Module 5:

Group Accounting
 What you will learn?

 Introduction to group
 Consolidated Statement of Financial Position
 Consolidated Statement of Profit or Loss and
Other Comprehensive Income
 Investment in Associates and Joint Ventures
 Joint Arrangement
 The Effects of Changes in Foreign Exchange Rates
 Introduction to group
Business Combination

Business combination: a transaction or other event in which

the acquirer obtains control of one or more business

Business combinations methods

Direct Indirect
Others
acquisition acquisition

Investor Investors
acquires the acquires shares
assets and in another entity
liabilities of one and obtains
or more business control
 Introduction to group
Definitions

A subsidiary is an entity controlled by another entity

“ An investor controls an investee if it has ALL the following:

 Power over the investee;
 Exposure, or rights, to variable returns from its
involvement with the investee; and
 The ability to use its power over the investee to affect
the amount of the investor’s returns.”

A parent is an entity which controls one or more entities

Group Parent Subsidiaries

 Introduction to group
Definitions

An associate is an entity in which an investor has significant

influence and neither a subsidiary nor a joint venture of the investor

Significant influence: The power to participate in the financial and

operating policy decisions of an economic activity but not comtrol or
joint control over those policies

Non-controlling interests are the “equity in subsidiary not

attributable, directly or indirectly, to a parent.”

For example:
If parent owns 60% of a subsidiary, then the non-controlling interest
percentage is 40%.
 Introduction to group
Group structure types

Group structure type Illustration

Parent

Direct 100% 80% 90%

S1 S2 S3

Parent
60%
Indirect S1
60%
S2

Parent
80%
Mix S1 30%
60%
S2
 Introduction to group
Types of relationships

Company

Control Associate Joint

Control

Wholly Partly
Joint Joint
owned owned
operation venture
subsidiary subsidiary
 Introduction to group
Required treatment in group accounts

Required treatment in
Investment Criteria
group accounts

Control Full consolidation

Subsidiary
(>50% rule) (IFRS 10)

Significant influence Equity method

Associate
(20% + rule) (IAS 28)

Assets held for As for single entity accounts

Trade investment
accreation of wealth (IFRS 9)

 50% rule: investor has control over the investee when it hold more than
50% of the equity interests that carry of voting right in the investee
 20% + rule: investor has significant influence over the investee when it
holds more than 20% of voting power of the investee.
 Introduction to group
Consolidation transaction

Non-controlling owner

P 60% of S 40% of S

Mr.A Mr.B Mr.C

P paid Mr.A, Mr.B, Mr.C, not paid S

Cash paid immediately

Consideration transfer Cash deferred payment

Share exchange
 Introduction to group
Consolidation transaction

Method of consideration transfer Accounting in investor

Dr Investment in subsidiary
Cash paid immediately
Cr Cash

Dr Investment in subsidiary
Cash deferred payment
Cr Liability

Dr Investment in subsidiary
Share exchange Cr Share capital
Cr Share premium (if any)
 Introduction to group
Consolidated FSs package

Consolidated FSs
prepared by parents

Separate FSs of parent

Consolidated FSs
company
 Statement of financial
 Consolidated statement of
position
financial position
 Statement of profit or loss
 Consolidated statement of
and other comprehensive
profit or loss and other
income
comprehensive income
 Statement of cash flow
 Consolidated statement of
 Statement of change and
cash flow
equity
 Introduction to group
Scope of consolidation

Parent should consolidate all subsidiaries, both foreign and

domestic in consolidated financial statements

In the parent’s separate financial statements, investments in

subsidiaries and associates should be recognized according to
one of the following:
 Cost method
 Equity method
 In accordance with IFRS 9
Is wholly-owned subsidiary or
partially owned subsidiary

Does not trade securities

Exemption for publicly
prepare
Is not in the process of issuing
Consolidated FS securities in public securities markets

The ultimate (or intermediate) parent

presents consolidated financial
statements in accordance with IFRSs.
 Introduction to group
Scope of consolidation

Exclusion of a subsidiary from consolidation:

Control must actually be lost

Example: A subsidiary in a foreign country, and this country is

currently at war. The subsidiary cannot transfer profit to its
parent.

If the subsidiary operates under severe long-term restrictions

and these significantly impair its ability to transfer fund to the
parent, the subsidiary is not excluded from consolidation

Subsidiaries held for sale is not excluded from consolidation. In

the separate FSs of parent, the investment in this subsidiary is
disclosed as “disposal group” (According to IFRS 5)
 Introduction to group
Adjustment on consolidated financial statements

Adjustment on the consolidated FSs

Different reporting dates Different accounting policies

between P and S by member of group

Adjust same accounting

≤ 3 months > 3 months
policies

Adjust and
Use the old
use new
statements
statements
 Introduction to group
Principal of consolidation

FSs consolidation

Combine Recognise Eliminate

Assets Goodwill Equity of S

when acquired
Liabilities
Intra-group
Income transactions
Expense

Cash flows
 Introduction to group
Basic Procedure

Combine on a line-by-line basis:

- Assets
- Liabilities
- Equity
- Income
- Expense

Eliminate/Cancel:
- Carring amount of investment in S
- Parent’s portion of equity of S
- Unrealised profit

Adjusted NCI in the net income of S

Present separately NCI in consolidated SOFP

 Consolidated SOFP
Process of consolidation SOFP

Step 1:
Take individual accounts of parent and each subsidiaries and adjust if they
are not prepared in the common basis in term of:
 Accounting policies
 Reporting period ending dates

Step 2:
Combine items of assets, liabilities of parents with subsidiaries

Step 3:
Do the consolidation adjustment by eliminating:
 The carrying amount of parent’s investment in each subsidiary
 Parent’s portion of equity of each subsidiary

Step 4:
Eliminate full intragroup assets, liabilities, equity, income, expenses
relating to the transactions between entities of the group.
 Consolidated SOFP
Step 2: Combine items

Step 2:
Combine items of assets, liabilities of parents with subsidiaries

Assets of Assets of Liabilities of Liabilities of

parent subsidiary parent subsidiary

100% 100% 100% 100%

Assets of group Liabilities of group

 Consolidated SOFP
Step 3: Consolidation adjustment

Step 3:
Do the consolidation adjustment by eliminating:
 The carrying amount of parent’s investment in each subsidiary
 Parent’s portion of equity of each subsidiary

Share Parent only

Group share of post-

Retained 100%
acquisition retained
Earnings Parent
reserves of subsidiary

Consolidation adjustment
 Consolidated SOFP
Step 3: Consolidation adjustment

Step 3:
Do the consolidation adjustment by eliminating:
 The carrying amount of parent’s investment in each subsidiary
 Parent’s portion of equity of each subsidiary

FV of net
Consideration
Goodwill NCI assets
transferred
acquired
Goodwill > 0: Positive goodwill
Goodwill < 0: Negative goodwill (Bargain purchase)

Consideration is measured at fair value, includes contingent

consideration, does not include acquisition cost (recognized in
profit or loss)

The identifiable assets acquired and the liabilities assumed should

be measured at their fair values
 Consolidated SOFP
Step 3: Consolidation adjustment

Step 3:
Do the consolidation adjustment by eliminating:
 The carrying amount of parent’s investment in each subsidiary
 Parent’s portion of equity of each subsidiary

Non-controlling interest

Pre-acquisition NCI
(valued at proportionate share of
subsidiary’s identifiable net assets or FV)

Post-acquisition NCI
(Proportionate share of subsidiary’s net
assets after acquisition date
 Consolidated SOFP
Step 3: Consolidation adjustment

Step 3:
Do the consolidation adjustment by eliminating:
 The carrying amount of parent’s investment in each subsidiary
 Parent’s portion of equity of each subsidiary

A proportion of Partial goodwill

the fair value of (goodwill of the
net assets on the acquiree attributable
can be to the parent and the
measured acquisition date
NCI)
at
NCI

Full goodwill
FV at acquisition (goodwill of the
date acquiree attributable
to the parent only)
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 1: Question

Assume that P Co acquired 100% of S Co on 31/12/2019. The

issued capital of the group is the issued capital of P Co.
Required: Prepare the consolidated statement of financial
position at 31/12/2019

As at 31 December 2019
P Co S Co
Non-current assets:
Tangibles 2,000 500
Investment in Subsidiary 1,000
Net current assets 2,000 500
5,000 1,000

Issued capital 500 1,000

Retained earnings 4,500 __
5,000 1,000
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 1: Answer

Consolidated statement of financial position

31 December 2019

Non-current assets:
Tangibles (2000+500) 2,500
Investment in Subsidiary (cancelled)
Net current assets 2,500
5,000

Issued capital (only parent) 500

Retained earnings 4,500
5,000
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 2: Question

Assume that P Co acquired 100% of S Co 2 years ago.

Subsidiary's reserves were $100 at the date of acquisition.
Goodwill has been impaired by $80 since the date of acquisition
Required: Prepare the consolidated statement of financial
position at 31/12/2019

As at 31 December 2019
P Co S Co
Non-current assets:
Tangibles 1,400 1,000
Investment in Subsidiary 1,200
Net current assets 700 600
3,300 1,600
100 900
Issued capital 3,200 700
Retained earnings 3,300 1,600
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 2: Answer

Consolidated statement of financial position

31 December 2019

Non-current assets:
Goodwill 120
Tangibles 2,400
Net current assets 1,300
3,820

Issued capital 100

Retained earnings 3,720
3,820
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 3: Question

Assume that P Co acquired 80% of S Co 2 years ago.

Subsidiary's reserves were $150 at the date of acquisition.
Goodwill has been impaired by $200 since the date of acquisition.
NCI in valued at the proportionate share of the subsidiary's
identifiable net assets
Required: Prepare the consolidated SOFP at 31/12/2019

As at 31 December 2019
P Co S Co
Non-current assets:
Tangibles 1,000 600
Investment in Subsidiary 1,200
Net current assets 500 600
2,700 1,200
Issued capital 100 50
Retained earnings 2,600 1,150
2,700 1,200
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 3: Answer

Consolidated statement of financial position

31 December 2019

Non-current assets:
Goodwill 840
Tangibles 1,600
Net current assets 1,100
3,540

Issued capital 100

Retained earnings 3,200
Non-controlling interest 240
3,540
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 4: Question

Assume that P Co acquired 80% of S Co 2 years ago.

Subsidiary's reserves were $150 at the date of acquisition.
Goodwill has been impaired by $200 since the date of acquisition.
NCI in valued at the proportionate share of the subsidiary's identifiable
net assets. The market price of a share in the subsidiary at the date of
acquisition was $29.60.
Required: Prepare the consolidated SOFP at 31/12/2019

As at 31 December 2019
P Co S Co
Non-current assets:
Tangibles 1,000 600
Investment in Subsidiary 1,200
Net current assets 500 600
2,700 1,200
Issued capital 100 50
Retained earnings 2,600 1,150
2,700 1,200
 Consolidated SOFP
Example: Simple consolidated statement of financial position

Example 4: Answer

Consolidated statement of financial position

31 December 2019

Non-current assets:
Goodwill 1,096
Tangibles 1,600
Net current assets 1,100
3,796

Issued capital 100

Retained earnings 3,240
Non-controlling interest 456
Non-current assets: 3,796
 Consolidated SOFP
Step 4: Eliminate intragroup items and transactions

Step 4:
Eliminate full intragroup assets, liabilities, equity, income, expenses
relating to the transactions between entities of the group.

Inter-company transactions elimination

Inter-company balances Unrealized profit

Non-current assets
Inventory
transfer
 Consolidated SOFP
Step 4: Eliminate intragroup items and transactions

Eliminate inter-company balances

Receivables and payables

(in the statement of financial position)
Inter-company
balances are
cancelled when
members of
group trade
with each other
Income and expense
(in the statement of comprehensive
income)
 Consolidated SOFP
Example: Eliminate the inter-company balances

A Co regularly sells good to its one subsidiary company, B Co, which it has
owned since B Co’s incorporation.
The statement of financial position of the two company on 31/12/2019
are given below:

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019

A Co ($) B Co ($)
ASSETS
Non-current assets:
Property, plant and equipment 35,000 45,000
Investment in 40,000 $1 share in S Co at
40,000
cost
75,000

Current assets:
Inventories 16,000 12,000
Trade receivables: B Co 2,000 _
Other 6,000 9,000
Cash and cash equivalents 1,000 ______
Total assets 100,000 66,000
 Consolidated SOFP
Example: Eliminate the inter-company balances

A Co regularly sells good to its one subsidiary company, B Co, which it has
owned since B Co’s incorporation.
The statement of financial position of the two company on 31/12/2019
are given below:

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019

A Co ($) B Co ($)
EQUITY AND LIABILITIES
Equity
40,000 $1 ordinary shares _ 40,000
70,000 $1 ordinary shares 70,000 _
Retained earnings 16,000 19,000
86,000 59,000
Current liabilities
Bank overdraft 3,000
Trade and other payables: A Co 2,000
Trade and other payables: Other 14,000 2,000
Total equity and liabilities 100,000 66,000
Required: Prepare the consolidated statement of financial position of
Park Co at 31/12/2019
 Consolidated SOFP
Example: Eliminate the inter-company balances
Consolidated statement of financial position of A Co
ASSETS
Non-current assets:
Property, plant and equipment 80,000

Current assets:
Inventories 28,000
Trade receivables: 15,000
Cash and cash equivalents 1,000
Total assets 44,000
124,000
EQUITY AND LIABILITIES
Equity
70,000 $1 ordinary shares 70,000
Retained earnings 35,000
105,000
Current liabilities
Bank overdraft 3,000
Trade and other payables 16,000
19,000
 Consolidated SOFP
Step 4: Eliminate intragroup items and transactions

Eliminate unrealised profit in inventory

Unrealised profit
in inventory

Seller is the parent Seller is the subsidiary

Profit included in Profit included in

parent’s RE subsidiary’s RE

Dr Group RE Dr Subsidiary RE
Cr Group Inventory CR Group Inventory
 Consolidated SOFP
Example: Eliminate unrealised profit in inventory

Example 1: Question

Parent owns 80% of Subsidiary. During the current accounting

period,
Parent transferred goods to Subsidiary for $4,000, which gave
Parent a profit of $1,000. These goods were included in the
inventory of Subsidiary at the end of the reporting period.
Required: Calculate the adjustment in the consolidated statement
of financial position.

Example 1: Answer

DR Retained Earnings 1,000

CR Inventory 1,000
 Consolidated SOFP
Example: Eliminate unrealised profit in inventory

Example 2: Question

Parent owns 80% of Subsidiary.

During the current accounting period, Subsidiary sold goods to
Parent for $18,000, which gave Subsidiary a profit of $6,000.
At the end of the reporting period, half of these goods are
included in Parent's inventory.
At the end of the reporting period, Parent's accounts showed
retained profits of $100,000, and Subsidiary's accounts showed
net assets of $75,000, including retained profits of $65,000.
Subsidiary had retained profits of $20,000 at acquisition. Ignore
goodwill.
Required: Show the adjustment to eliminate unrealised profits in
the consolidation workings for Parent.

Example 2: Answer

DR Retained Earnings (1/2 x 6,000) 3,000

CR Inventory 3,000
 Consolidated SOFP
Example: Eliminate unrealised profit in inventory

Example 2: Answer

WORKINGS Reporting date Acquisition date

(1) Subsidiary’s net assets

Issued capital 10,000 10,000

Retained earnings

As given 65,000 20,000

Unrealised profit (3,000) 62,000

72,000 30,000

(2) Non-controlling interests

Share of net assets (20% x 72,000) 14,400

(3) Retained earnings

Parent (as given) 100,000

Share of subsidiary (80% x (62,000 – 20,000) 33,600

133,600
 Consolidated SOFP
Step 4: Eliminate intragroup items and transactions

Eliminate non-current assets transfer

 The intra-group trading may include the non-current

asset,which is used by the entity rather than being sold
onwards.
 Adjustment is taken by assuming that no transfer has been
made

Consolidation adjustments for

non-current asset transfer

Eliminate the profit Adjust the depreciation

 Consolidated SOFP
Example: Eliminate unrealised profit in NCA transfer

Parent owns 80% of Subsidiary.

Parent transferred an asset to Subsidiary at a value of $12,000

on 1/1/2019. The original cost to Parent was $20,000 and the
accumulated depreciation at the date of transfer was $10,000.
The asset had a useful life of 8 years when originally acquired,
with a residual value of zero. The useful life at the date of
transfer remains at 4 years. Full allowance is made for
depreciation in the year of purchase and none in the year of sale.

Required: Calculate the adjustments for the consolidated

financial statements at 31/12/2019.
 Consolidated SOFP
Example: Eliminate unrealised profit in NCA transfer
Amounts if no
Amounts in
transfer had Adjustment
the accounts
occurred

CA at 1/1/2019 12,000 10,000

Charge for the year 2019 3,000 2,500 500

 Allocate
 Adjust increase Retained  Adjust  Adjust
this to
Eeanings of subsidiary, Parent’s NCI=500*20
Parent’s
because it’s depreciation of shareholder % =100
shareholder
PPE of Subsidiary after 1/1/19 =500*80%=400
and NCI

Profit on disposal 2,000

Because
 Adjust decrease Retained
Parent sell to
Eeanings of Parent
subsidiary

 Accounting treatment

Dr Parent’s shareholder
1,600
(2,000-400)

Cr NCI 100

Cr PPE (2,000-500) 1,500

 Consolidated SOPLOCI
Process of consolidation SOPLOCI

Step 1:
Draw up the group structure and where subsidiaries/ associates
are acquired in the year identify the proportion to consolidate

Step 2:
Draw up the pro-forma statement

Step 3:
Calculate income/expenses, subsidiary’s profit for the year (PFY),
total comprehensive income (TCI), associate’s PFY and other
comprehensive income (OCI)

Step 4:
Calculate necessary adjustments

Step 5:
Calculate ‘Share of profit of associate’ and ‘Share of other
comprehensive income of associate’

Step 6:
Complete non-controlling interest in subsidiary’s PFY and TCI
 Consolidated SOPLOCI
Step 1: Draw up the group structure

Step 1:
Draw up the group structure

Date of acquisition 80%

This indicates that P owns 80% of the ordinary shares of S and

when they were acquired.

This drawing will show how much of subsidiary owned by P and

how long P control over S.
 Consolidated SOPLOCI
Step 2: Draw up the pro-forma statement

Step 2:
Draw up the pro-forma statement

2018 2019 2020 2021 2022

Gross Profit 709,500 752,070 794,494 844,265 893,873

Expenses

Salaries 473,000 473,000 473,000 579,000 635,000

Payroll taxes 42,570 42,570 42,570 52,110 57,150

IT 42,500 30,206 30,206 30,206 30,206

Marketing 46,500 46,500 46,500 46,500 46,500

Depreciation 30,000 30,000 30,000 30,000 30,000

Interest 11,700 11,700 11,700 11,700 11,700

Total Expenses 646,270 633,976 633,976 749,516 810,556

Net Income 63,230 118,094 160,518 94,749 83,317

 Consolidated SOPLOCI
Step 3: Calculate income/expense, PFY, TCI, OCI

Step 3:
Calculate income/expenses, subsidiary’s profit for the year
(PFY), total comprehensive income (TCI), associate’s PFY and
other comprehensive income (OCI)

100% Parent + 100% Subsidiary × Time

Income and expense
apportioned × X/12

Dividends receivable Omit the amount from subsidiary

 Consolidated SOPLOCI
Step 4: Calculate necessary adjustments

Step 4:
Calculate necessary adjustments

Necessary adjustments

Intra-group Further
Dividends
trading adjustments

 Impairment of
 Sales
goodwill
 Interest
 Fair values
 Non-current
 Mid-year
asset tranfers
acquisitions
 Inventory
 Disposal
 Consolidated SOPLOCI
Step 4: Calculate necessary adjustments

Step 4:
Calculate necessary adjustments

Intra-group trading

 Consolidated sales revenue = P’s revenue + S’s

revenue – Intra-group revenue
Sales
 Consolidated cost of sales (COS)= P’s COS + S’s COS –
Intra-group COS

Loan and interest from outstanding loan between group

Interest
entities must be eliminated in the consolidated FS

 Remove profit or loss on transfer of NCA

Non-current
 Adjust the depreciation charge based on the cost of
asset transfer
asset to the group

 Value of goods sold intra-group included in closing

Inventory inventory must be added to cost to the group
 Reduce NCI based on the unrealized profit from
 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 1: Question

Whales owns 75% of Porpoise.

During the year, Porpoise made sales to Whales amounting to
$30,000. Of these sales, $15,000 was in inventory at the year end.
Profit made on the year-end inventory items amounted to $2,000.

The trading account for each company for the year ended 31
March is as follows:

Whales Porpoise
$ $
Revenue 120,000 70,000
Cost of sales (80,000) (50,000)
Gross profit 40,000 20,000

Required: Calculate group revenue, cost of sales and gross profit.

 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 1: Answer

Whales Purpoise Adjustment Consolidated

$’000 $’000 $’000 $’000

Revenue 120 70 (30) 160

Costs of sales
80 50 (30) 100
– per question

- Unrealised profit (2) (2)

Gross profit 40 20 (2) 58

Attributable to
Non-controlliing interest 4,5
(25% x 18,000)

Attributable to parent’s
shareholder 53,5
(40,000 + 75%x18,000)
 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 2: Question

Parent owns 80% of Subsidiary. Parent transferred a non-current

asset to Subsidiary on 1/1/2019 at a value of $15,000. The asset
originally cost Parent $20,000 and depreciation to the date of
transfer was $8,000. The asset had a useful life of 5 years when
originally acquired, with a residual value of zero. The useful life at
the date of transfer remains at 3 years. Both companies
depreciate their assets at 20% per annum on cost, making a full
year's depreciation charge in the year of acquisition and none in
the year of disposal. Total depreciation for 2014 was $700,000 for
Parent and $500,000 for Subsidiary.

Required: Show the adjustments required for the above

transaction in the consolidated statement of profit or loss for the
year ended 31/12/2019.
 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 2: Answer

Parent Subsidiary Adjustment Consolidated

$ $ $ $

Per question 700,000 500,000 1,200,000

Asset
unrealised 3,000 3,000
profit (*)

Depreciation
adjustment (1,000) (1,000)
(**)

1,202,000

(*) Asset unrealised profit: [15,000 – (20,000 – 8,000)]

(**) Depreciation adjustment: (15,000 / 3 years) – 4,000
 Consolidated SOPLOCI
Step 4: Calculate necessary adjustments

Step 4:
Calculate necessary adjustments

Dividends and further adjustment

Dividend from S must be removed

On
consolidated
financial
statement
Dividend from P’s own shareholder is kept
 Consolidated SOPLOCI
Step 4: Calculate necessary adjustments

Step 4:
Calculate necessary adjustments

Expense in P&L statement

Impairment
of Goodwill Remove impairment expense from
NCI profit if NCI valued at FV

Additional depreciation must be

charged to P&L
Further Fair Value
adjustment Depreciation charged must be based
on FV

Mid-year S’s results be consolidated from the

acquisitions date of acq only (post-acq)
 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 3: Question

Pathfinder owns 75% of Sultan. During the year, Pathfinder sold

goods to Sultan for $20,000, at a gross profit margin of 40%. Half of
the goods remained in inventory at the year end. Non-controlling
interest is valued at fair value on acquisition. Goodwill has been
impaired by $4,000 in the year ended 30 June.
Statements of profit or loss for the two companies for the year
ending 30 June are as follows:

Pathfinder ($) Sultan ($)

Revenue 100,000 50,000

Cost of sales (60,000) (30,000)

Gross profit 40,000 20,000

Expenses (20,000) (10,000)

Profit for the period 20,000 10,000

Required: Prepare the consolidated statement of profit or loss of the
group for the year ended 30 June.
 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 3: Answer

Consolidated statement of profit or loss for the year ended 30 June:

Revenue 130,000

Cost of sales (74,000)

Gross profit 56,000

Expenses (30,000)
Goodwill (4,000)

Profit 22,000

Non-controlling interest (1,500)

Profit for the period 20,500

 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 4: Question

Parent acquired 75% of Subsidiary during the year on 1 April. Since

acquisition, the Parent has made sales to the Subsidiary of $15,000.
None of these goods remain in inventories at the year end.
Extracts from the companies' statements of profit or loss for the year
ended 31 December are:

Parent Subsidiary
$ $

Revenue 100,000 75,000

Cost of sales (70,000) (60,000)

Gross profit 30,000 15,000

Required: Calculate revenue, cost of sales and gross profit for the
group for the year ending.
 Consolidated SOPLOCI
Example: Calculate necessary adjustment

Example 4: Answer

Parent Subsidiary Adjustment Consolidated

$ $ $ $

Revenue 100,000 56,250 (15,000) 141,250

Cost of sales (70,000) (45,000) 15,000 (100,000)

Gross profit 30,000 11,250 0 41,250

 Consolidated SOPLOCI
Step 5: Calculate share of profit and OCI of associate

Step 5:
Calculate ‘Share of profit of associate’ and ‘Share of other
comprehensive income of associate’

A’s profit for the year (PFY) x Group % X

Any group impairment loss on associate in the period (X)

Shown before group profit before tax X

A’s other comprehensive income (OCI) x Group% X

 Consolidated SOPLOCI
Step 6: Complete NCI in subsidiary’s PFY and TCI

Step 6:
Complete non-controlling interest in subsidiary’s PFY and TCI

PFY/TCI per question (time-apportioned) (x/12) X

Any group impairment loss on associate in the period (X)

Shown before group profit before tax X

A’s other comprehensive income (OCI) x Group% X

IAS 27 Separate Financial Statements
Accounting treatment

Account for investment in subsidiary, associates

and joint ventures in separate FSs

In accordance to
Using equity IFRS 9 –
At cost
method Recognition and
Measurement
IAS 28Investments in Associates and Joint Ventures
Definition of Associate

An associate is an entity over which an investor has

significant influence and which is neither a subsidiary nor an
interest in a joint venture

Significant influence include:

- Power to participate in policy-making process
- Representation on the BOD
- Interchange of management personel
- Provision of essential technical information

In general, if A owns 20% or more of the voting right in B,

A has significant influence on B
IAS 28Investments in Associates and Joint Ventures
Equity method

Initial
Cost
recognition

Share of the net

Subsequent retained post acquisition
adjustment profit or loss of the
associate
Equity
metho Test for Indications of
d impairment impairment

Recognize share of
SOPL&OCI profit after tax and share
of OCI

Unrealised
Eliminate to the extent
profits and
of investor’s interest
losses
IAS 28Investments in Associates and Joint Ventures
Example

Question

P Co, a company with subsidiaries, acquires 25,000 of the 100,000

$1 ordinary shares in A Co for $60,000 on 1/1/2019. In the year to
31/12/2019, A Co earns profits after tax of $24,000, from which it
pays a dividend of $6,000.

How will A Co's results be accounted for in the individual and

consolidated accounts of P Co for the year ended 31/12/2019?
IAS 28Investments in Associates and Joint Ventures
Example

Answer

In the individual accounts of P Co, the investment will be recorded

on 1/1/2019 at cost. This amount will remain in the individual
statement of financial position of P Co permanently (unless there
is an impairment in the value of the investment)
For the year end 31/12/2019, P Co will:

DR Cash 1,500
CR Income from shares in associates 1,500

In the consolidated FSs, P Co equity accounting principles will be

used to account for the investment in A Co.
Consolidated profit after tax will include the group's share of A
Co's profit after tax (25% x $24,000 = $6,000).
DR Investment in associates 4,500
CR Share of profit of associates 4,500
'Investment in associates' is then stated at $64,500, being cost
plus the group share of post-acquisition retained profits.
IFRS 11 Joint arrangements
Definitions

A joint arrangement is an arrangement of which

two or more parties have joint control

Joint control require:

- A contractual arrangement
- Unanimous consent

Contractual arrangement:
- Contract between the parties.
- Minutes of discussion between the parties
- Incorporation in the articles or by laws of the joint
venture
 IFRS 11 Joint arrangements
Types of joint arrangement

Joint arrangement

Joint operation Joint venture

Parties have rights to Parties have rights to

the assets and the net assets and
obligations for the obligations for the
liabilities, relating to the liabilities, relating to the
arrangement arrangement

Joint operator Joint venturer

 IFRS 11 Joint arrangements
Example

40%
A Co
30%
ABC Co B Co
30%
C Co

Decisions require a majority of 70%

A Co B Co Decisions
without No joint
unanimous control
A Co C Co consent

A and B (or C) must Unanimous Joint

agree to reach 70% consent control
 IFRS 11 Joint arrangements
Joint operations accounting

its assets, including its share of any

assets held jointly

its liabilities, including its share of

A joint any liabilities incurred jointly
operator
recognises in its revenue from the sale of its
relation to its share of the output of the joint
interest in a operation
joint
operation its share of the revenue from the
sale of the output by the joint
operation

its expenses, including its share of

any expenses incurred jointly
 IFRS 11 Joint arrangements
Joint venture accounting

Individual financial statements

 An investment in a joint venture can be accounted for:

₋ at cost
₋ in accordance with IFRS 9 Financial Instruments
₋ by using the equity method.

Consolidated financial statements

 The interest in the joint venture entity will be accounted

for using the equity method
 Identical to the treatment of an associate
 IFRS 11 Joint arrangements
Example of Joint venture accounting

A Co has a 30% share in a joint operation. Activities related to joint

arrangement for year ended 31 Dec 2019:
 The manufacturing facility cost $30m to construct was
completed on 1 Jan 2019, and is to be dismantled at the end of
its estimated useful life of 10 years. The present value of this
dismantling cost to the joint arrangement at 1 Jan 2019, using a
discount rate of 8%, was $3m.
 During the year, the joint operation entered into the following
transactions:
₋ goods with a production cost of $36m were sold for $50m
₋ other operating costs incurred amounted to $1m
₋ administration expenses incurred amounted to $2m.
 A co has only accounted for its share of the cost of the
manufacturing facility, amounting to 30% (30m + 3m) = $9.9m.
The revenue and costs are receivable and payable by the 02
other joint operation partners who will settle amounts
outstanding with Blast after each reporting date.

Required: Show how Blast will account for the joint operation
within its financial statements for the year ended 31 Dec 2019.
IFRS 11 Joint arrangements
Example of joint venture accounting

Profit or loss impact $m

Revenue ($50m x 30%) 15.000

Cost of sales ($36m x 30%) (10.800)

Operating costs ($1m x 30%) (0.300)

Depreciation (($30m + 3m) x 1/10 x 30%) (0.990)

Administration expense ($2m x 30%) (0.600)

Finance cost ($3m x 8% x 30%) (0.072)

Share of net profit of joint operation

2.238
(include in retained earnings with SOFP)
 IFRS 11 Joint arrangements
Example of joint venture accounting

Statement of financial position impact: $m

Property, plant and equipment (amount paid = share of cost) 9.000

Dismantling cost ($3m × 30%) 0.900

Depreciation ($33m × 1/10 × 30%) (0.990)

8.910
Non-current liabilities:

Dismantling provision (($3m × 30%) + $0.072) 0.972

Current liabilities:

Trade payables ($10.8m + $0.3m + $0.6m) (i.e. share of

expenses to pay)
11.700

The amounts calculated above should be classified under the appropriate

headings within the statement of profit or loss for the year or statement
of financial position as appropriate.
Note also that where there are amounts owed to and from a joint
operating partner, it may be acceptable to show just a net amount due to
or from each partner.
 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Types of currency

Currency

Functional currency Presentation currency

The currency in which the

The currency of the financial statements are
primary economic presented.
environment in which This may be any
the entity operates. currency, it is not
stipulated by IAS 21
 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Types of currency

Example

Sell goods
US Vietnam Report in
USD
UK
UK parent
customer entity
Payment

Functional currency: VND Presentation currency: Pound

 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Types of rate

Rate in place at the date the

transaction takes place,
Historical rate (HR)
sometimes referred to as
the spot rate

Closing rate (CR) Rate at reporting date

Average rate through the

Average rate (AR)
accounting period
 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Recognition

Record transaction initially at exchange rate on date of transaction

Monetary items Non-monetary items

e.g receivables e.g inventory and NCA

Retranslate at each
Measured Measured
reporting date using CR (year
at fair value at cost
end exchange rate)

When settled at
cash, record at Retranslate
exchange rate on when FV is
settlement date determined
Do not
using
translate
exchange
Exchange differences rate on that
recognized in profit or loss date
 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Foreign operations

A foreign operation is a subsidiary, associate, joint venture, or

branch whose activities are based in a country other than that
of the reporting entity.

The FSs of a Translate to Group presentation

foreign operation currency
 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Foreign operations

SOPL&OCI of foregin
SOFP of foregin operation
operation
 Income and expenses at
 Assets and liabilities at CR
spot rate on date of
 Pre-acquisition equity and
transaction; or
reserves at exchange rate
 average rate for the year
on acquisition date
as an approximation

Exchange difference on translation

recognized in OCI of foreign operation
Goodwill
arises on
Exchange difference on translation of
consolidation.
goodwill recognized in OCI
Transalte on
closing rate Cumulative exchange differences in
separate component of equity reclassified
to profit or loss on disposal of foreign
operation
 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Example

Question

 On 18 Aug 2019 ABC Co, which has the USD as functional currency,
bought a property from Vietnam, which costs 220million VND.
 ABC Co applies the IAS 16 revaluation model to its property,
however a valuation exercise at 31 Dec 2019 reveals that the fair
value of the property is not significantly different from carrying
amount.
 200 million VND was paid by ABC Co on 18 Aug; the remaining
amount was paid on 31 Oct 2019. Exchange rates were:

18 Aug 2019: 23 VND/1 USD

31 Oct 2019: 24 VND/1 USD
31 Dec 2019: 25 VND/1 USD
Require:
1. What amount is the property initially recognised on 18 Aug 2019?
2. Should the property be retranslated at 31 Dec 2019 using CR?
3. What exchange gain or loss arises on settlement of the amount
payable to the property vendor?
 IAS 21 The Effects of Changes in
Foreign Exchange Rates
Example

Answer

1. What amount is the property initially recognised on

18/8/2019?
$9,565m (220/23)
2. Should the property be retranslated at 31 Dec 2019
using CR?
No
A revalued property is retranslated when a revaluation
takes place, using the exchange rate at that date. No
revaluation has taken place in this case as fair value is not
significantly different from carrying amount.
3. What exchange gain or loss arises on settlement of the
amount payable to the property vendor?
$0,069m
Initial payble: $0,869m (20/23)
Settlement amount: $0,8 (20/25)
Recognize a gain: $0,069m