ACT3127 Advanced Financial Accounting II

1. ACT3127 Advanced Financial Accounting II COMPLEX GROUP STRUCTURE

2. Revision-Concept of group • Group consists of parent and subsidiary companies. • Test of parent-subsidiary relationship is control.

3. Revision-Control • “..is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.” - para 6, FRS127 • “..presumed to exist when the parent owns, directly or indirectly through subsidiaries, >50% of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.” - para 12, FRS127

4. Revision-Control • Control also exists even when there is ≤50% of the voting power when there is: • power over >1/2 of the voting rights by virtue of an agreement with other investors; • power to govern the financial and operating policies of the enterprise under a statute or an agreement; • power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or • power to cast the majority of votes at meetings of the board of directors or equivalent governing body.

5. Revision Control- S5(1) Co Act 1965 • “..a corporation shall be deemed to be a subsidiary of another corporation, if: • that other corporation - • controls composition of BOD of first-mentioned corporation; @ • controls >1/2 of voting power of first-mentioned corporation; @ • holds >1/2 of issued share capital of first-mentioned corporation(exc. pref shares); @ • first-mentioned corporation is subsidiary of any corporation which is that other corp.'ssubsidiary.”

6. C:\My Documents\Teaching ACT3126\ACT3126-Lec Note Group Accounts.ppt Revision-Control • Note that S5 of CA1965 is in conflict with FRS127 for the >50% ownership of shares criteria. Therefore, follow true & fair view S169(14) of CA1965 (FRS127). • Control must be unilateral or sole control. • Control usually comes together with substantial ownership interest. • Control can also exist even if the entity is a non-incorporated body.

7. Complex Group Structure- multiple direct subsidiaries Mother Bhd 60% 100% Daughter Sdn Bhd Son Sdn Bhd 80% Children Sdn Bhd

8. Multiple direct subsidiaries • Same procedures for CFS like in a situation involving only one parent and one direct subsidiary. The procedures are repeated for each direct subsidiary. • Mother Bhd + Sons Sdn Bhd + Daughter Sdn Bhd + Children Sdn Bhd = Mother Bhd & group CFS. • No complex issue arises.

9. Revision- Procedures in preparing CFS Acquisition method: • “cost of the acquisition should be allocated to the acquirer's share of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition, with the resulting difference being attributable to goodwill or negative goodwill.” (para 63, MASB22) • Note changes from MASB22 to FRS3

10. Revision- Procedures in preparing CFS • Cost of the acquisition = ∑ fair value (on date of acquisition) of Assets givenlessLiabilities assumedplusEquity issued by acquirer & any costs directly attributable to the business combination. • Goodwill = Cost of the acquisition lessfair value of acquirer's interest in identifiable net assets • Negative goodwill = fair value of acquirer's interest in identifiable net assets lesscost of the acquisition

11. Revision- Procedures in preparing CFS • Minority interest = minority shareholders' proportionate share of net assets (capital + reserve) in subsidiary • Arises when parent owns <100% of subsidiary's shares.

12. Bapa Bhd Anak Sdn Bhd Cucu Sdn Bhd Complex Group Structure- indirect subsidiary(s) 100% 80%

13. Indirect subsidiary(s) • Involve at least two layer of CFS. Multiple stage method: • Anak Sdn Bhd + Cucu Sdn Bhd. = Anak SB & group CFS, name it CFS1 AND • Bapa Bhd + CFS1 = Bapa Bhd & group CFS, name it CFS2 OR, a much easier way is: One-stage method: • Bapa Bhd + Anak Sdn Bhd + Cucu Sdn Bhd = Bapa Bhd & group CFS, name it CFS3. Can Anak Sdn Bhd be exempted from preparing its CFS (i.e. CFS1)?

14. Exemption from preparing CFS Paragraph 10 of FRS127- a parent need not present CFS if & only if: • The parent itself is a wholly-owned (100%) subsidiary, or isa partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting CFS; Previous MASB 11 only exempted wholly owned subsidiaries of another parent incorporated in Malaysia from preparing CFS. This is in line with paragraph 5(4)(a) of 9th Schedule of CA1965.

15. Exemption from preparing CFS-continued Paragraph 10 of FRS127- a parent need not present CFS if & only if: • The parent’s debt or equity instruments are not traded in a public market (domestic/foreign stock exchange/over-the-counter/local/regional); • The parent did not file nor is it in the process of filing, its FS with a securities commission/other regulatory org. for the purpose of issuing any class of instruments in a public market;

16. Exemption from preparing CFS-continued Paragraph 10 of FRS127- a parent need not present CFS if & only if: • The ultimate or any intermediate parent of the parent is incorporated in Malaysia and produces CFS available for public use that comply with FRS. Once the above requirements have been fulfilled, the parent need only to prepare separate FSof its own.

17. Multiple stage method • Sub-group CFS at the lowest tier of the vertical structure are prepared first, and subsequently, the consolidation is repeated by progressing stage-by-stage upward until it reaches the highest tier of the ultimate parent group accounts. • Refer to Bapa, Anak & Cucu.

18. One-stage method • Consolidation adjustments are made by reference to the ultimate parent’s effective indirect interests in the indirect subsidiaries. • In matching the cost of investment with the ultimate parent’s effective share of net assets in an indirect subsidiary, the portion of cost that is attributable to MI in the immediate parent is excluded and charged to MI account. Goodwill will then reflects only the ultimate parent’s proportionate share.