Chapter 17 – Investments in subsidiary and other financial

investments
Acc 100
Lesson 2
Holding company-subsidiary-
relationships
Example of holding company-subsidiary-relationship

Acquired in April
Acquired in April
2012 for $1 billion
2014 for $19 billion

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Holding company-subsidiary-relationship (1)

• Company obtain control over assets, liabilities and operations of another

company by either purchasing
 net assets of the other company
 majority of issued ORDINARY shares
• Acquisition through purchasing majority of ordinary shares (i.e. more than
50%)
 Implies majority of voting rights
• Holding company may have more than one subsidiary
• Holding company and its subsidiaries are known as a group of companies
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Holding company-subsidiary-relationship (2)

• Initial recognition and measurement

 Cost price of shares – excludes VAT, PLUS
 Transaction costs – includes VAT
• Transactions cost – legal fees, registration fees, brokerage fees, etc.

• Investment is a financial asset in H’s records and part of equity in S’s records

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CLASS EXAMPLE 1A: Holding company-subsidiary-relationship

• AKA Ltd recently obtained control of SUPAMEGA (Pty) Ltd on 1 January 2019
by purchasing 75% of issued shares in SUPAMEGA (Pty) Ltd. The cost price of
the shares was R1 000 000 and legal fees of R115 000 were paid. AKA Ltd has
a 31 December year end.
2019 Dr Cr
1 Jan Investment in SUPAMEGA (Pty) Ltd (SFP)
1 100 000
(1 000 000 + (115 000 x 100/115))
VAT Input (SFP) 15 000
Bank (SFP) 1 115 000
Recognise investment (75%) in subsidiary

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Holding company-subsidiary-relationship (3)
• Subsequent measurement
 At cost model
• Cost less accumulated impairment

• If the recoverable amount of an asset (also subsidiary) is less than the carrying
amount, the carrying amount must be reduced to the recoverable amount
 To be provided in first year!
• Impairment
 Impairment = [(Cost price + Transaction costs (excluding VAT)) – Recoverable amount)]
 Recoverable amount becomes the CARRYING AMOUNT
• NO DEPRECIATION

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CLASS EXAMPLE 1B: Holding company-subsidiary-relationship

• SUPAMEGA (Pty) Ltd has recently had some bad publicity and on 31
December 2019 it was discovered that SUPAMEGA (Pty) Ltd had a
recoverable amount of R800 000.
2019 Dr Cr
31 Dec Impairment loss – Inves. in SUPAMEGA (Pty) Ltd (P/L)
300 000
(1 100 000 – 800 000)
Accumulated impairment – Investment in
300 000
SUPAMEGA (Pty) Ltd (SFP)
Recognise impairment loss on investment (75%)
subsidiary

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CLASS EXAMPLE 1A: Holding company-subsidiary-relationship

• TEA Ltd recently obtained control of COFFEE (Pty) Ltd on 1 January 2019 by
purchasing 75% of issued shares in COFFEE (Pty) Ltd. The cost price of the
shares was R1 000 000 and legal fees of R115 000 were paid. TEA Ltd has a
31 December year end.
2019 Dr Cr
1 Jan Investment in COFFEE (Pty) Ltd (SFP)
1 100 000
(1 000 000 + (115 000 x 100/115))
VAT Input (SFP) 15 000
Bank (SFP) 1 115 000
Recognise investment (75%) in subsidiary

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Holding company-subsidiary-relationship (3)
• Subsequent measurement
 At cost model
• Cost less accumulated impairment

• If the recoverable amount of an asset (also subsidiary) is less than the carrying
amount, the carrying amount must be reduced to the recoverable amount
 To be provided in first year!
• Impairment
 Impairment = [(Cost price + Transaction costs (excluding VAT)) – Recoverable amount)]
 Recoverable amount becomes the CARRYING AMOUNT
• NO DEPRECIATION

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CLASS EXAMPLE 1B: Holding company-subsidiary-relationship

• COFFEE (Pty) Ltd has recently had some bad publicity and on 31 December
2019 it was discovered that COFFEE (Pty) Ltd had a recoverable amount of
R800 000.
2019 Dr Cr
31 Dec Impairment loss – Investment in COFFEE (Pty) Ltd
300 000
(P/L) (1 100 000 – 800 000)
Accumulated impairment – Investment in COFFEE
300 000
(Pty) Ltd (SFP)
Recognise impairment loss on investment (75%)
subsidiary

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Holding company-subsidiary-relationship (4)

• Income from subsidiaries

 Consists of dividends and management fees

• Dividends recognised when DECLARED by SUBSIDIARY

• Management fees recognised when HOLDING company INVOICES subsidiary

• Dividends and management fees are receivables until payment is received

 Create a holding account until settled

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Holding company-subsidiary-relationship (5)

Date Debit Credit

20.X Current account: S (Pty) Ltd (SFP) XXX
Dividend income from subsidiary (P/L) XXX
Management fees from subsidiary (P/L) XXX

• Dividends and management fees have a separate line item in Statement of

Profit and Loss - Income from Subsidiaries (Chapter 14 – p. 577)

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Holding Company – Subsidiary – Relationship

• Presentation
 Non–current asset: will be held longer than one reporting period
 Dividend income and management fees
• Income from subsidiaries
 Impairment loss
• Distribution costs, Administration expenses and other costs
 Loss on disposal
• Distribution costs, Administration expenses and other costs
 Profit on disposal
• Other income

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 CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

• Casper Ltd is a shoe manufacturer that sells shoes to retail companies across
South Africa.
• On 1 July 20.8 the board of directors voted to expand the business through
purchasing 1 100 000 issued shares of the clothing retailer Family Tree (Pty)
Ltd. Family Tree (Pty) Ltd currently has 2 000 000 issued shares.
• On 8 August 20.8 Casper Ltd purchased 1 100 000 of issued shares at
R16 000 000 and paid legal fees of R575 000.
• Casper Ltd has a 30 June financial year end.

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 CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

The following transactions occurred during the years ended 30 June 20.9.
• On 4 April 20.9 Family Tree (Pty) Ltd declared an ordinary share dividend of
40c per share dividends to shareholders.
• On 31 May 20.9 Casper Ltd sent an invoice of R160 000 to Family Tree (Pty)
Ltd for management services provided.
• On 15 June 20.9 Family Tree (Pty) Ltd made a payment for dividends and
management fees to Casper Ltd.
• On 30 June 20.9 it was determined that the Family Tree had not been as
profitable as expected and had a recoverable amount of R10 000 000.
• 16
CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

Required:
• Journalise the above transactions, including purchase of ordinary shares, for
the year ended 30 June 20.9.
• Present the above balances in the Statement of Financial Position and
Statement of Profit and Loss for the year ended 30 June 20.9.

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CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

• On 8 August 20.8 Casper Ltd purchased 1 100 000 of issued shares at

R16 000 000 and paid legal fees of R575 000.
Determine if it’s a subsidiary  1 100 000 shares/2 000 000 shares = 55%
20.8 Dr Cr
8 Aug Investment in Family Tree (Pty) Ltd (SFP)
16 500 000
(16 000 000 + (575 000 x 100/115))
VAT Input (SFP) 75 000
Bank (SFP) 16 575 000
Recognise investment (55%) in subsidiary

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CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

• On 4 April 20.9 Family Tree (Pty) Ltd declared an ordinary share dividend of
40c per share dividends to shareholders.
20.9 Dr Cr
4 Apr Current account: Family Tree (Pty) Ltd (SFP) 440 000
Dividend income from subsidiary (P/L)
440 000
(40c x 2 000 000 x 55%) or (40c x 1 100 000)
Recognise dividend declared by subsidiary

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CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

• On 31 May 20.9 Casper Ltd sent an invoice of R160 000 to Family Tree (Pty)
Ltd for management services provided.
20.9 Dr Cr
31 May Current account: Family Tree (Pty) Ltd (SFP) 160 000
Management fees from subsidiary (P/L) 160 000
Recognise management fees receivable from
subsidiary

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CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

• On 15 June 20.9 Family Tree (Pty) Ltd made a payment for dividends and
management fees to Casper Ltd.
20.9 Dr Cr
15 Jun Bank (SFP) (400 000 + 160 000) 600 000
Current account: Family Tree (Pty) Ltd (SFP) 600 000
Recognise receipt dividend income and management
fees from subsidiary

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CLASS EXAMPLE 2: Holding company-subsidiary-
relationship

• On 30 June 20.9 it was determined that the Family Tree had not been as
profitable as expected and had a recoverable amount of R10 000 000.
20.9 Dr Cr
30 Jun Impairment loss (P/L) (10 000 000 – 16 500 000) 6 500 000
Accumulated impairment – investment in Family
6 500 000
Tree (Pty) Ltd (SFP)
Recognise impairment on subsidiary

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CLASS EXAMPLE 2: Holding company-subsidiary-
relationship
CASPER LTD
Also remember the NOTES TO

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.9

THE FINANCIAL STATEMENTS

ASSETS
(see pp. 682 & 683)

Non-current assets
Property, plant and equipment XXX
Investment property XXX
Intangible assets XXX
Investment in subsidiary (16 500 000 – 6 500 000) 10 000 000
Other financial investments XXX
Total non-current assets XXX

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CLASS EXAMPLE 2: Holding company-subsidiary-
relationship
CASPER LTD
STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED
Also remember the NOTES TO
THE FINANCIAL STATEMENTS
30 JUNE 20.9
Revenue XXX
Cost of sales (XXX)
(see pp. 682 & 683)

Gross profit XXX

Other Income XXX
Income from subsidiaries (440 000 + 160 000) 600 000
Income from other financial investments XXX
Distribution costs
Administration expenses (6 500 000)
Other costs
Finance costs
XXX XXX

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Holding-Subsidiary relationships of the
Spur Corporation Ltd