FAC 3704 GROUP FINANCIAL REPORTING Mrs LA Jordaan

FAC 3704 GROUP FINANCIAL REPORTING

Mrs LA Jordaan Office: AJH van der Walt Building Office 2 -56 E – Mail: jordala@unisa. ac. za Tel No: 012 429 2468

FAC 3704 LECTURERS Tel No: E-mail: 012 429 4250 fac 3704@unisa. ac. za

AGENDA MRS JORDAAN OCTOBER 2016 EXAM VERTICAL GROUP QUESTION CHANGE IN CONTROL

1. OCTOBER 2016 EXAM D Ltd JOINT VENTURE 40% A Ltd PARENT C Ltd JOINT OPERATION 35% B Ltd SUBSIDIARY 80% Part a: Prepare the consolidated statement of profit and loss and OCI for the year ended 31 December 2016.

1. OCTOBER 2016 EXAM A Ltd PARENT B Ltd SUBSIDIARY C Ltd JOINT OPERATION SUB ACQUIRED ON 1 SEPTEMBER 2016 Part a: Prepare the consolidated statement of profit and loss and OCI for the year ended 31 December 2016.

1. OCTOBER 2016 EXAM A Ltd PARENT B Ltd SUBSIDIARY C Ltd JOINT OPERATION SUB ACQUIRED ON 1 SEPTEMBER 2016 SFP: SNAP SHOT of all the assets and liabilities at year end SPL: Subsidiary for only 4 months of the year. Therefore include 100% of all the income and expenses of the subsidiary x 4/12 months.

Consolidated statement of profit or loss and OCI for year ended 31 December 2016 100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 – 31 DECEMBER 2016) + 35% JO – Intragroup tx’s Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Gross profit Share of profit from joint venture (profit of JV for the year x 40%) Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Profit before tax Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Profit for the year

INTRAGROUP TRANSACTION 1 1. Intragroup sale of inventory Subsidiary Parent Total sales for the year = R 260 000 40% of inventory in the records of P Ltd (R 650) was purchased from S Ltd. Mark up on selling price is 25%, therefore use 25/100 (if was on cost price, would have used 25/125) Profit that S Ltd made: 40% x 650 x 25/100 = 65 065. Important principle: For group purposes this sale never occurred! You cannot sell to “yourself”. Which line items are affected in my consolidated AFS? Dr Revenue 260 000 Cr Cost of sales 260 000 Dr Cost of sales 65 065 Cr Inventory 65 065

INTRAGROUP TRANSACTION 1 1. Intragroup sale of inventory Subsidiary Parent TAX EFFECT? Cost of sales (debit) Dr Deferred tax Cr Income tax (65 065 x 28%) Profit 18 218 Income tax

Consolidated statement of profit or loss and OCI for year ended 31 December 2016 100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 – 31 DECEMBER 2016) + 35% JO – Intragroup tx’s Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 260 000 Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 260 000 + 65 065 Gross profit Share of profit from joint venture (profit of JV for the year x 40%) Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Profit before tax Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 18 218 Profit for the year

INTRAGROUP TRANSACTION 2 1. Intragroup sale of PPE JV Parent Selling price = R 120 000 Mark up on cost price is 20%, therefore use 20/120 Profit that JV made: 20/120 x 120 000 = 20 000 Important principle: For group purposes this sale never occurred! You cannot sell to “yourself”. Which line items are affected in my consolidated AFS? Dr Share of profit from JV (other income) 8 000 Cr PPE 8 000 (20 000 x 40%) NB. This profit was made in a prior period and therefore will have no effect on the current years statement of profit or loss!! Will however effect retained earnings!

INTRAGROUP TRANSACTION 2 1. Intragroup sale of PPE JV Parent Remaining useful life of PPE is 5 years (given in question) Unrealised profit was R 8 000 (see previous slide) Must realise (recognise) profit over the remaining useful life. Therefore 8 000/5 = 1 600 OR 120 000 x 20/120 = 20 000/5 years = 4 000 x 40% = 1 600. Dr Accumulated depreciation (PPE) 1 600 Cr Share of profit from JV (depr) 1 600

INTRAGROUP TRANSACTION 1 JV Parent Dr Share of profit from JV (income tax) 448 Cr Deferred tax (1 600 x 28%) 448

Consolidated statement of profit or loss and OCI for year ended 31 December 2016 100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 – 31 DECEMBER 2016) + 35% JO – Intragroup tx’s Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 260 000 Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 260 000 + 65 065 Gross profit Share of profit from joint venture (profit of JV for the year x 40%) + 1 600 - 448 Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Profit before tax Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 18 218 Profit for the year

Consolidated statement of profit or loss and OCI for year ended 31 December 2016 100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 – 31 DECEMBER 2016) + 35% JO – Intragroup tx’s Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 260 000 Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 260 000 + 65 065 Gross profit Share of profit from joint venture (profit of JV for the year x 40%) + 1 600 - 448 Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) + gain on bargain purchase – intragroup dividends Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) Profit before tax Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) – 18 218 Profit for the year

Consolidated statement of profit or loss and OCI for year ended 31 December 2016 100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 – 31 DECEMBER 2016) + 35% JO – Intragroup tx’s Profit attributable to: -Owners of the parent (balancing) -- Non controlling interests (profit of subsidiary – any intragroup transactions where the subsidiary was the SELLER) x 20%

2. VERTICAL GROUPS A Ltd B Ltd C Ltd

VERTICAL GROUPS A Ltd acquired control over B Ltd, and B Ltd acquired control over C Ltd. Start at the bottom of the group! A Ltd If C Ltd made a profit of R 20 000 for the year: 80% B Ltd 60% C Ltd How much of that profit would be: Attributable to B Ltd? 60% x R 20 000 = 12 000 Attributable to the NCI? 40% x R 20 000 = 8 000 NCI (other shareholders): R 8 000

VERTICAL GROUPS A Ltd acquired control over B Ltd, and B Ltd acquired control over C Ltd. If B Ltd made a profit of R 50 000 for the year: A Ltd 80% B Ltd Attributable to A Ltd? 80% x R 62 000 = 49 600 Attributable to the NCI? 20% x R 62 000 = 12 400 60% C Ltd Total consolidated profit of B Ltd: Profit of B Ltd R 50 000 PLUS: Profit of C Ltd attributable to B Ltd R 12 000 R 62 000 NCI (other shareholders): R 8 000 + R 12 400 = 20 400

EXAM STANDARD VERTICAL GROUP QUESTION PLEASE REFER TO QUESTION 4 OF YOUR TUT 103/3/2016 STEP 1: KEEP CALM STEP 2: READ THE REQUIRED SECTION - What am I expected to do? • • REQUIRED: (a) Prepare only the asset section (including the deferred tax asset) of the consolidated statement of financial position of the Pearson Ltd Group as at 30 June 2013. (28) • (b) Prepare only the retained earnings and non-controlling interests columns of the consolidated statement of changes in equity of the Pearson Ltd Group for the year ended 30 June 2013. (30)

EXAM STANDARD VERTICAL GROUP QUESTION PLEASE REFER TO QUESTION 4 OF YOUR TUT 103/3/2016 STEP 3: DRAW A DIAGRAM OF THE GROUP Holding Company PEARSON LTD Joint operation Fredman Ltd 11 Subsidiary Morgan Ltd CONTROL Sub-subsidiary Stanley Ltd CONTROL

EXAM STANDARD VERTICAL GROUP QUESTION PLEASE REFER TO QUESTION 4 OF YOUR TUT 103/3/2016 STEP 4: ADD IN THE PERCENTAGES AND WHEN EACH ENTITY WAS ACQUIRED 45% (given) Holding Company PEARSON LTD Joint operation Fredman Ltd 11 1 August 2012 Current period 244 550/335 000 = 73% Subsidiary Morgan Ltd CONTROL 1 August 2010 Prior period 204 000/ 240 000 = 85% Sub-subsidiary Stanley Ltd CONTROL 28 February 2012 Current period

SOLUTION PART A Consolidated statement of Financial Position at 30 June 2013 PEARSON LTD GROUP Consolidated Statement of Financial Position as at 31 December 2015 100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% subsubsidiary + 45% JO – Intragroup tx’s ASSETS Non-Current assets Property, plant & equipment 2 420 000 + 688 000 + 826 000 + (344 000 x 45%) Deferred tax asset -9 324 Investments in equity instruments: - Morgan Ltd at fair value 950 000 - Stanley Ltd at fair value 612 000 - Fredman Ltd at fair value 118 800 Step 5 Draw up the SFP and add the “easy” figures. Goodwill Total Non-current assets Current assets Trade and other receivables 340 200 + 312 000 + 145 000 + (180 000 x 45%) Cash and cash equivalents 260 000 + 177 000 + 384 000 + (178 000 x 45%) Inventory 340 000 + 185 000 + 226 000 + (111 000 x 45%) Total Non-current assets R

SOLUTION PART A Consolidated statement of Financial Position at 30 June 2013 PEARSON LTD GROUP Consolidated Statement of Financial Position as at 30 June 2013 R Investments in equity instruments: - Morgan Ltd at fair value 950 000 – 950 000 = 0 - Stanley Ltd at fair value 612 000 – 612 000 = 0 - Fredman Ltd at fair value 118 800 – 118 800 = 0 Cannot have an investment in “yourself”, therefore must be eliminated on consolidation!! Deferred tax asset -9 324 + 9324 = 0 - Deferred tax on mark to market reserve (given) - Pearson Ltd only has investments in group companies - Therefore this mark-to-market reserve can only relate to group companies

INTRAGROUP TRANSACTION 1 1. Intragroup sale of machine (point 3) Pearson (P) Morgan (S) SP = 155 000 Mark up on selling price is 25%, therefore use 25/100 (if was on cost price, would have used 25/125) Profit that Pearson Ltd made: 155 000 x 25/100 = 38 750 Important principle: For group purposes this sale never occurred! You cannot sell to “yourself”. Which line items are affected in my consolidated AFS? Dr Other income 38 750 **Will be used later in the SCE, profit for the year Cr PPE (machinery) 38 750

INTRAGROUP TRANSACTION 1 1. Intragroup sale of machine (point 3) Pearson (P) Morgan (S) TAX EFFECT? Other income Dr Deferred tax Cr Income tax (38 750 x 28%) Profit Income tax 10 850 **Will be used later in the SCE, profit for the year

SOLUTION PART A Consolidated statement of Financial Position at 30 June 2013 PEARSON LTD GROUP Consolidated Statement of Financial Position as at 31 December 2015 100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% subsubsidiary + 45% JO – Intragroup tx’s ASSETS Non-Current assets Property, plant & equipment 2 420 000 + 688 000 + 826 000 + (344 000 x 45%) - 38 750 (PPE) Deferred tax asset 0 + 10 850 Goodwill Total Non-current assets Current assets Trade and other receivables 340 200 + 312 000 + 145 000 + (180 000 x 45%) Cash and cash equivalents 260 000 + 177 000 + 384 000 + (178 000 x 45%) Inventory 340 000 + 185 000 + 226 000 + (111 000 x 45%) Total Non-current assets TOTAL ASSETS R

INTRAGROUP TRANSACTION 1 1. Intragroup sale of machine (point 3) Pearson (P) Morgan (S) CA of Machine 116 250 CA of Machine 155 000 Morgan Ltd would have depreciated based on R 155 000/4 years x 6/12 = 19 375 Group must depreciate based on R 116 250/4 years x 6/12 = 14 531 155 000 (SP) – 38 750 (profit) = 116 250 (original CA before the sale) Remember the sale never happened for group purposes! Need to reduce the depreciation already passed by Morgan Ltd: Dr Accumulated depreciation (PPE) 4 844 Cr Depreciation (other expenses) 4 844 **Will be used later in the SCE, profit for the year

INTRAGROUP TRANSACTION 1 1. Intragroup sale of machine (point 3) Pearson (P) Morgan (S) TAX EFFECT? Other expenses Dr Income tax Cr Deferred tax (4 844 x 28%) Profit Income tax 1 356 **Will be used later in the SCE, profit for the year 1 356

SOLUTION PART A Consolidated statement of Financial Position at 30 June 2013 PEARSON LTD GROUP Consolidated Statement of Financial Position as at 31 December 2015 100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% subsubsidiary + 45% JO – Intragroup tx’s ASSETS Non-Current assets Property, plant & equipment 2 420 000 + 688 000 + 826 000 + (344 000 x 45%) - 38 750 (PPE) + 4 844 (excess depr. ) Deferred tax asset 0 + 10 850 – 1 356 Goodwill Total Non-current assets Current assets Trade and other receivables 340 200 + 312 000 + 145 000 + (180 000 x 45%) Cash and cash equivalents 260 000 + 177 000 + 384 000 + (178 000 x 45%) Inventory 340 000 + 185 000 + 226 000 + (111 000 x 45%) Total Non-current assets TOTAL ASSETS R

INTRAGROUP TRANSACTION 2 1. Intragroup sale of inventory (point 5 & 6) Morgan (S) Inventory R 112 000 Stanley (SS) In the separate records of Stanley: Dr Trade recievables 13 000 Cr Sales 13 000 Dr Cost of sales 10 833 Cr Inventory 10 833 Record the purchase in the separate records of Morgan Ltd: Dr Inventory 13 000 Cr Trade and other payables 13 000

INTRAGROUP TRANSACTION 2 1. Intragroup sale of inventory (point 5 & 6) Morgan (S) Inventory Stanley (SS) R 112 000 + 13 000 = 125 000 Eliminate UP: 125 000 (Closing inv) x 20/120 = 20 833 Dr Cost of sales 20 833 **Will be used later in the SCE, profit for the year Cr Inventory 20 833 Tax effect? COS PROFIT I/TAX

INTRAGROUP TRANSACTION 2 1. Intragroup sale of inventory (point 5 & 6) Morgan (S) Inventory Stanley (SS) R 112 000 + 13 000 = 125 000 Tax effect? COS PROFIT I/TAX Dr Deferred tax 5 833 Cr Income tax expense 5 833 **Will be used later in the SCE, profit for the year (20 833 x 28%)

SOLUTION PART A Consolidated statement of Financial Position at 30 June 2013 PEARSON LTD GROUP Consolidated Statement of Financial Position as at 31 December 2015 100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% subsubsidiary + 45% JO – Intragroup tx’s ASSETS Non-Current assets Property, plant & equipment 2 420 000 + 688 000 + 826 000 + (344 000 x 45%) - 38 750 (PPE) + 4 844 (excess depr. ) Deferred tax asset 0 + 10 850 – 1 356 + 5 833 Goodwill Total Non-current assets Current assets Trade and other receivables 340 200 + 312 000 + 145 000 + (180 000 x 45%) – 13 000 Cash and cash equivalents 260 000 + 177 000 + 384 000 + (178 000 x 45%) Inventory 340 000 + 185 000 + 226 000 + (111 000 x 45%) + 13 000 – 20 833 Total Non-current assets TOTAL ASSETS R

GOODWILL CALCULATION (sub - subsidiary) Analysis of equity of Stanley Ltd Acquisition date: 28/2/2012 Total Share capital 480 000 Retained earnings 172 000 Goodwill/(GBP) (balancing) At 85% Since NCI @ FV 15% 652 000 554 200 97 800 68 000 57 800 10 200 612 000 108 000 Consideration @ COST + NCI Goodwill attributable to Morgan Ltd. (36 000 shares x 3, 00) Goodwill attributable (“that belongs to”) to NCI of Stanley Ltd

GOODWILL CALCULATION (sub - subsidiary) Pearson R 42 194 This only happens in a vertical group!!! 73% Morgan R 57 800 NCI: R 10 200 Stanley Goodwill R 68 000

GOODWILL CALCULATION (subsidiary) Analysis of equity of Morgan Ltd Acquisition date: 1/8/2010 Total Share capital 335 000 Retained earnings 546 000 Adjustment for TR (40 000 x 72%) (28 800) Adjustment for Inv (27 000 x 72%) (19 440) Goodwill/(GBP) (balancing) At 85% Trade receivables Inventories NCI @ FV 15% Stanley Ltd not yet acquired! Therefore no amounts of Stanley brought in yet! 832 760 707 846 124 914 356 680 192 154 164 526 900 000 289 440 Consideration @ COST + NCI A - 40 000 - 27 000 Since ( 90 450 shares x 3, 20) –L =E - 40 000 - 27 000

GOODWILL CALCULATION (joint operation) Analysis of equity of Fredman Ltd Acquisition date: 1/8/2012 Total At 45% Share capital 120 000 Retained earnings 144 000 Goodwill/(GBP) (balancing) Consideration @ COST No NCI for 264 000 118 800 0 0 118 800 a JO!!!

SOLUTION PART A Consolidated statement of Financial Position at 30 June 2013 PEARSON LTD GROUP Consolidated Statement of Financial Position as at 31 December 2015 100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% subsubsidiary + 45% JO – Intragroup tx’s ASSETS Non-Current assets R Property, plant & equipment 2 420 000 + 688 000 + 826 000 + (344 000 x 45%) - 38 750 (PPE) + 4 844 (excess depr. ) Deferred tax asset 0 + 10 850 – 1 356 + 5 833 Goodwill 10 200 + 42 194(57 800 x 73%)(SS) this will only ever happen in a vertical group!!! + 356 680 (S) + 0 (JO) – 120 000 (impairment – point 9) Total Non-current assets 4 054 894 15 327 289 074 4 359 295 Current assets Trade and other receivables 340 200 + 312 000 + 145 000 + (180 000 x 45%) – 13 000 Cash and cash equivalents 260 000 + 177 000 + 384 000 + (178 000 x 45%) Inventory 340 000 + 185 000 + 226 000 + (111 000 x 45%) + 13 000 – 20 833 Total Non-current assets TOTAL ASSETS 865 200 901 100 793 117 2 559 417 6 917 712

SOLUTION PART B PEARSON LTD GROUP Consolidated Statement of Changes in Equity for the year ended 30 June 2013 Share capital Balance as at 1 July 2012 Acquisition of subsidiary Total comprehensive income for the year: Profit for the year Other comprehensive income Ordinary dividends paid Balance as at 30 June 2013 Retained Earnings 600 000 # (165 000) # 600 000 # ALWAYS only parent company, therefore from TB of Pearson Ltd NCI

OPENING RETAINED EARNINGS CALCULATION (sub subsidiary) Analysis of equity of Stanley Ltd Acquisition date: 28/2/2012 Total Since 85% NCI @ FV 15% Since acquisition to beginning of current year Retained earnings (625 080 – 172 000) 453 080 UP profit (seller) (90 000 x 20/120 x 72%) (10 800) 442 280 375 938 612 000 RE attributable to Morgan Ltd. RE attributable (“that belongs to”) to NCI of Stanley Ltd. Unrealised profit only affects the analysis, if it affects the NCI!! Only affects the NCI when Stanley Ltd was the seller!!! 66 342

OPENING RETAINED EARNINGS CALCULATION (subsidiary) Analysis of equity of Morgan Ltd Acquisition date: 1/8/2010 Total Since 73% NCI @ FV 27% Since acquisition to beginning of current year Retained earnings (- 370 500 – 546 000) Reversal of write downs at acquisition: - Inventory - Trade receivables (916 500) 28 800 19 440 (868 260) Profit of Stanley attributable to Morgan (only for vertical groups!) 375 938 (492 322) (359 395) Goodwill of Stanley (57 800) Unrealised profit only affects the analysis, if it affects the NCI!! Only affects the NCI of Morgan Ltd when Morgan Ltd was the seller!!! (132 927) (15 606)

Opening Retained earnings NCI has its own column in SCE, therefore retained earnings is AFTER NCI has been taken out. 100% of Pearson Ltd: 1 518 000 Stanley Ltd: 442 280 x 85% x 73% = 274 435 Morgan Ltd: - 868 260 x 73% = - 633 830 loss Fredman Ltd: not yet acquired = 0 EQUALS = R 1 158 605 No disclosure = No marks! OR 100% of Pearson Ltd: 1 518 000 Morgan & Stanley: - 359 395 loss (analysis of Morgan) EQUALS = R 1 158 605

Opening NCI at acquisition date: Stanley: 108 000 Morgan: 289 440 PLUS NCI since acq to beg of c-year: Stanley: 66 342 Morgan: - 132 927 – 15 606 = - 148 533 EQUALS: 315 249 TIP FOR CALCULATING NCI: TOTAL per analysis = TOTAL per NCI column

SOLUTION PART B PEARSON LTD GROUP Consolidated Statement of Changes in Equity for the year ended 30 June 2013 Share capital Balance as at 1 July 2012 Acquisition of subsidiary Total comprehensive income for the year: Profit for the year Other comprehensive income Ordinary dividends paid Balance as at 30 June 2013 600 000 # Retained Earnings 1 158 605 (165 000) # 600 000 # ALWAYS only parent company, therefore from TB of Pearson Ltd NCI 315 249

CONSOLIDATED PROFIT FOR THE YEAR CALC (sub - subsidiary) Analysis of equity of Stanley Ltd Acquisition date: 28/2/2012 Total Since 85% NCI @ FV 15% Current year Profit for the year (463 083 – 129 663) UP profit of prior year, now realised (seller) UP profit, current year (125 000 x 20/120 x 72%) 333 420 10 800 (15 000) 329 220 Profit attributable to Morgan Ltd. 279 837 49 383 Profit attributable (“that belongs to”) to NCI of Stanley Ltd. Unrealised profit only affects the analysis, if it affects the NCI!! Only affects the NCI when Stanley Ltd was the seller!!!

CONSOLIDATED PROFIT CALC (subsidiary) Analysis of equity of Morgan Ltd Acquisition date: 1/8/2010 Total Since 73% NCI @ FV 27% Current year Profit for the year (1 904 028 – 533 128) 1 370 900 Goodwill impairment (only affects NCI if full goodwill method) (120 000) Dividend from Stanley (23 800) Profit of Stanley attributable to Morgan (only for vertical groups!) 279 837 1 506 937 1 100 064 Unrealised profit only affects the analysis, if it affects the NCI!! Only affects the NCI of Morgan Ltd when Morgan Ltd was the seller!!! 406 873

Consolidated profit for the year PEARSON LTD: 100% of Pearson Ltd: 2 048 600 (profit after tax) Less: intragroup transactions where Pearson was the seller (note these do not affect the NCI) UP on machinery (38 750) Add tax effect 10 850 Add depreciation reversed 4 844 Less tax effect (1 356) Less: Intragroup div received by Pearson: From Morgan: 73% x 45 000 = (32 850) PLUS: R 1 100 064 (Morgan & Stanley) (analysis of Morgan) PLUS: 219 000 (304 167 – 85 167) x 45% = 98 550 (profit of JO) EQUALS = 3 189 952

SOLUTION PART B PEARSON LTD GROUP Consolidated Statement of Changes in Equity for the year ended 30 June 2013 Share capital Balance as at 1 July 2012 Acquisition of subsidiary Total comprehensive income for the year: Profit for the year Other comprehensive income Ordinary dividends paid Balance as at 30 June 2013 600 000 # 600 000 Retained Earnings 1 158 605 NCI 315 249 3 189 952 456 256 (165 000) # (16 350)** 4 183 556 755 155 # ALWAYS only parent company, therefore from TB of Pearson Ltd ** Dividends paid to NCI: 4 200(28 000 x 15%)(Stanley) + 12 150(45 000 x 27%)(Morgan) = 16 350

CHANGE IN CONTROL What must I be able to do? SUBSIDIARY (80%) (control before) SUBSIDIARY (90%) (control after) SUBSIDIARY (70%) (control before) SUBSIDIARY (55%) (control after) NO INVESTMENT (0%) SUBSIDIARY (55%) (control before) SUBSIDIARY (65%) (control after) NO INVESTMENT (0%) Investment (10%) SUBSIDIARY (80%) (control after) SUBSIDIARY (70%) (control before) Investment (10%)

QUESTIONS?

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