Group Statements

Definitions
▪ A parent is a company that controls another company by virtue of shareholding or control
▪ Has majority voting rights in a subsidiary (could be in the form of shareholding or ability to direct
relevant activities).
▪ Subsidiary is an entity controlled by another entity (Parent).

▪ Group: Parent company and its subsidiaries.

Does the investor control the investee?

An investor controls an investee if the investor has the following:
a) Power over the investee;
b) Exposure, or rights to, variable returns from involvement with the investee;
c) The ability to use power over the investee to affect the amount of the investor's returns

POWER
 Is when an investor has existing rights that give it the current ability to direct the relevant activities
 Only substantive rights are considered (rights that do not hinder the investor in any way to exercise those
rights)
 The rights would normally be in the form of voting rights
 Power depends on majority voting rights or ability to direct relevant activities of the investee e.g.
 An investor can have power even without majority voting rights e.g., Material influence
 To have the right to appoint or choose the directors of the company that has the majority of the voting
rights

CONTROL: COMPANIES ACT

According to the Companies Act:
 The parent company does not need to have shares in the other company, as ownership is not necessary
to create a subsidiary relationship.
 Ability to direct relevant activities is sufficient
 Each issued share has one voting right except if otherwise specified in the memorandum of
incorporation.

EXPOSURE OR RIGHTS TO VARIABLE RETURNS

 An investor must be exposed or have rights to variable returns from its involvement with an investee to
control the investee.
Returns can be in the form of:
 Dividends
 Other distributions of economic distributions e.g., profits
 Interest
 Remuneration etc.
LINK BETWEEN RETURNS AND POWER
 A parent must not only have power over an investee and exposure to rights variable returns from its
involvement with the investee, but
 must also have the ability to use its power over the investee to affect its returns from its involvement
with the investee.

Non-controlling interests
→ The equity in a subsidiary that cannot be directly or indirectly attributed to the parent.
→ It is the residual interest in the net assets held by certain other owners.
→ Parent does not control this equity or share in it.

Separate statements
→ The parent is required to present separate financial statements.
→ These are books of the parent before consolidation
→ The investment in subsidiary is shown. Show at cost or IFRS 9
→ We will always show at COST for the purpose of ACCF221.

Consolidation
→ The process of combining the financial statements of the parent entity and its subsidiaries.
→ Consolidation starts on the date that the investor gains control over the investee and stops when control
is lost
→ In certain cases when requirements are met, consolidated financial statements are not required (IFRS
10.4).

Exemptions:
Para 1.11: Circumstances when consolidated financial statements need not be prepared by the parent.

Consolidation process:
→ Elimination at acquisition. Carrying amount of the parent's investment in the subsidiary and parent's
equity share of the subsidiary are offset and the goodwill is accounted for. (to avoid double accounting or
overstatement).
→ Intragroup balances and transactions between parent and subsidiary are eliminated (at the end of the
day the effect is zero in the group)
→ 100% Parent + 100% Subsidiary (on a line by line basis)
→ Pro-forma journals are used for the preparation of group statements. These journals are not recorded in
any of the individual statements. It is only for consolidation purposes.
 Consolidation at acquisition date
Consolidation process
 Eliminate common items.
 Combine remaining uncommon item 100% on a line-by-line basis.
 The consolidated statements show only items that result from transactions with parties outside the
group.
 Use proforma journals for the elimination of intragroup transactions.

Proforma journals
→ Used for consolidation purposes only.
→ Not accounted for in the records of either parent or subsidiary.
→ Should be repeated each year at consolidation

For Statement of financial position

→ The only common items are the investment in subsidiary (parent)
and equity i.e share capital and retained earnings (subsidiary).

When consolidation is at acquisition date:

→ Only the respective statements of financial position for the parent and subsidiary are consolidated.
→ SPL and SCE are not affected by the acquisition of a subsidiary on the last day of the reporting period.
→ Parent is not entitled to preacquisition profits.
→ Goodwill, gain on bargain purchase and noon controlling interests should be recognised when they arise
(to be discussed later in the chapter).

At acquisition pro forma journal

Where the consideration for the subsidiary is equal to the fair value of the net identifiable assets and
liabilities assumed.
All S’s share capital
Dr Share capital (S)(SCE)
Dr Retained earnings(S)(SCE)
All S’s at acquisition RE
Cr Investments (P)(SFP)
Cost price of investment

The investment in subsidiary is set off against total equity, i.e., share capital + retained earnings.

Definitions
 Acquisition date: Date on which the acquirer (parent) obtains control over the acquiree (subsidiary)

 Consideration: amount paid by the parent for the acquisition of interest in the subsidiary.
 Goodwill: The premium above the fair value of net assets, paid to obtain control. Consideration > FV of
net identifiable assets.
 Gain from bargain purchase: The discount received with the acquiring of the fair value of net assets.
Consideration < FV of net identifiable assets.
 Non-controlling interest: The owners other than the parent (the share of profit and losses and assets and
liabilities not directly owned by the parent)
(2 methods to determine)
NCI measurement:
 Fair Value (will result in goodwill or gain from bargain purchase).

 Proportionate share of net identifiable assets

 For a wholly owned subsidiary (100%) no NCI.
 For a partially owned subsidiary (< 100%) recognize NCI.

Wholly owned subsidiaries

 Parent pays more for net assets than what they are worth
Goodwill

Consideration
- Net assets
= Goodwill
Since it’s a wholly owned subsidiary, no NCI in determining goodwill.

Partially owned subsidiaries

 Parent does not own 100% of the subsidiary, thus there is non-controlling interest
 NCI – equity that is not directly or indirectly attributable to the parent.

 The amount of the non-controlling interest at the date of the original combination; and
 The non-controlling interests' share of changes in equity since the date of the business combination
 Presented in the consolidated SFP within equity, separately from the equity of the owners of the parent.
 Profit or loss and other comprehensive income is also attributed to NCI.

NCI can be measured at:

1. Fair Value
2. Portion of net assets

 Non-controlling interest in net assets consist of:

 The amount of the non-controlling interest at the date of the original combination; and
 The non-controlling interests' share of changes in equity since the date of the business combination
Calculation of goodwill in a partially owned subsidiary
Consideration
+
Non-controlling interest
-
Net assets
=
Goodwill

 When using the proportionate share of net identifiable assets, no goodwill or gain from bargain
purchase for NCI.

 When using FV, recognize goodwill or gain for NCI.

Consolidation after acquisition date

What happens after acquisition date?
 Movement in profits
 Consolidate SFP, SPL and SCE

Pre-acquisition profits
• Not distributable and eliminated upon consolidation
• Only profit since acquisition is distributable to the parent
• However, not available to the parent for distribution until distributed by subsidiary as dividends.
• Once distributed, parent recognises a dividend received (SPLOCI) while subsidiary records a dividend
declared (SoCE). (Intragroup – eliminate)

Intra-group dividends
• A div represents a distribution of a portion of the company’s profits to its shareholders
• Normally declared from R.E, but any reserve could be used.
• Disclosed in the Statement of Changes in Equity ( SoCE) – not disclosed in the SPL –distribution to owners
not an expense.
• Distribution must be authorised – no authorisation – no dividend.
• Recognised on the date on which it is declared

If declared after reporting period, but before financial statements are issued :
• No liability is recognised at the end of the reporting period
• No present obligation
• Only disclosed in the notes to the AFS
• Only recognised in the following period.

In the books of the parent:

• Recognised as income once the right to receive the div. has been established
Dr div. receivable (SFP)
Cr Other income (div. received) (SPL)
Recognition of div. receivable from the subsidiary
On the date the div. is paid, subsidiary (wholly owned) records:
• Reversal of liability in the books of the subsidiary.
Dr Shareholders for div. (SFP)
Cr Bank (SFP)
Payment of dividends

Parent records:
• Moving it from trade receivables to bank account now that cash has been received.
Dr Bank (SFP)
Cr Dividend receivable (SFP)
Recognition of dividends

Proforma journal
Dr Other income (div. rec) (P) (SPL)
Cr Dividend declared (S) (SCE)
Elimination of intragroup dividend on consolidation

Consolidation of financial statements

Same procedures:
• Identify common items
• Eliminate common and intragroup items (pro-forma journals)
• Consolidate remaining items on a line-by-line basis

Consolidation after acquisition date

Since acquisition - what has happened from the date parent acquired subsidiary to date?
• Expenses have been incurred
• Profit/losses created- Retained earnings
• Transfer to reserves
• Distribution of dividends
• Each of these should be apportioned to parent and NCI according to interest held.

Intragroup transactions
Intragroup balances
→ Amounts receivables or payables within the group
→ One entity records a receivable and the other a payable
→ Mirror images of the same item in the group
→ Should be eliminated
→ Intragroup rendering of services
→ Intragroup borrowings
Intragroup transactions

All 3 conditions NB - Set off does not

Bank overdrafts and should be met constitute an intra group
guarantees transaction!!

3. The groups has an

Overdrafts only offset intention to settle
against favourable amounts on a net
bank balances if: basis

2. The bank allows it and

1. Same bank for both has an agreement with
entities the 2 entities

Intragroup Sales

Three types:
1. Sales of inventories;
2. Sales of non-depreciable property; and
3. Sales of depreciable property, plant and equipment

Trading inventories- unrealized profit

 One entity sells inventory to another within the same group.
 Creates an intragroup sales transaction which should be eliminated.
 If part of inventory still exists at the end of the reporting period, unrealized profit should be eliminated.
 Profit should only be realized when the inventory is sold to parties outside the group.
 If inventory is still on hand, profit is unrealized for the group,
 Dr profit of the selling entity and credit the inventory of the purchasing entity with the unrealized profit.

Unrealized profit in opening inventories

 Closing inventories of one period affect the opening inventories of the following period.
 Unrealized profit in opening inventory affects retained earnings at the beginning of the reporting year.
When the parent sells:
 Intragroup profit or loss is included in the P/L of the parent
 NCI is not affected by the unrealised profit.
 Parent has nothing to do with NCI.
When the subsidiary sells:
 What affects the subsidiary affects the NCI proportionately.
 Portion of the unrealised profit is apportioned to the NCI.
Intragroup sale of property, plant & equipment
Same principles apply:
When the parent sells:
 Intragroup profit or loss is included in the P/L of the parent
 NCI is not affected by the unrealised profit.
 Parent has nothing to do with NCI.
When the subsidiary sells:
 What affects the subsidiary affects the NCI proportionately.
 Portion of the unrealised profit is apportioned to the NCI.

Distinctions must be made between intragroup gains earned on:

 Depreciable PPE
 Non depreciable PPE
 Whether the selling entity is a trader of PPE in which case it constitutes inventories and will be
treated like the sale of inventory (don’t focus much on this).
1. Full intragroup gain must, if the asset is held within the group, be eliminated for consolidation purposes.
2. The full amount of the unrealized gain is reversed and debited against the group gain.
3. Note: Only unrealized profit is eliminated , the sales are not eliminated-not trading in PPE- does not
constitute a sale, but other income.
4. Therefore, only eliminate unrealized profit.