Consolidated Financial Statements Simple Group Subs Associates Balance

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

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 Consolidated Financial Statements

Consolidated Financial Statements

IAS-27 Objective …. . û preparation and presentation of consolidated financial statements for a group of entities under the control of a parent û 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 Consolidated Financial Statements

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

…. IAS-27 Key definitions û 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. û A subsidiary An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent). Consolidated Financial Statements

Further Concepts û 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 Consolidated Financial Statements

Further Concepts û 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 Consolidated Financial Statements

Further Concepts û 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, ü have been informed about, and ü 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. Consolidated Financial Statements

Further Concepts û 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 Consolidated Financial Statements

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 Intragroup balances, transactions, income, and expenses should be eliminated in full. Intragroup losses 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 Consolidated Financial Statements 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 ü 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 Consolidated Financial Statements

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. Consolidated Financial Statements

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. Consolidated Financial Statements

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. ü The parent/investor shall apply the same accounting for each category of investments. ü Investments that are classified as held for sale in accordance with IFRS 5 shall be accounted for in accordance with that IFRS. ü Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. ü The measurement of investments accounted for in accordance with IAS 39 is not changed in such circumstances. ü An entity shall recognise a dividend from a subsidiary, jointly controlled entity or associate in profit or loss in its separate financial statements when its right to receive the dividend in established. Consolidated Financial Statements

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 Consolidated Financial Statements

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 Consolidated Financial Statements

IFRS - 3 û IFRS 3 now allows two methods of recognizing the non-controlling interest ûPirate IFRS 3 Business allows 20 X 7. a choice of method nonacquired 80% of. Combinations Sailor on 31 October On this date the to netvalue assetsthe of Sailor amounted to $160, 000. Sailor had 100, 000 shares in issue with a market value on 30 controlling interest (NCI) at acquisition: October 20 X 7 of $2. • As a proportion of the net assets of the subsidiary company. Required: • At value. Calculate thefair non-controlling interest at acquisition using both methods. û An entity may choose to apply a different measurement method to different acquisitions. 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. Consolidated Financial Statements

IFRS - 3 û Positive goodwill is shown in the consolidated statement of financial position as an intangible non-current asset. û It is held at cost and reviewed for impairment annually. The cumulative amount of the impairment is: a) b) û 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 a) 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. Consolidated Financial Statements

Practice Trail Balance Dec. 20 x 9 H Ltd S Ltd Investment in S Ltd. 1, 880 Assets 4, 000 3, 000 Dividend Paid 200 100 Cost of Sales 2, 400 1, 500 Total 8, 480 4, 600 Liabilities 1, 000 700 Capital 2, 000 1, 000 Ret Earning – op 2, 000 400 General Reserve 400 500 Sales 3, 000 2, 000 Dividend Income 80 Total 8, 480 4, 600 H ltd Purchased 80% share of S ltd. On Jan 1 20 x 9 Consolidated Financial Statements

Practice – Goodwill at Fair Value & Proportionate share of Net Assets Financial Position Land Investment in S Ltd. Inventories Receiveable Cash Capital Rs. 1 share Retained Earning Payebles H Ltd 14, 000 20, 000 10, 000 2, 000 1, 000 47, 000 S Ltd 12, 000 5, 000 1, 500 1, 200 19, 700 30, 000 10, 000 7, 000 47, 000 12, 000 6, 000 1, 700 19, 700 H acquired 80% shares of S ltd. When S retained earnings were 3000 Market price of share at the date of acquisition was Rs. 2. 00 Consolidated Financial Statements

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

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

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

Impairment A parent, Terra, buys 70% of a sub for $800 m at the year start, when the share capital is $50 m, reserves are $350 m and a fair value adjustment (FVA) of $100 m is required on machines with a life of five years. The fair value of the non-controlling interest is $317 m. During the year the sub made profits retained of $50 m and sold goods valued at $12 m 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 $360 m and net realizable value (NRV) of $666 m. It is the group‘s policy to value the non-controlling interest at fair value (full goodwill). Consolidated Financial Statements

Fair Value Adjustment H Equip Investment in S Inves 2 8 0 S 2, 10 0 4, 09 24 Development Exp 0 0 Inventories 3 Receivable 0 3 1, 90 71 58 7, 73 5 0 5 21 1, 80 Cash ) Capital 0 Share Premium 0 Retained Earnings 4 payable 3 26 3 30 (24 1, 80 1, 00 3, 21 1, 74 7, 73 0 0 5 5 4 1, 20 60 2, 40 23 4, 47 FV Equip H acquired 80% shares on Jan 1 when retained earnings of S were Rs. 2, 000 At year End Depriciation for the year due to revaluation of equip. reduced to 20 and amortization of Development Exp. Reduced by 70 Co. policy is to record revaluation in full & credit minority with their share in revaluation Development Exp Long term Recv Inves. Shares ) ) (100 (140 - 0) (24 Consolidated Financial Statements

Acquisition By Issuance of Shares û û û û û 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 FV of assets 33, 340 PV of Long term S H 1, 200 X (1/(1. 2 ^3)) 1 3 1, 200 x 0. 5787 694 7000 (7000 x 3 x 2) = 42, 000 34, 124 û + Rs. 1 = 7, 000 49, 000 34, 124 Goodwill 14, 876 Consolidated Financial Statements

Practice – Acq. By shares Issuance & FV Investor Limited acquired 27 million Rs. 10 shares of Investee Limited on January 1, 2008. This acquisition was effected by means of an exchange of 3 shares in Investor Limited for every 5 shares in Investee Limited. In addition, Rs. 100 million were to be paid after two years. Market price of Investor Limited� s shares at acquisition was Rs. 20 each. (Considering 12% as cost of capital of the Investor Limited, PV of Rs. 1 receivable in two years time may be taken as Rs. 0. 797). Fair value of the plant at acquisition was Rs. 25 million against the book value of Rs. 20 million. The plant had a remaining useful life of 5 years. Depreciation is to be charged using straight line method. At acquisition, Investee Limited had unrelieved tax losses of Rs. 25 million. Directors of the Investor Limited believed that these losses could be utilized and hence should be recognized as deferred tax asset. Share capital and reserves of Investee Limited at acquisition were Rs. 300 million (of Rs. 10 each) and Rs. 25 million respectively. Applicable tax rate is 35%. Find Good will 27 M Shares S 5 1 27 H 3 3/5 27*3/5 16 Market Price 2 o each FV of shares issued Cash consideration PV of 100 M FV of consideration 324 100 M after 2 years Share 300 Reserves FV of Plant Tax losses 25 5 8. 75 (25*35%) FV of NA 338. 75 FV of Consdieration FV of NCI 338. 75 X 10% Goodwill 80 404 Consolidated Financial Share of Holding 270/300 404 34 98. 83 Statements

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 Consolidated Financial Statements

Class issues Basic Flow for Goodwill, NCI & Retained Earnings Net Assets Share Capital Reserves FV of Net Assets FV of Consideration 80% FV of NCI 20% FV of Business 100% Good Will Retained Earnings Parent (as it is) Subs. Part - Growth X 80% Group Consolidated Retained Earning Acq. YE XXX XXX XXX Growth XXX 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% Consolidated Financial Statements

Consolidated Financial Statements

Consolidated Financial Statements

Thank You Consolidated Financial Statements

Relationships • Entities may have 3 types of relationships • Control • Influence • Passive Consolidated Financial Statements

Relationships Parent Control Parent More then 50% shares holding & voting power Parent Subsidiary Consolidated Accounts Asset Added Liabilities Added Influence Less then 50% shares holding /voting power Parent Associate Consolidated Accounts Asset Share of Asset Added Liabilities Share of Liabilities Added Consolidated Financial Statements

Terra Faken. Stock Consolidated Financial Statements

Terra Consolidated Financial Statements

Fair Value Adjustment Equip Goodwill Inves 2 0 0 Development Exp Inventories Receiveable 3 0 5 Cash ) Capital 0 Share Premium Reatined Earnings payable 0 4 3 H 2, 10 0 1, 25 24 0 -0 71 5 58 0 4, 88 (24 5 0 1, 80 1, 74 NCI 2 5 0 3 7, 73 Consol -0 21 0 1, 73 0 26 8 30 0 4, 32 4 0 6 -0 1, 00 3, 21 S 1, 82 7 -0 39 6 23 8 81 0 1, 47 0 3922 1, 25 Goodwill Net asset 45 Share Premium 1, 73 FV Adjustment 88 1 1, 80 1, 00 0 Retained Earnings 0 97 9, 21 0 0) 0 Fair Value of Consideration Fair Value of NCI Fair Value of Business FV of Net assets Acq 1, 20 60 2, 00 (24 3, 56 0 0) 0 80% 8 20% 2 100% 0 0 3, 60 1, 97 Goodwill 0 YE Growth 1, 20 60 2, 40 (15 4, 05 0 49 4, 09 71 4, 81 3, 56 1, 25 81 9, 21 Consolidated Financial Statements