Financial Accounting Consolidated Statement of Financial Position Samantha

Financial Accounting Consolidated Statement of Financial Position Samantha Karandagoda

Group • A Group Exists when one Entity Controls another Entity • Control is the power to govern the financial & operating policies • Normally Achieved by Owning More than 50% of Voting Rights

Non Controlling Interest • Shareholders who own less than 50% • Considered to be Shareholders of the Group • Their Shareholding is Reflected in the Equity of the Group

Group Accounts • Parent & Subsidiary are Separate Legal Entities • Requires Preparation of Separate Accounts • However to Reflect the Substance of a Group, Consolidated Accounts are Required

Acquisition Accounting • IFRS 3 Requires Acquisition Accounting (Purchase Method) to be used to Prepare Consolidated Accounts

Acquisition Accounting • Add 100% of the Parent’s & Subsidiary’s Assets, Liabilities, Income & Expenses • Investment in the Parents Books is not Included in Consolidated SOFP (since Subsidiary’s Net Assets + Goodwill is Included)

Goodwill at Acquisition • Good Will = Sum of the Fair Value of Investment + Sum of the Fair Value of Non Controlling Interest The Fair Value of the Net Assets Acquired

Non Controlling Interest • Balance for Non Controlling Interest will need to be Calculated & Included in the Consolidated Financial Statements • Share Capital of the Group is Only the Share Capital of the Parent

Subsidiary • Adjustments are Made to Record the Subsidiary’s Net Assets at Fair Value • Uniform Accounting Policies Should be Used • Intra. Group Balances & Transactions are Eliminated in Full • Profits/Losses from Intra. Group Transactions are Eliminated in Full

Consolidation Steps W 1: Map the Group Structure PARENT OWNERSHIP % SUBSIDIARY

Consolidation Steps W 2: Net Assets of Subsidiary Acquisition Date Share Capital XXX Retained XXX Earnings Other XXX Reserves XXX Reporting Date XXX XXX

Consolidation Steps W 3: Goodwill FV of Parent’s Investment Value of NCI at Acquisition FV of Sub’s Net Assets Acquired (W 2) Goodwill at Acquisition Impairment Goodwill at Reporting Date X X (X) X

Consolidation Steps W 4: Non Controlling Interest Value of NCI at Acquisition (W 3) NCI % x Post-Acquisition Reserves (W 2) NCI % x Impairment (W 3) (Fair Value Method Only) NCI at Reporting Date X X (X) X

Consolidation Steps W 5: Retained Earnings Parent Subsidiary Post Acquisition Reserves x % Ownership Impairment of Good Will X X (X) X

Consolidated SOFP • Goodwill: W 3 • Property Plant & Equipment: Parent + Subsidiary • Current Assets: Parent + Subsidiary • Share Capital: Parent Only • Retained Earnings: W 5 • Non-Controlling Interest: W 4 • Current Liabilities: Parent + Subsidiary

Goodwill • Guided by IFRS 3 • Parent Pays More than Net Assets because of: – Positive Reputation – Loyal Customer Base – Staff Expertise etc. • Negative Goodwill (Discount on acquisition) added to group retained earnings (profit!)

Value of NCI Holding • Fair Value – Market Value of the Subsidiary’s Shares at the Date of Acquisition – If not Traded, use other valuation • Proportion of Net Assets – Calculating the Share of the Fair Value of Subsidiary’s Net Assets (Share Capital + Retained Earnings)

Impairment of Goodwill • IFRS 3 Requires that Goodwill is tested at each reporting date for impairment • Impairment Review is Not Needed at Exam • You Will Be Given – Impairment Loss Amount – Data to Calculate the Amount

Fair Value Method • Reduce Goodwill by the Full Impairment Loss – CR Goodwill Account • Reduce Non Controlling Interest Proportionately – DR NCI Account • Reduce Retained Earnings for the Group Proportionate to the Parent’s Ownership – DR Retained Earnings

Proportion of Net Assets Method • Reduce Goodwill by the Full Impairment Loss – CR Goodwill • Reduce Retained Earnings for the Group by the Full Impairment Loss – DR Retained Earnings

Intra Group Balances • • Must Be Eliminated in Full Receivables & Payables Intra Group Loans Cancelled off Upon Consolidation

Cash in Transit • One Entity has Sent Cash (& Accounted) but the other entity has not received – hence a Receivable in Recipients Accounts Yet • DR Bank • CR Receivables

Goods in Transit • Goods have been sent by one entity, but have not been received by the other • DR Inventory • CR Payables

Unrealized Profits • Occurs when Entity within Group Sells to Another • If the Goods are Still Held within the Group as at the Reporting Date, Profit is Not Realized • Parent Sells – DR Retained Earnings – CR Inventory

Unrealized Profits • Subsidiary Sells • Impacts NCI • DR Post Acquisition Reserves of the Subsidiary within the Group Retained Earnings • DR Post Acquisition Reserves of the Subsidiary within the NCI • CR Inventory

Provisions for Unrealised Profits – Non Current Assets • Happens when Non Current Assets are Sold within the Group • Profit on Disposal Removed from Sellers Books

Parent Sells • DR Retained Earnings of the Parent within the Group Retained Earnings by the Difference in Carrying Amount • CR Property Plant & Equipment by the Difference in Carrying Amount • DR PPE by Diff. in Depreciation • CR Retained Earnings within the Group Retained Earnings

Subsidiary Sells • DR post Acquisition Reserves of the Sub. Within the Group Retained Earnings by the Difference in CA • DR Post Acquisition Reserves of the Subsidiary within the NCI by the Difference in CA • DR PPE by the Difference in CA

Subsidiary Sells • CR PPE By the Difference in CA • CR Post Acquisition Reserves of the Subsidiary within the Group Retained Earnings by the Difference in Depreciation • CR Post Acquisition Reserves of the Subsidiary within the NCI by the Difference in Depreciation

Mid Year Acquisitions • Assume Profits are Earned Evenly Over the Year • Time Apportioned & Added to Reserves Brought Forward

Financial Accounting Consolidated Statement of Financial Position Samantha Karandagoda