ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)
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Chapter 5: Group financial statements: complex groups
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Vertical group
Ownership of T
Direct holding of H 0%
Indirect holding of H (75% × 60%) 45%
H share of ownership of T 45%
Non-controlling interest in T (the balance) 55%
100%
In our vertical group, H has two subsidiaries S and T. This consists of a direct
interest of 75% in the shares of S and an indirect interest of 45% in the shares of T,
through its ownership of S. This gives a non-controlling interest of 25% in S and 55%
in T.
The non-controlling interest in T consists of two elements:
40% of the shares of T are held by shareholders other than S
The 25% non-controlling interest in S owns a share of the 60% of T that is owned
by S. This is an indirect non-controlling interest in T – the part of T that is owned
by the non-controlling interest in S.
Vertical group
Non-controlling interest in T
Direct non-controlling interest in T 40%
Indirect non-controlling interest in T (25% × 60%) 15%
Total non-controlling interest, one-stage method 55%
Mixed group: indirect non-controlling interest
A similar analysis can be applied to a mixed group. It has already been shown that
using the one-stage method, the percentage ownership of T in the mixed group is as
follows:
Mixed group
Ownership of T
Direct holding of H 40%
Indirect holding of H (60% × 20%) 12%
H share of ownership of T 52%
Non-controlling interest in T (the balance) 48%
100%
In our mixed group, H has two subsidiaries, S and T.
It has a 60% interest in S
It has a 52% interest in T. This comprises a direct interest of 40% plus an indirect
interest through S of 12% (60% × 20%).
As already seen, this gives non-controlling interests of 40% in S and 48% in T. The
non-controlling interest in T consists of two elements:
40% of the shares of T are held by shareholders other than S
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The 40% non-controlling interest in S owns a share of the 20% of T that is owned
by S. This is an indirect non-controlling interest in T – the part of T that is owned
by the non-controlling interest in S.
Mixed group
Non-controlling interest in T
Direct non-controlling interest in T 40%
Indirect non-controlling interest in T (40% × 20%) 8%
Total non-controlling interest, one-stage method 48%
4.2 Calculating the non-controlling interest for the consolidated statement
of financial position
We need to establish a value for non-controlling interest in the consolidated
statement of financial position.
For a direct subsidiary S, this is not a problem. The non-controlling interest in S
is the percentage of shares held directly by the non-controlling interest in S,
multiplied by the net assets of S.
For a sub-subsidiary, or any other subsidiary with an indirect non-controlling
interest (T), there is a problem. We can calculate a non-controlling interest in T as
the percentage non-controlling interest multiplied by the net assets of T.
However, this would involve some double-counting, of the non-controlling
interest in S and the indirect non-controlling interest in T
(This double-counting problem arises only with the one-stage method of
consolidation.)
To calculate the total non-controlling interest in the group, we have to remove the
double counting. The following approach is recommended:
Non-controlling interest in the H group
Non-controlling interest (NCI) in S (% NCI in S) × (Net assets of S) X
Non-controlling interest (NCI) in T (% NCI in T) × (Net assets of T) Y
Direct and indirect non-controlling interest in S and T (X + Y)
Subtract double counting:
Cost of indirect non-controlling interest
in T
(% NCI in S) × (Cost of
investment by S in T)
(Z)
Non-controlling interest in H Group (X + Y - Z)
4.3 Cost of the parent entity’s investment in T
Having calculated the non-controlling interest in T, we can calculate the parent’s
share of the cost of the investment in T.
The cost of the indirect non-controlling interest in T must be subtracted from the
total cost of the investment by S in T, to obtain the cost of the group’s investment in
T.
Chapter 5: Group financial statements: complex groups
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Cost of investment of S in T A
Cost of indirect non-controlling interest in T B = (X + Y – Z) above
Cost of parent’s investment in T A – B
The cost of the parent’s investment in T is then used to calculate the purchased
goodwill on the acquisition of T.
Example
On 1 June 20X5, H acquired 75% of the shares of S at a cost of $180,000. On the same
date, S acquired 60% of the share capital of T at a cost of $88,000.
Immediately after the acquisition, the statements of financial position of the three
companies were as follows:
H
S
T
$
$
$
InvestmentinSatcost 180,000
‐
‐
InvestmentinTatcost
‐
88,000
‐
Othernetassetsatfairvalue
420,000
112,000
100,000
600,000
200,000
100,000
Sharecapitalandreserves 600,000
200,000
100,000
Required
(a) Calculate the non-controlling interests in the H Group immediately after the
share acquisitions.
(b) Calculate the cost to H of the investment in T.
The H Group uses the partial goodwill method of consolidation.
Answer
The parent entity’s interest in T is 45% (75% × 60%). The non-controlling interest in
T is 55% (100% – 45%).
The non-controlling interest in the H group
$
Non‐controllinginterestinnetassetsofS
25%×$200,000 50,000
Non‐controllinginterestinnetassetsofT 55%×$100,000 55,000
––––––––––––––––––––
105,000
Subtract
Costofindirectnon‐controllinginterestinT
25%×$88,000 (22,000)
––––––––––––––––––––
Non‐controllinginterestinHGroup
83,000
––––––––––––––––––––
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An alternative way of calculating the non-controlling interest would be as follows:
$
NetassetsofS,excludinginvestmentinT(200,000–88,000)
112,000
$
NCIshareoftheseassetsinS:25%×$112,000
28,000
NCIshareofnetassetsofT:55%×$100,000
55,000
Non‐controllinginterestinHGroup
83,000
Cost of parent’s investment in T
$
CostofinvestmentofSinT
88,000
Costofindirectnon‐controllinginterestinT(seeabove) (22,000)
–––––––––––––––––––
Costofparent’sinvestmentinT
66,000
–––––––––––––––––––
4.4 Calculating the purchased goodwill
When the cost of the parent’s investment in the sub-subsidiary has been calculated,
the purchased goodwill on acquisition can be calculated in the normal way, using
the partial goodwill method. It is the difference between the parent’s cost of the
investment and the parent’s share of the net assets acquired, at fair value.
Example
Continuing the previous example of the H Group, and using the partial goodwill
method of consolidation, the goodwill on acquisition is calculated separately for S
and for T, as follows:
S
T
$
$
Costofinvestment
180,000
(seeabove) 66,000
Shareofnetassetsacquired (75%×$200,000) 150,000
(45%×$100,000) 45,000
Goodwill
30,000
21,000
The total purchased goodwill for the H Group at acquisition is therefore $30,000 +
$21,000 = $51,000.
The consolidated statement of financial position of the H Group at the date of the
acquisition of S by H and of T by S can now be constructed as follows.
$
Purchasedgoodwill
51,000
OthernetassetsofHgroupatacquisition(420+112+100) 632,000
683,000
Chapter 5: Group financial statements: complex groups
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SharesandreservesofH 600,000
Post‐acquisitionprofitsofsubsidiaries
0
600,000
Non‐controllinginterests(seeabove) 83,000
683,000
The following example illustrates how a consolidated statement of financial position
should be prepared for a complex group. The steps to take on consolidation are
those described in the previous chapter on consolidated accounts (for the partial
goodwill method), except that calculating the non-controlling interest (which was
Step 4) must now come before calculating the purchased goodwill (which was Step
3).
Example
The summary statements of financial position as at 31 December 20X7 are as
follows:
EntityA
EntityB EntityC
$000
$000
$000
InvestmentinBatcost:2,400shares 5,000
InvestmentinCatcost:180shares
750
Sundrynetassets 9,900
5,000
1,000
14,900
5,750
1,000
Sharecapital:ordinarysharesof$1each 10,000
3,000
300
Accumulatedprofits 4,900
2,750
700
14,900
5,750
1,000
Entity A acquired its investment in Entity B on 1 January 20X7. Entity B acquired its
investment in Entity C on 1 January 20X4. At the dates of the share purchases, the
following information is available:
Date
Accumulatedprofits,
EntityB
Accumulatedprofits,
EntityC
$000 $000
EntityB 1January20X4 2,000 500
EntityB
1January20X7 2,300 650
Required
Prepare the consolidated statement of financial position for the A Group as at 31
December 20X7, using the partial goodwill method of consolidation.
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Answer
Group structure
Entity B acquired its interest in Entity C before A purchased its interest in B;
therefore the date of entry into the A Group is the same for both Entity B and Entity
C. This is 1 January 20X7.
Step 1
Calculate the percentage ownership of the subsidiaries held by A and the
percentage ownership of the non-controlling interests.
OwnershipofB
DirectholdingofA 80%
Non‐controllinginterestinB(balancingfigure)
20%
100%
OwnershipofC
DirectholdingofA 0%
IndirectholdingofB(80%×60%)
48%
48%
Non‐controllinginterestinT(balancingfigure)
52%
100%
Step 2
Calculate the net assets of Entity B and Entity C at (1) the end of the current
reporting period and (2) the date of acquisition by the group.
EntityB EntityC
At31
December
20X7
At
acquisition
date
At31
December
20X7
At
acquisition
date
$000
$000
$000 $000
Sharecapital 3,000
3,000
300 300
Accumulatedprofits 2,750
2,300
700 650
–
––––––
–
––––
–
––
–
–
–––––––––––
–
––
–
–––––––––––––––– ––––––––––––
–
––
–
Netassets
(sharecapitalplusreserves)
5,750
––––––––––––––––
5,300
––––––––––––––––
1,000
––––––––––––––––
950
––––––––––––––––
Post‐acquisitionaccumulatedprofits
450=(5,750–5,300) 50=(1,000–950)
Chapter 5: Group financial statements: complex groups
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Step 3
Calculate the non-controlling interest
Use the method described earlier in this chapter.
$
Non‐controllinginterestinnetassetsofB
20%×5,750 1,150
Non‐controllinginterestinnetassetsofC 52%×1,000 520
––––––––––––––––
1,670
Subtract
Costofindirectnon‐controllinginterestinC
20%×750 (150)
(=20%×CostofinvestmentbyBinC)
––––––––––––––––
Non‐controllinginterestinAGroup
1,520
––––––––––––––––
Step 4
Calculate the purchased goodwill
To do this, we must first calculate the cost of the parent company’s investment in
Entity C.
$000
CostofinvestmentofBinC
750
Costofindirectnon‐controllinginterestinC(seeabove) (150)
–––––––––––––
Costofparent’sinvestmentinC
600
–––––––––––––
InvestmentinB
InvestmentinC
$000
$000
Costofinvestment 5,000 (seeabove) 600
Minusshareofnetassetsacquired:
80%×5,300(seeSteps1and2)
(4,240)
48%×950(seeSteps1and2)
(456)
–––––––––––––––
–––––––––––––––
Purchasedgoodwill
760
144
–––––––––––––––
–––––––––––––––
Total purchased goodwill for the group (in $000) = 760 + 144 = 904. (There has been
no impairment of goodwill.)
Step 5
Calculate the post-acquisition accumulated profits of the parent company
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$000
EntityAaccumulatedprofits(parentcompany)
4,900
Parent’sshareof:
EntityBaccumulatedprofits(80%×450)–seeStep2 360
EntityCaccumulatedprofits(48%×50)–seeStep2
24
5,284
We can now prepare the consolidated statement of financial position as at 31
December 20X7.
Consolidatedstatementoffinancialpositionat31December20X7
$000
Goodwill(Step4)
904
Sundrynetassets(9,900+5,000+1,000) 15,900
16,804
Sharecapital 10,000
Reserves(Step5)
5,284
Parentcompany’sshareinequityofthegroup
15,284
Non‐controllinginterest(Step3) 1,520
16,804
4.4 Complex groups: the full goodwill method
The full goodwill method differs from the partial goodwill method in the following
ways:
the calculation of the goodwill at acquisition
the valuation of non-controlling interests, and
the accounting treatment of subsequent impairments in goodwill.
An example will be used to demonstrate the accounting method required, and how
it differs from the partial goodwill method.
Example
The summary statements of financial position as at 31 December Year 8 are as
follows:
EntityA
EntityB EntityC
$000
$000
$000
InvestmentinBatcost:(80%holding) 3,300
InvestmentinCatcost:(60%holding)
2,200
Sundrynetassets 2,700
1,400
3,000
6,000
3,600
3,000
Chapter 5: Group financial statements: complex groups
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Sharecapital:ordinarysharesof$1each 4,000
2,500
2,000
Accumulatedprofits 2,000
1,100
1,000
6,000
3,600
3,000
Entity A acquired its investment in Entity B on 1 January Year 7. Entity B acquired
its investment in Entity C on 31DecemberYear7
The following information is relevant:
Date
Retainedearnings
EntityB
Retainedearnings,
EntityC
$000 $000
1JanuaryYear7 400 200
31DecemberYear7
700 320
Date
FairvalueofNCI,
EntityB
FairvalueofNCI,
EntityC
$000 $000
1JanuaryYear7 800 1,600
31DecemberYear7
960 2,000
The goodwill of Entity B is impaired as at 31 December Year 7 by $500,000.
Required
Prepare the consolidated statement of financial position of the Entity A Group as at
31 December Year 8, using:
(a) the full goodwill method
(b) the partial goodwill method.
Answer
The acquisition of Entity B by Entity A occurred before the acquisition of Entity C
by Entity B. The effective share of the A Group in Entity C is 80% × 60% = 48%.
The relevant retained earnings for the purpose of goodwill calculation are:
Entity B: at 1 January Year 7, $400,000
Entity C: at 31 December Year 7, $320,000.
Full goodwill method
(a) Calculation of goodwill
The fair value of the consideration held in Entity C represents the 60%
shareholding in entity C purchased by Entity B. The 20% shareholding held by
the NCI in Entity B should be deducted in the calculation, as shown below.
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The purchased goodwill relating to Entity B and Entity C are calculated as
follows.
Entity B Entity C
$000 $000
Fair value of consideration 3,300 2,200
Indirect holding of C belonging to NCI of B
(20% × 2,200)
(440)
Fair value of NCI at acquisition 800 2,000
4,100 3,760
Fair value of identifiable net assets at acquisition
(Entity B: 2,500 + 400) (Entity C: 2,000 + 320) 2,900 2,320
Purchased goodwill 1,200 1,440
Allowing for the impairment of goodwill in Entity B, the total goodwill at 31
December Year 8 (in $000) = $1,200,000 + $1,440,000 – $500,000 = $2,140,000.
(b) Calculation of NCI
Again, an adjustment is required to the NCI in Entity C to allow for the 20%
share held by the NCI of B in the investment in C.
Entity B Entity C
$000 $000
Fair value of NCI at acquisition 800 2,000
Indirect holding of C belonging to NCI of B
(20% × 2,200)
(440)
Post-acquisition profit attributable to NCI :
Entity B : 20% × (1,000 – 400)
140
Entity C : 52% × (1,000 – 320)
354
Impairment of goodwill: attributable to NCI in B
(20% × 500)
(100)
840 1,914
The total NCI at 31 December Year 8 is (in $000) $2,754.
(c) Calculation of consolidated retained earnings attributable to equity holders
of A
Attributable to parent: $000
Retained earnings of Entity A 2,000
Post-acquisition profit of B: 80% × (1,100 – 400)
560
Post-acquisition profit of C: 48% × (1,000 – 320)
326
Impairment of goodwill attributable to parent: 80% × 500
(400)
Consolidated retained earnings at 31 December Year 8 2,486