ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)
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Chapter 9: Statements of cash flows
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Investing activities
− cash paid to acquire shares in an associate during the year
− cash received from the disposal of shares in an associate during the year
− dividends received from an associate during the year.
Financing activities
− cash paid as a new loan to or from an associate during the year
− cash received as a repayment of a loan to or from an associate during the year.
Note that dividends received from an associate are shown as cash flows from
investing activities; whereas dividends paid to non-controlling interests in
subsidiaries are (usually) shown as cash flows from financing activities.
3.5 Calculating dividends received from an associate
In an examination, you may be required to calculate the dividends received from an
associate, using information in the opening and closing consolidated statements of
financial position and the consolidated statement of comprehensive income (profit
and loss section) or consolidated income statement. The technique is similar to the
calculation of dividends paid to non-controlling interests.
$
Group investment in net assets of associate at the beginning of
the year
A
Group share of associate’s profits before tax B
Group’s share of associate’s tax on profits (C)
A + B – C
Group investment in net assets of associate at the end of the year (D)
Dividends received from associate in the year A + B – C – D
Example
The following information has been extracted from the consolidated financial
statements of P for the year ended 31 December 20X7. The group has neither
purchased nor disposed of any investment during this period.
Group income statement
$000 $000
Groupoperatingprofit
1,468
Shareofoperatingprofitofassociate
244
1,712
Taxonprofitonordinaryactivities:
Incometaxes:group
(648)
Shareoftaxofassociate
(108)
(756)
Profitonordinaryactivitiesaftertax
956
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Group statement of financial position at 31 December
20X7
20X6
$000
$000
Investmentsinassociatedundertakings
Shareofnetassets 932
912
Required
(a) What figure should appear in the group statement of cash flows for the year to
31 December 20X7 for the associate?
(b) Under which heading would you expect this figure to appear in the group
statement of cash flows?
Answer
(a)
$000
Groupinvestmentinnetassetsofassociateatthebeginningofthe
year
912
Groupshareofassociate’sprofitsbeforetax 244
Group’sshareofassociate’staxonprofits
(108)
–––––––––––––
1,048
Groupinvestmentinnetassetsofassociateattheendoftheyear
(932)
–––––––––––––
Dividendsreceivedfromassociateintheyear 116
–––––––––––––
(b) The cash flow of $116,000 will be shown as a cash flow from investing
activities in the group statement of cash flows.
Chapter 9: Statements of cash flows
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Acquisitions and disposals of subsidiaries in the statement of cash
flows
Acquisition of a subsidiary in the statement of cash flows
Note to the statement of cash flows on acquisitions
Avoiding double counting when a subsidiary has been acquired
Disposal of a subsidiary in the statement of cash flows
4 Acquisitions and disposals of subsidiaries in the
statement of cash flows
4.1 Acquisition of a subsidiary in the statement of cash flows
When a subsidiary is acquired:
the group gains control of the assets and liabilities of the subsidiary, which
might include some cash and cash equivalents, and
the group pays for its share of the subsidiary, and the purchase consideration
might consist partly or entirely of cash.
In the group statement of cash flows, a single figure is shown (under the heading
‘Cash flows from investing activities’) for the net effect of the cash flows from
acquiring the subsidiary. This net effect is:
$
Cash element in the purchase consideration A
Minus: Cash assets of the subsidiary at the acquisition date B
Cash payment on acquisition of subsidiary, net of cash received A – B
This net cash payment is the amount shown in the group statement of cash flows.
Example
Blue Group acquired 80% of the shares in Green Entity on 5 September 20X6, when
the net assets of Green Entity were $800,000, including $25,000 in cash and cash
equivalents. The purchase consideration was $700,000, consisting of $500,000 in new
shares of Blue (the holding company) and $200,000 in cash.
The cash flow shown in the group statement of cash flows for the year to 31
December 20X6 is:
$
Cashelementinthepurchaseconsideration
200,000
Minus:Cashassetsofthesubsidiaryattheacquisitiondate (25,000)
Cashpaymentonacquisitionofsubsidiary,netofcashreceived
175,000
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Note that although only 80% of the shares in Green Entity have been acquired, the
full $25,000 of cash held by the subsidiary is brought into the group statement of
financial position at the acquisition date. The figure deducted from the cash in the
purchase consideration is therefore 100% of the subsidiary’s cash and cash
equivalents acquired.
4.2 Note to the statement of cash flows on acquisitions
In an examination, it is useful to prepare a statement summarising the cash flow
effects of an acquisition. This statement is actually required by IAS 7, and should be
presented as a note to the statement of cash flows.
The statement should be presented as follows:
$
Assets of the subsidiary at the acquisition date, at fair value A
(not yet including the purchased goodwill)
Liabilities of the subsidiary at the acquisition date (L)
Net assets of the subsidiary at the acquisition date A – L
Minus non-controlling interest in the subsidiary at this date
(% Non-controlling interest × Net assets)
(M)
Add: Purchased goodwill G
Fair value of net assets acquired A – L – M + G
Satisfied by:
New shares in holding company S
Cash C
1
Purchase consideration S + C
1
The total purchase consideration equals the fair value of the net assets acquired.
The cash of the subsidiary at the acquisition date (C
2
) is then deducted from the cash
paid (C
1
) to arrive at the figure that appears in the statement of cash flows for the
‘Acquisition net of cash received’
Example
A typical note to the statement of cash flows, using illustrative figures, might appear
as follows for a subsidiary in which 80% of the shares are acquired:
$000
Netassetsacquired:
Cash 3
Tradereceivables
85
Inventories
139
Property,plantandequipment
421
Tradepayables
(68)
Chapter 9: Statements of cash flows
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Bankloan (100)
–––––––––––––
480
Non‐controllinginterest(20%×480)
(96)
–––––––––––––
384
Purchasedgoodwill
76
–––––––––––––
Fairvalueofnetassetsacquired
460
–––––––––––––
Satisfiedby:
Issueofshares
152
Cashpaid
308
–––––––––––––
460
–––––––––––––
In the statement of cash flows itself, the cash payment on the acquisition of the
subsidiary is not $308,000, because the cash flow is shown as the payment minus the
cash held by the subsidiary at the acquisition date (which is cash brought into the
group by acquiring the subsidiary). In this example, the cash brought into the group
on acquisition, as a part of the net assets of the subsidiary, is $3,000. So the
statement of cash flows will show the cash paid for the acquisition minus $3,000.
Extract from statement of cash flows
Investing activities
Acquisition of subsidiary net of cash received ($308,000 – $3,000) $305,000
4.3 Avoiding double counting when a subsidiary has been acquired
When you are required to prepare a statement of cash flows in the examination, you
will often have to calculate the cash flow from information in the opening and
closing statements of financial position. If there is an acquisition during the year, it
is important to make an adjustment to your calculation for the assets or liabilities in
the subsidiary that were acquired. Unless you make this adjustment, the assets and
liabilities in the subsidiary at the acquisition date will be counted twice and your
calculations will be incorrect.
An adjustment will be needed for every item of asset or liability acquired, except for
cash and cash equivalents.
Inventory, trade receivables, trade payables
When the indirect method is used to present cash flows from operating activities,
the changes in receivables, inventory and trade payables are shown as adjustments
to the profit figure, to get to a figure for cash flow.
When preparing a statement of cash flows for an individual company, the changes
in these items are calculated by calculating the difference in the figure in the closing
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statement of financial position and the corresponding value in the opening
statement of financial position.
However, when a subsidiary has been acquired, the working capital brought into
the group (receivables plus inventory minus trade payables of the acquired
subsidiary) is paid for in the purchase price to acquire the subsidiary. As we have
seen, this is treated as a separate item in the investing activities section of the
statement of cash flows.
To avoid double counting of the effects of the working capital in the subsidiary at
the acquisition date, we need to deduct from the value in the closing statement of
financial position, or add to the value in the opening statement of financial position:
the receivables in the net assets of the subsidiary acquired, as at the acquisition
date
the inventory in the net assets of the subsidiary acquired, as at the acquisition
date, and
the trade payables in the net assets of the subsidiary acquired, as at the
acquisition date.
Example
D Group is preparing a group statement of cash flows for the year using the indirect
method. In the group opening an closing statements of financial position,
inventories were:
Atthebeginningoftheyear
$120,000
Attheendoftheyear
$190,000
During the year, the group acquired a 75% interest in a new subsidiary, Entity S,
which had inventories of $40,000 at the acquisition date.
Required
What figure should be shown in the group statement of cash flows as the
adjustment for the increase or decrease in inventories?
Answer
$
Groupinventoriesatthebeginningoftheyear
120,000
Add:Inventoriesacquiredinthesubsidiary 40,000
160,000
Groupinventoriesattheendoftheyear 190,000
Adjustmentforincreaseininventories
(30,000)
Chapter 9: Statements of cash flows
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Inventories have increased by $30,000 after allowing for the $40,000 of inventories
brought into the group when the subsidiary was purchased.
Purchases of non-current assets
When non-current assets are at carrying amount (net book value)
When non-current assets are shown at their carrying amount (net book value) and a
subsidiary has been acquired during the year, purchases of non-current assets
(assumed to be cash payments) are calculated as follows. (Figures have been
included in the table for illustrative purposes.)
$
Non-current assets at carrying amount, at the end of the year 290,000
Minus: Non-current assets acquired on acquisition of the subsidiary (65,000)
–––––––––––––––– ––––
225,000
Net book value of disposals of non-current assets during the year 30,000
Depreciation charge for the year 40,000
–––––––––––––––– ––––
295,000
Non-current assets at carrying amount, at the beginning of the year 240,000
–––––––––––––––– ––––
Cash paid to acquire non-current assets during the year 55,000
–––––––––––––––– ––––
When non-current assets are at cost
When non-current assets are shown at cost and a subsidiary has been acquired
during the year, purchases of non-current assets (assumed to be cash payments) are
calculated as follows. (Again, figures have been included in the table for illustrative
purposes.)
$
Non-current assets at cost, at the end of the year 485,000
Non-current assets acquired on acquisition of the subsidiary (90,000)
–––––––––––––––– ––––
395,000
Cost of disposals of non-current assets during the year 60,000
–––––––––––––––– ––––
455,000
Non-current assets at cost, at the beginning of the year (400,000)
–––––––––––––––– ––––
Cash paid to acquire non-current assets during the year 55,000
–––––––––––––––– ––––
Other items
Similar principles can be applied to all other assets and liabilities to find the cash
effect, for example to calculate loan repayments and repayments of leasing
obligations
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Example: calculating tax paid when a subsidiary has been acquired in the year
The Spot Group had the following items in its opening and closing group
statements of financial position at the beginning and at the end of 20X6:
At1January20X6 At31December20X6
$000 $000
Currenttaxpayable 250 325
Deferredtax(liability)
136 165
The Spot Group acquired a 60% holding in a subsidiary, Entity B, on 7 May 20X6.
The total tax liability of Entity B at this date was $120,000. The total charge for
taxation in the consolidated income statement of the Spot Group for the year to 31
December 20X6 was $950,000.
Required
What was the cash payment for taxation during the year, for inclusion on the group
statement of cash flows?
Answer
The tax liability in the subsidiary when it was acquired should be deducted from the
closing tax liability for the group (or added to the opening tax liability for the
group) to avoid double counting.
$000
Grouptaxliabilityatthebeginningoftheyear
386
Taxliabilityacquiredinthesubsidiary 120
Grouptaxchargeintheyear
950
1,456
Grouptaxattheendoftheyear(325+165) 490
Taxpaidintheyear
966
Note
To calculate the tax payment for the year, you should take the entire tax charge at
the beginning and at the end of the year – both current tax and deferred tax.
Example: dividends paid to non-controlling interest when a subsidiary has
been acquired
The Spot Group had the following items in its opening and closing group
statements of financial position at the beginning and at the end of 20X6:
At1January20X6 At31December20X6
$000 $000
Non‐controllinginterest 350 415
Chapter 9: Statements of cash flows
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The Spot Group acquired a 60% holding in a subsidiary, Entity B, on 7 May 20X6.
The net assets of Entity B at this date were $800,000 at fair value. The profit
attributable to non-controlling interests in the group’s income statement for the
year to 31 December 20X6 was $270,000.
Required
What dividends were paid to the non-controlling interests during the year to 31
December 20X6?
Answer
Again, to avoid double counting we need to:
deduct the non-controlling interest acquired from the value for non-controlling
interest in the closing consolidated statement of financial position, or
(as shown below) add the non-controlling interest acquired to the non-
controlling interest in the opening consolidated statement of financial position.
$000
Non‐controllinginterestatthebeginningoftheyear
350
Non‐controllinginterestacquiredinthesubsidiary(40%×800) 320
Non‐controllinginterestshareofprofitsfortheyear
270
940
Non‐controllinginterestattheendoftheyear 415
Dividendspaidtonon‐controllinginterestduringtheyear
525
The cash outflow will be shown as a cash flow from financing activities.
Example: adjustment for the impairment of goodwill
The Spot Group had the following items in its opening and closing group
statements of financial position at the beginning and at the end of 20X6:
At1January20X6 At31December20X6
$000 $000
Goodwill 600 540
The Spot Group acquired a 60% holding in a subsidiary, Entity B, on 7 May 20X6.
Purchased goodwill arising on the acquisition of Entity B was $110,000. The Spot
Group uses the indirect method to present its group statement of cash flows.
Required
What is the impairment to goodwill for the year, and where would it appear in the
group statement of cash flows?
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Answer
The impairment of goodwill is a non-cash item that reduces profit. When the
indirect method is used to present cash flows from operating activities, any
impairment of assets during the year and charged against profit must be added back
to the profit figure (in the same way that depreciation and amortisation charges are
added back).
When a subsidiary is acquired during the year, the calculation of the impairment
must allow for the purchased goodwill in the newly-acquired subsidiary. An
adjustment is needed to avoid double-counting.
$000
Goodwillatthebeginningoftheyear
600
Goodwillacquiredinthesubsidiary 110
710
Goodwillattheendoftheyear 540
Impairment
170
4.4 Disposal of a subsidiary in the statement of cash flows
The procedures for reporting the cash effect of disposals of subsidiaries in a group
statement of cash flows are similar to those used for acquisitions, except that the
process applies in reverse.
In the group statement of cash flows, the cash received from the disposal is the cash
actually received from the disposal, minus any cash in the subsidiary at the disposal
date.
A note to the statement of cash flows should show the details of the disposal,
including the cash received from the sale minus the cash in the subsidiary at the
disposal date.
Note
You should remember the assets and liabilities disposed of, and the non-controlling
interest that leaves the group on the disposal, to avoid double counting the other
cash flow items in the statement of cash flows.
Example
Entity D disposed of its 80% interest in the equity capital of Entity S for a cash sum
of $550 million. The statement of financial position of Entity S at the date of disposal
showed the following balances: