Ethiopia D5S1 Bus Comms and Consolidations

Consolidated financial statements
Prepared by: Michael Wells

Date: June 13-17, 2016
Addis Ababa
Aims
» Understand the concepts underlying the accounting for

business combinations and presenting consolidated financial
statements
» Understand the requirements and the judgements in
accounting for business combinations and for presenting
consolidated and separate financial statements in accordance
with IFRS and the IFRS for SMEs
2
Control: understanding the economics
Economics
Underlying concepts: element definitions 4
Asset (see Conceptual Framework Income (¶4.25(a))

¶4.4(a)) » recognised increase in asset/decrease
» resource controlled by the entity… in liability in current reporting period
» expected inflow of economic benefits » that result in increased equity
Liability (¶4.4(b)) except…
» present obligation… Expense (¶4.25(b))
» expected outflow of economic benefits » recognised decrease in asset/increase
in liability in current period
Equity (¶4.4(c))
» that result in decreased equity
» assets – liabilities except…
4
Economics
example 1: control of a resource? 5
Entity A owns 80% of the voting interest in Entity B.

In the absence of evidence to the contrary does Entity A likely
control Entity B’s economic resources (for example, its
manufacturing plant)? Choose one of:
1) Yes; or
2) No.
5
Economics
Entity A owns 30% of the voting interest in Entity B.

control Entity B’s economic resources (for example, its
manufacturing plant)? Choose one of:
1) Yes; or 2) No.
If no, what is the resource that Entity A controls? Choose one of:
1) the investment in Entity B; 2) there is no resource under Entity A’s
control; or 3) another resource (specify…).
6
Economics
» Entity A owns 60% of the voting interest in Entity B.

» Entity B owns 60% of the voting interest in Entity C.
control Entity C’s economic resources? Choose one of:
1) Yes, A directs 60% of the voting power in C through its control
of B.
2) No, A cannot direct C because it directs only 36% of the
voting power in C (ie 60% × 60% = 36%).
7
The economics
NCI: what do you think? 8
Which element is NCI in the statement of financial position?

Choose 1 of:
1) Asset
2) Liability
3) Equity
8
Economics
example: decrease interest in a subsidiary 9
Entity B is Entity A’s only subsidiary.

» At 31/12/20x1, NCI is CU100 claim against the group in its statement of financial
position.
» On 01/01/20x2 Entity A decreases its equity interest in Entity B from 80% to 60% in
exchange for CU1,000 cash.
From the group’s perspective does any income result from the transaction on
01/01/20x2? Choose one of:
1) Yes, CU900 income: the group’s asset (cash) increase by CU1,000 of which only
CU100 is attributable to its NCI; or
2) No, nil income: the CU1,000 increase in the group’s asset (cash) is all directly
attributable to the corresponding increase in equity (NCI by CU100 and equity
attributable to A by CU900).
9
Degrees of influence
Degree of influence over ‘investees’
11
o
of influence Definitions
IFRS 10: An investor controls an investee when the investor:
(i) has power over the investee;
(ii) is exposed, or has rights, to variable returns from its involvement with the
Control investee; and
(iii) has the ability to affect those returns through its power over the investee.
IFRS for SMEs: control is the ability to direct the financial and operating policies
of the investee.
Joint control IFRS for SMEs: joint control is the contractually agreed sharing of control.
IFRS and the IFRS for SMEs: significant influence is the ability to participate in the
Significant influence financial and operating policies of the investee.
11
IFRS financial statements
12
o
of influence IFRS accounting IFRS 12
Control Account for assets (ie controlled resources) and claims ✔
against those assets (see IFRS 10 Consolidated Exception for
Financial Statements) using IFRSs investment
entities:
Joint operation: account for assets (the controlled account for ✔
resources) and liabilities (the present obligations) (see investment
Joint control (joint IFRS 11 Joint Arrangements) using IFRSs ‘assets’ (rather
arrangements) Joint venture: account for investment asset (the than the
✔
controlled resource) using the equity method in underlying
accordance with IAS 28 controlled
resources)
Significant influence Account for investment asset (the controlled resource) using the fair ✔
using the equity method in accordance with IAS 28 value model
Less than significant Account for investment asset (the controlled resource) using the fair value ✘ 12
model in accordance with IFRS 9
IFRS for SME financial statements
13
o
of influence IFRS for SMEs accounting
Control Account for assets (ie controlled resources) and claims against those assets (see Section 9
Consolidated and Separate Financial Statements) using applicable Sections of the IFRS for
SMEs
Joint assets and jointly controlled operations: account for own assets and share of joint
assets (the controlled resources) and liabilities and share of joint liabilities (the present
Joint control (joint obligations) (see Section 15 Investments in Joint Ventures) using applicable Sections of the
arrangements) IFRS for SMEs
Jointly controlled entities (see Section 15 Investments in Joint Ventures) and Associates (see
Section 14 Investments in Associates) account for investment asset (the controlled
resource?) using: (i) the cost model; (ii) the fair value model; (iii) or the equity method as
Significant influence described in Section 14 Investments in Associates
Less than significant Account for investment asset (the controlled resource) using the fair value model or, ONLY if
fair value cannot be measured reliably, using the cost model (see paragraph 11.4)
13
Separate financial statements
IFRS and IFRS for SMEs
15
Degree of influence Accounting for ‘investment’ asset
Control (subsidiaries)
Choose from any of:
(i) cost;
Joint control (joint (ii) equity method; or
arrangements: joint (iii) fair value.
operations and joint ventures)
Can make different choice for each of subsidiaries, joint
Significant influence ventures and associates
(associates)
Less than significant influence Same as in its consolidated financial statements
Are separate financial statements consistent with the concepts in the IASB Conceptual Framework?
15
Does consolidation reflect economics?
16
You own a company (A). You could expand A’s business by
contracting A to buy either:
» the shares of a competitor company (say B); or
» B’s business (assets, operations etc)
» In both alternatives, after the purchase, all of A’s and all of B’s
assets are controlled by you. In other words, in both scenarios,
A’s and B’s assets are available to meet claims against legal
company A. Consequently, in general purpose financial
statements A and B together are viewed as a single economic
entity.
© Michael JC Wells 16
17
To expand its market share, company A buys 75% of company B.
» after the purchase, all of A’s and all of B’s assets are available to meet
claims against legal company A. Consequently, in general purpose
financial statements A and B together are viewed as a single economic
entity.
» the owners of the remaining 25% of B are called the non-controlling
interest (NCI) in the (combined) reporting entity’s general purpose financial
statements—ie when A and B are viewed as a single economic entity
» the NCI is equity because the group does not have a present obligation to
repay the NCI.
Assessing control
Assessing control
IFRS
19
Power Exposure Link
purpose and design
relevant activities exposure (or rights) to ability to use power

variable returns of the over the investee to
decision making investee affect its own returns
rights
19
Assessing control
power: what do you think?
20
For each unrelated example below choose 1 of:
1) ‘your’ company (A) controls Z; or
2) A does not control Z.
Example 1:
A holds 48% of the voting rights of Z.
» The remaining voting rights held by thousands, with less than 1% each.
Example 2:
A holds 45% of the voting rights of Z.
» Two other investors each hold 26% of the voting right
» Remaining voting rights are held by three other shareholders (each with 1%)
» No
© Michael JC other
Wells arrangements that affect decision-making 20
Assessing control
power: what do you think?
21
Example 3:
A holds 40% of the voting rights of Z and 12 other investors each hold
5% of the voting right of Z.
» Shareholder agreement:
» A has the right to appoint, remove and set the remuneration of management
responsible for directing the relevant activities of Z
» two-third majority vote of the shareholders is required to change the
agreement
Assessing control
power over relevant activities: what do you think?
22
Example 4:
Two investors (A and B) form an investee (Z) to develop and market a
medical product
» Investor A will develop and obtain the patent
» Investor B will manufacture and market the product
» Obtaining a patent for the product requires significant uncertainty and effort
» Patent results in 10 years exclusivity
» The 10-year exclusivity corresponds to 95% of the fair value of the patent
Assessing control
structured entities: judgement
23
» Determining control requires an assessment of all relevant facts and
circumstances, including:
» purpose and design of the investee;
» activities of the investee;
» how decisions about those activities are made; and
» rights held by the party involved with the investee.
» Particularly challenging for some structured entities:
» relevant activities in those entities are not usually directed by voting or similar
rights;
» benefits or returns expected from such investments can be more difficult to
assess
Business combinations
definitions
25
» A business combination is a transaction or other event in which
one entity (the acquirer) obtains control of one or more
businesses (the acquiree/s).
» A business is an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of
providing a return in the form of dividends, lower costs or other
economic benefits directly to investors…
» Why do these definitions matter?
can you identify the acquirer in each of the examples below?
26
In the absence of evidence to the contrary:
Example 1: Companies A and B combine businesses by forming C.
» C issues 30 million and 20 million shares to A’s & B’s shareholders in exchange
for A’s and B’s businesses.
Example 2: same as Example 1, except:
» 20 million shares are issued to each of A’s & B’s shareholders.
» C had 9 board members, 5 appointed by A’s shareholders and 4 by B’s.
Example 3: on 31 December 2014 A has 100 million shares in issue.
» On 1 January 2015 A issued 200 million new A shares to the owners of B in
exchange for all of B’s shares.
costs directly attributable to a business combination
27
» Examples of costs directly attributable to a business
combination include: directly attributable advisory, legal,
accounting, valuation and other professional or consulting fees.
» IFRS 3: recognise as an expense when incurred
» IFRS for SMEs: recognise in measurement of (ie ‘capitalised’ to)
assets acquired in the business combination.
Which (IFRS or the IFRS for SMEs) is more consistent with the
Conceptual Framework? Why are they different?
contingent consideration in a business combination
28
» IFRS 3: include fair value of contingent consideration in cost of the
business combination.
» subsequent changes recognised in profit or loss of the period of change.
» IFRS for SMEs: if probable and can be measured reliably include
contingent consideration in cost of the business combination at the
acquisition date. Otherwise, exclude from cost of business combination.
» subsequent changes adjust to cost of the business combination (consequently
usually adjusted to goodwill asset).
economics of goodwill
29
Are the ‘economics’ of goodwill one or more, if any, of the following?
1) The excess of net assets fair values over the carrying amounts.
2) The fair value of unrecognised net assets.
3) The fair value of the going concern element of an existing business (ie the
synergies of the net assets, market imperfections, including the ability to earn
monopoly profits and barriers to market entry—either legal or because of
transaction costs—by potential competitors).
4) The fair value of the expected synergies and other benefits from combining net
assets and businesses.
5) When purchasing a business, the overvaluation of the consideration paid by the
acquirer stemming from errors in valuing the consideration tendered.
6) When purchasing a business, the overpayment or underpayment by the acquirer.
Economics
example: economics of goodwill 30
Entity A pays $78,000 to acquire 75% of the voting interest in Entity B

when the fair value of Entity B’s identifiable assets less the fair value of
Entity B’s liabilities and contingent liabilities is $100,000.
Is the goodwill in the business combination an asset of the group?
Choose one of: 1) Yes; or 2) No.
(see paragraphs BC313–BC323 of the Basis for Conclusions of IFRS 3)
If yes, what is the economic value of the goodwill to the group? Choose
one of: 1) $3,000; 2) $4,000; 3) $3,000 or $4,000 (at the entity’s
discretion); or 4) somewhere between $3,000 (if all synergies are
attributable to Entity A’s CGUs) and $4,000 (if all synergies are
attributable to Entity B’s CGUs).
30
economics of goodwill
31
» Is goodwill a wasting asset?
» IFRS for SMEs: amortise goodwill
» IFRS: do not amortise goodwill (see paragraph BC131E of the Basis
for Conclusions of IAS 36)
» Why does IFRS require recognised goodwill be carried at its
historical cost, periodically tested for impairment?
(see paragraphs BC131A–BC131G of the Basis for Conclusions of IAS
36)
goodwill: relevant information and judgements
32
» What information about an entity’s goodwill is relevant (capable of
making a difference) to resource allocation decisions by the primary
users—existing and potential investors, lenders and other creditors
that cannot require the reporting entity to provide information directly
to them—and that can be faithfully represented?
» What judgements and estimates are made in testing goodwill for
impairment in accordance with IAS 36 Impairment of Assets?
» (see paragraphs BC132–BC159 of the Basis for Conclusions of IAS 36)
» What judgements and estimates are made when amortising goodwill
in accordance with the IFRS for SMEs?
non-controlling interest (NCI)
33
» IFRS 3: allows an accounting policy choice for measuring non-
controlling interest (NCI) at the acquisition date:
1) fair value; or
2) NCI’s proportion of the group values of the subsidiary’s net assets.
» IFRS for SMEs: NCI = NCI’s proportion of the group values of
the subsidiary’s net assets.
test your understanding: goodwill and non-controlling interest
34
On 1 January 2015 P buys 75% of S for $78,000 cash when:
» fair value of S’s identifiable assets = $130,000
» fair value of S’s liabilities = $20,000
» fair value of S’s contingent liabilities = $10,000
On 1 January 2015 how much goodwill and NCI is recognised? Choose 1 of:
1) Goodwill $3,000 and NCI $25,000 (when IFRS for SMEs and when IFRS 3 and
all goodwill is attributable to P’s CGUs)
2) Goodwill $4,000 and NCI $26,000 (when IFRS 3 and NCI is at fair value + all
goodwill is attributable to S’s CGUs)
3) Goodwill $3,800 and NCI $25,800 (when IFRS 3 and NCI is at fair value + the
$3,000 goodwill purchased by P is attributable as follows: $2,400 to S’s CGU
and $600 to P’s CGU)
4) All of 1) to 3) above. 34
why?
36
» Provide information about economic entity
» investors need information about all assets and liabilities of a combined
entity
» Definition of asset based on control
» with control, entity can dictate use or settlement
» control through an entity is indirect control
» Do not want legal form to dictate financial reporting (substance
over form)
the principle
37
» Consolidated financial statements present financial information
about the group (the parent and all its subsidiaries) as a single
economic entity.
» In other words, Group (the parent and all its subsidiaries) = one
economic entity.
» subsidiary = entity that is controlled by another entity (known as the
parent)
the principle
38
The consolidation principle—Group (the parent and its
subsidiaries) = one economic entity
» In other words, consolidated financial statements present the
group’s (the parent’s and its subsidiaries’) assets, liabilities, equity,
income, expenses and cash flow as those of a single economic
entity.
» Various methods are used to prepare consolidated financial
statements (the single outcome). Understanding the principle is
essential to preparing/auditing/regulating/analysing consolidated
financial statements.
01/01/2015 Group reasons (ignoring taxation effects) A B
Carrying Carrying Fair value
39
$ amount amount
» On 01/01/20X1 entity A acquires 100% of entity B.
Share capital 500 B’s $100 arose before joining group 500 100
Retained
earnings 500 B’s $600 arose before joining group 500 600
Equity 1,000 1,000 700
Machine Cost to the group = fair value when B
800 joined the group 700 800
Investment Group has machine asset not
in B » Share capital
– investment 1,000
» Machine
Goodwill Paid $1,000 – $800 identifiable net
200 assets acquired
Assets 1,000 1,000 700
39
giving effect to the principle: proforma consolidating entries
40
The consolidation can also be achieved with the following proforma journal
entry at acquisition to eliminate A’s investment in B; recognise goodwill; and
eliminate B’s share capital and reserves accumulated before it became part of
the group.
Debit Credit
Asset: property, plant and equipment 100
Equity: B’s at-acquisition share capital and reserves 700
Asset: goodwill (asset) 200
Asset: A’s investment in B 1 000
additional information for the year ended 31 December 2015
41
At 1 January 2015 the machine’s group carrying amount is $100 > B’s carrying
amount
» a remaining useful life of 5 years
» nil residual value
» Consequently, for 2015 group depreciation is $20 greater than B’s
In 2015 A purchased inventory for $100 and immediately sold it to B for $150
» B sold inventory it purchased from A for $90 to parties outside the Group for
$120 (note: B is yet to sell the remaining inventory it purchased from A for $60)
» Consequently, at 31 December 2015 unrealised profit = $20
» $60 carrying amount of such inventory in B’s books less $40 group carrying amount and
group profit for 2015 is $20 lower
41
31 December 2015 Group reasons (ignoring taxation effects) A B
Carrying Carrying Group CA
$ amount amount
Share capital 500 B’s $100 arose before joining group 500 100
42
Opening RE 500 B’s $600 arose before joining group 500 600
Profit for 2015 Group perspective: $20 less profit from selling
110 inventory; $20 more depreciation 50 100
Equity 1,110 1,050 800
Machine $800 cost to the group – $160 group’s
640 depreciation for 20x1 (or $560 + $80 adjust) 560 640
Invest in B – Group has machine + cash (not invest) 1,000
» Share capital Cost to group = $40 (what A paid); Cost to B =
Inventory
» Machine 180 $60 (what B paid A). (or $200 - $20 adjust) 200 180
Cash 90 50 40 40
Goodwill $1,000 – $800 identifiable assets acquired (if
200 using IFRS for SMEs would amortise goodwill)
Assets 1,110 1,050 800 42
proforma consolidating entries: depreciation and intragroup inventory
43
The consolidation outcome can also be achieved with the following proforma
journal entries: (i) to increase depreciation to group values (remaining
estimated useful life = 5 years); and (ii) to eliminate the unrealised intragroup
profit in inventory.
Debit Credit
Income: profit or loss 40
Asset: inventory 20
IFRS for SMEs proforma consolidating entries amortising goodwill
44
Only if applying the IFRS for SMEs, a further proforma journal entry would be
necessary to amortise goodwill (assumed useful life = 10 years):
Debit Credit
Expense: profit or loss (amortised goodwill) 20
Asset: goodwill 20
non-controlling interest
45
The non-controlling interests’ (NCI) claim against the group’s
assets is measured at:
» the amount of the NCI recognised in accounting for the
business combination at the acquisition date; plus
» the NCI’s share of post-acquisition recognised changes in
the group carrying amount of the subsidiary’s assets and
liabilities.
example: with non-controlling interest
46
» On 1 January 2015 Entity A acquires 75% of Entity B for $1,000
when B’s share capital and reserves = $700 (net fair value of
B’s assets and liabilities = $800).
» Difference in carrying amount and fair value is a machine with 5 years
remaining useful life and nil residual value.
» All goodwill is attributable to A’s CGU.
» B’s profit for the year ended 31 December 2015 = $400.
» Ignore taxation effects.
example with non-controlling interest
47
Debit Credit
Equity: B’s at-acquisition share capital and reserves 700
Asset: goodwill 400
Asset: A’s investment in B 1 000
Equity: non-controlling interest 200
example with non-controlling interest
48
Debit Credit
Expense: profit or loss (depreciation) 20
Asset: property, plant and equipment (accumulated
20
depreciation)
example IFRS for SMEs with non-controlling interest
49
» Only if applying the IFRS for SMEs would a further proforma
journal entry be necessary to amortise goodwill (assumed
useful life = 10 years).
» In this example all the goodwill is attributable to A’s CGU.
Debit Credit
Expense: profit or loss (amortised goodwill) 40
Asset: goodwill 40
example with non-controlling interest (NCI)
Calculation of the allocation of profit for the year (2015) to the NCI
Debit Credit
NCI profit allocation 95
NCI (equity) 95
B’s profit for 2015 400

Less depreciation adjustment (20) 380
25% attributable to NCI 95
50
expanded example with downstream sale of inventories and NCI
» In 2015 A sold inventory that cost A $100 to B for $150.

» At 31 December 2015 B’s inventory included $60 inventory
bought from A.
» B’s profit for the year ended 31 December 2015 = $400.
» Ignore taxation effects.
expanded example with downstream sale of inventory and NCI
52
Proforma consolidating entries to eliminate downstream intra-group sale of
inventories and the unrealised profit in inventories:
Debit Credit
Income: profit or loss (revenue) 150
Expense: profit or loss (cost of goods sold) 150
Expense: profit or loss (cost of goods sold) 20
Asset: inventories 20
52
expanded example with downstream sale of inventory and NCI
53
Calculation of the allocation of profit for the year (2015) to the NCI
Debit Credit
NCI (equity) 95

Less depreciation adjustment (20) 380
further expanded example now with upstream (B to A) sale of inventory
54
Same proforma journal entries as in previous example except adjustment to
NCI share of profit now also adjusted for unrealised profit in intragroup
inventory:
Debit Credit
NCI (equity) 90
Less depreciation adjustment (20)
Less inventory adjustment (20) 360
some other consolidation issues
55
» Uniform reporting date (unless impracticable)
» Uniform accounting policies
» Income and expenses of a subsidiary are included in
consolidated financial statements from the acquisition date until
the date on which the parent ceases to control its subsidiary
» Presentation currency
presentation currency
56
» A Group can choose to present its consolidated financial
statements in any presentation currency
» When a Group contains individual entities with different
functional currencies income and expense and financial position
of each ‘underlying’ entity are expressed in a common currency
so that consolidated financial statements may be presented
translating into the presentation currency
57
» To translate foreign operations into the presentation currency of
the consolidated financial statements:
» translate assets and liabilities at the closing rate on reporting date;
» translate income and expenses at exchange rates at the dates of the
transactions (can use average rate if difference is not material); and
» recognise resulting exchange differences in other comprehensive
income (OCI)
» if partly owned subsidiary, allocate relevant part to the non-controlling
interest (NCI)
disposal of subsidiary
58
» IFRS: gain or loss on disposal of a subsidiary =
» proceeds from disposal of a subsidiary;
» less carrying amount of its net assets measured from the Group’s
perspective at the date of disposal
» adjusted for recycling of cumulative exchange differences that relate to a foreign
subsidiary recognised in equity (in accordance with IAS 21)
» IFRS for SMEs: gain or loss on disposal of a subsidiary =

» proceeds from disposal of subsidiary; less
» carrying amount of its net assets measured from the Group’s perspective
at the date of disposal (without recycling cumulative exchange
differences that relate to a foreign subsidiary recognised in equity in
© Michaelaccordance
JC Wells with Section 30 Foreign Currency Translation) 58
lose control over subsidiary but retain interest (investment) in it
59
» Entity ceases to be a subsidiary but investor still holds investment in
former subsidiary, account for investment as:
» financial instrument;
» associate (if significant influence); or
» joint venture (if joint control)
» IFRS: remeasure remaining interest when control is lost and
recognise gain or loss.
» IFRS for SMEs: no remeasurement of remaining interest—group
carrying amount becomes cost on initial measurement of the
financial asset.
test your understanding: acquisition of the NCI
60
» Since its formation Z was owned 75% by A and 25% by B.
» When Z’s equity was $100,000, A acquires B’s 25% interest in Z
at its fair value of $60,000.
How would A present the acquisition of the shares in Z in its
consolidated statement of changes in equity? Choose one of:
1) $25,000 as a reduction in NCI?
2) $60,000 as a reduction in NCI?
3) $25,000 as a reduction in NCI and $35,000 as a reduction in equity
attributable to the controlling shareholder (eg retained earnings).
test your understanding: sale of shares in subsidiary without loosing control
61
» Since its formation Z was owned 75% by A and 25% by B.
» When Z’s equity is $100,000, A sells a 25% interest in Z at its fair
value of $60,000 (A now owns 50% of Z but A still controls Z).
How would A present the disposal of the shares in Z in its
consolidated statement of changes in equity? Choose one of:
1) $25,000 as an increase in NCI?
2) $60,000 as an increase in NCI?
3) $25,000 as an increase in NCI and $35,000 as an increase in equity
attributable to the controlling shareholder (eg retained earnings).
test your understanding: sale of shares in subsidiary and control lost
» Since its formation Z was owned 75% by A and 25% by B. When Z’s
equity is CU100,000, A sells a 25% interest in Z at its fair value of
$60,000 (A now owns 50% and A loses control of Z).
How would the group present the effects of this transaction in its
consolidated profit or loss? Choose one of:
1) $70,000 recognising gain on 50% of Z continuing to hold
2) $35,000 gain on 25% of Z sold
3) $105,000 income ($70,000 recognising gain on 50% of Z continuing to hold +
$35,000 gain on 25% sold)
4) $105,000 if using IFRS and $35,000 if using IFRS for SMEs (see paragraph
9.19 of the IFRS for SMEs)
Treasury shares
Equity instrument
treasury shares 64
» Treasury shares
» Equity instruments that an entity or group hold(s) in itself
» Treasury shares are deducted from equity
» Gain or loss on purchase/sale of treasury shares recognised directly in
equity
64
Example 1: acquisition of treasury shares
65
» Transaction: on 1 January 2016 it pays $1,500 million (fair
value) to buy 20% of its issued ordinary shares in a deep and
liquid market.
» Economics: Company A pays $1,500 million to extinguish former
shareholders’ $1,500 million claim against its assets.
» Accounting:
» Debit: equity treasury shares $1,500 million (ie reduce equity by $1,500
million)
» Credit: asset cash $1,500 million (ie reduce asset cash by $1,500 million)
Example 2
treasury shares 66
» Entity B is a 100% owned subsidiary of Entity A

» On 1 March 20x1, Entity B purchased 100 shares in Entity A at
a price of $200 each
» On 30 June 20x1, Entity B still held the shares. The share price
on that day was $225
66
Example 2
treasury shares continued 67
Group journal entries

Debit: consolidated equity 20,000
Credit: cash 20,000
To record the purchase of treasury shares on 1 March 20x1
» Net effect: reduction in Group cash of $20,000 and reduction in group

equity of $20,000
67
Example 2
Journal entries: Entity B’s separate financial statements

Debit: investment in shares 20,000
Credit: cash 20,000
To record the purchase of shares on 1 March 20x1
Debit: investment in shares 2,500
Credit: profit on shares2,500
To record the change in the fair value of investment to 30 June 20x1
» Net effect of reduction in cash $20,000, Increase in investments $22,500
and profit $2,500
68
Example 2
Consolidating journal entries (only if starting point was separate financial statement
information)
Debit: consolidated equity 20,000
Credit: investment in shares 20,000
To eliminate the purchase of treasury shares on 1 March 20x1
Debit: profit on shares 2,500
Credit: investment in shares 2,500
To eliminate the recorded price increase to 30 June 20x1
» Net effect, reduction in Group cash of $20,000 and reduction in group equity of $20,000
69
IFRS and the IFRS for SMEs
71
» Neither IFRS nor the IFRS for SMEs require presentation of
separate financial statements.
» However, if an entity does present separate financial statements it
must account for investments in subsidiaries, associates and
relevant joint arrangements in separate financial statements using:
» cost less impairment;
» at fair value;
» the equity method; or
» can elect different policy from 1) to 3) above for each ‘investment’ category.
Joint arrangements
Joint arrangements
IFRS 11 Joint Arrangements
Joint control exists where the parties, or a group of parties, have joint control
of the arrangement. Two types of joint arrangements:
1. Joint operations
» Parties that have rights to the assets and obligations for the liabilities
relating to the arrangement are parties to a joint operation.
» A joint operator accounts for assets, liabilities and corresponding revenues and
expenses arising from the arrangement.
2. Joint ventures
» Parties that have rights to the net assets of the arrangement are parties to
a joint venture.
» A joint venturer accounts for an investment in the arrangement (the joint venture)
using the equity method. 73
IFRS 12 Disclosure of Interests in Other
Entities
Scope 75
Combined disclosure Standard for:

» subsidiaries;
» joint arrangements;
» associates; and
» unconsolidated structured entities.
75
Disclosure objective 76
To disclose information that helps users of financial statements

evaluate:
» the nature of, and risks associated with, an entity’s interests in
other entities; and
» the financial effects of those interests on the entity’s financial
position, financial performance and cash flows.
76
Satisfying the disclosure objective 77
Disclose
» significant judgements and assumptions made
» information about interests in:
» subsidiaries
» joint arrangements and associates
» unconsolidated structured entities
» any additional information that is necessary to meet the
disclosure objective
77
For subsidiaries disclose… 78
» The composition of the group (including any changes)

» Involvement of NCI in the group’s activities (including profit or
loss allocation and summarised financial information for
subsidiaries with large NCI)
» The effect of significant or unusual restrictions on assets and
liabilities
» The nature of, and changes in, the risks associated with
structured entities
78
For unconsolidated structured entities disclose… 79
» Nature, extent and financial effects of interests. For example:

» nature, purpose, size, activities and financing
» for sponsors not providing other risk disclosures
» type of income earned
» the carrying amount of all assets transferred
» Nature of and changes in risks associated with interests
» carrying amount of the assets and liabilities recognised
» maximum exposure to loss and comparison to carrying amounts
» non-contractual support provided
79
For joint arrangements and associates disclose… 80
» Nature, extent and financial effects of interests eg:

» name and nature when individually-material
» summarised financial information for each individually-material JV and
associate, and in total for all others
» fair value where individually material if quoted
» unrecognised share of losses of JVs and associates
» nature and extent of restrictions on transfer of funds
» Nature of and changes in risks associated with interests
» commitments and contingent liabilities
80

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Consolidated financial statements

Prepared by: Michael Wells

» Understand the concepts underlying the accounting for

Asset (see Conceptual Framework Income (¶4.25(a))

Entity A owns 80% of the voting interest in Entity B.

Entity A owns 30% of the voting interest in Entity B.

» Entity A owns 60% of the voting interest in Entity B.

Which element is NCI in the statement of financial position?

Entity B is Entity A’s only subsidiary.

purpose and design

relevant activities exposure (or rights) to ability to use power

Entity A pays $78,000 to acquire 75% of the voting interest in Entity B

B’s profit for 2015 400

» In 2015 A sold inventory that cost A $100 to B for $150.

B’s profit for 2015 400

» IFRS for SMEs: gain or loss on disposal of a subsidiary =

» Entity B is a 100% owned subsidiary of Entity A

Group journal entries

» Net effect: reduction in Group cash of $20,000 and reduction in group

Journal entries: Entity B’s separate financial statements

Combined disclosure Standard for:

To disclose information that helps users of financial statements

» The composition of the group (including any changes)

» Nature, extent and financial effects of interests. For example:

» Nature, extent and financial effects of interests eg:

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