Learning Area 8

1. Learning Area 8 Chapter 11: Group accounts and insurance company accounts

2. What should you know? • Knowledge of holding companies, subsidiaries and associates etc. • Be able to calculate goodwill • Understand group AFS

3. Example: Group Sanlam Limited 100% Sanlam Life Insurance Company Limited http://www.sanlam.co.za/wps/wcm/connect/sanlam_en/Sanlam/For+Individuals/Sanlam+Sky+Solutions/About+Us/Structure/

4. Subsidiary companies p2 • Holding company holds a controlling interest in subsidiary company. • Controlling interest if: • >50% shares/voting rights • Right to appoint/remove the board • Holding company owns 100% of subsidiary’s shares: Wholly owned subsidiary • Holding company owns less than 100%: Partially owned subsidiary

5. Subsidiary companies p3 • Subsidiary company: own AFS • Holding company: own AFS and consolidated AFS • Purpose: to present group as single economic unit • What is consolidated AFS? • Adding across statements • Eliminating Intra-group transactions (i.e. eliminating double counting problems) • Why consolidated AFS? • Control • Investors’ interest

6. Subsidiary companies p3 & p4

7. Subsidiary companies p3, 4 & 5

8. Goodwill p5 • Goodwill = Cost of acquisition – book value of shares acquired • Cost of acquisition = Cash paid + market value of shares / debt paid to subsidiary’s shareholders • Why pay more than book value? - Holding company is paying for intangibles such as : • Reputation of subsidiary • Customer base • Loyal workforce • All separate identifiable assets should be recognised before goodwill is calculated e.g. trademarks etc. • Test annually for impairment

9. Accounting for goodwill p7

10. Accounting for goodwill p7

11. Goodwill p8 • What happens if Company H bought Company S for an amount lower than book value? • Therefore goodwill will be a negative amount • Negative amount added to the “other reserves” item (so that “other reserves” increase) • Question 11.1 • Solution 11.1.docx

12. Non-controlling interests p9 • If holding company owns <100%...still consolidated AFS (add 100% of Subsidiaries’ assets, liabilities, income, expenses), but: • Non-controlling interest to account for ‘minority Shareholder’s share in net assets of Subsidiary’ • Example p9 LA8 Non-controlling interest example.docx

13. Associated companies p12 Is a company over which the holding company has significant influence, but no control! • Usually between 20% and 50% shareholding • Do not include 100% income, expenses, assets, liabilities (as no control) • Include: • I/S: % of profit as a single line: income from associate • BS: Investment…increases by % income per income statement and decreases by dividends paid.

14. Interpretation of consolidated AFS p12 • Group has no legal entity BUT - controlled by same shareholders, therefore an accounting entity for which group AFS is compiled • In theory – it is possible for subsidiary to fail without receiving support from group members. • In practice – almost impossible since one of group members will bail out struggling company. • Why?..... It poses a reputational risk!!

15. Summary

16. Insurance company accounts p14 - 19 • Uncertainties • When claims are to be paid and how much? • How many future premiums to be received • Profits: how much and when to recognise • Additional liabilities: future claims – calculated by actuaries • AFS differ from normal companies’ AFS • Only short theory questions p14 – 19 in test and exam (Tested later in studies in the relevant specialist subjects General and Life)

17. HOMEWORK • Question 11.2 (p12 Subsidiaries and associates) • Question 11.3 (p13 Definitions)