Group Financial Reporting ACF 202 PART 1

1. Group Financial ReportingACF 202PART 1 Cynthia Fortin, CPA, CMA FALL 2018

2. Global companiesform groups

3. Group accounting There is a need to see the overallresults of a group not onlythat of itsindividualcompanies. Why? To communicate to the users the total picture, the complete story of the group.

4. Group accountsframework • IAS 27 Separatefinancialstatements https://www.iasplus.com/en/standards/ias/ias27 • IAS 28 Investments in associates https://www.iasplus.com/en/standards/ias/ias28 • IFRS 3 Business combinations https://www.iasplus.com/en/standards/ifrs/ifrs3 • IFRS 10 Consolidatedfinancialstatements https://www.iasplus.com/en/standards/ifrs/ifrs10 • IFRS 11 Joint arrangements https://www.iasplus.com/en/standards/ifrs/ifrs11 • IFRS 12 Disclosure of interest in otherentities https://www.iasplus.com/en/standards/ifrs/ifrs12 • IFRS 36 Impairment of assets https://www.iasplus.com/en/standards/ias/ias36

5. How is a parent-subsidiary relationship identified? Parent Controls Subsidiary IAS 27 defines consolidated financial statements as ‘the financial statements of a group presented as those of a single economic entity.’A group is made up of a parent and its subsidiary. Wewill focus on enterprises, e.g. companies Forms a group

6. Whatismeant by control? IFRS 10 Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

7. Group structure W1 Control = Power over to cast the majority of the votes at meetings of the board of directors. more than 50% of the voting rights by virtue of agreement with other investors to govern the financial and operating policies to appoint or remove the majority of the members of the board of directors holds <50% of the voting rights, but the remainder are widely distributed

8. Whenis a parent not required to prepare CFS? Group structure W1 If the parent itself is a wholly owned subsidiary and its parent produces CFS that comply with IFRS if the non currentassets are immaterial. Only if (IFRS 5) the non-currentassets are held for sale or discontinuedoperations If itsotherowners have been informed and do not object.

9. Illustration Green Co owns the following investments in other companies: Equity shares Non-equity shares held Violet Co 80% Nil Amber Co 25% 80% Black Co 45% 25% Green Co also has appointed five of the seven directors of Black Co. Which of the following investments are accounted for as subsidiaries in the consolidated accounts of Green Co Group? A Violet onlyB  Amber onlyC  Violet and BlackD  All of them

10. Group accounts GROUP

11. Reasons for group accounts Preventpreparingmisleadingaccounts (true and fairreporting) ensurecomparabilityof FS and removetemptation to structure combinations to producedesiredaccountingresults Providea more meaningful EPS ratio Only the purchasemethodisallowed (IFRS 3)

12. Example of a Consolidated Financial Position Statement • babcock annual report.pdf • Go to page 131

13. Five key workings (W) Whenconsidering the situation of a Parent and itsSubsidiarywe must determine: • W1 The Group structure • W2 Net assets of subsidiaryat date of acquisition • W3 Goodwill • W4 Non-controllinginterest • W5 Group retainedearnings Thenprepare the group statement of financial position.

14. W1 The Group structure to identify the relationship Parent Controls > 50% of votingshares Subsidiary At date of acquisiton ( doa) GROUP

15. W1 Group structure Date of acquisition P obtains control of S P startsdirecting operating and financialpolicies. P’smajority on BOD Written agreement P pays for shares and controls assets and assumes responsibility for liabilities P for Parent S for Subsidiary BOD board of directors

16. W2 Net assets of Subsidiary at doa Why? Because Parent acquires shares rather than the individual assets and liabilities

17. W2 Net assets of Subsidiaryatyearend Why? Because the post acquisition profits must be claimed by the Parent if 100% in control or the Parent and NCI if less than 100% control

18. W2 subsidiary’s post acquisition Profits Subsidiary’s Subsidiary’s Subsidiary’s post acquisition profits Fromdoa to yearend At year end At doa

19. Subsidiary’s post acquisition profits Post-acquisition profits S’s profits after date of acquisition When there is NCI, P and NCI split them according to the % of their shareholdings. P’s share is added in W5 NCI’s share is added in W4

20. W3 Goodwill Did the Parent pay a premium or pay more than the subssidiary’s net assets, if yes the differenceis goodwill. • When P controls 100% of voting shares, fair value of the P’s investment is compared to fair value of S’s net assets at the date of acquisition (doa) • If P’s investment > S’s net assets, then the difference is purchase of Goodwill.

21. W3 Goodwill at date of acquisition Parent’sinvestment W2 Subsidiary’s net assets GOODWILL

22. Goodwill Positive goodwill Recognized as an intangible asset Must be subject to annual impairment tests (IAS 36) Reflects reputation of the business: • Prospects of making future profits • Strong loyal customer base • Skilled workforce Whenrecognizedimpairmentlosscannot bereversed

23. Goodwill Negative goodwill Treat as a profit immediately and include in group retained earnings Reflects poor future prospects Bargain purchase • Reassess amounts • Identifyerrors if any • If not

24. W4 Non-controllinginterest (NCI) Subsidiary Votingshares Parent controls NCI isnil 100% Subsidiary Votingshares Parent controls NCI is 25% of Subsidiary’s net assets 25% of W2 75%

25. W5 Group retainedearnings Parent’sretainedearningsatyear end Parent’s%of Subsidiary’s post acquisition retainedearningsrefer to W2

26. Group statement of financial position Prepare consolidation Combine P’s assets and liabilities to S’s even if not wholly owned by P Retained earnings include P’s share capital, retained earnings per W5 and the NCI per W4 P’s investment in S is cancelled Goodwill per W3 is included as Intangible asset

27. Examples • Ghana • Rose and Tulip • Bird and Flower • Zambia • Jamaica • Trinidad • Cyprus • Croatia • Lion • Tiger

28. What I need to know • A group of companiesincludes at a minimum, a parent (P) and itssubsidiary (S). • S is an entitythatiscontrolled by P. • P owns a majority of the ordinaryshares in S. When P acquires control of another entity, it is done by acquiring shares rather than individual assets and liabilities. • The investment in P’s books is represented by the ownership of shares, which in turn represents control of the acquired entity’s net assets. • After the transaction S will continue to exist as a separate legal person with its continuing national legislative reporting responsibilities. • Groups accounts are prepared as if the group was a single entity and thisreflects substance over form. • Cross cast (combine) assets and liabilities of P and S. • P’sinvestment in S isnot a group asset, itiscancelled out when goodwill arises on consolidation.

29. What I need to know • Positive goodwill is a premium and isrecorded as an intangible asset and subject to an annualimpairmentreview • Negative goodwill is a bargain and recorded for as a group profit. • The share capital of the group isthat of the P only, ever and alwaysbecause the Financial statements are prepared for P’sshareholders. • Group retainedearnings are P’s plus P’s % of S’s post-acquisition profits. • NCI at reporting date willbe NCI at doa plus NCI % of S’s post-acquisition profits.

30. Multiple choice questions • Each student prepares 5 multiple choice questions with the content of Part 1. • Saves the questions on a USB key • Presents her questions on the screen in front of the class so everyone practices finding the correct answer.

31. References ACCA_F7_S16_Notes Chapter 6 Group Accounts and Introduction http://opentuition.com/acca/f7/ Clendon, Tom (2012), “A Student's Guide to Group Accounts, 2nd Ed.” Kaplan ISBN: 978-0-85732-764-2 chapters 1, 2, 3. Elliott, Barrie and Elliott, Jamie (2011) FINANCIAL ACCOUNTING AND REPORTING, 14 th Edition, pp 553 IFRSBOX https://www.youtube.com/watch?v=i5CCpERyNH8