Consolidations 1

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CONSOLIDATIONS IFRS 10

IAS 27

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Key definitions

Consolidated financial statements Financial statements of agroup in which A, L, OE, I and

E ofparent and its subsidiaries are presented as those ofa single economic entity

ParentAn entity that controls one or more entities

SubsidiaryAn entity that is controlled by another entity

Control

(IFRS 10: Appendix A)

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Control IFRS 10 identifies three elements of control

1. Power over investee

2. Exposure, or rights to variable returns frominvolvement with the investee

3. Ability to usepowerover the investee to affect theamount of the investors returns(IFRS 10:7)

An investor must possess all three elements toconclude it controls an investee. Conclusion isreassessed if there is an indication to at least one ofthe three elements.

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Elements of control: (1) Power The investor has existing rights that gives it the ability to direct

the relevant activities (activities that significantly affect theinvestees returns)

Power arises through Voting rights

such as when power over an investee is obtained directly and solely fromthe voting rights granted by equity instruments such as shares (oftenstraightforward)

Contractual arrangements when power results from one or more contractual arrangements (often

more complex)(IFRS 10:11)

Investor may have special relationship with investee thatindicates that it has power over the investee Investees operations are dependant on the investor Investees key management personnel are current or previous

employees of the investor Significant portion of the investees activities are conducted for the

investor.4


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Elements of control: Power (ctd ) Substantive v protective rights

IFRS 10 specifies that only substantive rights are considered inassessing power

Gives holderpractical ability to exercise the rights when decisionsneed to be made

Investor with protective rights would not have power over an

investee Eg, Right to approve new debt financing

(IFRS 10:11-14)

Considerations relating to voting rights

Power with a majority of voting rights Majority of voting rights but no power

Power without a majority of voting rights

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Power with a majority of voting rights

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An investor that holds more than half of the voting rights ofan investee has power in the following situations

the relevant activities are directed by a vote of the holderofthe majority of the voting rights, or

a majority of the members of thegoverning body that directsthe relevant activities are appointed by a vote of the holder ofthe majority of the voting rights

(IFRS 10: B35)


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Majority of voting rights but no power For an investor that holds more than half of the voting rights of

an investee, to have power over an investee,

the investors voting rights must be substantive

and must provide the investor with the current ability to direct therelevant activities

If another entity has existing rights that provide that entity with

the right to direct the relevant activities and that entity is not anagent of the investor, the investor does not have powerover theinvestee.

An investor does not have power over an investee, even thoughthe investor holds the majority of the voting rights in theinvestee, when those voting rights are not substantive.

Eg, if the relevant activities are subject to direction by agovernment, court, administrator or regulator.

(IFRS 10: B36, B37)7


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Example 1: Power, voting rights

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An investor acquires 48 per cent of the voting rights of an investee.

The remaining voting rights are held by thousands of shareholders,none individually holding more than 1 per cent of the voting rights.None of the shareholders has any arrangements to consult any of theothers or make collective decisions. When assessing the proportionof voting rights to acquire, on the basis of the relative size of the

other shareholdings, the investor determined that a 48 per centinterest would be sufficient to give it control.

In this case, on the basis of the absolute size of its holding and therelative size of the other shareholdings, the investor concludes that it

has a sufficiently dominant voting interest to meet the powercriterion without the need to consider any other evidence of power.

(IFRS 10: B43, Eg 4)


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Example 2: Power, voting rightsInvestor A holds 40 per cent of the voting rights of an investee andtwelve other investors each hold 5 per cent of the voting rights of the

investee. A shareholder agreement grants investor A the right toappoint, remove and set the remuneration of management responsible

for directing the relevant activities. To change the agreement, a two-thirds majority vote of the shareholders is required.

In this case, investor A concludes that the absolute size of theinvestors holding and the relative size of the other shareholdings aloneare not conclusive in determining whether the investor has rightssufficient to give it power.

However, investor A determines that its contractual right to appoint,

remove and set the remuneration of management is sufficient toconclude that it has powerover the investee.

(IFRS 10: B43, Eg 5

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Example 3: Power, voting rights

Investor A holds 45 per cent of the voting rights of aninvestee. Two other investors each hold 26 per cent of thevoting rights of the investee. The remaining voting rightsare held by three other shareholders, each holding 1 percent. There are no other arrangements that affect decision-

making.In this case, the size of investor As voting interest and itssize relative to the other shareholdings are sufficient toconclude that investor A does not have power. Only twoother investors would need to co-operate to be able to

prevent investor A from directing the relevant activities ofthe investee.

(IFRS 10: B44, Eg 6)

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Elements of control: Power (ctd ) Relevant activities for entities whose operations are

directed through voting rights are generally its operatingand financing activities.

May be situations where voting rights are less relevantbecause rights relate to administrative tasks only

Analysis of investors contractual and non-contractual rightsmay be necessary

Appoint key management personnel

Veto significant transactions

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E l P l i i i


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Example: Power, relevant activities

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Two investors form an investee to develop and market a medical product. One investor isresponsible for developing and obtaining regulatory approvalof the medical product.Once the regulator has approved the product, the other investor will manufacture and

market it.If all the activitiesdeveloping and obtaining regulatory approval as well asmanufacturing and marketing of the medical productare relevant activities, eachinvestor needs to determine whether it is able to direct the activities that mostsignificantly affect the investees returns.Accordingly, each investor needs to consider whether developing and obtainingregulatory approval or the manufacturing and marketing of the medical product is theactivity that most significantly affects the investees returns and whether it is able todirect that activity. In determining which investor has power, the investors wouldconsider:(a) the purpose and design of the investee;

(b) the factors that determine the profit margin, revenue and value of the investee as wellas the value of the medical product;(c) the effect on the investees returns resulting from each investors decision-makingauthority with respect to the factors in (b); and (d) the investors exposure to variabilityof returns

(IFRS 10:B13, Eg 1

El t f t l (2) E


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Elements of control: (2) Exposure, or

rights to variable returns

Returns must have the potential to vary as a result of theinvestees performance

Can be positive, negative or both

Examples

Change in value of investment Dividends or interest

Management or service fees(IFRS 10:15)

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El f l (3) Abili


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Elements of control: (3) Ability to use

power to affect returns

This considers the interaction between the first two controlconcepts

An investor with decision-making rights determineswhether it is a principal or an agent.

An investor that is an agent does not control an investee whenit exercises decision-making rights delegated to it.(IFRS 10:17, 18)

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CONSOLIDATION OF WHOLLY OWNED


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SUBSIDIARY AT ACQUISITION Parent / subsidiary relationship comes about as a result

of a business combination IFRS 3 defines a business combination as a transaction or

event in which the acquirer obtains control of one or morebusinesses

IFRS 3 requires acquisition method to be used Identification of acquirer

Determination of acquisition date

Recognition and measurement of

Identifiable assets and liabilities assumed

Anynon-controlling interest in subsidiary

Recognition and measurement ofgoodwillorgain from bargainpurchase option

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Recognition and measurement of goodwill or


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Recognition and measurement of goodwill or

gain from bargain purchase option Internally generated goodwill not recognised as intangible

assetWhen goodwill is purchased in a business combination, it

may be recognised as an intangible asset GW is defined in IFRS 3 as the excess of

the acquisition date fair value of the consideration transferred

over

the acquisition date fair value of the net amount of identifiableassets acquired and liabilities assumed

(this definition will be modified when dealing with partly-owned subsidiariesand non-controlling interests)

GW is thus the future economic benefits arising from assetsthat are not capable of being individually identified andseparately recognised.

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Eg 1 Consolidation at acquisition: Goodwill


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Eg 1- Consolidation at acquisition: GoodwillS plcSTATEMENT OF FINANCIAL POSITIONAT 31 DECEMBER 20X1

Other assets 303

Share capital 20

Retained earnings 10

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P plcSTATEMENT OF FINANCIAL POSITIONAT 31 DECEMBER 20X1

(a) (b) (c)Other assets 120 105 125

Investment in S 30 45 25

150 150 150

Share capital 100 100 100

Retained earnings 50 50 50150 150 150

On 31 December 20X1 P Limited acquired 100% of the ordinary share capital of S plc for(a) 30(b) 45(c) 25

The other assets of S plc consist of inventory and accounts receivable which are considered to befairly valued.Required:Prepare a consolidated SOFP at 31 December 20X1.


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Eg 1 - Procedure

Analyse equity of subsidiary for at acquisition adjustments Offset (eliminate) the carrying amount of the parents

investment in the subsidiary (in Ps records as a Dr balance)against the capital and reserves of S at date of acquisition (inSs records as Cr balances)

Combine like items of assets, liabilities, equity, income andexpenses of the parent with those of its subsidiary

(IFRS 10:B86)

On the consolidated SOFP, the assets and liabilities of S

replace the amount recorded by P as its investment in S.

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Eg 1 Workings


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Eg 1- WorkingsAnalysis of equity of S

At acquisition

Pro-forma consolidating j/e

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(a) (b) (c)

SC 20 20 20

RE 10 10 10

30 30 30

Inv in S 30 45 25

- 15 (5)GW BPO

Dr Cr Dr Cr Dr Cr

SC 20 20 20RE 10 10 10

GW 15

Inv in S 30 45 25

Gain 5


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Eg 1 - Solution

P & S GROUPCONSOLIDATED STATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20x1

(a) (b) (c)

Other assets (120 + 30) / (105 + 30) / (125 + 30) 150 135 155

Goodwill [15 (Dr GW)] 15

150 150 155Share capital [100 + 30 30 (Dr SC)] 100 100 100

Retainedearnings

(a) + (b) [50 + 10 -10 (Dr RE)](c) [50 + 10 -10 (Dr RE) + 5 Cr Gain]

50 50 55

150 150 155

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Principles learnt

On consolidated SOFP,

Group share capital is the share capital of P only Group RE is

RE of P,plus

RE of S

Post acquisition (thus eliminate at acquisition)

Investment in S (from Ps TB) does not appear

Other assets and liabilities of P and S are summedtogether

The consolidation adjustments are not recorded inthe records of P or S

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Change in value of non depreciable

assets of subsidiary

An arms-length transaction involving the transfer ofownership of shares in a subsidiary may be a reliableindicator of major asset held by the subsidiary

Adjustments are made to identifiable tangible assets

on the basis of specific information regarding the valuation of those assets

implied information by examining the SOFP of thesubsidiary

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Eg 2 - Consolidation at acquisition: Excess


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Eg 2 Consolidation at acquisition: Excessattributable to non-depreciable asset

S plcSTATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20X1Land 2

Other assets

3

Share capital 20Retained earnings 10

3

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P plcSTATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 20X1(a) (b) (c)

Other assets 120 105 125

Investment in S 30 45 25

150 150 150

Share capital 100 100 100Retained earnings 50 50 50

150 150 150

On 31 December 20X1 P Limited acquired 100% of the ordinary share capital of S plc for(a) 30, when FV of land is 25(b) 45, when FV of land is 40(c) 25, when FV of land is 20Required:Prepare a consolidated SOFP at 31 December 20X1.Ignore tax

Eg 2 - Workings


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Eg 2 WorkingsAnalysis of equity of S

At acquisition


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(a) (b) (c)

SC 20 20 20

RE 10 10 10

Land (37 25) / (20 25) 12 (5)

30 42 25

Inv in S 30 45 25

- 3 -GW

Dr Cr Dr Cr Dr Cr

SC 20 20 20

RE 10 10 10

Land 12 5

GW 3

Inv in S 30 45 25


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Eg 2 - Solution


AT 31 DECEMBER 20x1

(a) (b) (c)

Land (25) / [25 + 12 (Dr Land)] / [25 5 (Cr Land)] 25 37 20

Goodwill [3 (Dr GW)] 3

Other assets (120 + 5) / (105 + 5) / (125 + 5) 125 110 130

150 150 150

Share capital [100 + 30 30 (Dr SC)] 100 100 100

Retainedearnings

[50 + 10 -10 (Dr RE)] 50 50 50

150 150 150

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Principles learnt

The change in the fair value of the land

has not been recorded in the financial statements of S has been recorded as a consolidation adjustment only.

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SUBSIDIARY AFTER ACQUISITION

Analyse equity of subsidiaryAt date of acquisition for at acquisition adjustments

to establish the fair value of the identifiable net assets ofthe subsidiary

to calculate goodwill or bargain purchase option The period between the date of acquisition and

the start of the current financial year to establishthe post-acquisition profits or losses of the subsidiaryattributable to the parent company for adjustments at

beginning of current year The current year profit of the subsidiary company

and any dividends paid for current year adjustments

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Example 3: Consolidation after acquisition

S plcSTATEMENT OF FINANCIAL POSITIONAT 31 DECEMBER 20X1

Net assets 30

30

Share capital 20


30

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P plcSTATEMENT OF FINANCIAL POSITIONAT 31 DECEMBER 20X1

Net assets 150

150

Share capital 100


150

On 1 January 20X2 P Limited acquired 100% of the share capital of

S Limited for 30.


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Example 3: Consolidation after acquisition . . .

TRIAL BALANCES 31/12/20x3 31/12/20x2

P S P S

Net assets 220 47 160 35

Investment in S 30 - 30 -

250 47 190 35

Share capital 100 20 100 20

Retained earnings boy 90 15 50 10

Profit for period 60 12 40 5

250 47 190 35

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Required:Prepare consolidated financial statements for 20x2 and 20x3.

Trial balances of P plc and S plc at 31 December 20x2 and 20x3 are

as follows:

Eg 3 - Workings


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g g

Analysis of equity of S

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31/12/20x3 31/12/20x2

At acquisition Pro-forma Pro-formaSC 20 Dr 20 Dr

RE 10 Dr 10 Dr

30 30

Inv in S 30 Cr 30 Cr

Beginning of year - -

Beginning of year

RE at boy 15 (31/12/x2) 10 (31/12/x1)

RE at acquisition (10) (10)

5 -

Current year

Profit 12 5

Eg 2 Workings


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Eg 2 Workings . . .


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20x3 20x2Dr Cr Dr Cr

At acq

SC 20 20

RE 10 10

Inv in S 30 30

Eg 3 - Solution


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g

P & S GROUPCONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER

20x3 20x2

SC RE SC RE

Bal at boy 100 95 (90 + 15 10) 100 50 (50 + 10 10)

Profit for

period

72 45

Bal at eoy 100 167 100 95

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P & S GROUPCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER

20x3 20x2Profit for the period 72 (60 + 12) 45 (40 + 5)

Eg 3 Solution . . .


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g


AT 31 DECEMBER

20x3 20x2

Net assets 267 (220 + 47) 195 (160 + 35)

267 195

Share capital 100 P only, or(100 + 20 20) 100 P only, or(100 + 20 20))

Retained earnings 167 From SOCIE, or[(90 + 15 10) + 72]

95 From SOCIE, or[(50 + 10 -10) + 45]

267 195

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Principles learnt

Group RE at beginning of year =Ps RE at beginning of year

plusPs share of Sspost acquisitionRE at beginning of year

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Documents

Consolidations 1