Accounting for Groups, Subsidiaries, Associates and Minority Interest (IAS 27, 28 and IFRS 3)

Applicable Standards GROUP ACCOUNTING Note that the following applies to international accounting standards (IFRS and IAS). SUBSIDIARIES Applicable Standards

IFRS 3: Business Combinations IAS 27: Consolidated and Separate Financial Statements

Consolidated Balance Sheet Key Components

NCI can be measured in two ways:

o o

Measured as share of the net assets of the Sub At fair value

Method #1: Share of net assets at reporting date + NCI goodwill share of goodwill impairment loss Method #2: FV of NCI at acquisition + share of post-acquisition change in net assets share of goodwill impairment loss

Goodwill =

Cost of investment + NCI at acquisition FV of net assets of Sub at acquisition

If NCI is measured as METHOD #1 the goodwill calculated is just the goodwill attributed to the parents share. There is no goodwill attributed to the NCIs share. If NCI is measured METHOD # 2 a portion of the goodwill is attributed to the parent, and a portion is attributed to the NCI.

Details on Cost of Investment

Professional fees are expensed to P&L in the period the acquisition occurs. Changes in the value of contingent consideration after the acquisition would result in any liability being remeasured, with the change recognised in P&L. Goodwill and the cost of investment remain unchanged. Adjustments for Intra-Group Transactions

Cash-in-transit and inventory-in-transit can cause group receivables and payables not to balance. To fix, adjust the recipient companys accounts as though the cash / inventory has been received. For example, o For cash in transit, Dr Cash, Cr Receivables o For inventory in transit, Dr Inventory, Cr Payables Profits made from intra-group transactions need to be reversed since you cant make profits from yourself. o Reduce inventory / non-current assets of buyer by the amount of URP embedded in goods sold by group entities. o Reduce retained earnings of seller by the amount of URP. o URP is only calculated for items that are still remaining within the group, not items that have been further sold to external parties. o URP for non-current assets at a reporting date is the difference between (A) the carrying value of the asset by the buyer, and (B) the carrying value of the asset by the seller had it not been sold. Intra-group receivables and payables need to be cancelled out and they should be matching. Intra-group loans o The matching asset and liability for the loan needs to be removed. o Accrued interest payable at the borrower needs to be cancelled out with the matching interest receivable at the lender. o NCI is calculated as per normal in both Consolidated Balance Sheet and Consolidated Income Statement (i.e. both loan amount and loan interest are still included as it is from the perspective of the Sub).

Dividends are handled in Consolidated Income Statement, no adjustment in Consolidated Balance Sheet required because the full Consolidated Income Statement (without dividends) matches the accounts in the Consolidated Balance Sheet. Preparing Consolidated Balance Sheet

Make any fair value adjustments required (note that Retained Earnings need not be adjusted even if the FV of assets increased because any change in FV is matched and cancelled out by Goodwill within Assets, because Goodwills less net assets would have included that additional FV). Make adjustments for intra-group transactions per above. Adjust the Investments line o Subtract from Investments (under Parent), the original cost of investment in the Sub. o Note that any loan notes that the Parent bought from the Sub should be included as part of the original cost of investment in the Sub, and is already part of the Investments line in the Parents separate balance sheet. o Note that the Investments (under Parent) does not increase when the sub makes profits, the benefits only show up when the statements are consolidated. Add a Goodwill item o Under Non-Current Assets which either shows the Parents goodwill (if NCI is measured as share of net assets) or the full goodwill (if NCI is measured at FV). Share capital o Note that only the Parents share capital is included if the share capital of the Subs have not changed. This is because the conversion of Investments to Goodwill would have eliminated the Subs share capital that existed at acquisition. Compute Retained Earnings o Equals to Parents retained earnings + Parents share of post acquisition change in net assets Parents share of goodwill impairment (which is full if NCI is measured as share of net assets, or proportionate if NCI is measured at FV). o Note that Parents share of Subs net assets at acquisition is cancelled out with the Parents Investments item, with the excess classified as Goodwill. o Note that any increase in net assets post acquisition is proportionately split between the Parents retained earnings and the NCI. Add a NCI item o Under Equity. Value is based on how NCI is measured (see above). o Note that this NCI item includes the NCIs share of Subs net assets at acquisition. Consolidated Income Statement Adjustments for Intra-Group Transactions

Eliminate sales and purchases (reverse the sellers revenue and the buyers COGS by the same amount)

Eliminate interest paid and received (reverse the payers interest paid and the payees interest received) For the URP of goods that remain within the group, increase the sellers COGS by the URP to reverse the profit. For URP due to non-current assets transferred o The depreciation charge needs to be adjusted if the depreciation charge after transfer is different from depreciation charge had it not been transferred. o If the transfer occurred in the current period, reverse any profit/loss on transfer. Dividends from the Sub to the Parent are reversed because that is an intra-group transfer. Preparing Consolidated Income Statement

Only the Subs results after acquisition should be included in the Consolidated Income Statement. Make adjustments for intra-group transactions. Make adjustments for FV changes to non-current assets. Depreciation charge needs to be adjusted to correspond with the new FV. The change in the FV goes into the revaluation surplus account in Consolidated Other Comprehensive Income. Goodwill impairment is charged to P&L, can be put under Admin Expenses of the Parent. Tax charges remain unchanged despite goodwill impairment or adjustments in depreciation because tax is assessed on the individual companies. Profits attributable to NCI = NCI share * Subs profit [note: the Sub's profit here does not take into account adjustments to Revenue or COGS due to elimination of intragroup sales/purchases, BUT it does take into account reduced Sub's profits due to reversal of URP. It is not consistent treatment I know.] Profits attributable to Owners of the Parent = Parents profit + Parents share * Subs profit (or the balancing figure if lazy) Preparing Consolidated Statement of Comprehensive Income

Total comprehensive income attributable to NCI = NCI share * Subs total comprehensive income Total comprehensive income attributable to Owners of Parent = Parents total comprehensive income + Parents share * Subs total comprehensive income (or balancing figure)

ASSOCIATES Applicable Standard

IAS 28: Investments in Associates Consolidated Balance Sheet Equity method of accounting is used. Adjust the Investments line

Subtract from Investments (under Parent), the original cost of investment in the Assoc. o Note that dividends received do not decrease the original cost of investment in the Assoc, hence it doesnt impact the Investments line (under Parent). It is simply booked as Dr Cash, Cr Income from shares in associates (P&L). Add a non-current asset titled Investment in Associate o Cost of Investment o + Parents share of post-acquisition change in reserves of Assoc o - Dividends paid to Parent from Assoc o - Impairment losses o + Loans to Assoc (this is rolled in from what is a separate line item in the Parents separate balance sheet) o - URP if Parent sold to Assoc Retained earnings o Increased by the Parents share of post-acquisition reserves of associate o Less impairment loss in Assoc o Less URP from purchases/sales between Parent and Assoc (this needs to be specially adjusted here unlike the case for Subs because there is no consolidation of Assocs accounts into the Parents balance sheet) Inventory o Less URP if Assoc sold to Parent Only the Parents share of the URP is eliminated above. E.g. if the Parent owns 30% of the Assoc, only 30% of the full URP is eliminated in the entries above. This is consistent with the treatment of Subs where there is 100% consolidation and 100% of the URP is eliminated. Assets and liabilities items are not consolidated, hence no cancellation of any intercompany items (e.g. loans). Consolidated Income Statement Add a line Share of profits of associate immediately before the groups profit before tax (Equity method) o Share of profits of associate = Groups share of Assoc profit after tax Impairment of Assoc arising in the year Cancel any dividend income received from the Assoc because that would be grouped together and replaced with the Share of profits of associate Adjust for URP (groups share) o Increase COGS by the URP to remove the profit. No cancellation of Revenues and COGS for sales and purchases between Parent and Assoc as the income statements are not combined. Consolidated Statement of Comprehensive Income Add a line Share of other comprehensive income of associate under the Parent + Subs Revaluation Surplus o Groups share of associates other comprehensive income
o

JOINT VENTURES Applicable Standard

IAS 31: Interests in Joint Ventures IFRS 11: Joint Arrangements Two methods of accounting

Equity method: Same as accounting for Associates Proportionate consolidation: Both the Statement of Financial Position and the Statement of Comprehensive Income will include the venturers share of JVs line items, e.g. assets, liabilities, income, expenses.

DISPOSAL OF SUBSIDIARIES Applicable Standards

IFRS 3: Business Combinations IAS 27: Consolidated and Separate Financial Statements Note that Subs that are completely disposed or classified as held for sale, are covered by IFRS 5: Non current assets held for sale and discontinued operations. Complete Disposal where Control is Lost Gain on Disposal in Parents Separate Accounts

In P&L o Gain on Disposal = Fair value of consideration received for the disposal - Carrying value of investment disposed In Balance Sheet o Gain on Disposal is added to Retained Earnings Gain on Disposal in Group Accounts

In P&L o Gain on Disposal = o Fair value of consideration received for the disposal o + Fair value of residual interest retained (i.e. FV of Associate) o + NCI at disposal o - Subs net assets at disposal o - Total goodwill at disposal o + Gains/(losses) previously recognised in Other Comprehensive Income (e.g. fair value movements on available-for-sale assets, this is merely a reclassification to P&L of what was previously recorded in equity) In Balance Sheet o Gain on Disposal is added to Groups Retained Earnings

Disposal where Control is Retained No gain/loss on disposal recognised. All changes are recognised in Parents shareholders equity. The Fair value of consideration received for the disposal is split into 2 components o Increase in NCI (because effectively the sale transferred more of the company to NCI) o Decrease in retained earnings due to the transfer to NCI and the actual gain/loss on the Parents share that was sold Adjustment to Parents equity equals o Fair value of consideration received for the disposal o - Share of net assets disposed (transfer to NCI) o - Share (by % share ownership) of goodwill disposed (transfer to NCI) Accounting entries o Dr Cash (with FV of consideration) o Cr Parents Retained Earnings (with the Adjustment to Parents equity calculated above) o Cr NCI (with the amounts transferred to NCI above) Disposal to Associate Status Gain on Disposal in Parents Separate Accounts

In P&L o Gain on Disposal = Fair value of consideration received for the disposal - Carrying value of investment disposed In Balance Sheet o Gain on Disposal is added to Retained Earnings Gain on Disposal in Group Accounts

In P&L o Add item Gain on Disposal = Fair value of consideration received for the disposal + Fair value of residual interest retained (i.e. FV of Associate) + NCI at disposal - Subs net assets at disposal - Total goodwill at disposal + Gains/(losses) previously recognised in Other Comprehensive Income (e.g. fair value movements on available-for-sale assets, this is merely a reclassification to P&L of what was previously recorded in equity) o Add item Share of profits of associate for the share of post-disposal profits of associate o Still need to include into Group Accounts the results of the Sub until disposal date, and show profits attributable to NCI (i.e. for that portion of Sub profits until disposal date) and Owners of Parent!

In Balance Sheet o Gain on Disposal is added to Groups Retained Earnings o Remaining Associate investment will be carried at fair value at disposal + group shares of post-disposal earnings. Disposal to Available-For-Sale Financial Asset (i.e. < 20% ownership) Status In Balance Sheet (for both Separate and Group)

Remaining investment recognised at fair value at the date of disposal. Accounted for under IAS 39: Financial instruments, as an available-for-sale financial asset. In P&L

Separate Accounts o Future dividends after disposal recognised in P&L. Group Accounts o Gain/loss on disposal recognised, calculated in the same way as gain/loss on disposal from Sub to Assoc.

STEP ACQUISITIONS Applicable Standards

IFRS 3: Business Combinations IAS 27: Consolidated and Separate Financial Statements

Subsidiary to Subsidiary Effect is recognised directly in Parents equity. No change in goodwill, and no impact on P&L. Adjustment to Parents equity o Subtract Fair value of consideration paid (for the purchase) o Add Transfer from NCI Proportion of NCI transferred * NCI at purchase (which includes both net assets and goodwill) o [Note that this is different from disposal of Sub to Sub. Here the value of the NCI is computed, and the amount transferred is a share of the NCI. In the disposal scenario, the amount transferred is the parent's share (by share ownership %) of total net assets and total goodwill that was sold. If the parent's retained earnings for the Sub is computed, and proportionately transferred, then answer would be different. This is again because in the parent's retained earnings would likely contain a higher proportion of total goodwill than what its share ownership %.] Accounting entries o Cr Cash (FV of consideration) o Dr NCI (with amount transferred) o Dr Retained Earnings (with adjustment to Parents equity)

Associate to Subsidiary Consolidated Income Statement

Recognise any gain/loss in P&L o Gain/loss on derecognition of associate = FV of previously held interest Carrying Value (not cost!) of previously held interest Consolidated Balance Sheet

Remeasure the previously held equity interest at acquisition-date FV. Calculate Goodwill o FV of consideration + FV of previously held interest + FV of NCI FV of net assets acquired Reserves o Parents reserves o + Gain/loss on derecognition of associate o + Parents share of post-acquisition reserves o - total cumulative gains recognised in Other Comprehensive Income of Parents separate statements (which is correspondingly matched in part of the Investment in the Sub held under non-current assets, e.g. some items that are recognised in OCI which also increased the Investment in the Sub line. This needs to be subtracted because when consolidating, the Investment in the Sub is removed on the assets side, so the corresponding item on the L+E side needs to be removed. Note that the OCI gains/losses is already captured within Parents reserves). NCI o As per usual Sub. Note that financial statements should be accounted to the date control was achieved based on the Associate status, and only consolidate thereafter.

Available-for-sale Financial Asset to Subsidiary Available-for-sale financial asset is remeasured to FV, with gain/loss recognised in P&L. Other procedures are the same as Associate to Subsidiary.

COMPLEX GROUP ACCOUNTING Vertical Groups If the Sub-Sub is acquired by the Sub prior to the Sub being acquired by the Parent, the date of acquisition of both the Sub and the Sub-Sub is the same as the date of acquisition of the Sub.

Parents effective interest in a Sub-Sub = Parents interest in a Sub * Subs interest in a Sub-Sub NCI (for Sub-Sub)s effective interest o = 1 Parents effective interest, OR o = (1 Subs interest) + (Subs interest * (1 Parents interest in Sub)), i.e. the direct NCI of the Sub-Sub + the indirect NCI within the portion owned by the Sub Goodwill o Goodwill for Sub-Sub Groups cost of investment in Sub-Sub (i.e. groups share of Subs cost of investment in Sub-Sub, e.g. 80% of Subs cost of investment in Sub-Sub) - Groups share (using effective interest) of net assets of Sub-Sub o Calculate Goodwill for Sub as per normal, add both Goodwills together. NCI o Calculate NCI for Sub as per normal o Calculate NCI for Sub-Sub as per normal, but subtract the NCIs share of Subs cost of investment in Sub-Sub (e.g. Parent owns 80% of Sub, so subtract 20% * Subs cost of investment in Sub-Sub). This is because in the Goodwill computation, the cost excludes the NCIs share of Subs cost of investment in SubSub, so this amount needs to be correspondingly removed in the NCI for the SubSub. o Add the two NCI answers together. Reserves o Parents reserves + Parents share of Subs post-acquisition reserves + Parents share of Sub-Subs post-acquisition reserves Parents share of Goodwill impairment

D-shaped Groups Same as Vertical Groups, just that Parent has a direct holding in the Sub-Sub as well. The computation for Goodwill in the Sub-Sub will need to include the cost of direct and in-direct investments. Vertical Group with Sub invested in an Assoc Think of it as preparing the Subs separate financial statements, which would include its share of the Assocs profits, then consolidating the Subs statements into the Parents. Consolidated Balance Sheet o Includes the Investment in associate based on Subs share in Assoc. o NCI includes share of Assocs post-acquisition reserves, share being (1 Parents share in Sub) * (Subs share in Assoc). o Parents reserves includes share of Assocs post-acquisition reserves, share being (Parents share in Sub) * (Subs share in Assoc). Consolidated Income Statement o Includes the Share of profit after tax of associate, with the share being the interest of the Assoc owned by the Sub.

Profit attributable to NCI includes the share of profit after tax of the associate, with the share being (1 Parents share in Sub) * (Subs share in Assoc). Owners of Parent includes the share of profit after tax of the associate, with the share being (Parents share in Sub) * (Subs share in Assoc)