Consolidated Financial Statements

Consolidated Financial Statements Simple Group (Subs +Associates) Balance Sheet & Income Statements

Syllabus Requirement Group / Consolidated Financial Statements Balance Sheet & Income Statement in accordance with relevant IFRs / IASs. Simple groups including subsidiaries & associates Definition of holding, subsidiary and associated undertaking; Preparation of company accounts and consolidated financial statements as per IAS-27

Accounting Standards Covering the Group IAS 27 Consolidated and Separate Financial Statements IFRS 3 Business Combinations (revised) IAS 28 Investments in Associates IAS 31 Interests in Joint Ventures IAS 21 The Effect of Changes in Foreign Exchange Rates

IAS-27 Objective….. preparation and presentation of consolidated financial statements for a group of entities under the control of a parent In accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements

IAS-27 Key definitions ….. Consolidated financial statements:- Financial statements of a group presented as those of a single economic entity. Control Power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Group:- Parent and all its subsidiaries. Non-controlling interest (NCI) Equity in a subsidiary not attributable, directly or indirectly, to Parent.

….IAS-27 Key definitions Separate financial statements Presented by a parent in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees. A subsidiary An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).

Further Concepts Control (Identification of Subsidiary) Where more than 50% of ordinary shares (and so votes) are owned However without owning own majority of the ordinary share control may be established through: More than half of the voting rights by virtue of an agreement; Power to govern the financial and operating policies under statute or an agreement; Power to appoint/remove majority of board of directors Power to cast the majority of votes at board of directors

Further Concepts Single Entity Concept Both the parent and subsidiary companies are legally required to prepare separate sets of accounts These separate entity accounts are not useful to the shareholders of the parent company (who in turn are owners of the group), as: Cost of each subsidiary in the parent’s accounts does not reflect its performance since acquisition; It is difficult to understand the activities of the group as a whole by looking at several individual sets of financial statements; The individual accounts may be distorted by the effects of transactions between group companies

Further Concepts Presentation of Consolidated Accounts With following exemptions parent is required to present consolidated Financial Statements Parent is itself a wholly /Partially owned subsidiary and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object Parent is not traded in public market Parent neither filed or is filing its financial statements with SECP for issuing any class of instrument in public market Ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRS.

Further Concepts Consolidated Accounts should include all subsidiaries both Domestic & Foreign: Not any subsidiary is exempted whose business is of a different nature from the parent's That operates under severe long-term restrictions impairing the subsidiary's ability to transfer funds to the parent That had previously been consolidated and that is now being held for sale. SPE (Special purpose Entity) should be consolidated where substance of relationship indicates that SPE is controlled by reporting entity Once an investment ceases to fall within the definition of a subsidiary, it should be accounted for as an associate under IAS 28, as a joint venture under IAS 31, or as an investment under IAS 39, as appropriate However, a subsidiary that meets the IFRS 5 criteria as an asset held for sale shall be accounted for under that Standard

Solving the question – Consolidation Process Control is on/off switch Associates have two lines Start with goodwill All , All, none role N.C.I. present separately in consolidated accounts in equity section NCI share in profit of group shall separately be disclosed For B/sheet & P/L account use Year end values Intragroupbalances, transactions, income, and expenses should be eliminated in full. Intragrouplosses may indicate that an impairment loss on the related asset should be recognized Financial statements of Parent & subsidiaries should be prepared at same reporting date If it is impracticable , adjustment must be made for the significant transactions, or events that occur between the dates of the subsidiary's and the parent's financial statements. In no case may the difference be more than three months Use uniform accounting policies for like transactions and other events in similar circumstances for group

Solving the question – Consolidation Process Where losses applicable to the minority exceed the minority interest in the equity of the relevant subsidiary, the excess, and any further losses attributable to the minority, are charged to the group unless the minority has a binding obligation to, and is able to, make good the losses. Where excess losses have been taken up by the group, if the subsidiary in question subsequently reports profits, all such profits are attributed to the group until the minority's share of losses previously absorbed by the group has been recovered

Partial Disposal of an Investment in a Subsidiary The accounting depends on whether control is retained or lost Partial disposal of an investment in a subsidiary while control is retained. This is accounted for as an equity transaction with owners, and gain or loss is not recognised. Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.

Acquiring Additional Shares in the Subsidiary After Control Is Obtained Acquiring additional shares in the subsidiary after control was obtained is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not remeasured.

Separate Financial Statements of the Parent or Investor in an Associate or Jointly Controlled Entity In the parent's/investor's individual financial statements, investments in subsidiaries, associates, and jointly controlled entities should be accounted for either: • at cost, or • in accordance with IAS 39. The parent/investor shall apply the same accounting for each category of investments. Investments that are classified as held for sale in accordance with IFRS 5 shall be accounted for in accordance with that IFRS. Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. The measurement of investments accounted for in accordance with IAS 39 is not changed in such circumstances. An entity shall recognise a dividend from a subsidiary, jointly controlled entity or associate in profit or loss in its separate financial statementswhen its right to receive the dividend in established.

Disclosure Consolidated Financial Statements Nature of relationship the parent does not own more than half of the voting power the reasons why the ownership, of more than half of the voting or potential voting power of an investee does not constitute control Reporting date of subsidiary if it is different from parent, and reason for using different reporting date the nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances

Disclosure Separate financial statements for a parent , investor in a jointly controlled entity, or investor in an associate The fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law, A list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and A description of the method used to account for the foregoing investments

IFRS - 3 IFRS 3 now allows two methods of recognizing the non-controlling interest IFRS 3 Business Combinations allows a choice of method to value the non-controlling interest (NCI) at acquisition: As a proportion of the net assets of the subsidiary company. At fair value. An entity may choose to apply a different measurement method to different acquisitions. Pirate acquired 80% of Sailor on 31 October 20X7. On this date the net assets of Sailor amounted to $160,000. Sailor had 100,000 shares in issue with a market value on 30 October 20X7 of $2. Required: Calculate the non-controlling interest at acquisition using both methods. 1. As a proportion of net assets: 20% x $160,000 = $32,000. 2. At fair value: 20% x 100,000 x $2 = $40,000. The difference of $8,000 between the two amounts is goodwill.

IFRS - 3 Positive goodwill is shown in the consolidated statement of financial position as an intangible non-current asset. It is held at cost and reviewed for impairment annually. The cumulative amount of the impairment is: Deducted from goodwill on the face of the consolidated statement of financial position; Deducted from group reserves. In some cases, the goodwill calculation results in a negative amount referred to by IFRS 3 as a bargain purchase Negative goodwill is recognized in profit or loss in the period in which it arises. It therefore increases group reserves in the consolidated statement of financial position.

Practice

Practice – Goodwill at Fair Value & Proportionate share of Net Assets

Impairment Impairment:- An impairment occurs if the recoverable value of an asset falls below the carrying value. Recoverable Value:- This is the higher of VIU and NRV. VIV = Value in use NRV = Net realizable value. Impairment Of Subsidiary:- Goodwill impairment is identified by looking at the impairment of the whole subsidiary

Impairment ABC bought 100% of the equity of a subsidiary at the beginning of the year for $900m. At acquisition the subsidiary’s share capital was $100m and retained earnings were $400m. The subsidiary had retained profits for the year of $200m. Goodwill has an infinite life and an impairment review of the sub at the first year-end revealed a value in use (VIU) of $780m and net realizable value (NRV) of $350m. Required: Calculate the balance of goodwill at the year-end after the impairment.

Impairment A parent, Terra, buys 70% of a sub for $800m at the year start, when the share capital is $50m, reserves are $350m and a fair value adjustment (FVA) of $100m is required on machines with a life of five years. The fair value of the non-controlling interest is $317m . During the year the sub made profits retained of $50m and sold goods valued at $12m to the parent with a margin of 25%; one third of which is still in inventory in the parent. Goodwill has an infinite life and a year end review reveals a value in use (VIU) of $360m and net realizable value (NRV) of $666m. It is the group‘s policy to value the non-controlling interest at fair value (full goodwill).

Fair Value Adjustment

Acquisition By Issuance of Shares Long term Debtors 1,200 Capital (Rs.1 Each) 7,000 FV of Assets (other then Long Term Debtors) 33,340 Long Term debtors will be received after 3 years (Discount rate is 20%) H, Acquired 100% shares. H issued 3 shares to S for 1 share plus sash Rs. 1 for each share held. Market value of H share is Rs. 2. Compute Goodwill S H 1 3 7000 (7000 x 3 x 2) = 42,000 + Rs. 1 = 7,000 49,000 34,124 Goodwill14,876 FV of assets 33,340 PV of Long term 1,200 X (1/(1.2 ^3)) 1,200 x 0.5787 694 34,124

Practice – Acq. By shares Issuance & FV

Class issues Inter Company PUP (Provision for Unrealized Profits) Inventory 400 (Either will be calculated in “P” or “S” as Inventory exists) Inter Co. Margin 100 however will eliminate as it is between “P” & “S”. If FV of NCI is not given Calculate it from Shares out standing x Market value per share of subsidiary

Class issues Basic Flow for Goodwill, NCI & Retained Earnings Acq. YE Net Assets Share Capital XXX XXX Reserves XXXXXX FV of Net Assets XXX XXX FV of Consideration 80% XXX FV of NCI 20%XXX FV of Business 100% XXX Retained Earnings Parent (as it is) XXX Subs. Part - Growth X 80% XXX Group Consolidated Retained Earning XXX N.C.I. (for Balance sheet figure) – Proportionate Method “YE” Net Asset X 20% N.C.I. (for Balance sheet figure) – FV Method FV of NCI investment + “Growth” x 20% Good Will Growth

Thank You

Relationships Entities may have 3 types of relationships Control Influence Passive

Relationships Parent Parent More then 50% shares holding & voting power Less then 50% shares holding /voting power Control Influence

Terra FakenStock

Fair Value Adjustment

Consolidated Financial Statements