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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(d) Consolidated statement of financial position as at 31 December Year 8 (full
goodwill method)
$000
Net assets excluding goodwill: (2,700 + 1,400 + 3,000) 7,100
Goodwill (see (a)) 2,140
9,240
Equity shares 4,000
Retained earnings attributable to equity holders of A (see (c)) 2,486
6,486
NCI (see (b)) 2,754
9,240
Partial goodwill method
With the partial goodwill method, the calculation of goodwill and NCI are different.
In addition, the full impairment of goodwill is attributed to the equity holders of A;
therefore the consolidated retained profits attributable to the equity holders of A are
also less.
(e) Calculation of goodwill
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)
3,300 3,760
Fair value of identifiable net assets at acquisition
Entity B: 80% × (2,500 + 400) (Entity C: 48% × (2,000
+ 320)
2,320 1,114
Purchased goodwill 980 646
Allowing for the impairment of goodwill in Entity B, the total goodwill at 31
December Year 8 (in $000) = $980,000 + $646,000 – $500,000 = $1,126,000.
(f) 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.
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Entity B Entity C
$000 $000
NCI at acquisition (20% × 2,900: 52% × 2,320)
580 1,206
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
Total NCI 720 1,120
The total NCI at 31 December Year 8 is (in $000) $1,840.
(g) 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: 100% × 500
(500)
Consolidated retained earnings at 31 December Year 8 2,386
(h) Consolidated statement of financial position as at 31 December Year 8 (full
goodwill method)
$000
Net assets excluding goodwill: (same as before) 7,100
Goodwill (see (e)) 1,126
8,226
Equity shares 4,000
Retained earnings attributable to equity holders of A (see (g)) 2,386
6,386
NCI (see (f)) 1,840
8,226
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Paper P2 (INT)
Corporate Reporting
CHAPTER
6
Group financial statements:
step acquisitions and
disposals
Contents
1 Step acquisitions
2 Full and partial disposals of shares in a
subsidiary
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Piecemeal acquisitions
What is a step acquisition?
Accounting for step acquisitions: IFRS 3 (revised)
Increasing or reducing a shareholding whilst retaining control
1 Step acquisitions
1.1 What is a step acquisition?
A ‘step acquisition’ is a business combination achieved in stages, where the acquirer
(parent company) gains control of an acquiree (subsidiary) in stages over a period of
time.
For example, a company may purchase a 30% stake in the equity shares of another
company, and then a year later purchase another 40%, so that its ownership of the
subsidiary increases from 30% to 75%.
In this example, the acquirer would probably have accounted for its investment in
the other company as an investment in an associate, using the equity method of
accounting. After acquiring the next 40% of the shares, the associate becomes a
subsidiary.
1.2 Accounting for step acquisitions: IFRS 3 (revised)
The rules on accounting for step acquisitions were amended by IFRS 3 (revised
2008).
The current rules are simpler than the ‘old’ rules, which were sometimes referred to
as a ‘cost accumulation model’. Under the old rules, the underlying assumption was
that the cost of the investment accumulated with each step towards acquisition, so
that for each stage of the step acquisition an amount had to be calculated for
goodwill. This method of accounting for step acquisitions has been rejected by IFRS
3 (revised).
The new accounting rules for step acquisitions assume that when an entity gains
control of another through a step acquisition, it effectively ‘gives up’ its previous
investment in order to acquire control. A gain or loss should be reported on the
‘giving up’ of the previous investment. For the acquisition of the shares that give the
acquirer control there is an amount for purchased goodwill, but under the current
rules this amount will be less than under the ‘old’ rules.
When an entity owns equity in another company but does not have control, and
then acquires additional shares in the company that give it control, the step
acquisition is accounted for as follows:
Chapter 6: Group financial statements: step acquisitions and disposals
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All the equity interests held by the entity before control was obtained (which
might be an interest in an associate, an interest in a joint venture or simply an
investment) should be re-measured to fair value at the date when control is
obtained.
The difference between the previous carrying value of the investment and the
fair value re-measurement is a gain or loss. This should be reported in profit or
loss for the period in which control is obtained.
These rules will be illustrated using the following example.
Example
S has share capital of 1,000 $10 shares, unchanged since incorporation. H acquires
an 80% holding in S over two years, as follows:
Date Sharesacquired Costofinvestment NetassetsofS
1January20X5
(30%)300 $20,000 $60,000
1January20X7 (50%)500 $90,000 $90,000
31December20X7
$105,000
The net assets of S at 1 January 20X5 are at fair value. The fair value of the 30%
shareholding of H at 1 January 20X7 is measured as $45,000. The fair value of the net
assets of S at 1 January 20X7 is measured as $150,000.
The initial investment is probably accounted for as an associate by the equity
method. It is assumed that there has been no impairment to the investment, so that
the carrying value of the investment at 1 January 20X7, when control is obtained, is:
$
Investmentatcost
20,000
Plusshareofretainedprofitssincepurchaseofinvestment
(30%×$(90,000–60,000)
9,000
29,000
When control is obtained on 1 January 20X7, the previous investment in 30% of S is
re-valued to fair value, $45,000. There is a gain on re-measurement, which is
reported in profit or loss of H.
$
Investmentatfairvalue
45,000
Carryingvalueofinvestmentatdatecontrolisobtained
29,000
Gainonre‐measurement,taketoprofitorloss
16,000
Debit: Investment in S $16,000
Credit: Profit or loss $16,000
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For the consolidated statement of financial position, the goodwill on acquisition
attributable to the equity holders of H, using the partial goodwill method, is
calculated as follows:
$
Previousinvestmentatfairvalue
45,000
Costofadditional500shares
90,000
Purchaseconsideration+previousinvestmentatfairvalue
135,000
H’sshareoffairvalueofnetassetsofS(80%×150) 120,000
Goodwillarisingonacquisition
15,000
Example
On 1 January Year 9, Haff acquired 50% of the equity shares of Staff for $90 million.
It already held a 20% equity holding in Staff which had been acquired for $30
million but which was valued at $36 million at 1 January Year 9. The fair value of
the non-controlling interest at 1 January Year 9 was $60 million and the fair value
of the identifiable net assets in Staff at that date was $166 million.
Using the full goodwill method of consolidation, the purchased goodwill would be
calculated as follows:
$million
Purc hase consideration for shares at 1 January Year 9 90
Value of interest already held, as at 1 January Year 9 36
126
Fair value of NCI 60
186
Fair value of identifiable net assets 166
Goodwill 20
There is a gain on the initial investment in Staff of $6 million ($36 million - $30
million). This gain is reported in the statement of comprehensive income for the
period, as other comprehensive income (not in profit or loss).
1.3 Increasing or reducing a shareholding whilst retaining control
After a parent company has acquired a subsidiary, it might increase or reduce its
shareholding, whilst still retaining control. For example a subsidiary might issue
new shares to non-controlling interests or the parent might sell some shares in a
subsidiary. Similarly the parent might buy shares in a subsidiary from some of the
minority shareholders.
Chapter 6: Group financial statements: step acquisitions and disposals
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IAS 27 (revised) states that when an entity changes the percentage size o fits
ownership in a subsidiary without losing control, the transaction should be
accounted for as an equity transaction.
A group of companies is viewed as a single economic entity, and the equity
ownership of this entity consists of equity shareholders in the parent and non-
controlling interests in subsidiaries.
The sale of shares between the parent company and non-controlling interests is
therefore a transaction between equity owners of the group.
Since the sale of the shares is a transaction between equity owners in their
capacity as owners of the group, no profit or loss arises on the transaction, and
there is no gain or loss to report either as ‘other comprehensive income’.
The transaction should simply result in an adjustment to equity. The carrying
amounts of the parent’s interests and the non-controlling interests in the equity
of the group are adjusted to record the change in their ownership interests.
The rules summarised
When shares in a subsidiary are bought from or sold to non-controlling interests,
but the parent entity retains control over the subsidiary, the transaction should be
recorded directly in equity for the purpose of preparing consolidated accounts.
When shares are purchased from NCI, the difference between the price paid for the
shares and the carrying value of the NCI shares purchased should be recorded as a
debit or credit to the parent entity’s equity interest in the group.
If the price paid for the shares exceeds their carrying value, there will be a reduction
in the parent entity’s equity interest in the group, and so the excess price paid
should be debited to the parent entity’s interest.
Similarly when shares in a subsidiary are sold to NCI but the parent retains control
over the subsidiary the difference between the price paid for the shares and the
carrying value of the NCI shares purchased should be recorded as a debit or credit
to the parent entity’s equity interest in the group. A ‘gain’ on the sale will be
recorded as a credit to the parent entity’s equity interest in the group.
It follows that no additional goodwill or reduction in goodwill occurs as a result of
these transactions. There is also no recognition of any gain or loss on the transaction
in the consolidated statement of comprehensive income (either profit or loss, or
other comprehensive income).
Example
Pride owns 80% of the equity of Hide. The net assets of Hide are $4,000 million and
the carrying amount of the non-controlling interest in Hide is $800 million (= 20%).
Pride now buys one half of the shares held by the NCI, increasing its equity holding
by 10% to 90% of Hide. It pays $500 million for the shares.
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Under the rules of IAS 27 (revised) this transaction should be accounted for as an
equity transaction.
The parent company has spent $500 million to acquire the shares of the NCI;
therefore cash in the consolidated statement of financial position is reduced by
$500 million.
The NCI is reduced by $400 million.
The parent has paid $500 million to acquire net assets of $400 million at fair
value; therefore there is a reduction of $100 million in the equity attributable to
owners of the parent company.
The transaction therefore has the following effect:
Debit: NCI $400 million
Debit: Pride controlling equity interest in the group $100 million
Credit: Cash $500 million.
Notes
(1) An alternative method of accounting for a change in the size of an investment
in a subsidiary would be to treat any excess of the transaction value over the
value of the net assets acquired or sold as a change in goodwill attributable to
the parent company. In the example above, for example, it would be possible
to account for the increase in shares in Hide by adding $100 million to
goodwill rather than reducing the parent company’s equity interest by $100
million. This approach to accounting for share transactions is not allowed by
IAS 27 (revised).
(2) IFRS 3 allows two methods of accounting for NCI: this text has called them
the ‘partial goodwill method’ and the ‘full goodwill method’ or ‘fair value
method’. If an entity chooses to account for an acquisition using the full
goodwill method and subsequently buys additional shares from non-
controlling interests in the subsidiary, the reduction in the parent entity’s
interest in the group will be less than if the partial goodwill method is used.
This is because the value of the NCI acquired will be higher since it will
include some goodwill.
(3) The full goodwill method is illustrated below.
Example
On 1 January Year 9, Hak acquired 70% of the equity shares of Stak for $450
million. The fair value of the identifiable net assets in Stak at that date was $600
million. The fair value of the NCI at 1 January Year 9 was $264 million. Hak
subsequently acquired another 10% of the equity shares of Stak on 31 December
Year 9 for $102 million. The carrying value of the net assets of Stak at 31 December
Year 9 was $670 million.
Hak wishes to use the full goodwill method for consolidation.
At 1 January Year 9
Chapter 6: Group financial statements: step acquisitions and disposals
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Using the full goodwill method, the purchased goodwill lat 1 January Year 9, when
the original 70% of the shares in Stak were acquired, is calculated as follows:
$million
Purchase consideration for shares at 1 January Year 9 450
Fair value of NCI at 1 January Year 9 264
714
Fair value of net assets acquired 600
Purchased goodwill 114
When the additional 10% of shares are purchased from NCI on 31 December, this is
treated as an ‘equity transaction’ or ‘treasury transaction’ between equity interests
in the group, and there is no alteration to the goodwill.
However, the NCI has been reduced from 30% to 20%, resulting in a reduction in
NCI by 10%/30% = 1/3.
$m
Fair value of NCI at 1 January Year 9 264
NCI share of retained profits 1 January - 31 December = 30% × (670 – 600)
21
NCI net asset at 31 December (before share sale) 285
Transfer to equity of Hak equity shareholders (10/30) (95)
NCI: Balance at 31 December after share sale 190
The consideration paid for the extra 10% of the shares was $102 million. There is an
adjustment to the equity attributable to Hak shareholders, as follows:
$m
Consideration paid (102)
Equity transfer from NCI 95
Reduction in equity attributable to Hak shareholders (7)
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Full and partial disposals of shares in a subsidiary
Four possible situations following a disposal
Disposals of shares in subsidiaries without loss of control
Disposals of shares in subsidiaries and loss of control: the general accounting
rules
Full disposal of shares in a subsidiary
Partial disposal of shares: subsidiary becomes an associate after the disposal
Partial disposal of shares: the remaining shares become an ordinary
investment
2 Full and partial disposals of shares in a subsidiary
2.1 Four possible situations following a disposal
From time to time, shares in a subsidiary in a group might be disposed of. The
parent may sell its entire holding in the subsidiary (a full disposal) or just part of its
shareholding (a partial disposal).
Any one of the four situations listed below could occur when a disposal of shares in
a subsidiary takes place, and the holding company H disposes of shares in
subsidiary S:
Situation 1: H sells all its shares in S. This is a full disposal.
Situation 2: H sells some of its shares in S, and after the disposal, H still owns
more than 50% of the shares in S. S remains a subsidiary of the group. For
example, H may own 90% of the shares in S and then dispose of 15% of them. S
remains a subsidiary, but there is now a bigger non-controlling interest (up from
10% to 25%).
Situation 3: H sells some of its shares in S, and after the disposal, S has become
an associate for the purpose of preparing the consolidated accounts. Usually,
this is because H’s ownership is now between 20% and 50% of the shares in S.
Situation 4: H sells some of its shares in S, and after the disposal, S has become a
simple investment for the purpose of preparing the consolidated accounts.
Usually, this means that H now owns less than 20% of the shares in S.
Any of the situations 1, 2 or 3 could occur following a partial disposal.
2.2 Disposals of shares in subsidiaries without loss of control
The previous section explained the accounting rules for an increase or reduction in
the shareholding of a parent entity in a subsidiary, without any change in control.
The transaction is accounted for within equity, as a transaction between owners of
equity in the group.