BKAF3073 Chapter 4

Complex Group Structure

Learning Objectives:• To understand complex group structure• To calculate the direct and indirect interest for

group and NCI• To understand the consolidation techniques

for – multiple direct subsidiaries– indirect subsidiaries

• To prepare the consolidated SCI and consolidated SFP

Group Structures

• Multiple direct subsidiary

• Father-son-grandson (Vertical Group)

• Mixed Group (Connection affiliation)

• Cross holding (reciprocal shareholding)

Multiple Direct Subsidiaries

• Parent owns shares directly in more than one subsidiary, known as a group of multiple direct subsidiaries:

Parent

70% 60% 90%

Sub. A

Sub. B

Sub. C

Multiple Direct Subsidiaries

• For each acquisition (subsidiary), the cost of investment & NCI are compared with the fair value of identifiable net assets to determine the goodwill

• Same consolidation adjustment technique applied for each subsidiary

• Goodwill, NCI and post-acquisition reserves of each individual acquisition are then combined for presentation in CFS

Father-Son-Grandson Structure (Vertical Group)

• The parent company holds a controlling interest in a subsidiary, which in turn has a controlling interest in another company

• Ex:

• B is an indirect subsidiary of P

P

A

B

75%

60%

Father-Son-Grandson Structure

• Parent’s interest in a subsidiary is held indirectly via one or more other subsidiaries

Ultimate Parent P BHD.

75%

NCI 25%Direct Subsidiary A BHD.

45% 15% 60%

Indirect Subsidiary B BHD. NCI 40%


• Parent and NCI in Subsidiary A and B can be calculated as follows:

• A Bhd. is immediate parent of B Bhd

A Bhd. B Bhd.Parent interest: Direct Indirect 0.75 x 60%

75%45%

NCI: Direct Indirect 0.25 x 60%

25% 40%15%


• In practice, if A Bhd. not wholly-owned by P Bhd., 2 sets of group accounts must be prepared– A Bhd. and its subsidiary B Bhd.– P Bhd. and its subsidiary A sub-group

• If A Bhd. is wholly-owned by P Bhd. it need not present group

accounts • MFRS 127 - wholly-owned and virtually wholly-owned (owns

90% or more of the voting power) allowable. • Co Act 1965 - only wholly-owned parents to be exempted from

presenting CFS.

Indirect Subsidiary

80% 60%

NCI 20% 42% 40% NCI

6% 30% 30% 12%

40% NCI

Parent P Bhd

Subs B BhdSubs A Bhd

Subs C Bhd

Indirect Subsidiary• Parent and NCI in Subs A, B and C can be

calculated as follows:A Bhd B Bhd C Bhd

Parent interest:DirectIndirect: via A Bhd 0.80 x 30% via B Bhd 0.60 x 30%

80% 60%

24%18%42%

NCIDirectIndirect via A Bhd 0.20 x 30% via B Bhd 0.40 x 30%

20% 40% 40%

6%12%58%

100% 100% 100%

Indirect Subsidiaries

Note:• C is deemed to be subs of P. P indirect

interest in C is 42% but can exercise 60% of voting power on C as a group via shares held by A and B.

• For consolidation: effective 42% indirect interest will be used as far as members of the parent are concerned.

Mixed Group (Connecting Affiliation)

• The parent company holds a controlling interest in a subsidiary, and both the parent and that subsidiary have an interest in another company

• Ex: A

B

C

70%

40%

C is a subsidiary of A

30%

80% 15% P’s indirect

Interest

48% (80% x 60%)

60%

20% 12% 25%

NCI Indirect NCI NCI

P Bhd

B BhdA Bhd

Connecting Affiliation

• Parent and NCI in the subsidiaries can be determined as follows:


A Bhd B BhdParent interest:DirectIndirect 0.80 x 60%

80% 15%48%63%

NCI:DirectIndirect 0.20 x 60%

20% 25%12%

37%100% 100%

60% 30% P’s indirect

Interest

18%

30%

40% 12% 40%

NCI Indirect NCI NCI

P Bhd

B BhdA Bhd


• Parent and NCI in the subsidiaries can be determined as follows:


A Bhd B BhdParent interest:DirectIndirect 0.60 x 30%

60% 30%18%48%

NCI:DirectIndirect 0.40 x 30%

40% 40%12%

52%100% 100%

• Though P’s effective direct and indirect interest in B Bhd is only 48%, B Bhd is deemed a subsidiary of P Bhd because the group (P+A) as a whole can control 60% of the voting power in B Bhd.


Consolidation technique for Indirect Subsidiaries

• Where sub-groups exist in a group structure, more than one set of group accounts must be prepared if the immediate parents are not wholly-owned

• Method:1. stage-by-stage method

(multiple-stage /consolidation of consolidation)

2. one-stage method

(indirect interest method/ short-cut technique)

Stage-by-stage method

• sub-groups account at the lowest tier of the vertical structure are prepared first

• the consolidation is repeated by progressing stage-by-stage upwards until it reaches the highest tier of the ultimate parent group accounts

• at each subsequent level, Goodwill to indirect NCI is excluded by debiting NCI account in the CSFP (IF NCI measured at proportionate of net assets)

One-stage method

• consolidation adjustments are made by reference to the ultimate parent’s effective indirect interests in the indirect subsidiaries.

• in matching the cost of investment with the ultimate parent’s effective share of net assets in an indirect subsidiary, the portion of the cost attributable to NCI in the immediate parent is excluded and charged to NCI account

– this exclusion is necessary if goodwill is to reflect only the ultimate parent’s proportionate share

Example 1: Father-Son-Grandson Structure

• ULT Bhd acquired a 60% interest in the equity capital of IMM Bhd on 31 December 2005 when the net assets of the latter were RM3,000,000. On the same day, IMM Bhd acquired a 75% interest in the equity capital of SUB Bhd and the net assets of the latter on that date were RM2,500,000.

• The draft statement of financial position of the three companies on 31 December 2005, the acquisition date, were as follows:

Example 1

Share Capital of RM1 each

Reserves

ULT Bhd IMM Bhd SUB Bhd

RM’000 RM’000 RM’000

4,000 2,000 1,000

2,000 1,000 1,500

6,000 3,000 2,500

Investment in IMM Bhd

Investment in SUB Bhd

Sundry net assets

2,800 - -

- 2,675 -

3,200 325 2,500

6,000 3,000 2,500

Example 1

REQUIRED:

1. Calculate the goodwill arising on consolidation that should be reflected in the ULT Bhd’s group accounts (NCI measured at proportionate of net asset).

2. Show the consolidation adjustments required and draft the group accounts of ULT Bhd, using both methods, independently.

Solution: NCI measured at proportionate of net asset

IMM Bhd and SUB Bhd RM’000

COI 2,675

NCI (2500 x 25%) 625

3,300

(-)FV of NIA (1,000 +1,500) 2,500

Goodwill 800

ULT Bhd and IMM Bhd

COI 2,800

NCI (3000 x 40%) 1,200

4,000

(-) FV of NIA (2,000 +1,000) 3,000

Goodwill 1,000

Solution• Therefore, the goodwill that should be reflected in the ULT

Bhd’s group accounts would consist of:

* The portion of the goodwill in the sub-group that belongs to NCI in IMM Bhd is RM320,000 (40% x RM800,000) should be EXCLUDED as far as ULT Bhd is concerned.

The whole goodwill arising on acquisition of IMM Bhd RM1,000

ULT Bhd’s share of goodwill in the sub-group of IMM Bhd and SUB Bhd (60% x 800) 480

1,480

Solution

(i) Stage by stage method: Stage 1: Consolidate IMM Bhd and SUB Bhd as follows:

CJE:

(a) Share Capital SUB 750

Reserves SUB 1,125

Goodwill on con 800

Investment in SUB 2,675

(b) Share Capital SUB 250

Reserves SUB 375

NCI (SFP) 625

SolutionIMM SUB Consolidation

adjustmentSub-group

RM’000 RM’000 RM’000 RM’000 RM’000

Share Capital

Reserves

NCI

Investment in SUBGoodwill

Sundry net assets

2,000

1,000

-3,0002,675

-

3253,000

1,000

1,500

-2,500

--

2,5002,500

(a) 750(b) 250(a)1,125(b) 375

(a) 800

(b) 625

(a)2,675

2,000

1,000

6253,625

-800

2,8253,625

SolutionStage 2: Consolidate ULT Bhd and sub-Group as follows:

CJE:

(a) Share Capital IMM 1,200

Reserves IMM 600

Goodwill on con 1,000

Investment in IMM 2,800

(b) Share Capital IMM 800

Reserves IMM 400

NCI (SFP) 1,200

(c) NCI (SFP) 320

Goodwill on consolidation 320 (40% x 800)

SolutionULT Bhd Sub-

GroupConsolidation adjustment

Sub-UltimateGroup

RM’000 RM’000 RM’000 RM’000 RM’000

Share Capital

Reserves

NCI

Investment in IMMGoodwill

Sundry net assets

4,000

2,000

-6,0002,800

-

3,2006,000

2,000

1,000

6253,892

-800

2,8253,892

(a)1,200(b) 800(a) 600(b) 400(c) 320

(a)1,000

(b)1,200

(a)2,800(c) 320

4,000

2,000

1,5057,505

-1,480

6,0257,505

Solution

(ii) One-stage consolidation

IMM Bhd. SUB Bhd.

Parent interest:DirectIndirect 60% x 75%

60%-

-45%

NCI:DirectIndirect 40% x 75%

40%-

25%30%

100% 100%

Solution

CJE:

(a)Share Capital of IMM (600 x 2,000) 1,200

Reserves of IMM (60% x 1,000) 600



(b) Share Capital of IMM (40% x 2,000) 800

Reserves of IMM (40% x 1,000) 400

NCI (SFP) 1,200

Solution

(c) Share Capital of SUB (45% x 1,000) 450

Reserves of SUB (45% x 1,500) 675

NCI (SFP) (40% x 2,675) 1,070

Goodwill on con (60%x 800) 480


(d) Share Capital of SUB (55% x 1,000) 550

Reserves of SUB (55% x 1,500) 825

NCI (SFP) 1,375

ULT Bhd IMMBhd

SUBBhd

Consolidation adjustment

Sub-UltimateGroup

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000Share Capital

Reserves

NCI

Investment in IMMInvestment in SUBGoodwill

Sundry net assets

4,000

2,000

-

6,0002,800

--

3,200

2,000

1,000

-

3,000-

2,675-

325

1,000

1,500

-

2,500---

2,500

(a)1,200(b) 800(c) 450(d) 550(a) 600(b) 400(c) 675(d) 825(c)1,070

(a)1,000(c) 480

(b)1,200(d)1,375

(a)2,800(c)2,675

4,000

2,000

1,505

7,505--

1,480

6,0256,000 3,000 2,500 7,505

Example 2: (NCI measured at FV)Father-Son-Grandson Structure

• ULT Bhd acquired a 60% interest in the equity capital of IMM Bhd on 31 December 2005 when the net assets of the latter were RM3,000,000. On the same day, IMM Bhd acquired a 75% interest in the equity capital of SUB Bhd and the net assets of the latter on that date were RM2,500,000.

• The draft statement of financial position of the three companies on 31 December 2005, the acquisition date, were as follows:

Example 2

Share Capital of RM1 each

Reserves

ULT Bhd IMM Bhd SUB Bhd

RM’000 RM’000 RM’000

4,000 2,000 1,000

2,000 1,000 1,500

6,000 3,000 2,500

Investment in IMM Bhd

Investment in SUB Bhd

Sundry net assets

2,800 - -

- 2,675 -

3,200 325 2,500

6,000 3,000 2,500

Example 2

REQUIRED:

1. Calculate the goodwill arising on consolidation that should be reflected in the ULT Bhd’s group accounts (NCI measured at fair value)

2. For each of the two methods on consolidation, show the consolidation adjustments required and draft the group accounts of ULT Bhd.

Solution

Goodwill on consolidation (NCI measured at fair value):

IMM Bhd and SUB Bhd RM’000

COI 2,675

NCI (2,675/0.75 x 25%) 892

(-)FV of NIA (1,000 +1,500) 2,500

1,067

ULT Bhd and IMM Bhd

COI 2,800

NCI (2800/0.6 x 40%) 1,867

(-) FV of NIA (2,000 +1,000) 3,000

1,667

Solution

(i) Stage by stage method: Stage 1: Consolidate IMM Bhd and SUB Bhd as follows:

CJE:

(a) Share Capital SUB 750

Reserves SUB 1,125

Goodwill on con 800 (75%x1,067)


(b) Share Capital SUB 250

Reserves SUB 375

Goodwill on con 267

NCI (SFP) 892

SolutionIMM SUB Consolidation

adjustmentSub-group

RM’000 RM’000 RM’000 RM’000 RM’000

Share Capital

Reserves

NCI

Investment in SUBGoodwill

Sundry net assets

2,000

1,000

-3,0002,675

-

3253,000

1,000

1,500

-2,500

--

2,5002,500

(a) 750(b) 250(a)1,125(b) 375

(a) 800(b) 267

(b) 892

(a)2,675

2,000

1,000

8923,892

-

1,0672,8253,892

SolutionStage 2: Consolidate ULT Bhd and sub-Group as follows:

CJE:

(a) Share Capital IMM 1,200

Reserves IMM 600

Goodwill on con 1,000 (60%x1,667)


(b) Share Capital IMM 800

Reserves IMM 400

Goodwill on con 667

NCI (SFP) 1,867

SolutionULT Bhd Sub-

GroupConsolidation

adjustmentSub-

UltimateGroup

RM’000 RM’000 RM’000 RM’000 RM’000

Share Capital

Reserves

NCI

Investment in IMMGoodwill

Sundry net assets

4,000

2,000

-6,0002,800

-

3,2006,000

2,000

1,000

8923,892

-1,067

2,8253,892

(a)1,200(b) 800(a) 600(b) 400

(a)1,000(b) 667

(b)1,867

(a)2,800

4,000

2,000

2,7598,759

-

2,7346,0258,759

Solution

(ii) One-stage consolidation

IMM Bhd. SUB Bhd.

Parent interest:DirectIndirect 60% x 75%

60%-

-45%

NCI:DirectIndirect 40% x 75%

40%-

25%30%

100% 100%

Solution

CJE:

(a)Share Capital of IMM 1,200

Reserves of IMM 600

Goodwill on con 1,000 (60%x1,667)


(b) Share Capital of IMM 800

Reserves of IMM 400

Goodwill on con 667

NCI (SFP) 1,867

Solution

(c) Share Capital of SUB 450

Reserves of SUB 675

NCI (SFP) (40% x 2,675) 1,070

Goodwill on con (45% x 1,067) 480


(d) Share Capital of SUB 550

Reserves of SUB 825

Goodwill on con (55% x 1,067) 587

NCI (SFP) 1,962

ULT Bhd IMMBhd

SUBBhd

Consolidation adjustment

Sub-UltimateGroup

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000Share Capital

Reserves

NCI

Investment in IMMInvestment in SUBGoodwill

Sundry net assets

4,000

2,000

-

6,0002,800

--

3,200

2,000

1,000

-

3,000-

2,675-

325

1,000

1,500

-

2,500---

2,500

(a)1,200(b) 800(c) 450(d) 550(a) 600(b) 400(c) 675(d) 825(c)1,070

(a)1,000(b) 667(c) 480(d) 587

(b)1,867(d)1,962

(a)2,800(c)2,675

4,000

2,000

2,759

8,759--

2,734

6,0256,000 3,000 2,500 8,759

Effective acquisition date in indirect subsidiaries

(i) When an ultimate parent company acquires a direct subsidiary which itself owns a subsidiary on an earlier date, the effective acquisition date of the indirect subsidiary as regards the ultimate parent is the date in which it acquires the direct subsidiary

(ii) BUT, if the indirect subsidiary was acquired on a date later than the acquisition date of the direct subsidiary by the ultimate parent, then the later date is the effective date of acquisition of the indirect subsidiary as regards the ultimate parent.

Ultimate Parent – P Bhd.

Acquisition date (i) 1 Jan X8 (ii) 1 Jan X5

.

Direct Subsidiary – M Bhd

Acquisition date (i) 1 Jan X5 (ii) 1 Jan X7

Deemed Acqn date: (i) 1 Jan X8 (ii) 1 Jan X7

Indirect Subsidiary – N Bhd

Effective acquisition date in indirect subsidiaries

• Example:

80% 15% (1/1/2009)

60%

(1/1/2005)

• Subsequent purchase of shares in B Bhd by P bhd’s shall traeted as equity transaction

P Bhd

B BhdA Bhd

Direct & Indirect Interest with a Change in Stake

Direct & Indirect Interest with a Change in Stake

Example 3:• On 1 January 2001, X Bhd acquired a 75% interest in the equity

capital of Y Bhd for a consideration of RM53,500,000. On this date, the retained profits of Y Bhd were RM18,000,000.

• On the same day, Y Bhd acquired a 60% interest in the equity capital of Z Bhd for a consideration of RM23,600,000. The retained profits of Z Bhd on that date were RM11,000,000.

• On 1 January 2002, X Bhd acquired a 20% interest in the equity capital of Z Bhd for a consideration of RM8,080,000.

• The draft statement of financial position of the three companies on 31 December 2002 were as follows:

Example 3

Share Capital of RM1 eachRetained profitsLiabilities

X Bhd Y Bhd Z Bhd

RM’000 RM’000 RM’000

80,000 40,000 20,000

90,000 33,000 21,000

79,000 50,000 26,000

249,000 123,000 67,000

Investment in Y BhdInvestment in Z BhdSundry net assets

53,500 - -

8,080 23,600 -

187,420 99,400 67,000

249,000 123,000 67,000

Example 3

Profit after taxationRetained profits b/fRetained profits c/f

X Bhd Y Bhd Z Bhd

RM’000 RM’000 RM’000

14,000 8,400 5,600

76,000 24,600 15,400

90,000 33,000 21,000

• At the respective acquisition dates, the considerations paid by the parents are based on the fair values of subsidiaries as a whole.

• NCI are measured at fair value.

Required:Perpare the Consolidated Statement of Financial Position (CSFP) of Xray Bhd as at 31 Dec 2002.

Solution

Y Bhd. Z Bhd.

Parent interest:DirectIndirect (75% x 60%)

75% 20%45%

NCI:DirectIndirect (25% x 60%)

25% 20%15%

100% 100%

Solution:

• Goodwill on acquisition of Z Bhd (Y Bhd):

Consideration transferred 23,600

FV of NCI (23,600/0.6 x 0.4) 15,733

FV of Z Bhd as a whole 39,333

FV of NIA (20,000 + 11,000) 31,000

Goodwill 8,333

Parent (8,333 x 60%) 5,000

NCI (8,333 x 40%) 3,333

Solution:

• Goodwill on acquisition of Y Bhd (X Bhd):


FV of NCI (53,500/0.75 x 0.25) 17,833


FV of NIA (40,000 + 18,000) 58,000

Goodwill 13,333

Parent (75%) 10,000

NCI (25%) 3,333

Solution:

• Change in stake as equity transaction (Z Bhd):

Net assets of Z Bhd 1/1/02 35,400

Goodwill on consolidation 8,333

Total net asset & goodwill 43,733

Carrying amount of 20% additional stake

(43,733 x 20%) 8,747


Accretion to equity 667

SolutionOne-stage Method:

(a) Share Capital of Y 30,000

Retained profit of Y 13,500


Investment in Y 53,500

(b) Share Capital of Y 10,000

Retained profit of Y 6,150


NCI in the SFP 19,483

(c) NCI (SCI) 2,100

NCI (SFP) 2,100

Solution(d) Share Capital of Z [45% x 20,000] 9,000

Retained profit of Z [45% x 11,000] 4,950

NCI in SFP [25% x 23,600] 5,900

Goodwill on con [45% x 8,333] 3,750

Investment in Z 23,600

(e) Share Capital of Z 11,000

Retained profit of Z 8,470

Goodwill on con [55% x 8,333] 4,583


Solution

(f) NCI (SFP) 8,747

Accreation on change in stake 667

Investment in Z bhd 8,080

(g) NCI (SCI) 1,960NCI in the SFP 1,960

X Bhd Y Bhd Z Bhd Consolidation adj. GroupRM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Profit after tax 14,000 8,400 5,600 28,000

NCI (c) 2,100(g) 1,960

-4,060

Attributable to owner

23,940

Retained profits b/f

76,000 24,600 15,400 (a)13,500(b) 6,150(d) 4,950(e) 8,470

82,930

Change in stake (f) 667 667

Retained profits c/f

90,000 33,000 21,000 107,537


Share Capital

Retained profitNCI

Liabilities

Investment in YInvestment in Z

Goodwill

Sundry net assets

80,000

90,000-

79,000249,000

53,0008,080

-

187,420

40,000

33,000-

50,000123,000

-23,600

-

99,400

20,000

21,000-

26,00067,000

--

-

67,000

(a)30,000(b)10,000(d) 9,000(e)11,000

(d) 5,900(f) 8,747

(a)10,000(b) 3,333(d) 3,750(e) 4,583

(b)19,483(c)

2,100(e)24,053(g) 1,960

(a)53,500(d)23,600(f) 8,080

80,000

107,537

32,950155,000375,487

--

21,667

353,820249,000 123,000 67,000 375,487

• Example:

60% 30% (1/1/2001)

40%

(1/1/2002)

• Subsequent purchase of shares in B Bhd by P bhd’s shall traeted as step-acquisition.

X Bhd

Z BhdY Bhd

Direct & Indirect Interest with a Step-Acquisition

Direct & Indirect Interest with a Step-Acquisition

Example 4 :

• On 1 January 2001, X Bhd acquired a 60% interest in the equity capital of Y Bhd and a 30% interest in the equity capital of Z Bhd. The retained profits of Y Bhd and Z Bhd on that date were RM2,000,000 and RM4,000,000 respectively.

• On 1 January 2002, Y Bhd acquired a 40% interest in the equity capital of Z Bhd. The retained profits of Z Bhd on that date were RM6,000,000. The fair value of the ordinary shares of Z Bhd was determined at RM1.85 per share.

• The draft statement of financial position of the three companies on 31 December 2002 were as follows:

Example 4

Share Capital of RM1 eachRetained profits

X Bhd Y Bhd Z Bhd

RM’000 RM’000 RM’000

20,000 10,000 10,000

10,000 5,000 8,000

30,000 15,000 18,000

Investment in Y BhdInvestment in Z BhdSundry net assets

8,000 - -

4,700 7,400 -

17,300 7,600 18,000

30,000 15,000 18,000

Example 4

Required:• Using a consolidation worksheet, derived

the Con. Statement of Financial Position (CSFP) of Xray Bhd as at 31 Dec 2002.

Solution

Y Bhd. Z Bhd.

Parent interest:DirectIndirect (60% x 40%)

60% 30%24%

NCI:DirectIndirect (40% x 40%)

40% 30%16%

100% 100%

Solution:

• Goodwill on acquisition of Z Bhd:


FV of NCI (3,000 x 1.85) 5,550

FV of previously held stake (3,000 x 1.85) 5,550


FV of NIA (10,000 + 6,000) 16,000

Goodwill 2,500

Parent (2,500 x 54%) 1,350

NCI (2,500 x 46%) 1,150

Solution:

• Gain on remeasurement of previously held stake:

COI 4,700

Share of post-acqusition profit (6,000 – 4,000) x 30% 600

Carrying amount5,300

FV of previously held stake 5,550

Gain on remeasurement 250

Solution

(a) Share Capital of Y [60%x10,000] 6,000

Retained profit of Y [60%x2,000] 1,200

Goodwill on con 800

Investment in Y 8,000

(b) Share Capital of Y [40%x10,000] 4,000

Retained profit of Y [40%x5,000] 2,000

Goodwill on con 533


Solution(c) Investment in Z 600

Retained profit b/f 600

Investment in Z 250

Gain on remeasurement 250

(d) Share Capital of Z [54%x10,000] 5,400

Retained profit of Z [54%x6,000]3,240

NCI in SFP [40% x7,400] 2,960

Goodwill on con [54%x2,500] 1,350

Investment in Z 12,950

Solution

(e) Share Capital of Z [46% x10,000] 4,600

Retained profit of Z [46%x8,000]3,680

Goodwill on con [46%x2,500] 1,150



Share Capital

Reserves

NCI

Investment in YInvestment in Z

Goodwill

Sundry net assets

20,000

10,000

-

30,0008,0004,700

-

17,300

10,000

5,000

-

15,000-

7,400

-

7,600

10,000

8,000

-

18,000--

-

18,000

(a)6,000(b)4,000(c)3,000(d)5,400(e)4,600(a)1,200(b)2,000(d)3,240(e)3,680

(d)2,960

(c)600(c)250(a)800(b)533

(d)1,350(e)1,150

(b)6,533(e)9,430

(a)8,000(d)12,950

20,000

13,480

13,003

46,483--

3,583

42,90030,000 15,000 18,000 46,483

Subsidiaries Making Losses

• Consolidated accounts should recognize losses

• Full loss of a subsidiary should be included

• NCI in that subsidiary should be charged with its share of the loss

• Accounts of loss-making subsidiary should be continue to consolidated until declared technically insolvent – liquidation


• If parent provide guarantees to third party too make good losses in the subsidiary, consolidated accounts should continue to recognize the losses to the extent of the guarantees provided

• Similarly with NCI shareholders….it implies that losses in the subsidiary would reduce the NCI share of net assets until the amount is reduced to zero

• Then NCI should not be charged even it the accounts of the subsidiary continue to consolidate except in cases where NCI shareholders have guaranteed


• Theoretically, parent and NCI continue to share subsidiary’s net assets as long as the net assets are positive and discontinue when subsidiary’s net asset reach zero or negative

• In practice, in the absence of guarantees, controls of loss-making subsidiary would be in the hands of receivers / liquidators before the zero level point is reached

• Thus control has passed to receivers / liquidators, the accounts of subsidiary would be excluded from consolidation


• The investment in the subsidiary should be carried in CBS as recoverable amount.

• In parent accounts the investment in the subsidiary, recorded at cost should be written down to recognize the permanent decline in value – loss from ordinary activities – if material, should be separately disclosed as an exceptional change.

• In practice, permanent decline in value is write down the cost of shares to their underlying net tangible assets in the subsidiary


• In CPL recognizing losses of subsidiary need an extra charge to write down or write off any remaining GW on acquisition of that subsidiary.

• If write off has been applied against unrealized capital

reserve, the amount written off should be transferred from the unrealized reserve to realized (revenue) reserves to maintain parity of effects as the write down constitutes a realized loss.

End of the Chapter

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BKAF3073 Chapter 4