equals the share of losses not recognised.

1.3.4 Impairment losses

After application of the equity method, including recognising the associate’s or joint venture’s losses,
the investor applies the requirements of IAS 36 and IFRS 9 to determine whether it is necessary to
recognise any additional impairment loss with respect to the investor’s net investment in the associate
or joint venture.

The investor also applies the requirements of IAS 36 and IFRS 9 to determine whether any additional
impairment loss is recognised with respect to the investor’s interest in the associate that does not
constitute part of the net investment and the amount of that impairment loss.

Because goodwill included in the carrying amount of an investment in an associate is not separately
recognised, it is not tested for impairment separately by applying the requirements for impairment
testing of goodwill in IAS 36 Impairment of Assets. Instead, the entire carrying amount of the
investment is tested under IAS 36 for impairment, by comparing its recoverable amount (higher of
value in use and fair value less costs to sell) with its carrying amount, whenever application of the
requirements in IFRS 9 indicates that the investment may be impaired.

In determining the value in use of the investment, an entity estimates:

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(a) its share of the present value of the estimated future cash flows expected to be generated by the
associate, including the cash flows from the operations of the associate and the proceeds on the
ultimate disposal of the investment; or

(b) the present value of the estimated future cash flows expected to arise from dividends to be
received from the investment and from its ultimate disposal.

Using appropriate assumptions, both methods give the same result.

The recoverable amount of an investment in an associate is assessed for each associate, unless the
associate does not generate cash inflows from continuing use that are largely independent of those
from other assets of the entity.

1.3.5 Application of the Equity Method – In the Separate Financial Statement of the Investor
 In the case of an investor that issues consolidated financial statements ( because it has
subsidiaries), investment in associate should be either accounted for at cost, or in accordance
with IFRS 9 in its financial statements
 If an investor that does not issue consolidated financial statement(i.e has no subsidiaries) has
an investment in an associate, this should be included in the financial statements of the
investor using the equity method

1.3.6 Application of the Equity Method in accounting for Associate in consolidated financial
statements
 Investment in an associate is accounted for using the equity method from the date on which it
becomes an associate.
 In the CSoFP, the investment in an associate is initially recognised at cost and the carrying
amount is increased or decreased to recognise the investor’s share of the profit or loss of the
investee after the date of acquisition.
 In the consolidated statement of profit or loss and other comprehensive income (CSoCI),
group’s share of associate’s profit after tax is recognized as a separate line item ( after
operating profit)
 Distributions received from an investee reduce the carrying amount of the investment.

1.3.7 Required adjustments with Associates

i) Fair value and Depreciation adjustments
ii) Provisions for unrealized profit

i) Fair value and Depreciation adjustments

When calculating the fair value reserves for the associate, the effect of the fair value adjustments
should be included The fir value adjustment may then result in a depreciation adjustment after
acquisition.

iii) Provisions for unrealized profit

IAS 28 requires unrealized profits on transactions between the group and the associate to be
eliminated to the extent of the investor’s interest. The provision for the unrealized profit
adjustment is calculated as : PURP= Investors share (%) X URP on inventory

The transaction between the investor and the associate may be classified as ‘Up-stream
transaction’ and ‘Down-stream transaction’

Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions between an investor
(including its consolidated subsidiaries) and an associate are recognised in the investor’s financial
statements only to the extent of unrelated investors’ interests in the associate. ‘Upstream’
transactions are, for example, sales of assets from an associate to the investor. ‘Downstream’

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 transactions are, for example, sales of assets from the investor to an associate. The investor’s
share in the associate’s profits and losses resulting from these transactions is eliminated.

Note: Intercompany transactions between the group ( whether with the Investor entity or a
subsidiary of the investor entity ) and the associate are not eliminated within the consolidated
statement of profit or loss and other comprehensive income or consolidated statement of
financial position. This is because the associate is outside of the group . Thus the
transactions/balances are with a third party to the group and so may be reported within the
group financial statements. However, [as explained, in the immediately preceding paragraph] ,
unrealized profit on transactions must be eliminated on consolidation..

a) Upstream Transactions [Associate sells to Investor]

In the Consolidated Statement of Financial Position

 Reduce [Debit] Retained earnings
 Reduce [Credit[ Inventory

In the Consolidated Statement of profit or loss and other comprehensive income

 Reduce [Debit ] Income from Associate

b) Down-stream transactions [ Investor sells to Associate]

In the Consolidated Statement of Financial Position
 Reduce [Debit] Retained earnings
 Reduce [Credit[ Investment in Associate

In the Consolidated Statement of profit or loss and other comprehensive income

 Increase [Debit ] Cost of sales

Illustration 1
Gyedi Industrial Holding Company (GIHOC) has three subsidiaries. On 1 January 2009, it acquired
50,000 shares of Asona Bottling Company(ABC) in the stock market at GHS2.40 per share. The
stated capital of ABC consists of 200,000 shares issued at GHS1.00 per share. The retained earnings
of ABC as at 1 January 2009 was GHS60,000. In the year ended 31 December 2009, ABC earned
profit after tax of GHS48,000 from which a it declared a dividend of GHS20,000

Required
How will ABC’s financial position and operational results be accounted for in the individual and
consolidated accounts of GIHOC for the year ended 31 December 2009?

Solution to illustration 1
In the separate financial statement of GIHOC
In the individual statement of financial position of the GIHOC, Investment in Associate ABC will be
recorded on 1 January 2009 at cost of GHS120,000. Unless there is impairment in the value of the
investment, this amount will remain in the individual statement of financial position of GIHOC as
such.

In the individual statement of profit or loss and other comprehensive income/statement of profit or
loss and other comprehensive income, it will record Dividend income received of GHS 5,000 (25%
of the dividend declared)

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In the Consolidated Financial Statements
In the CSoFP as at 31 December 2009, Investment in Associate ABC will be shown at cost + share
of post acquisition retained earnings i.e GHS120,000 + 25% of (48,000-20,000) =
GHS 127,000

In the CIS/CSoCI, the share of profit after tax of associate of 25% of GHS48,000 = GHS12,000 will
be shown as a separate lie item (after operating profit)

Illustration 2
Alavanyo Plc, a holding company with many subsidiaries also holds 30% of the equity shares in
Dzibodi Plc. During the year ended 31 December 2009, Alavanyo made sales of GH20O,000 to
Dzibodi representing cost plus 25% mark up . At the year end Dzibodi has all these goods still in
inventories
Show the relevant consolidation adjustments in respect of this transaction

Solution to illustration 2
Alavanyo has made an unrealized profit of GHS40,000 (25/125 X GHS200,000) on its sale to the
associate. The group’s share of this is 30% = GHS12,000. This must be eliminated
Debit Retained Earning of Alavanyo GHS12,000
Credit Investment in Associate Dzibodi GHS12,000
Because the sale was made to the associate, the group’s share of the unsold inventories forms part of
the investment in Associate at the year end

If the sale had been made by Associate Dzibodi to Investor Alavanyo the consolidation adjustment
would have been as follows:
Debit Retained Earnings of Associate Dzibodi GHS12,000
Credit Inventories of Alavanyo GHS12,000
In preparing the CIS/CSoCI, the GHS12,000 would be deducted from the group’s share of the the
associate’s profit

Illustration 3
On 1 August 2017 Patience Plc purchased 18 million of a total of 24 million equity shares in Abotare
Plc. The acquisition was through a share exchange of two shares in Patience Plc for every three shares
in Abotare Plc. The market price of Patience Plc’s shares at 1 August 2017 was GHS5·75 per share.
Patience Plc will also pay in cash on 31 July 2019 (two years after acquisition) GHS2·42 per acquired
share of Abotare Plc. Patience Plc’s cost of capital is 10% per annum. The reserves of Abotare Plc on
1 April 2017 were GHS69 million. Patience Plc has held an investment of 30% of the equity shares in
Adom Plc for many years.
The summarised statement of profit or loss and other comprehensive incomes for the three companies
for the year ended 31 March 2018 are:
Patience Plc Abotare Plc Adom Plc
GHS’000 GHS’000 GHS’000
Revenue 150,000 78,000 80,000
Cost of sales (94,000) (51,000) (60,000)
–––––––– ––––––– –––––––
Gross profit 56,000 27,000 20,000
Distribution costs (7,400) (3,000) (3,500)
Administrative expenses (12,500) (6,000) (6,500)
Finance costs (note (ii)) (2,000) (900) nil
–––––––– ––––––– –––––––
Profit before tax 34,100 17,100 10,000
Income tax expense (10,400) (3,600) (4,000)
–––––––– ––––––– –––––––
Profit for the period 23,700 13,500 6,000
–––––––– ––––––– –––––––

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The following information is relevant:
(i) The fair values of the net assets of Abotare Plc at the date of acquisition were equal to their
carrying amounts with the exception of property and plant. Property and plant had fair
values of GHS4·1 million and GHS2·4 million respectively in excess of their carrying
amounts. The increase in the fair value of the property would create additional
depreciation of GHS200,000 in the consolidated financial statements in the post
acquisition period to 31 March 2018 and the plant had a remaining life of four years
(straight-line depreciation) at the date of acquisition of Abotare Plc. All depreciation is
treated as part of cost of sales. The fair values have not been reflected in Abotare Plc’s
financial statements. No fair value adjustments were required on the acquisition of Adom
Plc.

(ii) The finance costs of Patience Plc do not include the finance cost on the deferred
consideration.

(iii) Prior to its acquisition, Abotare Plc had been a good customer of Patience Plc. In the year to
31 March 2018, Patience Plc sold goods at a selling price of GHS1·25 million per month
to Abotare Plc both before and after its acquisition. Patience Plc made a profit of 20% on
the cost of these sales. At 31 March 2018 Abotare Plc still held inventory of GHS3
million (at cost to Abotare Plc) of goods purchased in the post acquisition period from
Patience Plc.

(iv) An impairment test on the goodwill of Abotare Plc conducted on 31 March 2018 concluded
that it should be written down by GHS2 million. The value of the investment in Adom Plc
was not impaired.

(v) All items in the above statement of profit or loss and other comprehensive incomes are
deemed to accrue evenly over the year.

(vi) Ignore deferred tax.

(vii) Required:

(a) Calculate the goodwill arising on the acquisition of Abotare Plc at 1 August 2017.
(b) Prepare the consolidated statement of profit or loss and other comprehensive income for the
Patience Plc Group for the year ended 31 March 2018.
Note: assume that the investment in Adom Plc has been accounted for using the equity method since
its acquisition.
(c) At 31 March 2018 the other equity shares (70%) in Adom Plc were owned by many separate
investors. Shortly after this date Spekulate (a company unrelated to Patience Plc) accumulated a 60%
interest in Adom Plc by buying shares from the other shareholders. In May 2018 a meeting of the
board of directors of Adom Plc was held at which Patience Plc lost its seat on Adom Plc’s board.

Required:
Explain, with reasons, the accounting treatment Patience Plc should adopt for its investment in
Adom Plc when it prepares its financial statements for the year ending 31 March 2019.

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Solution to illustration 3
1 (a) Cost of control in Abotare: GHS’000 GHS’000
Consideration
Shares (18,000 x 2/3 x GHS5·75) 69,000
Deferred payment (18,000 x 2·42/1·21 (see below)) 36,000
––––––––
105,000
Less
Equity shares 24,000
Pre-acquisition reserves:
At 1 April 2017 69,000
To date of acquisition (13,500 x 4/12) 4,500
Fair value adjustments (4,100 + 2,400) 6,500
––––––––
104,000 x 75% 104,000 (78,000)
––––––––
Goodwill 27,000
––––––––
GHS1 compounded for two years at 10% would be worth GHS1·21.
The acquisition of 18 million out of a total of 24 million equity shares is a 75% interest.

(b) Patience Group

Consolidated statement of profit or loss and other comprehensive income for the year ended 31 March
2018
GHS’000
Revenue (150,000 + (78,000 x 8/12) – (1,250 x 8 months intra group)) 192,000
Cost of sales (w (i)) (119,100)
–––––––––
Gross profit 72,900
Distribution costs (7,400 + (3,000 x 8/12)) (9,400)
Administrative expenses (12,500 + (6,000 x 8/12)) (16,500)
Finance costs (w (ii)) (5,000)
Impairment of goodwill (2,000)
Share of profit from associate (6,000 x 30%) 1,800
Profit before tax 41,800
Income tax expense (10,400 + (3,600 x 8/12)) (12,800)
Profit for the year 29,000
Attributable to:
Equity holders of the parent 26,900
NCI (w (iii)) 2,100
–––––––––
29,000
(c) An associate is defined by IAS 28 Investments in Associates as an investment over which an
investor has significant influence. There are several indicators of significant influence, but the most
important are usually considered to be a holding of 20% or more of the voting shares and board
representation. Therefore it was reasonable to assume that the investment in Adom (at 31 March
2018) represented an associate and was correctly accounted for under the equity accounting method.

The current position (from May 2018) is that although Patience still owns 30% of Adom’s shares,
Adom has become a subsidiary of Spekulate as it has acquired 60% of Adom’s shares. Adom is now
under the control of Spekulate (part of the definition of being a subsidiary), therefore it is difficult to
see how Patience can now exert significant influence over Adom. The fact that Patience has lost its
seat on Adom’s board seems to reinforce this point. In these circumstances the investment in Adom
falls to be treated under IFRS 9 Financial Instruments: Recognition and Measurement. It will cease to

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be equity accounted from the date of loss of significant influence. Its carrying amount at that date will
be its initial recognition value under IFRS 9 and thereafter it will be carried at fair value.

Workings
(i) Cost of sales GHS’000 GHS’000
Patience 94,000
Abotare (51,000 x 8/12) 34,000
Intra group purchases (1,250 x 8 months) (10,000)
Additional depreciation: plant (2,400/ 4 years x 8/12) 400
property (per question) 200

600
Unrealised profit in inventories (3,000 x 20/120) 500
––––––––
119,100
––––––––
Note: for both sales revenues and cost of sales, only the post acquisition intra group trading should be
eliminated.

(ii) Finance costs GHS’000

Patience per question 2,000
Unwinding interest – deferred consideration (36,000 x 10% x 8/12) 2,400
Abotare (900 x 8/12) 600
––––––
5,000
––––––
(iii) Non-controlling interest
Abotare’s post acquisition profit (13,500 x 8/12) 9,000
Less post acquisition additional depreciation (w (i)) (600)
––––––
8,400

x 25% = 2,100

Illustration 4
Victory Plc has investment in two companies, Happy Plc and Comfort Plc.
The separate financial statements of the three entities for 2022 are as below:
Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2022
Victory Happy Plc Comfort Plc
GHS GHS GHS
Sales Revenue 400,000 150,000 250,000
Cost of sales (300,000) (100,000) (180,000)
----------- ----------- -----------
Gross Profit 100,000 50,000 70,000
Operating expenses (60,000) (47,000) (65,000)
Investment income 1,000 - -
----------- --------- ------------
Net Profit before Tax 41,000 3,000 5,000
Taxation (13,000) (1,000) (1,500)
---------- --------- ----------
Net Profit for the period 28,000 2,000 3,500
Other comprehensive income - - -
--------- ---------- --------
Total Comprehensive Income 28,000 2,000 3,500
===== ===== ====

11
Statement of Financial Position as at 31 December 2022
Victory Plc Happy Plc Comfort Plc
GHS GHS GHS
ASSETS
Non-current assets
Property, plant and equipment 610,000 20,500 32,000
Investments in shares 41,000 - -
----------- --------- ---------
651,000 20,500 32,000
Current assets
Inventories 188,000 9,000 16,000
Trade and other receivables 130,000 21,000 10,000
Cash and cash equivalents 6,000 1,500 1,500
--------- --------- ---------
324,000 31,500 27,500
Total Assets 975,000 52,000 59,500
====== ===== =====
EQUITY AND LIABILITIES
Equity
Ordinary shares [issued at GHS 1.00] 356,000 - 25,000
Ordinary shares [issued at GHS0.50] - 20,000 -
Retained Earnings 417,830 4,500 9,900
--------- --------- --------
773,830 24,500 34,900

Current liabilities
Trade and other payables 178,000 25,500 23,400
Taxation 23,170 2,000 1,200
--------- ---------- --------
201,170 27,500 24,600
Total equity and liabilities 975,000 52,000 59,500
====== ===== =====

Additional information
i) Victory acquired 6,250 shares of Comfort Plc in 2015 at a total cost of GHS12,000. This
acquisition gives Victory Plc significant influence over Comfort Plc. At the date of acquisition,
Comfort Plc’s retained earnings had a balance of GHS4,300. The fair values of Comfort Plc’s assets
and liabilities approximated their carrying amounts.

ii) On 1 January 2022, Victory Plc acquired 32,000 of Happy Plc’s shares at a total cost of
GHS29,000. At the date of acquisition, The fair values of the assets and liabilities approximated their
carrying amounts except a piece of land (with a carrying amount of GHS2,000) which had a fair value
of GHS2,500. This fair valuation adjustment has not yet been reflected in the separate financial
statement of Happy Plc.

iii) The investment income of Victory Plc relates to dividends received from the investee entities
as follows: Happy GHS800
Comfort GHS200
Victory Plc also paid interim dividend of GHS GHS10,000

iv) In 2022, Happy Plc sold goods to Victory Plc at a mark-up of 20%. The goods cost
Happy Plc GHS1,000 and one-half remained in inventory at the year end.

12
v) Victory Plc undertakes annual impairment reviews of goodwill . An impairment loss of
GHS1,500 has been identified in respect of Happy Plc for the year ended 31 December 2022. So far,
no impairment loss relating to Comfort Plc is identified.

vi) The group has a policy of measuring non-controlling interest as proportionate share of net
asset of subsidiary .
Required
a) Prepare the consolidated statement of Profit or loss and other comprehensive income for
Victory Plc group for the year ended 31 December 2022.
b) Prepare the consolidated statement of financial position of Victory Plc as at 31
December 2022.

Answer to Illustration 4
Victory Plc Group
Consolidated Statement of Profit or Loss and Other Comprehensive Income for the Year Ended
31 December 2022
GHS
Sales (400,000+150,000-1200) 548,800
Cost of sales (300,000+100,000+100 -1200) (398,900)
-------------
Gross profit 149,900
Operating expenses(60,000+47,000) (107,000)
Goodwill impairment (1,500)
-------------
Operating profit 41,400
Share of profit of Associate (25% of 3500) 875
---------
Net profit before taxation 42,275
Taxation (13,000+1,000) (14,000)
----------
Profit for the period 28,275
-=====
Attributable to NCI [20% of (2,000-100)] 380
Members of Victory 27,895
-----------
28,275
======

Consolidated Statement of Financial Position as At 31 December 2022

ASSETS GHS
Non-current Assets
PPE (610,000+20,500+500) 631,000
Investment in Associate 13,400
Goodwill 8,300
-----------
652,700
----------
Current Assets
Inventories (188,000+9,000 -100) 196,900
Trade and other receivables (130,000+21,000) 151,000
Cash and cash equivalent (6,000+1,500) 7,500
-----------
355,400
-----------
Total Assets 1,008,100

13
EQUITY AND LIABILITIES
Equity
Stated capital 356,000
Retained earnings 418,450
-----------
774,450
NCI 4,980
-----------
779,430
-----------
Trade payables 203,500
Taxation 25,170
------------
228,670
----------
Equity and liabilities 1,008,100
=======

Workings

1 Control structure
Happy Comfort

Victory 80% 25%

NC1 20% -
Others - 75%
==== ======

2. Goodwill
Cost of Investment 29,000
Net Assets
Share capital 20,000
Pre-acquisition retained earnings 3,500
Revaluation surplus 500
-------
80% interest 24,000 19,200
--------- ---------
Goodwill 9,800
Impairment (1,500)
---------
Balance c/d 8,300
======

3. Intra-group adjustments
a) Sales
DR Sales 1,200
CR Cost of sales 1,200

b) URP
DR Cost of sales 100
CR Inventory 100

14
4 NC1 (CSOFP)
Share capital 20,000
Retained earnings (4500-100) 4,400
Revaluation surplus 500
---------
24,900
---------
20% interest 4,980
=====
5 Investment in associate
Cost 12,000
Share of post-acquisition profit
(25% of (9900-4300) 1,400
-------
13,400
=====
6 Consolidated retained earnings
Victory: Balance b/d as at 31 Dec 2022 417,830
Goodwill impairment (1,500)
Happy Share of post acquisition retained earnings
[ 80% of (2,000-100) -1,000] 720
Comfort 25% of (9,900 -4300) 1,400
-----------
418,450
======
OR
Balance b/f as at 1 January 2022 :
Victory (417,830 -18,000) 399,830
Comfort [(25% of (7,200 -4300)] 725
Profit for the year 27,895
Dividend paid (10,000)
-----------
418,450
======
Illustration 5
Below are the separate financial statements of Papa Plc and two investee companies which also
operate in the same industry as the investor entity.
Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December
2022
Papa Plc Susuka Plc Obra Plc
GHS’000 GHS’000 GHS’000
Revenue 92,500 45,000 30,000
Cost of sales (70,500 ) (36,000 ) (18,000)
Gross profit 22,000 9,000 12,000
Distribution costs (2,500 ) (1,200 ) (1,000)
Administrative expenses (5,500 ) (2,400 ) (2,000)
Finance costs (100 ) nil (nil)
Profit before tax 13,900 5,400 9,000
Income tax expense (3,900 ) (1,500 ) (2,200)
Profit for the year 10,000 3,900 6,800
Other comprehensive income:
Gain on revaluation of land 500 nil nil
––––––– ––––––– -------
Total comprehensive income 10,500 3,900 6,800
––––––– ––––––– -------

15
Statements of financial position as at 31 December 2022

Papa Plc Susuka Plc Obra Plc

GHS’000 GHS’000 GHS’000
Non-current assets
Property, plant and equipment 25,500 13,900 15,000
Investments 5,400 nil nil
––––––– ––––––– ---------
30,900 13,900 15,000
Current assets 12,500 2,400 3,000
––––––– ––––––– --------
Total assets 43,400 16,300 18,000
––––––– ––––––– ---------
Equity and liabilities
Equity
Equity shares of GHS1 each 15,000 5,000 6,000
Land revaluation reserve – 31 December 2022 2,000 nil nil
Other equity reserve – 31 December 2022 500 nil nil
Retained earnings 12,900 4,500 5,000
––––––– ––––––– -------
30,400 9,500 11,000
Non-current liabilities
20% loan notes 3,000 nil nil
Current liabilities 10,000 6,800 7,000
––––––– ––––––– -------
Total equity and liabilities 43,400 16,300 18,000
––––––– ––––––– ----------
The following information is relevant:

i) On 1 September 2022, Papa Plc acquired 80% of the equity share capital of Susuka Plc. The
consideration consisted of two elements: a share exchange of three shares in Papa Plc for every five
acquired shares in Susuka Plc and the issue of a GHS100 6% loan note for every 500 shares acquired
in Susuka Plc. The share issue has not yet been recorded by Papa Plc, but the issue of the loan notes
has been recorded. At the date of acquisition, shares in Papa Plc had a market value of GHS5 each and
the shares of Susuka had a stock market price of GHS3·50 each.

Papa had earlier, on 1 July 2022, acquired 2.4 million shares in Obra Plc on the stock market at a
price of GHS1.50 per share.

(ii) At the date of acquisition, the fair values of Susuka Plc’s assets were equal to their carrying
amounts with the exception of its property. This had a fair value of GHS1·2 million below its carrying
amount. This would lead to a reduction of the depreciation charge (in cost of sales) of GHS50,000 in
the post-acquisition period. Susuka Plc has not incorporated this value change into its separate
financial statements.

Papa’s group policy is to revalue all properties to current value at each year end. On 31 December
2022, the value of Susuka’s property was unchanged from its value at acquisition, but the land
element of Papa Plc’s property had increased in value by GHS500,000 as shown in other
comprehensive income.

(iii) Sales from Susuka Plc to Papa Plc throughout the year ended 31 December 2022 was GHS12
million. Susuka made a mark-up on cost of 25% on these sales. Papa Plc had GHS2 million (at cost to
Papa Plc) of inventory that had been supplied in the post-acquisition period by Susuka Plc as at 31
December 2022.

16
(iv) In December 2022, Papa Plc sold goods to Obra Plc for GHS2,000,000, thus achieving a profit
mark-up of 25%. The entire consignment remained unsold and included in the inventory of Obra Plc
as at 31 December 2022.

(v) Papa’s investments include some financial assets fair valued through OCI that have increased in
value by GHS300,000 during the year. The other equity reserve relates to these investments and is
based on their value as at 31 December 2021. There were no acquisitions or disposals of any of these
investments during the year ended 31 December 2022.
vi) Papa’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this
purpose Susuka’s share price at that date can be deemed to be representative of the fair value of the
shares held by the non-controlling interest.
(vii) It was determined at the year end that 10% of the goodwill relating to the acquisition of Susuka
was impaired.
Required:
(1) Prepare the consolidated statement of profit or loss and other comprehensive income for
Papa Plc Group for the year ended 31 December 2022.
(II) Prepare the consolidated statement of financial position for Papa Plc Group as at 31
December 2022.

Answer to Illustration 5
1 (a) Papa Plc Group
Consolidated statement of profit or loss and other comprehensive income for the year ended 31
December 2022
GHS’000
Revenue (92,500 + (45,000 x 4/12) – 4,000 intra-group sales) 103,500
Cost of sales (w (i)) (79,010 )
––––––––
Gross profit 24,490
Distribution costs (2,500 + (1,200 x 4/12)) (2,900 )
Administrative expenses (5,500 + (2,400 x 4/12)) (6,300 )
Goodwill impairment (930)
----------
Net operating profit 14,360
Share of profit of associate 1,360
----------
16,810
Finance costs (100 )
––––––––
Profi t before tax 15,620
Income tax expense (3,900 + (1,500 x 4/12)) (4,400 )
––––––––
Profi t for the year 11,220
––––––––
Other comprehensive income:
Gain on available-for-sale investments 300
Gain on revaluation of property 500
––––––––
Total other comprehensive income for the year 800
––––––––
Total comprehensive income 12,020
––––––––
Profi t for year attributable to:
Equity holders of the parent 11,216
Non-controlling interest ((1,300 see below – 400 URP + 50
reduced depreciation)-930 impairment loss x 20%) 4

17
 ––––––––
11,220
––––––––
Total comprehensive income attributable to:
Equity holders of the parent 12,016
Non-controlling interest 4
––––––––
12,020
––––––––
Senyo’s profi ts for the year ended 31 December 2022 of GHS3·9 million are GHS2·6 million (3,900
x 8/12) pre-acquisition and GHS1·3 million (3,900 x 4/12) post-acquisition.

(b) Consolidated statement of financial position as at 31 December 2022.

GHS’000
Assets
Non-current assets
Property, plant and equipment (w (ii)) 38,250
Goodwill (w (iii)) 8,370
Investment in Associate 4,800
FA -FVTOCI (5,400 – (3,600 + 800) consideration + 300 gain) 1,300
–––––––
52,720
Current assets (w (iv)) 14,150
–––––––
Total assets 66,870
–––––––
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of GHS1 each ((15,000 +12,000) w (iii)) 27,000
Land revaluation reserve 2,000
Other equity reserve (500 + 300) 800
Retained earnings (w (v)) 14,116
–––––––
43,916
Non-controlling interest (w (vi)) 3,504
–––––––
Total equity 47,420
Non-current liabilities
6% loan notes 3,000
Current liabilities (10,000 + 6,800 – 350 intra group balance) 16,450
–––––––
Total equity and liabilities 66,870
–––––––
Workings in GHS’000
(i) Cost of sales
Papa 70,500
Senyo (36,000 x 4/12) 12,000
Intra-group purchases (4,000 )
URP in inventory 400
Excess depreciation charge (50)
URP-Associate 160
–––––––
79,010
–––––––

18
ii) Analysis of Cost of Investment GHS’000
Total per the SoFP 5,400

Investment in subsidiary [4,000,000 shares/500 shares x GHS100] (800)

Investment in Associate [2,400,000 shares x GHS1.50] (3,600)
----------
Investment in FA –FVTOCI (balancing figure) 1,000
FV Gain 300
--------
1,300
======
The unrealised profit (URP) in inventory is calculated as GHS2 million x 25/125 = GHS400,000.
(iii) Non-current assets
Papa 25,500
Senyo 13,900
Fair value reduction at acquisition ( 1,200)
Excess depreciation 50
–––––––
38,250
–––––––
(iii) Goodwill in Senyo
Investment at cost
Shares (5,000 x 80% x 3/5 x GHS5) 12,000
6% loan notes (5,000 x 80% x 100/500) 800
–––––––
12,800
Fair value of NCI 3500
-------
16,300
--------

Stated capital 5,000

Pre-acquisition retained earnings 3,200
Adds: fair value adjustment for property (1,200)
` ––––––
Net assets at date of acquisition 7,000
–––––––
Goodwill 9,300
Impairment (930)
------
8,370
====
The 2·4 million shares (5,000 x 80% x 3/5) issued by Papa at GHS5 each would be recorded as share
capital of GHS12 million.
(iv) Current assets
Papa 12,500
Senyo 2,400
URP in inventory (400 )
Intra-group balance (350 )
–––––––
14,150
–––––––

19
(v) Retained earnings
Papa 12,900
Senyo’s post-acquisition adjusted profit
((1,300 – 400 URP +50 excess dep –
930 impairment]) x 80%) 16
Associate’s post acq profit 1,360
URP –Associate (160)
–––––––
14,116
–––––––

(vi) Non-controlling interest in statement of financial position

At date of acquisition 3,500
Post-acquisition profit from income statement 4
–––––––
3,504
–––––––

Investment in associate
Cost [2.4 m x 1.5] 3,600
Post acq retained profit 1,360
URP (160)
-------
4,800
====
Illustration 6
On 1 October 2006 Parent acquired the following non-current investments:
– 3 million equity shares in Subsidiary by an exchange of one share in Parent for every two shares in
Subsidiary plus GHS1 per acquired Subsidiary share in cash. The market price of each Parent share at
the date of acquisition was GHS6.
– 30% of the equity shares of Associate at a cost of GHS7·50 per share in cash.
Only the cash consideration of the above investments has been recorded by Parent.

The summarised draft balance sheets of the three companies at 30 September 2007 are:
Parent Subsidiary Associate
GHS’000 GHS’000 GHS’000
Assets
Non-current assets
Property, plant and equipment 18,400 10,400 18,000
Investments in Subsidiary and Associate 12,000 nil nil
FA-FVTOCI 6,500 nil nil
––––––– ––––––– –––––––
36,900 10,400 18,000
Current assets
Inventory 6,900 6,200 3,600
Trade receivables 3,200 1,500 2,400
––––––– ––––––– –––––––
Total assets 47,000 18,100 24,000
––––––– ––––––– –––––––
Equity and liabilities
Equity shares of GHS1 each 10,000 4,000 4,000
Retained earnings – at 30 September 2006 16,000 6,500 11,000
– for year ended 30 September 2007 8,000 2,400 5,000
––––––– ––––––– –––––––
34,000 12,900 20,000

20
Non-current liabilities
7% Loan notes 5,000 1,000 1,000
Current liabilities 8,000 4,200 3,000
––––––– ––––––– –––––––
Total equity and liabilities 47,000 18,100 24,000
––––––– ––––––– –––––––
The following information is relevant:
(i) At the date of acquisition the fair values of Subsidiary’s assets were equal to their carrying
amounts with the exception of Subsidiary’s land which had a fair value of GHS500,000 below its
carrying amount; it was written down by this amount shortly after acquisition and has not changed in
value since then.

(ii) On 1 October 2006, Parent sold an item of plant to Subsidiary at its agreed fair value of GHS2·5
million. Its carrying amount prior to the sale was GHS2 million. The estimated remaining life of the
plant at the date of sale was five years (straight-line depreciation).

(iii) During the year ended 30 September 2007 Subsidiary sold goods to Parent for GHS2·7 million.
Subsidiary had marked up these goods by 50% on cost. Parent had a third of the goods still in its
inventory at 30 September 2007. There were no intra-group payables/receivables at 30 September
2007.

(iv) Impairment tests on 30 September 2007 concluded that the value of the investment in Associate
was not impaired, but consolidated goodwill was impaired by GHS900,000.

(v) The FA -FVTOCI are included in Parent’s balance sheet (above) at their fair value on 1 October
2006, but they have a fair value of GHS9 million at 30 September 2007

(vi) No dividends were paid during the year by any of the companies.

Required:
(a) Prepare the consolidated balance sheet for Parent as at 30 September 2007.
(b) A financial assistant has observed that the fair value exercise means that a subsidiary’s net assets
are included at acquisition at their fair (current) values in the consolidated balance sheet. The assistant
believes that it is inconsistent to aggregate the subsidiary’s net assets with those of the parent because
most of the parent’s assets are carried at historical cost.
Required:
Comment on the assistant’s observation and explain why the net assets of acquired subsidiaries
are consolidated at acquisition at their fair values.

21
Answer to Illustration 6
Parent Plc Group
(a) Consolidated Statement of Financial Position of Parent as at 30 September 2007
GHS’000 GHS’000
Assets
Non-current assets:
Property, plant and equipment (18,400 + 10,400 – 400 (w (i))) 28,400
Goodwill (w (ii)) 3,600
Investments – associate (w (iii)) 10,500
– FA-FVTOCI 9,000
–––––––
51,500
Current assets
Inventory (6,900 + 6,200 – 300 URP (w (iv))) 12,800
Trade receivables (3,200 + 1,500) 4,700 17,500
––––––– –––––––
Total assets 69,000
–––––––
Equity and liabilities
Equity shares of GHS1 each (w (v)) 19,000
Reserves:
Retained earnings (w (vi)) 28,650
–––––––
47,650
Minority interest (w (vii)) 3,150
–––––––
Total equity 50,800
Non-current liabilities
7% Loan notes (5,000 + 1,000) 6,000
Current liabilities (8,000 + 4,200) 12,200
–––––––
Total equity and liabilities 69,000
–––––––

Workings (figures in brackets are in GHS’000)

(i) Property, plant and equipment
The transfer of the plant creates an initial unrealised profit (URP) of GHS500,000. This is reduced by
GHS100,000 for each year (straight-line depreciation over five years) of depreciation in the post-
acquisition period. Thus at 30 September 2007 the net unrealised profit is GHS400,000. This should
be eliminated from Parent’s retained profits and from the carrying amount of the plant. The fall in the
fair value of the land has already been taken into account in Subsidiary’s statement of financial
position.

(ii) Goodwill in Subsidiary:

Investment at cost: GHS’000 GHS’000
Shares issued (3,000/2 x GHS6) 9,000
Cash (3,000 x GHS1) 3,000
–––––––
12,000
Less – equity shares of Subsidiary (3,000)
– pre-acquisition reserves (6,000 x 75% (see below)) (4,500) (7,500)
––––––– –––––––
Goodwill on consolidation 4,500
–––––––

22
Goodwill is impaired by GHS900,000 thus has a carrying amount at 30 September 2007 of GHS3·6
million.
Subsidiary’s pre-acquisition reserves of GHS6·5 million require an adjustment for a write down of
GHS500,000 in respect of the fair value of its land being below its carrying amount. Thus the adjusted
pre-acquisition reserves of Subsidiary are GHS6 million. A consequent effect is that the post-
acquisition reserves which are reported as GHS2·4 million in Subsidiary’s statement of financial
position will become GHS2·9 million. This is because the fall in the value of the land has effectively
been treated by
Subsidiary as a post-acquisition loss.

(iii) Carrying amount of Associate at 30 September 2007 GHS’000

Cost (4,000 x 30% x GHS7·50) 9,000
Share post-acquisition profit (5,000 x 30%) 1,500
–––––––
10,500
–––––––
(iv) The unrealised profit (URP) in inventory is calculated as:
Intra-group sales are GHS2·7 million on which Subsidiary made a profit of GHS900,000 (2,700 x
50/150). One third of these are still in the inventory of Parent, thus there is an unrealised profit of
GHS300,000.

(v) The 1·5 million shares issued by Parent in the share exchange at a value of GHS6 each would be
recorded as increase in stated capital of GHS9 million

(vi) Consolidated retained earnings: GHS’000

Parent’s retained earnings 24,000
Subsidiary’s post-acquisition ((2,900 – 300 URP) x 75%) 1,950
Associate’s post-acquisition profits (5,000 x 30%) 1,500
URP in plant (see (i)) (400)
Gain on available-for-sale investment (9,000 – 6,500) see below 2,500
Impairment of goodwill (900)
–––––––
28,650
–––––––
The gain on available-for-sale investments must be recognised directly in equity.

(vii) Non-Controlling Interest

Adjusted equity at 30 September 2007: GHS’000
(12,900 – 300 URP) = 12,600 x 25% 3,150
–––––
(b) IFRS 3 Business Combinations requires the purchase consideration for an acquired entity to be
allocated to the fair value of the assets, liabilities and contingent liabilities acquired (henceforth
referred to as net assets and ignoring contingent liabilities) with any residue being allocated to
goodwill. This also means that those net assets will be recorded at fair value in the consolidated
statement of financial position. This is entirely consistent with the way other net assets are recorded
when first transacted (i.e. the initial cost of an asset is normally its fair value).

The purpose of this process is that it ensures that individual assets and liabilities are correctly
classified (and valued) in the consolidated statement of financial position. Whilst this may sound
obvious, consider what would happen if say a property had a carrying amount of GHS5 million, but a
fair value of GHS7 million at the date it was acquired. If the carrying amount rather than the fair value
was used in the consolidation it would mean that tangible assets (property, plant and equipment)
would be understated by GHS2 million and intangible assets (goodwill) would be overstated by the
same amount (note: in the consolidated statement of financial position of Parent the opposite effect
would occur as the fair value of Subsidiary’s land is below its carrying amount at the date of

23
acquisition). There could also be a ‘knock on’ effect with incorrect depreciation charges in the years
following an acquisition and incorrect calculation of any goodwill impairment. Thus the use of
carrying amounts rather than fair values would not give a ‘faithful representation’ as required by the
Framework.

The assistant’s comment regarding the inconsistency of value models in the consolidated statement of
financial position is a fair point, but it is really a deficiency of the historical cost concept rather than a
flawed consolidation technique. Indeed the fair values of the subsidiary’s net assets are the historical
costs to the parent. To overcome much of the inconsistency, there would be nothing to prevent the
parent company from applying the revaluation model to its property, plant and equipment.
Illustration 7
Below are the summarised statements of financial position for three companies as at 31 March 2009:
A Plc B Plc C Plc
Assets GHSm GHSm GHSm
Non-current assets
Property, plant and equipment 520 280 240
Investments 345 40 nil
–––––– –––– ––––
865 320 240
Current assets
Inventory 142 160 120
Trade receivables 95 88 50
Cash and bank 8 22 10
–––– –––––– ––––
Total assets 1,110 590 420
–––––– –––– ––––

A Plc B Plc C Plc GHSm GHSm GHSm

Equity and liabilities
Equity shares of GHS1each 500 145 100
Capital Surplus 100 nil nil
Retained earnings 130 260 240
–––– –––– ––––
730 405 340
Non-current liabilities
10% loan notes 180 20 nil
Current liabilities 200 165 80
–––––– –––– ––––
Total equity and liabilities 1,110 590 420
–––––– –––– ––––
Notes:
A Plc is a public listed company that acquired the following investments:

(i) Investment in B Plc

On 1 April 2007 A Plc acquired 116 million shares in B Plc for an immediate cash payment of
GHS210 million and issued at par one 10% GHS100 loan note for every 200 shares acquired. B Plc’s
retained earnings at the date of acquisition were GHS120 million.

(ii) Investment in C Plc

On 1 October 2008 A Plc acquired 30 million shares in C Plc in exchange for 75 million of its own
shares. The stock market value of A Plc’s shares at the date of this share exchange was GHS1·60
each. A Plc has not yet recorded the investment in C Plc.

(iii) A Plc’s other investments, and those of B Plc, are available-for-sale investments which are

24
carried at their fair values as at 31 March 2008. The fair value of these investments at 31 March 2009
is GHS82 million and GHS37 million respectively.

Other relevant information:

(iv) A Plc’s policy is to value non-controlling interests at their fair values. The directors of A Plc
assessed the fair value of the non-controlling interest in B Plc at the date of acquisition to be GHS65
million. There has been no impairment to goodwill or the value of the investment in C Plc.

(v) At the date of acquisition, B Plc owned a recently built property that was carried at its
(depreciated) construction cost of GHS62 million. The fair value of this property at the date of
acquisition was GHS82 million and it had an estimated remaining life of 20 years.

For many years B Plc has been selling some of its products under the brand name of ‘Kyklop’. At the
date of acquisition the directors of A Plc valued this brand at GHS25 million with a remaining life of
10 years. The brand is not included in B Plc’s statement of financial position.

The fair value of all other identifiable assets and liabilities of B Plc were equal to their carrying values
at the date of its acquisition.
(vi) The inventory of B Plc at 31 March 2009 includes goods supplied by A Plc for GHS56 million (at
selling price from A Plc). A Plc adds a mark-up of 40% on cost when selling goods to B Plc. There
are no intra-group receivables or payables at 31 March 2009.
(vii) C Plc’s profit is subject to seasonal variation. Its profit for the year ended 31 March 2009 was
GHS100 million. GHS20 million of this profit was made from 1 April 2008 to 30 September 2008.
(viii) None of the companies have paid any dividends for many years.
Required:
Prepare the consolidated statement of financial position of A Plc as at 31 March 2009.

Answer to Illustration 7
1 Consolidated statement of financial position of A Plc as at 31 March 2009:
GHS million GHS million
Non-current assets
Tangible
Property, plant and equipment (w (i)) 818
Intangible
Goodwill (w (ii)) 23
Brand (25 – 5 (25/10 x 2 years post acq amortisation)) 20
Investments
Investment in associate (w (iii)) 144
Other available-for-sale investments (82 + 37) 119
––––––
1,124
Current assets
Inventory (142 + 160 – 16 URP (w (iv))) 286
Trade receivables (95 + 88) 183
Cash and bank (8 + 22) 30 499
––––– ––––––
Total assets 1,623
––––––
Equity and liabilities
Equity attributable to the parent
Equity shares (500 + 120(w (iii))) 620
Capital Surplus 100
Retained earnings (w (iv)) 247
––––
967

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Non-controlling interest (w (v)) 91
––––––
Total equity 1,058
Non-current liabilities
10% loan notes (180 + 20) 200
Current liabilities (200 + 165) 365
––––––
Total equity and liabilities 1,623
––––––
Workings (all figures in GHS million)
The investment in B Plc represents 80% (116/145) of its equity and is likely to give A Plc control thus
B Plc should be consolidated as a subsidiary. The investment in C Plc represents 30% (30/100) of its
equity and is normally treated as an associate that should be equity accounted.

(i) Property, plant and equipment

A Plc 520
B Plc 280
Fair value property (82 – 62) 20
Post-acquisition depreciation (2 years) (20 x 2/20 years) (2)
––––
818
––––

(ii) Goodwill in B Plc:

Investment at cost – cash 210
– loan note (116/200 x GHS100) 58
Cost of the controlling interest 268
Fair value of non-controlling interest (from question) 65
333
Equity shares 145
Pre-acquisition profit 120
Fair value adjustments – property (w (i)) 20
– brand 25
Fair value of net assets at acquisition (310)
––––
Goodwill 23
––––
(iii) Investment in associate:

Investment at cost (75 x GHS1·60) 120

Share of post-acquisition profit (100 – 20) x 30% 24
––––
144
––––
The purchase consideration by way of a share exchange (75 million shares in A Plc for 30 million
shares in C Plc) would be recorded as an increase in share capital of GHS 120 million (75 million x
GHS1.·60).

(iv) Consolidated retained earnings:

A Plc’s retained earnings 130
B Plc’s post-acquisition profits (130 x 80% see below) 104
Gain on investments – A Plc (see below) 5
C Plc’s post-acquisition profits (w (iii)) 24
URP in Inventories (56 x 40/140) (16)
––––

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 247
––––
B Plc’s retained earnings:
Post-acquisition (260 – 120) 140
Additional depreciation/amortisation (2 + 5) (7)
Loss on available-for-sale investments (40 – 37) (3)
––––
Adjusted post-acquisition profits 130
––––
Gain on the value of A Plc’s available-for-sale investments:
Carrying amount at 31 March 2008 (345 – 210 cash – 58 loan note) 77
Carrying amount at 31 March 2009 82
––––
Gain to retained earnings (or other components of equity) 5
––––
(v) Non-controlling interest
Fair value on acquisition (from question) 65
Share of adjusted post acquisition profit (130 x 20% (w (iv))) 26
–––
91
–––

2 IFRS 11:JOINT ARRANGEMENTS

2.1 Objective
The objective of this IFRS is to establish principles for financial reporting by entities that have an
interest in arrangements that are controlled jointly (ie joint arrangements).

2.2 Meeting the objective

To meet the objective, this IFRS defines joint control and requires an entity that is a party to a joint
arrangement to determine the type of joint arrangement in which it is involved by assessing its rights
and obligations and to account for those rights and obligations in accordance with that type of joint
arrangement.

2.3 Scope
This IFRS shall be applied by all entities that are a party to a joint arrangement.

2.4 Joint Arrangements

A joint arrangement is an arrangement of which two or more parties have joint control.
A joint arrangement has the following characteristics:

(a) The parties are bound by a contractual arrangement

(b) The contractual arrangement gives two or more of those parties joint control of the
arrangement
A joint arrangement is either a joint operation or a joint venture.

Joint control is the contractually agreed sharing of control of an arrangement which exists only when
decisions about the relevant activities require the unanimous consent of the parties sharing control.
An entity that is a party to an arrangement shall assess whether the contractual arrangement gives all
the parties or a group of the parties, control of the arrangement collectively. All the parties, or a
group of the parties, control the arrangement collectively when they must act together to direct the
activities that significantly affect the returns of the arrangement (ie the relevant activities).

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Once it has been determined that all the parties, or a group of the parties, control the arrangement
collectively, joint control exists only when decisions about the relevant activities require the
unanimous consent of the parties that control the arrangement collectively.

In a joint arrangement, no single party controls the arrangement on its own. A party with joint control
of an arrangement can prevent any of the other parties, or group of the parties, from controlling the
arrangement.

An arrangement can be a joint arrangement even though not all of its parties have joint control of the
arrangement. This IFRS distinguishes between parties that have joint control of a joint arrangement
(joint operations or joint ventures) and parties that participate in, but do not have joint control of, a
joint arrangement.

An entity will need to apply judgement when assessing whether all the parties, or a group of the
parties, have joint control of an arrangement. An entity shall make this assessment by considering all
facts and circumstances

If facts and circumstances change, an entity shall reassess whether it still have joint control of the
arrangement.

2.5 Types of Joint Arrangement

An entity shall determine the type of joint arrangement in which it is involved. The classification of a
joint arrangement as a joint operation or a joint venture depends upon the rights and obligations of
the parties to the arrangement.

An entity applies judgement when assessing whether a joint arrangement is a joint operation or a joint
venture. An entity shall determine the type of joint arrangement in which it is involved by
considering its rights and obligations arising from the arrangement. An entity assesses its rights and
obligations by considering the structure and legal form of the arrangement, the terms agreed by the
parties in the contractual arrangement and, when relevant, other facts and circumstances .

Sometimes the parties are bound by a framework agreement that sets up the general contractual terms
for undertaking one or more activities. The framework agreement might set out that the parties
establish different joint arrangements to deal with specific activities that form part of the agreement.
Even though those joint arrangements are related to the same framework, their type might be different
if the parties’ rights and obligations differ when undertaking the different activities dealt with in the
framework agreement. Consequently, joint operations and joint ventures can coexist when the parties
undertake different activities that form part of the same framework agreement.

If facts and circumstances change, an entity shall reassess whether the type of joint arrangement in
which it is involved has changed.

2.5.1 A joint operation

A Joint operation is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties
are called joint operators.

2.5.2 A joint venture

A Joint venture is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement. Those parties are called joint venturers.

2.6 Financial Statements of parties to a Joint Arrangement

The applicable accounting treatment depends on whether a joint arrangement is a joint venture or
a joint operation.

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2.6.1 Accounting for joint operations
IFRS 11 requires that a joint operator recognises line-by-line the following in relation to its interest
in a joint operation:
(a) Its assets, including its share of any jointly held assets
(b) Its liabilities, including its share of any jointly incurred liabilities
(c) Its revenue from the sale of its share of the output arising from the joint operation
(d) Its share of the revenue from the sale of the output by the joint operation, and
(e) Its expenses, including its share of any expenses incurred jointly.
This treatment is applicable in both the separate and consolidated financial statements of the joint
operator.

2.6.2 Accounting for joint ventures

In the financial statements of a joint venture an investment in a joint venture is accounted for in the
same way as an associate. The equity accounting provisions of IAS 28 apply and therefore:

The consolidated statement of financial position is prepared by:

Including the interest in the joint venture at cost plus share of retained post-acquisition total
comprehensive income
Including the group share of the post-acquisition total comprehensive income in group reserves
The consolidated statement of profit or loss and other comprehensive income will include:
The group share of the joint venture's profit or loss
The group share of the joint venture's other comprehensive income
The use of the equity method should be discontinued from the date on which the joint venture ceases
to have joint control over, or have significant influence over, a joint venture.

2.6.2.1 Transactions between a joint venture and a joint venture

a) Upstream transactions
A joint venturer may sell or contribute assets to a joint venture so making a profit or loss. Any such
gain or loss should, however, only be recognised to the extent that it reflects the substance of the
transaction.
Therefore:
Only the gain attributable to the interest of the other joint venturers should be recognised in the
financial statements.
The full amount of any loss should be recognised when the transaction shows evidence that the net
realisable value of current assets is less than cost, or that there is an impairment loss.

b) Downstream transactions
When a joint venturer purchases assets from a joint venture, the joint venturer should not recognise its
share of the profit made by the joint venture on the transaction in question until it resells the assets to
an independent third party, ie until the profit is realised.

Losses should be treated in the same way, except losses should be recognised immediately if they
represent a reduction in the net realisable value of current assets, or a permanent decline in the
carrying amount of non-current assets.

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