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  1. MODULE 4 Group Accounting Section 1 Tracey Gribben November 2011 Dublin title goes here

  2. MODULE 4 – Group Accounting Introduction to Group Accounting For a variety of legal, tax and other reasons, entities frequently acquire ‘control’ of other entities. The combination of these entities can produce many advantages such as economies of scale, elimination of competition, spreading of risk across various product lines, access to distribution networks and production techniques and possibly tax benefits. Users of the financial statements will only be able to make informed economic decisions about the ‘group’ if they have access to a set of financial statements that combines the results, assets and liabilities of all the entities within the group. In the parent’s own financial statements, the investment in the subsidiary is shown at cost. As the parent controls the subsidiary, they are in effect acting as a single unit. However, the parent’s financial statements do not present a complete picture of the whole group’s economic activities or financial position. IAS 27 Consolidated & Separate Financial Statements requires parent companies to present consolidated financial statements in which they consolidate their investments in any subsidiaries. Consolidated financial statements provide a better reflection of the ‘economic substance’ of the group whilst preventing manipulation of results through intercompany transactions. The consolidated financial statements also provide a better measurement of the management performance of the entire group.

  3. MODULE 4 – Group Accounting Definitions • A ‘group’ exists when an entity controls, either directly or indirectly, another entity. • A ‘parent’ is an entity that has one or more subsidiaries. • A ‘subsidiary’ is an entity, including an unincorporated entity, such as a partnership, that is controlled by another entity (known as the parent). • ‘Non-controlling interests’ is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

  4. MODULE 4 – Group Accounting Control Control is the ‘power to govern the accounting and financial policies of another entity so as to obtain benefits from its activities’. Control is presumed to exist when a parent: owns (directly or indirectly) more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control can also exist when a parent owns half or less of the voting power of an entity if it has: • power over more than half of its voting rights by virtue of an agreement with other investors, • power to govern the financial and operating policies of the entity under a statute or an agreement, • power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or • power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.

  5. MODULE 4 – Group Accounting • Key Summary Point Normally a majority percentage ownership is indicative of control and/or influence. But it can be achieved by alternative criteria as well.

  6. MODULE 4 – Group Accounting Exemption from presenting consolidated financial statements A parent need not present consolidated financial statements if allthe following conditions are satisfied: • the parent is itself a wholly-owned subsidiary, or it is a partially-owned subsidiary of another entity and its owners have been informed about, and do not object to, the parent not presenting consolidated financial statements; • the parent’s debt or equity instruments are not publicly traded; • the parent did not file, nor is it in the process of filing its financial statements with a regulatory body for the purpose of issuing financial instruments; and • the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRS.

  7. MODULE 4 – Group Accounting Subsidiaries excluded from consolidation A subsidiary is not excluded from consolidation simply because its business activities are dissimilar from those of other entities within the group. In such instances, disclosures required by IFRS 8 Operating Segments will help to explain the significance of different business activities. If, on acquisition, a subsidiary meets the criteria to be classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, it must be accounted for in accordance with IFRS 5 (and excluded from consolidation). Key Summary Point There are four conditions that must be met in order for a parent company to be exempt from preparing consolidated financial statements. A subsidiary is only excluded from consolidation if it was acquired for the purpose of being sold.

  8. MODULE 4 – Group Accounting Reporting period end date The financial statements of all members of the group should be prepared at the same date. When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for consolidation purposes, additional financial statements as of the same date of the parent. If this is impracticable, the subsidiary’s most recent set of financial statement is adjusted for significant transactions occurring between the two dates. There should be no more than three months between the two dates. Accounting policies Uniform accounting policies should be used for all group companies. If a member of the group uses different accounting policies from those used in the group financial statements, its financial statements should be adjusted prior to consolidation. Key Summary Point There are rules governing the required consistency of reporting-period end-dates and accounting policies across members of a group.

  9. MODULE 4 – Group Accounting Types of investments The table below provides an overview of the different classifications of investments and the accounting treatment required. These investments will be discussed throughout the module (except for a trade investment which is discussed in Module 6 under Financial Instruments).

  10. MODULE 4 – Group Accounting Applicable international accounting standards There are a number of international accounting standards which apply to the preparation of group accounts: • IFRS 3 Business Combinations • IAS 27 Consolidated and Separate Financial Statements • IAS 28 Investments in Associates • IAS 31 Interests in Joint Ventures • IAS 7 Statement of Cash Flows (in relation to a Consolidated Statement of Cash Flows) • IAS 21 The Effects of Foreign Exchange Rates (in relation to foreign investments)  On 18 December 2008, the IASB published Exposure Draft 10 (ED 10) Consolidated Financial Statements, which proposed a new Standard to replace the requirements of IAS 27 Consolidated and Separate Financial Statements dealing with consolidation and also SIC-12 Consolidation – Special Purpose Entities. ED 10 was the result of the IASB’s work to date on its consolidation project, which was added to the Board’s active agenda in 2003 and which has been accelerated in the light of the global financial crisis and recommendations made by the Financial Stability Forum and others. The objective of ED 10 is to develop a single source of authoritative guidance on consolidation accounting. Its key proposals are for: • a revised definition of control, including additional application guidance; and • enhanced disclosures about consolidated and unconsolidated entities.

  11. MODULE 4 – Group Accounting Consolidation All assets and liabilities of the parent and subsidiaries are added together line by line, i.e. consolidated, with items appearing as assets in one company and liabilities or equity in another being cancelled out. The main items which are cancelled out include inter-company balances, and the parent’s investment in the subsidiary with its portion of the subsidiary’s equity acquired. These cancellations only take place in the group accounts. The individual company accounts of the parent and the subsidiary are not affected. Inter-company (intra-group) balances Inter-company balances can arise for a number of reasons, for example: • loans issued between group companies; • inter-company sales, where the goods are transferred between group companies; • current accounts which record the movement of goods, services or money between group companies. All inter-company balances are eliminated on consolidation. If the balances do not agree at the year-end, this will normally be due to either inventory or cash in transit. These in-transit items are shown as assets in the consolidated Statement of Financial Position and the corresponding inter-company balances cancelled out.

  12. MODULE 4 – Group Accounting Example – inter-company balances Lemon is the parent of Mango. At 31 December 2008, Mango owes 14,600 to Lemon and Lemon is due 26,750 from Mango. On 31 December 2008 Mango sent a cheque for 12,150 to Lemon. Lemon received the cheque on 3 January 2009. As a result, the two inter-company balances are eliminated and the ‘difference’ is added to the cash balance in the group accounts.

  13. MODULE 4 – Group Accounting Key Summary Point Consolidation involves adding assets and liabilities line by line whilst eliminating items such as inter-company balances and the parent’s investment in subsidiaries.

  14. MODULE 4 – Group Accounting Partly owned subsidiaries If the parent company does not own 100% of the subsidiary’s shares, the remainder of the shares are held by other minority shareholders, known as ‘non-controlling interests’. In this case, the Consolidated Statement of Financial Position will still include all of the subsidiary’s assets and liabilities, as the parent controls them all. However, an amount representing the net assets attributable to the ‘non-controlling interests’ will also be separately disclosed on the face of the Consolidated Statement of Financial Position. Non-controlling interests The balance for non-controlling interests is calculated at the date of consolidation each year and includes the minority share of the subsidiary’s: • ordinary share capital and share premium; • retained earnings; • other reserves (e.g. capital reserve, revaluation reserve, etc.); • preference shares (see below)

  15. MODULE 4 – Group Accounting The subsidiary may also have issued preference shares. These shareholders do not have any control over the company, but instead receive a fixed dividend each year. The percentage of preference shares held by the non-controlling interest can range from 0% to 100%. Debentures, loan stock, etc. not owned by the parent remain in the Consolidated Statement of Financial Position as a non-current liability. These are not included within the non-controlling interest balance. The non-controlling interest balance may also include the portion of the subsidiary’s goodwill attributable to the non-controlling interest (see Section 2 of this Module). Example – non-controlling interest On 30 September 2008, H Ltd acquired 30,000 ordinary shares in T Ltd. The Statements of Financial Position as at 30 September 2008 are detailed below.

  16. MODULE 4 – Group Accounting H Group - Consolidated Statement of Financial Position as at 30 September 2008  H TGroup ASSETS Non-current assets 83,00037,000120,000 Investment in T39,000 Current assets40,00030,00070,000 162,00067,000190,000 EQUITY & LIABILITIES Capital & reserves Ordinary share capital 100,00040,000100,000 Preference shares10,000 Retained earnings 50,0005,00050,000 Capital reserve7,000 Non-controlling interest 23,000 Current liabilities 12,0005,00017,000 162,00067,000 190,000

  17. MODULE 4 – Group Accounting W1 GoodwillT Fair value of consideration39,000 Less group share of net assets acquired:  T’s ord. share capital (75% x 40,000)(30,000) T’s pre-acq. reserves (75% x 5,000)(3,750) T’s other reserves (75% x 7,000)(5,250) Goodwill on acquisitionnil W2 Non-controlling interest T’s ordinary share capital (25% x 40,000)10,000 T’s reserves (25% x 5,000)1,250 T’s other reserves (25% x 7,000)1,750 13,000 T’s preference shares (100% x 10,000)10,000 23,000

  18. MODULE 4 – Group Accounting Key Summary Point The balance for non-controlling interests to be included in the Statement of Financial Position is calculated at the date of consolidation each year.

  19. MODULE 4 – Group Accounting Goodwill on consolidation A company will often pay more than ‘fair value’ to acquire a controlling interest in another business. This premium is known as goodwill. Positive goodwill is shown as an asset in the consolidated Statement of Financial Position and initially measured at cost. It is subsequently tested annually for impairment. In the case of negative goodwill, this should be recognised immediately as a gain in the consolidated Statement of Comprehensive Income. Calculating goodwill on acquisition Goodwill is calculated at the date of acquisition. Before goodwill can be calculated, the acquirer must decide on its accounting policy for measuring any non-controlling interest. IFRS 3 Business Combinations gives acquirers two options when measuring the value of any non controlling interest – the partial method and the full (fair) method. The calculation of goodwill at the date of acquisition will depend on the method used to value the non controlling interest. These two methods are discussed in more detail in Section 2 of this Module. At this stage we will just consider the partial method, whereby goodwill is measured at the acquisition date as: fair value of consideration paid – fair value of the share of identifiable net assets acquired

  20. MODULE 4 – Group Accounting Key Summary Point The calculation of goodwill depends on which of the two methods is used to Value the non-controlling interest – the partial method or the full (fair value) method.

  21. MODULE 4 – Group Accounting Pre- & post-acquisition profits The pre-acquisition profits of a subsidiary are the profits made by the subsidiary before the parent acquired control. They represent ‘net assets’ at the acquisition date and are therefore incorporated into the calculation of ‘Goodwill’. The post-acquisition profits of a subsidiary are the profits made by the subsidiary after the parent acquired control. They represent the increase in value of the investment (or decrease in the case of post-acquisition losses) and are added to consolidated retained earnings (and non-controlling interests, where appropriate). The table below shows how the retained earnings of the subsidiary at the date of consolidation are allocated.

  22. MODULE 4 – Group Accounting Example – pre- and post-acquisition profits Peter Ltd acquired 37,500 shares in Sid Ltd a number of years ago at a cost of 43,000 when the retained earnings of Sid Ltd were 10,000. Summary statements of financial position as at 31 December 2009 are shown below: Retained earnings of Sid Ltd can be split into pre-acquisition (10,000) and post-acquisition (14,000)

  23. MODULE 4 – Group Accounting Consolidated Statement of Financial Position as at 31 December 2009 Workings: Goodwill = 43,000 - 75% (50,000 + 10,000) = (2,000) Non-controlling interests = 25% (50,000 + 24,000) = 18,500 Retained earnings = 45,000 + 75% (14,000) = 55,500 + 2,000 (negative goodwill) = 57,500

  24. MODULE 4 – Group Accounting Key Summary Point Pre-acquisition profits are incorporated into Goodwill and post-acquisition Profits are included in consolidated retained earnings.

  25. MODULE 4 – Group Accounting Fair value adjustment in respect of net assets acquired At the date of acquisition, the subsidiary’s net assets are included in the consolidated Statement of Financial Position and in the goodwill calculation at their ‘fair value’. If some of the subsidiary’s net assets are not stated at fair value in the subsidiary’s Statement of Financial Position, a consolidation adjustment is required. An adjustment is made at the date of acquisition, which effectively restates the net assets in question to ‘fair value’. This fair-value adjustment will impact both the calculation of goodwill and non-controlling interest. Consolidated Statement of Financial Position Revaluation adjustment at date of acquisition Dr Net assets (this may involve more than one category of net assets) Cr Goodwill (group %) Cr Non-controlling interests (NCI %)

  26. MODULE 4 – Group Accounting In the case of restated non-current assets, such as property, plant and equipment, additional depreciation must also be accounted for since the acquisition date. Consolidated Statement of Financial Position Depreciation adjustment (for each year up to the date of consolidation)  Dr Retained earnings (group %) Dr Non-controlling interests (NCI %) Cr Property, plant and equipment (PPE)

  27. MODULE 4 – Group Accounting Example – fair-value adjustment at date of acquisition On 31 December 2009, Petra Ltd paid 60,000 to acquire all the shares in Sheila Ltd. The fair value of Sheila’s non-current assets was 40,000 at that date. Summary statements of financial position as at 31 December 2009 are shown below: Workings: Non-current assets = 410,000 + 30,000 + 10,000 = 450,000 Goodwill = 60,000 – (25,000 + 17,000 + 10,000) = 8,000 Retained earnings = 187,000 + nil (no post-acquisition profits) = 187,000

  28. MODULE 4 – Group Accounting Key Summary Point A subsidiary’s net assets are included in the consolidated Statement of Financial Position and in the goodwill calculation at fair value, which may require a consolidation adjustment to assets, group retained earnings and non-controlling interests.

  29. MODULE 4 – Group Accounting Group transactions Unrealised profits on group transfers When one group company transfers assets (inventory or property, plant or equipment) to another group company at a profit, the selling company will recognise a profit. If the assets are still held by the group at the year end, their value will include this unrealised profit. Unrealised profits on such transaction must be eliminated in full on consolidation. If this is not done, a group could artificially increase the value of its assets simply by transferring them at inflated prices between group companies. The consolidation adjustment will depend on which company recorded the profit in its books. Consolidated Statement of Financial Position Eliminating unrealised profits – consolidation adjustment Where parent transfers asset to subsidiary (parent makes the profit) Dr Retained earnings Cr Inventory / PPE Where subsidiary transfers asset to parent (subsidiary makes the profit) Dr Retained earnings (group %) Dr Non-controlling interests (NCI %) Cr Inventory / PPE

  30. MODULE 4 – Group Accounting Example – eliminating unrealised profits Harry Ltd owns 90% of Shane Ltd. During the year, Shane sold goods to Harry at cost plus 25%. At the year-end, the closing inventory of Harry includes 8,000 of goods, at invoice value, originally acquired from Shane. What adjustments are required on consolidation? Unrealised profit = 8,000 x 25/125 = 1,600 Dr Retained earnings (90% x 1,600) 1,440 Dr Non-controlling interests (10% x 1,600) 160 Cr Inventory 1,600

  31. MODULE 4 – Group Accounting Inflated depreciation on transferred property, plant or equipment When property, plant or equipment is transferred between group companies at a profit, the depreciation charge in the buying company’s accounts will be inflated. This additional depreciation must be eliminated on consolidation. Consolidated Statement of Financial Position Removing inflated depreciation – consolidation adjustment Where parent holds the asset: Dr PPE (accumulated depreciation) Cr Retained earnings Where subsidiary holds the asset: Dr PPE (accumulated depreciation) Cr Retained earnings (group share of excess depreciation) Cr Non-controlling interests (NCI share of excess depreciation)

  32. MODULE 4 – Group Accounting Example – inflated depreciation On 1 January 2009, Alison Ltd sold a machine to Billy Ltd for 100,000. The machine cost Alison 50,000 on 1 January 2007. Depreciation is charged at 10% per annum on a straight-line basis. The current year end is 31 December 2011. Alison is a 75% subsidiary of Billy. Billy still holds the machine. What adjustments are required on consolidation? Cost to the group 50,000 Depreciation (50,000 x 10% x 2yrs) (10,000) Book value at the date of transfer (1 Jan 2009) 40,000 Transfer price 100,000 Unrealised profit 60,000 Dr Retained earnings (75% x 60,000) 45,000 Dr Non-controlling interest (25% x 60,000) 15,000 Cr PPE 60,000 Being elimination of unrealised profit Depreciation based on transferred value (100,000 x 10% x 3yrs) 30,000 Depreciation based on original cost (50,000 x 10% x 3yrs) 15,000 Inflated depreciation charged 15,000 Dr PPE (accumulated depreciation) 15,000 Cr Retained earnings 15,000 Being elimination of inflated deprecation

  33. MODULE 4 – Group Accounting Key Summary Point Unrealised profits and inflated depreciation arising on intra-group asset transfers must be eliminated on consolidation.

  34. MODULE 4 – Group Accounting Dividends If ordinary or preference dividends have already been paid (by the parent or the subsidiary) no adjustments are required to the Statement of Financial Position. Ordinary dividends cannot be accrued until approved by shareholders at the AGM, and therefore proposed ordinary dividends will not be recognised as a liability in the financial statements of the parent, subsidiary or group. However, proposed preference dividends can be recognised as a liability in the financial statements. If the parent has proposed preference dividends, no further adjustments are required. If the subsidiary has proposed preference dividends (payable to the parent and the non controlling interests), it must be ensured that, before consolidation, both the parent and the subsidiary have accounted for the proposed dividend correctly. On consolidation, the dividend payable by the subsidiary is partly cancelled against the dividend receivable by the parent, leaving a dividend payable to the non-controlling interest as a liability in the Consolidated Statement of Financial Position.

  35. MODULE 4 – Group Accounting Example Hogan Ltd owns 75% of the preference shares of Stall Ltd and at the date of consolidation, Stall Ltd has a liability in respect of preference dividends payable of 200,000. Hogan Ltd is entitled to 75% of these dividends, i.e. 150,000. On consolidation, the dividend payable by the subsidiary is partly cancelled against the dividend receivable by the parent, leaving a liability of 50,000 representing the dividend payable to the non-controlling interest.

  36. MODULE 4 – Group Accounting Dividends paid out of pre-acquisition reserves After the parent acquires control of a subsidiary, the subsidiary may pay a dividend out of pre-acquisition reserves. This dividend received by the parent cannot be recognised as income in its books, but instead is treated as a reduction in the cost of its investment. Example Harold Ltd pays 80,000 to acquire 100% of Samuel Ltd with net assets worth 80,000. Samuel Ltd subsequently pays a dividend of 10,000 out of its retained earnings. As a result, Harold Ltd would be partially recovering its capital investment. The 10,000 received by Harold Ltd is clearly not distributable and should be regarded as a reduction in the cost of the investment.

  37. MODULE 4 – Group Accounting Key Summary Point Adjustments are required in respect of dividends proposed by subsidiaries and dividends paid by subsidiaries out of pre-acquisition reserves.

  38. MODULE 4 – Group Accounting ExampleOn 1 January 2010, H Ltd acquired 75% of the ordinary shares in S Ltd. At that date the fair value of S Ltd’s non-current assets was £23,000 greater than their book value and retained earnings were £21,000. S Ltd has not incorporated the revaluation into its books. If S Ltd had re-valued its non-current assets at 1 January 2010 an additional £3,000 depreciation would have been charged during the year. The Statements of Financial Position as at 31 December 2010 are given below. H Group - Consolidated Statement of Financial Position as at 31 December 2010 H S Adjustments Total Debit Credit Ref ASSETS Non-current assets Tangible assets63,00028,000 20,000 W4 111,000 Investment in S (75%) 51,000 51,000 W1 - Goodwill 3,000 W1 3,000 Current assets62,000 33,00095,000 176,00061,000209,000 EQUITY & LIABILITIES Capital & reserves Ordinary share capital 80,00020,000 20,000 W1 / W380,000 Retained earnings96,00041,000 28,250 W2108,750 Non-controlling interest20,250W320,250 176,00061,00071,25071,250 209,000

  39. MODULE 4 – Group Accounting W1 Goodwill Fair value of consideration51,000 Less group share (75%) of net assets acquired: S’s ordinary share capital (75% x 20,000)(15,000) S’s pre-acquisition reserves (75% x 21,000) (15,750) S’s re-valuationadjustment (75% x 23,000)(17,250) Goodwill on acquisition 3,000 W2 consolidated reserves 100% H’s reserves96,000 Add group share of:  S’s post-acquisition reserves (75% x 20,000)15,000 S’s depreciationadjustment (75% x 3,000)(2,250) 108,750

  40. MODULE 4 – Group Accounting W3 Non-controlling interest Minority share (25%) of: S’s ordinary share capital (25% x 20,000)5,000 S’s reserves (25% x 41,000)10,250 S’s revaluation adjustment (25% x 23,000)5,750 S’s depreciation adjustment (25% x 3,000)(750) 20,250 W4 Non-current assets H63,000 S – book value28,000 - add revaluation less depn to date (23,000–3,000)20,00048,000 111,000

  41. MODULE 4 – Group Accounting Consolidated Statement of Comprehensive Income Consolidation The income & expenditure of a parent and its subsidiaries are added together line by line, i.e. consolidated. Items appearing as income in one group company and expenditure in another are cancelled out. The main items which are cancelled out include: • inter-company sales/purchases • intra-group charges such as management charges, interest on loans, rent, etc. • Note that these cancellations take place only in the group accounts. The individual company accounts for the parent and the subsidiary are not affected.

  42. MODULE 4 – Group Accounting Example – inter-company sales H Ltd owns 75% of S Ltd. During the year S Ltd sold 70,000 of goods to H Ltd and H Ltd sold 30,000 of goods to S Ltd. Note: Inter-company transactions are eliminated in full Example – inter-company charges H Ltd owns 75% of S Ltd. H Ltd also owns 40% of the 800,000 10% debenture stock of S Ltd. Inter-company charge = 40% x(10% x 800,000) = 32,000

  43. MODULE 4 – Group Accounting Key Summary Point Items appearing as income in one group company and expenditure in another are cancelled out in the group accounts.

  44. MODULE 4 – Group Accounting Further consolidation adjustments Fair value of assets acquired At the date of acquisition, the subsidiary’s net assets are included, in the consolidated Statement of Financial Position and in the goodwill calculation, at ‘fair value’. If the subsidiary’s net assets are not at fair value, a consolidation adjustment is required with the net assets being restated at ‘fair value’ at the date of acquisition. In the case of restated property, plant and equipment, additional depreciation must also be accounted for, since the acquisition date. Consolidated Statement of Comprehensive Income Fair values – consolidation adjustment Adjustment for current year depreciation Dr Depreciation charge Cr PPE (accumulated depreciation) Adjustment for prior years’ depreciation Dr Retained earnings b/fwd (Group %) Dr Non-controlling interests (NCI %) Cr PPE (accumulated depreciation)

  45. MODULE 4 – Group Accounting Unrealised profits on group transfers When one group company transfers assets (inventory or PPE) to another group company at a profit, the selling company recognises a profit. If the assets are still held by the group at the year end, their value will include an unrealised profit. Unrealised profits on such transactions are eliminated on consolidation. Consolidated Statement of Comprehensive Income Eliminating unrealised profits – consolidation adjustment Where inventory is transferred at a profit Dr COS Cr Inventory Where PPE is transferred at a profit Dr Profit on sale of PPE Cr PPE If the asset transfer took place in a previous period Dr Retained earnings b/fwd Cr Inventory / PPE Refer to example on slide 30 – eliminating unrealised profits Statement of Comprehensive Income adjustment:  Dr Cost of sales 1,600

  46. MODULE 4 – Group Accounting Group transfers - inflated depreciation Where property, plant or equipment is transferred within the group at a profit, the depreciation charge in the buying company’s accounts will be inflated. An adjustment must be made on consolidation to correct any excess depreciation charged in current and previous years. Consolidated Statement of Comprehensive Income Inflated depreciation – consolidation adjustment Dr PPE (accumulated depreciation) Cr Depreciation charge – current yr Cr Retained earnings b/fwd – previous yrs Refer to Example – inflated depreciation (slide 31) Statement of Comprehensive Income adjustment: Cr Depreciation charge 15,000 Being elimination of inflated deprecation

  47. MODULE 4 – Group Accounting Unrealised profits in opening inventory Opening inventory may also include transferred assets with associated unrealised profits. If this is the case, an adjustment must be made in order to eliminate this unrealised profit from opening inventory: Consolidated Statement of Comprehensive Income Unrealised profits in opening inventory – consolidation adjustment Dr Retained earnings b/fwd Cr Cost of sales (opening inventory) Key Summary Point Consolidation adjustments are required in the consolidated Statement of Comprehensive Income, in respect of restatement of assets to fair value, intra-group asset transfers which also potentially entail adjustments to depreciation charges, retained earnings and non-controlling interest.

  48. MODULE 4 – Group Accounting Acquisition of a subsidiary during an accounting period When a subsidiary is acquired part-way through an accounting period, the profits for the period are apportioned into pre- and post-acquisition profits. Profits are normally apportioned on a time basis, unless an alternative method is preferable (e.g. seasonal income). Only the group share of post-acquisition profits is included in the consolidated Statement of Comprehensive Income. Example – acquisition of subsidiary during the year H Ltd acquires 80% of S Ltd on 30 April 2008. Results for the year ended 31 December 2008 are as follows: H LtdS Ltd Profit before tax 100,000 60,000 Income tax (45,000) (27,000) Profit for the year 55,000 33,000 Solution H LtdS Ltd(8 months)Group Profit before tax 100,000 40,000 140,000 Income tax (45,000) (18,000) (63,000) Profit for the year 55,000 22,000 77,000 Attributable to NCI (4,400) (4,400) Attributable to the group 55,000 17,600 72,600

  49. MODULE 4 – Group Accounting • Key Summary Point • When a subsidiary is acquired part-way through an accounting period, profits for the period are normally apportioned on a time basis between pre- and post-acquisition profits.

  50. MODULE 4 – Group Accounting Dividends paid Dividends paid by the parent are shown in the group’s Statement of Changes in Equity. No adjustments are required. Dividends paid by the subsidiary to the parent are cancelled out as follows: Dr Investment income (SoCI) Cr Dividends paid (SoCE) Dividends paid by the subsidiary to the non-controlling interest can be ignored, except for debt related preference dividends which will be shown in the Consolidated Statement of Comprehensive Income as an interest expense. The group’s investment income only includes dividends received from outside the group. Dividends proposed Proposed dividends cannot be recognised as a liability (as per IAS 10 Events after the Reporting Period), except for proposed preference dividends. Such dividends proposed by the parent are shown as a liability in the Statement of Financial Position and no adjustments are required. Dividends proposed by the subsidiary to the parent are cancelled out as follows: Dr Investment income (SoCI) Cr Dividends proposed (SoCE) Dividends proposed by the subsidiary to the non-controlling interest can be ignored, except for debt related preference dividends which will be shown in the consolidated Statement of Comprehensive Income as an interest expense.