Corporate

Reporting II
Lecture 4
Complex Groups-Vertical groups
Complex groups
 Complex group structure exist where a subsidiary
of a parent owns shareholding in another company
which makes that entity also a subsidiary of the
parent entity.
 Complex groups can be classified under two
headings;
 Vertical group
 Mixed group (D-shaped)
Vertical groups
 A vertical group exists where the subsidiary of a
parent entity holds shares in a further entity such
that control is achieved.
 The parent entity therefore controls the subsidiary
entity, and in turn, its subsidiary (often referred to
as sub-subsidiary entity)
Vertical groups
 Examples;
 1. H has 90% shares in S who in turn also has 80%
shares in T
 2. H has 70% shares in S who in turn also has 60%
shares in T
Vertical groups
 In both situations H controls S, and S controls T.
 H is therefore able to exert control over T by virtue
of its ability to control S.
 All three companies form a group.
 The basic techniques of consolidation is same as in
simple groups with some changes to goodwill,
NCI and group reserve calculations
Approach to question
 When establishing the group structure, follow
these steps;
 Control - Which entities does the parent control
directly or indirectly?
 Percentages – What are the effective ownership
percentages for consolidation?
 Dates – When did the parent achieve control over
the subsidiary and the sub-subsidiary?
Illustration 1
H purchased 90% shares of S on 31/12/2000
 S purchased 80% shares of T on 31/12/2000
 Control:
 H controls S and S controls T. Therefore H can
indirectly control T.
Illustration 1
 Effective consolidation percentage:
 S will be consolidated with H owning 90% and the
NCI owning 10%.
 T will be consolidated with H owning 72% (90% *
80%) and the NCI owning 28% (100%-72%)
 These effective ownership percentages will be
used in standard workings (W4) and (W5)
Illustration 1
 Dates
S will be consolidated from 31 December 2000.
 When H acquires control of S, it also acquires
indirect control over T. Therefore H will
consolidate T from 31 December 2000.
Illustration 2
H purchased 70% shares of S on 31/12/2001
 S purchased 60% shares of T on 30/04/2002
 Control
 H controls S and S controls T. Therefore, H can
indirectly control T.
Illustration 2
 Effective consolidation percentage:
 S will be consolidated with H owning 70% and the NCI
owning 30%.
 T will be consolidated with H owning 42% (70% * 60%)
and the NCI owning 58% (100%-42%)
 These effective ownership percentages will be used in
standard workings (W4) and (W5)
 Do not be put off by the fact that the effective group
interest in T is less than 50%, and that the effective non-
controlling interest is more than 50%
Illustration 2
 Dates
S will be consolidated from 31 December 2001.
 However, S did not gain control of T until 30 April
2002 meaning that H does not indirectly control T
until this date. Therefore T is consolidated into the
H group from 30 April 2002.
Indirect holding adjustment
 Accounting for sub-subsidiary requires an indirect
holding adjustment.
 Goodwill in the sub-subsidiary is calculated from
the perspective of ultimate holding company.
Therefore the cost of the investment in the sub-
subsidiary should be the parent’s share of the
amount paid by its subsidiary.
 The NCI’s share of the cost of the investment in the
sub-subsidiary must be eliminated from the goodwill
calculation.
Indirect holding adjustment
 The value of the non-controlling interest in the
subsidiary includes the NCI’s share of the cost of
the investment in the sub-subsidiary.
 The NCI’s share of the cost of the investment in the
sub-subsidiary must be eliminated from the NCI
calculation.
Illustration 3
 On 31 December 2001, A purchased 90% of the equity
shares in B for $150,000 and B purchased 80% of the equity
shares in C $100,000.
 At this date, the fair value of the net assets of B and C were
$144,000 and $90,000 respectively. The fair value of non-
controlling interest in B and C were $17,000 and $15,000
respectively.
 Required;
 Calculate goodwill and non-controlling interest for inclusion
in the consolidated statement of financial position as at 31
December 2001.
Solution
A– 90% - B – 80% - C
Goodwill
B ($) C ($)
Consideration 150,000 100,000
Indirect holding - (10,000)
adjustment
Add: FV of NCI @ 17,000 15,000
acqn
167,000 195,000
Less: NA @ acqn (144,000) (90,000)
Goodwill @ acqn 23,000 15,000
Non-controlling interest
 B: NCI @ acqn (W3) 17,000
 B: Indirect holding adj’ment (W3) (10,000)
 C: NCI @ acqn (W3) 15,000
 NCI 22,000
 Note: In subsequent years, the NCI will be adjusted
for its share of the post-acquisition net assets
movement of each subsidiary.
 The NCI% in B is 10% (100%-90%)
 The NCI% in C is 28% (100%-(90%*80%))
Illustration 4
 The draft statement of financial position for David
Colin and John, as at 31 December 2004 are as
follows; $’000
 D C J
 Net assets 280 180 130
 Shares in subsidiary 120 80 -
 400 260 130
Illustration 4
 D C J
 Equity capital ($1) 200 100 50
 Retained earnings 100 60 30
 Liabilities 100 100 50
 Total 400 260 130
Illustration 4
 The following information is also available;
 1. David acquired 75,000 $1 shares in Colin on 1
January 2004 when the retained earnings of Colin
amounted to 40,000. At that date the FV of NCI of
Colin amounted to $38,000.
 2. Colin acquired 40,000 $1 shares in John on 30 June
2004 when the retained earnings of John amounted to
$25,000. The retained earnings of John had been
$20,000 on the date of David’s acquisition of Colin.
Illustration 4
 On 30 June 2004, the FV of the NCI in John (both
direct and indirect), based upon effective
shareholding was $31,000.
 Goodwill has suffered no impairment. It is the
group policy to use full goodwill method.
 Required;
 Produce the CSFP of David group as at 31
December 2004.
Solution – Illustration 4
 Statement of Financial Position for the David
group at 31 December 2004.
 $’000
 Goodwill ($18+$16) W3 34
 Sundry assets ($280+$180+$130) 590
 624
Solution – Illustration 4
 Equity and liabilities; $’000
 Equity capital 200
 Retained earnings (W5) 118
 318
 NCI (W4) 56
 Total equity 374
 Total liabilities 250
 Total 624
Solution – Illustration 4
 Group structure;
 David – 75% - Colin 1/1/2004
 Colin – 80% - John 30/6/2004
Solution – Illustration 4
 Control:
 Davidcontrols Colin and Colin controls John.
Therefore indirectly David can control John.
Solution – Illustration 4
 Effective Consolidation Percentage:
 Colin will be consolidated with David owning
75% and NCI owning 25%.
 John will be consolidated with David owning 60%
(80% * 75%) and NCI owning 40% (100%-60%)
 The effective ownership percentage will be used in
standard workings W4 and W5.
Solution – Illustration 4
 Dates:
 Colin will be consolidated from 1 January 2004.
 However, Colin did not gain control of John until
30 June 2004. Therefore David does not indirectly
control John until this date. As such John is
consolidated on 30 June 2004.
Solution – Illustration 4
 W2; Net Assets
 The acquisition date will be the date when David
(the parent company) gained control over each
entity.
 Colin – 1 January 2004
 John – 30 June 2004
 This means that the information given regarding
John’s retained earnings at 1 January 2004 is
irrelevant in this context.
Solution – Illustration 4
 Net Assets of Subsidiaries; Colin
 At Acqn At Y/E
 Equity capital 100 100
 Retained earnings 40 60
 140 160
 Net Assets of Subsidiaries; John
 At Acqn At Y/E
 Equity capital 50 50
 Retained earnings 25 30
 75 80
Solution – Illustration 4
 W3: Goodwill
 A separate goodwill calculation is required for
each subsidiary.
 For the sub-subsidiary, goodwill is calculated from
the perspective of the ultimate parent entity
(David) rather than the immediate parent (Colin).
Therefore the effective cost of John is only
David’s share of the amount that Colin paid for
John, $80,000 * 75% = $60,000.
Solution – Illustration 4
 W3: Goodwill ($’000)
 Colin John
 Cost of investment in sub 120 80
 Ind holding adj (25%*80) - (20)
 FV of NCI 38 31
 158 91
 Less:
Net Assets @ acqn (140) (75)
 Goodwill 18 16
Solution – Illustration 4
 W4 – Non Controlling Interest (NCI)
 $’000
 Colin - NCI at acquisition (W3) 38
 Colin – NCI share of post acqn
 net assets (25% * 20,000)W2 5
 Less: Ind. Holding Adj. (25%*80,000) (20)
 John – NCI at acquisition (W3) 31
 John - NCI share of post acqn
 net assets (40% * 5,000)W2 2
 NCI 56
Solution – Illustration 4
 W5 – Group Retained Earnings
 $’000
 David 100
 Colin - 75%*20,000 (W2) 15
 John - 60% * 5,000 (W2) 3
 Total 118
 Note that only the group’s effective share (60%) is
taken of John’s post acquisition retained earnings.
Illustration 5 – Vertical group
 The draft statement of financial position for
Daniel, Craig and James, as at 31 December 2004
are as follows; $’000
 D C J
 Net assets 180 80 80
 Shares in subsidiary 120 80 -
 300 160 80
Illustration 5 – Vertical group
 D C J
 Equity capital ($1) 200 100 50
 Retained earnings 100 60 30
 Total 300 160 80
Illustration 5 – Vertical group
 The following information is also available;
 1. Craig acquired 40,000 $1 shares in James on 1
January 2004 when the retained earnings of James
amounted to 25,000.
 2. Daniel acquired 75,000 $1 shares in Craig on 30
June 2004 when the retained earnings of Craig
amounted to $40,000 and those of James
amounted to $30,000.
Illustration 5 – Vertical group
 Itis the group policy to value NCI using the
proportion of net assets method.
 Required;
 Produce the CSFP of Daniel group as at 31
December 2004.
Illustration 5 – Solution
 Statement of Financial Position for the Daniel
group at 31 December 2004.
 $’000
 Goodwill ($15+$12) W3 27
 Sundry assets ($180+$80+$80) 340
 367
Illustration 5 – Solution
 Equity and liabilities; $’000
 Equity capital 200
 Retained earnings (W5) 115
 NCI (W4) 52
 Total equity 374
Illustration 5 – Solution
 Group structure;
 Daniel – 75% - Colin 30/6/2004
 Craig – 80% - John 1/1/2004
Illustration 5 – Solution
 Control:
 Daniel controls Craig and Craig controls James.
Therefore indirectly Daniel can control James.
Illustration 5 – Solution
 Effective Consolidation Percentage:
 Craig will be consolidated with Daniel owning 75%
and NCI owning 25%.
 James will be consolidated with Daniel owning 60%
(80% * 75%) and NCI owning 40% (100%-60%)
 The effective ownership percentage will be used in
standard workings W4 and W5. they will also be
used in W3 to calculate goodwill as the group’s
policy is to use the proportion of net assets method.
Illustration 5 – Solution
 Dates:
 Craig will be consolidated from 30 June 2004.
 When Daniel acquires control over Craig, it also
acquires indirect control over James.
 Therefore Daniel will consolidate James on 30
June 2004.
Illustration 5 – Solution
 Net Assets of Subsidiaries; Craig
 At Acqn At Y/E
 Equity capital 100 100
 Retained earnings 40 60
 140 160
 Net Assets of Subsidiaries; James
 At Acqn At Y/E
 Equity capital 50 50
 Retained earnings 30 30
 80 80
Illustration 5 – Solution
 W3: Goodwill ($’000)
 Craig James
 Cost of investment in sub 120 80
 Ind holding adj (25%*80) - (20)
 FV of NCI 35 32
 Craig 25%*140,000 W2
 James 40%*80,000 W2
 155 92
 Less: Net Assets @ acqn (140) (80)
 Goodwill 15 12
Illustration 5 – Solution
 W4 – Non Controlling Interest (NCI)
 $’000
 Craig - NCI at acquisition (W3) 35
 Craig – NCI share of post acqn
 net assets (25% * 160-140)W2 5
 Less: Ind. Holding Adj. W3 (20)
 James – NCI at acquisition (W3) 32
 James - NCI share of post acqn
 net assets (40% * 80-80)W2 -
 NCI 52
Illustration 5 – Solution
 W5 – Group Retained Earnings
 $’000
 Daniel 100
 Craig - 75%*60-40 (W2) 15
 James - 60% * 30-30 (W2) -
 Total 115
Exercise 1
 The following are the statement of financial
position at 31 December 2017 for H group
companies. $’000
 H S T
 75% of shares in S 65 - -
 60% of shares in T - 55 -
 Sundry assets 280 133 100
 345 188 100
Exercise 1 contd
 H S T
 Equity capital ($1) 100 60 50
 Retained earnings 45 28 25
 Liabilities 200 100 25
 Total 345 188 100
Exercise 1contd.
 All the shareholdings were acquired on 1 January
2011 when the retained earnings of S were
$10,000 and those of T were $8,000. At that date
the fair value of the NCI in S was $20,000. The
fair value of the total NCI (direct and indirect) in T
was $50,000.
 It is the group’s policy to value the NCI using the
full goodwill method.
Exercise 1contd.
 At the reporting date, the recoverable amount of
the net assets of S were $93,000. It was deemed
that goodwill arising on the acquisition of T was
not impaired.
 Required;
 Prepare the CSFP of H group as at 31 December
2017.
Exercise 2.
 The statement of financial position of three entities
at 30 June 2016 were as follows. $’000
 G V W
 Investment 110 60 -
 Sundry assets 350 200 120
 460 260 120
Exercise 2 contd
 G V W
 Equity capital ($1) 100 50 10
 Retained earnings 210 110 70
 Liabilities 150 100 40
 Total 450 260 120
Exercise 2 contd
 1. G purchased 40,000 of the 50,000 $1 shares of
V on 1 July 2015 when the retained earnings of
that entity were $80,000. At that time, V held
7,500 of the 10,000 shares in W. These had been
purchased on 1 January 2015 when W’s retained
earnings were $65,000. On 1 July 2015 W’s
retained earnings were $67,000.
Exercise 2 contd
 2. At 1 July 2015, the fair value of the NCI in V was
$27,000, and that of W (both direct and indirect) was
$31,500. It is the group policy to value NCI using the
full goodwill method.
 3. The equity share capital of G includes $20,000
received from the issue of 20,000 shares class B
shares on 30 June 2016. These shares entitle the
holders to fixed annual dividends. The holders of
these B shares can also demand the repayment of their
capital from 30 June 2019.
Exercise 2 contd
 4.Included in the liabilities of G $100,000
proceeds from the issue of a loan on 1 July 2015.
There are no annual payments and G therefore
believes that no further accounting entries are
required until the repayment date. The loan is
repayable on 30 June 2018 at a premium of 100%.
The effective interest on the loan is 26%
Exercise 2 contd
 Required;
 Prepare the CSFP for the G group as at 30 June
2016.