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ACT 3127: ADVANCED FINANCIAL REPORTING II

ACT 3127: ADVANCED FINANCIAL REPORTING II. INTRODUCTION. COURSE OUTLINES. COURSE NAME : ADVANCED FINANCIAL ACCCOUNTING II COURSE CODE : ACT 3127 CREDIT HOUR 3 (3+0) PREREQUISITE : ACT 3126 LECTURE HOURS : 3 HOURS LECTURE PER WEEK

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ACT 3127: ADVANCED FINANCIAL REPORTING II

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  1. ACT 3127: ADVANCED FINANCIAL REPORTING II INTRODUCTION

  2. COURSE OUTLINES COURSE NAME: ADVANCED FINANCIAL ACCCOUNTING II COURSE CODE: ACT 3127 CREDIT HOUR 3 (3+0) PREREQUISITE: ACT 3126 LECTURE HOURS: 3 HOURS LECTURE PER WEEK CONSULTATION HOURS: Wed 10am-12pm; Thurs 3pm-5pm. EMAIL: mohdsaatn@econ.upm.edu.my Office Tel.: 89467786 Lecturer: Dr. Nur Ashikin Mohd Saat

  3. COURSE CONTENTS (1) ADVANCED CONSOLIDATION (CO ACT 1965, FRS 3, 127 & RELEVANT FRS) • Complex Group Structure • Multiple Direct Subsidiaries • Indirect Subsidiaries • Piecemeal Acquisitions – BEFORE AND AFTER FRS 3 REVISED • Disposal of Subsidiaries and Associates BEFORE AND AFTER FRS 3 REVISED (2) ACCOUNTING & REPORTING FOR FINANCIAL INSTRUMENTS (FRS 132, 139, 7, 9) • Definition • Presentation & Disclosure • Recognition & Measurement (3) EARNINGS PER SHARE (EPS) – FRS 133 • Basic EPS • Diluted EPS • Presentation & Disclosure (4) DEFERRED TAXATION - FRS112 • Concepts • Basis of Provisions • Methods of Calculation • Presentation & Disclosure

  4. Continue… (5) SHARE-BASED PAYMENTS – FRS 2 • Concepts and Definition • Types of Transactions • Presentation & Disclosure (6) ASSETS IMPAIRMENT, HELD FOR SALE & DISCONTINUED OPERATIONS – (FRS 136, 5) • Impairment of Assets • Measurement (Recoverable Amount) • Cash Generating Unit & Goodwill • Long-lived Assets Held for Sale • Discontinued Operations (7) SEGMENTAL REPORTING (FRS 114) / OPERATING SEGMENTS (FRS 8) • Concepts, Issues & Definition • Business & Geographical Segments • Presentation & Disclosure

  5. Continue… (8) ACCOUNTING FOR RELATED PARTY TRANSACTIONS – FRS 124 • Issues • Identifying Related Party Transactions • Presentation & Disclosure (9) INTERIM REPORTING – FRS 134 • Issues • Reporting Requirements of Bursa Malaysia • Presentation & Disclosure

  6. REVISION SUBSIDIARY PARENT ACQUISITION BUSINESS COMBINATION PARENT -SUBSIDIARY RELATIONSHIPS FINANCIAL REPORTING CONSOLIDATED FINANCIAL STATEMENT PREPARATION USING? PARENT CONCEPT (FRS 3) VS ENTITY CONCEPT (FRS 3 REVISED2009)

  7. Identification of Subsidiary Companies Act 1965: Section 5 (1)Section 5(1)(a), X corp is deemed subsidiary of Y corp if (i)Y Controls the composition of BOD of X OR (ii)Y Controls > 50% of voting power in X OR (iii)Y holds > 50% of issued OSC in X HOWEVER, Companies Act 1965 Para 5(9) of 9th Schedule FURTHER STATED, PARENT CO produces CFS only for subsidiary arising from shareholding [Section 5(1)(a)(iii)]. Recent development, regardless of no of shares held if an entity has control over another (eg lender) it has to prepare CFS, see Para 4, 13 of FRS 3 (latest)

  8. Continue….. (2)Section 5(1)(b), X is legally a subsidiary of Z corp, if X is a subsidiary of Y and Y is a subsidiary of Z. Example: Because of Y is subsidiary of Z, any subsidiary of Y is also subsidiary of Z Z (Parent/Holdings Co) 80% Y (Subsidiary) 60% X (Sub-subsidiary)

  9. Continue…. (3)Section 5(3)(b)(ii) – Any shares held by Y corp in X corp, shall be treated as held by Z corp ( Shares held by subsidiary treated as held by the Parent/Holdings company) Example: Z holds 70% interest in Y and 25% interest in X. Further, Y holds 27% interest in X. As a result, X is a subsidiary of Z, via holdings of 27% interest in X via Y and deemed to have in total 52% [27% +25%] interest in X. Z 25%70% X Y 27%

  10. Continue… FRS STIPULATIONS ON PARENT-SUB R/SHIP? FRS 127: Consolidated and Separate Financial Statements (i) Para 9- Parent/Holding prepares and presents consolidated fin stat (ii) Para 4 - Control: Power to govern financial and operating policies of an entity so as to benefit from its activities; FURTHER Para 13, Eventhough Parent > 50% voting power unless it can be clearly demonstrated, such ownership not constitute control E.g: Govt. control co by virtue of holding of one “golden share” in co

  11. Continue Para 13 - If parent holds 50% or less voting power In the entity, control also exists if the parent has power: • Over > 50% of the voting rights of the entity by virtue of agreement with other investors; • To govern fin. & opertg policies of the entity under statue/agreement; • To appoint/remove majority of the BOD/ equivalent governing body, provided the BOD/body control the entity; • To cast majority of votes at meetings of BOD/ equivalent governing body, provided the BOD/body control the entity;

  12. Continue… Para 14 & 15: If the entity owns instruments that have potential if exercised/converted to give the entity voting power over fin. and opertg policies of another entity (potential voting rights, warrants, options and convertible securities). The existence & effect of potential voting rights exercisable/convertible should be considered in assessing status of subsidiary. WITHfurther consideration of Para 23: When potential voting rights exists, proportion of profit or loss and changes in equity allocated to parent and MI are determined based on present ownership interest – such do not reflect possible exercise or conversion of potential voting rights [See further FRS 3, Para 19]

  13. (1) WHO IS PARENT/HOLDING CO? (2) WHO PREPARE CONSOLIDATED FINANCIAL STATMENT? PARENT: CO WHICH HAS “CONTROL” OVER OTHER CO [ Refer CO ACTS 1965, SECTION 5 + 9th SCHEDULE; FRS 127] GROUP : PARENT + ALL ITS SUBSIDIARIES + ASSOC & JV CFS PREPARATION: • Companies Act 1965 & FRS – PARENT CO REQUIRED to prepare 2 sets of financial statements: WHAT ARE THEY? (1) Consolidated Fin. Stat. of the Group (To show the parent and subsidiary as one entity) (a) Consolidated Bal. Sheet, (b) Consolidated Income Stat., (c) Consolidated Cash Flow Stat. and (d) Consolidated Stat of Changes in Equity (2) Parent Fin. Stat. (To show the parent as separate entity)

  14. CONTINUE ….. PARENT CO EXEMPTED FROM PREPARING CFS WHEN IT IS : (1) WHOLLY-OWNED SUBSIDIARY of another parent incorporated in Malaysia [Companies Act 1965: 9th Schedule Para 4 (a); FRS 127, Para 10 (a)] Example: [ B Bhd Parent of C Bhd and wholly-owned subsidiary of A Bhd. Hence A prepares CFS ] (2) Parent Co. - a partially owned subsidiary, INFORMED owners DONT object no CFS (3) Parent’s debt or equity instruments NOT traded in public market FRS 127 (not a listed entity) Para 10(a) (4) Parent co NOT in process filing Fin Stat with Sec Com or other regulatory organizations to issue any class of instruments in a public market (5) The ultimate / intermediate parent incorporated in Malaysia produces CFS. s A B C 100% 90%

  15. EXERCISE A (Ultimate Parent (Private Co.) Q2. By 2012 regardless of whether the co is SME or public all has to prepare fin stat based on IAS and IFRS. In this case which co has to prepare CFS? 52% Which entity has to prepare the groups financial statement in Malaysia? Give justification for your answer B (PLC in German) 100% C PLC in Malaysia Q 1. Another scenario ? If entity Eis a PLC in Malaysia which entity responsible to prepare the group accounts in Malaysia? 70% D PLC in Malaysia 60% E PLC in Thailand

  16. WHY DO WE NEED TO ACCOUNT BOTH THE REQUIREMENT OF CO ACT AND FRS WHEN PREPARING & PRESENTING FINL REPORT? FRS STIPULATIONS OVERIDE COMPANIES ACT’S [CO ACTS 1965, Section 166A, Para 6]

  17. APPLICATION OF ACQUISITION METHODFRS 3 (referring B4 REVISON 2009) FRS 3: Para16 • Acquirer • Cost of Business Combination • At date of Acquisition, (b) + FV Identifiable assets and Liabilities & Contingent Liabilities Assumed Para 17-23: ACQUIRER • Entity obtained Ctrl from bus comb Para 24-35: Cost of Bus Comb • FV at acq date of Assets, Liabilities incurred and assumed, Equity instruments issued by Acquirer to ctrl acquiree • Cost Directly Attributable to Bus Comb.

  18. Continue…. Para 36-60 – At Acquisition date, Allocate Cost of Business Comb to Acquiree’s FV Identifiable Assets, Liabilities and Contingent Liabilities Assumed [FRS 137 2004 (Restructuring) + FRS 1372006]

  19. ACQUISITION Method For CFS • FIN STATS of PARENT & SUBSIDIARY Combined on Line by Line basis like items (1) Consolidated Statement of Financial Position(CSFP) +Parent’s & Sub’s Assets, Liab, Equity, (2)Consolidated Comprehensive Income(CCI) +Parent’s and Sub’s Revenue and Expenses (3) Investment Account Eliminated Against Pre-Acq Equity to avoid double counting; GoodwillAccounted (4) < 100% Acq , Record Minority Interest of Profit & Loss (in CCI) and Equity Interest (CSFP) (5) Intra group/Inter Comps Transactions Eliminated - Profit/Loss arising UNREALISED from GROUP view

  20. What is Goodwill? • FRS 3: Para 51-57 • Excess = Cost of Business Comb – Net FV [IA-(L+CL)] • Recognise as an ASSET at date of acquisition-INITIAL RECOGNITION • Payment made by Acquirer in Anticipation of Future Economic Benefits from assets not capable of individually identified and separately recognised • Following Initial Recog, Cost – Impairment Loss

  21. Continue…… If FV of Net [IA-(L+CL)] > Cost of Bus Comb? Very rare occasion • Reassess the Identification and Measurement of the FV of Acquiree’s Net Asssets and Cost of Bus Comb • Following (a) (i) Recognise the excess (Negative goodwill) immediately in P&L on acq. date and attr. to the acquirer only (errors, possible future cost assoc. with CL, specific actg std req for actg treatment of IA) (See Also Para 81) OR (ii) Bargain Purchase – Gain recognised P&L –IFRS 3

  22. Goodwill Calculation: FRS 3 Para 51-57 Cost of Investment : Aggregate of - Cash FV of consideration (i.e. Assets given, equity or debt instruments issued) XX Incidental Cost incurred Less: Net FV of Identifiable Assets, Liabilities and Contingent Liabilities (XX) Goodwill amount as at acquisition dateXX Identifiable Assets : FRS 3 Para 37 (a) and (c), Para 41-46 (i) Asset other than Intangible: (1) Probable that future economic benefits flow to the acquirer + its FV can be measured reliably; (2) FRS 5 Non-Current Assets Held for Sale - Value Recognised = FV LESS Selling Cost (ii) Intangibles: Their FV can be measured reliably (FRS 138 Intangible Assets) Identifiable Liabilities: FRS 3 Para 37 (b) and (c), Para 47-50 (i) Liability other than Intangible: Probable that outflow of resources economic benefits will be required to settle obligation + its FV can be measured reliably (ii) Contingent liability: Its FV can be measured reliably

  23. Exercise On 1 December 2009 KaryaBhd, bought 52% equity shares in DermagaBhd for a cash consideration of RM100 million. On this date The assets, liabilities and equities of Dermaga were RM150 mil, RM50mil and 100mil. Compute if there is any goodwill arises from this business acquisition?

  24. Latest development on group accounts How control over another entity is determined? • Recently, control (for CFS preparation) is no more necessarily determined by having equity interest of ≥ 51% shares. • If an entity has control over another entity’s board of directors’ decision, then it‘s responsible to prepare group accounts. Eg: An entity has one vote/ golden share that gives it veto power to make ultimate decision

  25. Is this approach of determining ‘Parent/Holding’ company appropriate? WHY ???

  26. A 30% 70% C B 20% • Identify which entity is required to prepare group account for C if: • B has no veto power over board’s C decision • B has golden share in C that gives it veto power to make ultimate decision on Board of Directors of C?

  27. Exercise Green-Savy Bhd bought 37% equity interest in Plant-Tree Bhd on 1 June 2010 for RM300 million. On the same date Lake Bhd bought 60% equity interest in Plant-Tree Bhd for RM 600 million. Green-Savy has one golden share in Plant-Tree as part of the equity sale deal between the two company whereby the former agree to share its technology with Plant-Tree. If the total assets and total liabilities of Plant tree on this date were RM 800 million and RM200 million, compute if there is any goodwill arises from this business acquisition

  28. Take Home Notes • Who is SUBSIDIARY CO? • Who is PARENT CO - When prepares CFS • 2 SETS of FINL STATS prepared by PARENT Co? - CFS - Parent Fin Stat • PURCHASE METHOD: -Consolidation for Bus Comb: Parent-SUB - Control Acquired? Interest in Net Assets of Sub - Actg Treatment: *Line by line basis for like items * Goodwill * MI *Relevant Adjustments, Revaluation 5. CFS preparation – Control of BOD

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