Professional Documents
Culture Documents
Notes on Group Financial Statements
Notes on Group Financial Statements
Notes on Group Financial Statements
Eighteenth Edition
Notes on
Group Financial Statements
Eighteenth Edition
Authors
Keith Prinsloo, Derek Forsyth
Members of the LexisNexis Group worldwide
South Africa LexisNexis (Pty) Ltd
DURBAN 215 Peter Mokaba Road(North Ridge Road), Morningside, Durban, 4001
JOHANNESBURG Building 8, Country Club Estate Office Park, 21 Woodlands Drive, Woodmead, 2080
CAPE TOWN 1st Floor, Great Westerford, 240 Main Road, Rondebosch, 7700
www.lexisnexis.co.za
Australia LexisNexis, CHATSWOOD, New South Wales
Austria LexisNexis Verlag ARD Orac, VIENNA
Benelux LexisNexis Benelux, AMSTERDAM
Canada LexisNexis Canada, MARKHAM, Ontario
China LexisNexis, BEIJING
France LexisNexis, PARIS
Germany LexisNexis Germany, MÜNSTER
Hong Kong LexisNexis, HONG KONG
India LexisNexis, NEW DELHI
Italy Giuffrè Editore, MILAN
Japan LexisNexis, TOKYO
Korea LexisNexis, SEOUL
Malaysia LexisNexis, KUALA LUMPUR
New Zealand LexisNexis, WELLINGTON
Poland LexisNexis Poland, WARSAW
Singapore LexisNexis, SINGAPORE
United Kingdom LexisNexis, LONDON
USA LexisNexis, DAYTON, Ohio
© 2019
ISBN 978-0-6390-0929-2
Ebook ISBN 978-0-6390-0930-8
First Edition 1996 Sixth Edition reprint 2002 Twelfth Edition 2009
Second Edition 1997 Seventh Edition 2004 Thirteenth Edition 2010
Third Edition 1998 Eighth Edition 2005 Fourteenth Edition 2011
Fourth Edition 1999 Ninth Edition 2006 Fifteenth Edition 2013
Fifth Edition 2000 Tenth Edition 2007 Sixteenth Edition 2015
Sixth Edition 2001 Eleventh Edition 2008 Seventeenth Edition 2016
Copyright subsists in this work. No part of this work may be reproduced in any form or by any means without the publisher’s
written permission. Any unauthorised reproduction of this work will constitute a copyright infringement and render the doer liable
under both civil and criminal law.
Whilst every effort has been made to ensure that the information published in this work is accurate, the editors, publishers and
printers take no responsibility for any loss or damage suffered by any person as a result of the reliance upon the information
contained therein.
Changes have been made to the eighteenth edition, including additional illustrative examples.
The layout of the book has been changed significantly to make it more user-friendly. A sincere
word of thanks must go to Mandy Jonck and the LexisNexis team for their efforts in this regard.
Suggestions and comments received from our academic colleagues and from students are
invaluable and are very much appreciated.
May this book help those who use it to make a complex subject a little easier to grasp.
Suggested solutions to the tutorial questions in the latter half of the book are available to
institutions prescribing the book for their accounting courses.
v
\
Contents
Chapter Page
1 The group: Legal, accounting and reporting requirements for group financial
statements, separate financial statements and disclosure of interests in other
entities .............................................................................................................................. 1
2 Business combinations: IFRS 3 ....................................................................................... 13
3 Consolidated statement of financial position – at the date of acquisition or
formation of wholly owned subsidiary .............................................................................. 33
4 Consolidated statement of financial position at the date of acquisition: Partly
owned subsidiaries .......................................................................................................... 43
5 Consolidated statement of financial position – after the date of acquisition ................... 53
6 Consolidated statement of profit or loss and other comprehensive income –
introduction ...................................................................................................................... 61
7 Elimination of inter company (intragroup) transactions ................................................... 81
8 Fair value adjustments to non-current assets of subsidiary ............................................ 115
9 Methods of consolidation ................................................................................................. 131
10 Adjustments made by parent company to carrying amount of investment in
subsidiary ......................................................................................................................... 141
11 Subsidiary company’s capital includes ‘preference shares’ ............................................ 147
12 Subsidiary companies and accumulated deficits ............................................................. 155
13 Acquisition of subsidiary during a financial year .............................................................. 157
14 Investments in associates and joint ventures .................................................................. 167
15 Piecemeal (step) acquisitions .......................................................................................... 183
16 Sale of shares in subsidiary or associate ........................................................................ 213
17 Joint arrangements .......................................................................................................... 259
18 Indirect or vertical subsidiaries and associates ............................................................... 263
19 Share issues and share buy-backs by subsidiaries ........................................................ 285
20 Foreign operations ........................................................................................................... 317
21 Consolidated statement of cash flows ............................................................................. 337
vii
\
THE GROUP: LEGAL, ACCOUNTING AND
1 REPORTING REQUIREMENTS FOR GROUP
FINANCIAL STATEMENT, SEPARATE
FINANCIAL STATEMENTS AND DISCLOSURE
OF INTERESTS IN OTHER ENTITIES
A. INTRODUCTION
A company is a separate legal entity constituted in accordance with the requirements of the Com-
panies Act.
The Companies Act requires that financial reporting standards adopted by a company must be
consistent with International Financial Reporting Standards (IFRSs). This effectively means that
where a company (parent) has an interest in a subsidiary then the parent will have to, in addition
to its separate financial statements, prepare consolidated (or group) financial statements.
The financial reporting standards that are particularly relevant to the preparation of group (con-
solidated) financial statements are IFRS 10 and IFRS 3. IFRS 3 is dealt with in Chapter 2.
1. OBJECTIVE
The objective of the standard is to establish principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more entities.
The standard:
ƒ requires a parent entity (one that controls one or more other entities) to present consolidated
financial statements
ƒ defines the principle of control, and establishes control as the basis for consolidation
ƒ sets out the principle of control to determine whether an investor controls an investee
ƒ sets out the accounting requirements for the preparation of consolidated financial statements.
Business combinations are not in the scope of this standard and are dealt with in IFRS 3.
2. DEFINITIONS
Refer to Appendix A of the standard for the definitions.
Control of investee:
An investor controls an investee when the investor is exposed, or has the rights to, variable
returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee.
There are a number of definitions in this standard which were not in the previous standard.
1
Notes on Group Financial Statements
3. SCOPE
A parent shall present consolidated financial statements unless it meets all of the following condi-
tions:
ƒ it 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 parent not presenting consolidated financial statements
ƒ its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)
ƒ it did not file, nor is it in the process of filing, its financial statements with a securities commis-
sion or other regulatory organisation for the purpose of issuing any class of instruments in a
public market
ƒ its ultimate or any intermediate parent produces consolidated financial statements that are
available for public use and comply with IFRSs.
4. CONTROL
An investment entity shall not prepare consolidated financial statements for any investments it
controls but will rather measure them at fair value through profit or loss
An investor controls an investee if and only if an investor has all of the following:
ƒ power over the investee
ƒ exposure, or rights to, variable returns from its involvement with the investee, and
ƒ the ability to use its power over the investee to affect the amount of the investor’s returns.
4.1 Power
ƒ This is when an investor has existing rights that give it the current ability to direct the relevant
activities (that is the activities that significantly affect the investee’s returns).
ƒ Power arises from rights which would normally be voting rights, however, this could be more
complex and may require more than one factor to be considered.
ƒ An investor can have power over an investee even if other entities have existing rights, for
example when another entity has significant influence. An investor that holds only protective
rights does not control an investee.
When assessing whether an entity has power over an investee only substantive rights are con-
sidered. Protective rights are not taken into account.
Substantive rights
For a right to be substantive it needs to be:
ƒ exercisable when decisions about the direction of the relevant activities need to be made (in
most cases the rights need to be currently exercisable), and
ƒ the holder must have the practical ability to exercise the rights.
Protective rights
Are rights designed to protect the interest of the party holding those rights without giving the party
power over the entity to which those rights relate.
Examples of protective rights are:
ƒ The right of a lender to restrict the borrower from paying dividends if loan payments are in
arrears.
ƒ The right of a non-controlling shareholder to approve the issue of equity or debt instruments or
the sale of the greater part of the assets of the investee.
ƒ The right of a lender to seize assets of the investee in the case of default.
2
Chapter 1
If two or more investors each have existing rights giving them the unilateral ability to direct differ-
ent relevant activities, the investor that has the current ability to direct the activities that most
significantly affect the returns of the investee has the power over the investee (refer to 4.4.2).
4.2 Returns
An investor is exposed, or has rights to, variable returns from its involvement with the investee
when the investor’s returns from its involvement have the potential to vary as a result of the
investee’s performance. The returns can be only positive, only negative or both positive and
negative.
Only one investor can control an investee but of course more than one party can share in the
returns of an investee, for example non-controlling interests of a subsidiary.
3
Notes on Group Financial Statements
Example 1:1
A Ltd and B Ltd form Med Ltd to develop and market a medical product.
A Ltd is responsible for and developing and obtaining a regulatory approval of the medical
product.
Once the regulator has approved the product B Ltd will manufacture and market the product
Both investors have the unilateral ability to make all decisions relating to their respective re-
sponsibility.
Required:
How is control assessed by A Ltd and B Ltd?
Solution
If all the activities (developing the product and obtaining regulatory approval as well as manu-
facturing and marketing) are relevant activities then each investor needs to determine whether
it is able to direct the activities that most significantly affect the investee’s returns, that is
whether it is developing and obtaining regulatory approval or manufacturing and marketing. In
determining which investor has power it would consider:
ƒ the purpose and design of the investee
ƒ the factors that determine the profit margin, revenue and value of the investee as well as
the value of the medical product
ƒ the effect on the investee’s returns resulting from each investor’s decision-making authority
with respect to factors in the bullet point above, and
ƒ the investor’s exposure to variability of returns.
In this case they would also consider the uncertainty of, and effort required in, obtaining regula-
tory approval as well as which investor controls the product once the development phase is
successful.
4
Chapter 1
Example 1:2
A Ltd holds 45% of the equity shares (i.e. 45% of voting rights) of B Ltd. Two other investors
each hold 30% and 25% respectively.
Does A Ltd control B Ltd?
No, as only two other investors would need to co-operate to prevent A Ltd from directing the
activities of B Ltd it cannot be concluded that A Ltd has the power to exercise control.
Example 1:3
A Ltd holds 45% of the equity shares in B Ltd. No other investor holds more than a 1% interest
in B Ltd and there has been no past history of shareholders’ co-operation. Historically share-
holders holding 12% of the equity shares in B Ltd (other than A Ltd) participate at shareholder
meetings.
Does A Ltd control B Ltd?
Yes, it is clear that in terms of shareholders’ participation at shareholder meetings and the wide
spread of shareholding that A Ltd has the power to exercise control.
Example 1:4
A Ltd holds 35% of the equity shares of B Ltd. Three other shareholders each hold 8% with the
remaining shares widely dispersed. At recent shareholder meetings 75% of voting rights have
been exercised.
Does A Ltd control B Ltd?
35
No, as A Ltd does not have a majority of active voting rights (47% being /75).
5
Notes on Group Financial Statements
Example 1:5
A Ltd holds 70% of the equity shares (and voting rights) of B Ltd. X Ltd holds 30% of the equi-
ty shares of B Ltd and has an option to acquire half of A Ltd’s shares. The option is exercisable
in the next two years at a price of R20 per share. B Ltd shares are currently trading at R8 per
share and are not expected to exceed R10 per share over the next two years.
A Ltd has been exercising its votes and is actively directing the activities of B Ltd.
Required:
Which company is in control of B Ltd?
Solution
Although X Ltd has a currently exercisable option which if exercised would give it the majority
of the voting rights the terms and conditions (the options being deeply out of the money) asso-
ciated with the options are such that they are unlikely to be substantive. A Ltd therefore con-
trols B Ltd.
6
Chapter 1
Example 1:6
Mr Jones is a fund manager and manages a publicly traded fund. Mr Jones must make deci-
sions in the best interests of all investors and in accordance with the funds governing agree-
ments, but he has wide decision-making powers.
Mr Jones receives a market-based fee as follows:
ƒ 1% of assets managed
ƒ 10% of the profits earned above a specified rate.
Mr Jones has a 5% interest in the fund.
Required:
Is Mr Jones an agent?
Solution
In this example it is likely that Mr Jones is an agent. The fee is commensurate with the services
he renders. He does have decision-making powers that give him the power to direct the activ-
ities of the fund; however, his exposure (5%) is such that it is unlikely to be of such significance
to suggest he is a principal.
5. ACCOUNTING REQUIREMENTS
There are no significant changes between IAS 27 and IFRS 10 as far as the accounting require-
ments are concerned. This book covers the accounting methods in detail in subsequent chapters.
A summary of the accounting requirements is as follows:
ƒ Consolidated financial statements shall be prepared using uniform accounting policies.
ƒ Consolidation of a subsidiary shall begin from the date the parent acquires control over the
investee and cease when control is lost.
ƒ Paragraphs B86 to B93 provide guidance on consolidation procedures. These principles are
dealt with in detail in the chapters of the book.
ƒ The non-controlling interests shall be presented in the SOFP within equity but separately from
the equity of the parent. Refer to paragraphs B94 to B96 for guidance on accounting for the
NCI.
ƒ Changes in a parent’s ownership that do not result in loss of control of the subsidiary are
equity transactions.
ƒ Paragraphs B97 to B99 set out guidance for the accounting principles when a parent loses
control of a subsidiary.
These principles are dealt with in detail from Chapter 3 of this text.
Degree of influence
The degree of influence enables one to determine the status of a parent’s investment (i.e. it may
be a subsidiary, associate, joint venture or an investment carried as a financial asset in terms of
IFRS 9), and flowing from that, the method to be used to account for such investment in the
group financial statements.
7
Notess on Group
p Financial Statementts
The ta
able beloww is a summ
mary of the
e different m
methods of accountin
ng for invesstments for differing
degre
ees of influe
ence:
Degrree of Influe
ence How inve
estee accou
unted for in
n the Group
p AFS
1. Control Consolida
ate
2. Joint Contrrol Depends on type of joint arrange
ement
3. Significant Influence Equity me
ethod
4. Less than Significant
S In
nfluence Carry as a Financial Asset per IF
FRS 9
Effec
ctive intere
est
The e n the investee will reflect the pa
effective intterest of the parent in ual (net) share in the
arent’s actu
equityy (profits an
nd reserves) of the in
nvestee.
Both concepts (degree
( of influence over
o and efffective inte
erest in an
n investee) may be de
etermined
e percentag
by the ge of share
es that the group ownns in a partticular investment.
It is important to
t note thaat the perc centage of effective iinterest in an investeee does no ot always
equal the perce entage of control (or voting
v rightts) of the p
parent in such investee. This is
s because
of ma atters such as potentia
al voting rig
ghts and th
he contracttually agreeed ceding of
o voting rig
ghts.
The aapplication of these concepts as
a well ass the methods of acc counting fo
or differentt types of
investtments helld by a pa
arent comppany (according to th he degree of influencce exercise ed by the
paren
nt company y) are exam etail in laterr chapters of this book.
mined in de
The fo
ollowing ex
xamples arre examine
ed.
Exam
mple 1
8
Chapter 1
Example 2
1. OBJECTIVE
To set standards for the accounting of subsidiaries, joint ventures and associates in the separate
financial statements of the reporting entities.
3. DISCLORES
Refer to the Standard for disclosure requirements.
1. OBJECTIVE
The objective is to require the disclosure of information that enables users of financial statements
to evaluate
ƒ the nature of, and risks associated with, its interests in other entities (subsidiaries, joint arrange-
ments, associates and unconsolidated structured entities)
ƒ the effects of those interests on its financial position, financial performance and cash flows.
Where the disclosures required by IFRS 12, together with the disclosures required by other
IFRSs, do not meet the above objective, an entity is required to disclose whatever additional
information is necessary to meet the objective.
9
Notes on Group Financial Statements
2. SCOPE
IFRS 12 does not apply to certain employee benefit plans, separate financial statements to which
IAS 27 Separate Financial Statements applies (except in relation to unconsolidated structured
entities in some cases), certain interests in joint ventures held by an entity that does not share in
joint control, and the majority of interests in another entity accounted for in accordance with
IFRS 9 Financial Instruments.
3. DEFINITIONS
The following are key definitions:
Structured entity
An entity that has been designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when any voting rights relate to administrative tasks
only and the relevant activities are directed by means of contractual arrangements.
4. DISCLOSURES
This is a summary of the main disclosure requirements of IFRS 12.
10
Chapter 1
4.5 Aggregation
Circumstances will dictate how much detail an entity provides to satisfy the information needs of
users and how it aggregates that information. Interests in similar entities may be aggregated if
this is consistent with the disclosure objective and requirements of this standard.
An entity shall present information separately for interests in:
ƒ subsidiaries
ƒ joint ventures
ƒ joint operations
ƒ associates, and
ƒ unconsolidated structured entities.
4.6.1 Subsidiaries
For each subsidiary that has non-controlling interests that are material, an entity shall disclose:
ƒ dividends paid to the non-controlling interests
ƒ summarised financial information about assets, liabilities, profit/loss and cash flows to under-
stand the interests the NCI have therein. This information is before inter-company elimina-
tions.
11
Notes on Group Financial Statements
12
2 BUSINESS COMBINATIONS: IFRS 3
The Standard focuses on the accounting treatment of a combination at the date of acquisition and
deals with the determination of identifiable net assets acquired, the cost of combination, non-
controlling interests and goodwill. IFRS 3 was issued by the IASB in March 2004 and was revised
in January 2008.
1. OBJECTIVE
The objective of this IFRS is to improve the relevance, reliability and comparability of the infor-
mation that a reporting entity provides in its financial statements regarding a business combina-
tion and its effects. To accomplish that, this IFRS establishes principles and requirements for how
the acquirer:
ƒ recognises and measures in its financial statements the identifiable assets acquired, the liabil-
ities assumed and any non-controlling interest in the acquiree
ƒ recognises and measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and
ƒ determines what information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
2. DEFINITIONS
Definitions are included in Appendix A of IFRS 3. The following definitions are brought to your
attention:
Business combination – A transaction or other event in which an acquirer obtains control of one or more
businesses. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of
equals’ are also business combinations as that term is used in IFRS 3.
Acquiree – The business or businesses that the acquirer obtains control of in a business
combination.
Acquisition date – The date on which the acquirer obtains control of the acquiree.
Business – An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing:
ƒ a return to investors in the form of dividends, lower costs or other economic
benefits directly to investors, or other owners, members or participants.
A business generally consists of inputs, processes applied to those inputs, and
normally results in outputs. Outputs are as a result of inputs and processes
applied to those inputs that provide a return in the form of dividends, lower costs
or other economic benefits. If goodwill is present in a transferred set of activities
and assets, the transferred set shall be presumed to be a business although a
business need not have goodwill.
13
Notes on Group Financial Statements
3. SCOPE
This Standard does not apply to transactions:
ƒ resulting in joint control (joint venture)
ƒ the acquisition of an asset or group of assets that does not constitute a business
ƒ involving businesses under common control.
Where a group of assets are acquired that does not constitute a business, the assets are recog-
nised in terms of the relevant standard (e.g. IAS 16 (PP&E), IAS 38 (Intangible assets)) and the
cost of the group of assets is allocated to the individual assets on the basis of their relevant fair
values at the date of purchase. Such a transaction does not give rise to goodwill.
5. METHOD OF ACCOUNTING
Acquisition method
All business combinations shall be accounted for using the acquisition method. The Standard
does not permit the application of the uniting of interests method.
The acquisition method views the business combination from the perspective of the acquirer. The
acquirer purchases net assets and recognises the assets and liabilities (including contingent
liabilities) of the acquiree. It should be noted that the acquisition method is largely consistent with
the principles of consolidations (at acquisition) that have traditionally been used.
Applying the acquisition method involves the following steps:
ƒ identifying the acquirer
ƒ determining the acquisition date
ƒ recognising and measuring the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquire, and
ƒ recognising and measuring goodwill or a gain from a bargain purchase.
14
Chapter 2
In most cases it will be clear who is the acquirer. If this is not clear, then the following factors shall
be considered in making that determination:
ƒ Where the business combination is made by primarily transferring cash or other assets or by
incurring liabilities, the acquirer is normally the entity transferring the cash/assets or incurring
the liability.
ƒ In a business combination effected primarily by the issue of equity instruments, the acquirer is
normally the entity issuing its equity instruments. This, however, is not the case in ‘reverse
acquisitions’. A reverse acquisition is illustrated in the example below. Other pertinent facts
and circumstances shall be considered, including:
– the relative voting rights after the business combination
– the existence of a large minority voting interest in the combined entity if there is no other
significant voting interest
– the composition of the governing body of the combined entity
– the composition of senior management of the entity
– the terms of exchange of equity interests – the acquirer is normally the combining entity
that pays a premium over the pre-combination fair value of the other combining entity.
ƒ The acquirer is usually the combining entity whose relative size (e.g. assets, revenue, profits)
is significantly greater than the other combining entities.
ƒ Other relevant factors, for example, which entity initiated the combination.
As indicated above, where an entity issues shares to another in a business combination, the
acquirer is usually the entity issuing the shares. However, one entity that is smaller may issue
shares to another entity which may result the ‘acquiree’ company being the acquirer. This is
commonly referred to as a reverse acquisition. Normally this is done where the smaller company
has a listing on a stock exchange and the business combination is structured to retain the listing.
Example 2:1
B Ltd is a wholly owned subsidiary of H Ltd. No shares are held in A Ltd by H Ltd or B Ltd. The
following are the balance sheets of A Ltd and B Ltd:
A Ltd B Ltd
R R
Net assets 1 000 3 000
1 000 3 000
Share capital (100 shares; 1 000 shares) 100 1 000
Reserves 2 000 3 000
900 1 000
Market value – total 2 000 4 000
– per share 20 4
A Ltd acquires all the shares in B Ltd from H Ltd. In consideration for the acquisition A Ltd
issues shares in itself.
Required:
How will the business combination be accounted for:
(a) In the H Ltd group?
(b) In the A Ltd group?
15
Notes on Group Financial Statements
Solution
A new entity formed specifically to effect a business combination is not necessarily the acquirer. If
a new entity is formed to issue equity interests to effect a business combination, then it is not the
acquirer. One of the existing entities that existed before shall be identified as the acquirer on the
basis of the evidence available.
5.3 Recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree
Recognition conditions
(i) The identifiable assets acquired or liabilities assumed must comply with the definitions of
an asset or liability in terms of the Framework. This would mean that for both assets and
liabilities there must be probability of future inflows or outflows.
For example, costs of termination of employees that arise as a result of the acquisition are
not liabilities at acquisition date unless an obligation for such costs existed at acquisition
date.
(ii) Identifiable assets acquired or liabilities assumed must be part of the acquirer and acquiree
exchanged in the business combination rather than the result of separate transactions.
This principle is dealt with in more detail in 2.5.9 below.
(iii) Some assets and liabilities of the acquiree may be recognised in a business combination
even though they are not recognised by the acquiree.
16
Chapter 2
For example, an internally generated brand name would not be recognised in the acquiree
but as it is an identifiable asset, it will be recognised by the acquirer, or a reimbursement
may be recognised because it is probable that inflows will be received rather than virtually
certain, which is the requirement for recognition in IAS 37.
The following guidance is given in Appendix B on recognising intangible assets:
Intangible assets
Intangible assets are recognised provided they are identifiable. An intangible asset is
identifiable if it meets either the separability or contractual/legal criterion.
Non-controlling interests
Non-controlling interests are measured at either:
ƒ fair value, or
ƒ the proportionate share of the acquiree’s identifiable net assets.
If the first option is chosen, goodwill will now include any goodwill attributable to the non-
controlling interests. The second option excludes any goodwill attributable to the non-controlling
interests.
Fair value
The following guidance is given in Appendix B on measuring fair value:
ƒ Assets with uncertain cash flows.
The acquirer does not recognise a separate valuation allowance for such assets, as the
effects of uncertainty about future cash flows is included in the fair value measure.
ƒ Assets subject to operating leases where the acquiree is the lessor.
Any difference between the market related rental and the rental in the lease is taken into
account in determining the fair value of the leased asset and is not recognised as a separate
asset or liability.
17
Notes on Group Financial Statements
ƒ Assets which the acquirer intends to use differently from the way other market participants
would. Notwithstanding the intention of the acquirer, the fair value of the asset is determined in
accordance with its use by other market participants.
ƒ Non-controlling interests in an acquiree.
If these interests are measured at fair value at the acquisition date, then the fair value will be:
– the market price of these (minority) shares if traded in an active market, or
– fair value measured by other valuation techniques if these (minority) shares are not traded
in an active market.
It should be remembered that the value per share of the shares held by the acquirer and non-
controlling interests are likely to be different because the acquirer’s interest will ordinarily result in
the ability to exercise control over the acquiree.
Example 2:2
A Ltd acquires all the shares in B Ltd. At the date of acquisition B Ltd has the following contin-
gent liabilities:
Legal claim
The company is being sued for R2 million in respect of a patent infringement. Legal experts do
not think that this claim will be successful; however, the company has established that if they
were to insure against the possibility of losing the case, it would cost them R300 000.
Warranty for ship constructed
The company built a ship on behalf of a customer at a total cost of R86 million. The company
provided a warranty in respect of latent defects for a period of three years. The company is
confident that this will not give rise to any claim by the customer. The company has, however,
established that if they were to sell their obligation to an external party it would cost them
R680 000.
Required:
Indicate the effects of the above information on the business combination. Ignore taxation.
Solution
Legal claim
As the claim appears to be a possible (as opposed to a probable) obligation, no liability is
raised by A Ltd on acquisition of B Ltd.
Warranty
The warranty represents a present obligation. The fair value of the contingent liability appears
to be able to be reliably measured (R680 000). The contingent liability is recognised at its fair
value of R680 000, even though there is no probability of any outflow of resources.
18
Chapter 2
Example 2:3
A Limited acquired 100% of the shares in B Limited on 1 January 20.1. At that date B Limited
had an operating lease for a certain property with a monthly rental of R10 000. The remaining
lease period was three years.
Required:
Calculate the amounts that the lease liability and right-of-use asset should the recognised by A
Ltd in its group financial statement assuming the market related rental for the property was:
(a) R8 000
(b) R12 000
The incremental borrowing rate of B Limited is 8% p.a.
19
Notes on Group Financial Statements
Solution
Lease liability
Pmt = 10 000
n = 36
i = 8%/12
Comp PV = 319 118
Right-of-use asset
(a) 255 294(1)
(b) 382 924(2)
(1)
319 118 - 63 824 = 255 294
Pmt = 2 000
n = 36
i = 8%/12
Comp PV = 63 824
(2)
319 118 + 63 824 = 382 924
5.4.1 Goodwill
Goodwill is recognised as the excess of (a) over (b).
(a) The aggregate of:
ƒ the consideration transferred (purchase price)
ƒ the amount of any non-controlling interest, and
ƒ in a business combination achieved in stages (piecemeal) the acquisition date fair value
of the acquirer’s previously held equity interest in the acquiree.
20
Chapter 2
(b) The acquisition date identifiable net assets acquired, measured in accordance with this
IFRS.
Goodwill is measured as follows:
(i) The non-controlling interest may be measured at the proportionate share of the
acquiree’s identifiable net assets or at fair value. If the first option is chosen this will
result in goodwill only being attributable to the parent. However, if the second option is
chosen, goodwill recognised will be attributable to both the parent and non-controlling
interests. This choice is made for each business combination and an entity does not
have to apply the policy consistently.
(ii) Where a business combination is achieved in stages it is important to note that the
acquirer’s previously held equity interest at the date of acquisition is included in
determining goodwill only at the date of acquisition and is measured at fair value. The
following example illustrates this principle.
Example 2:4
B Ltd has for the last five years had 5 million shares in issue. A Ltd acquired equity interests in
B Ltd as follows:
Date Shares acquired Fair value of consideration transferred
1 June 20.1 0.75 million (15%) R1.2 million
30 September 20.3 1.5 million (30%) R3.4 million
31 August 20.4 1.75 million (35%) R5.25 million
On 31 August 20.4 the identifiable net assets of B Ltd were valued, in terms of IFRS 3, at
R12 million. At that date the market value of a B Ltd share for a non-controlling (minority)
interest was R2.80 per share. This was also considered to be the fair value of a B Ltd share.
Required:
Calculate the goodwill to be recognised as a result of the business combination, assuming the
non-controlling interests are measured at:
(a) their proportionate share of the acquiree’s identifiable net assets
(b) fair value.
Solution
(a) (b)
R’000 R’000
Fair value of consideration 5 250 5 250
Non-controlling interests 2 400(1) 2 800(3)
Fair value of existing holding 6 300(2) 6 300
13 950 14 350
Identifiable net assets 12 000 12 000
Goodwill 1 950 2 350
(1)
12 000 × 20% = 2 400
(2)
(750 + 1 500) × 2.80 = 6 300
(3)
5 000 × 20% × 2.80 = 2 800
continued
21
Notes on Group Financial Statements
Solution (continued)
(a) (b)
R’000 R’000
Note that goodwill can be analysed as follows:
Attributable to
ƒ Non-controlling interest (2 800 – 2 400) – 400
ƒ Existing holding (12 000 × 45% = 5 400- 6 300) 900 900
ƒ Acquisition resulting in control (12 000 × 35% = 4 200 – 5 250) 1 050 1 050
1 950 2350
Note that the final acquisition results in proportionately more goodwill than either the non-
controlling interests or the existing holding. This is likely to be due to the fact that the final
acquisition results in A Ltd obtaining control over B Ltd for which it is likely to pay an additional
premium over and above the amount of goodwill that exists for a non-controlling interest. This
‘cost of control’ can be calculated as follows:
R’000
Other goodwill (12 000 × 35%) – (1 750 × 2.80) 700
Cost of control (balancing figure) 350
1 050
22
Chapter 2
An acquirer may transfer assets to the sellers of the acquiree where the fair value of the asset is
different to its carrying amount. In such cases the acquirer recognises a gain or loss (in profit or
loss) on the effective disposal of the asset. If, however, the asset is transferred to the acquiree
(rather than to its former owners) then the asset is measured at the carrying amount immediately
before transfer. This is because the asset is transferred within the group and control of the asset
exists both before and after the transfer.
Where a business combination is effected only by an exchange of equity interests, the acqui-
sition-date fair value of the acquiree’s equity interest may be more reliably measurable than the
acquisition-date fair value of the acquirer’s equity interests. If so, the acquirer shall determine the
amount of goodwill by using the fair value of the acquiree’s equity interests rather than fair value
of the equity interests of the acquirer transferred. For example, assume that A Ltd acquires a
controlling interest in B Ltd by issuing A Ltd shares. If the fair value of a B Ltd share is more
reliably measurable than the fair value of an A Ltd share, then the fair value of a B Ltd share is
used to determine the goodwill arising on acquisition.
Contingent consideration
A contingent consideration usually arises where there is an obligation of the acquirer to transfer
additional assets or equity interests to the former owners of the acquiree if specified future events
occur or conditions are met, for example future share price, profits made, revenue earned, etc.
Contingent consideration may, however, give the acquirer the right to the return of previously
transferred consideration, if specified conditions are met.
Note that the consideration transferred (purchase price) includes contingent considerations and,
consequentially, an acquirer shall recognise the acquisition-date fair value of the contingent con-
sideration as part of the consideration transferred.
The acquirer shall classify the obligation to pay the contingent consideration as either:
ƒ a liability, or
ƒ equity
on the basis of the definitions of an equity instrument and financial liability in IAS 32.11
23
Notes on Group Financial Statements
Example 2:5
A Ltd acquired a 40% equity interest in B Ltd on 30 June 20.1 for R65 000. On 31 December
20.5 A Ltd acquired a further 20% holding for R120 000.
The equity and fair value of identifiable assets of B Ltd was as follows:
30 June 20.1 31 December 20.5
R
Share capital 100 000 100 000
Other reserves – 40 000
Retained earnings 40 000 250 000
140 000 390 000
IFRS 3 value of identifiable assets 150 000 450 000
On 31 December 20.5 the fair value of A Ltd’s original investment in B Ltd was estimated to be
R200 000.
A Ltd measures the non-controlling interests at the acquisition date at their share of the fair
value of the identifiable net assets. B Ltd was not an associate in prior years.
Required:
Draft the acquisition line item for the analysis of equity worksheet and prepare the pro forma
consolidation journal entry(ies), assuming:
(a) the investment in B Ltd was previously carried at cost, and
(b) the investment in B Ltd is was previously accounted for in terms of IFRS 9 with fair value
adjustments included in profit or loss (fair value was R200 000 on 31 December 20.5).
Ignore taxation.
Solution
24
Chapter 2
Example 2:6
X Ltd (year end 31 December) acquired 80% of the shares in Y Ltd on 30 June 20.1. Informa-
tion required to reliably value an intangible asset of Y Ltd was not available by the time the
20.1 financial statements were authorised for issue. The asset was, therefore, provisionally
estimated at R6 million and goodwill at R4 million in the 20.1 financial statements. The intan-
gible asset was estimated to have a useful life of six years. The recoverable amount of goodwill
at 31 December 20.1was R4.2 million.
On 30 April 20.2 the information necessary to value the intangible asset was available which
indicated its value at 30 June 20.1 was R4.5 million. The estimated useful life from that date
was confirmed to be six years.
The non-controlling interests are recognised at their share of the identifiable net assets.
Required:
Indicate how the above will be accounted for in the 20.1 and 20.2 financial statements.
Ignore taxation.
25
Notes on Group Financial Statements
Solution
26
Chapter 2
Example 2:7
A Limited was served papers by B Limited on 15 December 20.1 for R500 000 in respect of an
alleged infringement of copyright. B Limited’s shares are all owned by a Mr Baloyi.
In January 20.2 A Limited approached Mr Baloyi with an offer to purchase all the shares in
B Limited. Negotiations were concluded in late January 20.2 and a purchase consideration of
R6 000 000 in cash was agreed upon. The legal claim by B Limited was settled as part of the
negotiations. Control over B Limited passed to A Limited on 1 February 20.2 and the consid-
eration was transferred on the same date. The fair value of the lawsuit on 1 February 20.2 was
R380 000.
Required:
Draft the journal entry in the books of A Limited to account for the acquisition of the shares in
B Limited assuming
(a) no provision had been raised in A Limited in respect of the lawsuit, and
(b) a provision of R300 000 had been raised in the books of A Limited in respect of the law-
suit.
Ignore deferred tax.
Solution
Part (a)
Investment in B Limited 5 620 000
Settlement loss (P/L) 380 000
Bank 6 000 000
Part (b)
Investment in B Limited 5 620 000
Provision for lawsuit (SOFP) 300 000
Settlement loss (P/L) 80 000
Bank 6 000 000
27
Notes on Group Financial Statements
Reacquired rights
A reacquired right recognised as an intangible asset shall be amortised over the remaining con-
tractual period of the contract in which the right was granted.
If such a right is subsequently sold to a party, then the carrying amount at the time of disposal is
used to determine the gain or loss on the sale.
Contingent liabilities
After initial recognition and until the liability is settled, cancelled or expires, the contingent liability
is measured at the higher of:
ƒ the amount that would be recognised in terms of IAS 37
ƒ the amount initially recognised less, if appropriate, cumulative amount of revenue recognised
in accordance with IFRS 15.
Indemnification assets
At the end of each subsequent reporting period, an indemnification asset shall be measured on
the same basis as the indemnified asset or liability, subject to any contractual limitations on its
amount.
For an indemnification asset that is not measured at fair value, it is measured at management’s
assessment of the collectability of the indemnification asset.
The asset shall be derecognised only when it collects the asset, sells it or loses the right to it.
Contingent consideration
Measurement period adjustments
Measurement period changes to the fair value of the consideration transferred may be as a result
of additional information not available at the time. These changes are accounted for in the
manner discussed in 5.8 (Measurement period) above.
Adjustments in respect of the business combination agreement
There may be an adjustment to the consideration transferred in terms of the business combin-
ation agreement, for example:
ƒ meeting an earnings target
ƒ reaching a specified share price
ƒ reaching a milestone in a research and development project.
These are not measurement period adjustments. The acquirer shall account for changes in the
fair value of contingent consideration as follows:
ƒ Contingent consideration classified as equity shall not be remeasured and its subsequent
settlement shall be accounted for within equity.
ƒ Contingent consideration classified as an asset or liability that:
– is a financial instrument and is within the scope of IFRS 9 shall be measured at fair value,
with any resultant gain or loss included in profit or loss
– is not within the scope of IFRS 9 shall be measured at fair value with changes in fair value
included in profit or loss.
28
Chapter 2
Example 2:11
A Ltd acquired the business of B Ltd. The agreement stipulated that, in addition to the con-
sideration transferred at acquisition date, A Ltd would issue an additional 100 000 A Ltd shares
in respect of the acquisition of B Ltd if B Ltd’s cumulative profits reached R50 million two years
after the acquisition date. A Ltd estimated that the fair value of this contingent consideration
was R1.2 million and consequently included it in the consideration transferred (purchase price)
at acquisition date and credited a ‘contingent consideration reserve’ (equity). After two years,
assume that the value of an A Ltd share was R15 per share and:
(a) The cumulative profits of B Ltd were R65 million
(b) The cumulative profits of B Ltd were R43 million
Solution
(a) A Ltd issues the 100 000 shares to the vendors of B Ltd. The fact that the fair value of the
shares is now R1.5 million (100 000 × 15) is irrelevant. The contingent consideration
reserve is transferred to share capital.
(b) The profit target is not met and so the shares are not issued. No profit or loss is recog-
nised. The company may wish to transfer the contingent consideration reserve to another
equity account, however, this must be done within equity (statement of changes in equity).
Example 2:12
Assume the same facts as in Example 2:10 except that the contingent consideration is to be
settled with a cash payment of R2 million in two years’ time if the profit target is met. At the
date of acquisition A Ltd estimated the fair value of the contingent consideration to be
R1.2 million. The R1.2 million was, therefore, included in the consideration transferred and a
resultant liability raised. The fair value of the contingent consideration was estimated by taking
into account the time value of money (11.8%p.a.) and the probability of meeting the profit
target.
Two years after acquisition date the carrying amount of the liability was R1.5 million after taking
into account the unwinding of the discount rate.
Solution
The contingent consideration is a financial liability (refer IAS 32.25) and is included in the
scope of IFRS 9.
(a) The liability is settled by a payment of R2 million and the loss on settlement of R500 000
(2 – 1.5) is included in profit or loss.
(b) No payment is made and a gain on derecognition of R1.5 million (1.5 – 0) is included in
profit or loss for the period.
6. DISCLOSURE
6.1 Nature and financial effect of business combinations
The acquirer shall disclose information that enables users of its financial statements to evaluate
the nature and financial effect of a business combination that occurs either
ƒ during the reporting period, or
ƒ after the end of the reporting period but before the financial statements are authorised for
issue.
29
Notes on Group Financial Statements
Note, therefore, that the disclosure requirements also apply to a business combination that takes
place in the ‘post-balance sheet period’.
Refer to para B64 to B66 of appendix B of IFRS for the specific disclosures that are required to
give effect to the above.
Example 2:13
A Ltd, a company with a December year end, acquired 80% of the ordinary shares of B Ltd on
1 January 20.1 for R920 000 when the fair value of B Ltd’s identifiable net assets amounted to
R1 million. The fair value of the non-controlling interests at that date was R220 000. The con-
sideration transferred included an amount of R40 000 which represented a premium that A Ltd
paid in order to obtain control over B Ltd.
B Ltd represents a single cash generating unit. On 31 December 20.1 the carrying amount of
the identifiable net assets of B Ltd was R1.2 million. An impairment test was conducted on
31 December 20.1 in respect of B Ltd which established that its recoverable amount was
R1.23 million.
The goodwill arising on the acquisition of B Ltd is as follows:
R
Consideration transferred 920 000
Non-controlling interest (at fair value) 220 000
1 140 000
Identifiable net assets (measured in terms of IFRS 3) 1 000 000
Goodwill 140 000
The goodwill can be allocated as follows:
Parent (920 – (1 000 × 80%)) 120 000
Non-controlling interests (220 – (1 000 × 20%)) 20 000
140 000
continued
30
Chapter 2
The loss attributable to the non-controlling interests exceeds their share of the goodwill arising
on acquisition. In terms of the standard their share of the impairment loss is not limited to
R20 000 and consequently the non-controlling interest in the balance sheet will now be R2 000
less than their share of the identifiable net assets!
31
CONSOLIDATED STATEMENT OF FINANCIAL
3 POSITION – AT THE DATE OF ACQUISITION
OR FORMATION OF WHOLY OWNED
SUBSIDIARY
Example 3:1
S LTD
STATEMENT OF FINANCIAL POSITION AT 1 JANUARY 08
(before sale to H Ltd)
R
ASSETS
Non-current 240 000
Current 100 000
340 000
EQUITY 220 000
Share capital (100 000 shares) 120 000
Other reserves 25 000
Retained earnings 75 000
LIABILITIES 120 000
Non-current 90 000
Current 30 000
340 000
continued
33
Notes on Group Financial Statements
H LTD
STATEMENT OF FINANCIAL POSITION AT 1 JANUARY 08
(before purchase of S Ltd)
R
ASSETS
Non-current 650 000
Current 750 000
1 400 000
EQUITY 1 050 000
Share capital 500 000
Other reserves 200 000
Retained earnings 350 000
LIABILITIES 350 000
Non-current 180 000
Current 170 000
1 400 000
H Ltd pays S Ltd R300 000 cash for its net assets. In deciding how much it is willing to pay for
these net assets, H Ltd considers the assets of S Ltd to be fairly valued in its books.
H Ltd records the purchase of the net assets of S Ltd as follows:
R R
Non-current assets 240 000
Current assets 100 000
Goodwill 80 000
Non-current liabilities 90 000
Current liabilities 30 000
Bank 300 000
Goodwill is calculated as the difference between the purchase price and the fair value of the
net IDENTIFIABLE assets purchased.
S Ltd’s only asset at this stage will be the R300 000 cash received from H Ltd. Assuming that
S Ltd is to liquidate, the cash is paid to S Ltd’s shareholders.
Notes:
1. The two businesses have now merged to form one entity, and the financial statements of
H Ltd will, in future, include the assets and liabilities and the profit of the ‘new’ entity (only
one company is involved in this ‘new’ entity).
2. It is not necessary for the two businesses physically to move into the same premises now
that they have merged. The business previously carried on by S Ltd can still be performed
at its separate premises (i.e., a branch), but it now forms part of the enlarged entity – it no
longer exists as a separate legal entity.
3. In examining the purchase of S Ltd from the point of view of the H Ltd shareholders, the
following should be noted:
(i) The H shareholders (through H Ltd) have exchanged R300 000 cash for R300 000 net
assets.
(ii) The equity of H Ltd has not changed at all – the ‘new’ entity which now comprises the
two previously separate businesses, belongs to the H shareholders, although their
equity has not increased. There has merely been a change in the nature of their net
assets.
continued
34
Chapter 3
4. The statement of financial position of the ‘new’ entity on 1 January, after the purchase, will
be as follows:
H LTD
STATEMENT OF FINANCIAL POSITION AT 1 JANUARY 08
(after purchase of S Ltd)
R
ASSETS
Non-current – goodwill 80 000
– other (650 000 + 240 000) 890 000
Current (750 000 – 300 000 + 100 000) 550 000
1 520 000
EQUITY 1 050 000
Share capital 500 000
Other reserves 200 000
Retained earnings 350 000
LIABILITIES 470 000
Non-current (180 000 + 90 000) 270 000
Current (170 000 + 30 000) 200 000
1 520 000
Example 3:2
Using the same information as per example 3:1, except that all the shares in S Ltd (and not the
net assets) are purchased by H Ltd, the purchase will be recorded in H Ltd’s books as follows:
R R
Investment in S Ltd 300 000
Bank 300 000
In example 3:1 the purchase of the net assets from S Ltd by H Ltd concerns two parties, H Ltd
and S Ltd.
In example 3:2 the transaction involving the purchase of the shares in S Ltd by H Ltd involved
H Ltd and the present shareholders of S Ltd (i.e. not the company, S Ltd, itself).
The net assets of S Ltd do not now belong (directly) to H Ltd, and H Ltd’s separate statement
of financial position will not include these net assets. The two individual companies still operate
as two separate undertakings (legally) and each must produce its own statutory financial
statements. One of H Ltd’s assets will, of course, be ‘investment in S Ltd R300 000’. H Ltd
owns all the shares of S Ltd (and thereby the business or (indirectly) the net assets of S Ltd)
and one may therefore look upon these two companies as one economic entity or group. The
two companies have the same owners, viz. the shareholders of H Ltd.
As stated above, it should be appreciated that, in the statement of financial position of H Ltd,
one of H Ltd’s assets will be ‘investment in subsidiary, at cost R300 000’. This ‘cost’ figure
represents (or is equivalent in value to) the net asset value (identifiable net assets plus good-
will) of the subsidiary at the date these shares were acquired. The actual assets and liabilities
of the subsidiary are not included in H Ltd’s statement of financial position. The separate finan-
cial statements of H Ltd, in not supplying the shareholders of H Ltd with details of the underly-
ing net assets ‘indirectly’ owned by them, do not give these shareholders a fair picture of the
overall financial position of their investment in H Ltd.
continued
35
Notes on Group Financial Statements
Looking ahead at the period after the date of acquisition of the shares in S Ltd by H Ltd for a
moment, it can be noted that in example 3:1 the trading results of (the former) S Ltd are in
future to be incorporated with those of H Ltd when drawing up the financial statements of
H Ltd. The owners of H Ltd (who, of course, also own (the former) S Ltd, which has gone out of
existence as a separate company) by examining the separate financial statements of H Ltd, will
be able to judge the overall performance of their investment in H Ltd.
In the case of example 3:2 above (where the same effect of amalgamation was achieved
through the purchase of S Ltd’s shares by H Ltd), the trading results of S Ltd will not be incor-
porated into the separate financial statements of H Ltd. S Ltd, being a separate legal entity,
produces its own financial statements, which are sent to its shareholder (H Ltd) and these
financial statements are, of course, examined by the directors and not the shareholders of
H Ltd. In this way the results of S Ltd’s operations and the financial position of S Ltd are ‘with-
held’ from the ‘indirect’ owners of the net assets of S Ltd.
It is clear then that, whilst there is a legal requirement for each company to produce its own
separate financial statements, there is also a need for H Ltd to produce a set of financial
statements incorporating the net assets and the trading results of both H Ltd and S Ltd, its
subsidiary. In terms of IAS 27 (para 9) a parent company is required to produce such a com-
bined set of financial statements.
Group annual financial statements usually take the form of ‘consolidated annual financial
statements’, which comprise a consolidated statement of financial position, a consolidated
statement of profit or loss and other comprehensive income, a consolidated statement of
changes in equity and a consolidated cash flow statement, together with explanatory notes, for
the group of companies. Such financial statements are drawn up as though the whole group of
companies were a single entity.
The statement of financial position of the two companies, after the acquisition of the shares by
H Ltd, are now examined.
continued
36
Chapter 3
Before drawing up the consolidated statement of financial position of H Ltd and its subsidiary
company, the following points should be noted:
(i) The consolidated statement of financial position must obviously include all the assets and
liabilities of both companies (as in example 3:1). The exact same businesses, net assets
and shareholders are involved, and hence the consolidated statement of financial position
in example 3:2 cannot be any different.
(ii) The AT ACQUISITION position is being examined – no post-acquisition period has
elapsed.
(iii) Note again that H Ltd’s equity has not altered as a result of the acquisition of the shares in
S Ltd by H Ltd. Merely the nature of its net assets has changed – shares in S Ltd
R300 000 owned instead of cash of R300 000.
(iv) What does the asset ‘investment in S Ltd R300 000’ represent?
This investment represents the value placed on the underlying net assets of the subsidiary
by H Ltd at the date of acquisition of the shares. In this particular example the ‘investment
in subsidiary R300 000’ represents 100% of the shares in the subsidiary. If the parent
company acquired only 60% of the shares in the subsidiary, the investment in H Ltd’s
statement of financial position would represent only 60% of the value of the net assets of
the subsidiary. The remaining 40% then belongs to the non-controlling shareholders, but
this is dealt with in more detail later.
This principle of what the ‘investment in subsidiary’ in the parent company’s books repre-
sents is an important one. The shares intrinsically (i.e. the pieces of paper) are valueless
– it is the ‘right of ownership’ (indirectly) of the underlying net assets in the subsidiary
company that gives them their value.
(v) In drawing up the AT ACQUISITION consolidated statement of financial position in the
above example all that is involved is the substitution of the underlying net assets of the
subsidiary (at fair values) in place of the asset ‘Investment in subsidiary R300 000’.
The workings for the preparation of the Consolidated Statement of Financial Position in the
above example may be set out as follows:
continued
37
Notes on Group Financial Statements
H LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 1 JANUARY 08
R
ASSETS
Non-current
Goodwill 80 000
Property, plant and equipment 890 000
Current 550 000
1 520 000
EQUITY 1 050 000
Share capital 500 000
Other reserves 200 000
Retained earnings 350 000
LIABILITIES 470 000
Non-current 270 000
Current 200 000
1 520 000
Note that the figures in this statement of financial position correspond exactly with those in
example 3:1 (page 33).
38
Chapter 3
Example 3:3
H Ltd forms S Ltd on 1 January 09 and subscribes for S Ltd’s entire share capital.
H LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 1 JANUARY 09
R
ASSETS
Non-current 650 000
Current 750 000
1 400 000
EQUITY 1 050 000
Share capital 500 000
Other reserves 200 000
Retained earnings 350 000
LIABILITIES 350 000
Non-current 180 000
Current 170 000
1 400 000
39
Notes on Group Financial Statements
Example 3:4
On 1 January 09 H Ltd purchased all the shares in S Ltd for R400 000. With the exception of
the land and buildings (which H Ltd valued at R110 000), all the identifiable assets of S Ltd
were fairly valued in its books.
The following are the statement of financial position of H Ltd and S Ltd at 1 January 09:
continued
1 For the purposes of this book we will generally refer to the fair value of identifiable assets and liabilities
on acquisition in determining whether the carrying amount of an asset or liability needs to be adjusted on
consolidation. This is done because fair value is the general principle for initially recognising the subsid-
iary’s net assets. It must be remembered, however, that there are exceptions to this principle. These ex-
ceptions are dealt with in more detail in the section on business combinations in Chapter 2.
40
Chapter 3
Share capital 1 200 000 315 000 315 000 (2) 1 200 000
Other reserves 150 000 – 150 000
Retained earnings 600 000 5 000 5 000 (2) 600 000
Non-current liabilities 250 000 100 000 350 000
Current liabilities 150 000 100 000 250 000
2 350 000 520 000 500 000 500 000 2 550 000
All the consolidation workings above, including the worksheet and the journal entries, do not
appear in the books of either of the two companies.
They are memorandum in nature and are kept on a separate consolidation file resulting in the
annual financial statements being drawn up for the group.
It is for this reason that the consolidation journal entries are sometimes called ‘pro forma’ jour-
nal entries.
The AT ACQUISITION equity of the subsidiary has again been set off against the purchase
price of the shares and the revaluations have been made based on the fair values placed on
the subsidiary’s net assets at the acquisition date.
Note that an alternative here would have been for the subsidiary to revalue its land and build-
ings in its own books at R110 000 (by crediting a revaluation reserve). In this case the debit of
R50 000 in consolidation entry 2 would have been to ‘revaluation reserve’ (being part of the at
acquisition equity) and not to ‘land and buildings’. It should be remembered that the subsidiary
should only revalue the asset if it is in line with its accounting policy, not simply because of a
change in ownership.
continued
41
Notes on Group Financial Statements
The AT ACQUISITION accumulated depreciation in respect of the subsidiary’s assets is set off
against the cost so as to show the ‘fair cost to the parent company’ (or ‘group cost’) in the con-
solidated statement of financial position. The ‘group’ came into existence for the first time on
1 January 09 and the cost of the plant and machinery to the group was R140 000.
42
CONSOLIDATED STATEMENT OF FINANCIAL
4 POSITION AT THE DATE OF ACQUISITION:
PARTLY OWNED SUBSIDIARIES
Up to this point only wholly-owned subsidiaries have been dealt with. In the case of a wholly-
owned subsidiary the purchase price of the shares in the parent company’s books represents
100% of the net assets of the subsidiary (at fair value).
In the consolidated statement of financial position all the net assets of the subsidiary (at fair
values, including any goodwill) are merely substituted in place of the ‘Investment in S Ltd’.
In the case of a partly owned subsidiary, the purchase price of the shares in the parent com-
pany’s books represents only a portion of the value of the net assets of the subsidiary (at fair
values), plus the amount paid by the parent company in respect of any goodwill or a bargain
purchase arising at acquisition.
It could, therefore, be argued that the parent company indirectly owns 60% of each individual
asset and liability of the subsidiary and that in the consolidated statement of financial position one
should substitute 60% of each individual asset and liability of the subsidiary in place of the
‘investment in subsidiary’ asset. This method of group accounting is known as proportionate
consolidation or the proprietary theory method of consolidation. This method would, however,
result in meaningless figures being included in the consolidated statement of financial position as
the parent company does not have control over only 60% of the subsidiary.
It is more meaningful and logical to include in the consolidated statement of financial position
100% of all the assets and liabilities of the subsidiary company as these are under the control of
the parent. In this case, however, it is necessary to include in the equity section of the consoli-
dated statement of financial position the non-controlling shareholders (or minority) as co-owners
of the net assets of the subsidiary. This is the entity theory method of consolidation.
Putting this in another way, the consolidated statement of financial position would include the
parent company’s net assets as well as 100% of the net assets of the subsidiary (i.e. the net
assets of the whole group or economic entity). The equity section of the consolidated statement
of financial position would then be split into two sections; firstly, the equity of the parent company
shareholders and, secondly, the non-controlling shareholders, who own 40% of the subsidiary’s
net assets.
The parent company’s separate and consolidated financial statements are made available to the
parent company shareholders only (and not to the subsidiary company’s shareholders). The non-
controlling shareholders have a share only in the subsidiary’s net assets and their interests are
limited to the financial statements of the subsidiary only.
The non-controlling shareholders’ figure in the consolidated statement of financial position is
looked upon by some, as something of a ‘liability’ of the parent company shareholders of the
subsidiary as a result of including the remaining 40% of the net assets of the subsidiary in the
consolidated statement of financial position. It is more appropriate to regard the non-controlling
shareholders as co-owners of a portion of the net assets of the group and therefore a separate
component of equity.
As indicated in Chapter 2, there are, in terms of IFRS 3 (Business Combinations), two alterna-
tives to the amount of non-controlling interests initially recognised on acquisition of a subsidiary:
(i) Recognise the non-controlling interests at their share of the identifiable assets and liabilities
of the subsidiary at the date of acquisition. If this alternative is chosen, the goodwill arising
on acquisition will only be attributable to the parent shareholder’s interest.
43
\
Notes on Group Financial Statements
(ii) Recognise the non-controlling interests at their fair value at acquisition. The fair value
would normally be the market value of the interest if the share was traded in an active mar-
ket. If not traded, the fair value would be determined using an appropriate valuation tech-
nique. If this alternative is chosen, the goodwill arising on acquisition of the subsidiary will
be attributable to both the parent and non-controlling interests.
FOR THE PURPOSES OF THIS BOOK, IF A QUESTION IS SILENT AS TO THE TREATMENT
OF NON-CONTROLLING INTERESTS, THEN IT SHOULD BE ASSUMED THAT THEY WILL BE
MEASURED INITIALLY AT THEIR SHARE OF THE NET IDENTIFIABLE ASSETS OF THE
SUBSIDIARY.
The following examples illustrate how an AT ACQUISITION consolidated statement of financial
position is drawn up where a partly owned subsidiary is acquired.
Example 4:1
H Ltd acquires 60% of the shares of S Ltd on 1 January 09 for R85 000. H Ltd considers the
net assets per S Ltd’s statement of financial position to be fairly valued. The non-controlling
interests are recognised at their share of the net identifiable assets.
Required:
Prepare the consolidated statement of financial position of H Ltd and its subsidiary, S Ltd, at
1 January 09.
44
Chapter 4
Solution
Share capital 550 000 105 000 105 000 (2) 550 000
Other reserves 150 000 – 150 000
Retained earnings 200 000 20 000 20 000 (2) 200 000
Non-controlling interests 50 000 (2) 50 000
Non-current liabilities 100 000 25 000 125 000
Current liabilities 100 000 30 000 130 000
1 100 000 180 000 155 000 155 000 1 205 000
Note:
1. The above consolidated statement of financial position has been prepared AT THE AC-
QUISITION DATE – no post-acquisition period has elapsed.
2. The ‘investment in S Ltd R85 000’ has been eliminated against the parent company’s share
of the AT ACQUISITION EQUITY of S Ltd. No adjustments were necessary in respect of
any identifiable assets as these were considered by H Ltd to be fairly valued in S Ltd’s
statement of financial position. A difference (debit) of R10 000 arises when the investment
of R85 000 is set off against the parent company’s share of the at acquisition equity
(R75 000). This difference is ‘goodwill’ – but note that it represents the amount paid for
goodwill by the parent company only. The non-controlling interests have been given their
share (40%) of the at acquisition equity (as adjusted for any changes in the values of
IDENTIFIABLE assets – none in this case) and do not share in the goodwill at acquisition.
This is because the group has chosen to recognise the non-controlling interests at their
share of the net identifiable assets of the subsidiary rather than at fair value.
3. Where the valuations of the assets and liabilities of the subsidiary are different from their
carrying amounts, the non-controlling interests are recognised based on the amounts rec-
ognised for group purposes. This principle is dealt with in example 4:3.
4. The consolidated statement of financial position may now be drawn up from the figures
reflected in the ‘consolidation’ column of the worksheet.
45
Notes on Group Financial Statements
Example 4:2
Same information as in example 4:1, except that it is the policy of the group to recognise the
non-controlling interests at fair value. On 1 January 20.9 the fair value of the non-controlling
interests was R54 000.
Solution
Note:
The goodwill is now attributable to both the parent and non-controlling shareholders. The good-
will can be allocated as follows:
R
Parent shareholders [(85 000 – (125 000 × 60%)] 10 000
Non-controlling shareholders [(54 000 – (125 000 × 40%)] 4 000
14 000
It is important to note that the parent and the non-controlling interests share the equity (and
profits) in the ratio of 60:40 and that any goodwill impairment will be expensed in this ratio and
not in the ratio of 10:4 (i.e. the relative amounts of goodwill contributed initially).
46
Chapter 4
Example 4:3
H Ltd acquires 60% of the shares of S Ltd on 1 January 09 for R115 000. With the exception of
the plant and machinery (which has a fair value of R50 000 above carrying amount), all the
identifiable assets are considered to be fairly valued. The non-controlling interests are initially
measured at their share of the identifiable net assets.
Note:
As pointed out in point 3 on page 43, where at the date of acquisition of the subsidiary, the
recognised value of certain identifiable assets (or liabilities) of the subsidiary do not correspond
with the carrying amounts as per the subsidiary’s books, the fair values of these assets or lia-
bilities are introduced into the consolidated statement of financial position and an appropriate
portion of the surplus/deficit arising is allocated to the non-controlling interests. The credit to
the non-controlling interests at the acquisition date would, therefore, include their share of the
subsidiary’s net assets (or equity) per the books of the subsidiary as well as their share of the
increase (or decrease) in terms of the fair value adjustment made on consolidation.
Returning to example 4:3, the pro forma journal entries will be as follows:
R R
1. Plant and machinery – accumulated depreciation 20 000
Plant and machinery – cost 20 000
continued
47
Notes on Group Financial Statements
Notes:
1. The non-controlling interests have been recognised at their share (40%) of the AT ACQUI-
SITION equity (as adjusted for any changes in the values of IDENTIFIABLE ASSETS AND
LIABILITIES). Remember there is an alternative treatment where they are recognised at
fair value.
2. The goodwill ‘belongs’ only to the parent company. It arises from the difference between
the parent’s purchase price of the shares in the subsidiary and the attributable portion
(60%) of the subsidiary’s net identifiable assets (at fair value). This would not be the case if
the non-controlling interests are measured at fair value.
3. As an alternative to debiting plant in journal entry no. 2 above, one could first revalue the
plant in the subsidiary’s own books (creating a further non-distributable reserve of R50 000
in the subsidiary). In this case the debit of R50 000 in journal entry 2 above would go to the
non-distributable reserve created. The effect of this is, of course, exactly the same as be-
fore. This is not normally done unless it is an appropriate accounting policy.
Example 4:4 has been prepared to show the effect of the parent purchasing the shares of the
subsidiary at less than the fair value of the identifiable assets of the subsidiary.
Example 4:5 illustrates how, in preparing the workings for consolidation purposes, double entry
principles are maintained at all times.
48
Chapter 4
Example 4:4
H Ltd acquires 60% of the shares of S Ltd on 1 January 09 for R100 000. With the exception of
the plant and machinery (which H Ltd values at R50 000 above book value), all the identifiable
assets are considered to be fairly valued. The non-controlling interests are initially recognised
at their share of the identifiable net assets.
Required:
Prepare the consolidated statement of financial position of H Ltd and its subsidiary, S Ltd, at
1 January 09.
Solution
* This amount will be included in the statement of profit or loss and other comprehensive in-
come in the 09 financial year as a ‘gain on bargain purchase’.
continued
49
Notes on Group Financial Statements
Solution (continued)
Share capital 550 000 105 000 105 000 (2) 550 000
Other reserves 150 000 150 000
Retained earnings 200 000 20 000 20 000 (2) 5 000 (2) 205 000
Non-controlling intrests 70 000 (2) 70 000
Non-current liabilities 100 000 25 000 125 000
1 000 000 150 000 195 000 195 000 1 100 000
Notes:
1. The non-controlling interests have again been given their share (40%) of the AT ACQUISI-
TION equity. The non-controlling interests are again measured on their share of the value
of identifiable assets as adjusted, if necessary. (Same as example 4:3.) Remember there is
an alternative to this measurement.
2. The excess of net assets acquired over purchase price arising at the acquisition date
(R5 000) is attributable only to the parent company. It arises from the difference between
the parent company’s purchase price of the shares in the subsidiary and the attributable
portion (60%) of the subsidiary’s net identifiable assets (at fair value). This is regarded as a
‘profit’ on acquisition and is therefore credited to retained earnings. This amount will be in-
cluded in profit or loss in the consolidated statement of profit or loss and other comprehen-
sive income in the year in which the subsidiary is acquired.
50
Chapter 4
Example 4:5
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date all the
identifiable assets of S Ltd were considered to be fairly valued, with the exception of land and
buildings which were considered to be worth R20 000 more than the carrying amounts. S Ltd
did not revalue the land and buildings in its own books. The non-controlling interests are initial-
ly measured at their share of the identifiable net assets.
The following are the summarised statements of financial position of H Ltd and S Ltd at
31 December 02:
H Ltd S Ltd
R R
Land and buildings, at cost 185 000 60 000
Investment in S Ltd, at cost 65 000
Current assets 40 000 25 000
290 000 85 000
Required:
Prepare the consolidated statement of financial position of H Ltd and its subsidiary, S Ltd, at
31 December 02.
Solution
continued
51
Notes on Group Financial Statements
Solution (continued)
Example 4:6
Same as example 4.5 except that the non-controlling interests are initially measured at their
fair value which was R41 000 on 31 December 02.
Required:
Draft the analysis of equity worksheet of S Ltd.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL
SC OR RE L+B NCI INV (GW)
31.12.02 Purchased 60% 50 000 20 000 10 000 20 000 100 000 41 000 65 000 (6 000)
DEBITS CREDITS
52
CONSOLIDATED STATEMENT OF FINANCIAL
5 POSITION – AFTER THE DATE OF
ACQUISITION
Some of the major principles involved in drawing up the consolidated statement of financial pos-
ition AT THE ACQUISITION DATE were as follows:
1. The consolidated statement of financial position should include the identifiable assets of the
subsidiary at the fair values thereof, corresponding with the parent company’s considerations
taken into account in setting the purchase price of the shares in the subsidiary.
2. The parent company’s share of these net assets (as adjusted) are included in the consolidat-
ed statement of financial position in substitution for the purchase price of the shares in the
subsidiary. Where the purchase price exceeds the parent’s share of the net assets (as
adjusted), the balancing figure (debit) is ‘goodwill’ and is also included in the consolidated
statement of financial position. Where the purchase price is less than the parent’s share of
the net assets (as adjusted), the balancing figure (credit) is a ‘gain on a bargain purchase’
and is credited to income in the Consolidated Statement of Profit or Loss and Other Compre-
hensive Income.
3. The non-controlling shareholders’ share of the subsidiary’s net assets (as adjusted) is also
included in the consolidated statement of financial position and as a result of these net assets
being included, the non-controlling shareholders’ interests are included in the consolidated
statement of financial position as a ‘co-owner’ in respect of their share of these net assets.
The principles underlying the preparation of the consolidated statement of financial position at a
point in time AFTER ACQUISITION, are based on these same three principles.
The following points are considered in this connection:
1. Assume that the subsidiary has made profits in the post-acquisition years and has not dis-
tributed all these profits as dividends. The retained earnings at the end of (say) the third year
after acquisition comprises two elements:
(a) the at acquisition retained earnings (assuming no dividends have been paid out of this
after the acquisition date), and
(b) the post-acquisition retained earnings
2. Assume that this increase in retained earnings has been the only movement in the equity of
the subsidiary since the acquisition date.
3. If the equity of the subsidiary has increased as above (say by R20 000), then clearly the net
assets of the subsidiary have increased by a similar amount.
4. With regard to the preparation of the consolidated statement of financial position at this date,
the following matters are important:
(i) All the net assets of the subsidiary at this date must be included in the consolidated
statement of financial position.
(ii) These net assets may be divided into two parts – the value of the net assets that exist-
ed at the date the shares were acquired and the post-acquisition increase in the value
of the subsidiary’s net assets, representing the retained earnings post-acquisition (post-
acquisition losses are dealt with later). The parent company’s share of the at acquisition
portion of these net assets is included as a substitute for the ‘investment in S Ltd’ ac-
count. The same difference that arose at the acquisition date in respect of goodwill will
again be the balancing figure as far as the parent company’s investment is concerned.
53
\
Notes on Group Financial Statements
(iii) The non-controlling shareholders’ share of the at acquisition net assets (as adjusted), or
equity (as adjusted), is credited to non-controlling interests.
(iv) Steps (ii) and (iii) above eliminate the at acquisition equity of the subsidiary and the
‘investment in S Ltd’ account. Also the non-controlling interests are introduced, goodwill
is introduced and the net assets are adjusted (if necessary) to take into account the fair
values placed on these by the parent at the acquisition date. (See Example 5:1 below,
pro forma entry 1.)
(v) The post-acquisition increase in the subsidiary’s net assets having been included in the
consolidated statement of financial position, it is also necessary to include the post-
acquisition increase in equity of the subsidiary company, in order to balance the consol-
idated statement of financial position and to show how the owners’ interests have in-
creased during this period. The post-acquisition increase in the net assets of the
subsidiary ‘belongs’ to the parent company (say 60%) and the non-controlling interests
in the subsidiary (say 40%). On the consolidated statement of financial position, there-
fore, the post-acquisition increase in the subsidiary’s equity is allocated:
(a) 60% to the parent shareholders. and
(b) 40% to the non-controlling interests.
Assuming that the post-acquisition increase (R20 000) in the equity of the subsidiary is
represented by an increase in retained earnings, the retained earnings figure on the
consolidated statement of financial position (belonging to the parent shareholders) will
be increased by R12 000 and the non-controlling interests figure by R8 000.
(vi) To summarise, the consolidated statement of financial position at a date subsequent to
the acquisition date should include (together with the parent company’s own figures) the
following:
(a) All the identifiable assets (as adjusted) of the subsidiary
(b) The goodwill arising on acquisition of the subsidiary
(c) The non-controlling shareholders’ share of the equity (as adjusted) of the subsid-
iary. This will be credited to the non-controlling interests in two parts:
ƒ the at acquisition credit, and
ƒ the credit in respect of the post-acquisition increase in the equity of the subsid-
iary.
(d) The reserves (belonging to the parent company shareholders) per the consolidated
statement of financial position will include the parent company’s share of the post-
acquisition increase in the reserves of the subsidiary as well as any gain on a bar-
gain purchase (if any) at the date of acquisition. The parent company’s portion of
the at acquisition reserves of the subsidiary is not included in the reserves per the
consolidated statement of financial position, but is set off against the purchase
price of the investment by means of a pro forma journal entry.
54
Chapter 5
Example 5:1
H Ltd acquired 70% of the shares in S Ltd on 1 January 06 for R165 000. At this date the re-
tained earnings of the subsidiary was R40 000.
At the date of acquisition H Ltd considered the net assets of S Ltd to be fairly valued in its
statement of financial position, with the exception of land which was considered to be worth
R50 000 more than its carrying amount. S Ltd did not adjust the value of the land in its books.
The non-controlling interests are recognised at their share of the net identifiable assets of the
subsidiary.
The following are the summarised statements of financial position of H Ltd and S Ltd at
31 December 09:
Solution
continued
55
\
Notes on Group Financial Statements
Solution (continued)
Share Capital 550 000 110 000 110 000 (1) 550 000
Retained earnings 900 000 70 000 40 000 (1)
9 000 (2) 921 000
Non-controlling interests 60 000 (1)
9 000 (2) 69 000
Long-term loan 550 000 20 000 570 000
2 000 000 200 000 234 000 234 000 2 110 000
Notes:
1. In view of the fact that a ‘post-acquisition consolidated statement of financial position’ is
not prepared independently of a consolidated statement of profit or loss and other compre-
hensive income for the period ended on the date of the statement of financial position,
journal entry 2 above is somewhat artificial. The intention is, however, to explain a principle
first, (the allocation of post-acquisition increases in reserves between the parent company
and the non-controlling interests on the consolidated statement of financial position), before
introducing the consolidated statement of profit or loss and other comprehensive income in
Chapter 6.
2. A check on the non-controlling interests figure in the consolidated statement of financial
position is that they should be stated at 30% of the adjusted equity of the subsidiary
(R180 000 + R50 000), i.e. R69 000.
3. The at acquisition equity (adjusted for change in land value) has been eliminated/allocated
as follows:
(i) 70% (= R140 000) against the purchase price of the shares
(ii) 30% (= R60 000) by means of a credit to the non-controlling interests.
4. The excess of the purchase price of the shares over the attributable value of net assets
acquired is recognised as goodwill – this relates to the parent company only in this case, as
the non-controlling interests were not recognised at fair value initially.
5. The non-controlling interests are credited with their share of the post-acquisition increase in
reserves of the subsidiary.
6. The subsidiary’s R70 000 retained earnings has been ‘reduced’ to R21 000 (R70 000 –
R40 000 – R9 000), which is the parent company’s share of the post-acquisition increase in
reserves of the subsidiary. This is added to the parent company’s own retained earnings to
give the consolidated retained earnings.
continued
56
Chapter 5
Solution (continued)
The consolidated statement of financial position may now be prepared from the information
included in the ‘consolidation’ column as follows:
H LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 09
R
ASSETS
Non-current assets (including goodwill) 1 615 000 (b)
Current assets 495 000
2 110 000
EQUITY AND LIABILITIES
Equity attributable to
Parent shareholders 1 471 000
Share capital 550 000
Retained earnings 921 000 (a)
Non-controlling interests 69 000 2
Total equity 1 540 000
Non-current liabilities 570 000
2 110 000
(a) 1
900 + 21 = 921
(b)
1 400 + 503 + 254 + 140 = 1 615
Notes will also be attached including one to the effect that goodwill represents the excess of
the purchase price of the shares in the subsidiary over the attributable portion of the net assets
at the acquisition date and that the non-controlling interests are recognised at their share of the
identifiable net assets of the subsidiary.
Alternative workings (analysis of equity method)
The pro forma journal entries and the worksheet statements of financial position used as a
basis for determining the final figures for inclusion in the consolidated financial statements
used above is a very sound method of explaining the basic procedures of consolidation. This
objective has, hopefully, now been achieved.
This method, however, can be extremely time consuming especially when dealing with more
complex consolidations. An alternative, shorter method of setting out one’s workings will now
be introduced. This method involves analysing the equity of the subsidiary at various points in
time and dealing with the changes thereto in accordance with the basic principles dealt with
above.
In example 5:1, for instance, the equity of the subsidiary was analysed at the date of acquisi-
tion of the shares by the parent company and adjustments to the equity at this date, based on
the parent company’s valuations of the net assets when acquiring the shares, were made (i.e.
the increase in the value of land was recorded for consolidation purposes). This (adjusted) at
acquisition equity was then ‘eliminated’ and dealt with as follows:
ƒ 70% thereof set off against the investment in subsidiary, resulting in goodwill of R25 000
ƒ 30% thereof credited to the non-controlling interests.
The increase in the equity during the post-acquisition period was then analysed and dealt with
as follows:
ƒ 70% allocated to the parent company, to be included with the parent company’s own re-
serves in the consolidated balance sheet
ƒ 30% allocated to the non-controlling interests.
continued
57
\
Notes on Group Financial Statements
Solution (continued)
The (shortcut) consolidation process would now involve adding the parent company’s retained
earnings to the ‘since RE’ figure (parent company’s share of post-acquisition increases in sub-
sidiary’s reserve) to give the retained earnings for inclusion in the consolidated statement of
financial position.
The goodwill of R25 000 (debit) is taken to the consolidated statement of financial position as
well as the non-controlling interests of R69 000 (credit) and the R50 000 debit (increase) land
for consolidation purposes.
The remaining totals in the analysis of equity worksheet serve to ‘eliminate’ items from the
subsidiary’s statement of financial position and these items are not taken to the consolidated
statement of financial position. The assets and liabilities from both the parent company and
subsidiary’s statements of financial position are also included in the consolidated statement of
financial position (the land being increased by the debit of R50 000).
This shortcut method will save a great deal of time, especially when the more complex consoli-
dation problems are dealt with later. This method of presenting the workings is, therefore, rec-
ommended and will be used extensively henceforth.
It is important to understand the consolidation procedures thoroughly. It is vital to know how the
different figures fit together as well as the effect that all the adjustments have on the consoli-
dated financial statements.
continued
58
Chapter 5
Solution (continued)
In terms of the end product method, one could prepare the consolidated statement of financial
position without any journal entries or worksheets by simply showing the following workings or
explanations:
H LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 09
R
ASSETS
Non-current assets 1 615 000
Land 1 590 000 (1)
Goodwill 25 000 (2)
Current assets 495 000 (3)
2 110 000
EQUITY AND LIABILITIES
Share capital 550 000 (4)
Retained earnings 921 000 (5)
Equity attributable to parent shareholders 1 471 000
Non-controlling interests 69 000 (6)
Total equity 1 540 000
Non-current liabilities 570 000 (7)
2 110 000
Workings:
(1)
1 400 000 + 140 000 + 50 000 = 1 590 000
Although the R50 000 excess is not included in the subsidiary’s books, this must be incor-
porated into the consolidated statement of financial position as the parent company took
this into account when acquiring the shares in the subsidiary. The cost price of this invest-
ment (R165 000) included an amount (70% of R50 000) in respect of the fair value adjust-
ment and the excess must, therefore, be incorporated into the consolidated statement of
financial position when the R165 000 investment is ‘eliminated.’
(2)
165 000 – 70% (110 000 + 40 000 + 50 000) = 25 000. The amount that the parent com-
pany pays for goodwill is the cost of the investment less the parent company’s share of the
adjusted at acquisition equity of the subsidiary. (The subsidiary’s equity has been ‘adjusted’
by the R50 000 land fair value adjustment not incorporated into the subsidiary’s books.)
(3)
435 000 + 60 000 = 495 000.
(4)
The Parent Company figure only is included in the consolidated statement of financial pos-
ition for share capital.
(5)
900 000 + 70% (70 000 – 40 000) = 921 000.
Consolidated retained earnings include the parent company’s RE plus the parent com-
pany’s share of the subsidiary’s post-acquisition RE.
(6)
30% (110 000 + 70 000 + 50 000) = 69 000
OR
30% (110 000 + 40 000 + 50 000) + 30% (70 000 – 40 000) = 69 000
The alternative working simply separates the non-controlling interests’ post-acquisition
share from their at acquisition share. Note that the non-controlling interests do share in the
R50 000 revaluation excess.
(7)
550 000 + 20 000 = 570 000.
59
\
CONSOLIDATED STATEMENT OF PROFIT OR
6 LOSS AND OTHER COMPREHENSIVE
INCOME – INTRODUCTION
61
Notes on Group Financial Statements
In terms of IFRS 3 goodwill acquired on acquisition of a subsidiary should, after initial recog-
nition, be measured at cost less any accumulated impairment losses. Goodwill should not be
amortised. Instead, it should be tested at least annually for impairment.
Any gain on a bargain purchase is, after reassessing the fair value of the identifiable assets
and liabilities of the subsidiary, recognised immediately in the consolidated statement of profit
or loss and other comprehensive income.
Example 6:1
H Limited acquired 70% of the shares in S Ltd on 1 January 06 for R160 000. At that date
H Ltd considered all the net identifiable assets of S Ltd, with the exception of its land, to be
fairly valued in its statement of financial position.
H Ltd considered S Ltd’s land to be worth R50 000 more than its book value. On 1 January 06
S Ltd’s equity was as follows:
R
Share capital 105 000
Other reserves 15 000
Retained earnings 30 000
R150 000
Additional information:
Closing inventory – H Ltd R250 000; S Ltd R90 000
Plant is used in the manufacture of inventory.
Required:
Prepare H Ltd’s consolidated Statement of Profit or Loss and Other Comprehensive Income,
Statement of Financial Position and Statement of Changes in Equity for the 09 financial year.
62
Chapter 6
Solution
Workings:
1. Current year increases
H Ltd S Ltd
R’000 R’000
Sales 1 020 465
Cost of sales (615) (195)
Inventory – beginning (195) (73)
Purchases and depreciation on plant (630 + 40) (670) (212)
(865) (285)
Inventory – end 250 90
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 09
R
Revenue – sales (1 020 + 465) 1 485 000
Cost of sales (615 + 195) (810 000)
Gross profit 675 000
Operating expenses (316 + 191) (507 000)
Profit before tax 168 000
Taxation (41 + 32) (73 000)
Profit and comprehensive income for the year 95 000
Attributable to:
Equity holders of parent 80 900
Non-controlling interests 14 100
95 000
continued
63
Notes on Group Financial Statements
Solution (continued)
Non-
Share Other Retained Attrib. to Total
controlling
Capital Reserves Earnings Parent Equity
Interests
R R R R R R
Balances 1 January 09 550 000 70 000 197 500* 817 500 67 500 885 000
Comprehensive income for the year 80 900 80 900 14 100 95 000
Balances 31 December 09 550 000 70 000 278 400 898 400 81 600 980 000
1 072 000
continued
64
Chapter 6
Solution (continued)
Consolidation worksheet
H Ltd S Ltd Dr Cr Consolidated
R R R R R
Share capital (550 000) (105 000) 105 000 (550 000)
Other reserves (70 000) (15 000) 15 000 (70 000)
Retained earnings –
1 Jan 09 (180 000) (55 000) 30 000 (197 500)
7 500
Non-controlling interests 60 000
7 500
14 100 (81 600)
Sales (1 020 000) (465 000) (1 485 000)
Purchases 630 000 212 000 842 000
Inventory – 1 Jan 09 195 000 73 000 268 000
Administration expenses 28 000 14 000 42 000
Depreciation – plant 40 000 – 40 000
Rent and leasing 48 000 12 000 60 000
Other expenses 240 000 165 000 405 000
Accounts receivable 95 000 62 000 157 000
Accounts payable (63 000) (29 000) (92 000)
Bank 102 000 24 000 126 000
Taxation (expense) 41 000 32 000 73 000
Land, at cost – 75 000 50 000 125 000
Plant – cost 444 000 – 444 000
– accumulated
depreciation (140 000) – (140 000)
Investment in S Ltd 160 000 – 160 000 –
Goodwill 20 000 20 000
Non-controlling
interests’ share of
profit 14 100 14 100
– – 241 600 241 600 –
continued
65
Notes on Group Financial Statements
Solution (continued)
Example 6:2
H Ltd acquired 70% of the shares in S Ltd on 1 January 06 for R160 000. At that date H Ltd
considered all the identifiable assets of S Ltd, with the exception of land, to be fairly valued in
the books.
H Ltd valued S Ltd’s land at R50 000 more than its carrying amount. On 1 January 06 S Ltd’s
equity was as follows:
R
Share capital 105 000
Asset replacement reserve 15 000
Retained earnings 30 000
R150 000
continued
66
Chapter 6
Required:
Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income,
Statement of Changes in Equity and Statement of Financial Position of H Ltd and its subsidiary
company, S Ltd, for the year ended 31 December 09.
Solution
Workings:
Analysis of Equity Worksheet – S Ltd
(True) Equity of S Ltd Analysis of equity
Date Details Total Since
S Cap ARR RE Land NCI Inv (Gwill)
RE ARR
1 Jan 06 Purchased 70% 105 15 30 50 200 60 160 (20)
31 Dec 08 Increases 35 25 60 18 17.5 24.5
5
105 50 55 50 260 78 160 (20) 17.5 24.5
1
31 Dec 09 Profit 47 47 14.1 32.9
Transfer 10 (10) – – (7)4 7
9 8 10 7
105 60 92 50 307 92.1 160 (20) 43.4 31.56
continued
67
Notes on Group Financial Statements
Solution (continued)
Attributable to:
Equity holders of parent 80 900
Non-controlling interests 14 1001
95 000
(1)
(88 000 – 18 000) + 24 500 = 94 500
(2)
180 000 + 17 5005 = 197 500
*
18 000 + 7 0004 = 25 000
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 09
R
ASSETS
Non-current assets [(75 + 509 + 444 – 140) + 2010] 449 000
Current Assets 658 000
Inventory 340 000
Accounts receivable 192 000
Bank 126 000
1 107 000
continued
68
Chapter 6
Solution (continued)
Example 6:3
Assume the same information as in example 6:2, except that the recoverable amount of good-
will was calculated as follows:
Required:
Draft the consolidated financial statements of H Ltd for the 20.9 financial year.
69
Notes on Group Financial Statements
Solution
Workings:
Analysis of Equity Worksheet – S Ltd
(True) Equity of S Ltd Analysis of Equity
Date Details S Total Since
ARR RE Land NCI Inv (Gwill)
Cap RE ARR
1 Jan 06 Purchased 70% 105 15 30 50 200 60 160 (20)
31 Dec 08 Increases 35 25 60 18 4 13.5 24.5
105 50 55 50 260 78 160 (16) 13.55 24.5
31 Dec 09 Profit 47 47 14.11 6 26.9
Transfer 10 (10) – – (7)4 7
9 8 10 7
105 60 92 50 307 92.1 160 (10) 33.4 31.56
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 09
R
Profit before taxation (89 + 79 – 6) 162 000
Taxation (41 + 32) (73 000)
Profit and comprehensive income for the year 89 000
Attributable to:
Equity holders of parent 74 900
Non-controlling interests 14 1001
89 000
R R R R R R
(1) (2)
Balances 1 January 09 550 000 94 500 193 500 838 000 78 000 916 000
Comprehensive income
for the year 74 900 74 900 14 100 89 000
Transfer to ARR – 25 000* (25 000) – – –
Balances 31 December 09 550 000 119 500 243 400 912 900 92 100 1 005 000
(1)
(88 000 – 18 000) + 24 500 = 94 500
(2)
180 000 + 13 5005 = 193 500
*
18 000 + 7 0004 = 25 000
continued
70
Chapter 6
Solution (continued)
1 097 000
71
Notes on Group Financial Statements
Example 6:4
Assume the same information as in example 6:2, except for the following balances in H Ltd’s
trial balance:
H Ltd
R
Accounts receivable 125 000
Investment in S Ltd 130 000
Required:
Draft the consolidated financial statements of H Ltd for the 20.9 financial year.
Solution
Workings:
Analysis of Equity Worksheet – S Ltd
(True) Equity of S Ltd Analysis of Equity
Date Details S Total Since
ARR RE Land NCI Inv (Gwill)
Cap RE ARR
1 Jan 06 Purchased 70% 105 15 30 50 200 60 130 (–) 10
31 Dec 08 Increases 35 25 60 18 17.5 24.5
5
105 50 55 50 260 78 130 (–) 27.5 24.5
31 Dec 09 Profit 47 47 14.11 32.9
Transfer 10 (10) – – (7)4 7
9 8 7
105 60 92 50 307 92.1 130 (–) 53.4 31.56
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 09
R
Profit before taxation (89 + 79) 168 000
Taxation (41 + 32) (73 000)
Profit and comprehensive income for the year 95 000
Attributable to:
Equity holders of parent 80 900
Non-controlling interests 14 1001
95 000
continued
72
Chapter 6
Solution (continued)
(1)
(88 000 – 18 000) + 24 500 = 94 500
(2)
180 000 + 27 5005 = 207 500
*
18 000 + 7 0004 = 25 000
1 117 000
Note: In the year of acquisition (20.6) the consolidated statement of profit or loss and other
comprehensive income would have included a gain of R10 000, being the excess of
the attributable net assets over the purchase price.
continued
73
Notes on Group Financial Statements
Solution (continued)
Example 6:5
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings and asset replacement reserves were R10 000 and R20 000 respectively.
At the date of acquisition all the separately identifiable assets of S Ltd were considered to be
fairly valued with the exception of land which was considered to be worth R20 000 more than
the carrying amount. S Ltd did not revalue the land in its own books.
The following are the trial balances of H Ltd and S Ltd at 31 December 03:
H Ltd S Ltd
R R
CREDITS
Share capital 200 000 50 000
Asset replacement reserve 40 000 23 000
Retained earnings 30 000 10 000
Non-current liabilities 20 000 5 000
Profit before tax 35 000 15 000
325 000 103 000
DEBITS
Land and buildings at cost 185 000 60 000
Investment in S Ltd 65 000
Current assets 61 000 37 000
Taxation 9 000 3 000
Transfer to asset replacement reserve 3 000
Dividend paid – 31.12.03 5 000
325 000 103 000
continued
74
Chapter 6
Required:
Prepare H Ltd’s consolidated statement of profit or loss and other comprehensive income,
statement of changes in equity and the statement of financial position for the 03 financial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity SINCE
Date Details TOTAL
SC ARR RE LAND NCI INV (GW) RE ARR
31.12.02 Acq. 60% 50 000 20 000 10 000 20 000 100 000 40 000 65 000 (5 000)
3
31.12.03 Profit 12 000 12 000 4 800 7 200
4
31.12.03 Trf to ARR 3 000 (3 000) (1 800) 1 800
9 7 8 6 5
50 000 23 000 19 000 20 000 112 000 44 800 65 000 (5 000) 5 400 1 800
DEBITS CREDITS
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 09
R
Profit before tax (35 + 15) 50 000
Taxation (9 + 3) (12 000)
Profit and comprehensive income for the year 38 000
Attributable to:
Equity holders of parent 33 200
Non-controlling interests 4 800
38 000
Asset Non-
Share Retained Attrib. to controlling Total
Repl.
Capital Earnings Parent Interests Equity
Res.
R R R R R R
Balances 1 January 03 200 000 40 000 30 000 270 000 40 000 310 000
Comprehensive income for
the year 1 800 33 200 33 200 4 800 38 000
Transfer to ARR (1 800) – –
Dividend (5 000) (5 000) (5 000)
Balances 31 December 03 200 000 41 800 56 400 298 200 44 800 343 000
continued
75
Notes on Group Financial Statements
Solution (continued)
76
Chapter 6
Example 6:6
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings and asset replacement reserve were R10 000 and R20 000 respectively. At
the date of acquisition all the identifiable assets of S Ltd were considered to be fairly valued
with the exception of land which was considered to be worth R20 000 more than the carrying
amount. S Ltd did not revalue the land in its books and S Ltd sold the land on 31 May 04.
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
CREDITS
Share capital 200 000 50 000
Asset replacement reserve 45 000 25 000
Retained earnings 52 200 16 000
Long-term liabilities 20 000 5 000
Profit before tax 45 000 45 000
362 200 141 000
DEBITS
Land and buildings 185 000 –
Investment in S Ltd 65 000
Net current assets 87 200 133 000
Taxation 12 000 6 000
Transfer to asset replacement reserve 5 000 2 000
Dividends paid – 31.12.04 8 000
362 200 141 000
Required:
Prepare H Ltd’s consolidated statement of profit or loss and other comprehensive income,
statement of changes in equity and statement of financial position for the 20.4 financial year.
Ignore Capital Gains Tax.
Solution
Workings:
Equity of Subsidiary Analysis of Equity SINCE
TOTAL
SC ARR RE LAND NCI INV (GW) RE ARR
31.12.02 Acq. 60% 50 000 20 000 10 000 20 000 100 000 40 000 65 000 (5 000)
31.12.03 Increase 3 000 6 000 9 000 3 600 3 600 1 800
Sub Totals 50 000 23 000 16 000 20 000 109 000 43 600 65 000 (5 000) 3 6005 1 800
31.12.04 Profit 39 000 (20 000) 19 000 7 6003 11 400
4
31.12.04 Trf. to ARR 2 000 (2 000) – (1 200) 1 200
8 9 7 6
50 000 25 000 53 000 – 128 000 51 200 65 000 (5 000) 13 800 3 000
DEBITS CREDITS
continued
77
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Profit before taxation (45 + 45 – 20) 70 000
Taxation (12 + 6) (18 000)
Profit and comprehensive income for the year 52 000
Attributable to:
Equity holders of parent 44 400
Non-controlling interests 7 600
52 000
R R R R R R
Balances 1 January 04 200 000 41 800(1) 55 800(2) 297 600 43 600 341 200
Comprehensive income for
the year 6 200* 44 400 44 400 7 600 52 000
Transfer to ARR (6 200) – –
Dividend (8 000) (8 000) (8 000)
Balances 31 December 04 200 000 48 000 86 000 334 000 51 200 385 200
(1)
(45 000 - 5 000) + 1 800 = 41 800
(2)
52 200 + 3 6005 = 55 800
*
5 000 + 1 2004 = 6 200
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 04
R
ASSETS
Non-current assets 190 000
Goodwill 5 0008
Land and buildings 185 000
Current assets (87.2 + 133) 220 200
410 200
continued
78
Chapter 6
Solution (continued)
79
7 ELIMINATION OF INTERCOMPANY
(INTRAGROUP) TRANSACTIONS
1. INTRODUCTION
As was stated earlier, each company within a group prepares its own ‘separate’ statutory financial
statements as though there were no relationship between the companies. If one company in the
group sells inventory or an asset, say land, to another group company, then the selling company
eliminates that asset from its books and recognises any profit. The purchasing company records
the asset in its books at its cost price.
When preparing the consolidated financial statements, however, the group companies are treated
as though they are all part of a single entity and clearly one cannot ‘make a profit out of oneself’
by simply transferring an asset from one section of the entity to another.
Hence, to the extent that this intercompany profit is not yet realised outside of the group (i.e. to
the extent that the inventory purchased from the other group company is still on hand and hence
the profit is unrealised), such profit should be eliminated and the relevant inventory on hand
reduced to its original (group) cost.
Various intercompany transactions need to be adjusted in preparing the consolidated financial
statements. These adjustments are all aimed at ensuring that the detailed figures disclosed in the
consolidated financial statements are in accordance with the principle that all the individual com-
panies in the group are, in effect, part of the same economic entity.
In addition to this conceptual reason, which requires the elimination described above, IAS 27 also
requires that intercompany profits, balances and dividends be eliminated for the purposes of
consolidation.
Examples of the adjustments that need to be made are as follows:
1. Sales by one company in the group to another.
If these transactions are not set off, the group’s sales and purchases will have been ‘over-
stated’.
Pro forma journal entry or adjustment required:
DR Sales x
CR Purchases x
The same applies to other such income/expense items within the group (e.g. interest on
intercompany loan).
3. Statement of financial position intercompany items must be set off, for example where the
subsidiary company owes an amount to the parent company (or vice versa), from the group
point of view there is no asset or liability (this may be compared with an individual whose left
pocket owes money to his right pocket – from the individual’s point of view there is no debtor
or creditor as it does not involve anyone outside of the entity.
81
Notes on Group Financial Statements
This principle is followed also in branch accounting where intercompany current accounts are
set off.
This principle is also followed where the subsidiary owes an amount to its parent company in
respect of a dividend declared by the subsidiary. This liability of the subsidiary is set off
against the corresponding asset of the parent company (‘Dividends receivable from S Ltd’).
This is dealt with in more detail below.
82
Chapter 7
The subsidiary would have made the following entry in its own books:
R R
Dividends declared 12 000
Shareholders for dividends (owing) 12 000
The parent company would have made the following entry in its own books:
Div. receivable from S. Ltd (debtor) 8 400
Div. received from S. Ltd (P/L) 8 400
The pro forma consolidation entries required to ‘eliminate’ the intercompany dividends are:
Non-controlling interests (30%) 3 600
Div. received from S Ltd (P/L)(70%) 8 400
Dividends declared 12 000
The remaining R3 600 shareholders for dividends owing is owed to the non-controlling interests.
This liability should be included either with accounts payable or shareholders for dividend in the
consolidated statement of financial position and is not disclosed as a separate current liability.
Example 7:1
H Ltd acquired 80% of S Ltd’s shares on 2 January 20.6. All identifiable assets were consid-
ered to be fairly valued.
The following trial balances were extracted from the books of H Ltd and S Ltd at 31 December
06:
H Ltd S Ltd
R R
Share capital (10 000) (5 000)
Retained earnings (18 000) (12 000)
Profit before tax (20 000) (15 000)
Current liabilities (4 000) (9 000)
Property, plant and equipment 8 000 7 000
Investment in S, at cost 14 000 –
Current assets 15 000 23 000
Taxation 8 000 6 000
Dividends declared – 30 December 06 7 000 5 000
– –
Required:
Prepare the consolidated financial statements of H Ltd and its subsidiary for the 06 financial
year.
83
Notes on Group Financial Statements
Solution
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 06
R
Profit before tax (20 000 + 15 000 – 4 000) 31 000
Taxation (8 000 + 6 000) 14 000
Profit and comprehensive income for the year 17 000
Attributable to:
Equity holders of parent 15 200
Non-controlling interests 1 800
17 000
R R R R R
Balances 1 Jan 06 10 000 18 000 28 000 – 28 000
Acquisition of subsidiary – 3 400 3 400
Comprehensive income for the year 15 200 15 200 1 800 17 000
Dividends (7 000) (7 000) (1 000) (8 000)
Balances 31 December 06 10 000 26 200 36 200 4 200 40 400
continued
84
Chapter 7
Solution (continued)
Workings:
1. Analysis of equity
Equity of Subsidiary Analysis of Equity
Date Details TOTAL Since
SC RE NCI INV (GW)
RE
R R R R R R R
02.01.06 At acq. 5 000 12 000 17 000 3 400 14 000 (400)
31.12.06 Profit 9 000 9 000 1 800 7 200
Dividends (5 000) (5 000) (1 000) (4 000)
5 000 16 000 21 000 4 200 14 000 (400) 3 200
85
Notes on Group Financial Statements
Example 7:2
H Ltd buys 10 bicycles from its subsidiary S Ltd, for R100 each on 20 October 01. These bi-
cycles cost S Ltd R80 each.
1. Assume that at the end of its financial year (31 December 01) H Ltd has not yet sold any of
these bicycles.
In this case, from the group’s point of view, S Ltd is incorrectly showing a profit of R200 and
the bicycles are stated at R200 above the cost to the group.
The pro forma consolidation adjustments are as follows:
Sales 1 000
Cost of sales (purchases) 1 000
2. Assume that by the end of the financial year (31 December 01) H Ltd has sold 6 of these
bicycles for R720 (i.e. inventory on hand 4 × R100 = R400)
It is necessary, in this case, to eliminate the intercompany profit made by S Ltd only to the
extent that such items of inventory are still held within the group
The pro forma entries are then:
Sales 1 000
Cost of sales (purchases) 1 000
From the group’s point of view, this correctly reflects the position as follows:
Inventory on hand correctly valued at 4 × R80 = R320
Inventory sold to parties outside the group:
group makes a profit here of (6 × R120) – (6 × R80) = R240*
* Of this, (6 × R20) = R120 profit is in S Ltd’s books and (6 × R20) = R120 profit is in
H Ltd’s books. But as far as the consolidated statement of profit or loss and other com-
prehensive income is concerned this breakdown of where the profit was made is not im-
portant – as long as the profit made by the entity (i.e. the group) is correctly stated and
this profit is in respect of inventory sold to parties outside the group.
3. Assume now that 6 of the bicycles were sold by H Ltd by 31 December 01 for R120 each
and that during 02, 50 more bicycles are purchased by H Ltd for R100 each (cost to S Ltd
R80 each) and that at the end of 02, 20 bicycles purchased from S Ltd are included in
H Ltd’s final inventory.
The pro forma entries necessary at the end of 02 are as follows:
Sales 5 000
Cost of sales (purchases) 5 000
Retained earnings 80
Cost of sales 80
continued
86
Chapter 7
Example 7:3
H Ltd’s books
Plant and machinery – cost R1 000
– accumulated depreciation 400
– carrying amount 600
This asset is sold to H Ltd’s subsidiary, S Ltd, for R900 cash.
In H Ltd’s books
Bank 900
Plant & machinery – acc depr 400
Plant and machinery – cost 1 000
Profit on sale 300
continued
87
Notes on Group Financial Statements
In S Ltd’s books
Plant & machinery – cost 900
Bank 900
On consolidation the following pro forma consolidation adjustment should be made to reinstate
the original position:
Profit on sale 300
Plant & machinery – cost 100
Plant & machinery – acc depr 400
This consolidation adjustment will be made every year for as long as the asset is being used by
S Ltd (obviously in subsequent years the R300 debit to ‘Profit on sale’ will be made to the ‘re-
tained earnings’ account).
This is perhaps the appropriate point to deal with the question: ‘Why is it necessary to make
this consolidation adjustment every year – surely if it has been made in the year in which the
transaction took place, it need not be repeated in subsequent years?’
The answer to this question lies in the fact, referred to earlier, that the consolidation adjust-
ments are not made in the books of any of the companies of the group – they are merely work-
ings in order to produce the consolidated financial statements. Consequently the trial balances
produced every year as a starting point for consolidation, will always disclose the position from
the particular companies’ points of view – unadjusted for intercompany transactions – as long
as the particular asset is still in use in S Ltd.
The above R300 profit made by H Ltd is clearly included in the cost price to the subsidiary. The
subsidiary will, therefore, in its own books, be writing off depreciation of R900 over the remain-
ing life of this asset, whereas from the group point of view, it should be writing off only R600
over the remaining life. Hence, a pro forma consolidation adjustment to the depreciation
expense must also be made each year until the asset is fully depreciated, or else the deprecia-
tion expense of the group will be overstated.
In the above example, assuming that the parent company had been depreciating the asset at
the rate of 10% p.a. on a straight line basis and the subsidiary company agreed with this rate of
depreciation (i.e. the remaining life essentially), then the subsidiary company would write the
R900 off over a period of 6 years (i.e. R150 p.a.).
For purposes of the consolidated financial statements, this must be reduced to R100 p.a. for
6 years.
Assuming that the asset was sold to the subsidiary at the beginning of year 1, at the end of
year 1 the following additional pro forma consolidation adjustment is made:
Accumulated depreciation 50
Depreciation expense* 50
* or a credit to operating profit, if the depreciation has already been deducted from the profit
included in the trial balance.
At the end of year 2 it is necessary to make the pro forma adjustment for 2 years as follows:
(a) Accumulated depreciation 50
Depreciation expense* 50
At the end of year 6, journal entry (a) will again make the adjustment for only 1 year (i.e. year
6) and journal entry (b) will adjust for the previous 5 years at the rate of R50 per year.
At the end of year 7 (and all subsequent years for as long as the asset is still being used) jour-
nal entry (a) will fall away and journal entry (b) will adjust for 6 years at the rate of R50 per
year.
88
Chapter 7
Example 7:4
H Ltd bought 80% of the shares in S Ltd on 1 January 01 for R48 000 when S Ltd’s equity was
as follows:
R
Share capital 50 000
Retained earnings 10 000
60 000
89
Notes on Group Financial Statements
H Ltd buys certain inventory from S Ltd, which S Ltd sells to H Ltd at a markup of 25% on cost.
During the year H Ltd purchased inventory from S Ltd for R30 000. Included in H Ltd’s closing
inventory was inventory purchased from S Ltd as follows:
31 December 05 R5 000
31 December 06 R6 250
Consolidation pro forma adjustments for 06 (extracts):
Sales 30 000
Cost of sales 30 000
* This entry now combines the adjustments necessary to opening and closing inventory in the
cost of sales account for 06.
An extract from the consolidated statement of profit or loss and other comprehensive income is
as follows:
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 06
R
Sales (480 + 260 – 30) 710 000
Cost of sales (370 + 208 – 30 + 0,25) (548 250)
Gross profit 161 750
Assume now that the profit of S Ltd for the year ended 31 December 06 is R15 000 (before the
unearned profit adjustment).
When preparing the analysis of equity worksheet for S Ltd, R1 000 will be deducted from the
increase in S Ltd’s retained earnings up to the beginning of the current year and R250 will be
deducted from S Ltd’s current year profit.This will ensure that the outsiders are automatically
adjusted by their share of the unearned profit adjustments as follows:
True Equity of S Ltd Analysis of Equity
Date Details TOTAL SINCE
SC RE INVENT NCI INV (GWILL)
RE
1/1/01 Acquired 80% 50 000 10 000 ? ? ? ?
31/12/05 Increase 15 000 (1 000) 14 000 2 800 11 200
Subtotals 50 000 25 000 (1 000) ? ? ? ? 11 200
31/12/06 Profit 15 000 (250) 14 750 2 950 11 800
50 000 40 000 (1 250) 23 000
It is appropriate at this point to make some comments concerning the preparation of the con-
solidation worksheet.
1. The objective of the worksheet is to analyse the subsidiary’s equity from the parent com-
pany’s point of view.
2. The non-controlling interests are shareholders of the subsidiary and the non-controlling
interests will, therefore, be allocated their share of whatever appears in the ‘total’ column.
Their share of the current year profit, therefore, would be R2 950.
continued
90
Chapter 7
3. Note that the share capital and reserves columns on the left side of the worksheet must at
all times correspond exactly with the relevant accounts in the subsidiary company’s books.
Any pro forma consolidation adjustments that need to be made to the subsidiary’s equity
must therefore not be made in the retained earnings column. Such adjustments are made
in additional columns which are included on the left side of the worksheet.
Example 7:5
All details same as example 7:4, with the exception that S Ltd buys the inventory from H Ltd.
Consolidation pro forma adjustments for 06:
Same as for example 7:4.
In this case, however, the unearned profit adjustments will not be adjusted against the subsid-
iary’s figures when preparing the analysis of equity worksheet of S Ltd. Hence the non-
controlling interests will not be affected by these adjustments.
The adjustments will be made against the parent company’s retained earnings and current
year profit before tax figures for consolidation purposes in a separate working.
Example 7:6
H Ltd bought 80% of the shares of S Ltd on 1 January 01 when S Ltd’s equity was as follows:
R
Share capital 15 000
Retained earnings 10 000
25 000
continued
91
Notes on Group Financial Statements
S Ltd purchased an item of plant from H Ltd on 1 January 03 for R12 000 at which date this
plant appeared in H Ltd’s books as follows:
R
Cost 20 000
Accumulated depreciation 10 000
Carrying amount 10 000
H Ltd was depreciating this plant at the rate of 10% p.a. on a straight line basis (with a NIL
residual value) and S Ltd agreed that this was a fair rate (i.e. in effect agreeing with the 10 year
estimated life of the asset).
* These increases or decreases to profit or retained earnings are not adjusted against S Ltd’s
figures in the analysis of equity of S Ltd as the asset was sold by H Ltd to S Ltd and the non-
controlling interests are therefore not affected by these adjustments.
Workings:
At acquisition date 1 January 01
S purchased plant from H Ltd on 1 January 03
Depr – S = 12 000 ÷ 5 = 2 400
Depr – H = 20 000 ÷ 10 = 2 000
Annual consolidation adjustment R 400
Pro forma journal entries 4 years after date of intercompany sale would be:
Retained earnings 2 000
Plant – cost 2 000
(Eliminate original profit)
continued
92
Chapter 7
93
Notes on Group Financial Statements
Example 7:7
A Limited was incorporated on 1 July 04, and on that day bought two thirds of the share capital
of B Limited.
The following are the draft statements of profit or loss of the two companies for the year ended
30 June 06, drawn up without regard to the relationship between them:
A Ltd B Ltd
Inventory: 1 July 05 9 000 3 000
Purchases 60 000 30 000
69 000 33 000
Inventory: 30 June 06 15 000 8 000
Cost of sales 54 000 25 000
Sales 90 000 60 000
Gross profit 36 000 35 000
Dividend received from B Ltd 4 000
Directors’ fees (3 000) (2 000)
Depreciation – motor vehicles (5 500) (3 400)
– equipment (500) (600)
Selling and admin expenses (4 000) (5 000)
Profit before tax 27 000 24 000
Tax (6 000) (5 700)
Profit for the year 21 000 18 300
continued
94
Chapter 7
Required:
Prepare the consolidated financial statements of A Limited and its subsidiary company for the
06 financial year.
95
Notes on Group Financial Statements
Solution
A LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE 06
R
Revenue – sales 90 000 (1)
Cost of sales (20 200)(2)
Gross profit 69 800
Operating expenses (23 700)(3)
Profit before taxation 46 100
Taxation (11 700)(4)
Profit and comprehensive income for the year 34 400
Attributable to:
Equity holders of the parent 28 600
Non-controlling interests 5 800
34 400
Workings:
(1)
90 000 + 60 000 – 60 000 (interco) = 90 000
(2)
54 000 + 25 000 – 60 000 (interco) + 1 200(6) (unearned) = 20 200
(3)
13 000 (A’s expenses) + 11 000 (B’s expenses) – 300 (depr) = 23 700
(4)
6 000 + 5 700 = 11 700
(5)
7 000 + 200(B) = 7 200
(6)
20% (15 000 – 9 000) = 1 200
continued
96
Chapter 7
Solution (continued)
192 700
EQUITY AND LIABILITIES
Equity attributable to parent shareholders 145 800
Share capital 120 000
(7)
Retained earnings 25 800
(D)
Non-controlling interests 25 900
Total equity 171 700
Non-current liabilities
Deferred taxation 2 300
Current liabilities 18 700
192 700
Note: Details of property, plant and equipment are included in the statement of financial pos-
ition for illustrative purposes. Normally these will be shown by way of note.
Notes to include:
1. Sales does not include sales within the group (accounting policy note).
2. Non-current assets note.
3. Depreciation expense R9 700 (6 000 + 4 000 – 300).
continued
97
Notes on Group Financial Statements
Solution (continued)
Workings:
(7)
18 000 + 7 800 (C) = 25 800 (check only)
(8)
31 000 + 51 000 + 3 000 (E) = 85 000
(9)
30 000 – 1 200 + 28 000 + 1 900 = 58 700
(10)
10 000 + 12 000 – 600 + 1 900 = 23 300
(11)
15 000 + 8 000 – 3 000 (G) = 20 000
(12)
Intercompany sale of motor vehicle
Cost to A Ltd 8 800
Profit to B Ltd 1 200
Carrying amount at date of sale 7 600
Original cost to B 9 500
Annual depreciation (B) (20%) 1 900
Hence, remaining life at date of sale (R7 600 / R1 900) 4 years
Accumulated depreciation at date of sale (R9 500 – R7 600) 1 900
Annual consolidated depreciation adjustment R1 200 ÷ 4 years 300 p.a
(13)
Unearned profit in inventory
30 June 05
20% × 9 000 = 1 800 end 05
30 June 06
20% × 15 000 = 3 000 end 06
1 200 effect on 06 profit
continued
98
Chapter 7
Solution (continued)
99
Notes on Group Financial Statements
consolidated statement of financial position not corresponding with the carrying amounts per the
books of the individual companies. These pro forma adjustments are, therefore, also temporary
differences. The deferred tax provided per the companies’ books would not represent the tax
effect on the differences between the tax values of these assets and their consolidation carrying
amounts. Hence, pro forma deferred tax adjustments must be made with regard to any such
temporary differences arising from the pro forma restatement of any assets or liabilities for con-
solidation purposes.
Examples 7:2, 7:4 and 7:7 are now reconsidered taking into account the deferred taxation impli-
cations of the pro forma adjustments resulting in temporary differences. (Assume taxation rate is
40%.)
COMMENT
The inventory purchased from S Ltd has a carrying value of R1 000 in H Ltd’s statement of
financial position at the end of the year. The consolidation carrying amount at the end of the
year is R800 (1 000 – 200). When the inventory is sold in the future, R1 000 will be written off
as cost of sales in H Ltd’s books, whereas only R800 will be written off as cost sales for consoli-
dation purposes. Such a temporary difference is known as a deductible temporary difference
(the tax deduction in the future will be greater than the accounting (consolidation) deduction for
cost of sales).
A pro forma deferred tax adjustment is therefore required debiting the deferred tax account in
the statement of financial position and crediting taxation (deferred) in the statement of profit or
loss and other comprehensive income with the tax effect of this temporary difference.
Under assumption 2 (see page 76) the pro forma journal entries will be:
Cost of sales 80
Inventory 80
Under assumption 3 on page 76 the pro forma journal entries at the end of 02 will be:
Cost of sales 320
Retained earnings 80
Inventory 400
continued
100
Chapter 7
H Ltd bought 80% of the shares of S Ltd on 1 January 01 when S Ltd’s equity was as follows:
Share capital R50 000
Retained earnings 10 000
60 000
continued
101
Notes on Group Financial Statements
Note that the first journal entry now debits ‘profit before tax’ and not ‘cost of sales’. This is be-
cause the trial balance reflects profit before tax. The pro forma journal entries should therefore
take into account the manner in which the source information is presented. If a detailed trial
balance was presented, the first journal entry would be the same as in example 7:4 (page 79).
When preparing the analysis of equity worksheet for S Ltd, a net R600 will be deducted from
S Ltd’s retained earnings up to the beginning of the current year (– R1 000 + R400).
R150 (net) will also be deducted from S Ltd’s current year profit (– R250 + R100). Again this
ensures that the non-controlling interests are automatically adjusted.
The analysis of equity worksheet of S Ltd would be prepared as follows:
Question exactly the same as Example 7:7 on page 94 except that deferred tax at the rate of
40% must be taken into account on the consolidation adjustments to profit.
102
Chapter 7
Solution
Example 7:7 – Revised Solution to include tax
A LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE 06
R
Revenue – sales 90 000 (1)
Cost of sales (20 200) (2)
Revenue – sales 90 000 (1)
Gross profit 69 800
Operating expenses (23 700) (3)
Profit before taxation 46 100
Taxation (11 340) (4)
Profit and comprehensive income for the year 34 760
Attributable to:
Equity holders of parent 28 840
Non-controlling interests 5 920
34 760
Workings:
(1)
90 000 + 60 000 – 60 000 (interco) = 90 000
(2)
54 000 + 25 000 – 60 000 (interco) + 20% (15 000 – 9 000) (unearned) = 20 200
(3)
13 000 (A) + 11 000 (B) – 300 (depr.) = 23 700
(4)
6 000 + 5 700 – 360 (A) = 11 340
(5)
7 000 + 920 (D) = 7 920
continued
103
Notes on Group Financial Statements
Solution (continued)
192 700
Notes to include:
1. Sales does not include those within the group (accounting policy note).
2. Non-current assets note. Details of property, plant and equipment normally shown in
notes.
3. Depreciation expense R9 700 (6 000 + 4 000 – 300).
continued
104
Chapter 7
Solution (continued)
Workings:
(6)
18 000 + 8 760 (E) = 26 760
(7)
31 000 + 51 000 + 3 000 (I) = 85 000
(8)
30 000 – 1 200 + 28 000 + 1 900 = 58 700
(9)
10 000 + 12 000 – 600 + 1 900 = 23 300
(10)
15 000 + 8 000 – 3 000 (J) = 20 000
(11)
1 700 + 600 – 1 440 (H) = 860
(12)
Intercompany sale of motor vehicle:
Cost to A Ltd 8 800
Profit to B Ltd 1 200
Carrying amount at date of sale 7 600
Original cost to B 9 500
Annual depreciation (B) (20%) 1 900
Hence, remaining life at date of sale (R7 600 / R1 900) 4 years
Accumulated depreciation at date of sale (R9 500 – R7 600) 1 900
Annual consolidated depreciation adjustment R1 200 ÷ 4 years R300 p.a.
(13)
Unearned profit in inventory:
30 June 05
20% × 9 000 = 1 800 end 05
30 June 06
20% × 15 000 = 3 000 end 06
1 200 effect on 06 profit
continued
105
Notes on Group Financial Statements
Solution (continued)
Sales 60 000
Cost of sales 60 000
continued
106
Chapter 7
Solution (continued)
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings of S Ltd were R20 000.
H Ltd purchases inventory from S Ltd. H Ltd’s purchases for the current year amounted to
R45 000. S Ltd sells to H Ltd at its normal selling price less a 10% discount. S Ltd’s normal
mark-up is 25% on its cost price. The following inventories purchased from S Ltd were included
in H Ltd’s year end inventories at the end of the 03 and 04 financial years.
31 December 03 R3 600
31 December 04 R10 800
Taxation has been constant at the rate of 35 cents in the rand for 03 and 04.
continued
107
Notes on Group Financial Statements
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
CREDITS
Share capital 200 000 80 000
Retained earnings 52 200 30 000
Deferred taxation 2 000 1 000
Long-term liabilities 18 000 4 000
Profit before tax 45 000 25 000
317 200 140 000
DEBITS
Non-current assets 185 000 85 000
Investment in S Ltd, at cost 65 000
Current assets 55 200 49 000
Taxation 12 000 6 000
317 200 140 000
Required:
Prepare the abbreviated consolidated statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial position of H Ltd and its
subsidiary company, S Ltd for the 04 financial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC RE INVENT DT NCI INV (GW)
RE
31.12.02 Acq. 60% 80 000 20 000 100 000 40 000 65 000 (5 000)
31.12.03 Increase 10 000 (400) 140 9 740 3 896 5 844
Subtotals 80 000 30 000 (400) 140 109 740 43 896 65 000 (5 000) 5 8444
31.12.04 Profit 19 000 (800) 280 18 480 7 3923 11 088
9 7 6 8
80 000 49 000 (1 200) 420 128 220 51 288 65 000 (5 000) 16 9325
DEBITS CREDITS
Inventory
31.12.03 3 600 = 90% ∴ 100% = 4 000 Normal Profit = 1/5 on
SP = 800 – 400 Discount = R400
31.12.04 10 800 = 90% ∴ 100% = 12 000
Normal profit = 20% on SP = 2 400
less 1 200 Discount = R1 200
R R
Pro forma journal entries:
Retained earnings 400
Profit before tax 800
Inventory 1 200
continued
108
Chapter 7
Solution (continued)
R R
Deferred tax (SOFP) 420
Taxation – deferred (P/L) 280
Retained earnings 140
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Profit before tax (45 + 25 – 0.8) 69 200
Taxation (12 + 6 – 0.28) 17 720
Profit and comprehensive income for the year 51 480
Attributable to:
Equity holders of parent 44 088
Non-controlling interests 7 392
51 480
378 000
continued
109
Notes on Group Financial Statements
Solution (continued)
110
Chapter 7
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings of S Ltd were R20 000.
On 1 July 03 H Ltd purchased plant from S Ltd for R13 000. S Ltd had purchased this plant on
1 July five years previously for R18 000. H Ltd agreed with the remaining life of the plant. De-
preciation on plant is at the rate of 10% per annum on the straight line basis with no residual
value.
Taxation has been constant at the rate of 35 cents in the rand for 03 and 04.
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
CREDITS
Share capital 200 000 80 000
Retained earnings 55 000 30 000
Deferred taxation 7 000 5 000
Non-current liabilities 25 000 5 000
Profit before tax 45 000 25 000
332 000 145 000
DEBITS
Non-current assets 195 000 90 000
Investment in S Ltd, at cost 65 000
Current assets 60 000 49 000
Taxation 12 000 6 000
332 000 145 000
Required:
Prepare the abridged consolidated statement of profit or loss and other comprehensive in-
come, statement of changes in equity and statement of financial position of H Ltd and its sub-
sidiary company, S Ltd, for the 04 financial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC RE PLANT DT NCI INV (GW)
RE
31.12.02 Acq. 60% 80 000 20 000 100 000 40 000 65 000 (5 000)
31.12.03 Increase 10 000 (3 600) 1 260 7 660 3 064 4 596
Subtotals 80 000 30 000 (3 600) 1 260 107 660 43 064 65 000 (5 000) 4 5964
31.12.04 Profit 19 000 800 (280) 19 520 7 8083 11 712
8 6 7
80 000 49 000 (2 800) 980 127 180 50 872 65 000 (5 000) 16 3085
DEBITS CREDITS
continued
111
Notes on Group Financial Statements
Solution (continued)
continued
112
Chapter 7
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Profit before taxation (45 + 25 + 0.8) 70 800
Taxation (12 + 6 + 0.28) 18 280
Profit and comprehensive income for the year 52 520
Attributable to:
Equity holders of Parent 44 712
Non-controlling interests 7 8083
52 520
* 55 + 4.5964 = 59 596
396 200
continued
113
Notes on Group Financial Statements
Solution (continued)
7. CONTINGENT LIABILITIES
Contingent liabilities of the various companies in the group should be disclosed by way of a note
in the consolidated financial statements if the consolidated financial statements do not already
disclose an actual liability in respect of such items.
If the parent company guarantees the subsidiary’s bank overdraft, this guarantee will be disclosed
as a contingent liability in the parent company’s separate financial statements. In the consolidated
financial statements, however, this will not be disclosed as a contingent liability as the bank
overdraft will be disclosed as an actual liability in the consolidated statement of financial position.
8. BANK OVERDRAFTS
The bank overdraft of a company can only be set off against the favourable bank balance of
another company in the group in the consolidated statement of financial position if both the com-
panies operate their accounts at the same bank and offsetting represents the substance of the
transaction. Without the bank having the legal right to set off, this should not be done. In the vast
majority of cases, therefore, offsetting would not be appropriate.
114
8 FAIR VALUE ADJUSTMENTS TO
NON-CURRENT ASSETS OF SUBSIDIARY
Example 8:1
Refer at this stage to example 4:3 on page 47 (Chapter 4) and deal with the post-acquisition
years. At the acquisition date the carrying amount of the plant in the subsidiary’s books is
R80 000. The carrying amount, from the group or consolidation point of view, is R130 000.
Assuming that the asset is being written off at the rate of 10% p.a. on cost by the subsidiary
and that the parent company agreed with this rate (i.e. in effect agreeing with the remaining
life) then the subsidiary will write off R10 000 every year for the next 8 years. In the consolidat-
ed statement of profit or loss and other comprehensive income, however, R16 250 (R130 000
÷ 8) must be written off.
(A) Hence at the end of year 1 post-acquisition, the pro forma journal entries relating to the at
acquisition plant will be as follows:
(1) }
(2) } Same as on page 48 (Chapter 4)
Note that when calculating the non-controlling interests’ share of the current year profit of
the subsidiary, this extra depreciation must be taken into account (as though it were a
subsidiary company expense).
continued
115
Notes on Group Financial Statements
Note that when calculating the non-controlling interests’ share of the current year profit of
the subsidiary, this extra depreciation must be taken into account (as though it were a
subsidiary company expense).
As explained above, the extra depreciation expense must be borne by both the parent
company and the non-controlling interests. The same relates to the prior year’s deprecia-
tion adjustment (entry (3) above). When the non-controlling interests are credited with
their share of the post-acquisition increase in the subsidiary’s retained earnings up to the
beginning of the current year, this R6 250 must be deducted from this retained earnings
increase on the analysis of equity worksheet before the non-controlling interests are given
their share of the increase.
These adjustments would be included in the Analysis of Equity worksheet of the subsid-
iary as follows:
Equity of S Ltd Since
Date Details TOTAL NCI Inv (G/will)
SCap RE Plant RE
1/1/03 Purchased 60% 105 000 20 000 50 000 175 000 70 000 115 000 (10 000)
31/12/03 Increase in RE ? (6 250) ? ? ?
Subtotals X X X X X X X X
31/12/04 Profit ? (6 250) ? ? ?
continued
116
Chapter 8
This removes the extra 50 000 cost and accumulated depreciation introduced on consoli-
dation per entries 2, 3 and 4 above.
(E) At the end of year 9 post-acquisition
(a) If the plant has still not been scrapped by the subsidiary, then the pro forma entries
required would be:
(1) As per (A) (1) and (2)
(1) No entry
(4) No entry
continued
117
Notes on Group Financial Statements
or simply
(1) No entry
(2) Share capital 105 000
Retained earnings 20 000
Retained earnings (i.r.o. prior years’ depreciation) 50 000
Non-controlling interests 70 000
Investment in S Ltd 115 000
Goodwill 10 000
(3) }
(4) } no entries
(5) }
(c) If the plant was scrapped by the subsidiary in year 8, then the treatment for consoli-
dation purposes at the end of year 9 would be exactly the same as the treatment un-
der (E) (b) above.
(F) Sale of plant
Where the plant is sold by the subsidiary in any year, the profit or loss on sale per the
subsidiary’s books will not be the same as the profit or loss from the consolidated point of
view. The carrying amount of the item sold for consolidation purposes (which would obvi-
ously be different from the subsidiary’s own book value) will be compared with the pro-
ceeds on sale and the difference will be transferred to the consolidated statement of profit
or loss and other comprehensive income as the profit or loss on sale.
Example 8:2
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings and asset replacement reserve were R14 000 and R20 000 respectively.
At the date of acquisition all the identifiable assets of S Ltd were considered to be fairly valued
with the exception of plant and machinery which was considered to be worth R16 000 more
than the carrying amount. Ignore taxation on this adjustment. S Ltd did not revalue the plant
and machinery in its books. H Ltd agreed with the remaining life of the plant and machinery.
S Ltd depreciates plant and machinery at 10% per annum on the straight line method. Since
the date of acquisition, S Ltd has not sold or purchased any plant and machinery.
continued
118
Chapter 8
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
CREDITS
Share capital 200 000 50 000
Asset replacement reserve 45 000 20 000
Retained earnings 52 200 20 000
Non-current liabilities 20 000 5 000
Profit before tax 47 400 25 000
Accumulated depreciation – plant and machinery 20 000
364 600 140 000
DEBITS
Land and buildings at cost 185 000 –
Plant and machinery at cost 50 000
Investment in S Ltd at cost 65 000
Current assets 94 600 80 000
Taxation 12 000 6 000
Dividends paid – 31.12.04 8 000 4 000
364 600 140 000
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of H Ltd and its subsidiary com-
pany, S Ltd, for the 04 financial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC ARR RE P+M Acc Dep NCI INV (GW)
RE
31.12.02 Acq. 60% 50 000 20 000 14 000 16 000 100 000 40 000 65 000 (5 000)
31.12.03 Increase 6 000 (2 000) 4 000 1 600 2 400
4
Subtotals 50 000 20 000 20 000 16 000 (2 000) 104 000 41 600 65 000 (5 000) 2 400
1 3
31.12.04 Profit 19 000 (2 000) 17 000 6 800 10 200
31.12.04 Dividend (4 000) (4 000) (1 600) (2 400)
8 9 6 7 5
50 000 20 000 35 000 16 000 (4 000) 117 000 46 800 65 000 (5 000) 10 200
DEBITS CREDITS
continued
119
Notes on Group Financial Statements
Solution (continued)
Attributable to:
Equity holders of parent 43 200
Non-controlling interests 6 8003
50 000
continued
120
Chapter 8
Solution (continued)
Note that property, plant and equipment are normally shown as one figure on the face of the
statement of financial position with the detail disclosed by way of a note.
121
Notes on Group Financial Statements
Example 8:3
Information the same as in example 8:1 (page 101) with the exception that the plant was sold
for R50 000 at the end of year 5 post-acquisition.
In S Ltd’s books the carrying amount of the plant at the end of year 5 post-acquisition will be
R30 000 (R80 000 – (5 × R10 000)). S Ltd, therefore, shows a profit of R20 000 on the sale of
the plant. For consolidation purposes, the net carrying amount of the plant is R48 750
(R130 000 – (5 × R16 250) and a profit of only R1 250 is made.
122
Chapter 8
Example 8:4
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings and other reserves were R14 000 and R20 000 respectively.
At the date of acquisition all the identifiable assets of S Ltd were considered to be fairly valued
with the exception of plant and machinery which originally cost R50 000 and which was con-
sidered to be worth R16 000 more than the carrying amount. Ignore taxation on this adjust-
ment. S Ltd did not revalue the plant and machinery in its books. H Ltd agreed with the
remaining life of the plant and machinery. S Ltd depreciates plant and machinery at 10% per
annum on the straight line method.
On 30 June 04 the above plant and machinery was sold by S Ltd. The accumulated deprecia-
tion of this plant was R10 000 on 31 December 02.
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
CREDITS
Share capital 200 000 50 000
Other reserves 45 000 20 000
Retained earnings 52 200 20 000
Non-current liabilities 20 000 5 000
Profit before tax 47 400 25 000
364 600 120 000
DEBITS
Land and buildings 185 000 –
Investment in S Ltd at cost 65 000
Current assets 94 600 110 000
Taxation 12 000 6 000
Dividends paid – 31.12.04 8 000 4 000
364 600 120 000
Required:
Prepare the abridged consolidated statement of profit or loss and other comprehensive in-
come, the statement of changes in equity and statement of financial position of H Ltd and its
subsidiary company, S Ltd, for the 04 financial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details Acc TOTAL SINCE
SC OR RE P+M NCI INV (GW)
Dep RE
31.12.02 Acq. 60% 50 000 20 000 14 000 16 000 100 000 40 000 65 000 (5 000)
31.12.03 Increase 6 000 (2 000) 4 000 1 600 2 400
4
Subtotals 50 000 20 000 20 000 16 000 (2 000) 104 000 41 600 65 000 (5 000) 2 400
31.12.04 Profit 19 000 (1 000)
3
(16 000) 3 000 5 000 2 000 3 000
31.12.04 Dividend (4 000) (4 000) (1 600) (2 400)
6 7 5
50 000 20 000 35 000 – – 105 000 42 000 65 000 (5 000) 3 000
DEBITS CREDITS
continued
123
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Profit before tax (47.4 – 2.4 + 25 – 1 – 16 + 3) 56 000
Taxation (12 + 6) 18 000
Profit and comprehensive income for the year 38 000
Attributable to:
Equity holders of parent 36 000
Non-controlling interests 2 0003
38 000
continued
124
Chapter 8
Solution (continued)
125
Notes on Group Financial Statements
This simplifies the consolidation considerably in that the depreciation charged by the subsidiary in
its own books will need no adjustment for consolidation purposes.
The acquisition journal entry will be slightly different in that instead of debiting ‘plant’ with the
R16 000, the debit will be made to the revaluation reserve.
Also, where the asset is sold, the profit or loss disclosed in the subsidiary’s own books will be the
same as for consolidation purposes.
126
Chapter 8
In summary the only time deferred tax will be provided at the CGT rate on an at acquisition fair
value adjustment is when:
ƒ the fair value of the asset is above its original cost
ƒ the asset will be disposed of when its carrying amount is still above original cost, and
ƒ the proceeds on disposal are expected to be more than the original cost.
This is considered to be a specialised area and is not illustrated further in this book. All fair value
adjustments for depreciable (and deductible) assets will therefore be provided at normal tax rates.
Where the fair value adjustment occurs only on consolidation (i.e. not in subsidiary’s books), the
extra depreciation written off each year will also be a temporary difference and deferred taxation
on this difference will also be provided on a pro forma basis.
If one now reconsiders example 8:1(B) on page 102 taking deferred taxation into account, the pro
forma entries at the end of year 2 post-acquisition will be as follows (assuming a tax rate of 40%):
(1) Same as before
127
Notes on Group Financial Statements
Example 8:5
H Ltd acquired 80% of the shares in S Ltd on 1 January 06. At the date of acquisition S Ltd had
an office building with a carrying amount of R100 000 and it was considered that the fair value
of the building was R120 000. The building is not deductible for tax purposes. The tax rate is
30%. The building has a remaining useful life of 20 years and is not expected to be sold in the
future.
Required:
Show the relevant extracts from the analysis of equity to reflect the above information for the
year ended 31 December 06.
Solution
Equity of S Since
Date Details Total NCI Inv
S Cap RE Bldg D Tax RE
1/01/06 Acquisition ? ? 20 000 (36 000) ? ? ? –
31/12/06 Profit ? (1 000) 1 800
At 1 January 06 the building had a carrying amount of R100 000 in S Ltd and tax base of Rnil.
This temporary difference (R100 000) would be exempt for deferred tax purposes because it
would have originally arisen on the initial recognition of the building and would have had no
effect on either accounting profit or taxable income of S Ltd.
From the H Ltd group point of view, the building, at acquisition, has a carrying amount of
R120 000 and a tax base of Rnil. This R120 000 temporary difference, however, arises in a
business combination which results in the full R120 000 temporary difference being provided at
30% (R36 000). It would not be correct to simply provide on the R20 000 fair value adjustment.
The depreciation adjustment in the 06 year is R1 000 (20 000 ÷ 20) and the related deferred
tax amount is R1 800 (36 000 ÷ 20). Alternatively, depreciation of R6 000 (120 000 / 20) with
no related tax allowance, i.e. 6 000 × 30% = R1 800.
The pro forma journal entries are as follows:
Share capital ?
Retained earnings ?
Office building 20 000
Deferred tax (SOFP) 36 000
Non-controlling interests ?
Investment ?
Depreciation (or profit before tax) 1 000
Accumulated depreciation 1 000
Deferred taxation (SOFP) 1 800
Taxation – deferred (P/L) 1 800
128
Chapter 8
Example 8:6
H Ltd acquires 80% of the shares of S Ltd on 1 January 02 for R120 000 when the equity of
S Ltd is as follows:
R
Share capital 100 000
Retained earnings 10 000
110 000
Any excess paid by H Ltd is attributable to land which has a cost and carrying amount in S Ltd
of R100 000. All other assets and liabilities are considered to be fairly valued in S Ltd’s books.
S Ltd does not alter the value of the land in its own books. Ignore taxation on the fair value
adjustment on land.
The at acquisition pro forma journal entry will be:
Retained earnings 10 000
Land 40 000
Non-controlling interests 30 000
Investment in S Ltd 120 000
Share capital 100 000
* 80% of excess = 120 000 and 120 000 – 88 000 (80% × 110 000) = 32 000
∴ 100% of excess = 40 000
Assume now that during 05 S Ltd revalues its land to R160 000 (i.e. R60 000 more than cost).
Ignore tax.
The relevant pro forma journal entries at the end of 05 for consolidation purposes will be:
Share capital 100 000
Retained earnings 10 000
Gain on revaluation (OCI) 40 000
Non-controlling interests 30 000
Investment in S Ltd 120 000
continued
129
Notes on Group Financial Statements
Notes:
1. The R40 000 fair value adjustment will no longer be added to the land on the consolidated
statement of financial position – this has already been done by the subsidiary during 05.
2. Of the R60 000 revaluation surplus arising in the subsidiary’s own books, only R20 000 is
post-acquisition from the parent company’s point of view.
3. The R20 000 revaluation surplus will be included in ‘other comprehensive income’ in the
consolidated statement of profit or loss and other comprehensive income for the 05 year
and the non-controlling interest share of OCI will be R4 000. The revaluation reserve will
increase by the net amount of R16 000.
Now assume that the normal tax is 40% and 60% of capital gains are included in taxable in-
come. The analysis of equity will now be as follows:
Equity of S Ltd SINCE
Date Details Rev TOTAL NCI Inv GW Rev
S Cap RE Land D Tax RE
res res.
10/01/02 Purchased 100 000 10 000 40 000 (9 600) 140 400 28 080 120 000 (7 680)
80%
31/12/04 Increases ? ? ? ?
100 000 ? 40 000 (9 600) ? ? 120 000 (7 680) ?
(1)
31/12/05 Increases ? 45 600 (40 000) 9 600 15 200 3 040 12 160
100 000 ? 45 600 – – ? ? 120 000 (7 680) ? 12 160
130
9 METHODS OF CONSOLIDATION
It is appropriate at this stage to discuss the various methods or workings that can be used in
order to prepare a set of consolidated financial statements. It must be emphasised that whatever
method is used the principles upon which each method is based is the same and the outcome
(consolidated financial statements) must be the same. The methods are simply the manner in
which the individual financial statements of the group companies are incorporated together to
produce the group financial statements. This chapter discusses the consolidation process and the
different ways in which this can be effected and highlights the advantage and disadvantages of
each method. There is also an example where the different methods of effecting a consolidation
are illustrated.
Although the group (parent plus subsidiaries) is regarded as an economic and an accounting
entity, a set of books/accounting records is not kept for the group, as is the case for each individ-
ual company in the group. This means, therefore, that no group/consolidated trial balance arises
from a single (group) set of books from which the group financial statements may be prepared.
The starting point for the consolidation process is the trial balances or financial statements of the
individual companies and various types of ‘memorandum’ or ‘pro forma’ consolidated workings,
and adjustments are made in order to consolidate (or aggregate) the individual company
amounts.
As indicated above there are a number of different methods of setting out these workings and
adjustments (and numerous variations thereof) to prepare consolidated financial statements.
They are all based on the same principles of consolidation and each of these methods has its
own advantages and disadvantages. Some are more appropriate in a practical situation and
others more appropriate for answering questions in an examination situation.
131
Notes on Group Financial Statements
account item cross cast in order to determine the consolidated amounts, from which the group
financial statements are prepared.
In more complex questions it is very difficult to generate the pro forma journal entries without
doing additional workings. For example, it may be necessary to prepare an analysis of equity of
the subsidiary (or extracts thereof) (as per the analysis of equity worksheet method) in order to
determine some of the pro forma journal entries.
Broadly speaking there are three categories of pro forma journal entries:
a. ‘Elimination’ of at the acquisition equity and accounting for at acquisition fair value
adjustments
The ‘at acquisition’ pro forma journal entry
ƒ ‘eliminates’ the at acquisition equity of the subsidiary
ƒ records the fair value adjustments to identifiable assets and liabilities together with the result-
ant deferred tax
ƒ ‘eliminates’ the investment in the subsidiary
ƒ recognises the non-controlling interests, and
ƒ raises goodwill or gain on bargain purchase (balancing figure).
The fair value adjustments at acquisition usually result in adjustments in the form of increased/
decreased depreciation/amortisation of assets or other adjustments during the post-acquisition
period.
132
Chapter 9
Disadvantages
ƒ Mentally challenging where a full set of consolidated statements are required.
ƒ May require similar complex calculations to be done more than once which makes it more
difficult.
ƒ Workings must be presented particularly clearly to enable the marker/reviewer to follow the
process logically (and allocate marks appropriately)!
4. CONCLUSION
The authors suggest that the analysis of equity worksheet method be used as the basis for doing
the workings for the consolidation process as both other methods effectively rely on the principles
applied in the worksheet. Particularly for questions that require a full set of consolidated financial
statements, this method will usually be the quickest to apply.
Where only certain consolidated information is required, judgment needs to be exercised as to
whether the analysis of equity worksheet or the end product method is better. It is strongly sug-
gested that you understand the mechanics of the end product method and particularly how it
relates to the worksheet method.
It is suggested that the journal entry method be used only if one is required to do so in the ques-
tion. It is important, however, that students are able to apply the full journal entry method, as this
is probably the method most often used in practice.
It cannot be emphasised strongly enough that the most important learning strategy with regard to
consolidations is that one understands the consolidation process, and that it is not seen simply as
something one learns by rote.
Example 9:1
1. The following are the trial balances of H Ltd and its subsidiary S Ltd at 31 December 20.5:
H Ltd S Ltd
R R
Ordinary share capital 50 000 20 000
Retained earnings 26 000 18 000
Other reserves – 15 000
Loan – H Ltd – 4 000
Accounts payable 16 750 8 000
Shareholders for dividend – 5 000
Sales 100 000 80 000
Interest received 1 500 –
Dividends received 4 000 –
198 250 150 000
Property, plant and equipment 24 750 30 000
Investment in S Ltd – 80% holding 30 000 –
Loan – S Ltd 4 000 –
Inventory 16 100 18 800
Accounts receivable 19 000 23 000
Dividends receivable 4 000 –
Bank 2 500 2 200
Interest paid 900 700
Cost of sales 60 000 50 000
Operating expenses 18 000 12 500
Taxation 9 000 4 800
Dividend paid and declared 10 000 5 000
Transfer to other reserves – 3 000
198 250 150 000
continued
133
Notes on Group Financial Statements
2. H Ltd acquired its shares in S Ltd on 1 January 20.3 when the other reserves stood at
R5 000 and the retained earnings was R4 000. Equipment was considered to have a fair
value of R7 000 more than book value and debtors R1 500 less than book value. Equip-
ment had a remaining useful life of 7 years at that date. No debtors from acquisition date
remained on the books at 31 December 20.4. All other identifiable assets were considered
to be fairly valued.
3. Since its acquisition, S Ltd has sold certain inventory to H Ltd. S Ltd has consistently ap-
plied a markup of 20% on the cost of these inventories. Sales from S Ltd to H Ltd amount-
ed to R24 000 for the current year.
Inventory on hand in H Ltd included the following that had been purchased from S Ltd:
31 December 20.4 R6 000
31 December 20.5 R9 600
4. Interest on the intercompany loan amounted to R500.
5. At 31 December 20.5 the recoverable amount of goodwill was R2 500. There had been no
previous impairments.
6. The tax rate is 30%.
Required:
Prepare the consolidated statement of financial position of H Ltd and its subsidiary company at
31 December 20.5 and the consolidated statement of profit or loss and other comprehensive
income and consolidated statement of changes for the year ended on that date.
Solution
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
R
Revenue (100 + 80 – 24) 156 000
Cost of sales (60 + 50 – 24 + 0.6) (86 600)
Gross profit 69 400
Operating expenses (18 + 12.5 + 1 + 1.22) (32 720)
Investment income (1.5 – 0.5) 1 000
Finance charges (0.9 + 0.7 – 0.5) (1 100)
Profit before tax 36 580
Taxation (9 + 4.8 – 0.18 – 0.3) (13 320)
Profit and comprehensive income for the year 23 260
Attributable to:
– Equity holders of parent 21 084
– Non-controlling interests 2 176
23 260
continued
134
Chapter 9
Solution (continued)
141 250
EQUITY AND LIABILITIES
Equity
Issued share capital 50 000
Other reserves 8 000
Retained earnings 45 044
Attributable to parent shareholders 103 044
Non-controlling interests 11 736
Total equity 114 780
Non-current liabilities
Deferred tax 720
Current liabilities 25 750
Accounts payable (16.75 + 8) 24 750
Shareholders for dividend 1 000
141 250
continued
135
Notes on Group Financial Statements
Solution (continued)
continued
136
Chapter 9
Solution (continued)
(1)
Property, plant and equipment 24 750 30 000 7 000 3 000 (2) 58 750
Investment in S Ltd 30 000 – 30 000 (1) –
Loan – S Ltd 4 000 – 4 000 (7) –
Inventory 16 100 18 800 1 600 (10) 33 300
(4)
Accounts receivable 19 000 23 000 1 500 1 500 (1) 42 000
Dividends receivable 4 000 – 4 000 (8) –
Bank 2 500 2 200 4 700
(6)
Interest paid 900 700 500 1 100
(10) (9)
Cost of sales 60 000 50 000 600 24 000 86 600
Operating expenses 18 000 12 500 1 000 (2) 32 720
1 220 (16)
Taxation expense
(current and deferred) 9 000 4 800 300 (3) 13 320
180 (11)
Dividends 10 000 5 000 5 000 (14) 10 000
Transfer to other reserves – 3 000 600 (15) 2 400
(1)
Goodwill 3 720 1 220 (16) 2 500
Non-controlling interests’ share of
profit 2 176 (13) 2 176
198 250 150 000 289 566
continued
137
Notes on Group Financial Statements
Solution (continued)
continued
138
Chapter 9
Solution (continued)
continued
139
Notes on Group Financial Statements
Solution (continued)
Inventory
16 100 + 18 800 – 1 600 (interco) = 33 300
Accounts receivable
19 000 + 23 000 = 42 000
Bank
2 500 + 2 200 = 4 700
Deferred tax (SOFP)
((7 000 × 4/7) – 1 600) × 30% = 720
Accounts payable
16 750 + 8 000 = 24 750
Shareholders for dividend
(5 000 × 20%) = 1 000
140
ADJUSTMENTS MADE BY PARENT
10 COMPANY TO CARRYING AMOUNT OF
INVESTMENT IN SUBSIDIARY
141
Notes on Group Financial Statements
Example 10:1
H Ltd acquired 70% of the shares in S Ltd on 1 January 08 for R2 840. H Ltd considered all the
identifiable assets of S Ltd to be fairly valued in S Ltd’s statement of financial position.
Required:
A consolidated statement of profit or loss and other comprehensive income and statement of
changes in equity for the year ended 31 December 08 and a consolidated statement of finan-
cial position at that date.
142
Chapter 10
Solution
Workings:
In H Ltd’s own books an impairment of R500 was provided for. The dividend received from
S Ltd out of pre-acquisition profits was credited to income in H Ltd’s records. A pro forma
adjustment is now made reversing the impairment for consolidation purposes. This restates the
carrying amount of the investment to R2 840 (cost).
Investment in S Ltd 500
Impairment of investment (P/L) 500
CONSOLSIDATION WORKSHEET
Equity of S Ltd SINCE
Date Details INV (Gwill)
S Cap RE TOTAL NCI RE
01/01/08 Purchased 70% 2 000 1 600 3 600 1 080 2 840 (320)
02/01/08 Dividend (1 400) (1 400) (420) (980)
31/12/08 Profit
(1 000 – 400) 600 600 180 420
2 000 800 2 800 840 2 840 (320) (560)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 08
R
Profit before taxation (16 620 + 1 000) 17 620
Taxation (7 200 + 400) 7 600
Profit and total comprehensive income for the year 10 020
Attributable to:
Equity holders of parent 9 840
Non-controlling interests 180
10 020
continued
143
Notes on Group Financial Statements
Solution (continued)
EQUITY
Equity attributable to parent shareholders 17 840
Share capital 4 000
Retained earnings [check: (13 900 + 500 – 560)] 13 840
Non-controlling interests 840
Total equity 18 680
Example10:2
H Ltd acquired 70% of the shares in S Ltd on 1 January 08 for R2 800. H Ltd considered the
identifiable assets of S Ltd to be fairly valued in S Ltd’s statement of financial position. S Ltd’s
retained earnings on 1 January 08 were R1 600. Assume a normal tax rate of 40% (CGT rate
is 50% of this). H Ltd accounts for S Ltd in terms of IFRS 9 with fair value adjustments included
in other comprehensive income in its separate financial statements. The fair value of S Ltd was
R6 600 on 31 December 09 (R5 800 on 31 December 08).
TRIAL BALANCES – 31 DECEMBER 09
H Ltd S Ltd
R R
Share capital (4 000) (2 000)
Retained earnings – 1 January 09 (14 400) (5 600)
Fair value reserve – 1 January 09 (2 400)
Operating profit (12 000) (4 500)
Fair value adjustment (OCI) (800)
Taxation (expense) 5 000 2 000
Tax on other comprehensive income 160
Dividend declared 3 000 1 500
Dividend received (1 050) –
Shareholders for dividend declared (3 000) (1 500)
Dividends receivable from S Ltd 1 050 –
Other current assets 22 600 10 100
Deferred tax (760)
Investment in S Ltd, at fair value 6 600 –
– –
continued
144
Chapter 10
Required:
A Consolidated Statement of Profit or Loss and Other Comprehensive Income and Statement
of Changes in Equity for the year ended 31 December 09 and a Consolidated Statement of
Financial Position at that date.
Solution
Workings:
A pro forma consolidation adjustment reversing the restatement of the investment to fair value
is made before proceeding with the usual consolidation process.
Fair value reserve 2 400
Fair value adjustment (OCI) 800
Deferred tax (SOFP) 760
Tax on other comprehensive income [20% (6 600 – 5 800)] 160
Investment in S Ltd (6 600 – 2 800) 3 800
Note that if the investment was classified as ‘subsequently measured at fair value through profit
or loss’ then the entry would be as follows:
Retained earnings 2 400
Fair value adjustment (P/L) 800
Deferred tax (SOFP) 760
Taxation – deferred (P/L) 160
Investment in S Ltd 3 800
CONSOLIDATION WORKSHEET
Equity of S Ltd SINCE
Date Details TOTAL NCI INV (Gwill)
S Cap RE RE
01/01/08 Purchased 70% 2 000 1 600 3 600 1 080 2 800 (280)
31/12/08 Increase 4 000 4 000 1 200 2 800
2 000 5 600 7 600 2 280 2 800 (280) 2 800
31/12/09 Profit 2 500 2 500 750 1 750
Dividends (1 500) (1 500) (450) (1 050)
2 000 6 600 8 600 2 580 2 800 (280) 3 500
Attributable to:
Equity holders of parent 8 750
Non-controlling interests 750
9 500
continued
145
Notes on Group Financial Statements
Solution (continued)
(2)
14 400 + 2 800 = 17 200
EQUITY
Equity attributable to parent shareholders 26 950
Share capital 4 000
Retained earnings 22 950
Non-controlling interests 2 580
Total equity 29 530
146
11 SUBSIDIARY COMPANY’S CAPITAL
INCLUDES ‘PREFERENCE SHARES’
1. INTRODUCTION
The Companies Act no longer differentiates between ordinary and preference shares. This does
not, however, preclude a company from attaching special rights or restrictions for certain classes
of shares which would result in a share that is, in substance, the same as a preference share. In
other words, certain shares of a company may pay a fixed annual dividend. Furthermore, the
payment of this annual dividend may be compulsory or it may be at the discretion of the com-
pany. For the purposes of this text we will continue to refer to such instruments a ‘preference
shares’.
This chapter also applies to other instruments which include an equity component such as con-
vertible debentures.
147
Notes on Group Financial Statements
3.2.2 If the preference share capital of S is classified as a financial liability, then the cost of H’s
investment in the preference shares in S is set off (or ‘eliminated’) against H’s share of S’s pref-
erence share capital. If any difference arises this would most likely be because the parent is
accounting for the investment in the preference shares at fair value while the subsidiary would
retain them at the original amount received on issue. As with ordinary shares it is likely that the
parent will account for this investment in the subsidiary at cost in which case no goodwill (or gain
on bargain purchase) should arise. If carried at fair value, the fair value adjustments should be
reversed (pro forma) before the consolidation process is done. The non-controlling interests’
share of the subsidiary’s preference share capital is included as a non-current liability (unless to
be redeemed within 12 months) in the consolidated statement of financial position.
148
Chapter 11
The following examples are examined in order to explain the principles outlined above:
Example 11:1 (Non-controlling interests own all the subsidiary’s preference shares)
H Ltd acquired 60% of the ordinary shares in S Ltd on 31 December 02 for R60 000.
At that date the retained earnings were R10 000.
Assume that S Ltd’s preference shares are pure equity instruments.
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
Ordinary share capital (60 000) (90 000)
Preference shares (20 000)
Retained earnings (25 000)
Profit before taxation (10 000)
Taxation 3 000
Preference dividend paid 2 000
Investment in S Ltd 60 000
Current assets 140 000
– –
Required:
Prepare H Ltd’s consolidated statement of profit or loss and other comprehensive income,
statement of changes in equity and statement of financial position of H Ltd and its subsidiary,
S Ltd, for the 04 year.
Solution
Workings:
Analysis of Equity: Ordinary shares
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC RE NCI INV
RE
31.12.02 Acq. 60% 90 000 10 000 100 000 40 000 60 000
31.12.03 Increase 15 000 15 000 6 000 9 000
Subtotals 90 000 25 000 115 000 46 000 60 000 9 0004
31.12.04 Profit (ordi-
nary) 5 0001 5 0001 2 0003 3 000
6
90 000 30 000 120 000 48 000 60 000 12 0005
DEBITS CREDITS
1
10 000 – 3 000 (tax) – 2 000 (P.Div) = 5 000
continued
149
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Profit before taxation 10 000
Taxation (3 000)
Profit and comprehensive income for the year 7 000
Attributable to:
Equity holders of parent 3 000
Non-controlling interests (2 0003 + 2 000 (pref. div.) 4 000
7 000
(a)
Nil + 9 0004 = 9 000
(b)
46 000 (ords) + 20 000 (prefs) = 66 000
EQUITY
Equity attributable to parent shareholders 72 000
Share capital 60 000
Retained earnings 12 0005
Non-controlling interest (20 + 486) 68 000
Total equity 140 000
150
Chapter 11
Example 11:2 (Parent company owns some of the subsidiary’s preference shares)
H Ltd acquired 60% of the ordinary shares and 40% of the preference shares of S Ltd on
31 December 02. At that date the retained earnings of S Ltd were R12 000. The preference
shares are classified as a liability instrument and pay a compulsory dividend of R2 000 p.a.
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
Ordinary share capital (100 000) (100 000)
Preference share liability (20 000)
Retained earnings (29 000)
Gross profit (23 000) (13 500)
Other income (incl. preference share income) (2 000)
Operating expenses 1 000 700
Finance costs (incl. preference share expense) 2 800
Taxation 6 960 3 600
Investment in S Ltd – ordinary shares 80 000
Investment in S Ltd – preference shares 8 000
Current assets 29 040 155 400
– –
Required:
Prepare H Ltd’s consolidated statement of profit or loss and other comprehensive income,
statement of changes in equity and statement of financial position for the 04 financial year.
Solution
continued
151
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Gross profit (23 000 + 13 500) (36 500)
Other income (2 000 – 800) (1 200)
Operating expenses (1 000 + 700) 1 700
Finance costs (2 800 – 800) 2 000
Profit before taxation 34 000
Taxation (10 560)
Profit and comprehensive income for the year 23 440
Attributable to:
Equity holders of parent 20 880
Non-controlling interests 2 5602
23 440
EQUITY
Equity attributable to parent shareholders 131 080
Share capital 100 000
Retained earnings (23 000 + 2 000 – 1 000 – 6 960 + 14 0405) 31 080
Non-controlling interests 54 1604
Total equity 185 240
Non-current liability
Preference share liability of subsidiary (20 – 8) 12 000
197 240
continued
152
Chapter 11
Solution (continued)
153
154
12 SUBSIDIARY COMPANIES AND
ACCUMULATED DEFICITS
A company having an accumulated deficit is not necessarily insolvent. It is prima facie insolvent
only when the accumulated deficit exceeds the issued share capital and other reserves and a
negative equity figure, therefore, arises. With regard to insolvent subsidiaries, it is worth noting,
however, that IFRS 10 (B94), provides that the non-controlling shareholders’ interests will be
placed into a net debit (deficit) position where the subsidiary’s equity is negative. This is despite
the fact that the non-controlling shareholders in a subsidiary would normally not be responsible
for, or guarantee, the liabilities or losses of the subsidiary. Where a subsidiary has an accumu-
lated deficit there is therefore no difference in principle whether the subsidiary is insolvent or not.
Where a (solvent) subsidiary is acquired which has an accumulated deficit, the initial consolida-
tion process is no different from that explained in previous chapters, viz on the first (at acquisition)
line of the consolidation worksheet ‘eliminate’ the at acquisition equity, adjust the value of any
identifiable assets in accordance with the parent company's valuations, credit the non-controlling
interests with their share of the at acquisition equity (as adjusted for the abovementioned chang-
es in asset values), ‘eliminate’ the cost price of the shares to the parent company and raise any
balance remaining as consolidation goodwill/gain on bargain purchase, etc. The next step is
normally to analyse the post-acquisition increases or decreases in the reserves up to the end of
the prior year. The current year position is then dealt with separately.
Example 12:1
H Limited acquired 70% of the shares of S Limited on 1 January 05 for R3 500. At this date the
accumulated deficit of S Limited was R6 000. H Limited considered the identifiable assets of
S Limited to be fairly valued in S Limited's books.
The following are extracts from the trial balance of S Limited at 31 December 08:
R
Share capital (10 000)
Accumulated deficit – 31 December 08 8 000
CONSOLIDATION WORKSHEET
EQUITY OF S LTD ANALYSIS OF EQUITY
Date Details TOTAL RE
S Cap RE NCI INV (Gwill)
1.1.05 Purchased 70% 10 000 (6 000) 4 000 1 200 3 500 (700)
31.12.08 Increase loss (2 000) (2 000) (600) (1 400)
10 000 (8 000) 2 000 600 3 500 (700) (1 400)
If the accumulated deficit on 31 December 08 was R12 000 the consolidation worksheet would
be as follows:
EQUITY OF S LTD ANALYSIS OF EQUITY
Date Details TOTAL RE
S Cap RE NCI INV (Gwill)
1.1.05 Purchased 70% 10 000 (6 000) 4 000 1 200 3 500 (700)
31.12.08 Increase loss (6 000) (6 000) (1 800) (4 200)
10 000 (12 000) (2 000) (600) 3 500 (700) (4 200)
continued
155
Notes on Group Financial Statements
In the statement of financial position the non-controlling interests will be reflected at a debit
balance of R600.
It was common practice to transfer to another reserve the profit that represented a recovery of
a deficit at the date of acquisition, on the basis that these profits were not available for distribu-
tion in the subsidiary as they reduced the deficit and did not result in positive retained earnings.
In terms of the new Companies Act, dividends are declared based on a liquidity and solvency
basis so there is therefore no longer any need to make such a transfer.
Example 12:2
Same as example 12:1, with the exception that post-acquisition profit of R4 000 has been re-
tained up to the end of 08 and a further R12 000 profit after tax was earned in 09. Extracts from
the trial balance of S Ltd at 31 December 09 are, therefore, as follows:
R
Share capital (10 000)
Accumulated deficit – 31 December 08 (– 6 000 + 4 000) 2 000
Profit after tax (12 000)
Net current assets 20 000
CONSOLIDATION WORKSHEET
EQUITY OF S LTD ANALYSIS OF EQUITY
Date Details TOTAL
S Cap RE NCI INV (Gwill) RE
1.1.05 Purchased 70% 10 000 (6 000) 4 000 1 200 3 500 (700)
31.12.08 Increase RE 4 000 4 000 1 200 2 800
10 000 (2 000) 8 000 2 400 3 500 (700) 2 800 (1)
31.12.09 Profit 12 000 12 000 3 600 8 400 (2)
10 000 10 000 20 000 6 000 3 500 (700) 11 200
(1)
The subsidiary has earned R4 000 retained earnings during the post-acquisition years up to
31 December 08. This was included in the consolidated statements of profit or loss and other com-
prehensive income of these years and the non-controlling interests were allocated their share there-
of. If the position is left at that, the consolidated retained earnings at 31 December 08 will include
R2 800 from the subsidiary company. S Ltd's own retained earnings at the end of 08 showed a clos-
ing deficit of R2 000, however.
If the subsidiary applies liquidity and solvency criteria and finds that it does not regard the post-
acquisition increase in retained earnings as being distributable, a pro forma transfer is made from the
consolidated retained earnings to a reserve. Obviously only a maximum R2 800 would be trans-
ferred, as the non-controlling interests’ share of the R4 000 has already been transferred to the non-
controlling interests, leaving only R2 800 attributable to H Ltd.
Such pro forma transfers of post-acquisition profit of the subsidiary continue each year until the sub-
sidiary reaches the point where it has retained earnings it considers to be distributable. From this
point onwards the need for further transfers will not arise. If, however, the subsidiary then makes
losses and returns to a deficit situation transfers will be reversed until profits are again made.
(2)
The same principles as discussed in (1) above will apply to the profits earned during 09, i.e. the sub-
sidiary might consider part of the R8 400 as non-distributable.
156
13 ACQUISITION OF SUBSIDIARY DURING A
FINANCIAL YEAR
1. INTRODUCTION
In the preceding chapters the assumption was made that the acquisition of the subsidiary took
place at the end (or beginning) of a financial year. The situation is now examined where a subsid-
iary is acquired at some point during the course of a financial year.
Providing that one bears in mind that the purchase price of the shares represents the attributable
net assets or equity of the subsidiary at the date of acquisition, the consolidation procedure is not
different from that of an acquisition at the end of the financial year.
Basically, the procedure is as follows:
(1) Establish the value of the net identifiable assets at the date of acquisition. This is usually
calculated by reference to the equity of the subsidiary at the acquisition date, which will
amount to the equity at the end of the previous financial year, plus (minus) any increase (de-
crease) during the current financial year up to the date of acquisition of the shares by the
parent company. Such increase (decrease) in equity will usually come about as a result of
the profit (loss) made by the subsidiary for the period from the beginning of the current finan-
cial year to the date of acquisition.
This, therefore, involves analysing the subsidiary's results of the current year in order to
apportion the profit (loss) for the current year between the pre- and post-acquisition periods.
Once this has been done, the at acquisition equity (including the profit (loss) relating to the
pre-acquisition portion of the current year) is set off against the purchase price of the shares,
as before, on line 1 of the consolidation worksheet.
(2) The subsidiary's profit (loss) for the post-acquisition portion of the current year is included
separately in the consolidation worksheet and in the consolidated statement of profit or loss
and other comprehensive income as before. Pro forma adjustments to this profit, if any, are
dealt with in the normal manner.
157
Notes on Group Financial Statements
Items appropriated to or from profits should also be apportioned/allocated between the pre- and
post-periods according to the circumstances relating to each item. The following are some
examples:
(1) Non-statutory year end transfers to reserves – these would normally relate to the post-
acquisition period.
(2) Statutory transfers to reserves (e.g. capital redemption reserve fund) – these should be
allocated to the periods during which the transactions to which they relate occurred (e.g.
redemption of preference shares).
(3) Ordinary dividends – these should be allocated to the periods during which they were
declared.
(4) Preference dividends – these should be apportioned on a day to day basis, assuming that no
change in the preference share capital took place during the year. It is debatable whether
the preference dividend should be apportioned. One view is that the preference dividend
accrues over time and that apportionment is therefore appropriate. Another view is that the
dividend only accrues when it has been appropriately authorised (declared). In this text we
will normally apply the first view.
Example 13:1
The following trial balances were extracted from the records of Big Ltd and Small Ltd at
31 December 08:
Big Ltd Small Ltd
R R
Ordinary share capital (200 000) (20 000)
Preference share capital (5 000)
Other reserves (60 000) (48 000)
Retained earnings – 31 December 07 (40 300) (9 000)
3% Debentures (40 000)
Accounts payable (85 000) (64 000)
Furniture and equipment – cost 60 000 35 200
– accumulated depreciation (24 000) (9 200)
Inventory 90 000 24 600
Accounts receivable 152 950 115 300
Bank 57 300 13 000
Investment in Small Ltd – cost 70 000
Dividends received (4 950)
Sales (450 000) (260 000)
Purchases 308 000 161 600
Admin. and selling expenses 112 000 86 400
Interest paid on debentures 1 200
Transfer to other reserves 5 000
Ordinary dividend paid – 31 August 08 6 000
– 31 December 08 14 000
Ordinary dividend declared – 31 December 08 6 600
Preference dividend paid – 31 December 08 300
– –
continued
158
Chapter 13
Additional information:
(1) Big Ltd acquired 75% of the ordinary shares in Small Ltd on 1 September 08.
(2) The average monthly sales of Small Ltd increased by 25% during the period after Big Ltd
gained control.
(3) Administration and selling expenses accrued evenly during the year and includes depreci-
ation of: Big Ltd R6 000, Small Ltd R3 000.
(4) Inventory on hand at 31 December 08 was as follows:
Big Ltd R100 000
Small Ltd R 43 200
(5) Ignore taxation.
(6) The preference shares are classified as pure equity instruments.
(7) The non-controlling interests are not initially measured at fair value.
Required:
Prepare consolidated financial statements of Big Ltd and its subsidiary for 08.
Solution
Workings:
1. Apportionment of sales:
Let sales for 8 months (January to August) be 800 (100 × 8)
Then sales for 4 months (September to December) is 500 (125 × 4)
1 300
13 × = 260 000
∴ 8 × = 160 000
∴ 5 × = 100 000
2. Apportionment of gross profit: Big Small
Inventory – 1 January 08 90 000 24 600
Purchases 308 000 161 600
398 000 186 200
Inventory – 31 December 08 100 000 43 200
Cost of sales 298 000 143 000
Gross profit (∴) 152 000 117 000
Sales 450 000 260 000
Gross profit: 117 000 ÷ 260 000 = 45% of sales (Small)
continued
159
Notes on Group Financial Statements
Solution (continued)
3. Calculation of increase (decrease) in equity during the pre- and post-acquisition periods:
Small Ltd
(12 months) (8 months) (4 months)
R R R
Sales 260 000 160 000 100 000
Cost of sales (143 000) (88 000) (55 000)
Gross profit 117 000 72 000 45 000
Less: Admin and selling expenses (86 400) (57 600) (28 800)
Debenture interest (1 200) (800) (400)
Profit 29 400 13 600 15 800
Less: Preference dividend (300) (200) (100)
Ordinary dividend
– paid (6 000) (6 000)
– declared (6 600) (6 600)
Transfer to other reserve (5 000) (5 000)
11 500 7 400 4 100
4. CONSOLIDATION WORKSHEET
EQUITY OFS LTD ANALYSIS OF EQUITY
Date Details TOTAL
S Cap OR RE NCI INV (Gwill) RE OR
(1)
1.09.08 Purchased 75% 20 000 43 000 16 400 79 400 19 850 70 000 (10 450)
31.12.08 Profit 15 700 (2) 15 700 3 925 11 775
Transfer 5 000 (5 000) – (3 750) 3 750
Dividends (6 600) (6 600) (1 650) (4 950)
20 000 48 000 20 500 88 500 22 125 70 000 (10 450) 3 075 3 750
(1)
9 000 + 7 400 = 16 400
(2)
15 800 – 100 pref div = 15 700
continued
160
Chapter 13
Solution (continued)
(1)
19 850 + 5 000 (pref. capital) + 200 (pref. div.) = 25 050
(2)
1 650 + 300 = 1 950
549 250
* This represents the at acquisition accumulated depreciation (9 200 – (1/3 × 3 000)) = 8 200
EQUITY AND LIABILITIES
Equity attributable to parent shareholders 338 075
Share capital 200 000
Other reserves (60 000 + 3 750) 63 750
Retained earnings (71 250 + 3 075) 74 325
Non-controlling interest (22 125 + 5 000) 27 125
Total equity 365 200
Non-current liabilities
Debentures 40 000
Current liabilities
Accounts payable (85 000 + 64 000 – 6 600 + 1 650) 144 050
549 250
continued
161
Notes on Group Financial Statements
Solution (continued)
162
Chapter 13
Example 13:2
Abel Limited acquired the entire issued preference share capital of Cain Limited for R50 000 on
incorporation of the latter. On 1 March 08 Abel Limited purchased 60% of the issued ordinary
shares for R72 000. All the identifiable assets of Cain Limited were considered to be fairly val-
ued.
The abbreviated trial balances of the two companies at 30 September 08 were as follows:
Abel Ltd Cain Ltd
Credits
Share Capital – ordinary 200 000 60 000
– preference 50 000
General reserve 30 000
Retained earnings – 30.09.07 143 400 16 400
Gross profit (including depreciation on plant) 87 600 59 200
Dividends received 7 500
Administrative fees received 3 500
Accumulated depreciation – plant 11 200 8 300
Accounts payable 25 800 18 100
R479 000 R242 000
Debits
Land and buildings at cost 128 000 45 000
Plant at cost 34 600 42 000
Investment in Cain Limited 122 000
Inventory 63 600 43 240
Accounts receivable 42 100 36 500
Bank 14 300 32 745
Administration expenses 29 600 14 300
Taxation 24 800 15 715
Dividends paid – ordinary 20 000 8 000
– preference 4 500
R479 000 R242 000
Since acquiring the ordinary shares in Cain Limited, Abel Limited has charged Cain an admin-
istration fee of R500 per month.
The rate of taxation is 35% and in the case of Cain Limited, taxable income corresponds with
accounting profit.
The compulsory preference dividend is paid annually in arrears on 30 September. Cain Limited
paid an ordinary dividend of R3 000 on 15 January 08 and one of R5 000 on 30 September 08.
Cain Limited's average monthly gross profit (before taking depreciation on plant into account)
since 1 March 08 was 40% higher than for the months prior to March 08. Apart from the above,
revenues and expenses accrued evenly throughout the year.
Plant is depreciated by both companies at 10% per annum on cost. There has been no acquisi-
tions or sales of plant during the year ended 30 September 08.
At no stage during the 08 financial year was Abel’s investment in Cain considered to have
been impaired.
Required:
Prepare consolidated financial statements for the year ended 30 September 08, using only the
above information.
163
Notes on Group Financial Statements
Solution
Workings:
Pre – Post –
5 months 7 months
Gross profit before depreciation apportioned:
5 months × 100 = 500
7 months × 140 = 980
1 480
R63 400 in ratio 500 : 980 21 419 41 981
Depreciation R4 200 (ratio 5:7) (1 750) (2 450)
Admin. fees:
Total for year 14 300 (3 500)
Abel charged (7 × 500) 3 500
Balance 10 800
Allocate in ratio 5 : 7 (4 500) (6 300)
15 169 29 731
Taxation at 35% (total 15 715) (5 309) (10 406)
9 860 19 325
Preference dividends: 4 500 allocated in ratio 5 :7 (1 875) (2 625)
Profit attributable to ordinary shareholders 7 985 16 700
Dividends paid 15.01.08 (3 000)
Retained profit for 5 months 4 985
Retained earnings – 30.09.07 16 400
– 01.03.08 (at acquisition) 21 385
Worksheet
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC RE GR NCI INV GW
RE
1.03.08 Acq. 60% 60 000 21 385 30 000 111 385 44 554 72 000 (5 169)
30.09.08 Profit 16 700 16 700 6 6803 10 020
30.09.08 Dividend (5 000) (5 000) (2 000) (3 000)
60 000 33 085 30 000 123 085 49 2348 72 000 (5 169)9 7 0207
DEBITS CREDITS
continued
164
Chapter 13
Solution (continued)
continued
165
Notes on Group Financial Statements
Solution (continued)
166
14 INVESTMENTS IN ASSOCIATES AND
JOINT VENTURES
1. INTRODUCTION
Financial reporting reflects an entity’s accountability for its resources thus providing a basis for
assessing the stewardship of its management and for making economic decisions. The financial
statements of an entity assist those who use them to assess the financial position, performance
and financial adaptability of the reporting entity.
IAS 28 deals with the determination of what constitutes an associate and prescribes the account-
ing treatment of both associates and joint ventures. IFRS 11 deals with the issue of what consti-
tutes a joint venture. This chapter deals only with IAS 28, that is the accounting treatment of both
associates and joint ventures and what constitutes an associate. The determination of what
constitutes a joint venture is covered in Chapter 17. It should be noted that the accounting treat-
ment of both associates and joint ventures is exactly the same.
167
Notes on Group Financial Statements
3. ASSOCIATES
An associate is an entity over which the investor has significant influence.
168
Chapter 14
ƒ adjustments to the carrying amount which may be necessary for alterations in the investor’s
proportionate interest in the associate arising from changes in the associate’s equity that have
not been included in the statement of profit or loss and other comprehensive income (e.g. for-
eign exchange translation differences and adjustments/differences arising on business com-
binations).
ILLUSTRATION
(Extract from a Consolidated Statement of Profit or Loss and Other Comprehensive
Income)
20-2 20-1
Operating profit 100 000 80 000
Share of profit (after tax) of associates/joint ventures 20 000 12 000
Income from other investments 6 000 4 000
The equity method can be described as a method of accounting whereby the investment is ini-
tially recorded at cost and adjusted thereafter for the post-acquisition changes in the investor’s
share of net assets (or equity) of the investee.
It should be noted that where a parent company (A) holds a 70% interest in a subsidiary (B),
which owns 25% in an investee (C), C would be classified as an associate despite the fact that
A’s effective interest in C is only 17,5% (i.e. lower than 20%). A has control over B and, therefore,
over the whole of the 25% in C. Hence A can be said to have significant influence over C (based
on the 20% guideline).
B being a subsidiary of A, all of B’s assets are fully consolidated with A. This means that the
whole 25% interest in C is included into A’s consolidated financial statements on the equity basis
and not just A’s effective interest in C (17,5%). The non-controlling interests in B (30%) would
obviously have an interest in the investment in C and the profit generated by it. C can be de-
scribed as an indirect associate of A. Accounting for indirect subsidiaries and associates is dealt
with in more detail in Chapter 18.
Application of the equity method ensures that the profits of the group (and, therefore, the earnings
per share figures) incorporate the investor’s share of the profits of associates.
169
Notes on Group Financial Statements
4.5 Goodwill
The amount of goodwill arising on the acquisition of an associate or joint venture (determined in
the same manner as is done for a subsidiary on consolidation) forms part of the cost or carrying
amount of the investment. In the case of consolidation (subsidiary), goodwill is carried as a sep-
arate non-current asset on the consolidated statement of financial position. The reason for this
difference is the fact that in the case of consolidation, the investment is eliminated from the con-
solidated statement of financial position and the individual assets and liabilities of the subsidiary
are included. In the case of equity accounting, however, the investment remains on the consoli-
dated statement of financial position and the individual assets and liabilities of the associate are
not included on the consolidated statement of financial position.
The goodwill content of the cost price of the investment is accounted for at cost less any impair-
ment losses in terms of IFRS 3 (Business Combinations). As goodwill is not recognised separate-
ly as an asset, it is not tested for impairment separately in terms of IAS 36 (Impairment of
Assets). Instead, the entire carrying amount of the asset is tested under IFRS 9 for impairment by
comparing its recoverable amount with its carrying amount whenever the requirements of IFRS 9
indicate that there may be an impairment.
170
Chapter 14
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 profit in the determination of the investor’s
share of the associate’s profit or loss in the period in which the investment is acquired.
Example 14:1
A Ltd acquired a 30% interest in the ordinary shares of B Ltd at a cost of R40 000. The equity
of B Ltd at the date of acquisition of the shares was R100 000 and the assets of B Ltd were
considered to be fairly valued in B’s books at this date.
B Ltd’s profit for the first year post-acquisition was R20 000.
A Ltd also has a number of subsidiaries.
Required:
Show by means of journal entries, how A Ltd will account for the results of B Ltd on the equity
method in A Ltd’s consolidated financial statements at the end of the first year post-acquisition.
Assume that no impairment of goodwill has taken place since acquisition.
Solution
In A Ltd’s consolidated statement of profit or loss and other comprehensive income ‘share of
profit of associate’ will amount to R6 000 and the carrying amount of the investment will be
increased by R6 000 in A Ltd’s consolidated statement of financial position. The carrying
amount will, therefore, be R46 000, inclusive of R10 000 goodwill. IAS 28 does not require
separate identification of the goodwill content of the cost price.
In the notes to the consolidated statement of financial position the carrying amount of the in-
vestment in the associate will be analysed as follows:
Cost 40 000
Share of post-acquisition retained earnings 6 000
46 000
171
Notes on Group Financial Statements
172
Chapter 14
joint venture to the investor. ‘Downstream’ transactions are, for example, sales of assets from the
investor to an associate or joint venture. The investor’s share in the profits and losses resulting
from these transactions (upstream and downstream) is eliminated.
When dealing with an associate or joint venture, therefore, such unrealised profit adjustments can
be made on the left side of the analysis of equity worksheet (the full amount of the unrealised
profit is included here) which means that the investor’s share only of these adjustments will be
incorporated into the ‘since retained earnings’ column on the right side of the worksheet (see
example 14:2).
Example
I Ltd has a 30% interest in A Ltd. On 1 July 20.1 a decision to dispose of two thirds of the
investment is taken and consequently that portion of the investment is classified as held for
sale. The held for sale portion is sold on 15 August 20.1.
Assuming an investment of 20% or more gives significant influence the 10% investment will be
accounted for using the equity method up to 15 August 20.1. This is because I Ltd continues to
hold 30% which gives it significant influence. The remaining 10% investment will be accounted
for in terms of IFRS 9 from 15 August 20.1. The 20% investment will be accounted for in terms
of IFRS 5 from 1 July 20.1 until it is disposed of on 15 August 20.1.
If an investment in an associate or joint venture was previously classified as held for sale and
no longer meets the criteria to be classified as such, it shall be accounted for using the equity
method retrospectively.
For example, if an investment was classified as held for sale in the 20.1 financial statements
and in 20.2 no longer meets the criteria, then the investor accounts for the investment using
the equity method in the 20.2 financial statements, i.e. the equity method is used for the current
and comparative year.
4.16 Disclosure
Refer to IFRS 12 on page 9 of Chapter 1.
173
Notes on Group Financial Statements
4.17 Contingencies
The investor discloses:
ƒ its share of the contingent liabilities of an associate, and
ƒ those contingent liabilities that arise because the investor is severally liable for all or part of the
liabilities of the associate.
4.18 IAS 1
In terms of IAS 1 investments accounted for using the equity method shall be represented as a
separate item in the statement of financial position and the share of profit or loss of associates
and joint ventures accounted for on the equity method shall be presented separately in the state-
ment of profit or loss and other comprehensive income.
Example 14:2
The summarised trial balances of H Ltd, S Ltd and A Ltd at 31 December 02 were as follows:
H Ltd S Ltd A Ltd
R R R
Ordinary share capital (220 000) (220 000) (110 000)
Preference shares (20 000)
Revaluation Reserve (90 000)
General reserve (60 000) (10 000) (20 000)
Retained earnings – 1 January 02 (25 000) (19 000) (38 000)
Operating profit (120 000) (90 000) (78 000)
Dividends received (17 750) (1 800) –
Taxation (including deferred tax) 50 000 40 000 30 000
Preference dividend paid 2 000
Ordinary dividend paid 40 000 20 000 15 000
Transfer to general reserve 10 000 5 000 5 000
Land, at valuation 200 000
Other non-current assets – carrying amount 75 000 226 000 70 000
Investment in S Ltd, at cost 150 000
Investment in A Ltd, at cost 50 000
Other listed investments 28 000 24 000 –
Current assets 57 750 47 800 42 000
Deferred taxation (18 000) (22 000) (8 000)
Nil Nil Nil
Additional information:
1. H Ltd acquired 60% of S Ltd on 1 January 00 when S Ltd’s equity was as follows:
Share capital 220 000
General reserve Nil
Retained earnings 10 000
R230 000
continued
174
Chapter 14
At this date A Ltd’s land, which was included in A’s books at a cost of R110 000, was consid-
ered by H Ltd to be worth R160 000. A Ltd revalued this property for the first time during 02.
A Ltd has neither purchased nor sold any property since 1 January 01. H Ltd considered other
non-current assets to be fairly valued in its books at this date. Ignore Capital Gains Tax.
Assume A Ltd’s preference shares to be pure equity instruments.
Required:
Prepare H Ltd’s consolidated financial statements for the 02 financial year.
Solution
Workings:
Worksheet S Limited
Equity of S Ltd Analysis of Equity
Date Details Gen Total Since Since
S Cap RE NCI INV (Gwill)
Res GR RE
1.1.00 Purchased 60% 220 000 – 10 000 230 000 92 000 150 000 (12 000)
31.12.01 Increase – GR 5 000 5 000 2 000 3 000
– RE 9 000 9 000 3 600 5 400
220 000 5 000 19 000 244 000 97 600 150 000 (12 000) 3 000 5 400
(1)
31.12.02 Profit 51 800 51 800 20 720 31 080
Transfer 5 000 (5 000) – 3 000 (3 000)
Dividend (20 000) (20 000) (8 000) (12 000)
220 000 10 000 45 800 275 800 110 320 150 000 (12 000) 6 000 21 480
(1)
90 000 + 1 800 – 40 000 = 51 800
Worksheet A Ltd
Equity of A Ltd Analysis of Equity
Date Details TOTAL Since Since Since
S Cap GR RE LAND RR INV (Gwill)
GR RR RE
1.01.01 Purchased
25% 110 000 10 000 15 000 50 000 185 000 50 000 (3 750)
31.12.01 Increase
– GR 5 000 5 000 1 250
– RE 23 000 23 000 5 750
110 000 15 000 38 000 50 000 213 000 50 000 (3 750) 1 250 5 750
(1)
31.12.02 Profit 46 000 46 000 11 500
Revaluation (50 000) 90 000 40 000 10 000
Dividend (15 000) (15 000) (3 750)
Transfer
(GR) 5 000 (5 000) 1 250 (1 250)
110 000 20 000 64 000 – 90 000 284 000 50 000 (3 750) 2 500 10 000 12 250
(1)
78 000 – 30 000 – 2 000 = 46 000
continued
175
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 02
R
Revenue – sales (only H Ltd and S Ltd) xx
Cost of sales and operating expenses (only H Ltd and S Ltd) (x)
Operating profit 210 000
Share of profit of associate 11 500*
Dividends received – listed investments(1) 3 800
Profit before taxation 225 300
Taxation 90 000
Profit for the year 135 300
Other comprehensive income:
Items that will not be reclassified to profit or loss
Share of other comprehensive income of associate 10 000
Total comprehensive income for the year 145 300
(1)
17 750 – 12 000 – 3 750 + 1 800 = 3 800
(2)
25 000 + 5 400 + 5 750 = 36 150
(3)
10 000 + 3 000 + 1 250 = 14 250
(4)
(60 000 – 10 000) + 3 000 + 1 250 = 54 250
continued
176
Chapter 14
Solution (continued)
continued
177
Notes on Group Financial Statements
Solution (continued)
(e) Non-controlling interests share of profit = 40% (90 000 + 1 800 – 40 000) = 20 720
(f) General reserve (beginning of year) = (60 000 – 10 000) + 60% (10 000 – 5 000) + 25%
(20 000 – 5 000 – 10 000) = 54 250
(g) Retained earnings (beginning of year) = 25 000 (H) + [60% (19 000 – 10 000)] (S) +
[25% (38 000 – 15 000)] (A) = 36 150
(h) Transfer to GR = 10 000 (H) + (60% × 5 000) (S) + (25% × 5 000)(A) = 14 250
(i) Share of associate’s reval. res. = 25% (90 000 – 50 000) = 10 000
(j) Investment in associate = 50 000 + 25% (20 000 – 10 000) + 25% (64 000 – 15 000) +
25% (90 000 – 50 000) = 74 750
178
Chapter 14
Example 14:3
Same as 14:2 except that H Ltd’s ‘other non-current assets’ at 31 December 02 includes
R21 000 in respect of plant purchased from A Ltd on 1 July 01 for R31 500. The carrying
amount of this plant in A Ltd on the date of sale was R18 000. At the date of this intercompany
sale the plant was considered to have a remaining life of 4½ years with a nil residual value.
Required:
Indicate in what respects the solution given in 14:2 above will change as a result of the above-
mentioned intercompany transaction. Ignore deferred tax.
Solution
Workings:
Profit on sale made by A Ltd in 01 = R13 500
Annual depreciation adjustment required (13 500/4½) = R3 000
(A was depreciating at R4 000 per annum, while H Ltd is depreciating at R7 000 per annum.)
Adjustments required:
1. In the worksheet of A Ltd an additional column for ‘plant’ is required on the left side of the
total column.
2. At 31.12.01 on the ‘RE’ line, next to the 23 000 increase, a net adjustment of (12 000) (i.e.
13 500 – 1 500) should be included so as to reduce the 23 000 in the total column down to
11 000. (The 13 500 profit is eliminated and the ½ year depreciation adjustment is 1 500.)
This reduces the non-controlling interests’ share from 17 250 down to 8 250 and the inves-
tor’s share in the ‘since RE’ column from 5 750 down to 2 750. (This reduces the since RE
subtotal also from 5 750 to 2 750.)
3. In the current year, a 3 000 depreciation adjustment is also included in the worksheet – in
the same ‘plant’ column next to the profit of 46 000 so as to increase the 46 000 in the total
column to 49 000. The non-controlling interests share of this becomes 36 750 and the in-
vestor’s share in the since RE column increases to 12 250.
4. In the consolidated statement of profit or loss and other comprehensive income the ‘share
of profit of associate’ increases from 11 500 to 12 250, while the opening retained earnings
figure reduces from 36 150 to 33 150 (25 000 + 5 400 + 2 750). The closing retained earn-
ings therefore reduces to 94 230.
5. In the consolidated statement of financial position the carrying amount of the investment in
the associate reduces by 2 250, from 74 750 to 72 500.
6. Note again that in the case of equity accounting for associates, unearned profit, deprecia-
tion and deferred tax adjustments in respect of intercompany items should be included (i.e.
the full amounts) on the left side of the worksheet whether the investor sells to the associ-
ate or vice versa. This will ensure that only the investor’s share of such adjustments will be
included in the ‘since retained earnings’ column on the right side of the worksheet (see
para 19 below).
179
Notes on Group Financial Statements
It is interesting to note that as a result of the fact that equity accounting is, in effect, a ‘one-line
consolidation’, with the assets and liabilities of the associate not being included in the consolidat-
ed statement of financial position and the investment not being ‘eliminated’, an anomaly arises.
The plant which H Ltd acquired from A Ltd is included in the consolidated statement of financial
position at the higher value (i.e. including the intercompany profit element). It is the carrying
amount of the investment which has been reduced (a reduced profit is added to the carrying
amount of the investment).
Note that one cannot reduce the carrying amounts of both the plant and the investment as this
would amount to a double deduction. A similar anomaly arises with the sale of inventories by
A Ltd to H Ltd at a markup.
If one wishes to reduce the carrying amount of the asset itself, i.e. the plant or the inventories,
which one could argue is more correct, then the carrying amount of the investment in associate
would have to be increased accordingly.
The question arises, therefore, as to how the unearned profit adjustments should be made.
The group profit must be the same, whether the asset is sold intercompany by the investor
(downstream) or by the associate (upstream). The only questions are:
ƒ whether the ‘share of profit of the associate’ should be adjusted or should the adjustment be
made against the investor’s own profit figure, and
ƒ whether the carrying amount of the investment in the associate or the individual asset itself (if
this is included in the consolidated statement of financial position) should be reduced.
The net amount of the adjustment must be the same, whichever method is adopted.
Conceptually, it would appear to be sound to adjust the investor’s own profit and the carrying
amount of the investment where the investor has sold the asset to the associate. Corresponding-
ly, where the associate has sold the asset to the investor at a profit, the ‘share of profit of asso-
ciate’ and the individual asset on the consolidated statement of financial position should perhaps
be adjusted.
IAS 28 requires that such unearned profit adjustments should be made, but it does not prescribe
the method to be used.
The approach adopted in this book is, for both upstream and downstream transactions, to adjust
the ‘share of profit of associate’ and the ‘investment in associate’ items.
As far as preparing one’s workings is concerned, following this approach means that the un-
earned profit adjustments, in the case of an associate, can always be made in the analysis of
equity worksheet, whether the asset is sold by the investor or by the associate.
180
Chapter 14
Example 14:4
Same as example 14:3 except that the plant was sold from H Ltd to A Ltd (i.e. A Ltd’s ‘other
non-current assets’ include the plant purchased from H Ltd). All other details remain the same,
but deferred tax should be taken into account at the rate of 40%. (Ignore CGT.)
The worksheet may be prepared as follows:
Worksheet
EQUITY OF A LTD ANALYSIS OF EQUITY
Date Details TOTAL SINCE SINCE SINCE
S Cap GR RE Land RR Plant DT Inv (GWill)
GR RE RR
01.01.01 Purchased 110 000 10 000 15 000 50 000 185 000 50 000 (3 750)
31.12.01 25% 5 000 5 000 1 250
Increase 23 000 (12 000) 4 800 15 800 3 950
– GR
– RE
Sub totals 110 000 15 000 38 000 50 000 (12 000) 4 800 205 800 50 000 (3 750) 1 250 3 950
31.12.02 Profit 46 000 3 000 (1 200) 47 800 11 950
Revaluation (50 000) 90 000 40 000 10 000
Dividend (15 000) (15 000) (3 750)
Transfer 5 000 ( 5 000) – 1 250 (1 250)
110 000 20 000 64 000 – 90 000 (9 000) 3 600 278 600 50 000 (3 750) 2 500 10 900 10 000
Comments:
1. Note that in accordance with the approach discussed above, where an associate is involved
in unearned profit (and deferred tax) adjustments, the adjustments are made in the work-
sheet, whether the sale is from the investor to the associate or vice versa. (On consolida-
tion, such adjustments will be made in the worksheet only when the subsidiary sells to the
parent company.)
2. Following this approach means that both the ‘share of profit of associate’ and consequently
the ‘investment in associate’ are automatically adjusted for such unearned profit (and defer-
red tax) adjustments and the individual asset itself, whether it is in the investor company or
in the associate, will not be adjusted. Similarly, the investor’s own profit before tax and
taxation figures in the consolidated statement of profit or loss and other comprehensive
income will not be adjusted, even where the investor sells to the associate.
181
Notes on Group Financial Statements
Example 14:5
I Ltd subscribes for a 30% interest in A Ltd (an associate) on 1 January 20.1. The interest is
acquired in exchange for an item of plant with a carrying amount of R280 000 (cost R400 000,
accumulated depreciation R120 000). The fair value of the plant and interest acquired in A Ltd
was R350 000. The plant has a remaining useful life of 5 years.
The current tax rate is 30%. I Ltd has a 31 December year end.
The following entry will be passed in the books of I Ltd:
Investment in associate 350 000
Accumulated depreciation – plant 120 000
Plant at cost 400 000
Profit on disposal of plant 70 000
The following entries will be passed to equity account the investment (in addition to other
entries that would be required) for the year to 31 December 20.1:
Profit on disposal of plant (70 × 30%) 21 000
Taxation (P/L) (21 × 30%) 6 300
Investment in associate 14 700
Investment in associate (21 ÷ 5 × 70%) 2 940
Profit from associate 2 940
If the transaction lacked commercial substance, no profit or loss is recognised by the investor.
182
15 PIECEMEAL (STEP) ACQUISITIONS
1. INTRODUCTION
In the preceding chapters the assumption was made that the subsidiary (or associate) was
acquired by means of a single acquisition of shares. This chapter examines the position where
the parent company’s interest in the subsidiary (or associate) was acquired through a series of
acquisitions.
A ‘piecemeal acquisition’ (also called a ‘step acquisition’) takes place where a company had an
existing interest in another company and acquires a further interest in that company which results
in the acquirer (parent) obtaining control over that other company (acquiree/subsidiary). The
subsidiary is consolidated from the acquisition date which is the date on which the parent obtains
control. It will also apply to a situation where a company has an interest in another and, normally
because of a further acquisition of shares, significant influence becomes exercisable which re-
sults in the acquired company becoming an associate. The equity accounting method is used
from the date significant influence is obtained.
2. ACCOUNTING IMPLICATIONS
In terms of IFRS 3, goodwill arising in a business combination is recognised as the excess of (a)
over (b).
(a) The aggregate of:
ƒ the consideration transferred (purchase price)
ƒ the amount of any non-controlling interest, and
ƒ in a business combination achieved in stages (piecemeal/steps) the acquisition date fair
value of the acquirer’s previously held equity interest in the acquiree.
(b) The acquisition date identifiable net assets measured in accordance with IFRS 3.
If (b) exceeds (a), there is a gain on bargain purchase.
The important point to note with regard to piecemeal acquisitions is that the previously held equity
interest is measured at its fair value. Any resulting gain or loss, if any, on measurement to fair
value is included in profit or loss.
IFRS 9
If the financial asset was previously accounted for in terms of IFRS 9, it would normally be
accounted for at fair value with fair value adjustments included in profit or loss. The entity may,
however, have elected to present changes in fair value in other comprehensive income. In both
cases the previously held investment would already be reflected at fair value at the date of acqui-
sition.
If the previously held investment was carried at cost (because the fair value could not be reliably
measured and cost was considered the best estimate of fair value), any adjustment to fair value
on the date of acquisition is included in profit or loss.
IAS 28
If the previously held investment was being accounted for on the equity method (associate or joint
venture), any adjustment to fair value at the date of acquisition is included in profit or loss.
183
Notes on Group Financial Statements
3. METHOD OF CONSOLIDATION
The basic procedures to be followed are as follows:
(i) The previously held interest(s) are, if necessary, remeasured to fair value with the resultant
gain or loss included in profit or loss.
(ii) The first line of the analysis of equity worksheet relates to the date the parent achieves
control. In other words, the date(s) of previous purchases of the investment are not ana-
lysed separately unless the previously held investment was being equity accounted (asso-
ciate or joint venture).
(iii) Adjustments to the fair value of identifiable assets acquired and liabilities assumed are
made as usual at the date of acquisition of control.
(iv) The non-controlling shareholders are credited with either:
ƒ their share of the identifiable net assets received in terms of IFRS 3, or
ƒ the fair value of the non-controlling interests.
(v) The ‘Investment’ column represents both the consideration transferred (purchase price that
results in control) as well as the previously held investment.
(vi) The goodwill or gain on bargain purchase is the balancing figure. Note that this will result in
an amount being recognised for goodwill (or gain on bargain purchase) which is consistent
with the calculation in terms of IFRS 3 (refer to ACCOUNTING IMPLICATIONS above).
(vii) The subsidiary is then consolidated based on the ownership interest that exists after the
parent has obtained control, in the normal manner.
It should be noted that there may be a series of two, three or even more acquisitions before
control is obtained. The principles outlined above apply irrespective of how many acquisitions
have been made.
The above explanations are based on the accounting treatment where a piecemeal acquisition
results in a parent/subsidiary relationship. The principles will also broadly be applied where a
piecemeal acquisition results in an investor obtaining significant influence over an entity which is
consequently classified as an associate. This will be dealt with in more detail later in this chapter.
Example 15:1
The following are the summarised trial balances of H Ltd and S Ltd at 31 December 08:
continued
184
Chapter 15
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position for the 08 financial year.
Solution
Workings:
Worksheet – S Ltd
Equity of S Ltd Analysis of Equity
Date Details TOTAL
S Cap RE NCI INV (Gwill) RE
(1) (2)
01.04.08 Acquisition 5 000 10 500 15 500 6 200 10 600 (1 300) –
31.12.08 Profit (9/12) 4 500 4 500 1 800 2 700
5 000 15 000 20 000 8 000 10 600 (1 300) 2 700
(1)
9 000 + (6 000 × 3/12)
(2)
The investment column at the acquisition date includes the consideration transferred (R9 000) as
well as the previously held interest at fair value (R1 600)
(3)
H Ltd will consolidate S Ltd only from 1 April 08, the date S becomes a subsidiary. Hence S Ltd’s
profit for the first quarter of 08 (R1 500) is not consolidated into the operating profit figure in the con-
solidated statement of profit or loss and other comprehensive income.
continued
185
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 08
R
Operating profit [11 000 + (9/12 × 6 000)] 15 500
Gain on financial asset 120
Profit and total comprehensive income for the year 15 620
Attributable to:
Parent shareholders 13 820
Non-controlling interests 1 800
15 620
EQUITY
H Ltd members’ interest 37 550
Share capital 10 000
Retained earnings (13 730 + 11 000 + 120 + 2 700) 27 550
Non-controlling interests 8 000
45 550
186
Chapter 15
Example 15:2
This example is exactly the same as example 15:1 except that the original investment of 10%
was being carried at its original cost of R750 by H Ltd. This was because S Ltd is an unlisted
company whose fair value was not easily determinable so cost was previously considered to
be the best estimate of fair value. The investment in S Ltd is now R9 750, other assets of H Ltd
R24 250 and retained earnings R13 000. There is no gain on financial assets.
At 1 April 08 the existing investment was estimated to have a fair value of R1 600.
Solution
Workings:
1. The existing investment in S Ltd will be remeasured to fair value (R1 600) with the adjust-
ment included in profit (R850).
2. The analysis of equity worksheet will be exactly the same as example 15:1.
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 08
R
Operating profit for the year [11 000 + (9/12 × 6 000)] 15 500
Gain on financial asset on becoming a subsidiary 850
Profit and total comprehensive income for the year 16 350
continued
187
Notes on Group Financial Statements
Solution (continued)
Example 15:3
The following are the summarised trial balances of H Ltd and S Ltd at 31 December 08:
H Ltd S Ltd
R R
Share capital 10 000 5 000
Retained earnings 13 646 9 000
Operating profit for the year 16 000 8 500
Gain on financial asset (P/L) 140
39 786 22 500
Investment in S Ltd 10 900
Other net assets 23 886 20 000
Taxation 5 000 2 500
39 786 22 500
1. H Ltd acquired 10% of the shares in S Ltd for R800 on 1 January 04 when the retained
earnings of S Ltd were R2 000. A further 50% of the shares in S Ltd were acquired for
R9 200 on 1 April 08.
2. On 1 April 08 land of S Ltd had a fair value which was R600 more than its carrying amount.
3. Up until 1 April 08 the investment in S Ltd was accounted for as a financial asset (in terms
of IFRS 9). Since 1 April 08 it has been accounted for on the cost method. Its fair value was
R1 700 on 1 April 08 and R1 560 on 31 December 07.
4. The non-controlling interests are initially measured at fair value which was R6 800 on
1 April 08.
5. Profits are earned evenly throughout the year.
6. The tax rate is 30% with 50% of capital gains included in taxable income. S Ltd is consid-
ered to be a capital asset for tax purposes. H Ltd has not provided for taxation on the gain
on the financial asset for the current year.
7. The opening balance of H Ltd’s retained earnings includes an amount of R646 relating to
the fair value adjustments (after tax) of S Ltd.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position for the 08 financial year.
188
Chapter 15
Solution
Workings:
Worksheet – S Ltd
Equity of S Ltd Analysis of Equity
Date Details Total
S Cap RE Land D. Tax NCI Inv (GW) RE
(1)
1.4.08 Acquisition 5 000 10 500 600 (90) 16 010 6 800 10 900 (1 690)
31.12.08 Profit 4 500 (2) 4 500 1 800 2 700
5 000 15 000 600 (90) 20 510 8 600 10 900 (1 690) 2 700
(1)
9 000 + (8 500 – 2 500) × 3/12 = 10 500
(2)
(8 500 – 2 500) × 9/12 = 4 500
Pro forma journal entries:
R R
Deferred tax (other net assets) [50% × 30% × (1 560 – 800)] 114
Taxation – deferred (P/L) 114
Note:
1. The investment in S Ltd can be reconciled as follows:
Cost 800
Increase in fair value (646 × 100/85) 760
Fair value at beginning of year 1 560
Fair value adjustment to 1.4.08 140
Fair value at date of acquisition 1 700
2. It should be noted that H Ltd would have provided for deferred tax at CGT rates on fair
value gains on the investment in S Ltd in prior years. The deferred tax provided at the be-
ginning of the current year would be R114 ((1 560 – 800) × 50% × 30%). Note also that no
additional deferred tax has been provided for on the increase in fair value for the current
year.
This deferred tax of R114 relates to the difference between the fair value of S Ltd and its
original cost. After it becomes a subsidiary the investment no longer represents a separate
asset of the H Ltd group. It is therefore argued that this deferred tax should be eliminated
and profit or loss credited. This can be further justified because the underlying net assets
representing this investment have now been consolidated and on consolidation the differ-
ence between the consolidated carrying amounts of the net assets and their tax bases are
taken into account in the determination of the consolidated deferred tax liability (or asset).
On consolidation there is therefore no additional deferred tax liability relating to the pre-
viously held investment.
continued
189
Notes on Group Financial Statements
Solution (continued)
There may be an argument that the deferred tax should be retained together with the de-
ferred tax on the current increase in fair value. This may be appropriate if the net assets
consolidated relating to the original holding were to be disposed of (by selling the shares)
resulting in additional taxation being paid on the recovery of the (net) assets. We will, how-
ever, not adopt this approach in the book.
3. The goodwill arising on acquisition is attributable to parent and non-controlling sharehold-
ers as the latter are initially measured at fair value.
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 08
R
Operating profit for the year [16 000 + (8 500 × 9/12)] 22 375
Gain on financial asset 140
Profit before tax 22 515
Taxation [5 000 + (2 500 × 9/12) – 114] (6 761)
Profit for the year and total comprehensive income 15 754
Attributable to:
Parent shareholders 13 954
Non-controlling interests 1 800
15 754
EQUITY
Share capital 10 000
Retained earnings 27 600
H Ltd members’ interest 37 600
Non-controlling interests 8 600
46 200
190
Chapter 15
Example 15:4
The following are the summarised trial balances of H Ltd and S Ltd at 31 December 08:
H Ltd S Ltd
R R
Share capital 10 000 5 000
Fair value reserve – financial asset 646
Retained earnings 13 000 9 000
Operating profit for the year 16 000 8 500
Gain on financial asset (OCI) 140
39 786 22 500
1. H Ltd acquired 10% of the shares in S Ltd for R800 on 1 January 04 when the retained
earnings of S Ltd were R2 000. A further 50% of the shares in S Ltd were acquired for
R9 200 on 1 April 08.
2. On 1 April 08 land of S Ltd had a fair value which was R600 more than its carrying amount.
3. Up until 1 April 08 the investment in S Ltd was accounted for as a financial asset in terms of
IFRS 9 with fair value adjustments included in other comprehensive income. Since 1 April
08 it has been accounted for on the cost method. Its fair value was R1 700 on 1 April 08
and R1 560 on 31 December 07.
4. The non-controlling interests are initially measured at fair value which was R6 800 on
1 April 08.
5. Profits are earned evenly throughout the year.
6. The tax rate is 30% with 50% of capital gains included in taxable income. S Ltd is consid-
ered to be a capital asset for tax purposes. H Ltd has not provided for taxation on the gain
on the financial asset for the current year.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position for the 08 financial year.
191
Notes on Group Financial Statements
Solution (continued)
Workings:
Worksheet – S Ltd
Equity of S Ltd Analysis of Equity
Date Details Total
S Cap RE Land D. Tax NCI Inv (GW) RE
(1)
1.4.08 Acquisition 5 000 10 500 600 (90) 16 010 6 800 10 900 (1 690)
(2)
31.12.08 Profit 4 500 4 500 1 800 2 700
5 000 15 000 600 (90) 20 510 8 600 10 900 (1 690) 2 700
(1) 3
9 000 + (8 500 – 2 500) × /12 = 10 500
(2)
(8 500 – 2 500) × 9/12 = 4 500
Pro forma journal entries:
R R
Deferred tax (other net assets) [50% × 30% × (1 560 – 800)] 114
Tax on OCI 114
Note:
1. The opening fair value in the reserve is net of deferred taxation provided.
This investment can be reconciled as follows:
Cost 800
Increase in fair value (646 × 100/85) 760
Fair value at beginning of year 1 560
Fair value adjustment to 1.4.08 140
Fair value at date of acquisition 1 700
2. It should be noted that H Ltd would have provided for deferred tax at CGT rates on fair
value gains on the investment in S Ltd in prior years. The deferred tax provided at the be-
ginning of the current year would be R114 ((1 560 – 800) × 50% × 30%). Note also that no
additional deferred tax has been provided for on the increase in fair value for the current
year.
3. As discussed in example 15:3 [page 170, note 2] the deferred tax relating to an investment
in a financial asset should be reversed when it becomes a subsidiary. The R114 deferred
tax provided in prior years is therefore reversed. As this tax was previously provided in
other comprehensive income we suggest that the reversal also be included in other com-
prehensive income.
4. The goodwill arising on acquisition is attributable to parent and non-controlling sharehold-
ers as the latter are initially measured at fair value.
continued
192
Chapter 15
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 08
R
9
Profit before tax [16 000 + (8 500 × /12)] 22 375
Taxation [5 000 + (2 500 × 9/12)] (6 875)
Profit for the year 15 500
Other comprehensive income:
Items that are not reclassified subsequently to profit or loss:
Gain on financial asset 140
Tax relating to other comprehensive income 114
Other comprehensive income for the year 254
Total comprehensive income for the year 15 754
Profit attributable to:
Parent shareholders 13 700
Non-controlling interests 1 800
15 500
(1)
The fair value reserve may be transferred to another reserve in the statement of changes in equity,
however, may not be included in either profit/loss or other comprehensive income.
continued
193
Notes on Group Financial Statements
Solution (continued)
EQUITY
Share capital 10 000
Other reserves 900
Retained earnings 26 700
H Ltd members’ interest 37 600
Non-controlling interests 8 600
46 200
Example 15:5
The following are the summarised trial balances of H Ltd and S Ltd at 31 December 08:
H Ltd S Ltd
R R
Share capital 20 000 10 000
Retained earnings at 1 January 08 9 000 2 000
Profit before tax 10 500 1 600
39 500 13 600
1. H Ltd acquired 25% of the shares in S Ltd for R3 000 on 1 January 06 when the retained
earnings of S Ltd were R1 000. A further 35% of the shares in S Ltd were acquired for
R6 000 on 1 July 08.
2. On both dates of acquisition H Ltd considered the ‘other net assets’ of S Ltd to be fairly
valued. On 1 July 08 the fair value of the original holding in S Ltd was R4 000.
continued
194
Chapter 15
3. H Ltd’s policy has been to account for investments in associates on the equity method in
accordance with IAS 28.
4. The profit of S Ltd was earned at an even rate during the year.
5. Non-controlling interests are not initially measured at fair value.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position for the 08 financial year.
Solution
Workings:
Worksheet – S Ltd
Equity of S Ltd SINCE
Date Details TOTAL NCI INV (Gwill)
S Cap RE RE
1.01.06 Purchased 25% 10 000 1 000 11 000 n/a 3 000 (250)
31.12.07 Increase RE 1 000 1 000 250
10 000 2 000 12 000 n/a 3 000 (250) 250
1.7.08 Profit 500 500 125
10 000 2 500 12 500 n/a 3 000 (250) 375
1.7.08 Acq control 10 000 2 500 12 500 5 000 (3) 9 000 (4) (1 875) (6) 375 (5)
FV adj (625) (7) 625 (7)
31.12.08 Profit 500 500 200 300
10 000 3 000 13 000 5 200 9 000 (2 500) 1 300
(1)
The analysis worksheet is completed as per normal to 1 July 08. Note that the carrying amount of the
associate at this point is R3 375 (3 000 + 375). Remember that as S Ltd now becomes a subsidiary,
a fair value exercise needs to be done and the existing investment in the associate needs to be ad-
justed to fair value.
(2)
The easiest way to account for the business combination is to restart the analysis from the date the
associate becomes a subsidiary. This is not a new worksheet but simply extends the original acquisi-
tion to the one that results in control. Note that the subsidiary’s equity should be adjusted to bring the
carrying amount of identifiable assets and liabilities to fair value (not necessary in this example).
(3)
In this example the NCI are initially measured at their share of the identifiable net assets (12 500 ×
40% = 5 000).
(4)
This represents the cost of both acquisitions (3 000 + 6 000 = 9 000).
(5)
The reserves attributable to the holding while an associate are still part of H Ltd’s investment in S Ltd
and retain their nature as ‘since reserves’.
(6)
The balancing figure is goodwill. The only adjustment that has not yet been done at this point is to
bring the existing investment to fair value (see (7)).
(7)
This adjustment brings the existing investment to fair value (R4 000) and as the value increases, so
does the resulting goodwill (4 000 – 3 000 – 375 = 625). Goodwill of R2 500 (1 875 + 625) is there-
fore initially recognised when S Ltd becomes a subsidiary.
continued
195
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 08
R
Profit before tax [10 500 + (6/12 × 1 600)] 11 300 *
Profit on remeasurement of associate becoming subsidiary 625
Share of profit of associate 125
Profit before tax 12 050
Taxation [3 500 + (6/12 × 600)] (3 800)
Profit and total comprehensive income for the year 8 250
Attributable to:
Parent shareholders 8 050
Non-controlling interests 200
8 250
(1)
9 000 + 250 = 9 250
continued
196
Chapter 15
Solution (continued)
EQUITY
H Ltd members’ interests 37 300
Share capital 20 000
Retained earnings 17 300
Non-controlling interests 5 200
42 500
* Note that the consolidated statement of profit or loss and other comprehensive income includes the
full profit of the investee only from the date it became a subsidiary.
Example 15:6
This example is exactly the same as example 15:5 except for the following information:
H Ltd supplies inventory to S Ltd at a gross profit of 40%. Inventory on hand in S Ltd pur-
chased from H Ltd was as follows:
R
31 December 07 250
1 July 08 300
31 December 08 350
R325 of the inventory on hand at 31 December 08 was acquired by S Ltd after 1 July 08. Ig-
nore deferred tax on the intercompany sales of inventory.
Required:
Prepare the consolidated statement of profit and loss and other comprehensive income, state-
ment of changes in equity and statement of financial position for the 08 financial year.
197
Notes on Group Financial Statements
Solution
Workings:
Since
Date Details S Cap RE Inv Total NCI Inv (GW )
RE
1.01.06 Purchased 25% 10 000 1 000 – 11 000 n/a 3 000 (250)
31.12.07 Increase RE 1 000 (100)(1) 900 225
10 000 2 000 (100) 11 900 n/a 3 000 (250) 225
1.07.08 Profit 500 (20) 480 120
10 000 2 500 (120) 12 380 n/a 3 000 (250) 345
1.07.08 Acquired control 10 000 2 500 –(2) 12 500 5 000 9 000 (1 845) 345
FV adj (655) 655(3)
31.12.08 Profit 500 –(4) 500 200 300
10 000 3 000 – 13 000 5 200 9 000 (2 500) 1 300
(1)
The analysis worksheet for the period S Ltd is an associate. As discussed in Chapter 14 the work-
sheet is adjusted for the unearned profit even though the inventory was sold from H Ltd to S Ltd.
(2)
There is no adjustment for inventory on the date H Ltd acquires control of S Ltd. In terms of IFRS 3
the identifiable assets of S Ltd must be recognised at fair value and any adjustment to inventory
would be in conflict with this principle. It should be further noted that the adjustment to bring the in-
vestment to fair value effectively reverses the unearned profit at the date S Ltd becomes a subsidiary
(see (3) below). This problem arises from the ‘conceptual anomaly’ (refer to page 179 of Chapter 14)
where the profit was made by one entity (associate) but the asset is in another entity (parent).
(3)
Adjustment to bring investment to fair value (4 000 – 3 000 – 345 = 655)
(4)
There is no adjustment in the worksheet for unearned profit now that S Ltd is a subsidiary. This is
because the sales and profit were made by H Ltd.
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 08
R
Profit before tax [10 500 + (6/12 × 1600) – (40% × 325(1))] 11 170
Profit on remeasurement of associate becoming subsidiary 655
Share of profit of associate 120
Profit before tax 11 945
Taxation [3 500 + (6/12 × 600)] (3 800)
Profit and total comprehensive income for the year 8 145
Attributable to:
Parent shareholders 7 945
Non-controlling interests 200
8 145
(1)
Note that the unearned profit adjustment is only for sales made after S Ltd became a subsidiary. This
is because the unearned profit to 1.7.08 was effectively reversed in the adjustment to bring the asso-
ciate to fair value.
continued
198
Chapter 15
Solution (continued)
(1)
9 000 + 225
EQUITY
H Ltd members’ interests 37 170
Share capital 20 000
Retained earnings 17 170
Non-controlling interests 5 200
42 370
Example 15:7
How would example 15:6 change if the sales of inventory were from S Ltd to H Ltd.
The answer would be exactly the same except that the unearned profit for the period 1.7.08 to
31.12.08 of R130 (325 × 40%) would be adjusted to both the parent and non-controlling share-
holders. It would therefore, be included in the analysis of equity worksheet.
199
Notes on Group Financial Statements
Example 15:8
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
Share capital 200 000 50 000
Other reserves 45 000 25 000
Retained earnings 52 000 16 000
Operating profit 45 000 40 000
342 000 131 000
ADDITIONAL INFORMATION
1. H Ltd acquired 30% of the shares in S Ltd on 1 January 01 for R22 000. At that date the
other reserves of S Ltd were R15 000, the retained earnings were R5 000 and all the
assets of S Ltd were fairly valued. On 30 June 04 H Ltd acquired an additional 30% of the
shares in S Ltd for R40 000. The fair value of the original 30% investment was R36 000 on
this date.
2. When the 30% holding in S Ltd was acquired on 30 June 04 certain depreciable assets
were valued at R6 000 more than the carrying amount. (Ignore deferred tax on this sur-
plus.) The remaining life of these assets was 3 years at this date.
3. The non-controlling interests are initially measured at fair value. On 30 June 04 the fair
value of the non-controlling interests was R48 000.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd Group for the 04
financial year.
Solution
Workings:
Worksheet – S Ltd
Equity of S Ltd Analysis of Equity
Date Details Total
SC OR RE Assets NCI Inv GW RE OR
1.1.01 Acq. 30% 50 000 15 000 5 000 70 000 n/a 22 000 (1 000)
31.12.03 Increase 10 000 11 000 21 000 3 300 3 000
50 000 25 000 16 000 91 000 n/a 22 000 (1 000) 3 300 3 000
6
30.6.04 Profit ( /12) 13 000 13 000 3 900
50 000 25 000 29 000 104 000 n/a 22 000 (1 000) 7 200 3 000
continued
200
Chapter 15
Solution (continued)
Worksheet – S Ltd
(1)
The analysis worksheet is completed as per normal to 30 June 04. The carrying amount of the asso-
ciate at this point is R32 200 (22 000 + 7 200 + 3 000). As S Ltd now becomes a subsidiary, a fair
value exercise needs to be done and the existing investment in the associate needs to be adjusted
to fair value.
(2)
Note that the subsidiary’s equity has been adjusted to bring the carrying amount of identifiable
assets and liabilities to fair value.
(3)
In this example the NCI are initially measured at their fair value of R48 000.
(4)
This represents the cost of both acquisitions (22 000 + 40 000).
(5)
The reserves attributable to the holding while an associate are still part of H Ltd’s investment in S Ltd
and retain their nature as ‘since reserves’.
(6)
The balancing figure is goodwill. The only adjustment that has not yet been done at this point is to
bring the existing investment to fair value (see (7)).
(7)
This adjustment brings the existing investment to fair value (R36 000) and as the value increases, so
does the resulting goodwill (36 000 – 22 000 – 7 200 – 3 000 = 3 800). Goodwill of R14 000 is there-
fore initially recognised when S Ltd becomes a subsidiary.
continued
201
Notes on Group Financial Statements
Solution (continued)
H LIMITED
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Operating profit (45 + 20 – 1) 64 000
Profit on remeasurement of associate becoming a subsidiary 3 800
Share of profit of associate 3 900
Profit before tax 71 700
Taxation (12 + 7) (19 000)
Profit and total comprehensive income for the year 52 700
(1)
52 000 + 3 300 = 55 300
(2)
45 000 + 3 000 = 48 000
EQUITY
H Ltd members’ interests 351 200
Share capital 200 000
Revaluation reserves (45 + 3) 48 000
Retained earnings (85 + 18.2) 103 200
Non-controlling interests 52 800
404 000
202
Chapter 15
Example 15:9
The following are the summarised trial balances of H Ltd and S Ltd at 31 December 08:
H Ltd S Ltd
R R
Share capital 10 000 5 000
Retained earnings – 1 January 08 13 000 9 000
Profit for the year 11 000 6 000
34 000 20 000
Investment in S Ltd, at cost 5 700
Other net assets 28 300 20 000
34 000 20 000
60% of the shares in S Ltd were acquired for R3 900 on 1 July 02 when S Ltd’s retained earn-
ings were R1 000. On 1 July 08 an additional 10% of the shares in S Ltd were acquired at a
cost of R1 800.
The profit of S Ltd was earned evenly throughout the year. The other net assets of S Ltd were
considered to be fairly valued at both dates of acquisition.
The non-controlling interests are measured at their share of the identifiable net assets.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd Group for the
08 financial year.
203
Notes on Group Financial Statements
Solution
Workings:
Worksheet – S Ltd
Equity of S Ltd Analysis of Equity
Date Details TOTAL Acq-
S Cap RE NCI INV (Gwill) RE
Res
1.7.02 Purchased 60% 5 000 1 000 6 000 2 400 3 900 (300)
31.12.07 Increase RE 8 000 8 000 3 200 4 800
5 000 9 000 14 000 5 600 3 900 (300) 4 800
30.6.08 Profit (6/12) 3 000 3 000 1 200 1 800
5 000 12 000 17 000 6 800 3 900 (300) 6 600
1.7.08 Purchased 10% (1 700) (1) 1 800 (100) (2)
5 000 12 000 17 000 5 100 5 700 (300) 6 600
31.12.08 Profit (6/12) 3 000 3 000 900 2 100
5 000 15 000 20 000 6 000 5 700 (300) 8 700 (100)
(1)
17 000 × 10%
(2)
The acquisition of a further 10% interest in S Ltd results in an adjustment of R100. This represents
the amount that H Ltd pays for this acquisition that is in excess of the carrying amount of the 10% net
assets effectively acquired by H Ltd. The excess paid relates to:
ƒ unrecognised fair value adjustments relating to identifiable assets and liabilities, and
ƒ any goodwill (or bargain purchase).
(3)
The identifiable net assets are not subject to fair value adjustments for the additional acquisition and
goodwill is not recognised as it is not a business combination.
(4)
The adjustment results from a transaction with owners (parent purchasing from non-controlling
shareholders) and is therefore adjusted for in equity (acquisition reserve) which is the treatment
required in IRFS 10. Alternatively, the R100 could be set off retained earnings.
continued
204
Chapter 15
Solution (continued)
(1)
13 000 + 4 800 = 17 800
EQUITY
H Ltd members’ interests 42 600
Share capital 10 000
Other reserves (100)
Retained earnings (24 000 + 8 700) 32 700
Non-controlling interests 6 000
48 600
205
Notes on Group Financial Statements
Example 15:10
The following are the trial balances of H Ltd and S Ltd at 31 December 08:
H Ltd S Ltd
R R
Share capital 10 000 5 000
Retained earnings 13 000 9 000
Profit before tax 15 000 8 500
38 000 22 500
60% of the shares in S Ltd were acquired for R4 200 on 1 July 02 when S Ltd’s retained earn-
ings were R1 000. At that date the fair value of S Ltd’s land was R500 more than its carrying
amount. Ignore deferred tax on the adjustment to land.
On 1 July 08 an additional 10% of the shares were acquired at a cost of R1 880 and S Ltd’s
land was now considered to have a fair value of R800 more than its carrying amount in S Ltd.
The non-controlling interests are initially measured at fair value. The fair value of these interests
were as follows:
1 July 02 (40%) R2 640
1 July 08 (30%) R5 640
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd Group for the
08 financial year.
Solution
Workings:
Worksheet – S Ltd
Equity of S Ltd Analysis of S Ltd
Date Details TOTAL Acq
S Cap RE Land NCI INV GW RE
Res
1.7.02 Purchased 60% 5 000 1 000 500 6 500 2 640 4 200 (340) (1)
31.12.07 Increase RE 8 000 8 000 3 200 4 800
Subtotal 5 000 9 000 500 14 500 5 840 4 200 (340) 4 800
30.6.08 Profit (6/12) 3 000 3 000 1 200 1 800
Sub total 5 000 12 000 500 17 500 7 040 4 200 (340) 6 600
Acquisition 10% (1 760) (3) 1 880 (120)
Subtotal 5 000 12 000 500 17 500 5 280 6 080 (340) 6 600 (120)
31.12.08 Profit (6/12) 3 000 3 000 900 2 100
5 000 15 000 500 20 500 6 180 6 080 (340) 8 700 (120)
continued
206
Chapter 15
Solution (continued)
(1)
The goodwill of R340 arising on the initial acquisition can be allocated as follows:
R
H Ltd [(6 500 × 60%) – 4 200] 300
Non-controlling interests [(6 500 × 40%) – 2 640] 40
340
(2)
The fair value of the land and non-controlling interests on 1 July 08 are irrelevant as these values are
not incorporated into the consolidated amounts. This is because the second acquisition does not rep-
resent a business combination as control over S Ltd already exists.
(3)
In respect of the second acquisition one may argue that there are two alternatives for the amount
that the non-controlling interests are reduced by:
(a) 17 500 × 10% = 1 750, or
(b) 7 040 × 10/40 = 1 760
In alternative (b) both the share of identifiable net assets and goodwill are effectively transferred to
the parent whereas in alternative (a) it is only the identifiable net assets.
It is the opinion of the authors that alternative (b) is most appropriate as it correctly recognises that
the non-controlling interests have effectively given up not only a share of the identifiable net assets
but they have also given up a portion of goodwill. Of course, if they had not initially been measured
at fair value then this problem would not arise.
continued
207
Notes on Group Financial Statements
Solution (continued)
Attributable to:
H Ltd members 14 900
Non-controlling interests (1 200 + 900) 2 100
17 000
(1)
13 000 + 4 800 = 17 800
EQUITY
H Ltd members’ interests 42 580
Share capital 10 000
Other reserves (120)
Retained earnings (24 000 + 8 700) 32 700
Non-controlling interests 6 180
48 760
208
Chapter 15
Example 15:11
The following are the trial balances of H Ltd and A Ltd at 31 December 04:
H Ltd A Ltd
R R
Share capital 200 000 50 000
Other reserves 45 000 25 000
Retained earnings at 1 January 04 52 000 16 000
Operating profit for the year 45 000 40 000
Gain on financial asset 1 700
343 700 131 000
Non-current assets 236 700 80 000
Investment in A Ltd 35 000
Current assets (net) 60 000 37 000
Taxation 12 000 14 000
343 700 131 000
ADDITIONAL INFORMATION
1. H Ltd acquired 10% of the shares in A Ltd on 1 January 01 for R7 000. At that date the
revaluation reserves of A Ltd were R15 000 and the retained earnings R5 000. On
30 June 04 H Ltd acquired an additional 20% of the shares in A Ltd for R23 500.
2. On 30 June 04 one of A Ltd’s depreciable assets was valued at R6 000 more than its carry-
ing amount. Tax allowances are granted on this asset. The remaining life of the asset was
3 years at this date.
3. The original investment in A Ltd was accounted for in terms of IFRS 9 with fair value
changes included in other comprehensive income. The fair value of the investment was
R9 800 on 31 December 03 and R11 500 on 30 June 04. Ignore taxation on the financial
asset. The fair value adjustments are included in other reserves. Since 30 June 04 A Ltd
has been accounted for on the cost method.
4. Assume a tax rate of 30%.
5. H Ltd has a wholly-owned subsidiary which has already been consolidated into H Ltd’s trial
balance above.
Required:
Prepare the statement of profit or loss and other comprehensive income, statement of changes
in equity and statement of financial position of H Ltd, incorporating its associate on the equity
method for the 04 financial year.
209
Notes on Group Financial Statements
Solution
Workings:
Since
Date Details S Cap O Res RE Asset DT Total INV GW
RE
30.6.04 Acquisition 50 000 25 000 29 000 (1) 6 000 (1 800) 108 200 35 000 (2) (2 540)
6 (3)
31.12.04 Profit ( /12) 13 000 (1 000) 300 12 300 3 690
50 000 25 000 42 000 5 000 (1 500) 120 500 35 000 (2 540) 3 690
(1)
16 000 + (40 000 – 14 000) × 6/12 = 29 000
(2)
The investment represents the purchase price of the 2nd acquisition plus the fair value of the first (23
500 + 11 500).
(3) 6 000
/3 × 6/12 = 1 000
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Operating profit 45 000
Profit from associate 3 690
Profit before tax 48 690
Taxation (12 000)
Profit for the year 36 690
Other comprehensive income:
Items that are not reclassified subsequently to profit or loss:
Gain on financial asset 1 700
Total comprehensive income 38 390
(1)
9 800 – 7 000 = 2 800
(2)
45 000 – 2 800 = 42 200
continued
210
Chapter 15
Solution (continued)
EQUITY
Share capital 200 000
Fair value reserve 4 500
Other reserves 42 200
Retained earnings 88 690
335 390
211
16 SALE OF SHARES IN SUBSIDIARY OR
ASSOCIATE
The sale by an investor company of shares in its subsidiary or associate may fall into one of the
following categories:
1. sale of the entire holding of shares (examples 16:1 and 16:2)
2. sale of a portion of the holding of shares in a subsidiary, the remaining holding being classi-
fied merely as a financial asset (no significant influence) (example 16:3)
3. sale of a portion of the holding of shares and thereby losing control but retaining significant
influence (subsidiary becomes associate company) (example 16:4, 16:5 and 16:6)
4. sale of a portion of the holding of shares in a subsidiary, but retaining control of the subsid-
iary (example 16:7 and 16:8)
5. sale of a portion of the holding of shares in an associate, the remaining holding still to be
accounted for using the equity method (still have significant influence) (example 16:9)
6. sale of a portion of the holding of shares in an associate, the remaining holding being classi-
fied merely as a financial asset (no significant influence) (example 16:10).
7. loss of control of a subsidiary – reclassification of items previously in other comprehensive
income (example 16:11).
8. sale of shares in an associate (joint venture) and remains an associate (joint venture) –
reclassification of items previously in other comprehensive income (example 16:12).
The shares in the subsidiary or associate would normally be accounted for by means of the cost
method in the investor’s separate financial statements and therefore its books. In the investor's
books, therefore, the portion of the cost of the shares sold is eliminated, the proceeds recorded,
and the difference is the profit or loss on sale.
The group profit or loss on sale, however, is calculated by deducting from the proceeds on sale
the portion of the investee's interest being sold at the date of sale. This is effectively the group
carrying amount of net assets for which ownership has been lost. The exception to this principle
is where a sale takes place, but control is retained. This will be dealt with in section 4 of this
chapter.
The equity (and therefore the net assets) at the date of sale of the shares comprises the at acqui-
sition interest plus the post-acquisition increase up to the date of sale which together are also
equal to the carrying amount of the identifiable net assets.
The cost price of the shares in the investor's books represents the portion of the at acquisition
equity of the investee ‘purchased’ plus/minus the goodwill/bargain purchase arising at the date of
acquisition. It should be clear, therefore, that the difference between the profit on sale of the
investee's shares being sold as per the investor's books (i.e. using the ‘cost’ method) and the
profit on sale for group purposes will be the portion of the post-acquisition reserves of the investee
that have been ‘sold’.
Realisation of reserves ‘sold’
The post-acquisition reserves of the investee company ‘sold’ are, in effect, merely ‘realised’ by
the investor company. These reserves have been ‘earned’ by the investor and they would previ-
ously have been included in the consolidated statement of profit or loss and other comprehensive
income or into the consolidated reserves. They were, however, up until the sale, reserves which
were part of the investee's equity and were not directly part of the investor's equity, despite the
fact that the investor included these reserves as part of its consolidated post-acquisition equity.
213
Notes on Group Financial Statements
The proceeds on sale of the shares can, therefore, be said to comprise the following:
ƒ a payment to the investor for the portion of the original cost price of these shares (which in-
cludes any goodwill)
ƒ a payment to the investor for the post-acquisition reserves of the investee which the investor is
now ‘selling’, and
ƒ the profit or loss on the sale of these shares from the group or equity point of view.
It is important to understand that the payment to the investor of the portion of the post-acquisition
reserves of the investee which have been ‘sold’ merely amounts to the realisation of these re-
serves which the investor has previously earned in any event. In other words, the investor's ‘right’
to these reserves of the investee have now been converted into cash (proceeds) in the investor
company itself. These reserves, therefore, are not classified as ‘profit on sale’ by the investor
company in its consolidated financial statements (or under the equity method), whereas under the
cost method of accounting for the investee, these reserves will in fact form part of the profit on
sale shown in the investor's separate financial statements.
Having determined that these post-acquisition reserves ‘sold’ amounts merely to a realisation of
such reserves by the investor in its group statement of profit or loss and other comprehensive
income, we have to bear in mind that these reserves form part of the group’s retained earnings
and account for them accordingly.
Where the investee was consolidated or accounted for on the equity method previously, the
portion of the ‘since retained earnings’ of the investee which is now ‘sold’ had already been in-
cluded in the group’s retained earnings.
In the case of both the consolidation method and the equity method, the portions of any since
reserves (other than retained earnings) ‘sold’, having now been realised, have to be transferred
into the consolidated retained earnings, irrespective of the type of reserves these may be. They
have been realised in the proceeds on disposal.
It is important to remember that although we have referred to the ‘sale’ of the subsidiary’s ‘equity’
it is the underlying assets relating to that equity that have in fact been ‘sold’ or for which owner-
ship by the parent has been given up.
Where a parent has only one subsidiary and control is lost as a result of the sale of shares during
the current year, then consolidated financial statements will still be prepared. The statement of
financial position will, of course, not include the subsidiary previously consolidated as control has
been lost.
Where the sale of shares results in a loss of control, but results in the investee company being
converted to an associate (case 3 above), the equity method of accounting should be applied for
the remaining portion of the current year.
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings and asset replacement reserve were R10 000 and R20 000 respectively.
At the date of acquisition all the identifiable assets of S Ltd were considered to be fairly valued
with the exception of land, which was considered to be worth R20 000 more than the carrying
amount. Ignore deferred tax on fair value adjustments.
On 30 September 04 H Ltd sold all of its holding for R90 000. Since the date of acquisition of
the shares there have been no purchases or sales of land. Profit is earned evenly throughout
the year. The tax rate is 30%.
H Ltd accounted for S Ltd at cost in its separate financial statements.
The non-controlling interests are measured at their share of the identifiable net assets.
continued
214
Chapter 16
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R R
CREDITS
Share capital 200 000 50 000
Asset replacement reserve 45 000 25 000
Retained earnings 52 000 16 000
Operating profit 45 000 40 000
Profit on sale of S Ltd shares 25 000
367 000 131 000
DEBITS
Land at cost 185 000 80 000
Other net assets 170 000 37 000
Taxation 12 000 14 000
367 000 131 000
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd group for the 04 finan-
cial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC ARR RE LAND NCI INV GW
RE ARR
31.12.02 Acq. 60% 50 000 20 000 10 000 20 000 100 000 40 000 65 000 (5 000)
31.12.03 Increase 5 000 6 000 11 000 4 400 3 600 3 000
Subtotals 50 000 25 000 16 000 20 000 111 000 44 400 65 000 (5 000) 3 600 3 000
30.09.04 Profit 19 500 19 500 7 800 11 700
Subtotals 50 000 25 000 35 500 20 000 130 500 52 200 65 000 (5 000) 15 300 3 000
30.09.04 Sold 60% (65 000) 5 000 (15 300) (3 000)
50 000 25 000 35 500 20 000 130 500 – – – –
DEBITS CREDITS
Note:
1. As control is lost on 30 September 04 S Ltd is consolidated to that date.
2. The profit on the sale of shares, based on the cost method, reflected in the separate finan-
cial statements of H Ltd would have been calculated as follows:
R
Proceeds 90 000
Cost of shares sold (1) 65 000
Profit on sale 25 000
(1)
The cost of the shares includes the parent’s share of the at acquisition identifiable net assets
together with the goodwill arising on that acquisition.
continued
215
Notes on Group Financial Statements
Solution (continued)
3. The consolidated profit on sale can be calculated in three ways. The first method is by cal-
culating the consolidated profit using the profit on the cost method as a starting point. As
discussed earlier the difference between the consolidated profit on disposal and profit on
the cost method is the since acquisition reserves ‘sold’.
R
Profit – cost method 25 000
Since acquisition reserves ‘sold’ – retained earnings (15 300)
– asset replacement reserve (3 000)
Consolidated profit 6 700
As indicated above, the cost of the shares sold represents the parent’s share of the identi-
fiable net assets at acquisition together with the goodwill arising on that acquisition. The
since reserves ‘sold’ represent the parent’s share of the net assets earned in the since ac-
quisition period. Together they therefore represent the net assets (including goodwill) that
the parent is effectively disposing of.
The second method is to calculate the profit based on the carrying amount of the net
assets that the parent has disposed of or given up ownership interests for.
R
Net identifiable assets disposed of (60% × 130 500) 78 300
Goodwill disposed of 5 000
Carrying amount of net assets disposed of 83 300
Proceeds on disposal 90 000
Consolidated profit 6 700
As all of the investment was sold, all of the parent’s goodwill was included in the calculation
of the consolidated profit.
The third method compares what was previously consolidated (identifiable net assets,
goodwill and non-controlling interests) with the proceeds that were received on disposal
and, if applicable, any remaining investment.
R
Proceeds 90 000
Identifiable net assets no longer consolidated (130 500)
Goodwill (5 000)
Non-controlling interests 52 200
Consolidated profit 6 700
The full identifiable net assets, goodwill and non-controlling interests effectively represent
the parent’s interest in the subsidiary which, when compared to the proceeds on disposal,
result in the profit attributable to the parent.
4. The since asset replacement reserve has now been realised and therefore a transfer from
asset replacement reserve to retained earnings is made in the statement of changes in
equity.
continued
216
Chapter 16
Solution (continued)
R R
Non-controlling interests’ share of profit 7 800
Taxation (14 000 × 9/12) 10 500
Profit on sale of subsidiary 18 300
Asset replacement reserve (1.1.04) 3 000
Retained earnings (1.1.04) 3 600
Operating profit (40 000 × 9/12) 30 000
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOMEFOR THE YEAR ENDED 31 DECEMBER 04
R
Operating profit [45 000 + (40 000 × 9/12)] 75 000
Profit on sale of subsidiary 6 700
Profit before tax 81 700
Taxation [12 000 + (14 000 × 9/12)] (22 500)
Profit and total comprehensive income for the year 59 200
Attributable to:
Parent shareholders 51 400
Non-controlling shareholders 7 800
59 200
(1)
52 000 + 3 600 = 55 600
(2)
45 000 + 3 000 = 48 000
continued
217
Notes on Group Financial Statements
Solution (continued)
Example 16:2
H Limited purchased 75% of the shares of S Limited on 1 January 05 when the latter com-
pany's equipment was valued at R810 000 and its retained earnings were R5 000. The equip-
ment was purchased on 31 December 03 and depreciation is provided at 10% per annum on
the straight line basis. The non-controlling interests are initially measured at fair value. On
1 January 05 the fair value of the non-controlling interests was R170 000. H Ltd accounted for
S Ltd at cost in its separate financial statements.
S Limited sold goods to H Limited in 09 totalling R93 000 (08: R140 000). S Limited's mark-up
was 25% on cost. Inventory held by H Limited on 31 December 09 included goods purchased
from S Limited at a cost to the parent company of R20 000 (08: R40 000).
H Limited sold its entire shareholding in S Limited for R980 000 on 31 December 09.
continued
218
Chapter 16
The following figures have been extracted from the financial statements of the companies at
31 December 09:
1 040 878
EQUITY
Share capital 600 500
Other reserves 80 300
Retained earnings 360 78
1 040 878
continued
219
Notes on Group Financial Statements
Required:
Prepare H Limited's consolidated statement of profit or loss and other comprehensive income
and statements of changes in equity for the year ended 31 December 09, together with the
consolidated statement of financial position of H Ltd at that date. Assume a tax rate of 50%.
Solution
Workings:
Worksheet – S Ltd
Equity of S Ltd SINCE
Other
Equip- Other
Date Details SC RE Re- INV. DT TOTAL NCI INV GW RE
ment R
serves
01.1.05 Purchased
75% 500 000 5 000 (90 000) (1) 45 000 460 000 170 000 650 000 (2) (360 000) (3)
31.12.08 RE 28 000 40 000 (8 000) (16 000) 44 000 11 000 33 000
Other
reserves 200 000 200 000 50 000 150 000
500 000 33 000 200 000 (50 000) (8 000) 29 000 704 000 231 000 650 000 (360 000) 150 000 33 000
(4)
31.12.09 Profit 225 000 10 000 8 000 (9 000) 234 000 58 500 175 500
Transfer (100 000) 100 000 – 75 000 (75 000)
Dividend (80 000) (80 000) (20 000) (60 000)
500 000 78 000 300 000 (40 000) – 20 000 858 000 269 500 650 000 (360 000) 225 000 73 500
Sold 643 500 (650 000) 305 000 (225 000) (73 500)
500 000 78 000 300 000 (40 000) – 20 000 858 000 913 000 – (55 000) – –
DEBITS CREDITS
(1)
1 000 × 90% = 900 – 810 = (90)
(2)
980 (proceeds) – 330 (profit) = 650 (cost of shares)
(3)
460 – 170 – 650 = (360)
(4)
The unearned profit is all realised during the current period as the subsidiary has now been sold.
Remember that the inventory is an asset of H Ltd and not S Ltd. At the date of disposal, therefore,
the group carrying amount of the S Ltd inventory that is effectively disposed of is the carrying amount
of the inventory in S Ltd. There is therefore no unearned profit at the date of disposal and the inven-
tory on hand in H Ltd of R20 000 at 31 December 08 is irrelevant.
continued
220
Chapter 16
Solution (continued)
(5)
S Ltd is consolidated (i.e. included in the consolidated statement of profit or loss and other compre-
hensive income and statement of changes in equity) until 31 December 09, the date on which H Ltd
loses control. S Ltd is excluded from the consolidated statement of financial position at 31 December
09 as it is no longer part of the group.
(6)
The profit on the sale of the subsidiary is calculated as follows:
Alternative 1 R
Profit (cost method) 330 000
Since acquisition reserves ‘sold’ – ARR (225 000)
– RE (73 500)
Consolidated profit 31 500
Alternative 2 R
Net assets disposed of (858 × 75%) 643 500
Goodwill attributable to H Ltd 305 000 (7)
Carrying amount of assets ‘sold’ 948 500
Proceeds 980 000
Consolidated profit 31 500
Alternative 3 R
Proceeds 980 000
Identifiable net assets (858 000)
Goodwill (parent and NCI) (360 000)
Non-controlling interests 269 500
Consolidated profit 31 500
(7)
Note that the goodwill allocated to the carrying amount of assets disposed of is the goodwill attrib-
utable to H Ltd. This is calculated as follows:
R
H Ltd’s share of identifiable net assets at acquisition (460 × 75%) 345 000
Paid 650 000
305 000
The balance of the goodwill (R55 000) was attributable to the non-controlling shareholders.
Pro forma journal entries:
R R
Adjusted to trial balance of H Ltd only
Sales 93 000
Cost of sales 93 000
continued
221
Notes on Group Financial Statements
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 09
R
Revenue – sales (870 + 760 – 93) 1 537 000
Cost of sales (380 + 290 – 93 – 8) (569 000)
Gross profit 968 000
Operating expenses (90 + 80 – 10) (160 000)
Profit on sale of shares in subsidiary 31 500
Dividend income –
Profit before taxation 839 500
Taxation (180 + 165 + 9) (354 000)
Profit and total comprehensive income for the year 485 500
Attributable to:
H ltd shareholders 427 000
Non-controlling interests 58 500
485 500
(1)
30 + 150
(2)
20 + 33
continued
222
Chapter 16
Solution (continued)
EQUITY
Share capital 600 000
Other reserves 80 000
Retained earnings 360 000
1 040 000
223
Notes on Group Financial Statements
Example 16:3
H Limited purchased 75% of the shares of S Limited on 1 January 05 for R650 000 when the
latter company's plant was valued at R810 000 and its retained earnings were R5 000. The
plant was purchased on 31 December 03 and depreciation is provided at 10% per annum on
the straight line basis.
The non-controlling interests are measured at their share of the identifiable net assets. H Ltd
accounted for S Ltd on the cost method in its separate financial statements.
S Limited sold goods to H Limited in 09 totalling R93 000 (08: R140 000). S Limited's mark-up
was 25% on cost. Inventory held by H Limited on 31 December 09 included goods purchased
from S Limited at a cost to the parent company of R20 000 (08: R40 000).
H Limited sold 96% of its 75% shareholding in S Limited for R940 000 on 31 December 09.
The fair value of their remaining (3%) investment was R38 500 on 31 December 09.
Changes in the fair value of the investment is accounted for in other comprehensive income in
terms of IFRS 9 from 31 December 09.
continued
224
Chapter 16
The following figures have been extracted from the financial statements of the companies at
31 December 09:
STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER 09
H Ltd S Ltd
R’000 R’000
ASSETS
Non-current assets 226 800
Land and buildings 200 400
Equipment 400
Cost 1 000
Accumulated depreciation (600)
1 026 878
EQUITY
Share capital 600 500
Other reserves 80 300
Retained earnings 346 78
1 026 878
continued
225
Notes on Group Financial Statements
Required:
Prepare H Limited's consolidated statement of profit or loss and other comprehensive income
and statement of changes in equity for the year ended 31 December 09, together with the con-
solidated statement of financial position at that date. Assume a tax rate of 50% and that 50% of
capital gains are included in taxable income.
Solution
Workings:
Worksheet – S Ltd
EQUITY OF S LTD SINCE
Date Details Total NCI INV Gwill
S Cap RE Other R Plant Invent D Tax Other R RE
1.1.05 Purchased
75% 500 000 5 000 (90 000) (1) 45 000 460 000 115 000 650 000 (305 000)
31.12.08 RE 28 000 40 000 (8 000) (16 000) 44 000 11 000 33 000
Other R 200 000 200 000 50 000 150 000
500 000 33 000 200 000 (50 000) (8 000) 29 000 704 000 176 000 650 000 (305 000) 150 000 33 000
31.12.09 Profit 225 000 10 000 8 000 (9 000) 234 000 58 500 175 500
Transfer (100 000) 100 000 – 75 000 (75 000)
Dividend (80 000) (80 000) (20 000) (60 000)
500 000 78 000 300 000 (40 000) – 20 000 858 000 214 500 650 000 (305 000) 225 000 73 500
Sold 72% (2) 617 760 (624 000) 292 800 (216 000) (70 560)
500 000 78 000 300 000 (40 000) – 20 000 858 000 832 260 26 000 (12 200) 9 000 2 940
(1)
1 000 000 × 90% = 900 000 – 810 000 = (90 000)
(2)
96% × 75% = 72%
continued
226
Chapter 16
Solution (continued)
Note:
1. The remaining investment has a carrying amount of R37 940 representing the cost
(R26 000) plus the since reserves not sold (R9 000 + 2 940). This is immediately adjusted
to fair value (R38 500) which is the amount at which the financial asset is initially recog-
nised. The adjustment to fair value (R560) is included as part of the profit on disposal and
is included in profit or loss. The asset is now accounted for as a financial asset in terms of
IFRS 9.
2. The profit on disposal is calculated as follows:
R
Profit on disposal – cost method 316 000
Since reserves ‘sold’ – retained earnings (70 560)
– other reserves (216 000)
Adjustment to remaining investment 560
Consolidated profit 30 000
OR
Net assets disposed of 617 760
Goodwill 292 800
910 560
Proceeds 940 000
29 440
Adjustment to remaining investment 560
Consolidated profit 30 000
OR
Proceeds 940 000
Remaining investment 38 500
Identifiable net assets (858 000)
Goodwill (305 000)
Non-controlling interests 214 500
Consolidated profit 30 000
continued
227
Notes on Group Financial Statements
Solution (continued)
R R
Retained earnings (transfer to other reserves) 75 000
Other reserves 75 000
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 09
R
Revenue – sales (870 + 760 – 93) 1 537 000
Cost of sales (380 + 290 – 93 – 8) (569 000)
Gross profit 968 000
Operating expenses (90 + 80 – 10) (160 000)
Profit on sale of shares 30 000
Profit for the year 838 000
Taxation (180 + 165 + 9 + 0.14) (354 140)
Profit and total comprehensive income for the year 483 860
Attributable to:
H Ltd shareholders 425 360
Non-controlling interests 58 500
483 860
* These two may be set off to give a net transfer from other reserves of R91 000. It should also be noted
that it would also be appropriate to transfer the total other reserves of R225 000 in which case the re-
maining other reserves of R80 000 would all be directly attributable to the parent.
continued
228
Chapter 16
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 09
R
ASSETS
Non-current assets 238 500
Property, plant and equipment 200 000
Financial asset (26 + 2.94 + 9 + 0.56 = 38.5 = fair value) 38 500
Current assets 800 000
Inventory 220 000
Accounts receivable 216 000
Bank 364 000
1 038 500
continued
229
Notes on Group Financial Statements
Solution (continued)
(e) Non-controlling interests (P/L) = 25% (225 000 + 10 000 – 5 000* + 8 000 – 4 000*) =
58 500
(f) Other reserves (beginning of year) = 30 000(H) + 150 000 = 180 000
(g) Retained earnings (beginning of year) = 20 000(H) + 33 000 = 53 000
(h) Transfer to other reserves = 50 000(H) + 75 000 = 125 000
* Tax effect
Note that working (b) above is actually unnecessary as comparative figures (for goodwill) are
not required.
Solution
Workings:
Worksheet – S Ltd
EQUITY OF S LTD SINCE
Date Details Total NCI INV Gwill
S Cap RE Other R Plant Invent D Tax Other R RE
1.1.05 Purchased
75% 500 000 5 000 (90 000) (1) 45 000 460 000 115 000 650 000 (305 000)
31.12.08 RE 28 000 40 000 (8 000) (16 000) 44 000 11 000 33 000
Other R 200 000 200 000 50 000 150 000
500 000 33 000 200 000 (50 000) (8 000) 29 000 704 000 176 000 650 000 (305 000) 150 000 33 000
31.12.09 Profit 225 000 10 000 4 000 (7 000) 232 000 58 000 174 000
Transfer (100 000) 100 000 – 75 000 (75 000)
Dividend (80 000) (80 000) (20 000) (60 000)
500 000 78 000 300 000 (40 000) (4 000) 22 000 856 000 214 000 650 000 (305 000) 225 000 72 000
Sold 72% (2) 616 320 (624 000) 292 800 (216 000) (69 120)
500 000 78 000 300 000 (40 000) (4 000) 22 000 856 000 830 320 26 000 (12 200) 9 000 2 880
(1)
1 000 000 × 90% = 900 000 – 810 000 = (90 000)
(2)
96% × 75% = 72%
Note:
1. The remaining investment has a carrying amount of R37 880 representing the cost
(R26 000) plus the since reserves not sold (R9 000 + 2 880). This is immediately adjusted
to fair value (R38 500) which is the amount at which the financial asset is initially recog-
nised. The adjustment to fair value (R620) is included as part of the profit on disposal and
is included in profit or loss. The asset is now accounted for as a financial asset in terms of
IFRS 9.
2. The profit on disposal is calculated as follows:
R
Profit on disposal – cost method 316 000
Since reserves ‘sold’ – retained earnings (69 120)
– other reserves (216 000)
Adjustment to remaining investment 620
Consolidated profit 31 500
continued
230
Chapter 16
Solution (continued)
OR
Net assets disposed of 616 320
Goodwill 292 800
909 120
Proceeds 940 000
30 880
Adjustment to remaining investment 620
Consolidated profit 31 500
OR
Proceeds 940 000
Remaining investment 38 500
Identifiable net assets (856 000)
Goodwill (305 000)
Non-controlling interests 214 000
Consolidated profit 31 500
continued
231
Notes on Group Financial Statements
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 09
R
Revenue – sales (870 + 760 – 93) 1 537 000
Cost of sales (380 + 290 – 93 – 4) (573 000)
Gross profit 964 000
Operating expenses (90 + 80 – 10) (160 000)
Profit on sale of shares 31 500
Profit for the year 835 500
Taxation (180 + 165 + 7 + 0.155) (352 155)
Profit for the year 483 345
Attributable to:
H Ltd shareholders 425 345
Non-controlling interests 58 000
483 345
* These two may be set off to give a net transfer from other reserves of R91 000. It should also
be noted that it would also be appropriate to transfer the total other reserves of R225 000 in
which case the remaining other reserves of R80 000 would all be directly attributable to the
parent.
continued
232
Chapter 16
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 09
R
ASSETS
Non-current assets 238 500
Property, plant and equipment 200 000
Financial asset (26 + 2.88 + 9 + 0.62 = 38.5 = fair value) 38 500
Current assets 800 000
Inventory 220 000
Accounts receivable 216 000
Bank 364 000
1 038 500
continued
233
Notes on Group Financial Statements
Solution (continued)
(e) Non-controlling interests (P/L) = 25% (225 000 + 10 000 – 5 000* + 4 000 – 2 000*) =
58 000
(f) Other reserves (beginning of year) = 30 000(H) + 150 000 = 180 000
(g) Retained earnings (beginning of year) = 20 000(H) + 33 000 = 53 000
(h) Transfer to other reserves = 50 000(H) + 75 000 = 125 000
* Tax effect
Note that working (b) above is actually unnecessary as comparative figures (for goodwill) are
not required.
Example 16:4
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R66 000. At that date the
retained earnings and asset replacement reserve were R10 000 and R20 000 respectively. The
non-controlling interests are measured at their share of the identifiable net assets.
At the date of acquisition all the identifiable assets of S Ltd were considered to be fairly valued
with the exception of land which was considered to be worth R20 000 more than the carrying
amount. (Ignore deferred tax on fair value adjustments.)
On 30 September 04 H Ltd sold 35% of the shares in S Ltd for R52 500. H Ltd exercised signif-
icant influence over S Ltd from 30 September 04. The fair value of the remaining 25% invest-
ment was R37 500 on 30 September 04.
Since the date of acquisition of the shares there have been no purchases or sales of land.
Profit is earned evenly throughout the year.
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R’000 R’000
CREDITS
Share capital 200 000 50 000
Asset replacement reserve 45 000 25 000
Retained earnings 52 000 16 000
Operating profit 45 000 40 000
Profit on sale of S Ltd shares 14 000
356 000 131 000
DEBITS
Land at cost 185 000 80 000
Investment in S Ltd, at cost 27 500
Other net assets 131 500 37 000
Taxation 12 000 14 000
356 000 131 000
continued
234
Chapter 16
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd group for the 04 fi-
nancial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC ARR RE LAND NCI INV GW
RE ARR
31.12.02 Acq. 60% 50 000 20 000 10 000 20 000 100 000 40 000 66 000 (6 000)
31.12.03 Increase 5 000 6 000 11 000 4 400 3 600 3 000
50 000 25 000 16 000 20 000 111 000 44 400 66 000 (6 000) 3 600 3 000
9
30.09.04 Profit ( /12) 19 500 19 500 7 800 11 700
50 000 25 000 35 500 20 000 130 500 52 200 66 000 (6 000) 15 300 3 000
30.09.04 Sold 35% (38 500) 3 500 (8 925) (1 750)
50 000 25 000 35 500 20 000 130 500 27 500 n/a 6 375 1 250
(1)
31.12.04 Adj to FV 2 375
3
Profit ( /12) 6 500 6 500 1 625
50 000 25 000 42 000 20 000 137 000 27 500 n/a 10 375 1 250
DEBITS CREDITS
(1)
27 500 + 6 375 + 1 250 = 35 125 (carrying amount after disposal) – 37 500 (fair value) = 2 375
Note:
The consolidated profit on disposal is calculated as follows:
R
1. Profit – cost method 14 000
Reserves ‘sold’ – RE (8 925)
– ARR 2 375
Adjustment to remaining investment 5 700
Consolidated profit 30 000
OR
2. Net assets ‘sold’ (130 500 × 35%) 45 675
Goodwill 3 500
49 175
Proceeds 52 500
3 325
Adjustment to remaining investment 2 375
Consolidated profit 5 700
continued
235
Notes on Group Financial Statements
Solution (continued)
R
OR
3. Proceeds 52 500
Remaining investment 37 500
Identifiable net assets (130 500)
Goodwill (6 000)
Non-controlling interests 52 200
Consolidated profit 5 700
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Operating profit [45 + (40 × 9/12)] 75 000
Profit on disposal of subsidiary 5 700
Share of profit from associate 1 625
Profit before tax 82 325
Taxation [12 + (14 × 9/12)] (22 500)
Profit and total comprehensive income for the year 59 825
Attributable to:
Parent shareholders 52 025
Non-controlling shareholders 7 800
59 825
continued
236
Chapter 16
Solution (continued)
(1)
52 000 + 3 600 = 55 600
(2)
45 000 + 3 000 = 48 000
EQUITY
H Ltd shareholders’ interests
Share capital 200 000
Other reserves 46 250
Retained earnings [check: (99 + 10.375)] 109 375
355 625
Example 16:5
H Ltd acquired 60% in S Ltd on 31 December 07 for R7 500. All the identifiable net assets of
S Ltd were fairly valued and the non-controlling interests are initially measured at their share of
net identifiable assets.
On 30 September 08 H Ltd sold 20% of the shares in S Ltd for R3 000. S Ltd was classified as
an associate from that date and the fair value of the remaining investment was R6 000. Profits
are earned evenly during the year.
H Ltd sells inventory to S Ltd at a mark-up of 40% on cost. Inventory on hand in S Ltd bought
from H Ltd is as follows:
R
30 September 08 1 400
31 December 08 (all acquired by S Ltd after 30.9.08) 1 750
continued
237
Notes on Group Financial Statements
The following are the trial balances of H Ltd and S Ltd at 31 December 08:
H Ltd S Ltd
R R
CREDITS
Share capital 30 000 10 000
Retained earnings 12 000 2 000
Operating profit 12 600 3 600
Profit on the sale of S Ltd shares 500
55 100 15 600
DEBITS
Investment in S Ltd, at cost 5 000
Other net assets 46 400 14 400
Taxation 3 700 1 200
55 100 15 600
Required:
Prepare the 08 consolidated statement of profit or loss and other comprehensive income,
statement of changes in equity and statement of financial position as well as the pro forma
consolidation journal entries. Ignore deferred tax.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC RE INVENT NCI INV GW
RE
31.12.07 Acquired 60% 10 000 2 000 – 12 000 4 800 7 500 (300)
30.09.08 Profit (9/12) 1 800 1 800 720 1 080
10 000 3 800 – 13 800 5 520 7 500 (300) 1 080
Sold 20% (2 500) 100 (360)
10 000 3 800 – 13 800 5 000 n/a 720
FV adj 280(1)
31.12.08 Profit (3/12) 600 (500)(2) 100 40
10 000 4 400 (500) 13 900 5 000 n/a 1 040
(1)
Fair value adjustment (6 000 – 5 000 – 720 = 280)
The intercompany inventory is held by S Ltd (downstream). The investment in the associate is initially
recognised at fair value. This effectively reverses any unearned profit adjustment previously made
(40/140 × 1 400 = 400). The fair value adjustment will be increased by the unearned profit in inventory.
This is because this unearned profit is not reflected in the analysis, but the inventory is held by the
associate. See also the explanation to the pro forma journal entries.
(2)
Because the unearned profit was reversed when S Ltd became an associate, the unearned profit
adjustment is for sales made after 30.9.08 (40/140 × 1 750 = 500) and not the increase in unearned
profit.
continued
238
Chapter 16
Solution (continued)
OR
Net assets ‘sold’ (13 800 × 20%) 2 760
Goodwill 100
2 860
Proceeds 3 000
140
Adjustment to remaining investment (280 + 400 (UEP)) 680
Consolidated profit 820
OR
Proceeds 3 000
Remaining investment 6 000
Identifiable net assets (13 800 – 400 (UEP)) (13 400)
Goodwill (300)
Non-controlling interests 5 520
Consolidated profit 820
continued
239
Notes on Group Financial Statements
Solution (continued)
(1)
H Ltd only
EQUITY
Share capital 30 000
Retained earnings 22 440
52 440
The inventory is an asset of S Ltd and is therefore part of the investment in the associate. The
credit to inventory above therefore needs to be reversed. It cannot be credited to the invest-
ment in S Ltd as S Ltd is initially recognised at fair value when it becomes an associate. The
unearned profit is therefore realised as the subsidiary becomes an associate. It has been cred-
ited to the profit on sale of subsidiary as it is the sale that triggers its realisation.
Investment in S Ltd 40
Share of profit from associate 40
240
Chapter 16
Example 16:6
How would the solution to example 16.5 change if the sale of inventory was made by S Ltd to
H Ltd?
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL SINCE
SC RE INVENT NCI INV GW
RE
1.1.08 Acquired 60% 10 000 2 000 12 000 4 800 7 500 (300)
9
30.9.08 Profit ( /12) 1 800 (400) 1 400 560 840
10 000 3 800 (400) 13 400 5 360 7 500 (300) 840
Sold 20% (2 500) 100 (280)
(1)
10 000 3 800 – 13 800 5 000 n/a 560
(2)
FV adj 440
3 (3)
31.12.08 Profit ( /12) 600 (500) 100 40
10 000 4 400 (500) 13 900 5 000 1 040
(1)
As the fair value adjustment effectively reverses any unearned profit adjustments at the date of dis-
posal the inventory column is adjusted to reflect this fact (see (2) below).
(2)
Fair value adjustment (6 000 – 5 000 – 560 = 440)
As the remaining investment (associate) is initially recognised at fair value this effectively eliminates
the unearned profit previously adjusted for i.e. the fair value adjustment is R240 more than it would
have been if there had been no unearned profit in inventory.
(3)
As the unearned profit was effectively reversed when the subsidiary became an associate, the un-
earned profit adjustment relates to the entire inventory on hand at year end. This would, however,
only be for sales that took place after 1.7.08.
The consolidated profit on disposal is calculated as follows:
R
Profit – cost method 500
Retained earnings ‘sold’ (280)
Adjustment to remaining investment 440
Consolidated profit 660
OR
Net assets ‘sold’ (13 400 × 20%) 2 680
Goodwill 100
2 780
Proceeds 3 000
220
Adjustment to remaining investment 440
Consolidated profit 660
continued
241
Notes on Group Financial Statements
Solution (continued)
R
OR
Proceeds 3 000
Remaining investment 6 000
Identifiable net assets (13 400)
Goodwill (300)
Non-controlling interests 5 360
Consolidated profit 660
Investment in S Ltd 40
Share of profit of associate 40
continued
242
Chapter 16
Solution (continued)
(1)
H Ltd only
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 08
R
ASSETS
Other net assets 46 400
Investment in associate (5 000 + 1 040) 6 040
52 440
EQUITY
Share capital 30 000
Retained earnings 22 440
52 440
243
Notes on Group Financial Statements
Example 16:7
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R65 000. At that date the
retained earnings and asset replacement reserve were R10 000 and R20 000 respectively. The
non-controlling interests are measured at their share of the identifiable net assets.
At the date of acquisition all the identifiable assets of S Ltd were considered to be fairly valued
with the exception of land which was considered to be worth R20 000 more than the carrying
amount. (Ignore deferred tax on fair value adjustments.)
On 30 September 04 H Ltd sold 10% of its holding for R10 000. Since the date of acquisition of
the shares there have been no purchases or sales of land. Profit is earned evenly throughout
the year.
The following are the trial balances of H Ltd and S Ltd at 31 December 04:
H Ltd S Ltd
R’000 R’000
CREDITS
Share capital 200 000 50 000
Asset replacement reserve 45 000 25 000
Retained earnings 52 000 16 000
Operating profit 45 000 40 000
Profit on sale of S Ltd 3 500
345 500 131 000
DEBITS
Land at cost 185 000 80 000
Investment in S Ltd, at cost 58 500
Other net assets 90 000 37 000
Taxation 12 000 14 000
345 500 131 000
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd group for the 04 finan-
cial year.
Solution
Workings:
Equity of Subsidiary Analysis of Equity
Date Details TOTAL NCI SINCE
SC ARR RE LAND INV GW
40%/46% RE ARR
31.12.02 Acq. 60% 50 000 20 000 10 000 20 000 100 000 40 000 65 000 (5 000)
31.12.03 Increase 5 000 6 000 11 000 4 400 3 600 3 000
50 000 25 000 16 000 20 000 111 000 44 400 65 000 (5 000) 3 600 3 000
30.09.04 Profit 19 500 19 500 7 800 11 700
50 000 25 000 35 500 20 000 130 500 52 200 65 000 (5 000) 15 300 3 000
(2) (1)
30.09.04 Sold 6% 8 330 (6 500) – (1 530) (300)
50 000 25 000 35 500 20 000 130 500 60 530 58 500 (5 000) 13 770 2 700
31.12.04 Profit 6 500 6 500 2 990 3 510
50 000 25 000 42 000 20 000 137 000 63 520 58 500 (5 000) 17 280 2 700
DEBITS CREDITS
continued
244
Chapter 16
Solution (continued)
(1)
Note that as discussed above goodwill is not adjusted for the partial disposal. This is because control
has not been lost. There is, however, a reallocation of goodwill between the parent and non-
controlling shareholders. The amount of the reallocation is R500 (5 000 × 6/60).
(2)
(130 500 × 6%) + 500 (goodwill) = 8 330. The non-controlling interests carrying amount now includes
R500 in respect of goodwill.
(3)
The gain on disposal attributable to H Ltd shareholders is not included in comprehensive income but
adjusted directly to equity. This is because control of S Ltd is not lost.
(4)
The adjustment to equity of the parent can be calculated as follows:
R
Profit – cost method 3 500
Since reserves ‘sold’ – RE (1 530)
– ARR (300)
Adjustment to parent equity 1 670
OR
Net identifiable assets ‘sold’ 7 830
Goodwill 500
8 330
Proceeds 10 000
Adjustment to parent equity 1 670
continued
245
Notes on Group Financial Statements
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 04
R
Operating profit (45 + 40) 85 000
Profit on disposal of portion of subsidiary (3 500 – 1 830 – 1 670) –
Profit before tax 85 000
Taxation (12 + 14) (26 000)
Profit and total comprehensive income for the year 59 000
Attributable to:
H Ltd shareholders 48 210
Non-controlling shareholders (7.8 + 2.99) 10 790
59 000
(1)
52 000 + 3 600 = 55 600
(2)
Refer to note 4 in workings above.
(3)
45 000 + 3 000 = 48 000
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 04
R
ASSETS
Non-current assets 290 000
Goodwill 5 000
Land (185 + 80 +20) 285 000
Other net assets (90 + 37) 127 000
417 000
EQUITY
H Ltd shareholders interest 353 480
Share capital 200 000
Other reserves 47 700
Retained earnings [check: (88.5 + 17.28)] 105 780
Non-controlling interests 63 520
417 000
continued
246
Chapter 16
Solution (continued)
Example 16:8
Exactly the same as example 16:7 except non-controlling interests are initially measured at fair
value. On 31 December 02 the fair value of the non-controlling interests was R41 000.
Required:
Prepare the section of the analysis of equity worksheet to reflect the disposal of shares by
H Ltd.
Solution
The goodwill arising on acquisition will now be R6 000 (5 000 + 1 000) as the non-controlling
interests’ fair value is R1 000 more than their share of net assets.
Equity of subsidiaries Analysis of equity
Date Details Total Since
SC ARR RE Land NCI INV GW
RE ARR
30.09.04 Balance 50 000 25 000 35 500 20 000 130 500 53 200 65 000 (6 000) 15 300 3 000
30.09.04 Sold 6% 8 330 (6 500) (1 530) (300)
30.09.04 Balance 50 000 25 000 35 500 20 000 130 500 61 050 58 500 (6 000) 13 770 2 700
Note that the analysis is, as far as the disposal of shares is concerned, exactly the same as
example 16:7. In other words there is no change in the carrying amount of goodwill and the
non-controlling interests are allocated the portion of goodwill for which the parent has given up
ownership interest.
247
Notes on Group Financial Statements
Example 16:9
H Ltd purchased 400 shares in A Ltd for R880 when the latter company had retained earnings
of R1 000. On 30 June 09 H Ltd sold 200 shares for R950.
The abridged financial statements of the two companies are as follows:
continued
248
Chapter 16
Required:
Prepare H Ltd's statement of profit or loss and other comprehensive income and statement of
financial position for the 09 financial year incorporating the results of S Ltd on the equity meth-
od. No notes are required. No impairment of the investment has taken place.
Solution
Workings:
Worksheet
SINCE
Date Details SC OR RE TOTAL INV (GWILL)
OR RE
Purchase 40% 1 000 1 000 2 000 880 (80)
31.12.08 Profit 1 100 1 100 440
OR 800 800 320
1 000 800 2 100 3 900 880 (80) 320 440
30.6.09 Profit 400 400 160
1 000 800 2 500 4 300 880 (80) 320 600
Sale 20% (440) 40 (160) (300)
440 (40) 160 300
31.12.09 Profit 400 400 80
Dividend (400) (400) (80)
1 000 800 2 500 4 300 440 (40) 160 300
H LIMITED
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 09
R
Operating profit 2 500
Share of profit of associate (160 + 80) 240
Profit on sale of shares in associate 50 (1)
Profit before taxation 2 790
Taxation (1 250)
Profit and total comprehensive income for the year 1 540
(1)
510 – 160 – 300 = 50
OR
950 – (4 300 × 20%) – 40 = 50
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 09
Share Other Retained
Total
Capital Reserves Earnings
R R R R
(1)
Balances 1 January 09 1 000 320 3 370 4 690
Total comprehensive income for the year 1 540 1 540
Dividends (1 000) (1 000)
Reserves realised on sale of shares in associate (160) 160 –
Balances 31 December 09 1 000 160 4 070 5 230
(1)
2 930 + 440 = 3 370
continued
249
Notes on Group Financial Statements
Solution (continued)
H LIMITED
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 09
R
ASSETS
Investment in associate (440 + 300 + 160) 900
Current assets 4 330
5 230
EQUITY
Share capital 1 000
Revaluation reserves 160
Retained earnings (3 770 + 300) 4 070
5 230
Example 16:10
H Limited purchased 400 shares (40%) in A Limited for R880 when the latter company had
retained earnings of R1 000. On 30 June 09 H Limited sold 300 shares for R1 440. Fair value
adjustments relating to the remaining investment is subsequently accounted for in other com-
prehensive income in terms of IFRS 9.
The fair value of a 10% interest in A Ltd was R460 at 30 June 09 and R490 on 31 December 09.
Ignore taxation on the fair value adjustment.
continued
250
Chapter 16
Required:
Prepare H Ltd's statement of profit or loss and other comprehensive income and statement of
financial position for the 09 financial year incorporating the results of A Ltd on the equity meth-
od. No notes are required.
251
Notes on Group Financial Statements
Solution
Workings:
Worksheet
SINCE
Date Details SC OR RE TOTAL INV (GWILL)
OR RE
Purchase 40% 1 000 1 000 2 000 880 (80)
31.12.08 RE 1 100 1 100 440
OR 800 800 320
1 000 800 2 100 3 900 880 (80) 320 440
30.6.09 Profit – 6/12 400 400 160
1 000 800 2 500 4 300 880 (80) 320 600
Sale 30% (660) 60 (240) (450)
1 000 800 2 500 4 300 220 (20) 80 150
Note that H Ltd will have passed the following entry in its own books:
continued
252
Chapter 16
Solution (continued)
H LIMITED
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 09
R
ASSETS
Financial asset 490
Current assets 4 780
5 270
EQUITY
Share capital 1 000
Other reserves (80 + 30) 110
Retained earnings 4 160
5 270
Example 16:11
H Ltd acquired 60% of the shares in S Ltd on 31 December 02 for R90 000. At that date the
only reserve was retained earnings of R100 000. All identifiable net assets were considered
fairly valued and the non-controlling shareholders were measured at their share of the identifi-
able net assets.
On 31 December 05 S Ltd revalued their land. S Ltd did not dispose of any of their financial
assets (fair value through OCI) during the current financial year.
On 30 June 06 H Ltd sold 35% of the shares in S Ltd for R84 000. The fair value of the remain-
ing 25% investment in S Ltd was R58 000 on 30 June 06. Profit and gains were earned evenly
over the year.
continued
253
Notes on Group Financial Statements
It is the policy of the group to transfer realised revaluation surpluses to retained earnings.
Ignore deferred taxation.
The following are the trial balances of H Ltd and S Ltd on 31 December 06:
H Ltd S Ltd
R R
CREDITS
Share capital 100 000 50 000
Revaluation reserve (land) – 10 000
Fair value reserve (financial assets) – 6 000
Retained earnings 90 000 140 000
Operating profit 60 000 45 000
Fair value gains (financial assets) – 3 000
Profit on sale of S Ltd shares 31 500 –
281 500 254 000
DEBITS
Land, at valuation – 50 000
Investments
– S Ltd, a cost 37 500 –
– Financial assets (fair value through OCI) – 31 000
Other net assets 226 000 158 000
Taxation 18 000 15 000
281 500 254 000
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income (one
statement approach), statement of changes in equity and statement of financial position for the
06 financial year.
Solution
Workings:
FV
Date Details SC RE RR Total NCI INV RE FV Res RR
Res
31.12.02 Acquisition 60% 50 000 100 000 150 000 60 000 90 000
31.12.05 Retained earnings 40 000 40 000 16 000 24 000
31.12.05 FV Res 6 000 6 000 2 400 3 600
31.12.05 Reval. 10 000 10 000 4 000 6 000
50 000 140 000 6 000 10 000 206 000 82 400 90 000 24 000 3 600 6 000
30.06.06 Profit 15 000 15 000 6 000 9 000
6
(45 – 15) × /12
6
FV Res (3 × /12) 1 500 1 500 600 900
50 000 155 000 7 500 10 000 222 500 89 000 90 000 33 000 4 500 6 000
Sold 35% 77 875 (52 500) (19 250) (2 625) (3 500)
50 000 155 000 7 500 10 000 222 500 N/A 37 500 13 750 1 875 2 500
(1)
FV adj 2 375
(2)
Tfr 2 500 (2 500)
50 000 155 000 7 500 10 000 222 500 37 500 18 625 1 875 –
31.12.06 Profit 15 000 15 000 3 750
FV Res 1 500 1 500 375
50 000 170 000 9 000 10 000 239 000 37 500 22 375 2 250 –
continued
254
Chapter 16
Solution (continued)
(1)
58 000 – (37 500 + 13 750 + 1 875 + 2 500) = 2 375
(2)
The full revaluation reserve is transferred into retained earnings as control over the subsidiary has
been lost.
(3)
Profit on disposal is calculated as follows:
R
Profit – cost method 31 500
Reserves ‘sold’ – RE (19 250)
– FV Res (2 625)
– RR (3 500)
Fair value adjustment 2 375
Consolidated profit 8 500
OR
Identifiable assets ‘sold’ (222 500 × 35%) 77 875
Proceeds 84 000
6 125
Fair value adjustment 2 375
Consolidated profit 8 500
OR
Proceeds 84 000
Fair value of investment retained 58 000
Identifiable net assets (222 500)
Non-controlling interests 89 000
Consolidated profit 8 500
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 06
R
6
Operating profit [60 + (45 × /12)] 82 500
Profit on disposal of subsidiary 8 500
Share of profit from associate 3 750
Profit before tax 94 750
Taxation [18 + (15 × 6/12)] (25 500)
Profit for the year 69 250
Other comprehensive income:
Items that will not be reclassified subsequently to profit or loss
Fair value gain on financial assets 1 500
Other comprehensive income of associate 375
Other comprehensive income for the year 1 875
Total comprehensive income for the year 71 125
Profit attributable to:
Parent shareholders 63 250
Non-controlling interests 6 000
69 250
Total comprehensive income attributable to:
Parent shareholders 64 525
Non-controlling interests (6 000 + 600) 6 600
71 125
continued
255
Notes on Group Financial Statements
Solution (continued)
EQUITY
Share capital 100 000
Fair value reserve 2 250
Retained earnings 185 875
288 125
Example 16:12
A Ltd acquired 40% of the equity shares of B Ltd for R50 000 some years ago when the re-
tained earnings of B Ltd was R20 000 and there were no other reserves. The following are the
balances of B Ltd’s equity accounts at 31 December 20.2:
R
Retained earnings 80 000
Foreign currency translation reserve 15 000
Revaluation reserve (plant) 17 500
continued
256
Chapter 16
The statement of profit or loss and other comprehensive income of B Ltd for the 20.3 year in-
cludes the following amounts:
R
Profit for the year (after tax) 40 000
Gain on revaluation (net of tax) 7 000
Gain arising on translation of foreign operation 4 000
On 31 December 20.3 A Ltd disposed of one quarter of its investment in B Ltd for R30 600.
A Ltd’s profit after tax for the year ended 31 December 20.3 is R120 000. B Ltd did not declare
any dividends during the current year.
Required:
Prepare, insofar as the information permits, the statement of profit or loss and other compre-
hensive income of A Ltd for the year ended 31 December 20.3 incorporating B Ltd on the equi-
ty method.
Solution
A LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 20.3
R
Profit for the year before associate 120 000
Profit on sale of portion of associate 3 750(1)
Reclassification of associate’s other comprehensive income to profit on partial
disposal of associate 1 900(2)
Share of profit of associate 16 000(3)
Profit for the year 141 650
Other comprehensive income
Items that will not be reclassified to profit or loss:
Share of OCI of associate 2 800(4)
Items that may be reclassified to profit or loss: (300)
Share of OCI of associate 1 600(5)
Reclassification adjustments of associate to profit or loss (1 900)(2)
257
17 JOINT ARRANGEMENTS
IFRS 11 was issued in May 2011 and replaces IAS 31. The standard requires that a party to a
joint arrangement shall determine the type of joint arrangement by assessing its rights and obliga-
tions arising from the arrangement. Joint arrangements are classified into two types – joint oper-
ations and joint ventures.
Joint venturers now account for an investment in the joint venture using the equity method.
Proportionate consolidation is no longer permitted.
1. OBJECTIVE
The objective is to establish principles for financial reporting by entities that have an interest in
arrangements that are controlled jointly (i.e. joint arrangements).
2. SCOPE
Applies to all entities that are party to joint arrangements.
3. DEFINITIONS
Key definitions (Appendix A) are as follows:
259
Notes on Group Financial Statements
4. JOINT ARRANGEMENTS
All activities covered by IFRS 11 are now regarded as joint arrangements. A joint arrangement is
an arrangement of which two or more parties have joint control. A joint arrangement has the
following characteristics:
ƒ The parties are bound by a contractual arrangement.
ƒ The contractual arrangement gives two or more of those parties joint control of the arrange-
ment.
A joint arrangement is classified as either:
ƒ a joint operation, or
ƒ a joint venture.
260
Chapter 17
Yes
No
No
No
Example 17:1
C Ltd was incorporated in 20.1 with A Ltd and B Ltd each subscribing for 50% of the shares.
The purpose of C Ltd is to manufacture electronic components which will be used in the pro-
duction process of both A Ltd and B Ltd. A Ltd and B Ltd entered into a binding arrangement
whereby:
ƒ A Ltd and B Ltd will purchase the entire production of C Ltd in accordance with their owner-
ship interest.
ƒ Any cash requirements will be financed by A Ltd and B Ltd in accordance with their owner-
ship interests.
ƒ A Ltd and B Ltd will sell the products they manufacture in the open market.
Required:
Is C Ltd a joint operation or a joint venture of A Ltd and B Ltd?
261
Notes on Group Financial Statements
Solution
C Ltd is a joint operation. This is because A Ltd and B Ltd have the right to all of the output
(economic benefits) of C Ltd and also A Ltd and B Ltd will be responsible for settling C Ltd’s
liabilities on a continuous basis.
262
18 INDIRECT OR VERTICAL SUBSIDIARIES
AND ASSOCIATES
1. INTRODUCTION
A subsidiary company can itself have one or more subsidiaries and/ or associates. As was point-
ed out in chapter 1, the effective interest of a company in an investee need not be greater than
50% to achieve control over the investee. The following example illustrates this. Assume control
is exercised in terms of voting rights (percentage holding).
B B B B C B C
40% 40%
60% 30% 30%
C C C
In case 1, A's effective interest in C is 42% (i.e. less than 50%). C, nevertheless, is a subsidiary
of A because A controls B and hence A controls the whole 60% interest which B has in C. C is,
therefore, an indirect or vertical subsidiary of A. B is C's parent company and A is C's ultimate
parent company.
In Case 2, A's effective interest in C is 18% (i.e. less than the 20% guideline for associates). C is,
however, an associate of A (assuming no evidence exists to show that A does not have signifi-
cant influence over C), because A, again, controls B and, hence, the whole of the 30% interest in C.
In Case 3, B is not a subsidiary of A. A, therefore, does not control the 30% interest that B has in
C. However, A does have significant influence over B, which in turn has significant influence over
C. C is therefore not an associate of A as A does not exercise significant influence over C direct-
ly. However, it is a moot point as C is equity accounted into B and A will equity account B.
In Case 4 both B and C are subsidiaries of A. A controls B (70%) and therefore has control over
60% of the shares (votes) in C.
In Case 5, B is an associate of A. C is neither a subsidiary nor associate of A. This is because A
does not control B consequently does not control B’s interest in C. A therefore only controls 10%
of C. C will however be equity accounted into B which in turn will be equity accounted into A. The
10% holding of A will however not be equity accounted.
263
Notes on Group Financial Statements
usual rules for consolidation as has been outlined in previous chapters. When analysing the
equity of the indirect subsidiary at the various stages of the consolidation, the ultimate parent
company's effective interest is either set off against the cost of the investment at the date of
acquisition of the shares (with the usual at acquisition adjustments being made), or transferred to
the ultimate parent company shareholders' interest, depending on whether the equity relates to
the pre-acquisition period or the post-acquisition period.
This ‘effective’ method analyses the equity of the indirect subsidiary from the ultimate parent
company's point of view and can become quite complex and is a very mechanical method. It is
therefore not recommended and not explored further in this text.
The second method is to consolidate starting with the subsidiary that is most distant from the
reporting entity (ultimate parent) whereby the most distant subsidiary is consolidated into the
entity which has the direct holding.
Consider the following scenario:
Assume A has a 70% interest in B which in turn has a 60% interest in C. First an analysis of
equity worksheet for C is prepared for the purposes of consolidating C into B.
The equity of B is then analysed for the purposes of consolidating B into A. It is important to note
that it is B’s consolidated equity (B and its interest in C) that is analysed. The non-controlling
shareholders are allocated their interest in the analyses of both C and B.
The effective interest of A in C is 42% (70% × 60%) and therefore the non-controlling interest in C
is 58%. This interest is allocated to them as follows:
ƒ In the analysis of C 40%
ƒ In the analysis of B (30% × 60%) 18%
58%
Because C is consolidated into B, the analysis of equity of B includes B Ltd’s 60% interest in
C and the non-controlling shareholders of B therefore have a 30% interest therein.
The following examples illustrate how vertical subsidiaries and associates are consolidated.
Example 18:1
H Ltd acquired 60% of the equity share capital of S Ltd in 20-6 when the latter’s retained earn-
ings was R2 000. At that date H Ltd considered S Ltd’s identifiable assets to be fairly valued.
On 30 April 20-9 S Ltd acquired 75% of the equity share capital of T Ltd. T Ltd’s income was
earned evenly during the year.
Non-controlling interests are initially measured at their share of the identifiable net assets.
The following are the trial balances of H Ltd, S Ltd and T Ltd at 31 December 20-9:
H Ltd S Ltd T Ltd
R R R
CREDITS
Share capital 100 000 20 000 10 000
Retained earnings 12 000 10 000 4 000
Profit 7 000 6 000 3 000
119 000 36 000 17 000
DEBITS
Investment in S Ltd, at cost 14 000
Investment in T Ltd, at cost 12 250
Other assets 105 000 23 750 17 000
119 000 36 000 17 000
continued
264
Chapter 18
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of H Ltd for the year ended 31 December 20-9 and consolidat-
ed statement of financial position at 31 December 20-9.
Solution
Workings:
H
60% (20-6)
75% (30/4/20-9)
T
It should be noted that S Ltd was already a subsidiary of H Ltd when S Ltd acquired its share-
holding in T Ltd. Any profits earned by T Ltd after its acquisition by S Ltd are therefore, from
the H Ltd Group point of view, since acquisition.
The first step is to analyse T Ltd as it is the entity most distant from the reporting entity, H Ltd.
Worksheet – T Ltd
Equity of Subsidiary Analysis of Equity
Date Details Total NCI Inv Since
S Cap RE (G/W)
25% S Ltd RE
30/4/20-9 At acquisition 10 000 5 000 (1) 15 000 3 750 12 250 (1 000)
20-9 Since acquisition
Profit (3 000/12 × 8) 2 000 2 000 500 1 500
31/12/20-9 10 000 7 000 17 000 4 250 12 250 (1 000) 1 500
(1)
4 000 + 3 000/12 × 4
Now the analysis of S Ltd is prepared. Note that this is the consolidated equity of the S Ltd
Group (i.e. S Ltd including its interest in T Ltd). The analysis of T Ltd (above) is used to facili-
tate this process.
Worksheet – S Ltd (CONSOLIDATED)
Equity of Subsidiary Analysis of Equity
Retained Earn-
Date Details ings Total NCI Inv Since
S Cap (G/W)
S Ltd in 40% H Ltd RE
S Ltd
T Ltd
20-6 At acquisition 20 000 2 000 22 000 8 800 14 000 (800)
20-6 to Since acquisition
20-8 RE to 31/12/20-8 8 000 8 000 3 200 4 800
31/12/20-8 Sub total 20 000 10 000 30 000 12 000 14 000 (800) 4 800
20-9 Profit – S Ltd 6 000
– S Ltd in T Ltd 1 500 7 500 3 000 4 500
31/12/20-9 20 000 16 000 1 500 37 500 15 000 14 000 (800) 9 300
continued
265
Notes on Group Financial Statements
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20-9
R
Profit and total comprehensive income for the year (7 + 6 + 2) 15 000
Attributable to:
Parent shareholders 11 500
Non-controlling interests 3 500
15 000
continued
266
Chapter 18
Solution (continued)
Note, as discussed earlier, that the reserves are made up of H Ltd’s reserves and the since
reserves in the analysis of S Ltd only.
267
Notes on Group Financial Statements
Example 18:2
S Ltd acquired 75% of the equity share capital of T Ltd in 20-2 when the latter company’s re-
tained earnings amounted to R1 800. All identifiable assets were fairly valued.
H Ltd acquired 60% of the equity share capital in S Ltd during 20-6, when S Ltd’s retained
earnings amounted to R4 000 and T Ltd’s R2 500. At the date of this acquisition it was consid-
ered that T Ltd’s land was understated by R500. Ignore deferred tax.
Non-controlling interests are initially recognised at their share of the identifiable net assets.
The following are the trial balances of H Ltd, S Ltd and T Ltd at 31 December 20-9:
H Ltd S Ltd T Ltd
R R R
CREDITS
Share capital 100 000 20 000 10 000
Retained earnings 12 000 10 000 4 000
Profit 8 200 6 750 3 000
120 200 36 750 17 000
DEBITS
Investment in S Ltd, at cost 15 165
Investment in T Ltd, at cost 8 900
Other assets 102 035 25 850 16 000
Dividends – 30 December 20-9 3 000 2 000 1 000
120 200 36 750 17 000
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the H Ltd group for the year ended 31 December 20-9 and
consolidated statement of financial position at 31 December 20-9.
Solution
Workings:
H
60% (20-6)
75% (20-2)
T
In this example S Ltd acquired its shares in T Ltd prior to H Ltd acquiring its interest in S Ltd.
S Ltd was therefore already a group when it became a subsidiary of H Ltd. The increase in
reserves of T Ltd from 20-2 to 20-6 are therefore since acquisition for S Ltd’s purposes but pre-
acquisition from H Ltd’s point of view. This needs to be reflected in the respective analysis of
equity worksheets. T Ltd’s analysis therefore needs to be analysed for the period 20-2 to 20-6.
This is why the reserves of T Ltd are given at the date H Ltd acquires S Ltd.
continued
268
Chapter 18
Solution (continued)
Worksheet – T Ltd
Equity of Subsidiary Analysis of Equity
Inv in Since
Details Other Total NCI
S Cap RE S Ltd (G/W) RE FV
Assets 25%
75% Res.
At acquisition 10 000 1 800 11 800 2 950 8 900 (50)
(1)
RE till H Ltd acquired S Ltd 700 700 175 525
(1)
FV of land 500 500 125 375
RE since H Ltd Acquired S Ltd
to beg of year 1 500 1 500 375 1 125
10 000 4 000 500 14 500 3 625 8 900 (50) 1 650 375
20-9 Profit 3 000 3 000 750 2 250
Dividend (1 000) (1 000) (250) (750)
10 000 6 000 500 16 500 4 125 8 900 (50) 3 150 375
(1)
These reserves accrued in the period 20-2 to 20-6 and are since acquisition for the S Ltd Group but
pre-acquisition for the H Ltd Group and make up part of the at acquisition equity in the analysis work-
sheet of S Ltd below.
20-6
(1) (2)
At acquisition 20 000 4 000 525 375 (50) 24 850 9 940 15 165 (255)
Since acquisition
RE – S Ltd 6 000
– S Ltd in T Ltd 1 125 7 125 2 850 4 275
20-8
31/12 20 000 10 000 1 650 375 (50) 31 975 12 790 15 165 (255) 4 275
20-9 Profit
– S Ltd 6 000
– S Ltd in T Ltd 2 250 8 250 3 300 4 950
Div. – T Ltd 750 (750)
Div. – S Ltd (2 000) (2 000) (800) (1 200)
20 000 14 750 3 150 375 (50) 38 225 15 290 15 165 (255) 8 025
(1)
The goodwill attributable to S Ltd’s interest in T Ltd is eliminated at acquisition because H Ltd is acquir-
ing the S Ltd Group and goodwill is not an identifiable asset and is therefore, in terms of IFRS 3, not
recognised.
(2)
This goodwill is in respect of H Ltd’s acquisition of the S Ltd Group i.e. it is the goodwill on acquisition
of both S Ltd and T Ltd.
continued
269
Notes on Group Financial Statements
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOMEFOR THE YEAR ENDED 31 DECEMBER 20-9
R
Profit and total comprehensive income for the year
(8.2 (H Ltd) – 1.2 (Div) + 6.75 (S Ltd) – 0.75 (Div) + 3 (T Ltd) 16 000
Attributable to:
Parent shareholders 11 950
Non-controlling interests (3.3 + 0.75) 4 050
16 000
(1)
12 + 4.275
(2)
3.625 + 12.79
(3)
0.25 + 0.8
continued
270
Chapter 18
Solution (continued)
Example 18:3
H Ltd acquired 20% of the equity share capital of T Ltd in 20-6 when the latter company’s re-
tained earnings amounted to R1 000. The 20% interest did not give H Ltd significant influence.
It also acquired 60% of the equity shares in S Ltd during 20-7 when that company’s retained
earnings was R2 000.
During 20-8, when T Ltd’s retained earnings amounted to R1 500, S Ltd purchased 40% of
T Ltd’s equity share capital. The fair value of a 20% interest in T Ltd was R2 500. The non-
controlling interests are measured at their share of the identifiable net assets.
continued
271
Notes on Group Financial Statements
The following are the trial balances of H Ltd, S Ltd and T Ltd at 31 December 20-9:
H Ltd S Ltd T Ltd
R’000 R’000 R’000
CREDITS
Share capital 10 000 5 000 10 000
Retained earnings 5 000 4 000 2 000
15 000 9 000 12 000
DEBITS
Investment in T Ltd, at cost 2 400 5 600
Investment in S Ltd, at cost 6 000
Other assets 6 600 3 400 12 000
15 000 9 000 12 000
Required:
Prepare the consolidated statement of financial position of the H Ltd Group at 31 December
20-9.
Solution
Workings:
H
S T
40% (20-8)
The process for consolidating the indirect holding of H Ltd in T Ltd (i.e. H Ltd’s indirect holding
in T Ltd through S Ltd’s 40% interest) is the same as discussed in the previous vertical ex-
amples.
H Ltd’s direct 20% interest in T Ltd is consolidated directly into H Ltd as has been done in ear-
lier chapters of this text. This means that the right hand side of the worksheet of T Ltd will now
be analysed into 3 parts, that is:
ƒ S Ltd’s 40% interest
ƒ H Ltd’s 20% interest, and
ƒ the non-controlling shareholders interest.
The analysis of T Ltd will start with the earliest acquisition which, in this example, is H Ltd’s
acquisition.
The H Ltd consolidated reserves will now be made up of:
ƒ H Ltd’s own reserves
ƒ H Ltd’s direct interest in T Ltd’s since acquisition reserves, and
ƒ H Ltd’s interest in S Ltd’s consolidated since acquisition reserves.
continued
272
Chapter 18
Solution (continued)
Worksheet – T Ltd
H LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20-9
R
ASSETS (other) 22 000
Goodwill (200 + 1 000 (T Ltd) + 1 800 (S Ltd)) 3 000
Total assets (net) 25 000
EQUITY
Capital and reserves 10 000
Issued capital 16 520
Retained earnings (5 000 (H Ltd) + 100 (T Ltd) + 1 320 (S Ltd) + 100 (FV adj)) 6 520
Attributable to parent shareholders
Non-controlling interests (4 800 T Ltd) + 3 680 (S Ltd)) 8 480
Total equity 25 000
continued
273
Notes on Group Financial Statements
Solution (continued)
The next two examples are more comprehensive examples illustrating vertical groups.
Example 18:4
Angus Limited was incorporated in 20-3. Seyton Limited took up an offer for 25% of Angus’
shares at that date for R125 000. This holding resulted in the exercise of significant influence
over Angus Ltd.
On 1 January 20-6 Hecate Limited purchased 80% of Seyton’s share capital for R1 600 000. At
that date Seyton's retained earnings totalled R400 000 and Angus' retained earnings also to-
talled R400 000. They had no other reserves and all identifiable net assets were considered
fairly valued.
On 1 January 20-8 Hecate sold 25% of its holding in Seyton for R565 000 to a third party. The
profit/loss on sale is included in Hecate's profit before taxation (see below).
On 2 January 20-8 Hecate Limited purchased 50% of the shares in Angus from MacBeth Lim-
ited for R850 000. All Angus' identifiable net assets were considered fairly valued. At that date
Seyton Ltd’s investment in Angus Ltd had a fair value of R410 000.
Non-controlling interests are measured at their share of the identifiable net assets on initial
recognition.
continued
274
Chapter 18
The following are the trial balances of the three companies at 31 December 20-8.
Hecate Seyton Angus
Ltd Ltd Ltd
R’000 R’000 R’000
Share Capital 2 000 1 000 500
Retained earnings 300 700 1 000
Profit for the year before tax 556 300 200
2 856 2 000 1 700
Other non-current assets 1 600 1 500
Investment in Seyton 1 200
Investment in Angus 850 125
Current assets 506 65 60
Taxation 200 150 100
Dividends Paid 100 60 40
2 856 2 000 1 700
Required:
1. Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income
and Statement of Changes in Equity of Hecate Limited for the year ended 31 December
20-8. Comparative figures and notes are NOT required.
2. Prepare the Consolidated Statement of Financial Position of Hecate Limited at 31 Decem-
ber 20-8.
Solution
Attributable to:
Hecate Ltd members 305
Non-controlling interests 105 (2)
410
continued
275
Notes on Group Financial Statements
Solution (continued)
R’000
ASSETS
Non-current assets 3 635
Other non-current assets 3 100
Goodwill 535(7)
Current assets 631
Total assets 4 266
EQUITY
Share Capital 2 000
Retained earnings 940
Hecate Limited members’ interests 2 940
Non-controlling interests 1 326
Total equity 4 266
(1)
556(H) – 56(Divs rec) + 300(S) – 10(Divs rec) + 200(A) – (565 – 400) (Profit on sale) = 825
(2)
80 + 25 = 105
(3)
300(H) + 360(S) = 660
(4)
165(Profit H) – 90(RE ‘sold’) = 75
OR
565(Proceeds) – 390(Assets ‘sold’) – 100(GW ‘sold’) = 75
Note that this profit made by the Hecate shareholders on the disposal of Seyton is not included in
profit but rather as an adjustment to equity. This is because Hecate has not lost control and this rep-
resents a transaction with owners.
(5)
556 + 30 + 354 = 940
(6)
836 + 490 = 1 326
(7)
400 + 35 + 100 = 535
continued
276
Chapter 18
Solution (continued)
Workings:
continued
277
Notes on Group Financial Statements
Solution (continued)
Example 18:5
On 1 January 20-6 A Ltd purchased 60% of the equity of B Ltd. B Ltd had acquired 80% of the
shares in C Ltd on 1 October 20-3 at a cost of R55 000 when the latter's retained earnings
were R4 000. On 30 June 20-6 B Ltd sold 25% of its holding in C Ltd for R20 000.
The summarised trial balances of the companies at 30 September 20-6 were as follows:
continued
278
Chapter 18
The identifiable assets of B Ltd and C Ltd were fairly valued at the date of acquisition with the
exception of land owned by B Ltd. B Ltd's land was considered by A Ltd to be worth R15 000
more than carrying value. The fair value of goodwill attributable to C Ltd on 1 January 20-6 was
the same as on 1 October 20-3. Ignore Capital Gains Tax.
C Ltd’s other profit after tax includes a profit of R10 000 on the sale of land on 31 August 20-6.
The operating profits of A Ltd and B Ltd were earned evenly throughout the year. However,
C Ltd's operating profits were twice as great in the second six months compared with the first
six months’ period.
A Ltd recognises non-controlling shareholders’ interests in a business combination at their
share of the identifiable net assets.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the A Ltd Group for the year
ended 30 September 20-6. No notes are required.
Solution
A LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20-6
R
Profit before taxation XX
Taxation XX
Profit and total comprehensive income for the year 78 300 (1)
Attributable to:
A Ltd members 54 760
Non-controlling interests 23 540 (2)
78 300
continued
279
Notes on Group Financial Statements
Solution (continued)
continued
280
Chapter 18
Solution (continued)
LIABILITIES
Non-current liabilities 20 000
Debentures 30 950
Current liabilities 521 870
(1)
210 000 + 120 000 + 55 000 + 15 000 (Land) = 400 000
(2)
120 000 + 40 000 – 8 000 – 12 000 + 15 390 (B) = 155 390
(3)
39 350 (C) + 76 180 (B) = 115 530
Workings:
Worksheet – C Ltd
EQUITY OF
ANALYSIS OF EQUITY
C LTD
DATE DETAILS TOTAL SINCE
Share Retained NCI Invest-
(G/will) Retained
Capital Earnings (20%) ment
Earnings
20-3 Purchased 80% 50 000 4 000 54 000 10 800 55 000 (11 800)
20-5
30 Sept Retained earnings 16 000 16 000 3 200 12 800
50 000 20 000 70 000 14 000 55 000 (11 800) 12 800
31 Dec Profit (1) (Oct to Dec – 3/12) 3 500 (2) 3 500 700 2 800
50 000 23 500 73 500 14 700 55 000 (11 800) 15 600
20-6
30 June Profit (Jan to June – 6/12) 10 500 (2) 10 500 2 100 8 400
Dividend (31 Mar) (4 000) (4 000) (800) (3 200)
50 000 30 000 80 000 16 000 55 000 (11 800) 20 800
30 June Sold 20% 18 950 (3) (13 750) (5 200)
(40%)
30 Sep Profit (July to Sept – 3/12) 17 000 (2) 17 000 6 800 10 200
Dividend (6 000) (6 000) (2 400) (3 600)
50 000 41 000 91 000 39 350 (5) 41 250 (11 800) 22 200 (4)
continued
281
Notes on Group Financial Statements
Solution (continued)
(1)
Stop and analyse equity up to this point as A acquires B on this date (i.e. C becomes a sub of A at
this date).
(2)
A acquires B on 1 Jan 20.6. Hence C becomes a sub of A only on this date too.
C
21 000 (31 000 – 10 000 (Sale of land))
1st ½ 2nd ½
7 000 14 000
Worksheet – B Ltd
EQUITY OF B LTD
ANALYSIS OF EQUITY
C LIMITED
DATE DETAILS Share TOTAL
RE Land SINCE Invest- G/W on Since
Capital (G/W) NCI
RE ment Acq RE
20-5
30 Sep. Balance 80 000 60 000
31Dec. Profit
(30.8 – 6.8)
3
× /12 6 000
20-6
(2)
1 Jan. Purchased 80 000 66 000 15 000 (11 800) 15 600 164 800 65 920 110 000 (11 120)
60%
(1)
Profit 18 000 18 600 36 600 14 640 21 960
9
(24 × /12)
Profit on sale 6 250 (5 200) 1 050 420 630
of shares
Dividends
– interim (5 000) (5 000) (2 000) (3 000)
– final (7 000) (7 000) (2 800) (4 200)
80 000 78 250 15 000 (11 800) 29 000 190 450 76 180 110 000 (11 120) 15 390
(1)
8 400 + 10 200
(2)
Note that the goodwill of 11 120 is attributable to both B and C. The goodwill of R11 120 is allocated
to the two entities as follows:
C Ltd (11 800 × 60%) 7 080 (Fair value on 1/1/.6 same as on 1/10/.3)
B Ltd – (balancing amount) 4 040
11 120
The question states that the value of goodwill has not changed since 1 October 20.3 (when B ac-
quired C). The goodwill at that stage was R11 800 but that was in respect of B’s direct investment in
C. The goodwill of R11 120 is attributable to A’s direct investment in B and indirect investment in C
therefore the amount of goodwill attributable to C is R7 080, being 60% of the value for a direct hold-
ing.
continued
282
Chapter 18
Solution (continued)
On the partial disposal of C Ltd the goodwill for which ownership is lost is allocated from the parent to
the non-controlling shareholders. The goodwill allocated to the non-controlling interests is R1 770
(7 080 × 20/80). This can be recognised in the analyses of equity worksheets as follows:
Allocated in analysis of C Ltd 2 950
Allocated in analysis of B Ltd (1 180)*
1 770
* The non-controlling interests are allocated 40% of the profit on disposal of shares (1 050 × 40% =
420). This profit has been reduced by the goodwill portion of the cost of shares sold which in turn
results in the non-controlling interests being reduced by 40% thereof, i.e. 2 950 × 40% = 1 180.
283
19 SHARE ISSUES AND SHARE BUY-BACKS
BY SUBSIDIARIES
1. INTRODUCTION
Up to this stage the assumption has been made that the investee’s (i.e. associate’s or subsid-
iary’s) share capital was all issued at the time of its original incorporation and that no change in
the issued share capital of the investee has taken place.
This chapter examines the situation where an investee issues additional new shares to its exist-
ing and/or new shareholders. The manner in which this change of shareholding is accounted for
and the effect on the investor’s and the non-controlling shareholders’ interests is examined and
the appropriate consolidation procedures outlined. An issue of shares may be in proportion to
existing holdings and will therefore give rise to no change in the previously held interests. The
proportion of shares taken up by the parent may be less than their existing percentage holding.
After such an issue the parent may have lost control or may still have control. Conversely the
reporting entity may take up proportionately more of the issue such that their percentage holding
increases because of the issue. Such an issue may result in the issuing company becoming a
subsidiary or the issuing company may already have been a subsidiary. These circumstances
surrounding the issue will be important in determining how the issue of shares will be accounted
for in the consolidated financial statements of the parent.
Some of the principles dealt with earlier relating to the piecemeal acquisition and sale of shares in
a subsidiary are also relevant in the case of new shares being issued by a subsidiary and some
revision of these principles at this stage will be useful before examining the situation where the
subsidiary issues new shares.
It will have become clear by now that it is most important that the two groups of shareholders (the
parent company and the non-controlling interests) must always be allocated their full share of the
subsidiary’s equity. As one moves through the various stages of the consolidation, from the
original date of acquisition through the post-acquisition stages, the equity of the subsidiary is
continuously ‘updated’ and these two groups allocated their share of such changes to the equity.
The issue of shares is accounted for, with the appropriate adjustments to their interests being
made. Once this has been done, the usual consolidation procedures continue for the remaining
period, using the new percentage holdings of the shareholder groups.
This chapter also deals with the manner in which a share buy-back by a subsidiary is accounted
for in the consolidated financial statement of the parent company. Such a share buy-back will
usually also cause the percentage holdings of the parent company and the non-controlling
interests in the subsidiary to change.
285
Notes on Group Financial Statements
The following diagram illustrates the various ways in which these changes can occur:
% NCI H % NCI H
before: 100 40 60 before: 100 10 90
change: (20) 20 change: 30 (30)
after: 100 20 80 after: 100 40 60
Share Issue see Share Purchase Share Sale see Share Issue see
e.g. 19:3 and 19.6 see Chapter 15 Chapter 16 e.g. 19:2, 19:4 and 19.7
No. NCI H H%
before: 1 000 400 600 60%
issue: 2 000 200 1 800 20%
after: 3 000 600 2 400 80%
No. NCI H H%
before: 1 000 100 900 90%
issue: 2 000 1 100 900 (30%)
after: 3 000 1 200 1 800 60%
286
Chapter 19
(c) Determine the gain or loss in net assets arising from the issue and adjust the parent and
non-controlling interests accordingly. This will be illustrated in the examples.
(d) Determine how to account for the gain or loss determined in (c) above. This will depend on
what the substance of the issue is and will be examined in more detail in the examples.
(e) Determine whether a transfer out of the existing parent’s share of the since reserves of the
subsidiary is necessary. This too will be explained in the examples.
(f) Proceed as normal after the share issue, allocating the equity in terms of the new percent-
age holdings.
The following examples will illustrate this process:
Example 19:1
Share issue taken up by parent and non-controlling interests in proportion to existing holdings.
The following are the trial balances of the companies in the H Ltd group at 31 December 20-9:
H Ltd S Ltd
R R
Share capital 20 000 20 000
Retained earnings at 1 January 20-9 18 000 16 000
Profit for the year 12 000 8 000
50 000 44 000
Shares in S Ltd, at cost 19 600 –
Other assets 30 400 44 000
50 000 44 000
Notes:
1. H Ltd acquired a 70% interest in S Ltd for R12 600 on 1 January 20-5 when the equity of
S Ltd was:
Share capital (10 000 shares) 10 000
Retained earnings 6 000
16 000
The non-controlling interests are measured at their share of the identifiable net assets.
2. On 1 July 20-9 S Ltd increased its share capital by means of a rights issue of one share for
every two shares held at a price of R2.00 each. All shareholders took up their rights (i.e.
3 500 H Ltd and 1 500 non-controlling).
3. S Ltd’s profit was earned evenly throughout the year.
4. At all relevant dates S Ltd’s ‘other assets’ were considered to be fairly valued.
Required:
Prepare the summarised consolidated statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial position of H Ltd for the 20-9
financial year.
287
Notes on Group Financial Statements
Solution
Workings:
Worksheet – S Ltd
Since
Date Details S Cap RE Total NCI Inv (G/W)
RE
1.1.-5 Acq 10 000 6 000 16 000 4 800 12 600 (1 400)
31.12.-8 RE 10 000 10 000 3 000 7 000
30.6.-9 Profit 4 000 4 000 1 200 2 800
10 000 20 000 30 000 9 000 12 600 (1 400) 9 800
1.7.-9 Issue 10 000 10 000 3 000 7 000
31.12.-9 Profit 4 000 4 000 1 200 2 800
20 000 24 000 44 000 13 200 19 600 (1 400) 12 600
As the shares have been issued in proportion to the existing holdings there is no gain or loss
attributable to either the parent or non-controlling shareholders. There are no particular prob-
lems that arise because of the issue and the consolidation process is straightforward.
Transfer to reserve
Some authorities argue that there should be a transfer to a separate reserve as the initial
shareholding has ‘exchanged’ its share of post-acquisition reserves for share capital and there-
fore should no longer be reflected in retained earnings that are available for distribution.
7
The initial 7 000 shares acquired by H Ltd now represents a 46%( /15) holding in S Ltd. They
therefore share 46% of post-acquisition reserves of R14 000 and 46% of the share capital
of R20 000.
Total post-acquisition reserves prior to issue 14 000
Initial shareholding now × 46 %
6 533
Amount since per analysis 9 800
Transfer to reserve 3 267
It is submitted that this is not appropriate as the parent company sees its investment as 70%
2 7 1 3.5
before and after and not as two separate holdings of 46 /3%( /15) and 23 /3%( /15). The
acquisition of additional shares is seen as protecting the original investment i.e. the business
realities of the transaction do not conform with the legalities and therefore the R9 800 is still
distributable. In addition, if all R14 000 post-retained earnings were declared as a dividend,
H Ltd would receive R9 800 which is the same amount reflected in the since retained earnings
attributable to H Ltd.
It is therefore submitted that no transfer to reserves is necessary.
H LTD GROUP
SUMMARISED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20-9
R
Profit and total comprehensive income for the year (12 + 8) 20 000
Attributable to:
H Ltd shareholders 17 600
Non-controlling shareholders (1.2 + 1.2) 2 400
20 000
continued
288
Chapter 19
Solution (continued)
(1)
18 + 7
289
Notes on Group Financial Statements
Example 19:2
Notes:
1. H Ltd acquired a 55% interest in S Ltd for R9 900 on 1 January 20-5 when the equity of
S Ltd was:
Share capital (10 000 shares) 10 000
Retained earnings 6 000
16 000
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd group for the 04 finan-
cial year.
290
Chapter 19
Solution
Workings:
Worksheet – S Ltd
NCI Since
Date Details S Cap RE Total Inv (GW)
45%/60% RE
1.1.-5 Acquisition 10 000 6 000 16 000 7 200 9 900 (1 100)
31.12.-8 RE 10 000 10 000 4 500 5 500
30.6.-9 Profit (6/12) 4 000 4 000 1 800 2 200
10 000 20 000 30 000 13 500 9 900 (1 100) 7 700
1.7.-9 Issue 10 000 10 000 9 000 1 000
20 000 20 000 40 000 22 500 10 900 (1 100) 7 700
Loss on var 1 500 (1) (1 500) (2)
Fair value adj 500 (4)
31.12.-9 Profit (6/12) 4 000 4 000 1 600
20 000 24 000 44 000 N/A 10 900 (1 100) 8 300
(1)
In the above example the shares have been issued in a disproportionate number to the existing
shareholders. There is a resulting gain or loss for H Ltd and other shareholders. This is often referred
to as a gain or loss on variation of interest. This gain or loss can be most easily calculated as follows:
Other shareholders’ share of assets after issue (40 000 × 60%) 24 000
Balance per analysis 22 500
Gain for other shareholders/loss for H Ltd 1 500
(2)
The issue of shares has resulted in H Ltd losing control over S Ltd with the result that S Ltd is now an
associate. As the issue has resulted in H Ltd losing a portion of interest in S Ltd we would therefore
see this as a disinvestment or disposal in S Ltd. The R1 500 will therefore represent the loss on dis-
posal of S Ltd and will be included in H Ltd’s profit or loss for the period. (Note – not in H Ltd’s sep-
arate financial statements.)
(3)
Another question that arises is whether to reduce the investment by the amount of the underlying
goodwill in S Ltd that H Ltd has lost as a result of this transaction. This is less clear as the goodwill of
R1 100 could have included an amount for ‘cost of control’. As control has been lost there would be
an argument to reduce the investment by the full amount of cost of control. For the rest of the goodwill
there is an argument to write the investment down by the proportionate loss (i.e. 15/55).
It is considered that the above argument is largely irrelevant as the investment is now initially recog-
nised as an associate at fair value so whatever amount was written off to profit on the reduction of
goodwill will result in an equal but opposite adjustment in restating the investment to fair value. In
such a situation no adjustment will therefore be made for goodwill.
(4)
The carrying amount of the associate after the issue is R17 100 (10 900 + 7 700 – 1 500). The fair
value of the associate is R17 600 therefore there is a further gain of R500 (17 600 – 17 100).
(5)
H Ltd has incurred a loss on variation of R1 500. This is because the shares were issued at R2 which
is below their net asset value on 30 June 20-9 of R3 and H Ltd took up less than its existing holding.
Had the issue price of the shares been above R3 per share then H Ltd would have had a gain on var-
iation. This gain would also have been included in profit for the year.
(6)
Although the loss on variation R1 500) and fair value gain (R500) have been calculated separately in
this example it is actually not necessary to do so. This is because the associate is initially measured
at fair value. The overall loss of R1 000 could simply have been calculated as follows:
Carrying amount (10 900 + 7 700) 18 600
Fair value 17 600
Loss (1 000)
This will not be the case when the issue of shares does not result in the parent losing control.
continued
291
Notes on Group Financial Statements
Solution (continued)
H LTD GROUP
SUMMARISED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COM-
PREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20-9
R
Operating profit (15 + (10 × 6/12)) 20 000
Loss on variation of interest on loss on control over subsidiary (1 500)
Fair value adjustment on initial recognition of associate (17.6 – 10.9 – 7.7 + 1.5) 500
Share of profit of associate 1 600
Profit before tax 20 600
Taxation (3 + (2 × 6/12)) (4 000)
Profit and total comprehensive income for the year 16 600
Attributable to:
H Ltd shareholders 14 800
Non-controlling interests 1 800
16 600
(1)
18 + 5.5
continued
292
Chapter 19
Solution (continued)
Example 19:3
Notes:
1. H Ltd acquired a 45% interest in S Ltd for R8 100 on 1 January 20-5 when the equity of
S Ltd was:
Share capital (10 000 shares) 10 000
Retained earnings 6 000
16 000
293
Notes on Group Financial Statements
5. Non-controlling interests are initially measured at their share of the identifiable net assets.
6. The fair value of H Ltd’s original investment (45%) in S Ltd on 1 July 20-9 was R15 000.
Required:
Prepare the summarised consolidated statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial position of H Ltd for the 20-9
financial year.
Solution
Workings:
Worksheet – S Ltd
Since
Date Details S Cap RE Total NCI Inv (GW)
RE
1.1.-5 Acquisition 10 000 6 000 16 000 8 800 8 100 (900)
31.12.-8 RE 10 000 10 000 5 500 4 500
30.6.-9 Profit (6/12) 4 000 4 000 2 200 1 800
10 000 20 000 30 000 16 500 8 100 (900) 6 300
1.7.-9 After issue 30 000 20 000 50 000 20 000 26 100 (3 000) 6 900 (2)
31.12.-9 Profit (6/12) 4 000 4 000 1 600 2 400
30 000 24 000 54 000 21 600 26 100 (3 000) 9 300
(1)
As in the previous example, the shares have been issued in a disproportionate number to the existing
shareholders and as a result, H Ltd now has a 60% interest (4 500 + 4 500/15 000) in S Ltd. This is
therefore a business combination as H Ltd has obtained control. The identifiable net assets would
have to be adjusted to IFRS 3 values (already at fair value in this example). The existing holding is
also measured at fair value (see (2) below). S Ltd will be equity accounted until 1 July 20-9 after which
it will be consolidated.
(2)
Adjustment of exising holding to fair value 15 000 – (8 100 + 6 300) = 600 + 6 300 (since RE) = 6 900
(3)
In this example the non-controlling interests are not initially measured at fair value and the goodwill
(of R3 000) is only attributable to H Ltd. If the non-controlling interests were measured at fair value
then the goodwill would be for S Ltd as a whole, both parent and non-controlling interests.
(4)
Goodwill arose on the issue of shares because the shares were issued at price (R4) in excess of the
net asset value per share (R3). If the shares had been issued at less than R3 per share, a bargain
purchase may have arisen which would have been included in H Ltd’s consolidated profit for the year.
The goodwill or bargain purchase will result from a combination of the issue price as well as the fair
value of the existing investment (and NCI if at fair value).
continued
294
Chapter 19
Solution (continued)
H LTD GROUP
SUMMARISED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20-9
R
Operating profit (15 + (10 × 6/12)) 20 000
Profit/loss on remeasurement of associate becoming subsidiary
(15 000 – 8 100 – 6 300) 600
Share of profit of associate 1 800
Profit before tax 22 400
Taxation (3 + (2 × 6/12)) (4 000)
Profit and total comprehensive income for the year 18 400
Attributable to:
H Ltd shareholders 16 800
Non-controlling interests 1 600
18 400
(1)
18 + 4.5
continued
295
Notes on Group Financial Statements
Solution (continued)
Example 19:4
Notes:
1. H Ltd acquired a 70% interest in S Ltd for R12 600 on 1 January 20-5 when the equity of
S Ltd was:
Share capital (10 000 shares) 10 000
Retained earnings 6 000
16 000
The identifiable net assets of S Ltd were fairly valued on this date.
2. On 1 July 20-9 S Ltd increased its share capital by means of a rights issue of one share for
every two shares held at a price of R2.00 each. H Ltd took up 2 000 shares and the bal-
ance (3 000) was taken up by the non-controlling interests.
continued
296
Chapter 19
Solution
Workings:
Worksheet – S Ltd
Since
Date Details S Cap RE Total NCI Inv (GW)
RE Res
1.1.-5 Acquisition 10 000 6 000 16 000 4 800 12 600 (1 400)
31.12.-8 RE 10 000 10 000 3 000 7 000
6
30.6.-9 Profit ( /12) 4 000 4 000 1 200 2 800
10 000 20 000 30 000 9 000 12 600 (1 400) 9 800
1.7.-9 Issue 10 000 10 000 6 000 4 000
20 000 20 000 40 000 15 000 16 600 (1 400) 9 800
(1) (2)
Loss on variation 1 000 (1 000)
(3) (3)
G/W reallocation 200 (200)
(4)
Transfer (200) 200
6
31.12.-9 Profit ( /12) 4 000 4 000 1 600 2 400
20 000 24 000 44 000 17 800 16 600 (1 400) 10 800 200
(1)
The loss on variation is calculated as follows:
40 000 × 40% = 16 000 – 15 000 = 1 000
(2)
As this R1 000 loss (parent)/gain (NCI) results from a transaction between owners where control has
not been lost, it is accounted for as an equity transaction, i.e. in the statement of changes in equity.
(3)
The non-controlling interests were in initially measured at their share of the identifiable net assets.
The goodwill was therefore only attributable to the parent shareholders. This transaction has resulted
in the parent’s interest in the subsidiary dropping from 70% to 60%. There is therefore an argument
that a portion (10/70 × 1 400 = 200) of goodwill should be reallocated from the parent to the non-
controlling interests.
There is no certainty that a reallocation of goodwill is necessary. The fact is, however, that the par-
ent’s share of the subsidiary has dropped from 70% to 60% which results in a reduction of the par-
ents’ ownership interests. It is therefore argued that a reallocation of goodwill to reflect this reduction
is appropriate. The reallocation will be included as part of the adjustment to equity in the statement of
changes in equity.
(4)
A potential transfer out of since acquisition reserves is another problem that must be dealt with where
the parent’s holding is reduced as in this case where H Ltd’s interest has dropped from 70% to 60%.
The parents share in reserves was previously 70% but after the issue it is only 60%. This does not
give rise to any additional loss to that calculated in note 2 and 3 but necessitates a transfer to a sep-
arate reserve. This is because some or all of the reduced percentage of reserves is replaced with a
share of share capital arising on the issue.
To the extent that post-acquisition reserves are replaced with share capital, this requires a transfer to
a separate reserve. This is because a share of the subsidiary’s share capital is not available for dis-
tribution.
continued
297
Notes on Group Financial Statements
Solution (continued)
The transfer is reduced by the loss on variation and goodwill reallocation. This is because the loss
and reallocation reduce (eliminate) retained earnings and therefore retained earnings that no longer
exists do not need to be transferred! Only R200 of H Ltd’s share of since retained earnings is there-
fore replaced with a share of share capital.
The following confirms that the total of since retained earnings column at the end of the year
(R10 800) is correct:
Total post-acquisition retained earnings (24 – 6) 18 000
Attributable to H Ltd (60%) 10 800
It needs to be pointed out that while there are conceptual arguments that the transfer is appropriate
this is not a transfer that is required by IFRS. The conceptual argument is that, by making the trans-
fer, the group reserves are kept at amounts that are consistent with the balances of the reserves in
the subsidiary. All examples in this text will, by default, make the appropriate transfer if applicable.
continued
298
Chapter 19
Solution (continued)
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20-9 (SUMMARY)
R
Profit for year (12 + 8) 20 000
(1)
18 + 7
(2)
4.8 + 3
(3)
6 + 1 + 0.2
299
Notes on Group Financial Statements
Example 19:5
Same as example 19:4 except that the non-controlling interests are initially recognised at fair
value which was R5 200 on 1 January 20-5.
Solution
Workings:
Worksheet – S Ltd
Since
Date Details S Cap RE Total NCI Inv (GW)
RE Res
(1)
1.1.-5 Acquisition 10 000 6 000 16 000 5 200 12 600 (1 800)
31.12.-8 RE 10 000 10 000 3 000 7 000
30.6.-9 Profit (6/12) 4 000 4 000 1 200 2 800
10 000 20 000 30 000 9 400 12 600 (1 800) 9 800
1.7.-9 Issue 10 000 10 000 6 000 4 000
20 000 20 000 40 000 15 400 16 600 (1 800) 9 800
Loss on varia- 1 000 (2) (1 000)
tion
G/W 200 (200) (3)
Transfer (200) 200
31.12.-9 Profit (6/12) 4 000 4 000 1 600 2 400
20 000 24 000 44 000 18 200 16 600 (1 800) 10 800 200
(1)
The goodwill has increased by R400, being the non-controlling interests’ share. R1 400 of the good-
will is attributable to the parent.
(2)
40 000 × 40% = 16 000 – (15 400 – 400) = 1 000
The non-controlling interests’ balance (R15 400) is adjusted to eliminate their goodwill (R400) so as
to establish the gain or loss relating to the identifiable net assets.
(3)
The amount of goodwill is not adjusted. The parent’s share of goodwill has, because of the issue,
dropped from 70% to 60% and the non-controlling interests’ share has increased by the same
amount. An adjustment of R200 (1 400 × 10/70) is necessary to reflect this change in ownership. This
adjustment is made in the statement of changes in equity as part of the overall adjustment due to the
issue of shares.
The statements are the same as example 19:4 except for the following:
Example 19:6
300
Chapter 19
Solution
Workings:
Worksheet – S Ltd
30%/25% Since
Date Details S Cap RE Total Inv (G/W)
NCI RE
20-9
30.6 Equity prior to issue 10 000 20 000 30 000 9 000 12 600 (1 400) 9 800
1.7 Issue 10 000 10 000 1 500 8 500
20 000 20 000 40 000 10 500 21 100 (1 400) 9 800
1.7 Gain on variation (500) 500(1)
31.12 Profit 4 000 4 000 1 000 3 000
20 000 24 000 44 000 11 000 21 100 (1 400) 13 300
(1)
The R500 is calculated as follows:
40 000 × 25% = 10 000 – 10 500 = (500)
H Ltd has now increased its percentage shareholding in S Ltd from 70% to 75%. The R500 gain on
variation is directly attributable to the additional 5% holding H Ltd has acquired. It is a gain because
the shares are issued at R2.00 which is below the net asset value per share (R3.00).
(2)
As with example 19:4, the R500 results from a transaction between owners where control has not
been lost. This amount is therefore accounted for in the statement of changes in equity.
(3)
There is no adjustment to ownership interests for goodwill as goodwill was all attributable to the par-
ent and they have increased their holding.
(4)
As H Ltd has increased its holding in S Ltd, no transfer out of retained earnings is required.
(5)
The fact that the shares are issued below net asset value may be an indicator that the existing good-
will of R1 400 and possibly other assets are impaired. This would be the case if the shares were
issued at fair value. They may, however, have been issued at below fair value.
(6)
If the shares had been issued at above net asset value (say R4.00) then a loss on variation would
have arisen in respect of H Ltd. This loss would have been accounted for in the same way as the gain
(i.e. included in the statement of changes in equity). The loss would actually represent unrecognised
adjustments to identifiable net assets and goodwill arising on the extra holding by S Ltd. They are,
however, not recognised as it is not a business combination because H Ltd already exercised control
over S Ltd.
(7)
If the non-controlling interests were initially measured at fair value then a further adjustment would be
appropriate recognising the amount of existing goodwill the non-controlling interests had lost and the
parent had gained. This adjustment would be similar to the adjustment made in 19:5, except it would
be in the other direction.
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20-9 (SUMMARY)
R
Profit and total comprehensive income for year (12 + 8) 20 000
continued
301
Notes on Group Financial Statements
Solution (continued)
(1)
1.5 – 0.5
Example 19:7
302
Chapter 19
Solution
Workings:
Worksheet – S Ltd
30%/40% SINCE
Date Details S Cap RE Total Inv (G/W)
NCI RE Res
20-9
30.6 Equity prior to
issue 10 000 20 000 30 000 9 000 12 600 (1 400) 9 800
1.7 Issue 30 000 30 000 18 000 12 000
40 000 20 000 60 000 27 000 24 600 (1 400) 9 800
1.7 Gain on variation (3 000) (1) 3 000 (2)
G/W 200 (3) (200) (3)
Transfer (4 200) (4) 4 200
31.12 Profit 4 000 4 000 1 600 2 400
40 000 24 000 64 000 25 800 24 600 (1 400) 10 800 4 200
(1)
The R3 000 is calculated as follows:
60 000 × 40% = 24 000 – 27 000 = (3 000)
(2)
As discussed in example 19:4, this gain on variation (together with any goodwill reallocated) is included
in the statement of changes in equity.
(3)
A reallocation of goodwill is made here. Refer to the discussion in example 19:4.
(4)
Is a transfer to reserves necessary?
Post-acquisition retained earnings lost (9 800 × 10/70) 1 400
Gain on variation 3 000
Goodwill reallocation (200)
4 200
The gain on variation increases the transfer to the reserve arising on the issue. This is because the
gain represents a share of the share capital of S Ltd. The gain is therefore included in the statement
of changes in equity but as it represents a claim on share capital it is transferred to a separate
reserve.
The goodwill reduces the reserves attributable to H Ltd and, therefore, accordingly reduces the trans-
fer.
Note that this transfer will not only apply to post-acquisition retained earnings but also to any other
post-acquisition reserve.
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20-9 (SUMMARY)
R
Profit and total comprehensive income for year (12 + 8) 20 000
continued
303
Notes on Group Financial Statements
Solution (continued)
(1)
18 – 3 + 0.2
Example 19:8
The following are the trial balances in the H Ltd Group at 31 December 20-9:
H Ltd S Ltd X Ltd
R R R
Share capital 20 000 40 000 5 000
Retained earnings at 1 January 20-9 18 000 16 000 10 000
Profit for the year 12 000 8 000 4 000
50 000 64 000 19 000
continued
304
Chapter 19
H Ltd and S Ltd acquired their respective holdings in S Ltd and X Ltd on 1 January 20-5. The
details of the purchase price and equities at that date were as follows:
S Ltd X Ltd
R R
Percentage holdings 70% 75%
Purchase price 12 740 6 750
Share capital 10 000 5 000
Retained earnings 6 000 4 000
Case A
On 1 July 19-9 S Ltd increased its share capital by means of an issue of 5 000 shares at a
price of R6.00 each. H Ltd subscribed for 2 000 shares and the others 3 000. S Ltd now has
15 000 shares in issue.
Case B
Same as A, except H Ltd took up 4 250 of the shares issued. Cost of investment now R38 240
and net assets R11 760.
Required:
For Cases A and B prepare the summarised consolidated statement of profit or loss and other
comprehensive income, statement of changes in equity and statement of financial position for
the 20-9 financial year. In both cases the non-controlling interests are not measured initially at
fair value.
Solution
Workings:
Case A
Worksheet – X Ltd
25% Since
Date Details S Cap RE Total Inv (G/W)
NCI RE
1.1.5 Acq 5 000 4 000 9 000 2 250 6 750 –
31.12.08 RE 6 000 6 000 1 500 4 500
30.6.9 Profit (6/12) 2 000 2 000 500 1 500
31.12.9 Profit (6/12) 2 000 2 000 500 1 500
5 000 14 000 19 000 4 750 6 750 – 7 500
continued
305
Notes on Group Financial Statements
Solution (continued)
Worksheet – S Ltd
G/W RE 30%/40% Since Since
Date Details S Cap RE Total Inv (G/W)
(X) (X) NCI RE Res
-5
1.1 Acq 10 000 6 000 – 16 000 4 800 12 740 (1 540)
-8
01.12 RE 10 000 4 500 14 500 4 350 10 150
-9
30.6 Profit (6/12) 4 000 1 500 5 500 1 650 3 850
Equity prior issue 10 000 20 000 – 6 000 36 000 10 800 12 740 (1 540) 14 000
1.7 Issue 30 000 30 000 18 000 12 000
40 000 20 000 – 6 000 66 000 28 800 24 740 (1 540) 14 000
1.7 Gain on var. (2 400) 2 400
G/W 220 (220)
31.12 Trf (4 180) 4 180
Profit (6/12) 4 000 1 500 5 500 2 200 3 300
40 000 24 000 – 7 500 71 500 28 820 24 750 (1 540) 15 300 4 180
(1)
For the same reasons as discussed before, the gain on variation of interest is included in the state-
ment of changes in equity. ((66 000 × 40%) – 28 800 = (2 400))
(2)
A goodwill reallocation of R220 (1 540 × 10/70) may be appropriate recognising the portion of goodwill
‘lost’.
(3)
Is any transfer to reserves necessary?
Post-acquisition retained earnings lost (14 000 × 10/70) 2 000
Gain on variation 2 400
Goodwill reallocation (220)
R4 180
H LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME (SUMMARY)
R
Profit and total comprehensive income (12 + 8 + 4) 24 000
continued
306
Chapter 19
Solution (continued)
(1)
18 + 10.15
(2)
2.25 + 1.5 + 4.8 + 4.35
(3)
18 – 2.4 + 0.22
Case B
Worksheet – S Ltd
G/W RE 30%/25% Since
Date Details S Cap RE Total Inv (G/W)
(X) (X) NCI RE
20-9
30.6 Equity prior issue 10 000 20 000 – 6 000 36 000 10 800 12 740 (1 540) 14 000
1.7 Issue 30 000 30 000 4 500 25 500
40 000 20 000 – 6 000 66 000 15 300 38 240 (1 540) 14 000
1.7 Loss on var. 1 200 (1 200) (1)
Profit 4 000 1 500 5 500 1 375 4 125
40 000 24 000 – 7 500 71 500 17 875 38 240 (1 540) 16 925
(1)
The loss on variation of interest is included in the statement of changes in equity.
(66 000 × 25% = 16 500 – 15 300 = 1 200)
continued
307
Notes on Group Financial Statements
Solution (continued)
Example 19:9
In 20-1 S Ltd bought 60% of the issued shares in T Ltd (9 000 shares of the issued 15 000) for
R11 000 when the balance on share capital of T Ltd was R15 000 and retained earnings
R2 000.
H Ltd bought 60% of the issued shares in S Ltd in 20-3 when the retained earnings account of
S Ltd was R10 000 and that of T Ltd R5 000.
On 1 July 20-9 T Ltd offered its shareholders 1 share for every 1 held at a price of R2 per
share. S Ltd bought 2 000 rights for R2 000 and H Ltd bought 1 200 rights for R1 200 from the
other shareholders of T Ltd. The issue was fully subscribed.
The non-controlling interests are not initially measured at fair value.
continued
308
Chapter 19
Example 19:9
Required:
Prepare H Ltd’s consolidated statement of profit or loss and other comprehensive income,
statement of changes in equity and statement of financial position for the 20-9 financial year.
Solution
Workings:
Worksheet – T Ltd
continued
309
Notes on Group Financial Statements
Solution (continued)
Worksheet – S Ltd
RE 40% Since
Date Details S Cap RE (GW) Total Inv
(T) NCI RE
20-3 Acq 30 000 10 000 1 800 (800) 41 000 16 400 24 200 400
31.12.20-8 RE 10 000 6 000 16 000 6 400 9 600
30.6.20-9 Profit 10 000 7 600 17 600 7 040 10 560
20-9 Issue – T Ltd (1 600) (1 600) (640) (960)
30 000 30 000 13 800 (800) 73 000 29 200 24 200 19 600
Note that even though a gain on variation arises for both H Ltd and S Ltd that because of the
purchase of rights there is actually a reduction in parent equity arising on the issue. In H Ltd’s
case R960 (1 200 – 240) and R1 600 (2 000 – 400) for S Ltd of which R960 is attributable to
H Ltd.
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME (SUMMARY)
R
Profit and total comprehensive income (10 + 10 + 12) 32 000
310
Chapter 19
Example 19:10
H Ltd acquired 6 000 of the issued 10 000 shares in S Ltd in 20-1 when S Ltd’s retained earn-
ings was R10 000 and its other reserves were R5 000. The non-controlling interests are meas-
ured at their share of the identifiable net assets.
On 30 December 20-4 S Ltd bought back 2 000 of its own shares from the non-controlling
shareholders for R7 per share. The buy-back is to be set off all reserves on a pro rata basis.
Required:
Prepare the summarised consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity of H Ltd for the year ended 31 December 20-4.
311
Notes on Group Financial Statements
Solution
Workings:
Worksheet – S Ltd
Other NCI Since Since
Details S Cap RE Total Inv
Res. 40%/25% RE Other Res.
Acquisition 10 000 5 000 10 000 25 000 10 000 15 000
Since – RE 11 000 11 000 4 400 6 600
– OR 10 000 10 000 4 000 6 000
Profit 9 000 9 000 3 600 5 400
10 000 15 000 30 000 55 000 22 000 15 000 12 000 6 000
(1) (2) (3)
Buy-back (2 000) (4 000) (8 000) (14 000) (14 000)
8 000 11 000 22 000 41 000 8 000 15 000 12 000 6 000
(4) (5)
Loss on buy-back 2 250 (2 250)
(6) (6)
Transfer 750 (750)
8 000 11 000 22 000 41 000 10 250 15 000 10 500 5 250
(1)
(14 000 – 2 000) × 15 000/45 000 = 4 000
(2)
(14 000 – 2 000) × 30 000/45 000 = 8 000
(3)
Buy-back all from non-controlling shareholders
(4)
41 000 × 25% = 10 250 – 8 000 = 2 250
(5)
As a result of the buy-back H Ltd’s interest in S Ltd has increased to 75%. H Ltd therefore still has
control of S Ltd. The loss (gain for non-controlling shareholders) therefore results from a transaction
between owners where control has not been lost and it is therefore accounted for as an equity trans-
action, i.e. in the statement of changes in equity
(6)
The subsidiary has reduced its equity by 20% (2/10). This is seen as a contraction of the entity. The
contraction obviously affects both at and post-acquisition reserves. The at acquisition reserves are
now seen at R4 000 (5 000 × 80%) for other reserves and R8 000 (10 000 × 80%) for retained earn-
ings.
Other reserves – since (11 000 – (5 000 × 80%)) × 75% = 5 250
Per analysis = 6 000
Transfer out of other reserves = 750
Retained earnings – since (22 000 – (10 000 × 80%) × 75%) = 10 500
Per analysis (12 000 – 2 250) = 9 750
Transfer into retained earnings 750
Therefore, a result of the buy-back there is a rearrangement whereby R750 is transferred out of other
reserves into retained earnings.
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20-4 (SUMMARY)
R
Profit and total comprehensive income for the year (8 + 9) 17 000
continued
312
Chapter 19
Solution (continued)
(1)
17 + 6.6
(2)
10 + 4.4 + 4
(3)
14 – 2.25
How would the answer to 19:10 change if the excess over share capital of the buy-back was
set off only against retained earnings?
Worksheet – S Ltd
SINCE
Other
S Cap RE Total NCI Inv Other
Res RE
Res
Balance – before buy-back 10 000 15 000 30 000 55 000 22 000 15 000 12 000 6 000
Buy-back (2 000) (12 000) (14 000) (14 000)
8 000 15 000 18 000 41 000 8 000 15 000 12 000 6 000
Loss on buy-back 2 250 (2 250)
(1) (2)
Transfer (2 250) 2 250
8 000 15 000 18 000 41 000 10 250 15 000 7 500 8 250
(1)
(18 000 – (10 000 × 8/10)) × 75% = 7 500 – 12 000 + 2 250 = 2 250
(2)
(15 000 – (5 000 × 8/10)) × 75% = 8 250 – 6 000 = 2 250
The statement of profit or loss and other comprehensive income would be the same. The
statement of changes in equity would also be the same except the transfer would be R2 250
out of retained earnings into other reserves.
313
Notes on Group Financial Statements
Example 19:11
H Ltd acquired 8 000 of the issued 10 000 shares in S Ltd for R16 000 when the only reserve
of S Ltd was retained earnings of R10 000. The non-controlling interests are measured at their
share of the identifiable net assets.
On 30 December 20-4 S Ltd bought 2 000 shares in itself from H Ltd at R6 per share. The buy-
back is set off all reserves on a pro rata basis.
Required:
Prepare the summarised consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity of the H Ltd group for the year ended 31 December
20-4.
Solution
Workings:
Worksheet – S Ltd
SINCE
Other
Details S Cap RE Total NCI Inv Other
Res. RE
Res.
Acquisition 10 000 – 10 000 20 000 4 000 16 000
Since – RE 11 000 11 000 2 200 8 800
– OR 10 000 10 000 2 000 8 000
Profit 9 000 9 000 1 800 7 200
10 000 10 000 30 000 50 000 10 000 16 000 16 000 8 000
(1) (2) (3) (4) (6) (5)
Buy-back (2 000) (2 500) (7 500) (12 000) – (4 000) (5 625) (2 375)
8 000 7 500 22 500 38 000 10 000 12 000 10 375 5 625
(7) (8)
Gain on buy-back (500) 500
(8)
8 000 7 500 22 500 38 000 9 500 12 000 10 875 5 625
(1)
(12 000 – 2 000) × 10 000/40 000 = 2 500
(2)
(12 000 – 2 000) × 30 000/40 000 = 7 500
(3)
Rnil, as none of the shares were bought back from the non-controlling shareholders.
(4)
16 000 × 2 000/8 000 = 4 000
continued
314
Chapter 19
Solution (continued)
(5)
Other reserves – since (7 500 – 0) × 75% = 5 625
Per analysis = 8 000
Transfer out of other reserves (to retained earnings) = 2 375
(6)
The retained earnings column is the balancing figure after all other columns have been calculated.
Note that this does not represent a loss as it is replaced by the profit made by H Ltd (separate AFS)
on the sale of S Ltd shares.
(7)
38 000 × 25% = 9 500 – 10 000 = (500)
(8)
See comments below
Notes:
1. H Ltd has a gain of R500 arising on the buy-back. As control of S Ltd has not been lost this
must be included in the consolidated statement of changes in equity.
It is important to note that if the buy-back had resulted in a loss of control by H Ltd over
S Ltd then any gain or loss on variation attributable to H Ltd would be included in profit or
loss. This principle was covered in the section of this chapter dealing with issue of shares
by a subsidiary.
2. The R2 375 other reserve realised will result in a transfer to retained earnings in the con-
solidated statement of changes in equity.
3. The since retained earnings figure can be justified as follows:
Retained earnings per subsidiary 22 500
Less: At acquisition (10 000 × 8/10) (8 000)
Since retained earnings 14 500
H Ltd’s share (75%) 10 875
4. H Ltd reports (in their separate financial statements) a profit on sale of S Ltd shares of
R8 000 (12 000 (proceeds) – 4 000 (cost))
This R8 000 can be reconciled to the group figures as follows:
Retained earnings of S Ltd lost (see analysis) 5 625
Other reserves transferred 2 375
8 000
The retained earnings lost (R5 625) are simply replaced with retained earnings of H Ltd
with no consolidation implication. The R2 375 share of other reserves are now realised in
the sale of shares/buy-back, so a transfer is necessary in the consolidated statement of
changes in equity.
The R8 000 profit must be reversed in calculating consolidated profit.
H LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20-4 (SUMMARY)
R
Profit and total comprehensive income for the year
(14 – 8 (profit on sale of shares) + 9) 15 000
continued
315
Notes on Group Financial Statements
Solution (continued)
(1)
10 + 8.8
(2)
4 + 2.2 + 2
How would the answer to 19:11 change if the excess over share capital of the buy-back was
set off only against retained earnings?
Worksheet – S Ltd
SINCE
Other
S Cap RE Total NCI Inv Other
Res RE
Res
Balance – before buy-back 10 000 10 000 30 000 50 000 10 000 16 000 16 000 8 000
(1) (3) (2)
Buy-back (2 000) (10 000) (12 000) (4 000) (7 500) (500)
8 000 10 000 20 000 38 000 10 000 12 000 8 500 7 500
Gain on buy-back (500) 500
8 000 10 000 20 000 38 000 9 500 12 000 9 000 7 500
(1)
16 000 × 2/8
(2)
(10 000 – 0) × 75% = 7 500 – 8 000 = (500)
(3)
Balancing figure
Can the ‘Since retained earnings’ figure be justified?
RE per subsidiary 20 000
Less: At acquisition (10 000 × 8/10) (8 000)
12 000
The statement of profit or loss and other comprehensive income would be the same. The
statement of changes in equity would also be the same, except the transfer would be R500 out
of other reserves into retained earnings.
316
20 FOREIGN OPERATIONS
2. FUNCTIONAL CURRENCY
The functional currency is the currency of the primary economic environment in which the entity
operates. This is generally the economy in which it primarily generates and expends cash. The
following factors are considered in determining the functional currency:
ƒ the currency
– in which sales prices for goods and services are denominated and settled
– of the country whose competitive forces and regulations mainly determine the sales price of
its goods and services.
ƒ the currency in which labour and other costs of providing goods and services are denominated
and settled.
Other factors that may provide evidence of the functional currency:
ƒ the currency in which funds from financing activities are generated
ƒ the currency in which receipts from operating activities are retained.
Lastly, but very relevant to this chapter, there are additional factors to be considered where the
entity is a subsidiary, branch, associate or joint venture of the reporting entity:
ƒ whether the activities of the entity are an extension of the reporting entity’s activities.
ƒ whether transactions with the reporting entities are a high or low proportion of the foreign
operations activities.
ƒ whether cash flows of the foreign operation directly affect the cash flows of the reporting entity.
ƒ whether cash flows of the foreign operation are sufficient to settle the debt obligations without
funds made available from the reporting entity.
Where indicators are not clear management uses its judgement to determine the functional cur-
rency that most faithfully represents the economic effects of the underlying transactions, events
and circumstances. Once chosen the functional currency is not changed unless there is a change
in the underlying transactions, events and circumstances.
3. APPROACH OF IAS 21
The approach adopted by this Standard is as follows:
ƒ Functional currency is determined by an entity in terms of the principles above.
ƒ The entity then measures its results and financial position in that currency.
ƒ Foreign currency amounts are amounts denominated in any currency other than the functional
currency and are translated into the functional currency in the manner that would have been
dealt with in detail in a course on foreign exchange transactions (spot rate at date of trans-
action, monetary items restated at spot rate, etc.)
317
Notes on Group Financial Statements
ƒ The presentation currency may be different to the functional currency. This involves the prin-
ciples relating to the translation of entities and is covered in detail in this chapter.
Where a parent or investor has a subsidiary, branch, associate or joint venture that operates in a
different country it is clear that the results and financial position of that entity will need to be
translated from the foreign currency into the functional currency of the reporting entity (in our case
the SA rand). From the above (see 2 above) it is clear that the functional currency of the subsid-
iary, branch, associate or joint venture will depend on the nature of the relationship between the
reporting entity and the foreign operation.
For example, where a South African company has a subsidiary that is incorporated in the USA
and that foreign operation operates primarily in North America, employs mainly Americans and is
financed by American banks then it is clear that the company is independent of the parent and
the functional currency of that company will be the US dollar. On the other hand, consider the
situation where a South African company incorporates a company in the UK in order to distribute
the products of the South African parent. The UK company purchases almost all of its products
from the SA parent, senior management are South African, it is financed by the SA parent and
excess cash flows are remitted to the parent. In this case the foreign operation is an extension of
the activities of the parent and therefore the UK company’s functional currency will be the SA
rand even though it operates in the UK.
In both of the above cases the two company’s financial statements will have to be translated into
the SA rand. However, the method of translation will, because of the difference in functional
currency, be different for each of the two companies.
318
Chapter 20
ƒ Components of equity are at historic rates (although equity as a whole is at the closing rate).
ƒ The gain or loss on translation is taken to other comprehensive income (foreign currency
translation reserve).
ƒ The foreign currency translation reserve is included in profit or loss on disposal of the foreign
operation.
As the foreign operation is independent of the reporting entity it is likely that the reporting entity is
more interested in the foreign operation as a whole than its individual assets or liabilities and
therefore the closing rate method better reflects the net investment as a whole. In addition, the
gain or loss on translation will have little direct effect on current or future cash flows (other than
on disposal of the foreign operation) and therefore the gain or loss is not included in profit or loss
but included in other comprehensive income. This method is illustrated in example 20:3
319
Notes on Group Financial Statements
Example 20:1
H Limited has an 80% interest in a foreign subsidiary S Limited where functional currency is
the FC. A loan of R10 000 was made to S Limited at the beginning of the year when the rate
was FC 10 : R1. The rate at balance sheet date is FC 12 : R1 and the average for the year FC
11 : R1. The loan is denominated in rands and repayment is not anticipated in the foreseeable
future.
The trial balance of S Limited and translation thereof would be as follows:
FC Rate R
Loan (10 000 × 12) 120 000 12 10 000
Forex loss (10 000 × (12 – 10)) 20 000 11 1 818
In S Limited’s financial statements the loss will be included in profit or loss however on consoli-
dation the loss of R1 818 would not be expensed during the current year but would be taken to
other comprehensive income.
The cumulative gain or loss on the loan would be taken to profit or loss on disposal of the for-
eign operation or repayment of loan.
9. DISCLOSURE
The disclosure requirements are outlined in paragraphs 51 to 57. These are related mainly to the
disclosure of the following matters:
ƒ amount of exchange differences included in profit or loss for the period
ƒ amount of the foreign currency translation reserve, with a reconciliation of the opening bal-
ance, movements for the year and the closing balance
ƒ where the presentation currency is different from the functional currency, this fact shall be
stated, together with disclosure of the functional currency and the reason for using a different
presentation currency
ƒ where there is a change in the functional currency of either the reporting entity or a significant
foreign operation, that fact shall be disclosed.
Example 20:2
S Ltd is a foreign subsidiary of H Ltd. S Ltd keeps its books and records locally in $, but the
functional currency of both companies is determined as the SA rand, while the presentation
currency of the group is also the SA rand.
continued
320
Chapter 20
The following are the abridged trial balances of H Ltd and S Ltd at 31 December 07.
H Ltd S Ltd
R $
Share capital 500 000 50 000
General reserve 90 000 15 000
Retained earnings 127 000 48 000
Sales 620 000 186 000
Dividends received from S Ltd 18 000 –
Accounts payable 34 000 22 000
1 389 000 321 000
Additional information
1. H Ltd acquired 60% of the ordinary shares in S Ltd on 1 January 04 for R130 000. At that
date the retained earnings were $18 000.
2. There is to be a transfer to the general reserve of $10 000 at 31 December 07. The general
reserve of $15 000 was transferred at 31 December 06.
3. The plant in S Ltd was purchased on 1 January 03. The depreciation for the current year is
$16 000 which is included in operating expenses.
4. The inventory of $57 000 in the records of S Ltd on 31 December 07 comprises the following:
Purchased from H Ltd on 15 December 07 $40 000
Other – purchased evenly in November and December 07 $17 000
The opening inventory was $45 000, none of which was acquired from H Ltd. It was ac-
quired when the average rate was $1 = R3.80.
H Ltd sells its inventory at a mark-up of 33%. There was only one sale between H Ltd
and S Ltd during the 07 financial year on 15 December 07 when H Ltd sold goods costing
R160 200 to S Ltd for R213 600.
5. Consolidated retained earnings at 31 December 06 were R176 800.
6. The exchange rates for the relevant periods were:
1 January 03 $1 = R2.50
1 January 04 $1 = R3.00
31 December 06 $1 = R4.00
15 December 07 $1 = R4.45
31 December 07 $1 = R4.50
Average – 07 $1 = R4.25
– November and December 07 $1 = R4.40
7. Ignore taxation.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position of the H Ltd Group for the 07
financial year.
321
Notes on Group Financial Statements
Solution
Workings:
Translation of trial balance – 31 December 07
$ Rate R
Share capital 50 000 3.00 150 000
General reserve – 31.12.06 15 000 4.00 60 000
– 31.12.07 10 000 4.50 45 000
Retained earnings – 1.1.04 18 000 3.00 54 000
– 31.12.06 30 000 Actual (1) 83 000
Sales 186 000 4.25 790 500
Accounts payable 22 000 4.50 99 000
331 000 1 281 500
continued
322
Chapter 20
Solution (continued)
H LTD
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 07
R
Sales revenue (620 + 790.5 –213.6) 1 196 900
Cost of sales (407 + 437.8 – 213.6 + 44.5) (675 700)
Gross profit 521 200
Operating expenses (130 + 154.25) (284 250)
Other income 4 350
Profit and total comprehensive income for the year 241 300
R R R R R R
(1) (2)
Balances 1 January 07 500 000 126 000 176 800 802 800 138 800 941 600
Total comprehensive income
for the year 160 180 160 180 81 120 241 300
Dividend paid (20 000) (20 000) (12 000) (32 000)
Transfer to GR 27 000 (27 000) –
Balance 31 December 07 500 000 153 000 289 980 942 980 207 920 1 150 900
(1)
90 + 36
(2)
127 + 49.8
continued
323
Notes on Group Financial Statements
Solution (continued)
1 283 900
continued
324
Chapter 20
Solution (continued)
(h) RE (end of year) = 208 000(H) + 126 480 – 44 500 = 289 980 (check only)
(i) GR (end of year) = 90 000 + 63 000 = 153 000 (check only)
Note:
Goodwill is translated at the historical rate (temporal method) in terms of IAS 21 as the func-
tional currency of the subsidiary is the same as the presentation currency of the group. It is
only when the foreign operation’s functional currency is different from the group’s presentation
currency that the closing rate method of translation is used and the goodwill on acquisition is
then translated at the closing rate each year (see example 20:3).
Example 20:3
H Limited acquired 60% of Forex Limited on 1 January 02 for R500 000 when Forex Ltd’s re-
tained earnings were $300 000 and its land was recorded at cost. The non-controlling interests
are intitially measured at their share of the fair value of the identifiable net assets. The func-
tional currency of Forex Ltd was determined as the US $ while the functional and the presenta-
tion currency of H Ltd was the SA rand.
The trial balances of the two companies at 31 December 03 were as follows:
FOREX LIMITED H LIMITED
$ $ R R
Operating profit 700 (1) 1 700
Land – at valuation 1.1.03 2 000 1 500
Plant – at cost – 1.1.02 1 000 1 900
– accumulated depreciation 400 900
Investment in Forex Ltd 500
Inventory 600 450
Accounts receivable 200 180
Bank 100 10
Accounts payable 500 300
Long-term loan 1 500 1 325
Revaluation reserve 300 (2)
Share capital 100 100
Retained earnings 1.1.03 400 215
3 900 3 900 4 540 4 540
(1)
Operating profit includes depreciation of $200
(2)
Revaluation of land on 1.1.03
The relevant exchange rates were:
1.1.02 $1 = R2.00
31.12.02 $1 = R3.00
31.12.03 $1 = R4.00
Average for – 02 $1 = R2.50
– 03 $1 = R3.50
continued
325
Notes on Group Financial Statements
Required:
Prepare the consolidated financial statements of the H Limited Group for the 03 financial year.
(Ignore taxation).
Solution
Workings:
WORKSHEET
TOTAL TOTAL SINCE
DATE DETAILS SC RR RE RATE NCI INV GW
$ R RE RR FCTR
1.1.02 Purchase 100 300 400 2,0 800 320 500 (20)
31.12.02 Profit 100 100 2,5 250 100 150
FCTR 450 180 270
FCTR (10) 10
100 400 500 3,0 1 500 600 500 (30) 150 – 280
1.1.03 Revalue 300 300 3,0 900 360 540
31.12.03 Profit 700 700 3,5 2 450 980 1 470
FCTR 1 150 460 690
FCTR (10) 10
100 300 1 100 1 500 4,0 6 000 2 400 500 (40) 1 620 540 980
Note that if the consolidation worksheet is prepared, then it is not necessary to prepare the
translation trial balance because the assets and liabilities are all translated at the closing rate
(and this can be done directly onto the consolidated balance sheet via a working) and the equi-
ty of the foreign subsidiary can be translated and the exchange difference determined on the
consolidation worksheet.
Note that goodwill arising on acquisition of the subsidiary is translated using the closing rate
each year with the exchange difference going to the FCTR. (Goodwill was $10 at acquisition
date.) As goodwill is only attributable to the parent all of the FCTR is allocated to parent share-
holders.
continued
326
Chapter 20
Solution (continued)
(1)
215 + 150 = 365
continued
327
Notes on Group Financial Statements
Solution (continued)
Liabilities
Non-current liabilities (1 325 + 1 500 × 4) 7 325
Current liabilities
Accounts payable (300 + 500 × 4) 2 300
17 180
continued
328
Chapter 20
Solution (continued)
Example 20:4
Same as example 20:3 except that the non-controlling interests are initially measured at fair
value which was R330 on 1 January 20.2.
Solution
Workings:
continued
329
Notes on Group Financial Statements
Solution (continued)
(2)
The adjustment to goodwill of R15 arising because of translating goodwill at the closing rate is allo-
cated to the parent and non-controlling interests based on their profit sharing ratios (in this case own-
ership interests). This is an extension of the principle contained in IAS 36. The principle is based on
the premise that once goodwill is established in the business combination it loses attributability
between the parent and non-controlling interests. It is the opinion of the authors, however, that in the
case of the FCTR arising on the restatement of goodwill it would be more appropriate to allocate this
amount on the same basis as the goodwill that originally arose (see (1) above) i.e. 10/15 to the parent
and 5/15 to the non-controlling interests. This text will, however, allocate the FCTR arising goodwill in
the profit sharing ratio to ensure compliance with IFRSs.
H LIMITED
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 03
R
Profit for the year 4 150
Other comprehensive income:
Items that will not be reclassified to profit or loss
Revaluation of land 900
Items that may be reclassified to profit or loss
Foreign currency translation reserve (1 150 + 15) 1 165
Other comprehensive income 2 065
Total comprehensive income 6 215
Profit attributable to:
Parent shareholders 3 170
Non-controlling interests 980
4 150
Total comprehensive income attributable to:
Parent shareholders 4 409
Non-controlling interests (360 + 980 + 460 + 6) 1 806
6 215
(1)
215 + 150 = 365
continued
330
Chapter 20
Solution (continued)
Liabilities
Non-current liabilities (1 325 + 1 500 × 4) 7 325
Current liabilities
Accounts payable (300 + 500 × 4) 2 300
17 200
Example 20:5
P Ltd acquired 70% of the 100 000 shares in issue in S Ltd, a foreign company whose func-
tional currency is the dollar, on 1 January 20.1 for $200 000. The only reserve of S Ltd on that
date was retained earnings of $150 000. All identifiable net assets were fairly valued and the
non-controlling interests were initially measured at their fair value which was $80 000.
continued
331
Notes on Group Financial Statements
The trial balances of P Ltd and S Ltd at 31 December 20.3 are as follows:
P Ltd S Ltd
R’000 $’000
Property, plant and equipment 2 060 000 305 000
Investment in S Ltd, at cost 480 000 –
Current assets 2 600 000 175 000
Taxation 210 000 20 000
5 350 000 500 000
S Ltd revalued its land on 31 December 20.2. There are no capital gains tax implications relat-
ing to this revaluation.
On 31 December 20.3 P Ltd disposed of 60% of their ordinary shares of S Ltd for $189 000.
The fair value of an S Ltd share on this date was $4.50 per share.
It is the policy of the P Ltd group to transfer realised revaluation surpluses to retained earnings.
The consolidated retained earnings of the group on 31 December 20.2 was R2 064 000.
The exchange rate between the rand and the dollar is as follows:
$1 = R
1 January 20.1 6.0
31 December 20.2 7.0
31 December 20.3 8.0
Average 20.3 year 7.5
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income, state-
ment of changes in equity and statement of financial position for the 20.3 financial year end
(31 December).
332
Chapter 20
Solution
P LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.3
R
Operating profit (1300 + (80 × 7.5) – 792 (profit on disposal)) 1 108 000
Profit on disposal of subsidiary (Wkg 2) 32 000
Exchange differences reclassified on disposal of foreign operation 511 000
Profit before tax 1 651 000
Taxation (210 + (20 × 7.5)) (360 000)
Profit for the year 1 291 000
Other comprehensive income:
Items that may be reclassified to profit or loss (101 000)
Exchange differences on translation of foreign operation
– Exchange differences arising (380 + 30) 410 000
– Reclassification to profit (306.6 + 204.4) (511 000)
(1)
All realised, or 266 + 21 – 306.6 – 204.4
continued
333
Notes on Group Financial Statements
Solution (continued)
Equity
Share capital 1 500 000
Retained earnings 3 318 000
Total equity 4 818 000
Current liabilities 850 000
Total equity and liabilities 5 668 000
Comments on example
1. The full FCTR is reclassified to profit even though a portion of this reserve is still attribut-
able to P Ltd as they still have a 28% interest in S Ltd. It can be argued that this is appro-
priate because P Ltd has realised the interest in the net assets it previously controlled in
exchange for cash and the remaining investment in associate.
2. If P Ltd had only sold (say) 10 000 shares in S Ltd then none of the FCTR would, in terms
of IAS 21, be reclassified to profit. This is because control has been retained. In other
words if control is lost the full amount is reclassified to profit or loss whereas if control is not
lost none is reclassified but we must re-attribute the proportionate share of the FCTR to the
NCI.
3. The same principle applies to the revaluation reserve if control is lost. If it is the policy of
the group to transfer realised revaluation reserves to retained earnings, then if control is
lost then the full revaluation reserve attributable to the subsidiary is transferred to retained
earnings even though the parent continues to have a non-controlling interest in the subsid-
iary. Note that this is a transfer and not a reclassification to profit.
4. If a parent sells a portion of a subsidiary but control is retained (say 70% to 60%) then that
portion of the revaluation reserve attributable to the subsidiary will be transferred out of the
revaluation reserve into retained earnings. Note that this is different from a reserve that is
reclassified into profit or loss.
continued
334
Chapter 20
Solution (continued)
Workings:
(1)
80 000 × 6.0 = 480 000
(2)
200 000 × 6.0 = 1 200 000
(3)
NCI ((1 500 × 30%) – 480) = R30 000 ÷ 6.0 = $5 000
Parent ((1 500 × 70%) – 1 200) = R150 000 ÷ 6.0 =$25 000
Remember this allocation is not the basis for future adjustments to goodwill.
(4)
2 064 000 – 1 700 000 = 364 000 × 100/70 = 520 000
(5)
$30 000 × 7.0 = R210 000 – 180 000 = 30 000
(6)
30 000 × 30% = 9 000 (profit sharing)
(7)
30 000 × 70% = 21 000
(8)
$30 000 × 8.0 = R240 000 – 210 000 = 30 000
(9)
(150 000 + 21 000 + 21 000) × 42/70 = 115 200
(10)
28 000 shares × 4.50 × 8.0 = 1 008 000 – 480 000 – 271 600 – 243 600 = 12 800
Alternatively:
Profit - cost method (1 512 – 720) 792 000
Reserves ‘sold’
– Retained earnings (407 400)
– Revaluation reserve (58 800)
– FCTR (306 600)
Fair value adjustment 12 800
32 000
continued
335
Notes on Group Financial Statements
Solution (continued)
Alternatively:
Proceeds 1 512 000
Fair value of investment retained 1 008 000
Identifiable assets – control lost (3 280 000)
Goodwill derecognised (240 000)
Non-controlling interests derecognised 1 032 000
32 000
336
21 CONSOLIDATED STATEMENT OF CASH
FLOWS
1. INTRODUCTION
While the information conveyed by a statement of financial position and statement of profit or loss
and other comprehensive income are essential to assess the financial position and operating
results of an enterprise or group, these statements have their limitations. Especially during diffi-
cult economic periods, information concerning an enterprise’s cash flows are usually at least as
important as the enterprise’s wealth or profitability. The statement of cash flows has, therefore,
grown in importance in recent times.
The statement of cash flows is dealt with in IAS 7, which requires all cash flows during a period to
be disclosed. The definition of ‘cash flows’ is important as it can materially affect the kind of
information which is disclosed in this statement. For example, if a ‘pure’ cash flow approach is
adopted, the acquisition of a property with the purchase price being settled by means of a share
issue will not appear in the statement of cash flows, as no cash was involved. Similarly, the ac-
quisition of an asset by means of a finance lease will also not be disclosed in the statement of
cash flows for the same reason.
IAS 7 requires a pure cash flow approach and, in essence, the statement of cash flows can,
therefore, be looked upon merely as a summary of the enterprise’s cash book for the period.
The objective of IAS 7 is to produce information about cash flows of an enterprise in order to
provide a basis to assess the ability of the enterprise to generate cash and cash equivalents and
to assess the needs of the enterprise to utilise those cash flows.
The statement of cash flows should present information in a format which facilitates the analysis
and interpretation of the financial statements of an enterprise. In particular, details of cash gener-
ated or utilised by operations, investing activities and financing activities should be disclosed.
This information not only gives information of the cash effects of changes in net assets, but de-
tails of the enterprise’s solvency and liquidity. The presentation of historical cash flows allows
users to predict future operating cash flows. Such information is required to facilitate the use of
valuation models based on discounted future cash flows.
The statement of cash flows relates to the flow of cash and cash equivalents. Cash equivalents
are defined in IAS 7 as ‘short-term, highly liquid investments that are readily convertible into
known amounts of cash and are subject to insignificant risk of changes in value’. An investment
qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from
the date of acquisition and has a specified maturity date. This requirement ensures that the cash
realised on the maturity of the investment is known with a high degree of certainty.
Bank borrowings repayable on demand and which form an integral part of the enterprise’s cash
management system qualify as cash equivalents.
337
Notes on Group Financial Statements
In determining receipts from customers and payments to suppliers using the direct method, a
provision for the write down of non-cash working capital items (e.g. allowance for doubtful debts)
cannot be construed as a cash flow item.
Paragraph 31 indicates that cash flows from interest and dividends paid/received should each be
disclosed separately and classified as either operating, investing or financing activities in a con-
sistent manner from period to period. Such separate disclosure is useful as different enterprises
have different dividend and debt policies and knowledge of such items could lead to greater
comparability between enterprises.
The Standard does not prescribe how the cash flows from these items should be classified.
Dividends and interest received from trading investments should, however, be disclosed in the
operating section, as cash flows from the purchase and sale of the underlying investments are
included therein. Similarly, dividends and interest received on non-trading investments should be
included in the investing section. However, the Standard also allows for the inclusion of dividends
and interest received from non-trading investments in the operating section, as these amounts
enter into the determination of profit or loss.
Dividends and interest paid can also be included in the financing section, as they represent the
cost of obtaining financial resources and are not related to the principal revenue-producing activi-
ties of the enterprise. Alternatively, they can be included in the operating section, as they enter
into the determination of profit of loss, and provide information on the ability of the enterprise to
pay interest and dividends out of operating cash flows.
Because of the lack of consensus on these items their classification would depend on the enter-
prise’s particular viewpoint, but consistent disclosure from period to period is important.
Paragraph 35 requires cash flows in respect of taxes to be separately identified and classified as
operating activities, unless they are specifically identified with financing and investing activities.
Where it is possible to identify a tax cash flow with a particular underlying cash flow, the tax cash
338
Chapter 21
flow should bear the same classification as the underlying flow. Where no identification of under-
lying flows is possible, the tax cash flow should be classified as an operating activity. Examples of
where an underlying flow can be identified are:
ƒ Transfer duty on purchase of an asset. These taxes would be considered to form the total
acquisition cash flow and would form part of investing activities.
ƒ STC paid on dividends which are classified as a financing activity (refer previous paragraph),
would also be regarded as a financing activity.
339
Notes on Group Financial Statements
When a subsidiary is disposed of, the consolidated statement of cash flows following this disposal
will include the proceeds on sale of the subsidiary, while the notes will again detail the underlying
assets and liabilities of the subsidiary at the date of disposal with the non-controlling share there-
of being deducted. Any profit or loss on sale of the shares would be excluded from operating
activities.
340
Chapter 21
6. NON-CASH TRANSACTIONS
Paragraph 43 expressly removes from the statement of cash flows investing and financing activ-
ities that do not require the flow of cash/cash equivalents. Such transactions have to be disclosed
by way of note, providing all relevant investing and financing information.
Paragraph 49 gives examples of items considered to be non-cash transactions, namely:
ƒ purchase of assets by mortgage or finance lease
ƒ acquisition of an entity by means of an equity issue
ƒ conversion of debt to equity.
7. OTHER DISCLOSURES
Significant cash/cash equivalents not available for use by the entity have to be disclosed.
The disclosure of the following items is also encouraged:
ƒ amount of undrawn borrowing facilities available for future activities and capital commitments,
including any restrictions on these funds
ƒ the aggregate amounts included in operating, investing and financing activities proportionally
consolidated from a joint venture
ƒ the amount of cash flows from operating, investing and financing activities in each industrial
and geographical segment.
341
Notes on Group Financial Statements
Example 21:1
H Limited owns 75% of S Limited. The operating income before interest and taxation is as fol-
lows:
H Limited S Limited
Operating profit 80 000 55 000
The above has been arrived at after providing for depreciation of R10 000 (H Limited) and R5 000
(S Limited). There are no other non-cash items.
What is the ‘cash generated by operations’ figure that will appear in the consolidated statement of
cash flows?
R
H Limited 80 000
S Limited 55 000
Depreciation (10 + 5) 15 000
Cash generated by operations 150 000
Although R15 000 ((55 + 5) × 25%) of the cash generated is attributable to the non-controlling
shareholders this is irrelevant for the purposes of the statement of cash flows.
Transactions between the non-controlling shareholders involving the flow of cash and the
group are reflected in the statement of cash flows as they do have an impact of the group’s
cash resources. On the other hand, intercompany transactions between a parent and subsid-
iary are, in line with consolidation principals, eliminated in arriving at consolidated cash flows.
Clearly a subsidiary paying cash to its parent or vice versa increases and decreases the
respective entity’s cash resources but has no effect on the amount of consolidated cash and
cash equivalents.
Example 21:2
H Limited has for some years held 60 000 shares of the 100 000 R1 shares in issue of S Lim-
ited. During the current year S Limited had a one for two rights issue at R2 per share. All
shareholders subscribed for their shares.
How does this affect the consolidated cash flow?
Subsidiary Group
Cash flows from financing activities
Proceeds from issue of shares (in Subsidiary) 100 000 40 000
Increase in cash and cash equivalents 100 000 40 000
Clearly the R40 000 received from the non-controlling interests increase the groups cash re-
sources ‘and is therefore reflected in the consolidated statement of cash flows while the
R60 000 received from the parent has no effect on the groups cash balance and is therefore
eliminated.
342
Chapter 21
statement of cash flows net of any cash and cash equivalents of the entity acquired or disposed
of. This then represents the overall cash effect of the acquisition or disposal on the group’s cash
resources.
The following are disclosed, in aggregate, for acquisitions and disposals of subsidiaries or other
business units:
ƒ the total purchase consideration
ƒ the portion of the purchase consideration in cash or cash equivalents
ƒ the amount of cash and cash equivalents in the subsidiary or business unit acquired or dis-
posed of, and
ƒ the amount of the assets and liabilities other than cash or cash equivalents in the subsidiary or
business unit acquired or disposed of, summarised by each major category.
The above information will be disclosed as a note to the consolidated statement of cash flows.
In preparing a consolidated statement of cash flows where an acquisition or disposal of a subsid-
iary or other business unit has taken place in the current year it will have to be recognised that
increases/decreases of assets or liabilities will now include assets and liabilities acquired or
disposed of in such a transaction and which are already therefore included in the statement of
cash flows. In addition, an acquisition will also result in an increase in non-controlling interests on
initial consolidation of a subsidiary or a decrease in non-controlling interests on deconsolidation of
a subsidiary (other than for wholly owned subsidiaries).
Example 21:3
H Limited acquired 80% of the shares in S Limited for R55 000 during the current year when
S Limited’s abridged balance sheet was as follows:
R
Property, plant and equipment 60 000
Accounts receivable 33 000
Bank 5 000
Accounts payable (18 000)
80 000
Equity 65 000
Long-term liability 15 000
80 000
Requirement 1:
Disclose the impact of the above on the consolidated statement of cash flows and notes there-
to.
Solution
continued
343
Notes on Group Financial Statements
Solution (continued)
Requirement 2:
Assume the following is an extract from the consolidated balance sheet:
End of year Beg of year
Accounts receivable 168 000 128 000
Inventory 232 000 217 000
Accounts payable (92 000) (78 000)
Calculate the working capital and increase in cash and cash equivalents amounts to be reflect-
ed in the consolidated statement of cash flows.
Solution
WORKING CAPITAL
Trade receivables (168 – 33) – 128 7 000 increase
Inventory (232 – 217) 15 000 increase
Trade payables (92 – 18) – 78 4 000 decrease
26 000
Alternatively to calculate the cash received and paid could be done in the form of a T-account
as follows:
Trade Receivables Trade Payables
b (1) (2) b
Balance /f 128 000 Bank (∴) 993 000 Bank (∴) 804 000 Balance /f 78 000
c c
Sales (assumed) 1 000 000 Balance /f 168 000 Balance /f 92 000 Purchases (assumed) 800 000
Subsidiary 33 000 Subsidiary 18 000
1 161 000 1 161 000 896 000 896 000
(1)
Or 1 000 000 (sales) – 7 000 (increase) = 993 000
(2)
Or 800 000 (purchases) + 4 000 (decrease) = 804 000
344
Chapter 21
The increase in receivables and payables is now partly due to the acquisition and resultant con-
solidation of the subsidiaries. These ‘acquisitions’ are reflected as part of the acquisition of the
subsidiary in the investing section of the statement of cash flows. In order to determine the in-
crease or decrease of receivables and payables (and inventory if applicable) the amounts ac-
quired through the business combination needs to be adjusted to determine the increase or
decrease in these amounts that relate to ongoing operating activities. The same but opposite
situation would arise if the group had disposed of a subsidiary or business unit during the year.
The movement in working capital would now be partly attributable to the subsidiary or business
units working capital being no longer consolidated as a result of the disposal.
Consider now the following scenarios:
(a) A parent increases its holding of an existing subsidiary
(b) A parent decreases its holding of an existing subsidiary however control is not lost
(c) An additional holding in an existing associate is acquired which results in control.
In scenarios (a) and (b) the purchase or disposal consideration in cash will be included in the
statement of cash flows. However, it will not be net of cash or cash equivalents of the subsidiary,
as control exists both before and after the transactions and therefore the subsidiary’s cash re-
sources are consolidated both before and after the transaction.
In scenario (c) however the associate will now be consolidated for the first time in the current year
and all of the principals discussed before will apply.
It may be useful for the reader to consider any other scenarios that may arise and how they will
be dealt with in the consolidated statement of cash flows using the principles discussed above.
For example, an acquisition or disposal of a proportionately consolidated joint venture.
Example 21:4
A LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 20-2
R
Revenue 30 650
Cost of sales (26 000)
Gross profit 4 650
Operating expenses (1 400)
Interest expense (net of amount capitalised) (250)
Investment income (interest 300, dividends 200) 500
Profit before taxation 3 500
Taxation (300)
Profit and total comprehensive income for the year 3 200
continued
345
Notes on Group Financial Statements
EQUITY
Liabilities
Trade payables 550 1 890
Interest payable 230 100
Income taxes payable 400 1 000
Long-term debt 1 800 1 040
Total liabilities 2 980 4 030
Shareholders’ equity
Share capital 2 400 1 250
Retained earnings 3 380 1 380
Total shareholders’ equity 5 780 2 630
Total liabilities and shareholders’ equity 8 760 6 660
Additional information
1. All of the shares of a subsidiary X were acquired during the current year for R590. The fair
values of assets acquired and liabilities assumed were as follows:
R
Inventories 100
Accounts receivable 100
Cash 40
Property, plant and equipment 650
Trade payables (100)
Long-term debt (200)
2. All of the shares of a subsidiary Y were acquired during the current year by issuing shares in
the company to the value of R400. The fair value of assets acquired and liabilities assumed
were as follows:
R
Inventories 500
Accounts receivable 200
Trade payables (300)
3. R250 was raised from the issue of share capital and a further R250 was raised from long-
term borrowings.
4. Interest incurred during the period amounted to R400 of which R170 was paid during the
period. R100 relating to interest expense of the prior period was also paid during the period.
continued
346
Chapter 21
Solution
Workings:
1. Cash receipt from customers
Revenue 30 650
Accounts receivable (2 000 – (100 + 200) – 1 200) (500)
30 150
continued
347
Notes on Group Financial Statements
Solution (continued)
Direct method
A LIMITED GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 20-2
Note R
Cash flows from operating activities
Cash receipts from customers 30 150
Cash paid to suppliers and employees (27 635)
Cash generated from operations 1 2 515
Interest received 200
Interest paid (270)
Dividends received 200
Dividends paid (1 200)
Normal tax paid (800)
Secondary tax on companies paid (100)
Net cash inflow from operating activities 545
Cash flows from investing activities
Acquisition of subsidiary X, net of cash acquired 2 (550)
Purchase of equipment 3 (350)
Replacement of equipment (350)
Additions to equipment (–)
Proceeds from sale of equipment 15
Net cash outflow from investing activities (885)
Cash flows from financing activities
Proceeds from issue of share capital 250
Proceeds from long-term borrowings 250
Payment of capital element of finance lease liabilities (90)
Net cash inflow from financing activities 410
Net increase in cash and cash equivalents 70
Cash and cash equivalents at beginning of period 4 160
Cash and cash equivalents at end of period 4 230
continued
348
Chapter 21
Solution (continued)
Indirect method
A LIMITED GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 20-2
Note R
Cash flows from operating activities
Cash generated from operations 1 2 515
Interest received 200
Interest paid (270)
Dividends received 200
Dividends paid (1 200)
Normal tax paid (800)
Secondary tax on companies paid (100)
Net cash inflow from operating activities 545
Cash flow from investing activities
Acquisition of subsidiary X, net of cash acquired 2 (550)
Purchase of equipment 3 (350)
Replacement of equipment (350)
Additions to equipment (–)
Proceeds from sale of equipment 15
Net cash outflow from investing activities (885)
Cash flows from financing activities
Proceeds from issue of share capital 250
Proceeds from long-term borrowings 250
Payment of capital element of finance lease liabilities (90)
Net cash inflow from financing activities 410
Net increase in cash and cash equivalents 70
Cash and cash equivalents at beginning of period 4 160
Cash and cash equivalents at end of period 4 230
continued
349
Notes on Group Financial Statements
Solution (continued)
Notes to the statement of cash flows (direct method and indirect method)
1. Reconciliation of profit before taxation to cash generated from operations
R
Profit before taxation 3 500
Adjustments for:
Depreciation 450
Loss on sale of plant 5
Foreign exchange loss 40
Investment income (500)
Interest expense 250
Operating profit before working capital changes 3 745
Working capital changes (1 230)
Decrease in inventories 1 050
Increase in accounts receivable (500)
Decrease in trade payables (1 780)
This note is only required for the indirect method and may be included in the face of the
statement of cash flows.
2. Acquisition of subsidiary
During the period, the group acquired subsidiary X. The fair value of assets acquired and lia-
bilities assumed were as follows:
Property, plant and equipment 650
Inventories 100
Accounts receivable 100
Cash 40
Long-term debt (200)
Trade payables (100)
Total purchase price 590
Less: Cash of X (40)
Cash flow on acquisition net of cash acquired 550
(b) During the period, additional share capital was issued upon the conversion of R500 of
debentures.
(c) During the period, the group acquired plant and equipment with an aggregate cost of
R1 250, of which R900 was acquired by means of finance lease.
continued
350
Chapter 21
Cash and cash equivalents at the end of the period include deposits with banks of R100 held
by a subsidiary that are not freely remittable to the holding company because of currency ex-
change restrictions.
The Group has undrawn borrowing facilities of R2 000 of which R700 may be used only for
future expansion.
5. Segment information
Segment Segment Consolidation
A B adjustments Total
R R R R
Cash flows from:
Operating activities 480 250 (150) 580
Investing activities (1 040) 160 – (880)
Financing activities 340 190 (120) 410
(220) 600 (270) 110
Example 21:5
You are the manager in charge of the audit of Sao Paulo Limited, a large conglomerate. The
financial director has asked you for assistance with the preparation of the consolidated state-
ment of cash flows. The financial director has provided a schedule of movements in the consoli-
dated financial statements of Sao Paulo Limited. These schedules are attached as Annexure A
and Annexure B.
The following additional information has been given by the financial director during the course
of the audit:
ƒ Ordinary share capital:
Sao Paulo Limited issued 30 000 Ordinary shares during the year as follows:
– 10 000 were issued for cash on 2 January 20-5 with part of these funds being used to
finance the redemption of preference shares, and
– 20 000 were issued in settlement of the purchase consideration of the shares acquired in
Brasilia Limited on 14 September 20-5.
continued
351
Notes on Group Financial Statements
ƒ Preference shares:
Preference shares were redeemed during the current year for a payment of R4 000. No
preference shares were issued during the year. The preference shares were redeemable at
the option of the company and had correctly been classified as equity.
ƒ Debentures:
On 1 July 20-5 the company issued 20 000 R1 8% debentures at a discount of 25%. These
debentures are redeemable after 10 years at par. Interest is payable annually in arrears.
On 31 December 20-5 certain debentures were redeemed.
ƒ Land:
The R5 000 profit on expropriation of land relates to a property held by a 75% owned sub-
sidiary. The original cost and carrying amount of this land was R2 300. No properties were
revalued during the current year. The profit on disposal is not available for distribution.
ƒ Other non-current assets:
Plant and equipment sold by the Sao Paulo group had a book value of R2 100. The Sao
Paulo group entered into finance lease agreements in respect of other non-current assets to
the extent of R3 700 during the current year.
ƒ Investments:
Investments, other than investments in associates and subsidiaries, are carried at cost by
the group as they represent unlisted equity investments where cost is considered the best
estimate of fair value. The impairment on investments amounting to R13 312 disclosed in
the statement of profit or loss, arose in a 90% held subsidiary.
Interests in associates are included in investments and are accounted for on the equity
method. The group did not dispose of any investments (other than the shares in Natal Ltd –
see below) during the year.
ƒ Purchase of shares in Brazilia Limited:
On 14 September 20-5 Sao Paulo Limited purchased a further 60% interest in Brazilia Lim-
ited for R53 360. All Brazilia’s issued shares were issued on its incorporation. The purchase
price was settled by the issue of 20 000 ordinary shares in Sao Paulo Limited. In 20-1 Sao
Paulo Ltd had purchased a 25% interest in Brazilia Limited for R5 600 which represented
25% of the carrying amount and fair value of the net assets of Brazilia at the time. The non-
controlling interests were not initially measured at fair value. The assets and liabilities of
Brazilia Ltd on 14 September 20-5 were as follows:
R
Property 3 000
Other non-current assets 23 000
Inventory 34 000
Debtors 17 000
Cash 3 000
Deferred taxation (2 300)
Creditors (23 000)
Net assets 54 700
The fair value of the investment in Brazilia Limited on 14 September 20-5 was equal to its
equity accounted carrying amount.
continued
352
Chapter 21
The fair value of the investment in Brazilia Limited on 14 September 20-5 was equal to its
equity accounted carrying amount.
ƒ Sale of shares in Natal Limited:
During the year Sao Paulo Limited reduced its holding in Natal Limited from 80% to 40%.
The identifiable assets and liabilities of this subsidiary at date of sale were as follows:
R
Property 4 000
Other non-current assets 3 900
Inventory 4 500
Debtors 3 750
Cash 4 500
Deferred taxation (1 100)
Creditors (3 400)
Net assets 16 150
Natal is correctly classified as an associate. The fair value of the remaining asset was equal
to 40% of the carrying amount of Natal Limited’s identifiable net assets plus the goodwill re-
lating to the investment retained.
There were no other acquisitions or disposals of subsidiaries.
ƒ Property expropriation reserve:
The transfer to this reserve comprises a transfer in respect of the profit on the expropriation
of the property during the year.
ƒ Dividends:
Details of dividends paid and declared on instruments classified as equity by Sao Paulo
during the year are as follows:
20-5 20-4
Preference: 800 1 200
Declared 31 December
Ordinary:
Interim – paid 30 June 2 000 2 000
Final – declared 31 December 4 000 8 000
ƒ Non-controlling interests are not initially measured at fair value.
Required:
Prepare the consolidated statement of cash flows, with supporting notes, of Sao Paulo Ltd for
the year ended 31 December 20-5 in accordance with generally accepted accounting practice.
Ignore capital gains tax.
continued
353
Notes on Group Financial Statements
ANEXURE A:
SCHEDULE OF MOVEMENTS IN THE CONSOLIDATED STATEMENT OF FINANCIAL
POSITION OF SAO PAULO LTD BETWEEN 31 DECEMBER 20-4 AND
31 DECEMBER 20-5:
DR CR
R R
Ordinary share capital 70 000
Property expropriation reserves 3 750
Retained earnings 12 980
10% preference share capital 4 000
Deferred taxation 1 700
Non-controlling interests 10 959
Debentures – current and non-current 3 939
Long-term borrowings 3 500
Land 16 700
Other non-current assets 24 389
Goodwill 27 102
Trademarks 2 000
Investments 16 700
Inventory 75 228
Debtors 18 097
Bank balances and cash on hand 71 488
Receiver of Revenue 2 000
Creditors 23 944
Dividends payable 4 400
196 438 196 438
continued
354
Chapter 21
ANNEXURE B:
SAO PAULO LIMITED AND ITS SUBSIDIARIES
SUMMARY OF CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME AND RETAINED EARNINGS MOVEMENTS FOR THE YEAR
ENDED 31 DECEMBER 20-5
R
Revenue – sales 450 987
Cost of sales and net operating expenses (377 531)
Operating profit 73 456
Dividends received from associate 3 562
Share of associate’s retained earnings for year 1 878
Financing costs (35 584)
Other net expenses (23 265)
Profit before taxation 20 047
Taxation (11 340)
Profit for the year 8 707
Attributable to non-controlling interests (11 137)
Attributable to Sao Paulo Ltd members (2 430)
Transfer to property expropriation reserve (75% × 5 000) (3 750)
Preference dividends (800)
Ordinary dividends (6 000)
Retained earnings for the year (12 980)
Retained earnings at beginning of the year 68 265
Retained earnings at the end of the year 55 285
Notes to the consolidated statement of profit or loss and other comprehensive income:
ƒ Operating profit includes the following:
Depreciation of plant and equipment (14 500)
Profit on sale of plant and equipment 3 200
Amortisation of trademarks (2 000)
ƒ Other net expenses:
Goodwill impairment (14 992)
Profit on sale of shares in Natal Ltd 17 329
Impairment reversals on non-current assets 5 600
Impairments of investments (13 312)
Inventory obsolescence write down (17 140)
Restraint of trade payments made by Sao Paulo Ltd (5 750)
Profit on expropriation of land 5 000
(23 265)
355
Notes on Group Financial Statements
Solution
continued
356
Chapter 21
Solution (continued)
continued
357
Notes on Group Financial Statements
Solution (continued)
476 393
Alternatively:
Operating profit 73 456
Depreciation of plant and equipment 14 500
Profit on sale of plant and equipment (3 200)
Amortisation of trademarks 2 000
Restraint of trade payment (5 750)
Debtors (4 847)
Creditors (43 544)
Inventory (62 868)
(30 253)
Cash received from customers (446 140)
Cash paid to suppliers and employees (476 393)
3. Interest paid R
Expense 35 584
Interest on debentures not paid (WK below) (939)
Paid 34 645
continued
358
Chapter 21
Solution (continued)
4. Taxation paid DR CR
Deferred tax
Movement 1 700
Subsidiary – acquired 2 300
– sold 1 100
Income statement 500
Receiver of Revenue
Movement 2 000
Taxation expense (11 340 – 500) 10 840
Paid 8 840
5. Dividend paid
Movement 4 400
Declared 6 800
Paid 11 200
6. Non-controlling interests
Movement 10 959
Subsidiary – acquired (54 700 × 15%) 8 205
– sold (16 150 × 20%) 3 230
Share of profit 11 137
Dividends paid 5 153
7. Land
Movement 16 700
Subsidiary – acquired 3 000
– sold (4 000 × 60%) 4 000
Sold 2 300
Acquisitions 20 000
Proceeds on sale
Carrying amount 2 300
Profit on sale 5 000
Proceeds 7 300
8. Other non-current assets
Movement 24 389
Sold 2 100
Subsidiary – acquired 23 000
– sold (3 900 × 60%) 3 900
Depreciation 14 500
Impairment – reversal 5 600
Acquisition – finance lease 3 700
Acquisitions – bank 12 589
Proceeds on sale
Carrying amount 2 100
Profit on sale 3 200
Proceeds 5 300
9. Goodwill
Movement 27 102
Impairment 14 992
Brazilia 20 540
Goodwill realised on sale 32 650
10. Investments
Movement 16 700
Brazilia (54 700 × 25%) 13 675
Natal (16 150 × 40%) + 16 325 (GW) 22 785
Retained earnings of associate 1 878
Impairment 13 312
Acquisitions 19 024
continued
359
Notes on Group Financial Statements
Solution (continued)
360
PRACTICE QUESTIONS
Questions
Question 1:1
In each of the following cases state which company would be required to prepare group annual
financial statements and name the subsidiaries which would be included in the group annual
financial statements. Reasons should be given.
(1) A Limited holds no shares in B Limited but has the power to elect 4 of B Limited’s 7
directors. B Limited holds 50% of the voting rights of C Limited.
(2) A Limited holds 40% of B Limited’s equity shares and voting rights and A Limited and
B Limited each hold 40% of C Limited’s equity shares and voting rights.
(3) A Limited holds all the shares of B Limited and B Limited holds 95% of the ordinary shares
and voting rights of C Limited.
(4) A Limited holds 45 000 of B Limited’s 100 000 issued ordinary shares. B Limited has
20 000 options outstanding all of which are held by A Limited. The options are currently
exercisable.
(5) Same example as (4) except that the options are only exercisable in two years’ time.
363
Notes on Group Financial Statements
Question 2:1
On 1 July 20.8 A Limited issued 60 000 of its ordinary shares to acquire a 80% interest in the
issued ordinary shares of B Limited. The market values (which were also their fair values) of
the ordinary shares were as follows:
– A Limited R8.20 per share
– B Limited R6.00 per share
A Limited incurred related share issue costs of R28 000 and professional fees directly relating
to this acquisition of R55 000.
B Limited’s statement of financial position at 30 June 20.8 appears below:
Property, plant and equipment 432 000 (fair value = 500 000)
Other assets 480 000 (fair value = 450 000)
Current liabilities (294 000) (fair value = 294 000)
618 000
Other information
1. B Limited had an assessed loss of R80 000 at 30 June 20.8. This was not taken into
account by B Limited in arriving at its deferred tax balance included in the above statement
of financial position. A Limited are of the view that the assessed loss meets the recognition
criteria in terms of IAS 12. The tax rate is 40%.
2. It is reliably estimated that A Limited will incur future reorganisation and integration costs of
R120 000 relating to B Limited.
Required:
1. Calculate:
(i) the amount at which the total net assets of B Limited will be measured by the A group
(ii) the non-controlling interests at acquisition
(iii) the goodwill arising on acquisition
assuming the non-controlling interests are measured at:
(a) their share of the fair value of the identifiable net assets.
(b) fair value.
2. Discuss the conceptual reasoning for your treatment of the future reorganisation and
integration costs of R120 000.
364
Questions
Question 2:2
Barcelona Limited, a company with a 31 December year end, purchased a 75% interest in
Lombok Limited on 30 June 20.5. In terms of the purchase agreement the company paid
R20 million for these shares with an additional R10 million being payable (in cash) on 30 June
20.8 if Lombok Limited produced a total operating profit after taxation of R12 million for the
3 years ended 30 June 20.8. For the 6-month period ended 31 December 20.5, Lom-
bok Limited produced an after tax operating profit of R2 100 000.
Due to the length of time taken to close the above purchase agreement, the accountant of
Barcelona Limited feels that the expenses of the mergers and acquisitions department of the
company, amounting to R750 000, as well as specific professional and legal expenses
incurred, amounting to R250 000, should be capitalised to the cost of the investment.
The fair value of net assets of Lombok Limited, at the date of acquisition amounted to R16 mil-
lion whereas the carrying amount of the net assets in the subsidiary was R15 million. The
accountant of Barcelona Limited has decided to accrue for the acquisition to the subsidiary in
the group financial statements with the following journal entry.
Dr Equity of subsidiary 15 million
Dr Revaluation of assets 1 million
Cr Non-controlling interests (25%) 4 million
Cr Investment (R20m + R0,75m + R0,25m) 21 million
Dr Equity of parent 9 million
The accountant has explained that the debit to equity of the parent has been made as the
entire purchase (R20 million) was settled by the issue of ordinary shares to the shareholders of
Lombok Limited and therefore it is appropriate to reduce the share capital issued to acquire
Lombok Limited and that the goodwill was not recognised in terms of prudence as it is an
intangible asset.
The accountant of Barcelona Limited. has also informed you that a review of the provisions in
Lombok Limited at 31 December 20.5 indicated that the provision for warranty costs had been
underprovided by R600 000 at 30 June 20.5. Again, in terms of prudence, the accountant
raised the provision by R600 000 and expensed the full amount to the group income statement
at 31 December 20.5.
Required:
Critically discuss the accounting treatment in the 20.5 annual financial statements that is
required in respect of the purchase of the interest in Lombok Limited in the group financial
statements of Barcelona Limited.
Ignore deferred taxation.
365
Notes on Group Financial Statements
Question 2:3
Harry Limited purchased 80% of the ordinary shares of Sally Limited on 31 March 20.8, at
which date the consolidated shareholders’ equity (and therefore net asset value) of
Sally Limited was R4 million.
The following information may be relevant in determining the fair value of the net assets of the
Sally Limited Group at 31 March 20.8:
1. All expenditure on internally generated brand names has been expensed. At 31 March
20.8, various reliable measurement techniques were used to determine a fair value of
R200 000 for the brand name. (There is no active market in brand names of this nature.)
2. Sally Limited has a loan (credit) of R800 000 which is redeemable on 31 March 20.18.
Interest at a fixed rate of 10% is payable (annually in arrears) on the loan, whereas a fair
interest rate on a similar loan is 18%.
3. Sally Limited has a defined benefit pension fund. At 31 March 20.8 the present value of the
defined benefit obligation was R600 000 and the fair value of plan assets was R550 000.
The statement of financial position carrying amount relating to post-employment benefits
reflected a debit balance of R15 000 at 31 March 20.8.
4. The net assets of Sally Limited include goodwill of R40 000 relating to Sally Limited’s
acquisition of 60% of the net assets of Rally Limited on 31 March 20.4.
5. Provisions recognised by Sally Limited at 31 March 20.8 (i.e. taken into account in
determining the shareholders’ equity of R1m) included the following:
(a) Provision for damages claim of R500 000 – this provision related to damages suffered
by a customer of Sally Limited as a result of a defective product sold. The R500 000
was based on a provisional best estimate at 31 March 20.8. Following consultation with
legal experts in July 20.8, a revised estimate of R400 000 was agreed upon.
There is a counter-suit against the manufacturer of one of the constituent parts of the
product for R220 000 of the damages. The provisional net asset value at 31 March
20.8 did not include any amount relating to the possible reimbursement. In July 20.8,
the opinion of the legal experts was that it was probable that a claim of R200 000 (at
least) by Sally Limited against the manufacturer would be successful.
In November 20.8 judgement was received on the damages case – Sally Limited paid
damages of R350 000 of which R220 000 was recoverable from the manufacturer.
(b) Provision of R600 000 was made for operating losses that are expected to be incurred
in the next two years in the micro-lending division of Sally Limited.
(c) Provision of R300 000 for expenditure to be incurred in changing stationery,
redecorating, etc. as a result of the acquisition by Harry Limited.
(d) Provision of R1m relating to retrenching staff, cancelling leases, etc. as a result of a
decision by Harry Limited to shut the head office of Sally Limited as a result of a
duplication of infrastructure. The main features of the restructuring plan were
developed and announced in April 20.8. A detailed plan for the restructuring was drawn
up by 30 June 20.8, and at that stage the R1m provision appeared to be correct.
The purchase price for the 80% shareholding of Sally Limited consisted of:
ƒ Cash of R3 500 000, plus
ƒ Issue of 200 000 shares in Harry Limited. The shares were issued when the market value
was R10 per share. Harry Limited provided a guarantee that if the price of shares fell below
R8.50 per share, Harry Limited would compensate them for 75% of the amount by which the
market value fell below R8.50. It was estimated that the fair value of this potential
compensation was R7 200 on 31 March 20.8. The market value of the shares in
Harry Limited was R8.00 on 30 June 20.8.
The non-controlling shareholders are recognised at their share of the identifiable net assets.
continued
366
Questions
Sally Limited represents a cash generating unit and its recoverable amount was calculated to
be R7 100 000 on 30 June 20.8, at which date its identifiable net assets carrying amount was
R6 240 000.
The 20.8 financial statements were authorised for issue on 30 September 20.8.
Required:
Calculate the amount of goodwill that would be recognised on the consolidated statement of
financial position of Harry Limited for the financial year ending 30 June 20.8.
Your answer should individually identify all adjustments made to the net asset value of
Sally Limited, and should explain the reason for the adjustment and, where necessary, provide
appropriate workings.
Assume a tax rate of 30%.
367
Notes on Group Financial Statements
Question 2:4
Sarnia Limited is a company listed on the JSE Ltd. The company has grown considerably in
the last 10 years but further significant organic growth is limited. As a result the directors of the
company have decided to pursue a policy of acquisition in order to fulfil their growth potential.
The company has a 30 June year end.
After extensive discussions and negotiations between the directors of Sarnia Limited and
shareholders of Redhill Limited the following was agreed upon:
1. On 31 March 20.4 Sarnia Limited would acquire 16 million shares in Redhill Limited. The
purchase consideration would be settled by the exchange of R1.50 cash plus one
Sarnia Limited share for every two Redhill Limited shares.
The cash portion of the payment, although unconditional, is to be paid on 30 June 20.5.
The shares were issued by Sarnia Limited on 30 April 20.4. the market value of a
Sarnia Limited and a Redhill Limited share was as follows:
Sarnia Limited Redhill Limited
R R
31March 20.4 10.60 5.95
30 April 20.4 10.85 5.10
30 June 20.4 11.30 6.25
2. If the market price of the Sarnia Limited shares is less than R11.00 per share on 30 June
20.5 Sarnia Limited is required to refund part of the purchase price in cash. The amount of
the refund is calculated as follows:
(11 – market price of Sarnia share) × 2 000 000
This was not considered probable at any stage during the 20.4 financial year, however the
fair value of the potential liability was considered to be R650 000 on 31 March 20.4.
The statement of financial position of Redhill Limited at acquisition date is as follows:
R’000
ASSETS
Non-current assets
Land 11 200
Factory buildings 19 500
Office buildings 12 300
Plant and equipment 30 500
73 500
Current assets 76 600
Inventory 31 100
Debtors 42 400
Bank and cash 3 100
150 100
continued
368
Questions
A note to the financial statements reveals that Redhill Limited has a contingent liability of
R3 100 000 in respect of a warranty. The contingent liability is not recognised because there is
no probable outflow of resources. The final purchase consideration was reduced by
R1 040 000 due to the existence of this warranty. The amount will not be tax deductible.
Redhill Limited sells its products under the brand name ‘Acme’ which was developed by the
company. This brand name has, in compliance with IAS 38, not been recognised as an asset.
The fair value of the brand is, however, reliably determined at R5 500 000.
The fair value of Redhill Limited assets was equal to their carrying amounts except for:
Fair value
R’000
Land 16 000
Factory buildings 28 000
Office buildings 22 000
Plant and equipment 33 000
Inventory 32 000
The non-current borrowings of Redhill Limited represent a fixed interest (16%) loan. The capital
portion of the borrowings of Redhill Limited are repayable on 31 March 20.7 and interest is
payable annually in arrears. Redhill Limited is using amortised cost to account for the
borrowings. The loan was raised three years ago when interest rates were significantly higher
than now.
The market related interest rate is currently 11% p.a. which is also the incremental borrowing
rate of Sarnia Limited.
Redhill Limited has not raised a liability for its post-retirement medical liability. A provisional
estimate of this liability in terms of IAS 19 for the purposes of the acquisition is R2.8 million.
The present value of the deferred tax balance of Redhill Limited is estimated at R2.6 million.
The tax rate is 30% and 50% capital gains are included in taxable income. The office buildings
are not deductible for tax purposes.
Required:
(a) Calculate the goodwill or gain on bargain purchase in respect of Sarnia Limited’s acqui-
sition of Redhill Limited. Non-controlling interests are not recognised at their fair value.
(b) At 30 June 20.5 the Sarnia Limited share was trading at R9.50 on the JSE.
Explain what impact this will have on the group financial statements of Sarnia Limited for
the year ended 30 June 20.5.
(c) In February 20.5 the actuarial report was received indicating that the post-retirement
medical liability was R3.1 million at the date of acquisition.
Explain how this will be accounted for in the group financial statements of Sarnia Limited
for the year ended 30 June 20.5. Support your answer with reference to amounts
involved.
(d) Discuss, with reasons, how the brand name ‘Acme’ should be accounted for in the group
financial statements of Sarnia Limited, both at the date of acquisition and in subsequent
periods.
369
Notes on Group Financial Statements
Question 3:1
Hang Limited decided to acquire all the shares of Swing Limited for R50 000, which was
agreed to be the fair value of Swing Limited.
The statements of financial position of the two companies immediately prior to the proposed
take-over were as follows:
Hang Ltd Swing Ltd
R000 R000
ASSETS
Non-current assets 30 100
Current assets 70
100 100
The assets and liabilities of Swing Limited are considered to be fairly valued at their carrying
amounts.
Required:
(a) Prepare the statement of financial position of Hang Limited and the consolidated state-
ment of financial position of Hang Limited immediately after the take-over, assuming that
Hang Limited pays cash to settle the purchase consideration.
(b) Prepare the statement of financial position of Hang Limited and the consolidated state-
ment of financial position of Hang Limited immediately after the take-over, assuming that
Hang Limited issues 50 000 of its own shares to settle the purchase consideration.
(Notes and comparatives are not required.)
370
Questions
Question 3:2
Hold Limited acquired all the shares in Sub Limited on 31 December 20-4. Sub Limited’s land
was considered to be worth R4 500, its plant and machinery was considered to be valued at
R2 500 more than carrying amount and the current assets were considered to be fairly valued.
Ignore taxation.
SHAREHOLDERS’ EQUITY
Share capital 30 000 12 000
Retained earnings 10 000 3 000
40 000 15 000
Required:
Prepare the Consolidated Statement of Financial Position of Hold Limited at 31 December
20-4.
(Notes and comparatives are not required, except for details of non-current assets.)
371
Notes on Group Financial Statements
Question 4:1
Halyard Limited acquired 80% of the 100 000 shares in Spoor Limited on 31 December 20-4.
The plant and machinery of Spoor Limited was considered to be worth R250 000 and the
current assets R45 000.
Goodwill on acquisition of the subsidiary is considered to be fairly valued at its original cost (i.e.
no impairment has taken place). The group’s policy is to value the non-controlling interests
initially at their share of the separately identifiable net assets of the subsidiary at the date of
acquisition. Ignore taxation.
Required:
Prepare the Consolidated Statement of Financial Position of Halyard Limited at 31 December
20-4.
(Notes and comparatives are not required, except for details of general reserve and non-
current assets.)
372
Questions
Question 4:2
On 2 January 20.3 H Ltd purchased 80% of the issued share capital of S (Pty) Ltd. At that date
H Ltd considered S (Pty) Ltd’s non-current assets to be understated by R4 000.
ASSETS
Non-current assets at cost 39 000 30 000
Accumulated depreciation (18 000) (13 000)
Investment in S (Pty) Ltd
– ordinary shares 30 000 –
Loan to S (Pty) Ltd 4 000 –
Net current assets 20 000 22 000
75 000 39 000
Required:
Prepare the Consolidated Statement of financial position of H Ltd at 2 January 20.3.
(Notes and comparatives are not required, except for details of non-current assets.)
373
Notes on Group Financial Statements
Question 5:1
Haze Limited acquired 16 000 of the 20 000 issued shares in Smog Limited on 1 January 20-3
when Smog Limited’s equity was as follows:
Share capital 25 000
Retained earnings 5 000
30 000
At the date of acquisition Haze Limited considered the land owned by Smog Limited to be
worth R80 000 and the current assets to be fairly valued. Smog Limited has not sold any land
during
20-3 and 20-4.
Required:
Prepare the Consolidated Statement of Financial Position of Haze Limited at 31 December
20-4.
Notes and comparatives are not required. Goodwill is considered to be fairly valued at its
original cost (i.e. no impairment has taken place). The group’s policy is to value the non-
controlling interests initially at their share of the separately identifiable net assets of the
subsidiary at the date of acquisition. Ignore taxation.
374
Questions
Question 5:2
H Ltd acquired 70% of the shares in S Ltd on 1 January 06 for R412 500. At this date the
retained earnings of the subsidiary was R100 000.
At the date of acquisition H Ltd considered the net assets of S Ltd to be fairly valued in its
statement of financial position, with the exception of land which was considered to be worth
R125 000 more than its carrying amount. S Ltd did not adjust the value of the land in its books.
The non-controlling interests at the date of acquisition of the subsidiary were initially measured
at their fair value of R170 000.
The following are the summarised statements of financial position of H Ltd and S Ltd at
31 December 09:
H Ltd S Ltd
R R
ASSETS
Land, at cost 3 500 000 350 000
Investment in S Ltd 412 500
Current assets 1 087 500 150 000
5 000 000 500 000
Assume that an increase in retained earnings has been the only movement in the equity of the
subsidiary since the acquisition date.
Required:
(a) Calculate the consolidated Retained Earnings figure at 31 December 09.
(b) Prepare H Ltd’s consolidated statement of financial position at 31 December 09.
Ignore taxation.
375
Notes on Group Financial Statements
Question 6:1
The trial balances of Pen Ltd and Pencil Ltd are presented as follows:
Trial Balances at 31 December 20-4:
Pen Ltd Pencil Ltd
R R
Share capital (840 000) (201 600)
General reserve (80 000) (34 000)
Retained earnings – 1 January 20-4 (192 000) (126 000)
10% debentures (160 000) (80 000)
Sales (1 280 000) (448 000)
Dividends received (14 400) (7 200)
Accounts payable (115 200) (36 800)
SARS (9 600) (6 400)
Land at cost 376 000 96 000
Investment in subsidiary 256 000
Other investments 192 000 80 000
Accounts receivable 292 800 57 600
Bank 140 800 152 800
Inventory – 1 January 20-4 168 000 100 800
Purchases 832 000 320 000
Leasing charges 72 000 12 800
Administration expenses 104 000 9 600
Salaries and wages 144 000 40 000
Rent 27 200 9 600
Other expenses 30 400 22 400
Taxation 40 000 28 800
Transfer to general reserve 16 000 9 600
– –
Additional information
1. Pen Ltd acquired 128 000 of Pencil Ltd’s 160 000 issued shares in Pencil Ltd on 1 January
20-2. With the exception of Pencil Ltd’s land, Pen Ltd considered all the assets of
Pencil Ltd to be fairly valued in its statement of financial position at the date of acquisition.
The purchase price of the shares in Pencil Ltd includes nothing in respect of goodwill.
2. On 1 January 20-2 Pencil Ltd’s capital and reserves were:
R
Share capital 201 600
General reserve 16 000
Retained earnings 80 000
297 600
3. Inventories on hand at 31 December 20-4 were valued at R200 000 in Pen Ltd and at
R136 000 in Pencil Ltd.
4. Taxation has been accurately estimated.
5. Non-controlling interests are initially recognised at their share of the separately identifiable
net assets of the subsidiary.
Required:
Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income and
the Statement of Changes in Equity of Pen Ltd for the year ended 31 December 20-4 and the
Consolidated Statement of Financial Position at that date.
(Notes and comparatives are not required. Ignore capital gains tax.)
376
Questions
Question 6:2
Holly Limited bought 6 000 of the 10 000 issued shares in Solly Limited on 31 December 20-3,
at which date the identifiable assets of Solly Limited were considered to be fairly stated in the
books.
The statements of financial position and statements of profit or loss and other comprehensive
income of the two companies were prepared as though there were no relationship between the
companies and they are summarised as follows:
44 500 26 500
continued
377
Notes on Group Financial Statements
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the Holly Limited Group for the year ended 31 December
20-4 and the consolidated statement of financial position at that date. The goodwill in
Solly Limited is considered to be impaired by R500 in the current year. The group’s policy is to
value the non-controlling interests initially at their share of the separately identifiable net assets
of the subsidiary at the date of acquisition.
(Notes are not required, except the property, plant and equipment note. Comparatives are not
required.)
378
Questions
Question 7:1
A Limited bought 60 000 of B Limited’s 100 000 issued shares on 31 December 20.1, at which
date the identifiable assets of B Limited were considered to be fairly valued in the books.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and the
statement of changes in equity of A Limited for the year ended 31 December 20.2 and the
consolidated statement of financial position at that date.
379
Notes on Group Financial Statements
Question 7:2
Hobie Limited bought 6 000 of the 10 000 issued shares in Sprog Limited on 31 December
20-3, at which date the identifiable assets of Sprog Limited were considered to be fairly stated
in the books. At 31 December 20-4, any goodwill that arose on the acquisition of the subsidiary
was considered to have been impaired by 20% of its original cost.
The non-controlling interests at the date of acquisition were initially measured at their fair value
of R7 500.
The statements of financial position and statements of profit or loss and other comprehensive
income of the two companies were prepared as though there were no relationship between the
companies and they are summarised as follows:
44 500 26 500
continued
380
Questions
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income of
Hobie Limited for the year ended 31 December 20-4 and the consolidated statement of finan-
cial position at that date.
(Notes are not required, except the property, plant and equipment note. Comparatives are not
required.)
381
Notes on Group Financial Statements
Question 7:3
The following are the trial balances of A Ltd and its subsidiary, B Ltd, at 30 June 20-8:
A Ltd B Ltd
R R
Share capital 15 000 10 000
Retained earnings: 1 July 20-7 40 000 20 000
Revaluation reserve – 10 000
General reserve 20 000 20 000
Sales 220 000 150 000
Dividends received 6 000 1 000
Creditors 9 000 19 000
310 000 230 000
Taxation 15 000 10 000
Purchases 100 000 70 000
Administrative expenses 5 000 20 000
Investment in B Ltd: 8 000 shares at cost 30 000 –
Other investments 10 000 4 000
Machinery 25 000 50 000
Inventory 35 000 12 000
Debtors 25 000 8 000
Bank 26 000 18 000
Audit fee 5 000 2 000
Directors’ remuneration 24 000 19 000
Leasing charges: Machines – 12 000
Dividends paid 10 000 5 000
310 000 230 000
A Ltd acquired its 80% interest in B Ltd on 1 July 20-5, at which date B Ltd had the following
reserves:
R
Retained earnings 5 000
General reserve 10 000
Revaluation reserve 10 000
A Ltd commenced buying certain inventory items from B Ltd in 20-6. Details of such sales for
the last two years are as follows:
20-8 R30 000
20-7 R40 000
B Ltd sold these inventories to A Ltd at a markup of 20% on its cost price.
A Ltd’s inventory on hand at the end of the 20-8 and 20-7 financial years included inventories
purchased from B Ltd as follows:
20-8 R6 000
20-7 R4 500
Closing inventory on hand at 30 June 20-8: A = R38 000; B = R15 000
Ignore deferred taxation.
Goodwill on acquisition of the subsidiary is considered to be fairly valued at its original cost (i.e.
no impairment has taken place).
The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
Required:
Prepare the consolidated financial statements of the A Ltd Group for the year ended 30 June
20-8.
Notes are not required.
382
Questions
Question 7:4
The following are the summarised annual financial statements of H Limited and S Limited.
continued
383
Notes on Group Financial Statements
Notes:
(1) H Limited purchased its 100% interest in S Limited on 28 February 20-3 on which date
S Limited’s land was worth R50 000 more than its carrying amount.
(2) Shortly before the financial year end, H Limited sent goods to S Limited for R3 000 and
S Limited remitted R7 000 to H Limited.
(3) H Limited has guaranteed the overdraft of S Limited, and a suitable note appeared on the
statement of financial position of H Limited.
(4) Details of the furniture accounts of the two companies at 28 February 20-4 were as
follows:
H Limited S Limited
R000 R000
At cost 124 98
Less: Accumulated depreciation 31 17
93 81
continued
384
Questions
(5) The entire inventory held by S Limited was purchased from H Limited. H Limited’s sales to
S Limited during the year totalled R195 000 at a mark-up of 50% on cost.
(6) The corporate tax rate is 30%. Ignore capital gains tax.
Required:
Prepare the consolidated statement of financial position of the H Limited Group at 28 February
20-4 and the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity for the year ended on that date.
Pro forma (consolidation) journal entries must be shown as part of your workings.
385
Notes on Group Financial Statements
Question 7:5
Hake Ltd acquired its 80% interest in Sober Ltd on 1 July 20-1, at which date Sober Ltd had
the following reserves:
R
Retained earnings 12 500
General reserve 25 000
Other reserve 25 000
The following are the trial balances of Hake Ltd and its subsidiary Sober Ltd at 30 June 20-4:
Hake Ltd Sober Ltd
R R
Share capital 37 500 25 000
Retained earnings: 1 July 20-3 100 000 50 000
Other reserve – 25 000
General reserve 50 000 50 000
Sales 550 000 375 000
Dividends received 15 000 2 500
Accounts payable 22 500 47 500
775 000 575 000
Sober Ltd has always purchased goods from Hake Ltd. The current year’s sales from Hake Ltd
to Sober Ltd amounted to R100 000 (20-3: R80 000). Hake Ltd always achieves a gross
margin of 25% on its sales to Sober Ltd. The accountant of Sober Ltd confirmed that inventory
on hand purchased from Hake Ltd at 30 June 20-4 amounted to R20 000 (20-3: R16 000).
During 20-3 Hake Ltd commenced buying components for its products from Sober Ltd. Details
of such sales by Sober Ltd are as follows:
20-3 R65 000
20-4 R90 000
Sober Ltd sells these items to Hake Ltd at a mark-up of 20% on the cost price. Hake Ltd’s
inventory on hand, at year end, of goods purchased from Sober Ltd amounted to:
20-3 R15 000
20-4 R12 000
continued
386
Questions
The total inventory on hand for both companies at 30 June 20-4 is:
Hake Ltd R95 000
Sober Ltd R37 500
The tax rate has been 40% throughout the period. No goodwill impairment has taken place.
The group’s policy is to value the non-controlling interests initially at their share of the separ-
ately identifiable net assets of the subsidiary at the date of acquisition.
Required:
Prepare the consolidated financial statements of the Hake Ltd Group for the year ended
30 June 20-4.
(Comparatives and notes may be ignored.)
387
Notes on Group Financial Statements
Question 7:6
In order to secure a supply of components, Car Ltd purchased a 75% holding in Parts Ltd on
1 January 20-3, when Parts Ltd had retained earnings of R64 000 and other reserves of
R5 000. In determining the purchase price, Car Ltd felt that Parts Ltd’s land was overvalued but
that all other assets were fairly valued. There was no goodwill on acquisition.
The trial balances for both companies are attached as Annexure A.
As the accountant of Car Ltd you have determined the following information with respect to the
Group:
(1) Car Ltd purchased 60% of the debentures of Parts Ltd in 20-2.
(2) The property which Car Ltd felt was overvalued in Parts Ltd was expropriated
in December 20-3 and Parts Ltd recorded a profit of R20 000 thereon. This profit was
transferred to other reserves.
(3) Car Ltd sold plant and machinery to Parts Ltd on 2 January 20-3 for R96 000. At the date
of sale the plant and machinery had a carrying amount of R60 000 and accumulated
depreciation amounted to R40 000. When this plant and machinery was originally
purchased by Car Ltd, it was estimated to have a 10-year life with a NIL residual value.
These estimates have not been changed. Parts Ltd has purchased all other plant and
machinery since the acquisition date of the shares.
(4) Parts Ltd regularly sells vehicle parts to Car Ltd at its normal retail prices. These sales
amounted to R300 000 in the 20-4 financial year (20-3: R280 000). At Car Ltd’s annual
inventory count on 31 December the inventory of parts on hand purchased from Parts Ltd
amounted to R23 000 (20-3: R40 000).
(5) Parts Ltd had sent inventory to Car Ltd on 28 December 20-4. These items had not been
included in the inventory count details in Note 4. The value of this inventory in transit
amounted to R7 000.
(6) In order to reduce the bank overdraft Parts Ltd sold their trade debtors of R96 000, with
recourse to the bank on 31 December 20-4. Included in these debtors was the current
account of Car Ltd which amounted to R56 000. A suitable note was attached to the
statement of financial position of Parts Ltd.
(7) Car Ltd has guaranteed the remainder of the bank overdraft in Parts Ltd.
Required:
Prepare the Consolidated Statement of Financial Position of Car Ltd at 31 December 20-4 and
the Consolidated Statement of Profit or Loss and Other Comprehensive Income and Statement
of Changes in Equity for the year then ended, in a manner suitable for publication.
(Comparatives are not required. Notes are not required, with the exception of the non-current
assets note and the contingent liability note. Disclosable items must be shown on the face of
the statement of profit or loss and other comprehensive income.) Assume a tax rate of 40%.
Ignore capital gains tax.
For practice, it is suggested that the workings be done using the analysis of equity worksheet
method, in the first instance, followed by the pro forma journal entry (and trial balance
worksheet) method.
continued
388
Questions
ANNEXURE A:
TRIAL BALANCES – 31 DECEMBER 20-4
Car Ltd Parts Ltd
R R
Share capital (600 000) (200 000)
Other reserves (20 000) (40 000)
Retained earnings – 31 December 20-3 (346 000) (89 000)
Long-term loans (250 000)
10% debentures (100 000)
Deferred tax (15 000) (6 000)
Land 450 000 235 000
Plant and machinery 310 000 250 000
Acc depreciation
– plant and machinery (98 000) (95 000)
Investment in Parts Ltd: shares 192 000
Investment in Parts Ltd: debentures 60 000
Other investments 36 000
Inventory 210 000 124 000
Debtors 198 000 2 000
Current account – Parts Ltd (49 000)
Cash at Bank 264 500
Creditors (247 000) (75 000)
Shareholders for dividend (45 000) (25 000)
Bank overdraft (6 000)
Sales (1 240 000) (900 000)
Cost of sales 900 000 720 000
Interest received (9 500)
Interest paid 30 000 16 000
Dividends received (15 000) (1 500)
Other expenses 150 000 60 000
Taxation 70 000 39 500
Transfer to other reserves 15 000 10 000
Dividend – interim 40 000 20 000
– final 45 000 25 000
– –
389
Notes on Group Financial Statements
Question 8:1
The following are the abridged trial balances of H Ltd and S Ltd at 31 December 20-6:
H Ltd S Ltd
R R
Share capital: Ordinary shares 50 000 20 000
Retained earnings: 1 January 20-6 50 000 20 000
General reserve 10 000 15 000
Revaluation reserve 10 000 21 250
Profit before taxation 20 000 10 000
Deferred taxation 3 750
Current liabilities 15 000 25 000
155 000 115 000
Additional information
(1) H Ltd acquired 16 000 of the 20 000 shares in S Ltd for R35 000 on 1 January 20-5. At
this date all the assets of S Ltd were considered to be fairly valued in the books except for
land which was shown at a cost of R40 000, but which H Ltd considered to be worth
R60 000. S Ltd revalued this land in its books on 31 December 20-5.
(2) On 1 January 20-5 the retained earnings of S Ltd amounted to R10 000 and the general
reserve to R10 000.
(3) The following transfers must still be made to general reserves:
H Ltd R2 000
S Ltd R1 000
(4) Ignore goodwill impairment.
(5) Assume a taxation rate of 30%. Capital gains tax is provided on 50% of any capital profits.
(6) The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the H Ltd Group for the year ended 31 December 20-6 and
the consolidated statement of financial position at that date.
390
Questions
Question 8:2
The following are the summarised trial balances of the two companies in the H Ltd group at
31 December 20-2 before preparation of the annual financial statements:
H Limited S Limited
R R
DEBITS
Bank and cash 78 000 51 500
Debenture interest 60 000
Debtors 450 000 210 000
Dividends paid (see note 2) 50 000 4 000
Dividends declared 70 000 30 000
Non-current assets (other than properties) 730 000 325 000
(at valuation 1 January 20-0, plus additions at cost)
Freehold properties 340 000
Interest on H Ltd’s loan 8 000
SARS (Provisional tax paid for 20-2) 141 600 81 600
Inventory 467 900 422 700
Subsidiary company
Dividends receivable 24 000
Loan 80 000
Shares – at cost 738 400
2 889 900 1 472 800
CREDITS
Creditors 384 000 133 200
Debentures – 12% 500 000
Deferred taxation 16 000 12 000
Retained earnings – 31 December 20.1 89 700 46 000
Parent company – loan 80 000
Income from subsidiary company
Dividends – special 3 200
– ordinary 24 000
Loan interest 8 000
Other Reserves
Realised profits on property sale 7 000
Revaluation reserve 108 000
Operating profit before taxation 345 000 177 600
Profit on sale of Property P 14 000
Accumulated depreciation of non-current assets
(other than properties) 250 000 65 000
Share capital 1 200 000 800 000
Shareholders for dividend declared 70 000 30 000
2 889 900 1 472 800
continued
391
Notes on Group Financial Statements
Additional information
(1) On 1 January 20-0 H Limited bought 80% of the shares of S Limited for R738 400 when
the retained earnings of that company were R40 000. There were no other reserves. At
that date H Limited considered the non-current assets (other than properties) to be worth
R18 000 more than the carrying amount and S Limited subsequently entered these
revaluations into its books (immediately after acquisition). S Limited has not sold any of
these assets since 1 January 20-0. On 1 January 20-0 H Limited also considered the
properties (which all comprise only land) to be worth more than cost, at which date they
stood in the books, as follows:
Property G Property P Other
Properties
R R R
Cost price 40 000 50 000 250 000
Value for consolidation 45 000 60 000 300 000
(2) During 20-0 the tenant of Property G was given notice, the property was sold for R47 000,
and the whole profit transferred to other reserves. During 20-2 Property P was sold for
R64 000 and R4 000 of the profit was paid out as a special dividend. Suitable alternative
premises have since been leased.
“Other properties” were those owned at 1 January 20-0 and they were revalued by
S Limited during December 20-2 at R340 000.
(3) Since H Limited acquired control of S Limited, H Limited has regularly sold one of its
products to S Limited at cost plus 25%. Such sales during 20-2 amounted to R140 000.
Inventory on hand of this product in S Limited was (at cost to S Limited):
31 December 20-1 31 December 20-2
R80 000 R100 000
(4) Final estimates of the current tax charges for the year are:
R
H Limited 126 000
S Limited 75 600
and suitable adjustments must be made to the trial balance figures above.
(5) Ignore deferred tax on non-current assets. Assume a tax rate of 40% for other items, if
necessary.
(6) The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
Required:
Prepare a summarised consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity of the H Limited group for the 20-2 financial year
and the consolidated statement of financial position at 31 December 20-2.
Notes to the financial statements are not required. Ignore capital gains tax.
SHOW ALL WORKINGS.
For practice, it is suggested that the workings be done using the analysis of equity worksheet
method, in the first instance, followed by the pro forma journal entry (and trial balance
worksheet) method.
392
Questions
Question 8:3
(1) On 1 July 20-3 Hipol Ltd acquired 90 000 of the 100 000 shares in Skipol Ltd at which
date the inventory and plant of Skipol were considered to be worth R10 000 and R30 000
more than their book values respectively.
Details of Skipol’s plant at 1 July 20-3 were as follows:
Cost – 1 January 20-1 R100 000
Accumulated depreciation at 30 June 20-3 R25 000
R75 000
The directors of Hipol Ltd agreed with Skipol’s estimate of the plant’s life.
The books of Skipol were, however, not adjusted in respect of these valuations (see
note 3 below). All the other identifiable assets of Skipol were considered to be worth their
carrying amounts at this date. The general reserve and retained earnings of Skipol Ltd at
1 July 20-3 were R20 000 and R28 000 respectively. By 30 June 20-4 all the inventory of
Skipol that was on hand on 1 July 20-3 had been sold.
(2) Since September 20-3 Hipol has been selling certain of its inventory to Skipol at cost plus
25%. Details of such intercompany sales and the amount of such inventory held by Skipol
at its financial year ends are as follows:
Sales by Hipol to Skipol:
1 September 20-3 to 30 June 20-4 R160 000
1 July 20-4 to 30 June 20-5 R280 000
Inventory bought from Hipol still on hand in Skipol:
At 30 June 20-4 R 40 000
At 30 June 20-5 R 60 000
(3) The directors of Hipol Ltd and Skipol Ltd have decided that the plant of both companies
are to be revalued in the companies’ books for the first time on 30 June 20-5 at net
replacement costs of R180 000 and R80 000 respectively. No entries have, however, yet
been made with regard to these revaluations. No plant has been bought or sold by
Skipol Ltd since 1 July 20-3.
(4) You may assume that the rate of taxation has remained constant at 40 cents in the rand
for the past 3 years.
(5) Ignore any deferred tax effects of plant adjustments.
(6) Ignore goodwill impairment.
(7) The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
continued
393
Notes on Group Financial Statements
(8) The following summarised trial balances were extracted at 30 June 20-5:
Hipol Ltd Skipol Ltd
R R
Share capital (440 000) (110 000)
Deferred taxation (7 800) (5 100)
General reserve – (40 000)
Retained earnings – 1 July 20-4 (180 000) (70 000)
Operating profit, before depreciation (126 000) (85 000)
Taxation, including deferred tax 38 000 30 000
Dividends received (10 800) –
Dividends declared – 30 June 20-5 30 000 12 000
Transfer to general reserve – 10 000
Plant – cost 300 000 100 000
– accumulated depreciation (175 000) (45 000)
Depreciation 30 000 10 000
Shareholders for dividends (30 000) (12 000)
Investment in Skipol Ltd, at cost 200 000 –
Inventory 178 000 130 000
Accounts receivable 146 000 104 600
Accounts payable (34 000) (28 000)
Bank 63 700 4 800
Current account – Hipol Ltd – (6 300)
Current account – Skipol Ltd 17 900 –
Nil Nil
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the Hipol Ltd Group for the year ended 30 June 20-5 and the
consolidated statement of financial position at that date, after adjusting the figures in the
summarised trial balances given above in respect of the revaluations referred to in note 3
above. Notes to the financial statements and comparative figures are not required.
394
Questions
Question 8:4
The following are the abridged financial statements of Helter Limited and Skelter Limited for the
20-4 financial year:
continued
395
Notes on Group Financial Statements
Additional information
(1) Helter Ltd purchased its investments (two-thirds of the ordinary shares and one half of the
debentures) in Skelter Ltd on 1 January 20-2, when Skelter Ltd had retained earnings of
R4 000 and no other reserves.
On 1 January 20-2 the details of the non-current assets per the books of Skelter Ltd were
as follows:
Accumulated Net book
Cost depreciation value
R R R
Land 385 000 – 385 000
Plant 35 000 7 000 28 000
420 000 7 000 413 000
At that date, Helter Ltd considered Skelter Ltd’s land and buildings to be worth R435 000
and its plant to be worth R40 000. Skelter Ltd depreciates plant at the rate of 10% per
annum straight line and there is no intention to sell the plant in the foreseeable future.
No adjustments have been made in the books of Skelter Ltd with regard to these
valuations.
None of the non-current assets on hand at 1 January 20-2 has been sold or scrapped by
Skelter Ltd.
(2) On 1 July 20-2 Skelter Ltd purchased certain plant from Helter Ltd for R7 500. Helter Ltd
had purchased this plant 6½ years prior to the date on which Helter bought the shares in
Skelter for R15 000, and had been depreciating it at the rate of 10% per annum on cost.
Skelter Ltd agreed that this rate had been fair.
continued
396
Questions
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and the
statement of changes in equity of the Helter Ltd Group company for the year ended
31 December 20-4 and the consolidated statement of financial position at that date.
Notes (except for the property, plant and equipment notes) and comparatives are not required.
397
Notes on Group Financial Statements
Question 8:5
Extracts from the latest annual financial statements of Hotel Limited and Sierra Limited are as
follows:
Additional information
(1) Hotel Limited purchased 70% of the shares in Sierra Limited on 1 July 20-1 when the
subsidiary’s plant was valued at R180 000 and its retained earnings stood at R110 000.
(2) During the year Hotel Limited sold goods to Sierra Limited at a mark-up of 25% on cost.
Details of such goods are as follows:
R
Sales during the year 130 000
Inventory held by Sierra Limited : 30 June 20-3 20 000
: 30 June 20-4 35 000
(excluding goods in transit per note 3)
continued
398
Questions
Additional information
(1) Hotel Limited purchased 70% of the shares in Sierra Limited on 1 July 20-1 when the
subsidiary’s plant was valued at R180 000 and its retained earnings stood at R110 000.
(2) During the year Hotel Limited sold goods to Sierra Limited at a mark-up of 25% on cost.
Details of such goods are as follows:
R
Sales during the year 130 000
Inventory held by Sierra Limited : 30 June 20-3 20 000
: 30 June 20-4 35 000
(excluding goods in transit per note 3)
(3) Sierra Limited had neither received nor accounted for goods dispatched and invoiced at
R55 000 by Hotel Limited to Sierra Limited on 27 June 20-4.
(4) The plant account of Sierra Limited since 20-1 is as follows:
(depreciation on straight-line basis)
R
Cost of plant 200 000
Accumulated depreciation at 1 July 20-1 (4 years) 80 000
Balance at 1 July 20-1 120 000
Depreciation 1/7/20-1 to 30/6/20-4 incl (3 years) 60 000
Balance at 30 June 20-4 60 000
Required:
Consolidated statement of financial position of the Hotel Limited Group at 30 June 20-4 and
consolidated statement of profit or loss and other comprehensive income and statement of
changes in equity for the year ended on that date.
NO notes other than the one relating to the property, plant and equipment is required. Com-
paratives are not required.
For practice, it is suggested that the workings be done using the analysis of equity worksheet
method, in the first instance, followed by the pro forma journal entry (and trial balance work-
sheet) method.
399
Notes on Group Financial Statements
Question 9
400
Questions
Question 10:1
On 1 January 20-8 Oxford Ltd purchased 80% of Cambridge Ltd’s shares for R51 200. At the
date of purchase Oxford Ltd considered all the assets of Cambridge Ltd to be fairly valued, with
the exception of Land (Property No 1). There was no goodwill or ‘bargain purchase’ at acqui-
sition. The summarised statement of financial position items of Cambridge Ltd at 31 December
20-7 are as follows:
R
Land – Property No 1 12 000
– Property No 2 20 000
Current assets 40 000
72 000
The Statements of Profit or Loss and Other Comprehensive Income of the two companies for
the year ended 31 December 20-8 are as follows:
Oxford Cambridge
Ltd Ltd
R R
Sales 275 000 100 000
Cost of sales plus operating expenses 165 000 60 000
Operating profit 110 000 40 000
Profit on sale of properties – 32 000
Dividend Income 55 200 –
Profit before tax 165 200 72 000
Taxation 55 000 20 000
Profit after tax 110 200 52 000
continued
401
Notes on Group Financial Statements
Required:
Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income and
the Statement of Changes in Equity of the Oxford Ltd Group for the year ended 31 December
20-8, insofar as the information permits.
402
Questions
Question 10:2
On 1 January 20-2 Raider (Pty) Ltd purchased 75% of the ordinary shares in Victim Ltd for
R146 250. At that date Victim Ltd’s General Reserve was R25 000 and Retained Earnings
were R50 000.
The following trial balances have been extracted from the ledgers of the two companies at
31 December 20-4:
Raider Victim
(Pty) Ltd Ltd
R R
Share capital (276 000) (100 000)
General reserve (40 000) (35 000)
Retained earnings – 30.12.20-3 (140 900) (75 000)
Deferred taxation (70 000) (8 000)
16% Debentures of R1 each – (25 000)
Accounts payable (54 400) (11 500)
Shareholders for dividend (12 000) (50 000)
SARS (5 500) (2 500)
Non-current assets
– Land and buildings – cost 210 000 180 000
– accumulated depreciation – –
– Plant and machinery – cost 180 000 110 000
– accumulated depreciation (42 000) (60 500)
– Furniture and fittings – cost 75 000 70 000
– accumulated depreciation (30 500) (63 000)
Inventory 37 750 22 000
Accounts receivable 46 000 26 500
Current account – Victim Ltd 37 700 –
Bank 14 800 (3 000)
Trading profit (148 300) (93 000)
Depreciation 40 000 29 000
Interest received (400) –
Interest paid – 2 000
Impairment expense (Victim Ltd) 8 000 –
Dividends received (39 000) –
Taxation (current and deferred) 42 000 30 000
Transfer to general reserve 15 000 5 000
Dividends
– paid – 2 000
– declared 12 000 50 000
Investment in Victim Ltd
– ordinary shares 138 250 –
– 2 500 debentures 2 500 –
– –
continued
403
Notes on Group Financial Statements
Additional information
(1) Neither company has issued shares since they were incorporated.
(2) On 1 January 20-2 Raider (Pty) Ltd considered Victim Ltd’s non-current assets to have the
following values:
(a) A vacant property with a cost of R50 000 was valued at R70 000. On 3 January 20-2
this property was sold for R80 000 and Victim Ltd declared and paid a dividend equal
to the profit on sale of the property on the same day. Victim Ltd had never revalued
this property from its original cost. Land and buildings are not depreciated. Ignore
capital gains tax on the property.
(b) All other assets were fairly valued in the books of Victim Ltd.
(3) Victim Ltd declared and paid a dividend of R20 000 on 10 January 20-2. Ignore taxation
on the impairment of the investment in Victim Ltd.
(4) Raider (Pty) Ltd’s manufacturing division sold plant it had manufactured to Victim Ltd on
1 April 20-2 for R110 000. The cost of sales to Raider (Pty) Ltd was R70 000. Victim Ltd
depreciates its plant on a straight line basis.
(5) Victim has not sold or purchased any non-current assets, other than as detailed above.
(6) Victim Ltd regularly sells goods to Raider (Pty) Ltd at a markup of 33% on cost. Details
of Victim Ltd’s annual sales to Raider (Pty) Ltd and of Raider Ltd’s inventory on hand
bought from Victim Ltd at end of its three most recent financial years, are as follows:
Inventory
Sales 31/12
R R
20-2 42 000 12 000
20-3 45 000 16 000
20-4 30 000 8 000
(7) Total sales for Raider (Pty) Ltd and Victim Ltd was R450 000 and R400 000 respectively.
(8) Victim Ltd issued its 25 000 debentures on 1 July 20-4. Interest of R2 000 is payable
6 monthly in arrears. All cheques were posted on 29 December 20-4. Raider (Pty) Ltd
received its cheque on 3 January 20-5. The debentures are redeemable at R1 each on
30 June 20-14.
(9) Raider (Pty) Ltd has a contingent liability disclosed in respect of a guarantee over
Victim Ltd’s overdraft to the bank.
(10) The tax rate was 40% throughout the period.
(11) The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
Required:
Prepare the Consolidated Statement of Financial Position at 31 December 20-4 and the
Consolidated Statement of Profit or Loss and Other Comprehensive Income and Statement of
Changes in Equity for the year ended on that date. Comparatives are not required. The only
note to the financial statements required is the non-current assets note. Depreciation and
interest should be shown on the face of the Statement of Profit or Loss and Other
Comprehensive Income.
Pro forma (consolidation) journal entries must be shown as part of your workings.
404
Questions
Question 11:1
H Limited purchased the following investments in its subsidiary, S Limited, on 1 January 20-3.
75% of the ordinary shares
60% of the preference shares
60% of the 10% debentures
On 1 January 20-3 S Limited had a general reserve of R3 600 and retained earnings of
R1 600. At the same date S Limited’s plant was valued at R1 200 more than its carrying
amount. All other assets of the subsidiary were considered to be worth their carrying amounts
at the date of acquisition.
continued
405
Notes on Group Financial Statements
Additional information
(1) S Limited supplies goods to H Limited at cost plus 50%. Details of such sales and of
inventories held are as follows:
Sales by S Limited to H Limited:
Year ended 31 December 20-3 R25 600
Year ended 31 December 20-4 R39 000
H Limited’s inventory purchased from S Limited:
On hand at 31 December 20-3 R2 400
On hand at 31 December 20-4 R7 800
(2) Details of S Limited’s plant were as follows:
DEBIT CREDIT BALANCE
January 1, 20-2 8 000 8 000
December 31, 20-2 2 000 6 000
December 31, 20-3 2 000 4 000
December 31, 20-4 2 000 2 000
(3) S Limited posted its preference dividend cheques on 31 December 20-4. H Limited
journalised all dividends receivable from S Limited to the debit of the subsidiary’s current
account. The preference shares are classified as pure equity instruments.
(4) The taxation rate for each of the years covered in the question was 40%.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and a
note reconciling the opening and closing consolidated retained earnings of the H Limited Group
for the financial year ended 31 December 20-4.
Comparative figures and other notes are not required.
All disclosable items may be shown on the face of the consolidated statement of profit or loss
and other comprehensive income. Ignore goodwill impairment. The group’s policy is to value
the non-controlling interests initially at their share of the separately identifiable net assets of the
subsidiary at the date of acquisition.
Pro forma (consolidation) journal entries must be shown as part of your workings.
406
Questions
Question 11:2
The following are the summarised statement of financial position and statements of profit or
loss and other comprehensive income of H Limited and S Limited for the year ended 31 March
20-5:
STATEMENTS OF FINANCIAL POSITION AT 31 MARCH 20-5
H Ltd S Ltd
R000 R000
ASSETS
Property, plant and equipment 264 2 170
Investment in S Limited 1 560
Ordinary shares, at cost 1 500
Preference shares, at cost 60
Current assets 427 1 340
Inventory 230 820
Debtors 165 470
Bank 32 50
2 251 3 510
EQUITY AND LIABILITIES
Ordinary shareholders’ equity 1 552 2 429
Ordinary share capital 1 000 100
General reserve 400 1 900
Retained earnings 152 429
Non-current liabilities 410 601
Preference share capital 200 200
Deferred taxation 40 70
Long-term loans 170 331
Current liabilities 289 480
Creditors 134 198
SARS 145 232
Shareholders for dividend 10 50
2 251 3 510
continued
407
Notes on Group Financial Statements
Additional information
(1) H Limited acquired its 80% holding in the ordinary shares of S Limited on 1 April 20-1
when S Limited’s retained earnings were R160 000 and its general reserve was
R1,5 million. At this date H Limited valued the machinery of S Limited, with a remaining
useful life of 5 years, at R4 000 less than its carrying amount. (Ignore deferred tax on this
difference and on any subsequent depreciation adjustments.) All other assets and
liabilities were fairly valued at carrying amount.
It is group policy to depreciate machinery over 10 years on the straight-line basis.
(2) H Limited acquired its 30% holding in the preference shares of S Limited on 1 April 20-2.
(3) S Limited sells inventory to H Limited at cost plus 25%, details of which are as follows:
R750 000 sales by S Limited to H Limited during 20-5 financial year;
included in H Limited’s inventory on hand purchased from S Limited
– at 31 March 20-5 R150 000
– at 1 April 20-4 R250 000
(4) On 1 October 20-3 H Limited sold newly manufactured machinery (a non-current asset in
H Limited) to S Limited for R800 000 which had cost R600 000. SARS views this profit as
taxable.
(5) The tax rate has been 40% since 1 April 20-1.
(6) There have been no issues or redemption of shares in either company for the period
under review.
(7) Goodwill on acquisition of the subsidiary is considered to be fairly valued at its original
cost (i.e. no impairment has taken place).
(8) The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
Required:
Prepare the consolidated statement of financial position, statement of profit or loss and other
comprehensive income and statement of changes in equity of the H Limited Group for the year
ended 31 March 20-5.
No notes to the financial statements or comparative figures are required.
Pro forma (consolidation) journal entries must be shown as part of your workings.
408
Questions
Question 12:1
Holds Ltd acquired an 80% interest in C Bpk on 1 March 20-5 when the latter had an accu-
mulated deficit of R12 000.
The following is an extract from the trial balances at 28 February 20-8:
Holds Ltd C Bpk
R R
Accumulated deficit – 1 March 20-7 – 7 000
Creditors 106 000 20 000
Deferred taxation (credit balance) 4 000 400
Dividends proposed 25 000 –
Plant and machinery – at cost less depreciation 65 000 9 000
Profit for the year 92 000 11 000
Retained earnings – 1 March 20-7 37 000 –
Share capital – authorised and issued 270 000 30 000
Shares in C Bpk at cost 18 000 –
Inventory 120 000 4 000
Sundry current assets 223 000 2 000
The following information is available:
(a) C Bpk has not issued any shares or sold any plant and machinery since 1 March 20-5.
(b) During the year C Bpk commenced selling inventory to Holds Ltd at normal selling price
less 20%. The normal selling price of C Bpk is cost price plus 33%. Included in
Holds Ltd’s inventory at 28 February 20-8 is an amount of R28 800 in respect of inventory
bought from C Bpk for that amount.
(c) Goodwill was tested for impairment and its recoverable amount was determined to be
R2 520 on 28 February 20-8 (20-7 : R2 880).
(d) Ignore deferred tax implications of the accumulated loss (if any).
(e) The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
Required:
(a) Prepare the summarised consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity of Holds Ltd and its subsidiary for the year
ended 28 February 20-8.
(b) Give the figures which should appear in the consolidated statement of financial position of
Holds Ltd and its subsidiary at 28 February 20-8 for the following:
(i) Goodwill.
(ii) Non-controlling interests.
Comparative figures and notes are not required.
Assume the tax rate to be 40%.
409
Notes on Group Financial Statements
Question 12:2
On 1 July 20-3 Squash Ltd purchased 75% of the ordinary shares of its supplier, Orange Ltd,
and 3 000 of Orange Ltd’s Preference Shares (classified as pure liability instruments).
Orange Ltd had been experiencing financial difficulties and had reported an Accumulated
Deficit of R22 000 on 30 June 20-3. Orange Ltd had no other reserves at the date of purchase.
All assets were considered to be fairly valued in the books of the subsidiary. The summarised
Financial Statements at 30 June 20-7 for the two companies are as follows:
Statement of Profit or Loss and Other Comprehensive Income Items and Reconciliation
of Opening and Closing Retained Earnings (R000’s):
Squash Orange Squash Orange
Ltd Ltd Ltd Ltd
Cost of sales 160,4 80 Revenue 360 200
Operating expenses 49 54 Dividend received 7,8 –
Depreciation 25 10 Admin.fee rec. – Orange 12 –
Admin. fees paid – squash – 12 Retained earnings
Taxation 65 22 from previous years 250,6 13
Dividends 40 11
Transfer to GR 10 1
Retained earnings 281 23
421 79 421 79
continued
410
Questions
As accountant of Squash Ltd you received the following answers to your queries:
(1) The ordinary dividend of R10 000 was declared by the directors of Orange Ltd on 30 June
20-7. The preference dividend of R1 000 was also declared on this date.
(2) Orange Ltd sold 70% of its sales to Squash Ltd. Sales for Squash Ltd and Orange Ltd
were R360 000 and R200 000 respectively for the 20-7 financial year.
(3) R14 000 (20-6: R8 000) of Squash Ltd’s year end inventory of “fruit concentrate” had been
purchased from Orange Ltd. Orange Ltd’s pricing policy is cost + 25%.
(4) On 1 January 20-4, Squash Ltd sold a ‘Juice Extraction Plant’ to Orange Ltd for R30 000.
The plant had been originally purchased for R40 000 and had been depreciated to a
carrying amount of R24 000. The directors of Orange Ltd depreciate the plant at 20% p.a.
straight line. At 1 January 20-4 the remaining useful life was assessed at five years.
(5) Squash Ltd had posted a cheque for R2 500 to Orange Ltd on 29 June 20-7. Orange Ltd
had not received the cheque by 30 June 20-7.
(6) The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition. Ignore
goodwill impairment.
Required:
Prepare a Consolidated Statement of Financial Position of the Squash Ltd Group at 30 June
20-7 and a Consolidated Statement of Profit or Loss and Other Comprehensive Income and
Statement of Changes in Equity for the year then ended. Notes and comparatives are not
required. The tax rate was 40% throughout the period.
411
Notes on Group Financial Statements
Question 13:1
Hors Ltd purchased 80% of the shares in Kort Ltd on 1 October 20-5 for R180 000. At that date
all identifiable assets of Kort Ltd were considered to be fairly valued, except for Furniture which
was considered to have a fair value of R12 000 more than the carrying amount in Kort Ltd. The
following are the account balances of the two companies at 28 February 20-6:
Hors Ltd Kort Ltd
R R
Accumulated depreciation – furniture (24 000) (32 500)
Bank 116 700 87 600
Inventory 187 500 95 000
Creditors (301 500) (28 000)
Loan account – ‘Hors Ltd’ (78 000)
Debtors 168 000 107 500
Depreciation – furniture 12 000 6 000
Dividend – interim – 15 000
Dividend – final 75 000 15 000
Furniture – cost 120 000 60 000
General expenses 162 000 72 000
Gross profit (345 600) (240 000)
Investment in subsidiary 258 000 –
Land 645 000 –
Other reserves (232 500) (37 500)
Rent paid – 36 000
Rent received (36 000) –
Retained earnings – 1 March 20-5 (63 000) (13 500)
Shareholders for dividends (75 000) (15 000)
Share capital (750 000) (100 000)
Taxation 83 400 50 400
– –
Kort Ltd sold their land on 1 March 20-5 for R172 500. The original cost of this asset was
R150 000. The profit (ignore capital gains tax) was posted directly to Other Reserves. The
remainder of Kort Ltd’s Other Reserves arose in 20-2.
In order to continue trading, Kort Ltd had occupied a building owned by Hors Ltd for the year
and had paid a monthly rental of R3 000.
Kort Ltd earns its profit from long-term contracts and monthly profits do not fluctuate.
On 30 September 20-5 Kort Ltd declared an interim dividend of R15 000. This was paid on
15 October 20-5. On 28 February 20-6 the directors of Hors Ltd and Kort Ltd declared
dividends of 10% and 15% of share capital respectively.
With the exception of the land, no assets had been purchased or sold during the year. The
furniture of Kort Ltd, undervalued at the date of acquisition of the shares, related to furniture
purchased on 1 October 20-0. Kort Ltd depreciates its furniture at 10% p.a. using a straight line
policy.
Goodwill on acquisition of the subsidiary is considered to be fairly valued at its original cost (i.e.
no impairment has taken place).
The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
The corporate tax rate is 30%.
continued
412
Questions
Kort Ltd sold their land on 1 March 20-5 for R172 500. The original cost of this asset was
R150 000. The profit (ignore capital gains tax) was posted directly to Other Reserves. The
remainder of Kort Ltd’s Other Reserves arose in 20-2.
In order to continue trading, Kort Ltd had occupied a building owned by Hors Ltd for the year
and had paid a monthly rental of R3 000.
Kort Ltd earns its profit from long-term contracts and monthly profits do not fluctuate.
On 30 September 20-5 Kort Ltd declared an interim dividend of R15 000. This was paid on
15 October 20-5. On 28 February 20-6 the directors of Hors Ltd and Kort Ltd declared
dividends of 10% and 15% of share capital respectively.
With the exception of the land, no assets had been purchased or sold during the year. The
furniture of Kort Ltd, undervalued at the date of acquisition of the shares, related to furniture
purchased on 1 October 20-0. Kort Ltd depreciates its furniture at 10% p.a. using a straight line
policy.
Goodwill on acquisition of the subsidiary is considered to be fairly valued at its original cost (i.e.
no impairment has taken place).
The group’s policy is to value the non-controlling interests initially at their share of the
separately identifiable net assets of the subsidiary at the date of acquisition.
The corporate tax rate is 30%.
Required:
Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income and
Statement of Changes in Equity of the Hors Ltd Group for the year ended 28 February 20-6
and the Consolidated Statement of Financial Position at that date. Provide a break-down of the
cost and accumulated depreciation of the group’s property, plant and equipment at 28 February
20-6 as part of your answer.
Note: (a) Notes to the financial statements are not required.
(b) Work to the nearest rand.
413
Notes on Group Financial Statements
Question 14:1
On 1 January 20-2 Heave Ltd purchased a 40% holding in Shove Ltd for R60 000. At the date
of acquisition the equity of Shove Ltd was as follows:
R
Share capital 50 000
General reserve 35 000
Retained earnings 50 000
135 000
All assets of Shove Ltd were considered to be fairly valued in its books at this date.
The following summaries were given to you by the accountants of both companies for the year
ended 31 December 20-4:
continued
414
Questions
Additional information
1. Heave Ltd purchased R45 000 worth of inventory from Shove Ltd during the 20-4 financial
year. Shove Ltd’s mark-up is 33% on cost. Inventory on hand in Heave Ltd purchased
from Shove Ltd at 31 December 20-4 is R10 000 (31/12/20-3: R14 000).
2. Share capital has not changed in either company.00
3. Heave Ltd’s investment in Shove Ltd has remained unchanged.
4. The tax rate was 40% throughout the period.
Required:
(a) Prepare the consolidated financial statements of Heave Ltd incorporating the results of
Shove Ltd on the equity method in accordance with IFRS.
The following items need not be prepared:
(i) Directors Report
(ii) Cash Flow Statement
(iii) Notes to the financial statements.
(b) Draft the journal entries necessary to account for Shove Ltd on the equity method.
415
Notes on Group Financial Statements
Question 14:2
X Limited purchased 30% of Y Limited’s equity shares on 1 January 20.1. In deciding on the
purchase price of R30 000, X Limited’s directors decided that the company’s land was
understated by R10 000. Y Limited is classified as an associate.
The following trial balances were extracted from the books of X Limited and Y Limited at
30 June:
20.1 20.2
X Limited Y Limited X Limited Y Limited
CREDITS
Share capital 75 000 25 000 75 000 25 000
Reserves 20 000
Retained earnings 60 000 50 000 67 450 53 500
Net operating profit 25 000 20 000 35 800 30 000
Dividends received 1 950 2 400
161 950 95 000 180 650 128 500
DEBITS
Property, plant and equipment 85 000 60 000 85 000 75 000
Investment in Y Limited – cost 30 000 30 000
Other sundry investments 10 000
Net current assets 27 450 18 500 30 150 30 500
Taxation 12 500 10 000 17 500 15 000
Dividends paid – 30 June 7 000 6 500 8 000 8 000
161 950 95 000 180 650 128 500
Additional information
1. On 30 June 20.2 Y Limited revalued its land by R20 000.
2. Y Limited earns its income evenly during the year.
3. The carrying amount of the investment in Y Limited had not been impaired at either
30 June 20.1 or 30 June 20.2.
Required:
Prepare the statement of financial position of X Limited at 30 June 20.2 and the statement of
profit or loss and other comprehensive income and statement of changes in equity for the year
ended on that date, accounting for its associate on the equity method.
Comparative figures are required.
A statement of accounting policies is not required.
Ignore CGT.
416
Questions
Question 14:3
The following are the final balances of England Limited, Ireland Limited and Scotland Limited at
31 December 20.4 (credit balances in brackets):
England Ireland Scotland
Limited Limited Limited
R’000 R’000 R’000
Retained earnings (33 400) (18 300) (9 800)
Other reserves (19 500) (9 000) –
Share capital (48 000) (48 000) (24 000)
Deferred tax (960) (1 080) (630)
Long-term borrowings (17 500) (14 500) (4 000)
Investments
Shares in Ireland Limited, at cost 50 000 – –
Shares in Scotland Limited, at cost 12 000 – –
Loan to Scotland Limited 4 000 – –
Property, plant and equipment 34 500 62 300 28 400
Current assets 20 160 37 980 14 030
Cost of sales 61 600 87 800 43 200
Finance costs 2 300 1 600 500
Other expenses 12 700 14 300 6 600
Other income (including interest and dividends received) (5 100) (400) –
Sales revenue (83 200) (123 600) (58 100)
Income tax expense 2 400 5 800 2 300
Dividends paid 6 000 3 600 1 500
Transfer to reserves 2 000 1 500 –
– – –
Ireland Limited
England Limited acquired 80% of the issued ordinary shares in Ireland Limited at the beginning
of 20.1 when the latter’s retained earnings amounted to R9.6 million and its only other reserve
was a capital redemption reserve fund of R6 million. Except for inventory, which was con-
sidered to be overvalued by R2.4 million, the remainder of Ireland Limited’s identifiable assets
were considered to be fairly valued.
All the inventory referred to above had been sold by Ireland Limited by the end of 20.1 for
R14.3 million.
In 20.2 Ireland Limited made a capitalisation issue of six million ordinary shares at R1 each by
using its capital redemption reserve fund of R6 million.
On 1 July 20.3 Ireland Limited sold a five-year old item of plant to England Limited. The asset
had an original cost of R8.4 million and Ireland Limited recognised a pre-tax profit of R2 million
on the sale. The asset has a total useful life of ten years and the depreciation provided by both
companies reflects this fact. Both companies use the straight line method of depreciation.
Scotland Limited
On 2 January 20.4 England Limited purchased 30% of the ordinary shares in Scotland Limited.
All of Scotland Limited’s identifiable assets were considered to be fairly valued at that date.
At the beginning of the current year England Limited granted a loan to Scotland Limited. This is
the only interest-bearing debt that Scotland Limited has and all its finance costs relate to this
loan.
continued
417
Notes on Group Financial Statements
During the current year England Limited started supplying Scotland Limited with certain
inventories at a mark-up of 30% on cost. Details of these transactions for the current year are
as follows:
R’000
Total sales from England Limited to Scotland Limited 12 350
Inventory bought by Scotland Limited from England Limited
on hand at 31 December 20.4
– Cost to Scotland Limited 3 900
Other information:
1. The tax rate is 30%. You may assume that this tax rate has remained unchanged since 20.1.
2. At 31 December 20.4 the goodwill acquired on acquisition of Ireland Limited had a recover-
able amount of R1 053 000 (20.3: R 2 106 000).
3. At 31 December 20.4 England Limited considered its investment in Scotland Limited to
have a recoverable amount of R12 639 000.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
consolidated statement of changes in equity of England Limited for the 20.4 financial year in
compliance, as far as the given information permits, with South African Standards of Generally
Accepted Accounting Practice.
Note:
ƒ No notes are required.
ƒ You may round off figures to the nearest R1 000.
ƒ England Limited accounts for its associates on the equity method i.t.o. IAS 28 in its consoli-
dated financial statements.
ƒ Non-controlling interests are not initially measured at fair value.
418
Questions
Question 14:4
Honduras Ltd is a large public company with numerous subsidiaries and one associate, Gua-
temala Ltd.
Detailed below are the draft consolidated statement of financial position at 31 December 20-4
and the draft consolidated statement of profit or loss and other comprehensive income and a
reconciliation of opening and closing consolidated retained earnings of Honduras Ltd for the
year ended 31 December 20-4:
Reconciliation of opening and closing consolidated retained earnings for the year ended
31 December 20-4.
R
Balance 1 January 20-4 39 800
Comprehensive income for the year 60 500
Dividends paid (20 000)
Transfer to other reserves (20 000)
Balance 31 December 20-4 60 300
continued
419
Notes on Group Financial Statements
Required:
Redraft the above consolidated statement of financial position and consolidated statement of
profit or loss and other comprehensive income (include also a statement of changes in equity)
of Honduras Ltd, accounting for Honduras Ltd’s interest in Guatemala Ltd on the full consolida-
tion basis.
420
Questions
Question 14:5
Investor Limited acquired a 25% interest in Associate Limited for R50 000 on 1 January 20-4,
when Associate’s retained earnings were R50 000 and share capital R20 000. At this date
Investor valued Associate’s land at R100 000 more than its carrying amount. Associate made
no adjustment for this in its own books.
Up to 1 January 20-5, the beginning of the current financial year, Associate’s retained earnings
increased by R60 000 and land was revalued upwards in its books by R150 000.
The land was sold by Associate early in 20-5 at a profit of R25 000. No tax resulted from the
sale. Associate’s profit for the year for the year ended 31 December 20-5 amounted to
R45 000, out of which a R5 000 dividend was declared and R25 000 (the profit on sale of land)
was transferred to a general reserve. The realised revaluation reserve was also transferred to
the general reserve. Investor earned profit after tax for the year of R26 250 and declared a
dividend in terms of its stated aim of maintaining a dividend cover of three times (before equity
earnings from associates). Investor’s opening retained earnings was R180 000 before applying
the equity method to Associate Limited and share capital R100 000.
Investor’s tax expense for 20-5 was R20 000 and that of Associate R8 000. Investor had no
long-term liabilities or deferred taxation at 31 December 20.5, and disclosed other net assets at
R247 500 (excluding its investment in Associate, which was accounted for at cost).
Required:
(a) Prepare the Statement of Profit or Loss and Other Comprehensive Income, Statement of
Changes in Equity and Statement of Financial Position of Investor Limited for 20-5 in a
manner which accounts for its associate using the equity method. Notes are not required.
Ignore capital gains tax.
(b) Assume now that:
– Associate did not at any stage revalue the land in its own books
– The land was sold by Associate early in 20.5 at a profit of R175 000. (Note: The whole
175 000 was transferred to a general reserve.)
Without doing any additional workings, indicate which items in the Statement of Profit or Loss
and Other Comprehensive Income, Statement of Changes in Equity and Statement of Financial
Position prepared in your solution to (a) will change as a result of the above assumptions and
indicate what the adjusted figures will be.
421
Notes on Group Financial Statements
Question 14:6
Foodcorp Limited is a company that manufactures and distributes a wide range of products in
the catering industry. Some years ago Foodcorp Limited and two other companies established
Pesto Limited which manufactures high quality speciality foods for the restaurant trade. In
establishing Pesto Limited an agreement was drawn up whereby the three companies would
exercise joint control over the company.
Foodcorp Limited has a 40% interest in Pesto Limited and the other venturers each have a
30% interest.
The following is an extract from the trial balances of Foodcorp Limited and Pesto Limited for
the year ended 30 June 20.2:
Foodcorp Limited Pesto Limited
(Dr)/Cr R’000 R’000
Turnover 228 400 38 900
Interest and dividend income 6 200 320
Cost of sales (115 600) (15 600)
Operating costs (64 700) (8 100)
Finance costs (4 800) (1 200)
Taxation expense (10 800) (3 960)
Loan to Pesto Limited (6 000) –
Loan from Foodcorp Limited – 6 000
Dividends paid and declared (15 000) (5 000)
Foodcorp Limited supplies certain raw material inventories to Pesto Limited. The goods are
sold at a mark-up of 50% on cost. The following information in respect of these goods is avail-
able for the 20.2 financial year:
R’000
Sales from Foodcorp Limited to Pesto Limited 12 100
Inventory of Pesto Limited bought from Foodcorp Limited at:
– 30 June 20.1 2 700
– 30 June 20.2 3 900
The loan from Foodcorp Limited to Pesto Limited was made soon after the incorporation of the
latter company. There were no advances or repayments during the current financial year. The
loan bears interest at 15% p.a.
The corporate tax rate is 30%.
Required:
(a) Assume that Pesto Limited is classified as a joint venture by Foodcorp Limited. Prepare
the statement of profit or loss and other comprehensive income of Foodcorp Limited
incorporating Pesto Limited on the equity method in terms of Statement IAS 28.
(b) Assume now that Pesto Limited is a subsidiary of Foodcorp Limited. Prepare the consoli-
dated statement of profit or loss and other comprehensive income of Foodcorp Limited for
the current financial year.
For both requirements your answer should comply with IFRS insofar as this is possible.
You may work to the nearest R1 000.
422
Questions
Question 15:1
On the formation of Neptune Limited in 20-4 Unitas Limited acquired a 10% interest for
R10 000. On 31 March 20-6 this was increased to 30% and on 30 June 20-7 the holding was
increased to 60%. Appendix 1 gives the summarised financial statements of the two companies
for the year ended 31 December 20-7.
You established that:
(i) Operating profit is earned evenly during the year;
(ii) Neptune paid an interim dividend of R60 000 on 24 June 20-7.
(iii) You are to assume that goodwill has been maintained at its cost and that no impairment
has taken place.
(iv) The investment in Neptune Limited was carried at cost as it was the best approximation of
fair value. At 31 March 20-6 it had an estimated fair value of R57 000. On 30 June 20-7
the equity accounted carrying amount was estimated to be the same as the investment’s
fair value.
(v) Non-controlling interests are initially measured at their share of net identifiable assets.
Required:
(a) Prepare the pro forma journal entries necessary to consolidate Neptune Limited and
Unitas Limited for the years ended in December 20-6 and 20-7.
(b) Prepare the consolidated statement of financial position, statement of profit or loss and
other comprehensive income and statement of changes in equity of Unitas Limited for the
year ended 31 December 20-7. (Comparative figures are required.)
Notes to the financial statements are not required but sufficient detail should be given on the
face of the statements.
APPENDIX 1
continued
423
Notes on Group Financial Statements
424
Questions
Question 15:2
On 30 June 20-1 Hack Limited acquired a 10% stake in the ordinary share capital of
Slice Limited for R20 000. On 1 January 20-8 Hack Limited acquired an additional 50% of the
ordinary share capital for R140 000. The assets and liabilities of Slice Limited were considered
to be fairly valued at this date, except land which was considered to be worth an additional
R30 000.
Up until 1 January 20.8 the original investment in Slice Ltd was accounted for by including the fair
value adjustment in other comprehensive income in terms of IFRS 9. Since this date it has been
accounted for on the cost method. The original investment as well as the non-controlling
shares in Slice Limited had a fair value of R2.60 per share on 1 January 20-8.
The retained earnings and general reserve of Slice Limited on 30 June 20-1 were R30 000 and
R60 000 respectively. The assets and liabilities of Slice Limited were considered to be fairly
valued at this date, except land which was considered to be worth an additional R8 000.
Slice Limited has been selling inventory to Hack Limited for many years at a gross profit
percentage of 40% on the selling price. Sales by Slice Limited to Hack Limited during the 20-8
financial year totalled R8 000 per month. Hack Limited’s closing inventory included the follow-
ing amounts purchased from Slice Limited.
30 June 20-1: R15 000
31 December 20-7: R25 000
31 December 20-8: R30 000
On 30 June 20-4 Hack Limited sold some plant which was 2,5 years old, to Slice Limited for
R150 000. The carrying amount at the date of sale was R120 000. Hack Limited depreciates
plant on the straight-line basis over ten years and Slice Limited did not alter the remaining
useful life of the asset.
The summarised financial statements of the two companies at 31 December 20-8 were as
follows:
Share capital [Hack Ltd: 150 000 shares; Slice Ltd: 100 000 shares] 150 100
General reserve 120 85
Fair value reserve 5.4
Retained earnings 80 85
Deferred taxation 40.6 20
Creditors 20 25
Shareholders for dividends 40 20
456 335
continued
425
Notes on Group Financial Statements
Additional information
(i) The tax rate is 40%. The effective CGT rate is 10%.
(ii) Slice Limited has not purchased or sold any plant since 30 June 20-4.
(iii) You should assume that the goodwill in Slice Ltd has not been impaired since the acqui-
sition date.
(iv) Non-controlling interests are initially measured at fair value.
Required:
(a) Provide the workings to be done using the analysis of equity worksheet method, in the first
instance, followed by the pro forma journal entry (and trial balance worksheet) method.
(b) Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity for Hack Limited for the year ended 31 December 20-8 and
a consolidated statement of financial position at that date.
Comparatives and notes are not required.
426
Questions
Question 15:3
The summarised statements of profit or loss and other comprehensive income combined with
reconciliations of the opening and closing retained earnings of Alpha Limited and its subsidiary
Beta Limited for the year ended 31 March 20-5 were as follows:
Alpha Limited Beta Limited
R R R R
Trading profit for the year 131 650 50 800
Less: Depreciation 16 000 4 000
Interest 8 000 24 000 2 500 6 500
Profit before taxation 107 650 44 300
Less: S.A. normal tax 42 000 19 500
Profit for the year 65 650 24 800
Dividends
– preference – 31 March 20-5 7 000
– ordinary – 1 May 20-4 (Interim) 5 000
– 31 March 20-5 30 000 8 000 20 000
Retained earnings for the year 35 650 4 800
Retained earnings 31 March 20-4 128 000 63 100
Retained earnings 31 March 20-5 163 650 67 900
Alpha Limited has held 40% of Beta Limited’s preference shares (classified as pure equity
instruments) since its incorporation, acquired 75% of Beta’s ordinary shares on 1 April 20-4
and a further 15% on 15 September 20-4. At no time was any discount on bargain purchase
created.
At 1 April 20-4 Beta Limited’s plant was reflected at cost of R40 000 less accumulated depre-
ciation of R10 000, giving a carrying amount of R30 000. Depreciation provided by Beta Limited
was calculated at 10% p.a. on cost at all times. However, Alpha Limited considered the plant to
be worth R5 000 more than the carrying amount at 1 April 20-4 and that it had a remaining
useful life of 7 years. No adjustment was made to the plant in the books of Beta Limited.
The interest paid by Beta Limited was paid to Alpha Limited and is included in the trading profit
of the latter, as is the total of all dividends received from Beta Limited.
The profit of Beta Limited was earned evenly throughout the year.
Assume a tax rate of 40%.
Required:
Draft the consolidated statement of profit or loss and other comprehensive income as well as
a statement reconciling the opening and closing consolidated retained earnings of the
Alpha Limited Group for the financial year ended 31 March 20-5 based on the available infor-
mation.
Comparative figures are not required.
Work to the nearest rand.
427
Notes on Group Financial Statements
Question 15:4
Rata Limited acquired 10% of the ordinary share capital of Parfait Limited four years ago for
R15 000 when the retained earnings of the latter were R20 000. On the same date
Rata Limited also acquired 60% of the preference shares of Parfait Limited for R35 000. The
preference dividends have never been in arrears. The preference shares were classified as
pure equity instruments.
On 1 January 20-4 Rata Limited acquired an additional 20% of the ordinary share capital of
Parfait Limited for R40 000 and in accordance with an agreement with the company, gained the
right to appoint two of the five directors of the Board of Parfait Limited.
The original investment in Parfait was accounted for by including the fair value adjustment in
other comprehensive income in terms of IFRS 9. (Ignore tax on the fair value adjustments.) The
fair value of the investment was R16 000 on 30 June 20-3 and R18 500 on 1 January 20-4.
Since 1 January 20-4 Parfait Limited has been accounted for on the cost method. The invest-
ment in preference shares is accounted for at cost by Rata Limited.
The assets of Parfait were considered to be fairly valued in its books on this date with the
exception of its plant which was considered to be worth R10 000 more than carrying amount.
Parfait did not adjust its books in line with this valuation, which valuation was less than the
original cost of the plant. The estimated remaining useful life of Parfait’s plant at that date was
5 years. No plant has been purchased or sold by Parfait during the 20-4 financial year, other
than the plant manufactured by Parfait and sold to Rata on 1 April 20-4 (see below).
On 1 April 20-4 Parfait sold plant which it had manufactured as inventory to Rata Limited for
R90 000. Parfait made a profit R30 000 on the sale and Rata Limited depreciates the plant on
the straight-line basis over 5 years.
The profit on the sale of land in the trial balance of Parfait Limited relates to the expropriation of
certain land by the government on 15 February 20-4. The profit is not taxable.
Parfait Limited earned its profit, excluding the R30 000 profit on sale of the plant to Rata Ltd,
evenly over the year.
On 1 July 20-2 Rata Limited also acquired 60% of the ordinary shares of Zenu Limited when
the shareholders’ funds of the latter company were as follows:
R
Ordinary share capital 25 000
Revaluation reserve (land) 15 000
Capital redemption reserve fund 10 000
Retained earnings 30 000
80 000
At that date the land of Zenu Limited were considered to be worth R8 000 more than their
carrying amount while all the other assets of Zenu Limited were agreed to be fairly valued.
(Ignore tax on the land excess.)
Zenu Limited has not purchased or sold any land since 1 July 20-2. The latest revaluation of
the land was on 30 June 20-4. No revaluation of land took place in 20.2 or 20.3.
Assume that goodwill in Zenu Limited has not been impaired since 1 July 20-2. Non-controlling
interests are initially measured at their share of the subsidiary’s net identifiable assets.
continued
428
Questions
The following are the trial balances of the three companies at 30 June 20-4:
RATA PARFAIT ZENU
R R R
Share capital
– ordinary shares (50 000) (100 000) (25 000)
– preference shares (50 000)
Other reserves (10 000)
Fair value reserve (1 000)
Revaluation reserve (land) (40 000)
Retained earnings 1.7.20-3 (70 000) (40 000) (64 000)
Deferred taxation (10 000) (30 000)
Plant 85 500 70 000
Land 54 500 135 000 120 000
Debtors 15 000 40 000 42 400
Inventory 20 000 50 000 37 000
Cash 5 000 15 000 24 000
Creditors (36 000) (25 000) (18 400)
Operating profit (90 000) (120 000) (104 000)
Taxation 40 000 50 000 46 000
Dividends received (25 500)
Gain on financial asset (OCI) (2 500)
Dividends paid – 30.6.20-4
– preference 5 000
– ordinary 25 000 15 000 30 000
Profit on expropriation of land – 15.2.20-4 (15 000)
Investment in Parfait
– ordinary shares 58 500
– preference shares 35 000
Investment in Zenu 60 000
Long-term loan (113 500) (38 000)
– – –
Required:
(a) Prepare the pro forma journal entries necessary to consolidate the Rata Limited group of
companies for the year ended 30 June 20-4.
(b) Prepare the consolidated statement of profit or loss and other comprehensive income and
the statement of changes in equity of the Rata Limited Group for the year ended 30 June
20-4 and the consolidated statement of financial position at that date.
No notes or comparative figures are required.
Show workings clearly. Assume a tax rate of 35%.
429
Notes on Group Financial Statements
Question 16:1
Hobday Ltd purchased 600 000 (60%) ordinary shares and 20 000 (20%) preference shares in
Sevi Ltd on 31 December 20-6. The cost of the 600 000 ordinary shares and 20 000 preference
shares amounted to R654 000 and R20 000 respectively. On 31 December 20-6 Sevi Ltd
reported an accumulated deficit of R50 000 and had no other reserves. The preference divi-
dends were, however, not in arrears at this date. On 31 December 20-6, Sevi Ltd’s furniture
was valued at R270 000 but all other assets were considered to be worth their carrying
amounts. Sevi Ltd did not revalue the furniture in their own books. Hobday Ltd agreed with the
remaining life of the furniture. The non-controlling interests are measured at their share of the
identifiable net assets.
On 30 June 20-8 Hobday Ltd sold 10% of its holding in ordinary shares (i.e. 60 000 ordinary
shares) in Sevi Ltd for R70 000.
Extracts from the annual financial statements of the two companies for the financial year ended
31 December 20-8 are as follows:
continued
430
Questions
Notes:
(1) Sevi Ltd’s trade receivables included an amount of R13 000 owing to it by Hobday Ltd.
(2) Sevi Ltd posted out its ordinary dividend cheques totalling R10 000 on 31 December 20-8.
Hobday Ltd did not receive its ordinary dividend until January 20-9 and has included the
amount due from Sevi Ltd in its trade receivables figure, in respect of this dividend. All
preference shareholders had received their dividend cheques by 31 December 20-8.
(3) Sevi Ltd sells goods to Hobday Ltd. During the year, sales to Hobday Ltd amounted to
R400 000. The cost of the goods sold to Hobday Ltd amounted to R300 000. Sevi Ltd
maintains a constant mark-up on cost price on all sales to Hobday Ltd. On 31 December
20-8 Hobday Ltd’s inventories included goods purchased from Sevi Ltd amounting to
R48 000
(20-7: R80 000).
The inventories on hand in Hobday Ltd, of goods purchased from Sevi Ltd, at 30 June 20-8
amount to R120 000.
(4) Details of Sevi Ltd’s non-current assets are as follows:
(a) Furniture R’000’s
Purchased 1 January 20-6 at cost 200
Less: Accumulated depreciation
Year ended: 31/12/20-6 20
31/12/20-7 20
31/12/20-8 20 60
Carrying amount at 31/12/20-8 140
(b) Plant
Purchased 1 July 20-7 at cost 500
Less: Accumulated depreciation:
Year ended: 31 December 20-7 25
31 December 20-8 50 75
Carrying amount at 31 December 20-8 425
continued
431
Notes on Group Financial Statements
The plant purchased on 1 July 20-7 had been purchased from Hobday Ltd. On this date
Hobday Ltd had recorded a carrying amount of R360 000. Hobday Ltd agreed with
Sevi Ltd’s estimate of remaining useful life.
(5) The taxation rate throughout the period is 35%. Assume that the profit of the subsidiary
was earned evenly throughout the year. Furthermore, assume that Sevi Ltd has no
intention to resell its furniture. Deferred taxation is recognised in terms of IAS 12 and it is
group policy to raise deferred tax assets, if appropriate.
(6) The preference shares which are classified as pure equity instruments, are preferent as to
capital and ordinary dividends.
(7) Ignore goodwill impairment.
Required:
Prepare the consolidated statement of financial position of the Hobday Ltd Group at 31 Decem-
ber 20-8, and the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity for the year ended on that date in accordance with Generally
Accepted Accounting Practice. Notes are not required.
432
Questions
Question 16:2
Peregrine Ltd is a large seed and grain wholesaler. Since 20-3 it has actively pursued a policy
of investing in other companies. To date, Peregrine Ltd has invested in Falcon Ltd and Bird Ltd.
The trial balances of the three companies at 31 December 20-9 are as follows:
Peregrine Ltd Falcon Ltd Bird Ltd
R R R
Share capital (730 000) (200 000) (100 000)
Other reserves (150 000) (100 000) (130 000)
Retained earnings (410 000) (199 000) (101 000)
Debentures (35 000) (25 000)
Long-term loans (140 000) (100 000)
Deferred tax (59 000) (49 000) (11 000)
Land (valuation) 850 000 275 000 490 000
Plant and equipment (cost) 450 000 350 000
Accumulated depreciation
– plant and equipment (275 000) (210 000)
Investments in Falcon Ltd and Bird Ltd 326 000
Other investments 120 000
Current assets 461 000 186 000 33 000
Profit before tax (697 000) (449 000) (176 000)
Taxation 309 000 206 000 78 000
Dividends paid 100 000 50 000 42 000
Transfer to GR 20 000
– – –
continued
433
Notes on Group Financial Statements
3. The Plant and Equipment accounts in the books of Falcon Ltd are as follows:
Plant and Equipment Debit Credit Balance
1.7.20-1 Purchases 100 000 100 000
1.1.20-5 Purchases from Peregrine Ltd 250 000 350 000
Acc. Depreciation – Plant & Equipment: Debit Credit Balance
31.12.20-1 Depreciation (5 000) (5 000)
31.12.20-2 Depreciation (10 000) (15 000)
31.12.20-3 Depreciation (10 000) (25 000)
31.12.20-4 Depreciation (10 000) (35 000)
31.12.20-5 Depreciation (35 000) (70 000)
31.12.20-6 Depreciation (35 000) (105 000)
31.12.20-7 Depreciation (35 000) (140 000)
31.12.20-8 Depreciation (35 000) (175 000)
31.12.20-9 Depreciation (35 000) (210 000)
The purchase from Peregrine Ltd on 1 January 20-5, was for plant which Peregrine Ltd had
depreciated to a carrying amount of R200 000 from its cost price of R220 000. Peregrine
had purchased the plant on 2 January 20-4.
4. The purchase of shares in Bird Ltd was made on 1 January 20-3 when Bird Ltd had other
reserves of R50 000 and retained earnings of R67 000. Any ‘goodwill’ with respect to any
purchases of shares in Bird Ltd is directly attributable to the under-valuation of land in
Bird Ltd. The fair value of the original 25% investment on 1 January 20-9 was estimated at
R100 000.
5. Bird Ltd revalued its land by R100 000 on 31 December 20-6 and credited the surplus (net
of taxation) to other reserves.
6. There have been no changes in the share capital of any of the three companies.
7. The tax rate has been consistent at 40% throughout the period with 50% of capital gains
included in taxable income.
8. You should assume that goodwill/the carrying value of the investments have not been
impaired since the acquisition dates.
9. Non-controlling interests are initially not measured at fair value.
Required:
(a) Provide the pro forma journal entries required to consolidate the Peregrine Ltd group of
companies for the year ended 31 December 20-9.
(b) Prepare Peregrine Ltd’s consolidated statement of financial position at 31 December 20-9
and its consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity for the year then ended.
(Comparatives are not required. The only note which is required is a note providing a
breakdown of the cost and accumulated depreciation of property, plant and equipment at
31 December 20-9.)
434
Questions
Question 16:3
The following are the draft trial balances of H Ltd, S Ltd and A Ltd at 31 December 20-6.
H Ltd S Ltd A Ltd
R R R
Ordinary shares (200 000) (100 000) (100 000)
Preference shares (20 000)
Other reserves:
Asset replacement reserve (21 000) (12 000) –
Land revaluation reserve – – (40 000)
Retained earnings – 1 January 20-6 (78 000) (24 000) (21 000)
Deferred taxation (6 000) (2 500) –
Long-term loans (14 000) (26 000) –
Current liabilities (98 000) (22 000) (24 000)
Land, at cost 190 000 130 000 –
at valuation – – 140 000
Plant, at cost 70 000 120 000 –
accumulated depreciation (21 000) (72 000) –
Sundry investments, at cost 19 000 4 500 6 500
Shares in S Ltd, at cost 76 500 – –
Shares in A Ltd, at cost 58 000 – –
Current assets 27 380 20 700 67 400
Operating profit (93 500) (60 000) (45 000)
Profit on sale of shares in S Ltd (6 500) – –
Dividends received:
S Ltd (9 180) – –
A Ltd (3 300) – –
Other investments (2 400) (700) (900)
Taxation, including deferred tax 35 000 24 000 20 000
Dividends paid – preference (31 December) – – 2 000
– ordinary (30 June) 20 000 8 000 6 000
Dividends proposed – (31 December) 50 000 10 000 9 000
Transfer to asset replacement reserve 7 000 2 000 –
– – –
Additional information
1. H Ltd purchased 70 000 (70%) shares in S Ltd on 1 January 20-5 for R105 000 when
SLtd’s retained earnings was R15 000 and the other reserves stood at R8 000. With the
exception of S Ltd’s plant, the net assets of the company were considered to be fairly
valued in S Ltd’s statement of financial position at that date. The plant which then stood in
S Ltd’s books at a carrying amount of R72 000 (Cost R120 000, Accumulated depreciation
R48 000) was considered to be worth R90 000. This plant was acquired by S Ltd on
1 January 20-1 and was being depreciated at the rate of 10% per annum on cost. H Ltd
agreed with this estimate of the asset’s life. The non-controlling interests are initially
measured at fair value, which was considered to be R42 140 on 1 January 20-5.
2. On 1 January 20-6 H Ltd sold 19 000 of the shares it held in S Ltd for R35 000.
3. On 1 January 20-5 H Ltd also acquired 10 000 ordinary shares (10%) in A Ltd for R18 000
when A Ltd’s retained earnings stood at R16 000. At this date A Ltd’s assets were all
considered to be worth their carrying amounts, with the exception of the land which was
recorded in the books at its cost of R100 000 but was agreed to be worth R130 000.
Assume that the investment in A Ltd was carried at cost in H Ltd, because cost has been
the best approximation of fair value. Its fair value was estimated on 1 July 20-6 to be
R19 800.
continued
435
Notes on Group Financial Statements
Additional information
1. H Ltd purchased 70 000 (70%) shares in S Ltd on 1 January 20-5 for R105 000 when
SLtd’s retained earnings was R15 000 and the other reserves stood at R8 000. With the
exception of S Ltd’s plant, the net assets of the company were considered to be fairly
valued in S Ltd’s statement of financial position at that date. The plant which then stood in
S Ltd’s books at a carrying amount of R72 000 (Cost R120 000, Accumulated depreciation
R48 000) was considered to be worth R90 000. This plant was acquired by S Ltd on
1 January 20-1 and was being depreciated at the rate of 10% per annum on cost. H Ltd
agreed with this estimate of the asset’s life. The non-controlling interests are initially meas-
ured at fair value, which was considered to be R42 140 on 1 January 20-5.
2. On 1 January 20-6 H Ltd sold 19 000 of the shares it held in S Ltd for R35 000.
3. On 1 January 20-5 H Ltd also acquired 10 000 ordinary shares (10%) in A Ltd for R18 000
when A Ltd’s retained earnings stood at R16 000. At this date A Ltd’s assets were all con-
sidered to be worth their carrying amounts, with the exception of the land which was
recorded in the books at its cost of R100 000 but was agreed to be worth R130 000.
Assume that the investment in A Ltd was carried at cost in H Ltd, because cost has been
the best approximation of fair value. Its fair value was estimated on 1 July 20-6 to be
R19 800.
4. On 1 July 20-6 H Ltd acquired a further 20 000 ordinary shares (20%) in A Ltd for R40 000
and became entitled to appoint 2 of the 6 directors to A Ltd’s Board. At this date A Ltd’s
land was agreed to be worth R135 000.
A Ltd’s operating profit and dividend income from other investments were earned at an
even rate throughout the year.
5. A Ltd revalued its land for the first time on 31 December 20-6. A Ltd has not purchased or
sold any land since 1 January 20-5.
6. The issued share capitals of the companies have not changed since incorporation.
7. You may assume that the rate of taxation has remained at 40 cents in the rand during the
past three years. Ignore capital gains tax.
8. You should assume that goodwill and/or the carrying values of the investments have not
been impaired since the dates of acquisition.
9. The preference shares are classified as pure equity instruments.
Required:
(i) Draft the pro forma consolidation/equity journal entries necessary to incorporate S Ltd and
A Ltd.
(ii) Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the H Ltd Group for the year ended 31 December 20-6.
(iii) Prepare the consolidated statement of financial position of the H Ltd Group at 31 Decem-
ber 20-6.
Notes to the financial statements and comparative figures are NOT REQUIRED.
SHOW ALL WORKINGS CLEARLY.
436
Questions
Question 16:4
The following are the trial balances of three companies, Honeyball Limited, Skinstad Limited
and Amabok Limited at 31 December 20-8.
Honeyball Skinstad Amabok
Limited Limited Limited
R R R
Ordinary share capital 500 000 187 500 127 500
Preference share capital 100 000 60 000 –
General reserves 262 000 – 15 000
Retained earnings 405 000 192 000 111 000
Deferred taxation 40 000 20 000 10 000
Profit before taxation 637 500 442 500 309 000
Profit on sale of shares in subsidiary 144 500 – –
2 089 000 902 000 572 500
continued
437
Notes on Group Financial Statements
continued
438
Questions
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of Honeyball Limited for the year ended 31 December 20-8 in
conformity with generally accepted accounting practice.
Comparative amounts are not required.
Accounting policy notes and statement of compliance are not required.
Detailed and systematic workings of how you arrived at the amounts appearing in your
answer must be furnished.
Work to the nearest rand (except for earnings per share disclosure).
439
Notes on Group Financial Statements
Question 16:5
1. H Limited acquired 180 000 shares (60%) in S Limited on 1 January 20-4 for R600 000
when the retained earnings of S Limited was R6 000 and when S Limited’s land was con-
sidered to be worth R30 000 more than carrying amount (cost). All other assets of
S Limited were considered to be fairly valued at this date.
2. On 1 January 20-9 H Limited sold 60 000 shares in S Limited for R235 000. H Limited,
however, retained the right to appoint 2 of the 5 directors to S Limited’s board. The fair
value of the remaining investment in S Limited was R411 600 on 1 January 20-9.
3. On 5 July 20-9 all the land S Limited owned on 1 January 20-4 was expropriated. (Ignore
taxation on this item.)
4. On 1 January 20-9 H Limited also acquired a 75% interest in X Limited for R165 000.
X Limited’s land was considered to be fairly valued in its books at this date, and any excess
paid by H Limited for the shares was attributable to X Limited’s investments. X Limited has
not purchased or sold any investments during 20-9. The investments are unlisted and, due
to valuation issues, carried at cost by X Limited.
5. No new shares have been issued by X or S since incorporation.
6. You should assume that goodwill and/or the carrying value of the investment in S Ltd has
not been impaired since 1 January 20-4.
7 The non-controlling interests are initially not measured at fair value.
440
Questions
Required:
(a) Prepare the pro forma journal entries required to incorporate S Limited and X Limited into
the H Limited Group for the year ended 31 December 20-9.
(b) Prepare the consolidated financial statements (statement of financial position, statement
of profit or loss and other comprehensive income and statement of changes in equity) of
H Limited for the 20-9 financial year.
(Notes and comparatives are not required.)
Ignore deferred taxation.
441
Notes on Group Financial Statements
Question 16:6
On 31 March 20-3 H Ltd purchased 40 000 shares (40%) in A Ltd for R76 000. The account-
ants of H Ltd and A Ltd have provided the attached financial statements and the following
information:
1. Neither company has issued additional shares since incorporation.
2. With the exception of land, all assets in A Ltd were considered to be fairly valued. An
amount of R4 000 was paid in respect of ‘goodwill’ on acquisition of the 40 000 shares. At
no stage was the carrying amount of the investment in A Ltd considered to be impaired.
3. On 31 December 20-3 A Ltd revalued its land to R130 000. The land was expropriated on
1 September 20-4 and this gave rise to the R20 000 ‘unusual item’ recorded in A Ltd’s 20-4
statement of profit or loss and other comprehensive income. A Ltd had never revalued its
land prior to 31 December 20-3. A new property was purchased immediately after the sale.
The reserve created on revaluation of the land was not transferred to retained earnings.
4. The ‘unusual items’ recorded by H Ltd and A Ltd in 20-3 were due to damage caused by 2
floods, details are as follows:
H Ltd A Ltd
Flood – 25 February 20-3 40 000 35 000
Flood – 30 November 20-3 – 55 000
40 000 90 000
Required:
Prepare a statement of financial position at 31 December 20-4 and a statement of profit or loss
and other comprehensive income and a statement of changes in equity for the year ended on
that date for H Ltd in accordance with generally accepted accounting practice, for the following
situations:
(a) The sale of shares causes H Ltd to lose significant influence (you may assume that the
remaining investment is accounted for in terms of IFRS 9 with changes in fair value
included in other comprehensive income, and
(b) The sale of shares does not cause a loss of significant influence.
Notes are not required.
continued
442
Questions
APPENDIX 1
STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER
H LTD A LTD
20-4 20-3 20-4 20-3
R’000 R’000 R’000 R’000
ASSETS
Non-current assets 1 080 794 448 252
Land 800 400 305 130
Plant – cost 400 400 120 80
– accumulated depreciation (200) (120) (33) (21)
Furniture – cost 60 50 70 70
– accumulated depreciation (21) (15) (14) (7)
Investment in A Ltd – shares 38 76 – –
– 3 000 debentures 3 3 – –
Current assets 321 213 202 131
Inventory 148 71 67 49
Debtors 103 68 53 38
Loan to associate 20 35 – –
Ban 50 39 82 44
continued
443
Notes on Group Financial Statements
APPENDIX 2
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
H LTD A LTD
20-4 20-3 20-4 20-3
R’000 R’000 R’000 R’000
ASSETS
Sales 2 950 2 516 1 598 1 358
Cost of sales plus operating expenses (2 076) (1 765) (1 073) (918)
Operating profit 874 751 525 440
Interest received 15 10 2 –
Dividend received 26 24 – 1
Interest paid (15) (5) (6) (5)
Depreciation (86) (85) (19) (16)
Unusual items 32 (40) 20 (90)
Profit before taxation 846 665 522 330
Taxation (343) (284) (202) (180)
Profit for the year 503 371 320 150
Other comprehensive income:
Revaluation of land – – – 35
Total comprehensive income for the year 503 371 320 185
444
Questions
Question 17
445
Notes on Group Financial Statements
Question 18:1
The trial balances of H Limited, S Limited and T Limited at 31 December 20-8 are as follows:
H Ltd S Ltd T Ltd
R R R
Share capital 10 000 20 000 20 000
Retained earnings – beg. of year 80 000 60 000 15 000
Profit for the year after tax 20 000 15 296 20 000
10% Debentures (R10 each) 50 000 40 000 –
Deferred taxation 10 000 – –
Other long-term liabilities 15 000 9 704 10 000
185 000 145 000 65 000
Additional information
(1) H Limited acquired its interest in S Limited on 31 December 20-7. The investment consists
of 90% of the issued ordinary shares for R90 000 and 2 000 R10 redeemable debentures.
(2) S Limited acquired 80% of the issued shares in T Limited on 31 December 20-4, at which
date T’s retained earnings amounted to R500.
(3) Non-controlling interests are measured at their share of the identifiable net assets.
(4) S Limited’s inventory at year end included inventory to the value of R20 700 bought from
T Limited at cost plus 15%.
(5) Assume a taxation rate of 40%.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income,
statement of changes in equity and statement of financial position of the H Limited Group at
31 December 20-8 – comparatives are NOT required.
446
Questions
Question 18:2
The abridged balance sheets at 31 December 20-9 and abridged income statements and
schedule of changes in retained earnings for the year ended on the same date of P Limited,
Q Limited and R Limited are as follows:
Schedule of changes in retained earnings for the year ended 31 December 20-9.
P Limited Q Limited R Limited
R R R
Balances 1 January 20-9 9 000 150 000 90 000
Profit for the year 34 000 33 000 30 000
Balances 31 December 20-9 43 000 183 000 120 000
continued
447
Notes on Group Financial Statements
Required:
1. Draft the pro forma journal entries required to consolidate Q Limited and R Limited into the
P Limited group.
2. Prepare a consolidated statement of financial position of P Limited at 31 December 20-9.
3. Prepare a consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of P Limited for the year ended 31 December 20-9.
IGNORE TAXATION
448
Questions
Question 18:3
1. The following are summaries of the statements of financial position at 31 December 20-9 of:
Omega Alpha Gamma
Limited Limited Limited
R R R
Shares in subsidiary companies
120 000 Alpha ordinary – cost 136 000
10 000 Alpha preference – cost 10 000
10 000 Gamma – cost 10 900
45 000 Gamma – cost 50 400
Other (net) assets 493 100 255 600 116 000
650 000 306 000 116 000
2. The following are summaries of the changes in retained earnings of the companies for the
year ended 31 December 20-9:
Omega Alpha Gamma
Limited Limited Limited
R R R
Retained earnings at beginning of the year 19 000 10 000 8 000
Profit for the year 70 000 44 000 23 000
Transfers to asset replacement reserves (9 000) (13 000) –
Dividends paid
Preference (5 000)
Ordinary (50 000) (20 000) (25 000)
Retained earnings at end of the year 30 000 16 000 6 000
3. Omega Limited acquired its shareholdings in Alpha Limited and in Gamma Limited on
31 December 20-5 and Alpha Limited acquired its shareholding in Gamma Limited on
31 December 20-6.
Omega Limited considered the freehold property (land) of Alpha Limited to be worth
R10 000 more than the carrying amount at 31 December 20-5 and R15 000 more than the
carrying amount at 31 December 20-9. Alpha’s freehold property is included at cost in its
“other (net) assets” in 1 above. Ignore capital gains tax.
4. The following is the summarised Equity section of Alpha Limited at 31 December 20-5:
R
Ordinary share capital (200 000 shares) 200 000
Asset replacement reserve 15 000
Accumulated deficit (3 000)
212 000
Preference share capital 50 000
262 000
continued
449
Notes on Group Financial Statements
The fair value of a Gamma Limited share was R1.12 per share on 31 December 20.6.
6. All the shares were issued on incorporation of the respective companies. The preference
shareholders are entitled to a dividend of 10% per annum and have no further rights to
participate in profits at any time. Preference dividends have been paid every year.
7. It is the policy of the companies in the group to make no entries in respect of profits earned
by subsidiary or associate companies in their own books and financial statements except in
respect of dividends declared by those companies. Non-controlling interests are initially
measured at their share of the identifiable net assets.
8. Omega Limited sold a machine to Alpha Limited on 3 January 20-6 at a profit of R2 000.
Alpha Limited is depreciating the machine on the straight-line basis over 5 years on the
assumption that there will be no scrap value.
9. Omega Limited has for years sold certain inventory to Gamma Limited at a gross profit of
25% of Omega’s selling price. Inventories on hand of such goods in Gamma Limited at cost
to Gamma were:
at 31 December 20.8 R 9 600
at 31 December 20.9 R11 400
10. On 31 December 20-9 Omega Limited sold 6 000 of its shares in Alpha Limited for
R10 000. No entry had yet been passed in Omega’s books with regard to this sale.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the Omega Limited Group for the year ended 31 December
20-9 and the consolidated statement of financial position at that date.
The statements should be presented in a form suitable for publication only insofar as the infor-
mation is available.
Ignore taxation. Work to the nearest rand if necessary.
450
Questions
Question 18:4
You are presented with the following trial balances of the companies in the A Ltd group at
31 December 20-8.
A Ltd B Ltd C Ltd
R000 R000 R000
Sales (108 000) (30 400) (17 400)
Cost of sales 76 300 16 000 11 000
Interest expense 2 250 200 600
Other expenses 25 900 5 400 3 000
Dividends received from B Ltd (1 200) (360)
Interest received from C Ltd
Taxation 1 500 3 200 980
Damage caused by earthquake on 31 October (note 7) 750
Dividends paid on 31 December 400 2 000 –
Share capital (14 000) (3 000) (1 000)
Retained earnings – 1 January (7 500) (3 600) (1 900)
Plant and equipment – carrying amount 1 800 1 500 1 600
Investments:
B Ltd, at cost 3 760 1 500
C Ltd, at cost 1 200
Loan: B Ltd/C Ltd 2 000 (2 000)
Deferred taxation (140) (40) (60)
Accounts receivable 21 530 7 060 4 400
Inventory 25 000 4 812 3 400
Accounts payable (21 600) (6 100) (3 740)
Bank 370
Short-term borrowings (7 200) (172) –
Nil Nil Nil
Additional information
1. A Ltd purchased a 60% interest in B Ltd on 2 January 20-1 for R3 760 000 when B Ltd’s
retained earnings were R600 000. B Ltd has three million shares in issue. Non-controlling
interests of B Ltd were initially measured at their share of the identifiable net assets.
2. On 2 January 20-7 B Ltd purchased a 40% interest in C Ltd for R1 500 000 at which date
C Ltd’s retained earnings were R1 700 000 and all of C Ltd’s identifiable net assets were
considered to be fairly valued. B Ltd also loaned C Ltd R2 000 000 on 2 January 20-7. The
loan is repayable on 30 June 20-9. C Ltd has one million shares in issue.
3. On 1 July 20-8 A Ltd purchased a 20% interest in C Ltd for R1 200 000. C Ltd’s identifiable
net assets were again considered to be fairly valued in its records at this date. The fair
value of a C Ltd share was R5 per share on this date (minority holding). Non-controlling
interests are initially measured at fair value.
4. A Ltd has always supplied B Ltd with certain items of inventory at a discount to normal
selling price. Sales to B Ltd during the 20-8 financial year amounted to R7 000 000. Normal
selling price, achieved on all other sales, is based on a gross profit of 30% on sales.
Inventory on hand at 31 December 20-8 in B Ltd which had been purchased from A Ltd
amounted to R1 000 000 (20-7: R500 000).
5. C Ltd’s profits are earned evenly throughout the year.
6. Assume a tax rate of 30% for all periods.
7. Assume that the damage caused by the earthquake is not tax deductible.
continued
451
Notes on Group Financial Statements
Required:
(a) Prepare the pro forma journal entries to incorporate B Ltd and C Ltd into the A Ltd Group.
(b) Prepare the consolidated statement of profit or loss and other comprehensive income and
the consolidated statement of changes in equity of the A Ltd Group for the year ended
31 December 20-8 as well as the consolidated statement of financial position at that date.
Comparatives and notes to the financial statements are not required.
452
Questions
Question 18:5
You are the accountant of Cannes Ltd, a company listed on the JSE Limited, and have
obtained the following trial balances for the companies in the Cannes Ltd group at 31 Decem-
ber 20-8:
The following additional information about the Cannes group has been provided:
ƒ Cannes Ltd purchased a 60% interest in Bordeaux Ltd on 1 January 20-1 for R1 880 000
when Bordeaux Ltd had a balance on share capital of R1 750 000 and retained earnings of
R300 000. Bordeaux Ltd had 1 750 000 shares in issue at the time.
ƒ On 2 January 20-8 Bordeaux Ltd purchased a 40% interest (200 000 shares) in Mar-
seilles Ltd. The purchase consideration of R750 000 was settled by Bordeaux Ltd by issuing
250 000 ordinary shares to the vendors. In addition, Bordeaux Ltd lent Marseilles Ltd
R1 000 000 on 2 January 20-8. The capital sum is repayable on 30 June 20-9.
ƒ On 1 July 20-8 Marseilles Ltd had a rights issue of 1 share for every 2 held. These shares
were issued at R5,00 each which was also considered to be their fair value on that date.
Bordeaux Ltd took up all rights to which they were entitled and in terms of an agreement
with the other shareholders of Marseilles Ltd, Cannes Ltd took up all the 150 000 rights
attributable to such shareholders.
ƒ Cannes Ltd has always supplied Bordeaux Ltd with certain items of inventory at a discount
to normal selling price. Sales to Bordeaux Ltd amounted to R3 700 000 during the 20-8
financial year. Normal selling price, achieved on all other sales, is based on a gross profit of
30% on sales. Inventory on hand at 31 December 20-8 in Bordeaux Ltd which had been
purchased from Cannes Ltd amounted to R500 000 (20-7: R250 000).
continued
453
Notes on Group Financial Statements
ƒ The non-controlling interests are initially measured at their share of identifiable net assets.
ƒ Cannes Ltd has 6 000 000 ordinary shares totalling R6 000 000 and 1 000 000 10% non-
cumulative compulsorily convertible preference shares (R1 000 000) in issue. Each prefer-
ence share is convertible into an ordinary share on 31 December 20-9. The preference
shares are regarded as equity instruments.
ƒ On 31 December 20.8 Cannes Ltd impaired their investment in Marseilles Ltd by R44 000.
The impairment is included in the expenses figure in the trial balance.
ƒ Assume a tax rate of 35%
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of Cannes Ltd for the year ended 31 December 20-8 as
well as a consolidated statement of financial position at that date. Accounting policies and
other notes to the financial statements are not required. Comparatives are not required.
(b) Prepare the pro forma entries required to consolidate Marseilles Ltd and Bordeaux Ltd into
the Cannes Ltd Group.
454
Questions
Question 18:6
The following are the trial balances of X Ltd, Y Ltd and Z Ltd at 31 December 20-8:
X Ltd Y Ltd Z Ltd
R R R
Share capital (1 800 000) (2 700 000) (150 000)
Retained earnings – 1/1/20-8 (1 260 000) (345 000) (150 000)
Deferred taxation (90 000) (40 000) (18 000)
Land 175 000 1 900 000
Investment in Y Ltd 1 910 000
Investment in Z Ltd (33 000) 90 000
Other long-term investments 1 200 000 1 043 000
Net current assets 198 000 142 000 442 550
Operating profit (370 000) (460 000) (560 846)
Dividends received (270 000) (90 000)
Taxation 130 000 160 000 196 296
Dividends paid:
31 March 20-8 180 000
31 December 20-8 210 000 300 000 60 000
Nil Nil Nil
Sales – year ended 31 December 20-8 3 900 000 4 500 000 4 835 000
Additional information
(1) X Ltd purchased 225 000 of the 300 000 shares in issue of Y Ltd on 2 January 20-7 at a
cost of R560 000. On 2 January 20-8 Y Ltd had a public issue of 600 000 shares at a price
of R4 each. X Ltd acquired 225 000 of these shares. X Ltd increased its holding further in
Y Ltd when on 31 December 20-8 it acquired 90 000 shares ex div. from certain minority
shareholders at a cost of R450 000.
(2) On 2 January 20-7 Y Ltd’s retained earnings were R225 000.
(3) Y Ltd acquired 30 000 shares (a 20% interest) in Z Ltd on 31 December 20-7 at a cost of
R90 000. X Ltd acquired 60 000 shares (a 40% interest) in Z Ltd on 1 April 20-8 at a cost
of R120 000 which also represented the fair value of a Z Ltd share at that time. On
30 September 20-8 X Ltd sold 45 000 (30%) of these shares in Z Ltd to the minority for an
amount of R153 000. These proceeds were credited to the ‘Investment in Z Ltd’ account.
On 30 September 20-8 a Z Ltd share had a fair value of R3.40 per share.
(4) All the identifiable assets of Y Ltd and Z Ltd were considered to be worth their carrying
amounts at all stages.
(5) During November 20-8 Z Ltd sold some goods to Y Ltd for R35 000. These goods were
sold at a mark-up of R7 000 on Z Ltd’s cost price. At 31 December 20-8 Y Ltd’s inventory
included goods bought from Z Ltd at a cost to Y Ltd of R10 000 (cost to Z Ltd R8 000).
(6) X Ltd retained the right to appoint the majority of the directors of Y Ltd throughout the 20-8
financial year. X Ltd accounts for associate companies on the equity method in its con-
solidated financial statements in terms of IAS 28.
(7) Ignore goodwill impairment.
(8) To the extent necessary, you should assume that the profit (including dividends received
and taxation) of Y Ltd and Z Ltd are apportioned evenly throughout the year.
(9) It is the policy of all three companies to value investments on the weighted average cost
basis and to treat dividends received on the LIFO basis. Non-controlling interests are
initially measured at their share of the fair value of identifiable net assets.
(10) Assume a tax rate of 35%.
continued
455
Notes on Group Financial Statements
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the X Ltd Group in accordance with generally accepted
accounting practice for the year ended 31 December 20-8, insofar as the information is
available.
(b) Show how the following items would appear in the consolidated statement of financial
position of the X Ltd Group at 31 December 20-8:
ƒ Non-controlling interests
ƒ Goodwill
ƒ Investment in associates
Comparative figures and notes are not required.
Work to the nearest R1. Assume all amounts to be material.
456
Questions
Question 18:7
Agadir Ltd is a manufacturer of electronic components and has a 31 December year end.
Agadir Ltd has always followed a policy of investing in its customers. As part of this expansion
programme, Agadir Ltd has invested in Tunis Ltd and Maknes Ltd. The financial statements of
the three companies are attached as Annexure A.
Details of Agadir Ltd’s investments are as follows:
ƒ Tunis Ltd
Agadir Ltd purchased a 60% interest in Tunis Ltd on 2 January 20-2. At this date Tunis Ltd’s
share capital was R300 000 (100 000 shares) and the retained earnings was R500 000. All
assets were considered to be fairly valued except for the land of Tunis Ltd which was
considered to be worth R150 000 above its carrying amount of R400 000.
ƒ Maknes Ltd
Agadir Ltd purchased a 40% interest in Maknes Ltd on 2 January 20-1, when the latter
company’s share capital was R300 000 (100 000 shares) and the retained earnings
R350 000. All assets were considered to be fairly valued at this date. On 30 June 20-3 the
fair value of this investment was considered to be R510 000.
On 30 June 20-3 Tunis Ltd acquired a 30% interest in Maknes Ltd for R405 000. At this date
the retained earnings of Maknes Ltd was R700 000. All assets were considered to be fairly
valued except for land which were considered to be under-valued by R100 000. Maknes Ltd
has not sold any land throughout the period under review.
Due to increasing competition, it was decided to restructure the operations of Maknes Ltd.
In order to raise the necessary finance, Maknes Ltd had a fully subscribed rights issue on
30 June 20-6 on a 1 for 1 basis at an issue price of R20,00 per share. In determining the
issue price, the land of Maknes Ltd was considered to be worth R220 000 more than its
carrying amount.
In terms of an agreement with the minority shareholders, Tunis Ltd took up all the rights to
which it was entitled and Agadir Ltd sold all its rights to the non-controlling shareholders for
R30 000. Agadir Ltd will continue to control Maknes Ltd after the issue.
Details of sales from Agadir Ltd to the group companies and the inventory holdings of such
goods are as follows:
Tunis Ltd Maknes Ltd
Sales
1 January – 30 June 20-6 600 000 680 000
1 July – 31 December 20-6 750 000 910 000
1 350 000 1 590 000
Tunis Maknes
Inventory on hand
31 December 20-5 120 000 60 000
31 December 20-6 70 000 80 000
continued
457
Notes on Group Financial Statements
Required:
To prepare the consolidated statement of financial position of the Agadir Ltd Group at
31 December 20-6 and the consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity for the year then ended.
Comparatives and notes to the financial statements are not required.
ANNEXURE A:
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20-6
Agadir Tunis Maknes
R000 R000 R000
Sales 12 500 9 200 7 500
Cost of sales plus operating expenses 10 625 7 725 6 750
Operating profits 1 875 1 475 750
Dividends received 160 35 –
Profit on sale of rights 30 – –
Profit on disposal of land – 600
Profit before taxation 2 065 2 110 750
Taxation 660 590 300
Profit and total comprehensive income for the year 1 405 1 520 450
458
Questions
Question 19:1
Happy Limited acquired 80% of Sterling Limited for R110 000 when Sterling’s statement of
financial position reflected share capital of R50 000 (250 000 shares) and retained earnings of
R60 000. The assets were considered to be fairly valued. Non-controlling interests are meas-
ured at their share of the identifiable net assets.
On 1 April 20-2 Sterling issued 125 000 ordinary shares at 60c each. The minority took up
118 750 shares and Happy the balance.
The reconciliation of the opening and closing retained earnings for the current year ended
31 March 20-3 of the two companies reflected the following:
Happy Sterling
R R
Retained earnings at beginning of year 150 000 110 000
Comprehensive income (profit/loss) for the year 900 000 (50 000)
Ordinary dividend declared (250 000) (40 000)
Retained earnings at end of year 800 000 20 000
In February 20-3 Sterling suffered a loss on sale of land and buildings of R90 000 (after
deducting taxation of R25 000).
An impairment test was done by Happy Limited in respect of Sterling Limited at 31 March 20-3
which resulted in the investment being impaired by R18 500.
Required:
(1) Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity for the Happy Limited Group for the year ended 31 March
20-3.
(2) Show how the following items will be disclosed in the group’s consolidated statement of
financial position at 31 March 20-3:
– Reserves (other than retained earnings)
– goodwill on acquisition of shares in subsidiary
– non-controlling interests
459
Notes on Group Financial Statements
Question 19:2
The abridged trial balances of H Limited and S Limited at 31 December 20-5 were as follows:
H Limited S Limited
R R
Share capital 50 000 60 000
Retained Earnings at 1 Jan 20-5 40 000 60 000
Profit for the year 10 000 15 000
100 000 135 000
H Limited acquired 7 500 shares in S Limited on 1 January 20-3 when the share capital was
R10 000 (10 000 shares). At that date retained earnings amounted to R25 000.
S Limited announced a rights issue on 2 January 20-5, in terms of which one additional share
could be acquired for each share held at a price of R10,00 per share. H Limited exercised only
2 500 of its rights, while the non-controlling interests exercised all their rights.
Required:
Prepare the consolidated financial statements of the group for the 20-5 financial year.
460
Questions
Question 19:3
The trial balance of H Limited and its subsidiary at 30 June 20-8 were as follows:
H Limited S Limited
R R
Share capital 100 000 34 372
Other Reserves – 10 000
Retained earnings at 30.6.20-7 35 000 45 000
Profit for the year 25 000 15 000
160 000 104 372
H Limited acquired 7 500 shares in S Limited for R19 875 on 1 July 20-3 when the share
capital was R10 000 (10 000 shares). At that date the retained earnings of S Limited amounted
to R15 000. The excess purchase price was attributable to the fair value of inventory being
different to its carrying amount.
S Limited made a rights issue on 1 January 20-8 in terms of which shareholders were offered
1 ordinary share for every 2 shares held at a price of R6,00 per share. H Limited exercised all
its rights, while the minority took up 312 shares.
S Limited declared a dividend of 50 cents per share on 30 June 20-8. On the same date
H Limited declared a dividend of R15 000. These dividends have not yet been recorded in the
books.
Profit was earned evenly throughout the year.
Assume a taxation rate of 40%.
Required:
Prepare the Consolidated Financial Statements of the group at 30 June 20-8.
461
Notes on Group Financial Statements
Question 19:4
Hwange Limited conducts all its trading activities through its subsidiary, Sambawizi Limited,
which it acquired on 5 July 20.2. At this date Sambawizi’s ordinary shareholders’ funds com-
prised:
R
Ordinary shares (125 000 shares) 50 000
Accumulated loss (15 000)
All Sambawizi’s assets were fairly valued and Hwange paid R40 000 for its investment of
112 500 shares. At that date the non-controlling interests fair value was R3 900 which is used
to initially measure their interest.
During the period ended 30 June 20-5 Sambawizi transferred R10 000 to an asset replacement
reserve. The balance on the retained earnings account at 30 June 20-5 was R30 000.
On 31 March 20-6 125 000 new ordinary shares were issued to raise R125 000. Hwange took
up 62 500 of this issue and the non-controlling interests took up the balance. It is considered
appropriate to adjust the parent equity for the proportionate share of goodwill lost.
You can assume for the purpose of this question that the R70 000 profit earned by Sambawizi
for the year ended 30 June 20-6 was earned evenly throughout the year. A R20 000 dividend
was declared and paid out of these profits on 30 June 20-6, Hwange’s share of which was in
turn distributed to its shareholders.
Hwange is a non-trading entity and its statement of financial position at 30 June 20-6 reflected
the following:
20-6 20-5
R R
Investment in Sambawizi 102 500 40 000
Bank (2 500) 60 000
Share capital 100 000 100 000
Sambawizi never had long-term creditors and its statement of financial position reflected
property, plant and equipment of R200 000 (20-5: R105 000) and other net assets of R65 000
(20-5: other net liabilities of R15 000).
Required:
Draft the consolidated statement of profit or loss and other comprehensive income, statement
of changes in equity and statement of financial position of the Hwange Limited Group and its
subsidiary for the year ended 30 June 20.6.
462
Questions
Question 19:5
Holding Limited acquired 44 000 shares in Subsidiary Limited on 1 January 20.4 for R175 000,
at which date the latter company had 80 000 Ordinary Shares each in issue, share capital of
R100 000 and Retained Earnings of R250 000. All Subsidiary’s assets were considered fairly
valued. Non-controlling interests are measured at their share of the identifiable net assets.
Subsidiary earned a modest profit (all retained) of R50 000 up to 1 January 20.7, at which date
80 000 Ordinary Shares were issued to raise R300 000 in an attempt to improve Subsidiary’s
performance. This rights issue was fully subscribed, with Holding taking 68 000 of these shares
in total.
This fresh injection of capital had the desired effect and the company reported profits of
R75 000 for the year ended 31 December 20.7. A dividend of R20 000 was declared and paid
on 26 December 20.7.
In the light of the company’s improved performance and a general sense of optimism about the
company’s future, management decided to expand its operations extensively. For this purpose,
a further 40 000 ordinary shares were issued on the last day of the financial year, which raised
R240 000. Holding subscribed to all, but 2 000, of these shares.
Holding Limited did not declare a dividend despite having earned profits of R164 000 for the
year under review. Its own share capital at 31 December 20.7 was R500 000 and its opening
retained earnings was R200 000. The company’s total net assets at year end amounted to
R864 000. Subsidiary’s net asset at that date stood at R995 000.
Required:
Prepare the summarised Consolidated Statement of Financial Position at 31 December 20.7
and the Consolidated Statement of Profit or Loss and Other Comprehensive Income, and
Statement of Changes in Equity for the year then ended of the Holding Limited Group.
463
Notes on Group Financial Statements
Question 19:6
Required:
(a) Draft the pro forma journal entries required to consolidate Subsidiary.
(b) Prepare the Consolidated Statement of Financial Position, Statement of Profit or Loss and
Other Comprehensive Income and Statement of Changes in Equity for 20.9 of the Hold-
ing Limited Group.
464
Questions
Question 19:7
Notes:
(1) On 1 January 20-1 S Limited had share capital of R100 000 (100 000 shares). The
general reserve stood at R50 000 and retained earnings was R70 000. On 30 June 20-2
S Limited issued 100 000 shares for R5 each and on 31 December 20-2 it issued 100 000
capitalisation shares at R1 per share (i.e. 100 000 was transferred out of retained
earnings into share capital).
(2) It was established that S Limited’s inventory was undervalued by R40 000 at 31 Decem-
ber 20-0. All other assets and liabilities were considered to be fairly valued. All the
inventory on hand at acquisition was sold by 31 December 20.1. Non-controlling interests
are measured at their share of identifiable net assets.
(3) Assume a tax rate of 40% in 20-1 and 20-2.
continued
465
Notes on Group Financial Statements
(4) S Limited supplied its holding company with goods at a mark-up of 50% on cost:
R’000
Sales: 20-1 203
20-2 214
Inventory held by H Limited:
31 December 20-1 60
30 June 20-2 30
31 December 20-2 90
(5) Sales (net of returns) of H Limited and S Limited for 20-2 totalled R1 123 000 and R1
346 000 respectively.
(6) At 31 December 20-0 S Limited’s furniture was as follows:
At cost 763 000
Accumulated depreciation 106 000
657 000
On 2 January 20.1 H Limited sold some of its own furniture to S Limited at its carrying
amount of R195 000 (cost to H Limited R236 000, accumulated depreciation to
31 December 20-0 R41 000). No furniture was sold by S Limited in 20-1 or 20-2.
(7) The dividends declared by both companies on 31 December 20-2 were paid in January
20-3.
(8) At 31 December 20-2 S Limited’s debtors included an amount of R33 000 owing to it by
H Limited.
Required:
(a) Consolidated statement of financial position of the H Limited Group at 31 December 20-2
and consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity for the year ended on that date. The presentation required
by Generally Accepted Accounting Practice must be complied with but only to the extent
that the information is available or can be ascertained.
If necessary, work to the nearest R’000.
(b) Prepare the pro forma journal entries to incorporate S Limited into the H Limited Group.
When preparing the pro forma journal entries assume that the journal entry for the sale of
shares has been passed in the books of H Ltd.
466
Questions
Question 19:8
On 1 January 20.4, A Limited purchased 60% of the equity of B Limited. B Limited had
acquired 75% of the shares in C Limited some years ago at a cost of R40 000 when the latter’s
retained earnings was R4 000. Non-controlling interests are initially measured at their share of
the identifiable net assets.
The identifiable assets of B Limited and C Limited were fairly recorded at the date of acquisition
with the exception of land owned by B Limited. B Limited’s land was considered by A Limited to
be worth R20 000 more than book value. On 1 January 20.4 B Limited’s goodwill in C Limited
was valued at R11 000.
The summarised trial balances of the companies at 31 December 20.4 were as follows:
A Limited B Limited C Limited
R R R
Share capital 200 000 80 000 40 000
Retained earnings 120 000 60 000 20 000
Profit before tax 54 000 52 000 46 000
Debentures 20 000 – –
Current liabilities 10 000 21 000 5 000
404 000 213 000 111 000
On 1 April 20.4 B Limited sold 20% of their holding in C Limited for R14 500.
The tax rate is 30% with 50% of capital gains included in taxable income.
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income,
consolidated statement of changes in equity and statement of financial position of A Limited
and its subsidiaries for the year ending 31 December 20.4.
(b) Prepare the pro forma journal entries to incorporate the subsidiaries into the A Limited
Group.
467
Notes on Group Financial Statements
Question 19:9
H Ltd acquired a 70% interest in S Ltd for R70 000 some years ago when S Ltd’s share capital
was R80 000 (80 000 shares) and its retained earnings were R20 000. In terms of a share buy-
back scheme, S Ltd acquired 8 000 of its own shares, 7 040 of these from H Ltd and the
remaining 960 from the other shareholders. The shares were acquired at R3 each on 1 July 20-6.
S Ltd decided to utilise its general reserves for this purpose.
Non-controlling interests are initially measured at their share of the identifiable net assets.
Required:
(a) Consolidated Statement of Profit or Loss and Other Comprehensive Income, Statement of
Changes in Equity and Statement of Financial Position for the H Ltd Group for the year
ended 31 December 20-6.
(b) Prepare the pro forma entries to consolidate S Ltd into H Ltd.
468
Questions
Question 19:10
H Ltd acquired a 70% interest in S Ltd for R70 000 some years ago when S Ltd’s share capital
was R80 000 (80 000 shares) and its retained earnings were R20 000. In terms of a share buy-
back scheme, S Ltd acquired 8 000 of its own shares, 4 160 from H Ltd and the remaining
3 840 from the other shareholders. The shares were acquired at R3 each on 1 July 20-6. S Ltd
decided to use its retained earnings for this purpose.
Non-controlling interests are initially measured at their share of the identifiable net assets.
Required:
Consolidated Statement of Profit or Loss and Other Comprehensive Income, Statement of
Changes in Equity and Statement of Financial Position for the H Ltd Group for the year ended
31 December 20-6.
469
Notes on Group Financial Statements
Question 19:11
A Limited has owned the whole of the issued share capital of B Limited since the incorporation
of the latter, and 60% of the issued share capital of C Limited also acquired an incorporation of
C Limited. No goodwill arose on the acquisition of C Limited.
On 1 September 20.4 the shares in B Limited were sold to C Limited for R12 000 above the
carrying amount of B Limited’s assets less its liabilities.
The following are summarised statements of profit or loss and other comprehensive income of
the three companies for the year ended 31 December 20.4:
A Limited B Limited C Limited
R R R
Operating profit 520 000 96 000 250 000
Interest expense (100 000) (12 000) –
Dividends received from subsidiaries 75 000 – 15 000
Profit on sale of shares in B Limited 110 200 – –
Profit before tax 605 200 84 000 265 000
Taxation (168 000) (33 600) (100 000)
Profit for year 437 200 50 400 165 000
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income and
the retained earnings columns of the statement of changes in equity for the year ended
31 December 20.4 for:
ƒ C Limited
ƒ A Limited
and
(b) Calculate the amount of goodwill in the A Limited group.
470
Questions
Question 19:12
You are the auditor of Integritas Limited, which holds interests in various subsidiary and
associate companies. You have been approached by the financial director to assist him in the
preparation of abridged consolidated financial statements for the year ended 31 December
20.2.
The draft consolidation work papers as prepared by your client are attached as appendices 1
and 2.
Your trainee accountant has checked the draft consolidation work papers and has drawn your
attention to the following:
1. Maneo (Pty) Limited
A few years ago Integritas Limited obtained a 50% equity share in Maneo (Pty) Limited for
R425 000. At the date of acquisition, the retained earnings was R50 000 and the land of the
company was worth R200 000 more than its carrying amount. During the current financial
year Maneo (Pty) Limited revalued its land by R800 000. (Deferred tax implications relating
to land should be ignored.)
Since acquisition this investment has been accounted for in the consolidated annual
financial statements as well as in the draft consolidation work papers for 20.2 according to
the equity method.
In terms of a shareholder’s agreement, Integritas Limited has, since acquisition, appointed
2 of the 4 directors of Maneo (Pty) Limited. One of the directors appointed by Integri-
tas Limited also acts as chairman with a casting vote. The financial director only realised
this year that means that Maneo (Pty) Limited is a subsidiary of Integritas Limited.
The 20.2 draft consolidation work paper amounts have not been adjusted to take account
the fact that Maneo (Pty) Limited is a subsidiary.
The abridged financial statements of Maneo (Pty) Limited for 20.2 appear in appendix 3.
2. Firmly (Pty) Limited
Integritas Limited subscribed for 80% of the share capital of Firmly (Pty) Limited on its
incorporation some years ago. On 1 July 20.2 Firmly (Pty) Limited issued 500 000 shares to
the non-controlling shareholders at R3 per share. This issue reduced the equity interest of
Integritas Limited to 60%.
The client accounted for Firmly (Pty) Limited in the draft consolidation work papers for 20.2
as follows:
ƒ The share issue was eliminated by the following pro forma consolidation journal entry:
DrOrdinary share capital 1 500 000
Cr Non-controlling interests 1 500 000
ƒ The financial statements of Firmly (Pty) Limited were thereafter consolidated on the basis
of the original 80% equity interest.
The necessary adjustments still have to be made to the draft consolidation work papers.
The abridged financial statements Firmly (Pty) Limited for 20.2 appear in Appendix 3.
3. Ratione (Pty) Limited
On 30 June 20.2 Integritas Limited acquired the total issued ordinary share capital of
Ratione (Pty) Limited from Mr Day, the sole shareholder, for R2.12 million. The net asset
value of Ratione (Pty) Limited at acquisition was R1.8 million.
The purchase price of R2.12 million is payable on 31 December 20.2 and is included in the
draft consolidation work papers as non-controlling interest. The amount bears interest from
1 January 20.3 at a market related rate which is currently 12%.
The financial statements of Ratione (Pty) Limited for the 6 months ended 31 December
20.2 have been appropriately accounted for in the draft consolidation work papers including
adjusting the purchase price for the interest free period.
continued
471
Notes on Group Financial Statements
There has been no change in estimate for the guarantee for the three-year period com-
mencing on 1 January 20.3.
The profit of Ratione (Pty) Limited (as already accounted for in the draft consolidation work
papers) amounted to R364 000 after taxation of R336 000.
The adjustments required on account for the guarantee given by Mr Day still have to be
made. The profit for the six-month period to 31 December 20.2 was due to large scale
industrial action and it is considered probable that the profits before tax will be in excess of
R1.6 million in the next three years.
4. Ethics (Pty) Limited
Three years ago Integritas Limited loaned R1 million to its subsidiary Ethics (Pty) Limited.
Ethics (Pty) Limited has for the past 2 years incurred operating losses. Consequently,
Integritas Limited has in its own financial statements impaired its investment in its sub-
sidiary. In 20.2 the impairment was R400 000 and in 20.1 R200 000 which is equal to the
losses incurred by Ethics (Pty) Limited that are attributable to Integritas Limited.
5. Associate companies
Integritas Limited holds interests in several associate companies and the amounts included
in the draft consolidation work papers for such companies are reflected correctly.
6. Unlisted investments
Due to fair value problems unlisted investments are measured at cost.
7. Non-controlling interests
Non-controlling interests are initially measured at their share of the identifiable net assets.
Required:
(a) Prepare the abridged consolidated statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial position for the Integri-
tas Group of Companies for the year ended 31 December 20.2, and
(b) Comment on the acceptability of the inclusion of the amount owing to Mr Day as part of
non-controlling interests in the consolidated statement of financial position.
The tax rate is 48%. Work to the nearest R’000.
(QE adapted – 50 minutes)
continued
472
Questions
APPENDIX 1
INTEGRITAS LIMITED
DRAFT CONSOLIDATION WORK PAPER
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20.2
Dr Cr
R’000 R’000
Share capital 2 500
Revaluation reserve 800
Retained earnings 8 825
Non-controlling interests 5 400
Long-term loans 6 500
Loan from Integritas Limited 600
Deferred taxation 875
Land at valuation 5 600
Plant and machinery 5 900
Goodwill 800
Investment in unlisted shares 1 800
Investment in associates 3 300
Amount owing by associates 900
Net current assets 7 200
25 500 25 500
APPENDIX 2
INTEGRITAS LIMITED
DRAFT CONSOLIDATION WORK PAPER
SUMMARY OF CHANGE IN RETAINED EARNINGS FOR THE YEAR ENDED
31 DECEMBER 20.2
Dr Cr
R’000 R’000
Operating profit 4 200
Impairment of investment in subsidiary 400
Finance costs 800
Dividends received – unlisted investments 200
Associate companies
Dividends received 300
Share of associated companies’ retained earnings 625
Taxation expense
Current 1 050
Deferred 750
Non-controlling share of profit 475
Dividends paid and proposed 600
Retained earnings at the beginning of the year 7 575
Retained earnings at the end of the year 8 825
12 900 12 900
continued
473
Notes on Group Financial Statements
Note:
The non-controlling interests’ share of dividends for the year per the above draft amounts is
R150 000.
APPENDIX 3
ABRIDGED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED
31 DECEMBER 20.2
Maneo Firmly
(Pty) (Pty)
Limited Limited
R’000 R’000
Operating profit 700 1 740
Borrowing costs (210) (200)
Profit before taxation 490 1 540
Taxation (240) (740)
Current (240) (670)
Deferred – (70)
continued
474
Questions
EQUITYAND LIABILITIES
Ordinary shares 600 3 000
Revaluation reserve 800 –
Retained earnings 450 1 800
1 850 4 800
Long-term loans
Integritas Limited 400 –
Other 1 000 1 850
Deferred taxation – 350
3 250 7 000
Notes:
1. R60 000 of the borrowing costs incurred by Maneo (Pty) Limited was paid to Integri-
tas Limited.
2. The profit of Firmly (Pty) Limited was earned evenly throughout 20.2.
475
Notes on Group Financial Statements
Question 19:13
The following abridged trial balances were extracted from the financial records of Paje-
ro Limited and its subsidiaries at 30 June 20.5:
Pajero Lexus Saab
Limited Limited Limited
R’000 R’000 FC’000
Share capital 5 000 7 000 1 000
Retained earnings – 30 June 20.4 7 500 7 800 3 500
Other reserves – – 224
Long-term loan 1 500 1 200 2 900
Deferred taxation 2 000 1 000 256
Profit before taxation 12 500 5 300 2 500
28 500 22 300 10 380
Land – – 1 920
Plant and equipment 8 500 9 500 3 060
Net current assets 5 300 6 662 3 900
Investment in Lexus Limited 9 200 – –
Investment in Saab Limited – 2 838 –
Taxation 2 500 1 300 700
Dividend paid 30 June 2005 3 000 2 000 800
28 500 22 300 10 380
Saab Limited
Lexus Limited acquired 70% of the shares in Saab Limited on 1 July 20.3 in order to diversify
its activities. At that date the retained earnings of Saab Limited was FC2 000 000. The rand
equivalent of goodwill on that date was R150 000 and the only identifiable asset or liability not
fairly valued was land.
On 30 June 20.5 the directors of Saab Limited revalued the land to market value (also a group
revaluation). The resulting surplus is the only amount included in other reserves. Capital gains
have always been subject to taxation at a rate of 20% in the country in which Saab Limited
operates.
The following rates of exchange are provided:
FC1 = R
1 July 20.3 1.20
30 June 20.4 1.60
30 June 20.5 2.10
Weighted average for 20.4 financial year 1.40
Weighted average for 20.5 financial year 1.90
Saab Limited declared and paid a dividend of FC450 000 on 30 June 20.4.
continued
476
Questions
Lexus Limited
Pajero Limited acquired 800 000 of the 2 million shares in issue of Lexus Limited on 1 July 20.3
for R4 000 000 at which date the retained earnings of Lexus Limited was R7 200 000 and the
balance on share capital R2 000 000. All identifiable assets and liabilities were fairly valued at
acquisition.
During May 20.4 Lexus Limited announced a rights issue of 1 share for every share held
exercisable at R5 per share to be exercised on 2 July 20.4. Pajero Limited purchased 200 000
rights for R1 each from the other shareholders and exercised these as well as those to which
they were entitled on 2 July 20.4. The remaining rights of the other shareholders were not exer-
cised. The fair value of the identifiable assets and liabilities of both Lexus Limited and
Saab Limited were fairly valued with the exception of the land of Saab Limited which value was
the same as on 1 July 20.3.
When Lexus Limited became a subsidiary of Pajero Limited all of the goodwill arising in the
business combination was attributable to the Saab Limited cash generating unit. The fair value
of Pajero Limited’s original investment in Lexus Limited on 2 July 20.4 was R5 500 000.
Required:
(a) Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income
and Consolidated Statement of Changes in Equity for the 20.5 financial year. Your answer
should comply with IFRSs only insofar as the information permits. Non-controlling
interests are not initially measured at fair value.
Note that no statement of financial position is required.
(b) Calculate the goodwill figure that will appear in the Consolidated Statement of Financial
Position of Pajero Limited at 30 June 20.5.
477
Notes on Group Financial Statements
Question 20:1
Boerwors Limited is a company incorporated and operating in South Africa. Boerewors Limited
purchased 80% of the shares of Bratwurst Incorporated, a company incorporated in Switzer-
land, on Bratwurst Incorporated’s date of incorporation, 1 October 20-8. Non-controlling
interests are measured initially at their share of the identifiable net assets.
Trial Balances 30 September 20-9
BOERWORS LTD BRATWURST INC.
DR CR DR CR
R R SFr SFr
Dividend received from Bratwurst Inc.
– 30 June 20-9 – 78 049 – –
Accounts payable 40 000 112 400
Accounts receivable 92 640 193 000
Bank 80 000 44 500
Depreciation – – 15 400
Dividend paid (30 June 20-9) 60 000 40 000
Non-current asset
– cost (purchased 1 October 20-8) – –
– accumulated depreciation – – 84 000 15 400
Long-term loan (advanced 31 March 20-9) – – 75 000
Interest on long-term loan – – 4 500
Operating profit 62 651 203 000
Taxation 25 060 64 400
Share capital 80 000 100 000
Inventory
– at cost 83 000 50 000
– at net realisable value – 10 000
General reserve 10 000 – –
Investment in Bratwurst Inc. at cost 160 000 – –
Retained earnings – 1 October 20-8 230 000 – –
500 700 500 700 505 800 505 800
Additional information
1. Bratwurst Inc.’s business is not subject to seasonal fluctuations and trading began
immediately after incorporation.
2. The inventory on hand at cost was acquired evenly during the last three months of the year.
3. The long-term loan is repayable on 30 June 20-13. It is denominated in Swiss Francs and
is payable to a Swiss bank.
4. The rates of exchange between South Africa and Switzerland were as follows:
Spot rates:
1 October 20-8 R1 = SFr 0.50
31 March 20-9 R1 = SFr 0.44
30 September 20-9 R1 = SFr 0.38
Average rate from 1 October 20-8 to 30 September 20-9 R1 = SFr 0.44
Average rate from 1 October 20-8 to 31 March 20-9 R1 = SFr 0.47
Average rate from 1 April 20-9 to 30 September 20-9 R1 = SFr 0.41
Average rate from 1 July 20-9 to 30 September 20-9 R1 = SFr 0.395
5. Non-controlling interests are initially measured at their share of the identifiable net assets.
continued
478
Questions
Required:
Prepare the group Statement of Financial Position at 30 September 20-9, a group Statement of
Profit or Loss and Other Comprehensive Income and Statement of Changes in Equity for the
year then ended for Boerwors Limited. Bratwurst Incorporated’s functional currency is the SA
rand. Boerwors Limited’s functional and presentation currency is also the SA rand.
EARNINGS PER SHARE, NOTES TO THE ANNUAL FINANCIAL STATEMENTS AND COM-
PARATIVES ARE NOT REQUIRED.
INDICATE CLEARLY THE RATES YOU ARE USING TO TRANSLATE BRATWURST
INCORPORATED.
WORK TO THE NEAREST RAND.
479
Notes on Group Financial Statements
Question 20:2
Hippo Limited is a South African registered company with a foreign subsidiary, Snake Limited,
which operates in Swanland.
Snake was a wholly owned subsidiary from the date of incorporation, but this situation changed
at the beginning of the current financial year when Hippo allowed Snake’s management to
purchase 20% of shares in Snake for R35 025.
The statements of profit or loss and other comprehensive income of the two companies for the
year ended 30 June 20-8 were as follows:
Hippo Snake
(Rand) ($)
Sales 5 950 000* 4 100 000
Cost of sales 4 050 000 2 800 000
Gross profit 1 900 000 1 300 000
Exchange losses (19 675) –
Other expenses, including
interest paid i.r.o. inter-company loan (700 000) (400 000)
Income from subsidiary – dividends 266 000 –
– interest 18 900 –
Profit on shares sold 24 358
Profit before taxation 1 489 583 900 000
Taxation 650 000 250 000
Profit and total comprehensive income for the year 839 583 650 000
Statement showing changes in retained earnings for the year ended 30 June 20-8:
Hippo Snake
(Rand) ($)
Retained earnings 1 July 20-7 769 417 80 000
Total comprehensive income for the year 839 583 650 000
Dividends – paid (150 000) (100 000)
– proposed (200 000) (130 000)
Retained earnings 30 June 20-8 1 259 000 500 000
continued
480
Questions
Their summarised statements of financial position at 30 June 20-8 reflected the following:
Hippo Snake
(Rand) ($)
ASSETS
Equipment, at cost 910 000 80 000
Accumulated depreciation
– equipment (182 000) (15 000)
Investment in subsidiary
– shares at cost 42 666 –
– loan account 121 500 –
Inventory on hand 500 000 300 000
Debtors and cash 578 209 563 500
Interest receivable 18 225 –
Dividends receivable from Snake 140 400 –
2 129 000 928 500
Additional information
(1) Snake deals primarily in the products of its parent company. The selling prices of these
products are determined by the holding company. The functional currency of Snake Ltd is
the SA rand.
(2) Snake’s indebtedness of R121 500 to Hippo (loan account) dates back to 1 January 20-5.
The loan is foreign currency ($) denominated and carries an interest rate of 15% per annum
payable annually in arrears. No capital repayments on this loan were made in 20-8.
(3) The current year’s depreciation charges for the two companies were:
Hippo Snake
(Rand) ($)
Depreciation – equipment 68 000 7 500
(4) Snake’s equipment was acquired on 1 January 20-6.
(5) The unrealised profit content of inventory held by Snake at 30 June 20-8 amounted to
R84 000 (30 June 20-7: R64 000). This inventory on hand at year end was shipped when
the exchange rate was $1 = R1.33 (20-7 comparative $1 = R1.50). Snake’s opening and
closing inventory was all acquired from Hippo.
(6) The opening inventory of Snake Limited was $240 000.
continued
481
Notes on Group Financial Statements
Required:
Prepare the consolidated statement of financial position of the Hippo Limited Group at 30 June
20-8 and the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the group for the year then ended. Comparatives and notes
to the financial statements are not required.
482
Questions
Question 20:3
Required:
Prepare the Consolidated Statement of Financial Position of Forex Ltd as at 31 March 20-2 and
the Consolidated Statement of Profit or Loss and Other Comprehensive Income and Statement
of Changes in Equity for the year then ended. Notes and comparatives to the financial state-
ments may be omitted.
continued
483
Notes on Group Financial Statements
APPENDIX “A”:
Financial Statements:
STATEMENTS OF FINANCIAL POSITION – 31 MARCH 20-2
FOREX BON-
LTD CHANCE
LTEE
R Rs
Share capital (600 000 shares) 750 000
Share capital (1 000 000 shares) 1 000 000
General reserves 345 000 400 000
Retained earnings 758 000 655 000
Long-term loans 100 000 150 000
Deferred taxation 45 000 300 000
Bank overdraft – 108 000
Creditors 178 000 467 000
Shareholders for dividend 200 000 150 000
2 376 000 3 230 000
continued
484
Questions
APPENDIX “B”:
Relevant exchange rates:
R Rs
Actual Rate on 1 April 20-1 1,00 = 4,95
Average rate for period 1 April 20-1 – 30 September 20-1 1,00 = 5,11
Average rate for Forex Ltd’s inventory on hand at 30 September 20-1 1,00 = 5,20
Actual rate on 30 September 20-1 1,00 = 5,24
Average rate for period 30 September 20-1–31 March 20-2 1,00 = 4,98
Average rate for Forex Ltd’s inventory on hand at 31 March 20-2 1,00 = 4,88
Actual rate on 31 March 20-2 1,00 = 4,82
Average rate for period 1 April 20-1–31 March 20-2 1,00 =
5,04416
(i.e. on 31 March 20-2, R1.00 (1 rand) was equivalent to Rs4.82 (4.82 rupees).)
485
Notes on Group Financial Statements
Question 20:4
Pen (Pty) Limited, a South African company, is the holding company of a foreign subsidiary,
Pencil Inc. The functional currency of Pencil Inc. is the Dollar.
The draft financial statements of the two companies for the year ended 31 December 20.5
were as follows:
continued
486
Questions
Additional information
1. The forex losses reflected in the statement of profit or loss and other comprehensive
income consisted of the following:
R
Losses incurred on repayment of trade creditors during the year 55 000
Losses arising from the translation of foreign trade creditors at relevant closing
rates on 31 December 20.5 85 000
Losses incurred on the repayment of a foreign currency loan 125 000
265 000
2. On 1 January 20.5 Pen (Pty) Limited obtained a foreign long-term loan of $375 000 and
received a rand equivalent amount of R503 333. The loan is payable on 31 December 20.7
in dollars.
The necessary entries in respect of this loan still have to be made.
3. Details of the short-term loans are as follows:
3.1 On 1 October 20.5 Pen (Pty) Limited obtained a short-term loan of $75 000 when
R1 = $0.50. The necessary entries still have to be made.
3.2 On 1 January 20.5 Pencil Inc. obtained a short-term loan of £250 000 when $1 = £1.
The loan is repayable in pounds sterling. The rate of exchange on 31 December 20.5
was $1 = £1.25. The necessary entries still have to be made.
continued
487
Notes on Group Financial Statements
4.2 The activities of Pencil Inc. are unrelated to those of Pen (Pty) Limited.
4.3 The translation of the financial statements of Pencil Inc. on 31 December 20.4 and the
accounting for the currency translation reserve difference was in accordance with
IFRSs.
4.4 The consolidated statement of financial position of Pen (Pty) Limited at 31 December
20.4 reflected a consolidated retained earnings of R545 000.
4.5 Exchange rates were as follows:
1 January 20.4 R1 = $1.05
31 December 20.4 R1 = $0.75
Average for 20.5 R1 = $0.50
31 December 20.5 R1 = $0.45
5. Non-controlling interests are measured initially at fair value, which was R110 000 on
1 January 20.4.
6. The tax rates are as follows:
Pen (Pty) Limited 50%
Pencil Inc. 40%
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of Pen (Pty) Limited and its subsidiary for the year ended
31 December 20.5.
(b) Calculate the amounts to be included in the consolidated statement of financial position
for non-controlling interests and long-term loan.
Your answer should be prepared in accordance with IFRSs to the extent allowed by the given
information. Comparative figures may be ignored.
Note: Assume that the accounting treatment of all foreign exchange transactions has the
same effect on taxable income, i.e. gives rise to no temporary or permanent difference.
488
Questions
Question 20:5
You are the group accountant of Momentum Limited, a company that holds a number of
subsidiary and associate companies. Your assistant has prepared a draft consolidated trial
balance however there are certain adjustments that still need to be made.
The following is the preliminary consolidated trial balance of Momentum Limited at 31 December
20.6:
R’000 R’000
DR CR
Ordinary share capital 5 000
Fair value reserve – FV through OCI investments 85
Retained earnings 3 900
Non-controlling interests 2 650
Long-term liabilities 3 650
Deferred tax 550
Profit before tax 3 800
Equity earnings from associates (net of dividends received) 640
Property, plant and equipment 6 100
Intangibles 1 350
Investments – associates 4 040
– FV through OCI 770
– other 1 814
Net current assets 2 751
Tax expense – current and deferred 1 330
Non-controlling interest’s share of profit 620
Dividend paid 1 500
20 275 20 275
The following issues have either not been accounted for or have been accounted for incor-
rectly.
1. Investments
The ‘Investments – FV through OCI’ amount represents two investments of Momen-
tum Limited that were still held by the company at 31 December 20.6, namely investments
in Speed Limited and Velocity Limited. Details relating to these two investments as well as
Momentum Limited’s investment in GForce Limited are as follows:
Company Percentage Date Cost Fair Value Fair Value
acquired acquired 31/12/20.5 31/12/20.6
GForce Limited 8% 02/03/20.4 R160 000 R240 000 Not Applicable
Speed Limited 5% 09/04/20.5 R390 000 R410 000 R360 000
Velocity Limited 10% 23/07/20.6 R370 000 Not Applicable R430 000
The above investments were correctly designated as subsequently measured at fair value
through other comprehensive income, in terms of IFRS 9, upon acquisition and were cor-
rectly accounted for up to 31 December 20.5.
GForce Limited was sold on 16 July 20.6 for R250 000 so as to enable the company to
invest in Velocity Limited. The only entry processed was to debit bank and credit ‘Invest-
ments – fair value through OCI’ with the proceeds. In addition, the only entry that was pro-
cessed for the purchase of Velocity Limited was to debit ‘Investments – FV through OCI’
and credit bank with the cost price of the investment.
The reduction in the value of the Speed Limited investment is considered to be permanent.
Dividends received from the three companies totalling R18 000 have been correctly
accounted for.
Other than mentioned above, no entries (including those relating to taxation) were passed
during 20.6 in respect of the above 3 investments.
continued
489
Notes on Group Financial Statements
2. Inertia Limited
Three years ago Momentum Limited acquired a 40% interest in Inertia Limited for
R960 000. No goodwill on acquisition arose on this transaction and at that date Inertia’s
only reserve was retained earnings. At that date Inertia Ltd had 2 000 000 shares in issue
and share capital of R2 000 000.
On 30 June 20.6 Inertia Limited issued 500 000 shares to Momentum at R2.50 per share.
Momentum Limited accounted for this transaction by debiting its ‘Investment – Associates’
by R1 250 000 and crediting bank by the same amount. Momentum Limited has accounted
for Inertia Limited as if it was an associate company for the whole year. In doing so, the
actual percentage holdings (in both six month periods) in Inertia Limited have been used.
The abridged financial statements of Inertia Limited are set out in the appendix. You should
assume that the carrying amount of all identifiable assets in Inertia Limited approximate fair
value and that profit was earned evenly throughout the year. The fair value of the existing
40% interest in Inertia Limited on 30 June 20.6 was R1 400 000.
3. Energy Inc
Momentum Limited has an 80% held subsidiary, Impact Limited, which it acquired some
years ago. At the beginning of the current year Impact acquired a 30% interest in Energy
Inc, a company incorporated in the United States. The purchase price was $270 000.
Energy Inc is a retailing company whose market is limited to the Southwestern USA.
Impact Limited has the right to appoint two of the five directors of Energy Inc.
In drafting the consolidated trial balance (of Momentum Limited) the financial statements of
Impact were used in which Energy Inc had been accounted for on the cost method. No
further adjustments have been made. Impact Limited’s investment in Energy Inc is included
in ‘Investments – other’ above.
Impact Limited’s goodwill in the investment in Energy Inc. had a recoverable amount of
$15 000 at 31 December 20.6.
Dividends of Energy Inc are not taxable in Import Limited
The following rates of exchange may be relevant:
$1 = R
2 January 20.6 (acquisition date) 6.72
30 June 20.6 7.21
1 December 20.6 7.68
31 December 20.6 7.47
Average for 20.6 7.12
The abridged financial statements of Energy Inc are set out in the appendix.
Additional information
ƒ The companies have complied with all applicable accounting standards except for where it
is evident from the above information that they have not. It is, however, the group’s intention
to apply all the latest accounting standards of GAAP when accounting for all the above
information. Non-controlling interests are initially measured at their share of identifiable net
assets.
ƒ The company tax rate has always been 30% with 50% of capital gains being included in
taxable income. The tax computations are all correct except for the available-for-sale
investments referred to in 1 above.
ƒ All the company’s in the Momentum Limited group are NOT considered to be share dealers
in terms of Income Tax Act and consequently all investments sold give rise to either a
capital profit or loss.
continued
490
Questions
Required:
(a) Draft correcting journal entries and any other relevant journal entries required in Momentum
Limited’s accounting records so as to correctly account for the information included under
point 1 ‘FV through OCI’.
Your answer should include entries relating to taxation (current and deferred).
(b) Prepare the consolidated statement of profit or loss and other comprehensive income,
consolidated statement of changes in equity and consolidated statement of financial position
of Momentum Limited for the 20.6 financial year.
No notes are required but the format must insofar as is possible be in accordance with
IFRSs.
Ignore VAT and STC.
Show all workings.
You may work to the nearest R1 000.
(c) Provide extracts from the consolidated statement of cash flows of Momentum Limited for
dividends received and dividends paid for the year ended 31 December 20.6 using only
the information apparent from the question.
You are not required to prepare any additional note disclosures.
Show all workings.
You may work to the nearest R1 000.
continued
491
Notes on Group Financial Statements
APPENDIX
Abridged statements of profit or loss and other comprehensive income for the year ended
31 December 20.6:
Inertia Energy
R’000 $’000
Profit before tax 1 600 200
Taxation (500) (70)
Profit after tax and total comprehensive income 1 100 130
492
Questions
Question 20:6
Pretoria Ltd is a company incorporated and operating in South Africa. Its financial year ends on
31 December 20-7. The following information relates to its investments in other companies.
Strand Ltd
Pretoria Ltd acquired a 15% interest in Strand Ltd some years ago for R3.88 million when
Strand Ltd’s share capital was R16 million (16 million shares) and its only reserve was retained
earnings of R8 million. On 30 September 20-7 Pretoria Ltd acquired a further 60% of
Strand Ltd’s issued ordinary shares. Prior to 30 September 20-7 the investment had been
accounted for as a subsequently measured at fair value through other comprehensive income
financial asset. Since 30 September 20-7 this investment has been accounted for on the cost
method in the accounting records of Pretoria Ltd; fair value adjustments to 30 September 20-7
have not been reversed in the accounting records of Pretoria Ltd. (Refer to Appendix B)
The fair value of a Strand Ltd share (for a non-controlling interest) was:
31 December 20-6 R3.70
30 September 20-7 R4.50
On 30 September 20-7 all of Strand Ltd’s identifiable net asset’s carrying amounts were con-
sidered to be equal to their fair value, however, for certain specialised plant it was not possible
to reliably measure its fair value by 15 March 20-8, the date the group financial statements
were authorised for issue. For the purposes of the 20-7 group financial statements the fair
value of this plant was provisionally measured at its carrying amount of R1.8 million at the date
of acquisition.
On 30 September 20-7 Strand had the following contingent liabilities:
ƒ Strand Ltd has signed a surety agreement with First Bank in respect of an overdraft
amounting to R16 million granted by the bank to Upton Ltd. Upton Ltd produces a strategic
component to Strand Ltd and the surety agreement was entered into so that Upton Ltd has
sufficient finance to ensure a continuous supply of the strategic components to Strand Ltd. It
is estimated that Strand Ltd would have to pay R1 million for another party to take over its
guarantee to First Bank.
ƒ One of Strand Ltd’s employees was involved in an altercation at a hotel while on a business
trip. The company is confident that their employee was not at fault however there is a
possibility that a legal claim may be instituted against the company. Any such claim will be
defended by Strand Ltd and they are confident that they would be successful. After
consultation with legal experts and risk assessors it has been established that they could
obtain insurance to avoid any loss in this matter at a cost of approximately R500 000.
By 31 December there was no further information available on either contingency. Neither of
the contingent liabilities will be deductible for tax purposes if they result in outflows.
The consideration transferred to acquire the additional 60% interest in Strand Ltd comprised
the following:
ƒ Cash of R11.2 million with half payable on 30 September 20-7 and the other half one year
later.
ƒ 5 million ordinary shares of Pretoria Ltd which were trading at R6.00 per share on 30 Sep-
tember 20-7 and R6.50 per share on 31 December 20-7.
In addition to the consideration transferred, the purchase agreement stipulated additional
consideration which is dependent on future events. Details of the contingent consideration are:
ƒ An additional 500 000 Pretoria Ltd ordinary shares if the pre-tax profit of Strand Ltd is at
least R50 million for the period 1 October 20-7 to 31 December 20-9. The fair value of this
additional consideration was R2.2 million on 30 September 20-7 and R2.4 million on
31 December 20-7.
ƒ A cash payment of R5 million if Strand Ltd’s share price is at least R6.50 per share on
31 December 20-9. The fair value of this additional consideration was R3 million on
30 September 20-7 and R3.3 million on 31 December 20-7.
continued
493
Notes on Group Financial Statements
Professional and consulting fees amounting to R1.2 million were incurred in relation to the
acquisition of Strand Ltd and share issue expenses of R400 000 were incurred in relation to the
issue of Pretoria Ltd ordinary shares. Neither of these costs is deductible for tax purposes.
The non-controlling interests of Strand Ltd are initially measured at their share of the identi-
fiable net assets.
On 31 December 20-7 Strand Ltd issued 4 million shares at a price of R5.00 per share to
Pretoria Ltd. No shares were issued to the non-controlling shareholders.
Scranton Inc
Pretoria Ltd acquired a 70% (1 050 000 shares) interest in Scranton Inc, a company
incorporated in the USA on 1 January 20-5 for R19 110 000. At that date the equity of Scranton
Inc was as follows:
$’000
Issued share capital (1 500 000 shares) 1 500
Retained earnings 2 100
At the date of acquisition all identifiable net assets of Scranton Ltd were considered to be fairly
valued. The non-controlling interests in Scranton Ltd are initially measured at fair value. On
1 January 20-5 their fair value was estimated to be R8 190 000.
Prior to the current year Scranton Inc had only declared one dividend of $300 000, on 31 Decem-
ber 20-6.
On 31 December 20-7 Pretoria Ltd sold 600 000 shares in Scranton Inc for R21.6 million. Since
that date Pretoria has exercised significant influence over Scranton Inc. The fair value of a
Scranton Inc share on 31 December 20-7 was $4.50 per share.
Pretoria Ltd has accounted for Scranton Inc on the cost method in its accounting records. The
functional currency of Scranton Ltd is the US dollar.
The following are rates (spot) between the US dollar and the SA rand:
Date
Rate
$1 = R
1 January 20-5 6.5
31 December 20-6 7.5
15 December 20-7 7.9
31 December 20-7 8.0
Average for the period:
– 1 January 20-5 to 31 December 20-6 6.9
– 1 January 20-7 to 31 December 20-7 7.7
Other information
ƒ The South African current tax rate is 30% with 50% of capital gains included in taxable
income.
ƒ An appropriate discount rate for Pretoria Ltd is 12% p.a.
Note that the trail balances of the two group companies are set out in Appendix A and financial
information relating to Pretoria Ltd is in Appendix B.
continued
494
Questions
Required:
(a) Discuss, giving reasons, how the contingent liabilities of Strand Ltd should be accounted
for in the consolidated financial statements of Pretoria Ltd for the 20-7 financial year.
Your answer should be limited to recognition and measurement issues. Ignore taxation.
(b) Refer to the specialised plant of Strand Ltd. Consider the following two scenarios:
Scenario 1
On 31 July 20-8 the necessary information that was required to determine the fair value of
the specialised plant was obtained. This information determined that the fair value of the
plant was R300 000 in excess of its carrying amount on 30 September 20-7.
Scenario 2
The same information as scenario 1 except that the information was obtained on 15 Novem-
ber 20-8.
Discuss, giving reasons, how information set out in the two scenarios above should be
accounted for in the consolidated financial statements of Pretoria for the year ended
31 December 20-8. You should assume the amounts involved are material.
(c) Draft all the journal entries in the accounting records of Pretoria Ltd (not consolidated) for
the year ended 31 December 20-7 related to the acquisition of the 60% interest in
Strand Ltd including the acquisition/issue costs and the contingent consideration.
No narrations or entries relating to taxation are required.
(d) Draft the pro forma consolidation journal entries in order to consolidate Strand Ltd into the
Pretoria Ltd Group for the 20-7 financial year.
Your entries must be based on the information contained in the accounting records of
Pretoria Ltd and Strand Ltd respectively. No narrations are required. Entries that affect
total comprehensive income must clearly indicate whether the adjustment is to profit or
other comprehensive income.
(e) Prepare the consolidated statement of profit or loss and other comprehensive income (one
statement approach) of the Pretoria Ltd Group for the 20-7 financial year insofar as the
information permits.
Reclassification adjustments must be presented separately in the statement. Tax relating
to items of other comprehensive income is presented separately in the statement.
(f) Prepare the consolidated statement of changes in equity of the Pretoria Ltd Group for the
20-7 financial year.
Work to the nearest R1 000.
continued
495
Notes on Group Financial Statements
496
Questions
Question 20:7
Petrel Limited is a parent of a number of subsidiaries and associates. You have been asked to
assist the group accountant, Les Preiss, with finalising the group financial statements. Les has
completed most of the consolidation but there are a number of outstanding issues that he is
unable to deal with. The following information relates to the parent and other group companies:
1. Petrel Limited
The following is an extract from the consolidated trial balance of the Petrel Limited Group. The
trial balance has been prepared correctly except as unless otherwise indicated in the
information given below:
Trial balance of Petrel Limited Group at 30 June 20.12
DR CR
R’000 R’000
Profit for the year (after tax) 58 600
Gain on revaluation of property, plant and equipment (before tax) 2 200
Tax on revaluation of property, plant and equipment 504
Non-controlling shareholders:
– Share of profit 4 860
– Share of other comprehensive income (revaluations) 810
Retained earnings – 1 July 20.11 138 600
Revaluation reserve – 1 July 20.11 9 760
Non-controlling interests (SOFP) – 30 June 20.12 28 380
Dividends declared and paid 20 000
The non-controlling interests balance at 30 June 20.12 above has been determined after
deducting dividends declared and paid to the non-controlling interests of R2 150 000.
2. Hawk Limited and Sparrow Limited
Petrel Limited acquired a controlling interest in Hawk Limited some years ago. Hawk Limited
acquired a 60% interest in Sparrow Limited in 20.9. The non-controlling interests of Sparrow
Limited were initially measured at fair value. When Sparrow Limited first became a subsidiary
of the Petrel Limited Group the excess of the fair value of the non-controlling interests over
their share of the fair value of the identifiable net assets was R80 000.
Les has correctly consolidated the Hawk Limited Group into the trial balance above, however,
the information below has not been taken into account in incorporating Sparrow Limited.
On 1 July 20.11, Petrel Limited acquired a 15% interest in Sparrow Limited. This 15% interest
has been accounted for in terms of IFRS 9 as a financial asset subsequently measured at fair
value through profit and loss in the consolidated trial balance (see 1 above). Deferred tax at
CGT rates has been provided.
Petrel Limited paid R780 000 for their 15% interest in Sparrow Limited and the fair value of this
investment on 30 June 20.12 was R800 000.
The following information is available for Sparrow Limited:
R’000
Equity at 1 July 20.11
– Share capital 1 000
– Revaluation reserve 172
– Retained earnings 3 628
4 800
Sparrow Limited earned a profit (after tax) of R720 000 for the year to 30 June 20.12. Their
land was revalued by R150 000 on 30 June 20.12 and they declared a dividend of R240 000
on 25 June 20.12.
continued
497
Notes on Group Financial Statements
3. Stork Limited
Stork Limited is a company based in France. Its functional currency is the Euro. Petrel Limited
acquired a 30% interest in Stork Limited on 1 July 20.10 for ̀780 000. The identifiable net
assets of Stork limited were fairly valued on that date except for land which had a fair value of
̀120 000 more than its carrying amount of ̀480 000 (also cost).
Due to the debt crisis the value of land dropped and consequently Stork Limited impaired the
land to its recoverable amount of ̀400 000 at 30 June 20.11.
On 1 July 20.11 Petrel Limited acquired a further 40% interest in Stork Limited for ̀1 200 000.
Petrel Limited chose to measure the non-controlling interests at their fair value of ̀860 000
which was also equal to the fair value of their existing 30% investment. The carrying amount of
all identifiable net assets of Stork Limited on this date was equal to their IFRS 3 values.
The value of Stork Limited’s land had increased by 30 June 20.12 and consequently
Stork Limited revalued the land, in terms of the company and group policy, to its fair value of
̀500 000.
Stork Limited has a portfolio of shares that are classified as subsequently measured at fair
value through other comprehensive income. The shares are capital assets for tax purposes.
The fair value of the shares are as follows:
̀’000
1 July 20.8 (date shares were acquired) 400
1 July 20.10 620
30 June 20.11 680
30 June 20.12 700
The gains are closed off to a fair value (mark-to-market) reserve.
Stork Limited has issued share capital of ̀800 000. The movement in its retained earnings is
summarised as follows:
̀’000
Balance at 30 June 20.10 1 400
Profit for the year 240
Dividend declared and paid – 30 June 20.11 (90)
Balance at 30 June 20.11 1 550
Profit for the year 320
Dividend declared and paid – 30 June 20.12 (120)
Balance at 30 June 20.12 1 750
Profits are earned evenly over the year. The only other reserves of Stork Limited relate to
information given above.
The tax rate in France is 25% for normal profits and 10% for capital gains. Capital losses are
deductible at the capital gains tax rate.
The accountant was not sure how to consolidate foreign operations and consequently
Stork Limited has been accounted for on the cost method in the consolidated trial balance (see
1 above). In other words, the only entries passed have been in respect of dividends received
from the investee.
continued
498
Questions
Average for:
1 July 20.10 to 30 June 20.11 9.5
1 July 20.11 to 30 June 20.12 10.1
4. Seagull Limited
Seagull Limited has been a wholly owned subsidiary of Petrel Limited for the last eight years.
Seagull Limited has been correctly consolidated into the consolidated trial balance of
Petrel Limited except the following information was not taken into account in the consolidation
process. The transaction has been correctly accounted for in the financial statements of
Seagull Limited and the separate (non-consolidated) financial statements of Petrel Limited.
On 1 January 20.12 Seagull Limited entered into a sale and leaseback agreement with Petrel
Limited whereby they sold an item of plant. The plant was acquired by Seagull Limited on
1 July 20.10 for R3 600 000 and has a useful life of 10 years with no residual value.
Details of the sale and leaseback are as follows:
Commencement date: 1 January 20.12
Period of lease: Four years
Selling price: R4 020 000
Fair value of asset: R4 150 000
Lease payments: Eight payments in arrear of R615 711 payable semi-annually
commending on 30 June 20.12
Ownership: Transfers back to lessee on expiry of lease
The asset is deductible for tax purposes at a rate of 20% p.a. not pro-rated for periods of less
than a year. Ignore VAT.
The policy of the company is to allocate any exempt temporary difference arising on the
transaction evenly over the period of the lease.
5. Other information
ƒ Stork Limited is the only company in the group that has investments in equity instruments
that are not subsidiaries or associates.
ƒ The company tax rate in South Africa is 28% and 50% of capital gains are included in
taxable income.
ƒ Taxation on items of other comprehensive income is presented separately in the statement
of profit and loss and other comprehensive income.
ƒ The group adopts the two statement approach for the statement of profit and loss and other
comprehensive income.
ƒ No transfers are made either into or out of the revaluation reserve account in respect of
realised revaluation surpluses.
continued
499
Notes on Group Financial Statements
Required:
(a) Prepare the pro forma journal entries that still need to be passed to correct the consoli-
dated trial balance to take into account the 15% interest that Petrel Limited has in
Sparrow Limited.
• Narrations are not required.
500
Questions
Question 21:1
The following information was extracted from Ward Limited’s consolidated statement of finan-
cial position at 31 December 20.8:
20.8 20.7
R’000 R’000
Share capital (151 500) (50 000)
Retained earnings (46 727) (44 522)
Non-controlling interests (20 750) –
Long-term liabilities (90 000) (150 000)
Land and buildings – cost 2 069 1 596
Equipment – cost less depreciation 188 493 141 025
Patents – cost less amortisation 22 500 25 000
Unlisted investments – cost 22 400 25 400
Inventory 64 900 31 200
Debtors 95 300 57 400
Bank (13 725) 7 600
Receiver of Revenue 320 (920)
Creditors (75 780) (43 279)
Shareholders for dividend (1 500) (500)
Goodwill 4 000
– –
Additional information
1. A profit of R1 043 000 was made on the sale of unlisted investments. No investments had
been bought during the year.
2. Taxation of R2 500 000 had been charged to the profit for the current year. No deferred
taxation is provided.
3. Equipment with a carrying amount of R3 439 000 was sold for R1 807 000. Depreciation for
the year in respect of equipment amounted to R21 828 000.
4. The following is an extract from the statement of changes in equity.
Dividends 5 000 000
Ordinary dividend 2 500 000
Capitalisation issue of 5 shares for every 100 held 2 500 000
5. During the year Ward Limited acquired 75% of the shares in a subsidiary for R64 000 000.
The fair value of assets and liabilities of the subsidiary at the date of acquisition were:
Equipment 46 000 000
Inventory 28 000 000
Debtors 31 000 000
Bank 4 000 000
Creditors (29 000 000)
80 000 000
continued
501
Notes on Group Financial Statements
6. Included in the creditors figure is an amount of R125 000 for dividends owing to non-con-
trolling shareholders. The subsidiary has declared dividends of R1 000 000 since being
acquired. None have been ‘pre-acquisition’.
7. The non-controlling interests’ share of profit for the current year was R1 000 000.
8. The group paid interest of R3 640 000 during the current year and received dividends of
R1 344 000 on its unlisted investments.
9. During the year long-term loans of R110 000 000 had been repaid and new loans of
R50 000 000 had been raised.
10. No patents have been acquired or registered during the year.
Required:
(a) Prepare a consolidated statement of cash flows for Ward Limited. The indirect method should
be used.
(b) Assuming the turnover is R189 420 000 show how the direct method would differ from the
indirect method.
502
Questions
Question 21:2
The following financial statements are provided for the H Ltd group and of S Ltd, one of the
subsidiaries that was disposed of on 30 June 20-1.
Consolidated statements of financial position 31.12.20-1 31.12.20-0 30.6. 20-1
at
H Ltd H Ltd S Ltd
Consolidated Consolidated
R’000 R’000 R’000
ASSETS
Property, plant and equipment 11 000 12 000 2 500
Goodwill 480 500 –
Investment in associate 374 – –
Current assets 37 300 32 000 5 600
– Inventory 20 000 18 000 3 000
– Debtors 17 000 14 000 2 200
– Taxation prepaid 300 – –
– Cash – – 400
49 154 44 500 8 100
continued
503
Notes on Group Financial Statements
Several years ago, H Ltd acquired 80% of the shares of S Ltd for R340 000 when S Ltd’s
general reserves were R50 000 and its retained earnings were R100 000. H Ltd sold 50% of its
shareholding in S Ltd on 30 June 20-1 at a profit (from the group’s point of view) of R100 000.
This profit is included in ‘Operating profit before depreciation’. There were no property, plant
and equipment disposals during the year. Non-controlling interests in the H Ltd Group are
recognised at their share of identifiable net assets. Assume that the fair value of the remaining
investment in S Ltd on 30 June 20-1 approximated its equity accounted value.
Required:
Draft the consolidated statement of cash flows for the H Ltd Group for the year ended
31 December 20-1. The only note required is the one relating to the disposal of S Ltd. Ignore
goodwill impairment.
504
Questions
Question 21:3
On 1 July 20.7 H Limited owned all the shares in A Limited, held since incorporation of A Lim-
ited and 80% of the shares in B Limited. In addition, H Limited has a number of associate
companies.
The draft consolidated statement of profit or loss (extract) and statement of financial position of
H Limited for the financial year ended 30 June 20.8 as well as an extract from the statement of
changes in equity follows:
Attributable to:
Parent shareholders 94 000
Non-controlling interests 13 000
107 000
continued
505
Notes on Group Financial Statements
continued
506
Questions
Additional information
1. Loss on expropriation
The loss on expropriation is in respect of land in B Limited. B Limited received R35 000 for this
property and is the only company in the group which owns land.
2. On 31 March 20.8 H Limited sold 90% of its shareholding in A Limited. A Limited had the
following assets and liabilities at 31 March 20.8.
R
Plant – cost 40 000
– accumulated depreciation (10 000)
30 000
Inventory 15 000
Cash at bank 25 000
Creditors (20 000)
Net assets 50 000
H Limited did not sell any other shares during the year.
3. Other investments comprise investments in unlisted companies including the remaining
investment in A Limited. Due to the inability to reliably measure fair value these are carried at
cost. The fair value of the remaining investment in A Limited was estimated to be R6 000 on
31 March 20.8.
4. Land is revalued annually in terms of IAS 16. Note that the company adopts the two statement
approach in terms of IAS 1.
5. There are no dividends payable to non-controlling shareholders at 30 June 20.8 (20.7: Nil).
6. Dividends of R5 000 were received from associates.
7. Ignore capital gains tax.
Required:
To prepare a statement of cash flows, using the direct method, in terms of IAS 7 for the group for
the financial year ending on 30 June 20.8. (Comparative figures and notes to the statement are
not required.)
507
Notes on Group Financial Statements
Question 21:4
You are assisting with the completion of the consolidated annual financial statements of
Diplo Limited, and have been asked by management to prepare the consolidated statement of
cash flows for the year ended 31 December 20.5 in accordance with the provisions of IAS 7,
Statement of Cash Flows. You have been provided with the following schedule, which lists the
consolidated statement of financial position figures for 20.5 and 20.4 as well as the differences
between the consolidated statement of financial position at these dates:
continued
508
Questions
As a consequence, the equity interest of Diplo Limited in Cento (Pty) Limited was
decreased to 60%. On consolidation a gain of R1 200 000 attributable to the parent arose
on the issue of the shares to the non-controlling shareholders. The accountant was unsure
how to account for this amount and has included it in the ‘Operating profit before borrow-
ing costs’. (See note 4 below.)
2.2 Purchase of an 80% equity interest in Aloe (Pty) Limited
On 1 March 20.5 Diplo Limited purchased 80% of the equity of Aloe (Pty) Limited for
R9 600 000. The purchase amount was settled by the issue of 1 200 000 ordinary shares
in Diplo Limited. Non-controlling interests are not initially recognised at fair value.
2.3 Sale of interest in Bella (Pty) Limited
For many years Diplo Limited had held 75% of the ordinary shares of Bella (Pty) Limited.
This interest had been purchased at a discount of R500 000 compared with attributable
identifiable net asset value. On 30 June 20.5 Diplo Limited sold its entire interest in Bella
(Pty) Limited for a cash amount of R10 000 000. In terms of the agreement of sale an
amount of R6 500 000 was allocated to the equity interest and R3 500 000 to the loan
account. The profit on the sale of the shares which arose on consolidation was included in
the ‘Operating profit before borrowing costs’. (See note 4 below.)
2.4 Net assets of Aloe (Pty) Limited and Bella (Pty) Limited
Details relating to the net assets of Aloe (Pty) Limited and Bella (Pty) Limited on the
respective dates of the changes in interests were as follows:
Aloe (Pty) Bella (Pty)
Limited Limited
1 March 30 June
20.5 20.5
R’000 R’000
Fixed property 3 600 4 200
Plant and equipment
At cost 3 200 2 400
Accumulated depreciation (800) (750)
Shareholder’s loan account – (3 500)
Deferred taxation (125) (120)
Inventory 2 950 3 070
Debtors 3 850 4 300
Creditors (1 850) (1 400)
Bank balances 175 (400)
11 000 7 800
3. Reserves
R’000
During the year under review the following changes occurred in the other reserves:
Transfer from retained earnings
Transfer resulting from Diplo Limited’s 60% portion of the share capital of
Cento (Pty) Limited (see 2.1) 7 200
Transfer to retained earnings (1 700)
Fixed property revaluation surplus realised by the sale of the interest in
subsidiary Bella (Pty) Limited (800)
Fixed property revaluation surplus realised (see 3.3) (900)
continued
509
Notes on Group Financial Statements
3.1 This arises from the annual revaluation of the fixed property of the group. An amount of
R1 400 000 relating to subsidiaries which are not wholly owned was credited to non-
controlling interests.
3.2 This represents the portion of the dividends of Diplo Limited for the current year in respect of
which shareholders elected to receive bonus shares instead of a cash dividend, in terms of a
share election scheme.
3.3 On 3 January 20.5 Diplo Limited sold undepreciated retail premises to a property trust for
R2 150 000 in terms of a sale and leaseback (operating lease) agreement. The lease
agreement is for a period of ten years.
Details of the property sold are as follows:
R’000
Cost of property 650
Carrying amount at which the property was included in the consolidated
statement of financial position at 31 December 20.4 1 550
Market value at the date of the sale 1 550
4. Retained earnings
Set out below is the abbreviated consolidated statement of profit or loss (the group uses a
two statement approach) of the group for the year ended 31 December 20.5:
R’000
Turnover 448 000
Cost of sales, operating expenses and other income (392 500)
Operating profit before borrowing costs 55 500
Borrowing costs (8 500)
Operating profit before taxation 47 000
Taxation (current and deferred) (16 000
Operating profit after taxation 31 000
Profit from associate companies 2 800
Equity accounted income 2 350
Dividends received 450
Attributable to non-controlling interests (4 050)
Attributable to parent shareholders 29 750
continued
510
Questions
5. Long-term loans
5.1 During the year under review the following changes occurred in respect of long-term debt:
R’000
Loans raised
Surplus arising from the sale and leaseback agreement (see 3.3) 600
Plant and equipment obtained in terms of a lease agreement 3 250
Other long-term loans raised 9 500
Loans redeemed (36 000)
Unrealised exchange rate losses 1 450
Short-term portion transferred to current liabilities (3 800)
(25 000)
5.2 The group has unused loan facilities of R24 000 000 of which only R8 000 000 may be
utilised for future expansion.
6. Creditors
Creditors at the end of the current and the previous year have been summarised as follows:
Diff 31 Dec 31 Dec
20.5 20.4
R’000 R’000 R’000
Trade creditors 8 000 24 500 16 500
Creditors relating to development costs capitalised 750 1 250 500
Short-term loans (2 600) 6 150 8 750
Receiver of Revenue
Normal taxation 845 1 650 805
Value-added tax 370 3 240 2 870
Shareholders for dividends (3 100) 400 3 500
4 265 37 190 32 925
7. Non-current assets
During the year under review the following changes occurred:
Property Plant & Development Total
Equipment costs
R’000 R’000 R’000 R’000
Additions (including revaluations
in the case of property) 17 500 26 000 – 43 500
Development costs capitalised – – 2 250 2 250
Interest capitalised 2 050 – – 2 050
Disposals (carrying amount) (5 750) (9 650) – (15 400)
Depreciation and amortisation – (6 500) (550) (7 050)
13 800 9 850 1 700 25 350
7.1 The proceeds on the disposal of the plant and equipment by companies in the group
amounted to R9 000 000. This excludes the proceeds from the sale of the interest in Bella
(Pty) Limited (see 2.3 and 2.4). The profit from the sale is included in ‘Operating profit before
borrowing costs’.
7.2 A portion the plant and equipment purchases, namely R5 500 000, relates to the replacement
of plant and equipment. The balance of purchases by the companies in the group relates to
expansions of production capacity.
continued
511
Notes on Group Financial Statements
8. Debtors
Debtors at the end of the current and the previous year have been summarised as follows:
Diff 31 Dec 31 Dec
20.5 20.4
R’000 R’000 R’000
Gross trade debtors 29 000 119 000 90 000
Allowance for credit losses (1 500) (7 500) (6 000)
Unearned finance income (11 000) (46 000) (35 000)
16 500 65 500 49 000
Required:
Prepare a consolidated statement of cash flows, including the relevant notes thereto, for the
Diplo Limited Group for the year ended 31 December 20.5, in compliance with the provisions of
IAS 7 using the direct method. Cash flows in respect of VAT are not required to be disclosed
separately.
Note: The accounting treatment of fixed property is in conflict with IAS 16 and IAS 40 in that
fixed property is revalued in terms of IAS 16 each year but is not depreciated. You should
accept this as being correct in answering this question.
QE – adapted
512
Questions
Question 21:5
The newly appointed accountant of Guatemala Limited has requested your assistance in the
preparation of the consolidated statement of cash flows of the group for the year ended
31 December 20.7. A draft trial balance of the group as at 31 December 20.7 has been pro-
vided. This is attached as appendix A. In addition, the accountant has provided the following
information:
1. Non-current assets
The following reconciliation has been prepared as a note as at 31 December 20.7:
Land & Plant &
Buildings Equipment
R R
Carrying amount at 1 January 20.7 3 500 000 3 120 000
Revaluations – 690 000
Additions/Acquisitions 750 000 1 250 000
Disposals – (920 000)
Depreciation – (1 250 000)
Adjustment to market value 500 000 –
Carrying amount at 31 December 20.7 4 750 000 2 890 000
The group revalues all non-current assets on a regular basis. All revaluations in respect of
plant and equipment have been based on fair value which has always been less than the
original cost of the asset.
The group’s land and buildings are investment properties. No tax allowances are granted on
them. They are accounted for in terms of the fair value model.
The additions to plant and equipment include plant and equipment of R600 000 which was
purchased in terms of a lease. This lease was entered into on 1 July 20.7, provides for interest
at 15% per annum and is repayable in four annual installments of R210 159 each commencing
on 30 June 20.8.
Acquisitions and disposals of non-current assets include any assets which may have been
acquired or disposed of in terms of changes in holdings in group companies. There were no
revaluations in any partly owned subsidiaries.
2. Investments in associate companies
The accountant of Guatemala Limited has provided the following details in respect of the
group’s investments in associate companies:
R
Share of profits 587 000
Dividends received 350 000
continued
513
Notes on Group Financial Statements
It was the policy of the group to amortise goodwill on subsidiaries, joint ventures and associate
companies over 10 years on the straight line basis, however from the current financial year
IFRS 3 has been applied. In terms of IFRS 3 the new policy is not applied retrospectively and
goodwill is carried at the (amortised) carrying amount from when IFRS 3 is adopted.
There was an impairment of goodwill at 31 December 20.7.
4. Other investments
Other investments are all held for short term profit making.
Details of the group’s investments are as follows:
31 Dec. 31 Dec.
20.7 20.6
R R
Historic cost 500 000 750 000
Market value 900 000 1 020 000
All investments held by the Guatemala Limited Group at 31 December 20.6 were sold during
the 20.7 financial year. None of the investments purchased in 20.7 were sold by the Gua-
temala Limited Group during the 20.7 financial year.
continued
514
Questions
515
Notes on Group Financial Statements
Question 21:6
continued
516
Questions
4. Dividends
Dividends declared by Portland Limited during the 20.14 year were as follows:
R
30 June 20.14 3 000
31 December 20.14 5 000
5. Additional information
The turnover of the group amounted to R6 520 000 for the 20.14 financial year.
ƒ Depreciation on plant per the group income statement for the year ended 31 Decem-
ber 20.14 amounted to R8 000.
ƒ During the year plant with a book value of R4 000 was sold for R3 200 by the group.
ƒ Goodwill was previously amortised in the consolidated income statement on a straight line
basis over ten years. IFRS 3 was applied for the first time in the current year. In terms of
IFRS 3 goodwill on hand at the beginning of the year is retained at that carrying amount
subject to an annual impairment list.
ƒ Portland Limited incurred R890 finance charges during the financial year.
ƒ Portland Limited’s share of the profit from associate companies and joint ventures for the
year ended 31 December 20.14 amounted to R5 000.
ƒ The normal tax rate was 30% in 20.14 and 35% in 20.13 and 50% of capital gains are
included in taxable income.
ƒ The tax expense per the group income statement, for the year ended 31 December 20.14,
was R12 000.
ƒ The non-controlling share of the current year’s profits was R8 000.
ƒ There was no taxation owing/receivable at the beginning or end of the financial year.
ƒ There was a goodwill impairment at 31 December 20.14.
Required:
Prepare the consolidated statement of cash flows of Portland Limited in a form suitable for
publication for the year ended 31 December 20.14.
continued
517
Notes on Group Financial Statements
Appendix A:
GROUP STATEMENT OF FINANCIAL POSITION MOVEMENTS FOR THE YEAR ENDED
31 DECEMBER 20.14
Dr Cr
R R
Buildings (net book value) 44 000 –
Plant (net book value) 50 000 –
Goodwill – 2 000
Investment in associates and joint ventures 8 650 –
Inventories 30 000 –
Accounts receivable – 4 000
Cash at bank 20 –
Share capital – 10 000
Capital redemption reserve fund 4 000 –
Revaluation reserve – 20 202
Replacement reserve – 3 140
Retained earnings – 74 169
Non-controlling interests – 16 000
Long-term loans – 10 000
Deferred taxation 9 841 –
Accounts payable – 6 000
Shareholders for dividend – 1 000
146 511 146 511
518
Questions
Question 21:7
Potter Ltd is a company listed on the JSE Ltd and has a number of subsidiary companies. Its
financial year ends on 31 December. All of its subsidiary companies were acquired some years
ago with the exception of Snape Ltd which was acquired on 30 June 20-6. Non-controlling
interests of Snape Ltd were initially measured at their share of the identifiable net assets.
The consolidated income statements and statements of financial position of the Potter Ltd group
together with information relating thereto for the financial year ending on 31 December 20-6 are
set out in Appendix A at the end of this question.
The trial balance at 31 December 20-6 is for the six months to 31 December 20-6.
1. Identifiable net assets at date of acquisition
The fair value of all assets and liabilities of Snape Ltd on 30 June 20-6 was considered to be
the same as their carrying value except in respect of the following items:
Intangible asset
The intangible asset on 30 June 20-6 represents capitalised development expenditure for a
project that was in progress. The fair value of the development expenditure was considered to
be R810 000 at that date. The project was completed and available for use on 30 September
20-6 after a further R150 000 expenditure was incurred. The development expenditure is being
written off evenly by Snape Ltd over its estimated useful life of six years.
continued
519
Notes on Group Financial Statements
Investment property
The investment property, which originally cost R1 800 000, consists of a single factory building
which had a fair value of R2 100 000 on 30 June 20-6. The fair value on 31 December 20-6
was R2 450 000. Snape Ltd, who adopts the cost model for investment property, has not
changed its accounting policy to be consistent with the Potter Ltd group. The Potter Ltd group
uses the fair value model for investment property.
At 30 June 20-6 the building had a remaining useful life of 25 years. The carrying amount of the
investment property is expected to be recovered through disposal. The building is deductible
for tax purposes.
Post-employment pension liability
At 30 June 20-6 Snape Ltd’s post-employment pension liability was provisionally estimated to
have a fair value of R1 300 000. This estimate had not changed by the time the 20-6 financial
statements were finalised.
2. Purchase consideration
The purchase consideration payable by Potter Ltd was to be settled as follows:
ƒ An issue of 1 800 000 Potter Ltd shares on 30 June 20-6. Due to legal formalities these
shares were only issued on 15 August 20-6.
ƒ An additional 120 000 shares in Potter Ltd if the value of a Snape Ltd share exceeded
R5.00 on 31 December 20-7. The fair value of this contingent consideration was R378 000
on 30 June 20-6 and R410 000 on 31 December 20-7.
On 30 June 20-6 it was estimated that the value of Snape Ltd shares would exceed R5.00 on
31 December 20-7. This estimate had not changed by the time the 2-6 financial statements
were authorised for issue.
The fair value of a Potter Ltd ordinary share was as follows:
R
30 June 20-6 4.20
15 August 20-6 4.30
31 December 20-6 4.60
3. Dividend declared
Snape Ltd declared and paid its only dividend for the year of R300 000 in December 20-6.
4. Other reserves
The other reserves of Snape Ltd represent the fair value reserve arising from the financial
assets as well as an asset replacement reserve. An amount was transferred from retained
earnings to the asset replacement reserve on 31 December 20-6.
5. Financial assets at fair value through other comprehensive income
Snape Ltd neither bought nor sold any such financial assets from 30 June 20-6 to 31 Decem-
ber 20-6.
OTHER INFORMATION
The SA Normal tax rate is 30% and 50% of capital gains have always been included in taxable
income. Ignore all other forms of taxation.
continued
520
Questions
Required:
(a) Draft the pro forma consolidation journal entries that would have been recorded to
consolidate Snape Ltd into the Potter Ltd group for the 20-6 financial year. You should
assume that the trial balance of Snape Ltd is for the six-month period to 31 December 20-6.
No narrations are required.
(b) Prepare the ‘Cash flows from operating activities’ section of the consolidated statement of
cash flows of the Potter Ltd group for the year ended 31 December 20-6.
The Potter Ltd group has the following accounting policies:
ƒ Cash flows are presented using the direct method
ƒ Dividends and interest received as well as interest and dividends paid are classified as
operating cash flows
Notes are not required.
(c) Explain what impact the information set out below will have on the group financial state-
ments of Potter Ltd for the year ended 31 December 20-7. Support your answer with refer-
ence to amounts involved.
Assume the following information for the year ending 31 December 20-7:
1. At 31 December 20-7 Snape Ltd shares were trading at R4.80
2. In April 20-7 an actuarial report was received which valued the post-employment pension
plan liability of Snape Ltd at R1 450 000 at the date Potter Ltd acquired Snape Ltd.
continued
521
Notes on Group Financial Statements
APPENDIX A
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AND STATEMENT OF PROFIT
OR LOSS OF POTTER LTD GROUP AND INFORMATION RELATING THERETO
20-6 20-5
Note R’000 R’000
NON-CURRENT ASSETS
Property, plant and equipment – at depreciated historic cost 3 8 840 4 050
Investment property at fair value 6 180 3 100
Intangible assets at amortised historic cost 2 450 1 860
Financial assets at fair value through OCI 720 –
Goodwill 6 1 790 1 270
Inventory 3 840 1 500
Accounts receivable 4 320 2 120
Bank and cash 1 220 580
29 360 14 480
EQUITY
Issued ordinary capital 11 420 3 860
Other reserves 5 1 498 730
Retained earnings 3 274 2 060
Parent shareholders interest 16 192 6 650
Non-controlling interest 4 252 1 940
Non-current liabilities
Long-term borrowings 1 378 1 800
Post-employment benefit plans 2 830 1 420
Deferred taxation 1 620 690
Current liabilities
Accounts payable 2 068 1 200
Receiver of Revenue 220 180
Shareholders for dividend 7 800 600
29 360 14 480
Note R’000
Gross revenue 2 24 680
Cost of sales 4 (14 220)
Operating expenses (4 960)
Fair value gains – investment property 530
Finance costs (490)
Profit before tax 5 540
Taxation (1 620)
Profit for the period 3 920
Attributable to
– parent shareholders 3 050
– non-controlling interests 870
3 920
continued
522
Questions
OTHER INFORMATION
1. Consolidated statement of financial position and statement of profit or loss
The consolidated statement of financial position and statement of profit or loss above are the final
statements after correctly consolidating all subsidiaries in the group INCLUDING Snape Ltd. The
group adopts the two statement approach.
2. Gross revenue
Gross revenue includes interest received of R158 000 and dividends received of R56 000.
3. Non-current assets
There were no disposals of non-current assets by the group during the current year. The
following acquisitions of non-current assets were made during the year (excluding those
acquired through the acquisition of the subsidiary):
R’000
Property, plant and equipment 1 240
Investment properties 450
There were no other acquisitions of non-current assets other than is apparent from the infor-
mation. Snape Ltd is the only company in the group that holds any available-for-sale financial
assets
4. Cost of sales and operating expenses
The following amounts were charged to cost of sales and operating expenses for the year:
Cost of Sales Operating expenses
R’000 R’000
Depreciation on property, plant and equipment 380 230
Post-employment benefit plans 140 170
There was no effect on other comprehensive income in respect of the post-employment benefit
plans.
5. Other reserves
The other reserves of the group comprise only an asset replacement reserve, the fair value
reserve in respect of available-for-sale financial assets and the contingent share issue reserve.
6. Goodwill
During the year an impairment test was done in relation to a cash generating unit in one of
Potter Ltd’s subsidiaries. This gave rise to a write down of goodwill. No other assets were
impaired in the current year.
7. Dividends
Potter Ltd declared dividends of R1 500 000 during the current year.
523