Basic Principles of Group Accounts

1. Learning Outcomes: Demonstrate the basic principles of the acquisition method of consolidated accounts Understand the journal entries at the date of acquisition Understand the procedures to prepare the consolidated accounts Basic Principles of Group Accounts

2. Consolidated balance sheet can be prepared either: On the date the shares were acquired On the subsequent dates Cont.

3. Cont. Preparation of the Consolidated Balance Sheet: • On the date the shares were acquired • On the subsequent dates See Illustration 1 & 2

4. Issues: Pre-acquisition adjustments Pre-acquisition vs post-acquisition reserves Minority interest Other post-acquisition results Preference shares Intragroup balances Intragroup transactions Cont.

5. Issues: Pre-acquisition adjustments Pre-acquisition vs post-acquisition reserves Minority interest Other post-acquisition results Preference shares Intragroup balances Intragroup transactions Cont.

6. FRS 127 The net asset values of the subsidiary be stated at the fair values to the parent Consolidated adjustments may be necessary to revise the book values to their fair values Pre-Acquisition Adjustments

7. Cont. See Example 1.1 from TLT, CFS, 5th edition, p.5

8. Issues: Pre-acquisition adjustments Pre-acquisition vs post-acquisition reserves Minority interest Preference shares Intragroup balances Intragroup transactions Cont.

9. Reserves • In CFS, two types of reserve: • Pre-acquisition reserve (profit) Reserve that exists in subsidiary accounts at the date of acquisition. Not belong to the parent company Need to be eliminated when preparing consolidated account • Post-acquisition reserve (profit) The subsidiary’s profit/loss incurred after the date of acquisition A parent company has a share on this reserve based on the percentage owned in a subsidiary This reserve becomes part of the consolidated account

10. All the reserves that exist in the subsidiary on the date the shares were acquired It is a capital profits Non distributable profits Any distribution of dividends by the subsidiary out of pre-acquisition reserves is a return of capital for the parent company Pre-acquisition vs Post-acquisition • All the reserves that exist in the subsidiary after the date of acquisition. Increases or decreases from other reserves are post-acquisition reserves • It is revenue profits • Distributable profits • Any distribution of dividends out of post reserves is an income for the parent company

11. Example LM Bhd acquires 100% shares in MN Bhd. The equity of MN Bhd is as follows:

12. Solution Based on the information given, the amount of pre-acquisition reserve and post-acquisition are as follows:

13. Cont. See Example 1.2 from TLT, CFS, 5th edition, p.9

14. Issues: Pre-acquisition adjustments Pre-acquisition vs post-acquisition reserves Minority interest Other post-acquisition results Preference shares Intragroup balances Intragroup transactions Cont.

15. Minority Interest (MI) • Exist when a parent company acquires less than 100% all the issued shares capital of subsidiary • Refers to the interest of shareholders other than a parent company in a subsidiary’s net assets • In the CBS, the MI should be presented separately from group’s equity and liabilities because they are not part of the group interest

16. Cont. • MI is not a liability to the group • MI is also eligible to receive the profit/loss and dividends of subsidiary • MI can be determined based on the percentage of ownership on the fair value of the net assets.

17. Example 1 On January 1 20X8, CC Bhd acquired 80% of the ordinary shares (RM1 par value) of DD Bhd. The balance sheets of DD Bhd at the date of acquisition was as follows: *A fair market value for land is RM30,000 (increased RM10,000) and a fair market value for machine is RM22,000 (decreased RM5,000). Calculate the minority interest on the subsidiary’s net assets

18. Cont. MI = % of MI x net assets of subsidiary after acquisition = 20% x (RM180,000 + 10,000 – 5,000 – 30, 000) = RM31, 000 Journal entry to record MI on net assets of subsidiary Share capital (20% x RM100,000) RM20,000 Retained earnings (20% x RM50,000) 10,000 Revaluation reserves (20% x RM5,000) 1,000 Minority Interest 31,000

19. Cont. See Example 1.3 from TLT, CFS, 5th edition, p.12

20. Issues: Pre-acquisition adjustments Pre-acquisition vs post-acquisition reserves Minority interest Other post-acquisition results Preference shares Intragroup balances Intragroup transactions Cont.

21. Other Post-acquisition Results • If a subsidiary revalues any of its property, plant and equipment in the post-acquisition period, any increase in the carrying amount is usually credited directly to a revaluation reserve account. • In the group accounts, this increase in post-acquisition revaluation reserves is split between the minority interest and the parent accordingly, with the latter’s share being reflected in the group’s revaluation reserves.

22. Cont. See Example 1.4 from TLT, CFS, 5th edition, p.15