ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)
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Chapter 4: Group financial statements
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Step 2
Calculate the net assets of S at acquisition and at the end of the reporting period (=
31 December Year 6).
At end of
reporting
period
At
acquisition
Post acquisition
accumulated
profits
$
$ $
Equity shares 40,000
20,000 -
Share premium 30,000
50,000 -
Accumulated profits 90,000
65,000 25,000
160,000
135,000
You should assume that the subsidiary has not issued any shares since acquisition,
so the figures for equity shares and share premium will be the same at acquisition as
at the end of the reporting period.
Step 3
Calculate the goodwill.
$
Cost of the acquisition
188,000
Minus: Parent’s share of the subsidary’s net assets at acquisition
($135,000 (Step 2) × 80% (Step 1))
(108,000)
–––––––––––––––– ––––––
Goodwill at acquisition 80,000
Minus: Impairment of goodwill to date (balancing figure)
(30,000)
–––––––––––––––– ––––––
Balance carried forward 50,000
–––––––––––––––– ––––––
Step 4
Calculate the non-controlling interest’s share.
Share of net assets of the subsidiary at the end of the reporting period:
= $160,000 (Step 2) × 20% (Step 1) = $32,000
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Step 5. Calculate consolidated accumulated profits.
$
Parent accumulated profits
480,000
Parent’s share of subsidiary’s post-acquisition profits
(80% (Step 1) × $25,000 (Step 2))
20,000
Minus: Impaired goodwill since acquisition (Step 3)
(30,000)
–––––––––––––––– –––
Consolidated accumulated profits 470,000
–––––––––––––––– –––
The consolidated statement of financial position as at the date of acquisition is
prepared as follows:
P Group
Consolidated statement of financial position as at 31 December Year 6
$000
Tangible non-current assets (620,000 + 120,000) 740,000
Goodwill
50,000
–––––––––––––––– –––
790,000
Current assets (112,000 + 60,000)
172,000
–––––––––––––––– –––
Total assets 962,000
–––––––––––––––– –––
Equity and liabilities
Equity attributable to equity holders of the parent
Share capital (parent only)
100,000
Share premium (parent only)
200,000
Accumulated profits (Step 5)
470,000
–––––––––––––––– –––
770,000
Non-controlling interest (Step 4)
32,000
–––––––––––––––– –––
Total equity 802,000
Bank loans (140,000 + 20,000)
160,000
–––––––––––––––– –––
Total equity and liabilities 962,000
–––––––––––––––– –––
2.3 Fair value method of accounting for NCI: full goodwill method
NCI and goodwill
A problem with accounting for non-controlling interests is the treatment of
goodwill.
When a parent company acquires 100% of a subsidiary, it acquires 100% of the
goodwill in the subsidiary, which is included in the consolidated statement of
financial position as purchased goodwill.
Chapter 4: Group financial statements
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When a parent company acquires less than 100% of a subsidiary, there is
presumably some goodwill in the subsidiary that is attributable to the non-
controlling interests. However the value of this goodwill is likely to be less than
the goodwill attributable to the parent company, not only because the NCI owns
a smaller proportion of the shares but also because the value of goodwill is
usually enhanced for the parent by having a controlling interest.
If there is some goodwill in the subsidiary that is attributable to the NCI, a question
to resolve is whether this goodwill should be included in the consolidated statement
of financial position.
As stated previously, IFRS 3 (revised) allows two methods of accounting for NCI, on
a transaction-by-transaction basis:
Method 1 (partial goodwill method). Do not recognise any goodwill for the NCI
in the consolidated statement of financial position. NCI should be valued at a
proportionate share of the identifiable net assets of the subsidiary. For example if
the NCI in a subsidiary is 30% and the identifiable net assets of the subsidiary
are $1,000,000, the NCI should be included in the consolidated statement of
financial position at $300,000. This is the ‘traditional’ method of accounting for
NCI, described above, that has been applied by companies that use IFRSs to
prepare their financial statements.
Method 2: fair value method or full goodwill method. Recognise the goodwill
attributable to the NCI in the consolidated statement of financial position, as at
the date of acquisition. By doing this, the NCI is measured at ‘fair value’ as at the
acquisition date. This goodwill cannot subsequently be re-valued upwards, but
if the goodwill is subsequently impaired it should then be written down in
value.
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:
$
Purchase consideration paid by the parent company A
Fair value of NCI at acquisition date B
A + B
Identifiable net assets of the subsidiary at the acquisition date
(at fair value) (C)
Total goodwill (parent and NCI) A + B – C
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After the acquisition date, the fair value formula is no longer applied. NCI is valued
in the consolidated statement of financial position at:
$
Proportionateshareofidentifiablenetassetsofsubsidiary X
GoodwillattributabletoNCI
(=goodwillasatacquisitiondatelessanysubsequentimpairment) Y
X–Y
Example 1
Hold acquired 75% of the shares of Stub on 1 April Year 3 at a price of $11 per share.
A summary statement of financial position of Stub at this date is as follows:
Stub
Statement of financial position at 1 April Year 3
$
Totalassets 750,000
Equity
Ordinarysharesof$1each 100,000
Retainedearnings 600,000
700,000
Liabilities 50,000
Equityplusliabilities 750,000
It has been estimated that the goodwill attributable to the non-controlling interests
in Stub at this date was $60,000.
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 = $(750,000 – 50,000) 700,000
Fair value of parent company share = 75% × $700,000
525,000
Amount attributable to NCI = 25% × $700,000
175,000
Goodwill attributable to NCI at acquisition 60,000
Fair value of NCI at acquisition date 235,000
$
Purchaseconsiderationpaidbytheparentcompany(75,000shares×$11) 825,000
Fairvalueofparentcompanyshareofnetassets 525,000
Purchasedgoodwillattributabletoparent 300,000
$
Purchasedgoodwillattributabletoparent 300,000
GoodwillattributabletoNCI 60,000
Totalgoodwillinconsolidatedstatementoffinancialposition 360,000
Chapter 4: Group financial statements
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Alternatively, total goodwill could be calculated as follows:
$
Purchaseconsiderationpaidbytheparentcompany 825,000
FairvalueofNCIatacquisitiondate(175,000+60,000) 235,000
1,060,000
Netassetsofthesubsidiaryattheacquisitiondate(atfairvalue) (700,000)
Totalgoodwill(parentandNCI) 360,000
At the acquisition date, the NCI is valued at $235,000. 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 $60,000 less
any accumulated impairment of this goodwill.
Example 2
Hake acquired 60% of the equity shares in Sole in a single transaction, paying $80
million in cash. Based on the trading price of shares in Sole at the acquisition date, a
value of $50 million is assigned to the 40% of Sole held by the non-controlling
interests.
At the acquisition date, the fair value of Sole’s identifiable net assets was $90
million.
If the fair value method is used and goodwill in Sole is attributed to the NCI, the
transaction would be accounted for as follows:
Debit Credit
$ million $ million
Fair value of assets acquired 90
Goodwill (800 + 500 – 900) 40
Cash 80
Non-controlling interests 50
$million
PurchaseconsiderationpaidbyHake 80
NetassetsinSoleattributabletoHakeshareholders(60%×$90m) 54
PurchasedgoodwillattributabletoHakeshareholders 26
$million
ValueassignedtoNCIatacquisition 50
NetassetsinSoleattributabletoNCI(40%×$90m) 36
PurchasedgoodwillattributabletoNCI 14
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If the partial goodwill method is used and NCI is valued at a proportionate share of
the net assets of the subsidiary, the transaction would be accounted for as follows:
Debit Credit
$ million $ million
Fair value of assets acquired 90
Goodwill (Hake shareholders only - see above) 26
Cash 80
Non-controlling interests (40% × $90 m)
36
Comparing the full goodwill and partial goodwill methods
The following example shows the differences between the partial goodwill and the
full goodwill methods of consolidation.
Example
Hand acquired 70% of the equity shares in Sand in a single transaction, paying $226
million in cash. At the acquisition date the fair value of the net assets of Sand was
$220 million. The fair value of the non-controlling interest at this date was $69
million.
At the acquisition date, Hand had $600 million of ordinary shares in issue and
reserves of $800 million, and net assets of $1,400 million, including the investment in
Sand at cost. It has no other subsidiaries.
Required
Prepare a consolidated statement of financial position at the acquisition date, using:
(a) the partial goodwill method
(b) the full goodwill method.
Answer
Partial goodwill method
$ million
Fair value of net assets of subsidiary at acquisition date 220
NCI (30%) (66)
154
Purchase consideration 226
Goodwill 72
Consolidated statement of financial position
$ million
Fair value of net assets (1,400 – 226 + 220) 1,394
Goodwill 72
1,466
Chapter 4: Group financial statements
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Ordinary shares (Hand) 600
Reserves attributable to equity holders of Hand 800
1,400
Non-controlling interest 66
Total equity 1,466
Full goodwill method
$ million
Purchase consideration 226
Fair value of NCI 69
295
Fair value of net assets of subsidiary at acquisition date 220
Goodwill 75
Consolidated statement of financial position
$ million
Fair value of net assets (1,400 – 226 + 220) 1,394
Goodwill 75
1,469
Ordinary shares (Hand) 600
Reserves attributable to equity holders of Hand 800
1,400
Non-controlling interest 69
Total equity 1,469
The goodwill is higher with the full goodwill method, and so too is the value of the
NCI.
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 exam
question will either give the value of the goodwill attributable to the NCI or will
provide information that enables you to calculate it. NCI might be calculated in one
of the following ways.
The exam question might state that the fair value of the NCI at the acquisition
date was $X. The value of attributable goodwill can then be calculated as the
difference between this total fair value ($X) and the proportionate share of the
NCI in the net assets of 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).
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In the P2 exam, it is more likely that you will be given the fair value of the NCI at
the acquisition date. The examiner has commented (Student Accountant, February
2009): ‘Although measuring NCI at fair value may prove difficult, goodwill
impairment testing is likely to be easier under full goodwill, as there is no need to
gross up goodwill for partially-owned subsidiaries.’
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. It is tempting to allocate the write off of
goodwill between the parent and NCI by prorating. However, para C6, Appendix C
to IAS 36 says that the impairment should be “allocated between the parent and the
NCI on the same basis as that on which profit or loss is allocated”.
Example
S has 10 million shares of $1 each in issue. H acquired 80% of these shares at a price
of $11.6 million when the net assets of S were $10 million. Prior to the acquisition,
the shares of S had been trading in the stock market at $1.20 per share.
$
Purchaseconsiderationpaidbytheparentcompany 11,600,000
Fairvalueofparentcompanyshareofnetassets(80%×$10million) 8,000,000
Purchasedgoodwillattributabletoparent 3,600,000
$
FairvalueofNCIatacquisitiondate(2,000,000 ×$1.20) 2,400,000
NCIshareofnetassetsatthisdate(20%×$10million) 2,000,000
PurchasedgoodwillattributabletoNCI 400,000
Total goodwill = $3,600,000 + $400,000 = $4,000,000.
Suppose that subsequently goodwill is impaired in value by $1.5 million, so that it is
now valued at just $2,500,000.
The impairment in the goodwill may be attributed to the parent company and the
NCI in the according to the proportions used to allocate profit or loss (80:20)
Total
Attributable
toparent
Attributable
toNCI
$ $ $
Originalgoodwill 4,000,000 3,600,000 400,000
Impairment (1,500,000) (1,200,000) (300,000)
––––––––––––––––––––––– ––––––––––––––––––––––– –––––––––––––––––––––––
Revisedvalue 2,500,000 2,400,000 100,000
––––––––––––––––––––––– ––––––––––––––––––––––– –––––––––––––––––––––––
Chapter 4: Group financial statements
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Note that with the full goodwill method, the net assets of the group will be higher
than with the partial goodwill method, because of the larger amount for goodwill.
However, subsequent impairments of goodwill will also be larger with the full
goodwill method.
2.4 Preparing a consolidated statement of comprehensive income: basic
rules
IAS 1 requires consolidated financial statements to include either:
a single consolidated 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.
Pre- and post-acquisition profits
When a parent acquires a subsidiary during a financial year, the profits of the
subsidiary have to be divided into pre-acquisition and post-acquisition profits.
For the purpose of reporting the consolidated profit or loss, we need to calculate the
pre-acquisition and post-acquisition profit in the current year.
The pre-acquisition profit is used to calculate the goodwill.
The post-acquisition profit (or loss) is included in the consolidated profit for the
year, in the consolidated statement of comprehensive income or the consolidated
income statement.
Unless you are given information that suggests an alternative, assume that in the
year of acquisition, the profits of the subsidiary occur at an even rate throughout the
year. The division of the annual profit of the subsidiary into pre-acquisition and
post-acquisition elements can then be done on a time basis.
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Non-controlling interest in consolidated profit or loss
When there is a non-controlling interest in a subsidiary, the consolidated profit or
loss should show:
the post-acquisition profit for the year for the group as a whole, including all the
post-acquisition profit of the subsidiary, and
the amount of this total profit that that is attributable to the parent’s equity
shareholders and the amount that is attributable to the non-controlling interest
in the subsidiary.
For the purpose of preparing the consolidated statement of comprehensive income
(or consolidated income statement), all the pre-acquisition profits of the
subsidiary are excluded. The statement should include the following analysis:
Profit for the period X
Attributable to:
Equity holders of the parent Y
Non-controlling interest Z
Y + Z = X
Example
Entity P acquired 400,000 shares in Entity S on 1 September Year 7. The total net
assets of Entity S at 1 January Year 7 were $1,330,000.
The statement of financial position of entity S at 31 December Year 7 was as follows:
EntityS
Statementoffinancialpositionasat31DecemberYear7
$000
Property,plantandequipment 1,400
Currentassets
600
2,000
Equityandliabilities
Equitysharesof$1each
600
Sharepremium
300
Accumulatedprofits
700
1,600
Liabilities 400
2,000