ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Chapter 18: Consolidated accounts
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Attheacquisitiondate
1May
P S
$ $
Non‐currentassets:
Property,plantandequipment 500,000 350,000
InvestmentinS 700,000 ‐
–
–––––––
–
––––––
1,200,000 350,000
Currentassets
Inventory 70,000 60,000
Othercurrentassets 130,000 110,000
–
–––––––
–
––––––
1,400,000 520,000
–
–––––––
–
––––––
Equity
Ordinaryshares 300,000 200,000
Sharepremium 200,000 100,000
Retainedearnings 580,000 170,000
–
–––––––
–
––––––
1,080,000 470,000
Currentliabilities 320,000 50,000
–
–––––––
–
––––––
1,400,000 520,000
–
–––––––
–
––––––
The accounting policy of Entity P is to measure non-controlling interests at their
proportionate share of the net assets of the subsidiary.
The fair value of the subsidiary’s inventory at 1 May is estimated as $52,000.
The fair value of the non-current assets of the subsidiary at 1 May is estimated as
$420,000.
The goodwill is calculated as follows:
$
Fairvalueofnetassets:
Non‐currentassets 420,000
Inventory 52,000
Othercurrentassets 110,000
Liabilities (50,000)
–
––––––
532,000
Costoftheacquisition 700,000
–
––––––
Goodwill 168,000
–
––––––
A consolidated statement of financial position as at the date of acquisition will be as
follows.
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PGroup
ConsolidatedstatementoffinancialpositionasatthedateofacquisitionofS
1May
Non‐currentassets:$
Property,plantandequipment (500,000+420,000) 920,000
Goodwillatcost 168,000
Currentassets
Inventory (70,000+52,000) 122,000
Othercurrentassets (130,000+110,000) 240,000
––––––––
1,450,000
––––––––
Equity
Ordinaryshares(Ponly) 300,000
Sharepremium(Ponly) 200,000
Consolidatedretainedearnings 580,000
––––––––
1,080,000
Currentliabilities (320,000+50,000) 370,000
––––––––
1,450,000
––––––––
Note that the statement of financial position of the subsidiary S at the date of
acquisition is adjusted as follows, for the purpose of consolidation:
S
Adjustedstatementoffinancialpositionat1May
$
Non‐currentassets:
Property,plantandequipment 420,000
Currentassets
Inventory 52,000
Othercurrentassets 110,000
–––––––
582,000
–––––––
Equity
Ordinaryshares 200,000
Sharepremium 100,000
Revaluationreserve(420,000–350,000)–seeNote1 70,000
Retainedearnings–seeNote2 162,000
–––––––
532,000
Currentliabilities 50,000
–––––––
582,000
–––––––
Notes
(1) A revaluation reserve is created for the revaluation of the non-current assets.
The retained earnings are adjusted downwards to allow for the downwards
revaluation of the inventory by $8,000.
Chapter 18: Consolidated accounts
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(2) The retained earnings of the subsidiary after the fair value adjustments are
calculated as follows:
$
RetainedearningsintheaccountsofSasattheacquisitondate 170,000
Minusdownwardadjustmenttoinventoryvaluation(60,000–52,000) (8,000)
–––––––
AdjustedretainedearningsofsubsidiaryS 162,000
–––––––
5.3 Fair value adjustments in a subsequent period
Fair value adjustments normally continue to affect the consolidated statement of
financial position after the acquisition date.
Sometimes this is simply a matter of including the original fair value adjustment in
the calculation of the subsidiary’s net assets at the end of a subsequent reporting
period.
Atendofsubsequent
reportingperiod
At
acquisition
Post
acquisition
$
Equityshares X X‐
Retainedearnings X X X
Fairvalueadjustments X X‐
–
– ––
X X
–
– ––
Occasionally the situation is more complicated. For example:
Where a non-current asset has been revalued upwards, extra depreciation must
be charged on the difference between the asset’s book value and its fair value.
Where a long-term loan has been discounted to net present value, the discount
unwinds and the net present value of the loan increases in subsequent periods.
The unwinding of the discount is an additional expense (a finance charge).
In both these cases:
the amount of the fair value adjustment changes after the acquisition date; and
post-acquisition reserves are affected.
Atendofsubsequent
reportingperiod
At
acquisition
Post
acquisition
$
Equityshares X X‐
Retainedearnings X Y X–Y
Fairvalueadjustments X Y X‐Y
–
– ––
–
––––
X Y X–Y
–
– ––
–
––––
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Example
Entity P acquired 100% of the shares of Entity S on 1 January Year 1, when S had
equity share capital of $500,000 and retained earnings of $200,000.
The summarised statement of financial position of S at 31 December Year 1 is shown
below.
S
Statementoffinancialpositionat31DecemberYear1
$
Non‐currentassets:
Property,plantandequipment 1,200,000
Currentassets 300,000
––––––––
1,500,000
––––––––
Equity
Ordinaryshares 500,000
Retainedearnings 300,000
––––––––
800,000
Non‐currentliabilities:loan 500,000
Currentliabilities 200,000
––––––––
1,500,000
––––––––
At 1 January Year 1 the fair values of S’s property, plant and equipment exceeded
their book value by $200,000. They had a remaining useful life of 5 years at this date.
The long-term loan of $500,000 is repayable on 31 December Year 5. The loan is
interest-free, but the interest rate on a similar borrowing would be 10%.
The book values (carrying amounts) of the other assets and liabilities of S were
approximately equal to their fair values at 1 January Year 1.
The effect of the fair value adjustments is as follows:
Property, plant and equipment increases by $200,000 at the acquisition date. In
Year 1, additional depreciation of $40,000 is charged. At 31 December Year 1, fair
values exceed book values by $160,000.
At 1 January Year 1 the long-term loan is discounted to $310,500 (500,000 ×
0.621). At 31 December Year 1 the loan is discounted to $341,500 (500,000 ×
0.683). The unwinding of the discount is the difference between these two
amounts: $31,000. Discounting the long-term loan increases the net assets of S by
$189,500 at acquisition and by $158,500 at the end of the reporting period.
Chapter 18: Consolidated accounts
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The net assets of S are calculated below.
Atendof
reporting
period
Atacquisition Postacquisition
$ $ $
Equityshares 500,000 500,000 ‐
Retainedearnings 300,000 200,000 100,000
Fairvalue
adjustments:
Non‐currentassets 160,000 200,000 (40,000)
Longtermloan 158,500 189,500 (31,000)
–
–––––––
–
––––––– ––––––––
1,118,500 1,089,500 29,000
–
–––––––
–
––––––– ––––––––
5.4 Fair value method of accounting for NCI
IFRS 3 (revised) allows an alternative method of measurement for non-controlling
interests, which values the NCI at the date of acquisition at a fair value. This
includes some goodwill in the subsidiary that is attributable to the NCI.
With this ‘fair value’ method, the preparation of the consolidated statement of
financial position is similar to the method already described. The difference is that:
Goodwill attributable to the NCI (asset) is included in goodwill in the
consolidated statement of financial position
NCI (equity) is increased by the amount of this goodwill.
By adding the goodwill attributable to the non-controlling interests to their
proportionate share of the net assets of the subsidiary, the non-controlling interests
are valued at their fair value as at the acquisition date.
IFRS 3 provides the following ‘fair value’ formula for the calculation of total
goodwill in the consolidated statement of financial position as at the acquisition
date:
$
Purchaseconsiderationpaidbytheparentcompany A
FairvalueofNCIatacquisitiondate B
A+B
Identifiablenetassetsofthesubsidiaryatthe
acquisitiondate(atfairvalue)
(C)
Totalgoodwill(parentandNCI) A+B– C
After the acquisition date, the fair value formula is no longer applied. NCI is valued
in the consolidated statement of financial position at:
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$
Proportionateshareofidentifiablenetassetsof
subsidiary
X
GoodwillattributabletoNCI(=goodwillasat
acquisitiondatelessanysubsequentimpairment)
Y
X–Y
Example
Hedd acquired 80% of the shares of Stove on 1 May Year 2 at a price of $8 per share.
A summary statement of financial position of Stove at this date is as follows:
Stove
Statement of financial position at 1 May Year 2
$
Totalassets 650,000
Equity
Ordinarysharesof$1each 100,000
Retainedearnings 500,000
600,000
Liabilities 50,000
Equityplusliabilities 650,000
It has been estimated that the goodwill attributable to the non-controlling interests
in Stove at this date was $45,000.
For the purpose of preparing a consolidated statement of financial position,
goodwill and the non-controlling interests should be valued as follows.
Net assets of subsidiary at acquisition date = $(650,000 – 50,000) = $600,000
Fair value of parent company share = 80% × $600,000 = $480,000
Amount attributable to NCI = 20% × $600,000 = $120,000
FairvalueofNCIatacquisitiondate=$120,000+attributablegoodwill$45,000=
$165,000.
$
Purchaseconsiderationpaidbytheparentcompany
(80,000shares×$8)
640,000
Fairvalueofparentcompanyshareofnetassets 480,000
Purchasedgoodwillattributabletoparent 160,000
$
Purchasedgoodwillattributabletoparent 160,000
GoodwillattributabletoNCI 45,000
Totalgoodwillinconsolidatedstatementoffinancialposition 205,000
Chapter 18: Consolidated accounts
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Alternatively, total goodwill could be calculated as follows:
$
Purchaseconsiderationpaidbytheparentcompany 640,000
FairvalueofNCIatacquisitiondate(120,000+45,000) 165,000
805,000
Netassetsofthesubsidiaryattheacquisitiondate(atfairvalue) (600,000)
Totalgoodwill(parentandNCI) 205,000
At the acquisition date, the NCI is valued at $165,000. Subsequently, the value of
NCI in the consolidated statement of financial position should be the proportionate
share of the NCI in the net assets of the subsidiary, plus the goodwill of $45,000 less
any accumulated impairment of this goodwill.
How is the goodwill attributable to NCI calculated?
For the purpose of your examination, if you are asked to prepare a consolidated
statement of financial position using the fair value method for NCI, the goodwill
attributable to the NCI will be identifiable in one of the following three ways.
The exam question might state the value of the goodwill attributable to the NCI.
The exam question might state that the fair value of the NCI at the acquisition
date was $X. The value of attributable goodwill can then be calculated as the
difference between total fair value ($X) and the proportionate share of the NCI in
the net assets o f the subsidiary at the acquisition date.
The exam question might give the market value of the shares in the subsidiary
before its acquisition. The fair value of the NCI can then be estimated as the
number of shares held by the NCI multiplied by the pre-acquisition price per
share. Having established the total fair value of the NCI, the attributable
goodwill is calculated by subtracting the proportionate share of the NCI in the
net assets of the subsidiary at the acquisition date (same as the method above).
Example
Stott has 1 million shares of $1 each in issue. Hott acquired 75% of these shares at a
price of $10 per share. Prior to the acquisition, the shares of Stott had been trading in
the stock market at $9 per share. The fair value of the net assets of Stott at the
acquisition date was $8 million.
Total goodwill and the value of the NCI at the acquisition date can be calculated as
follows:
$
Purchaseconsiderationpaidbytheparentcompany
(750,000shares×$10)
7,500,000
Fairvalueofparentcompanyshareofnetassets
(75%×$8million)
6,000,000
Purchasedgoodwillattributabletoparent 1,500,000
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$
FairvalueofNCIatacquisitiondate(250,000×$9) 2,250,000
NCIshareofnetassetsatthisdate(25%×$8million) 2,000,000
PurchasedgoodwillattributabletoNCI 250,000
$
Purchasedgoodwillattributabletoparent 1,500,000
GoodwillattributabletoNCI 250,000
Totalgoodwillinconsolidatedstatementoffinancialposition 1,750,000
Alternatively, total goodwill could be calculated as follows:
$
Purchaseconsiderationpaidbytheparentcompany 7,500,000
FairvalueofNCIatacquisitiondate 2,250,000
9,750,000
Netassetsofthesubsidiaryattheacquisitiondate(atfairvalue) (8,000,000)
Totalgoodwill(parentandNCI) 1,750,000
At the acquisition date, the NCI is valued at $2,250,000, which includes goodwill of
$250,000.
As stated earlier, after the acquisition date, the fair value formula is no longer
applied. The NCI of Stott will be valued in the consolidated statement of financial
position at:
$
Proportionateshareofidentifiablenetassetsofsubsidiary X
GoodwillattributabletoNCIasatacquisitiondate 250,000
Accumulatedimpairmentofgoodwillafterthatdate Y
X+250,000–Y
Impairment of goodwill after acquisition: fair value method of measuring NCI
When non-controlling interests are valued by the fair value method, any
impairment in the total goodwill after acquisition should be shared between the
parent company shareholders and the NCI.
Example
Start has 10 million shares of $1 each in issue. Hart acquired 80% of these shares at a
price of $19.5 million when the net assets of Start were $20 million. Prior to the
acquisition, the shares of Stott had been trading in the stock market at $2.25 per
share.
Chapter 18: Consolidated accounts
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$
Purchaseconsiderationpaidbytheparentcompany 19,500,000
Fairvalueofparentcompanyshareofnetassets(80%×
$20million)
16,000,000
Purchasedgoodwillattributabletoparent 3,500,000
$
FairvalueofNCIatacquisitiondate(2,000,000 ×$2.25) 4,500,000
NCIshareofnetassetsatthisdate(20%×$20million) 4,000,000
PurchasedgoodwillattributabletoNCI 500,000
Total goodwill = $3,500,000 + $500,000 = $4,000,000.
Suppose that subsequently goodwill is impaired in value by $3 million, so that it is
now valued at just $1,000,000.
The impairment in the goodwill may be attributed proportionally to the parent
company and the NCI
Total Attributable
toparent
Attributable
toNCI
$ $ $
Originalgoodwill 4,000,000 3,500,000 500,000
Impairment (3,000,000) (2,625,000) (375,000)
Revisedvalue 1,000,000 875,000 125,000
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Consolidated statement of comprehensive income
IAS 1 requirement for a consolidated statement of comprehensive income
Consolidated income statement: the basic rules
Pre- and post-acquisition profits
Non-controlling interest in the consolidated income statement
Impairment of goodwill and consolidated profit
Fair value adjustments
Accounting for deferred consideration
6 Consolidated statement of comprehensive income
6.1 IAS1 requirement for a consolidated statement of comprehensive
income
IAS1 requires consolidated financial statements to include either:
a single statement of comprehensive income, or
two statements: (1) a consolidated income statement that reports the components
of profit or loss, and (2) a consolidated statement of comprehensive income that
begins with profit after tax and then shows the other components of
comprehensive income.
This is the same requirement as for single entities.
In addition, in consolidated financial statements, there must also be disclosure of:
(1) the profit or loss for the period attributable to:
− owners of the parent company, and
− non-controlling interests.
(2) total comprehensive income for the period attributable to:
− owners of the parent company, and
− non-controlling interests.
When there are two separate statements, item (1) should be disclosed in the
consolidated income statement and item (2) should be disclosed in the statement of
comprehensive income.
The main problems with preparing a consolidated statement of comprehensive
income relate to reporting profit or loss for the period, and this section therefore
focuses on profit or loss items. For convenience, this will be referred to as the
‘consolidated income statement’.