CIMA-F2-Financial-Management1

Consolidated statement of comprehensive income and statement of changes in equity

Workings for CSOCE

(W4) Net assets of Hawk

Share capital Acquisition B/f C/f
Retained earnings $000 $000 $000
(Equity b/f – share capital) (310 – 200) 200 200 200
(Equity c/f – share capital) (452 – 200) 10
Fair value adjustment 110
Depreciation adjustment 252
Inventory – fair value adjustment 100 100 100
– (10) (20)
25 25 –
–––– –––– ––––
335 425 532
–––– –––– ––––

(W5) Equity attributable to parent shareholders B/f C/f
$000 $000
Wolf
(485 – 1 pup) 450 484
Hawk
(100% × (425 – 335) (W4)) 90 197
(100% × (532 – 335) (W4)) (8)
Impairments (2) ––––
–––– 673
––––
538
––––

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chapter

5

Associates and joint
ventures

Chapter learning objectives

On completion of their studies students should be able to:

• Prepare consolidated financial statements for a group of

companies involving one or more subsidiaries and associates;

• Explain the accounting treatment of associates and joint ventures

using the equity method and proportional consolidation method.

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Associates and joint ventures
1 Session Content

2 Associates (IAS 28)

Definition:

• An associate is an entity over which the investor has significant

influence and which is neither a subsidiary nor a joint venture of the
investor.

• Significant influence is the power to participate in, but not control, the

financial and operating policy decisions of an entity. A holding of 20%
or more of the voting power is presumed to give significant influence
unless it can be clearly demonstrated that this is not the case. At the
same time a holding of less than 20% is assumed not to give significant
influence unless such influence can be clearly demonstrated.

IAS 28 explains that an investor probably has significant influence if:

• It is represented on the board of directors.
• It participates in policy-making processes, including decisions about

dividends or other distributions.

• There are material transactions between the investor and investee.
• There is interchange of managerial personnel.
• There is provision of essential technical information.

3 Accounting for associates

Associates are not consolidated as the parent does not have control.
Instead they are equity accounted.

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chapter 5

Consolidated statement of financial position

The CSFP will continue to consolidate 100% of the assets and liabilities of
the parent (P) and subsidiary (S) on a line by line basis.

There will be one line within non-current assets representing the associate
(A) called 'investment in associate'.

It is possible to calculate the investment in associate in two ways as follows:

Investment in associate (preferred by the examiner) $000
X
Cost of investment X
Add: share of increase in net assets i.e. share of post acquisition
reserves (X)
Less: impairment losses (X)
Less: PUP (where P is selling – see later) ___
X
___

Investment in associate (alternative) $000
X
Share of net assets at reporting date X
Add: carrying value of goodwill (X)
Less: PUP (where P is selling – see later)
___
X
___

You will need to produce W2 (net assets) for the associate to calculate the
share of the increase in net assets (post-acquisition profits).

You will need to include in W5 (group retained earnings) the parent's share
of A’s post acquisition profits less any impairments in the associate.

Consolidated statement of comprehensive income

The CSCI will continue to consolidate 100% of the income and expenses of
the parent and subsidiary on a line by line basis.

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Associates and joint ventures

There will also be one line before profit before tax representing the parent's
share of the associate’s profit after tax less any impairment losses called

"share of profit of associate".

Parent's share of associate profit after tax X
Less: current year impairments (X)
––
X
––

Dividends received by the parent from the associate are excluded as the
share of associate's profit is calculated in its place as above.

Note: Non-controlling interests are not applicable for associates as the
group only reflects its share in the associate's net assets and profit for the
year.

IAS 28 Investments in associates

4 Trading with the associate
Inter-company transactions

Remember that you do not eliminate inter-company sales and purchases,
receivables or payables between the group and the associate as the
associate is outside of the group. The only exception to this is any
unrealised profit on transactions, of which the group’s share must be
eliminated.

Provisions for unrealised profit (PUP)

IAS 28 requires that only the group share of unrealised profit is removed:

PUP = P% × Unrealised profit in inventory

Parent sells to associate

In the CSFP the following adjustment is necessary for the group share of the
PUP:

• Reduce W5 retained earnings
• Reduce investment in associate (W)

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In the CSCI, the reduction in profit for the current year is adjusted for as
follows:

• Reduce revenue and reduce cost of sales of the parent by the parent's

share of the sale resulting in unrealised profit. This results in the
required reduction in gross profit by the parent's share of the PUP.

• The exam alternative is to increase the cost of sales of the parent

company by the parent's share of the PUP.

Illustration 1 - Parent sells to associate
The parent (P) has an associate (A). P owns 40% of A.

P has sold $200,000 of goods to A at a price which represents cost plus
25%.

At the reporting date 60% of these items remain in inventory.

There is no intra group trading to be eliminated between a group and
associate as the associate is not a group member. The only adjustment
will be for the PUP on closing inventory.

Profit on sale 25/125 × 200,000 =
40,000
Profit in inventory
PUP (group share of 60% × 40,000 = 24,000
profit)
40% × 24,000 = 9,600

CSFP treatment

Dr Retained earnings (W5) ? 9,600
Cr Investment in associate ↓ 9,600

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Associates and joint ventures

CSCI treatment

The $9,600 represents the fall in the parent’s gross profit.

Since the value of the sales have not been eliminated in the
consolidated statement of comprehensive income, it is necessary to
adjust both sales and cost of sales to achieve the fall in gross profit of
$9,600. This is achieved by recorded the following double entry:

Dr Revenue ↓ 48,000 (9,600 ×
125/25)
Cr Cost of ↓
sales 38,400 (9,600 ×
100/25)

and so Gross profit ↓ 9,600

Exam Alternative: ↑ 9,600
Dr Cost of
sales

And so Gross profit ↓ 9,600

Associate sells to the parent

In CSFP the following adjustment is necessary for the group share of the
PUP:

• Reduce retained earnings (W5)
• Reduce inventory (CSFP)

In the CSCI, the reduction in profit for the current year is adjusted for as
follows:

• Reduce share of associate's profits

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Illustration 2 - Associate sells to parent

Using the same scenario as illustration 1 above, the parent's share of
the PUP is $9,600.

CSFP treatment

Dr Retained earnings ? 9,600 (W5)

Cr Inventory ↓ 9,600 (CSFP)

The reduction in retained earnings is achieved by reducing the share of
associate's post acquisition profit.

CSCI treatment

Dr Share of associate's profits ? 9,600

No adjustment is required to sales and cost of sales.

Test your understanding 1

A parent company owns 25% of its associate. The parent made sales to
the associate during the year amount to $450,000. The sales have been
made at cost plus 20%. At the reporting date 30% of these items remain
in inventory.

Required:

Identify the relevant adjustments required to be made to the consolidated
statement of financial position and consolidated statement of
comprehensive income.

Example 1
Example 1 answer
Example 1 - alternative calculation

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Associates and joint ventures

Test your understanding 2

P acquired 100% of S on 1 December 20X4 paying $5.35 in cash per
share. At this date the balance on S’s retained earnings was $870,000.
On 1 March 20X7 P acquired 30% of A’s ordinary shares. The
consideration was settled by share exchange of 4 new shares in P for
every 3 shares acquired in A. The share price of P at the date of
acquisition was $5. P has not yet recorded the acquisition of A in its
books.

The statements of financial position of the three companies as at 30
November 20X7 are as follows:

Non-current assets P S A
Property $000 $000 $000
Plant & Equipment
Investments 890 850 900
450 210 150
2,675
– –

Current assets 270 230 200
Inventory 100 340 400
Receivables 160 140
Cash ––––– 50 –––––
4,545 ––––– 1,790
––––– 1,680 –––––
–––––

Share capital $1 1,800 500 250
Share premium 250 80 –
Retained earnings
1,145 400 1,200
Non-current liablities ––––– ––––– –––––
10% Loan notes 3,195 1,450
980
500 –
300

Current liabilities 520 330 250
Trade payables 330 70 90
Income tax –––––
4,545 ––––– –––––
––––– 1,680 1,790
––––– –––––

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chapter 5

The following information is relevant:

• As at 1 December 20X4, plant in the books of S was determined to

have a fair value of $50,000 in excess of its carrying value. The
plant had a remaining life of 5 years at this time.

• During the year, S sold goods to P for $400,000 at a mark-up of

25%. P had a quarter of these goods still in inventory at the year-
end.

• In September A sold goods to P for $150,000. These goods had

cost A $100,000. P had $90,000 (at cost to P) in inventory at the
year-end.

• As a result of the above inter-company sales, P’s books showed

$50,000 and $20,000 as owing to S and A respectively at the year-
end. These balances agreed with the amounts recorded in S’s and
A’s books.

• Goodwill in the subsidiary is to be impaired by 40% at the reporting

date. An impairment review found the investment in the associate
was to be impaired by $15,000 at the year-end.

• A’s profit after tax for the year is $600,000.

Required:

Prepare the consolidated statement of financial position as at 30
November 20X7.

KAPLAN PUBLISHING 147

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Associates and joint ventures

Test your understanding 3

Below are the statements of comprehensive income of the Barbie group
and its associated companies, as at 31 December 20X8.

Revenue Barbie Ken Shelly
Cost of sales $000 $000 $000
385 60
Gross profit (185) 100 (20)
Operating expenses ___ (60) ___
200 ___ 40
Profit before tax (50) (10)
Tax ___ 40 ___
150 (15) 30
Profit for the year (50) ___ (10)
Other comprehensive income ___ ___
100 25 20
Total comprehensive income – (12) –
___ ___ ___
100 20
___ 13 ___
–

___
13

___

You are also given the following information.

(1) Barbie acquired 60,000 ordinary shares in Shelly for $80,000 when
that company had a credit balance on its retained earnings of
$50,000 a number of years ago. Shelly has 200,000 $1 ordinary
shares.

(2) Barbie acquired all of the ordinary shares in Ken a number of years
ago for $70,000 when retained earnings were $20,000.

(3) During the year Shelly sold goods to Barbie for $28,000. Barbie still
holds some of these goods in inventory at the year end. The profit
element included in these remaining goods is $2,000.

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chapter 5

(4) Goodwill and the investment in the associate were impaired for the
first time during the year as follows:

Shelly $2,000

Ken $3,000

Impairment of the subsidiary’s goodwill should be charged to
operating expenses.
Required:

Prepare the consolidated statement of comprehensive income for
Barbie for the year ended 31 December 20X8.

5 Joint ventures (IAS 31)

A joint venture is a contractual arrangement whereby two or more parties
undertake an economic activity that is subject to joint control.

Joint control is the contractually agreed sharing of control over an economic
activity. This means that none of the parties alone can control the activity but
all together can do so. Decisions on operating and financial policy require
each venturer's consent.

Types of joint venture

6 Accounting for joint ventures

There are two acceptable methods of accounting for jointly controlled
entities:

• equity accounting – same treatment as for associate
• proportional consolidation – an alternative method recommended by

the IASB.

Accounting for joint ventures

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Associates and joint ventures

7 Accounting for joint ventures - proportional consolidation

Consolidate the joint venture line by line in the same way as a subsidiary but
only include the parent's proportion of the joint venture's items.

Consolidated statement of financial position (extracts)

Goodwill X
Non-current assets (P + (% × JV)) X
Consolidated income statement (extracts)

Revenue (P + (% × JV)) X

The following rules apply:

• purchased goodwill is calculated, including fair value adjustments

• non-controlling interests are not applicable

• the group share of post-acquisition reserves will be included in group

reserves

• only the group share of inter-company balances and transactions are

eliminated

• only the group share of unrealised profit (PUP) adjustments will be

removed.

Test your understanding 4

P acquired 100% of the equity share capital of S on 1 January 20X4. On
1 January 20X5 P acquired 30% of the share capital of X, an entity set
up under a contractual arrangement as a joint venture between P and
one of its suppliers. The directors of P have decided to adopt a policy of
proportionate consolidation wherever appropriate and permitted by
International Financial Reporting Standards.

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chapter 5

Below are the statements of financial position of P, S and X as at 31
December 20X7.

P SX
$000 $000 $000

Non-current assets 5,650 7,400 1,300
Property, plant and equipment
Investments 7,100 −−

Current assets 2,800 1,800 850
Inventory 2,980 1,320 640
Receivables 1,170 430
Bank ––––– 980 –––––
19,700 ––––– 3,220
––––– 11,500 –––––
–––––

Equity 2,600 3,000 1,000
Share capital, $1 shares 2,400 − −
Share premium 7,250
Retained earnings ––––– 5,000 750
12,250 ––––– –––––
Non-current liabilities 8,000 1,750
Loans
3,500 1,700 800
Current liabilities
Payables 3,150 1,500 550
Taxation 800 300 120
–––––
Notes: ––––– ––––– 3,220
19,700 11,500 –––––
––––– –––––

(1) P acquired the investment in S by making a cash payment of $1.5m
and issuing two shares for every three acquired in S. The market
value of P’s shares as at 1 January 20X4 was $2.50 per share. On
the same date the balance on S’s retained earnings was $1m.

(2) P acquired the investment in X by making a cash payment of $2 per
share acquired. The balance on X’s retained earnings at 1 January
20X5 was $300,000.

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Associates and joint ventures

(3) At the dates of acquisition, fair value exercises were carried out. On
the acquisition of S it was determined that property, plant and
equipment had fair values of $2 million in excess of their carrying
values. These assets had a remaining life of 10 years as at 1
January 20X4. The fair values of X were approximately equal to their
carrying values at the date of acquisition.

(4) During the year, P sold goods to both S and X at a mark-up of 20%.
Details were as follows:

Sales value Value in inventory Receivables outstanding

S $500,000 $360,000 $250,000

X $275,000 $240,000 $100,000

Required:

Prepare the consolidated statement of financial position of the P Group
as at 31 December 20X7.

Test your understanding 5 - H, S & A

The following are the summarised accounts of H, S, and A for the year
ended 30 June 20X8.

Statements of financial position at 30 June 20X8

Tangible non-current assets H S A
Investments $ $ $
S (100%) 87,000 88,000 62,000
A (30%)
Current assets 115,000 40,000 9,000
15,000 _______ _______
Equity capital ($1 shares) 74,000 128,000
Retained earnings _______ 71,000
Liabilities _______ _______
291,000 75,000
_______ 51,000 35,000
200,000 34,000
2,000
89,000 _______ 2,000
2,000 128,000 _______
_______
_______ 71,000
291,000 _______
_______

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chapter 5

Statements of comprehensive income for the year ended 30 June
20X8

H SA

$ $$

Revenue 500,000 200,000 100,000

Operating costs (400,000) (140,000) (60,000)

_______ _______ _______

Profit from operations 100,000 60,000 40,000

Tax (23,000) (21,000) (14,000)

_______ _______ _______

Profit after tax 77,000 39,000 26,000

Other comprehensive income – ––

_______ _______ _______

Total comprehensive income 77,000 39,000 26,000

_______ _______ _______

The shares in S and A were acquired on 1 July 20X5 when the retained
profits of S were $15,000 and the retained profits of A were $10,000.

At the date of acquisition, the fair value of S’s non-current assets, which
at that time had a remaining useful life of ten years, exceeded the book
value by $10,000.

During the year S sold goods to H for $10,000 at a margin of 50%. At
the year-end H had sold 80% of the goods.

At 30 June 20X8 the goodwill in respect of S had been impaired by 30%
of its original amount, of which the current year loss was $1,200. At 30
June 20X8 the investment in A had been impaired by $450, of which the
current year loss was $150.

Required:

Prepare the consolidated statement of comprehensive income for the
year ended 30 June 20X8 and consolidated statement of financial
position as at 30 June 20X8.

KAPLAN PUBLISHING 153

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Associates and joint ventures
8 Chapter summary

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chapter 5

Test your understanding answers

Test your understanding 1
Inventory remaining at reporting date = 450,000 x 30% = 135,000

Profit within closing inventory = 135,000 x 20/120 = 22,500
Parent's share of PUP = 22,500 × 25% = 5,625
Adjustments required to group financial statements

Dr Retained earnings (W5) 5,625
Cr Investment in associate (W or CSFP) 5,625

In the statement of comprehensive income, the sales and cost of sales of
the group must be adjusted to allow for an overall reduction in profits of
$5,625.

Reduce sales by (5,625 x 120/20) = 33,750.

Reduce cost of sales by (5,625 x 100/20) = 28,125

Net impact: gross profit falls by 33,750 – 28,125 = 5,625.

Or: exam alternative is to increase cost of sales by 5,625

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Associates and joint ventures

Test your understanding 2

Consolidated statement of financial position as at 30 November
20X7

Non-current assets $000
Goodwill (W3)
Property (890 + 850) 705
Plant & equipment (450 + 210 + 50 – 30) 1,740
Investment in associate (W6)
680
620
–––––
3,745

Current assets 471
Inventory (270 + 230 – 20 – 9) 390
Receivables (100 + 340 – 50) 210
Cash (160 + 50) –––––
4,816
–––––

Share capital (1,800 + 100) 1,900
Share premium (250 + 400) 650
Retained earnings (W5) 266

Non-controlling interests –––––
Non-current liabilities 2,816
10% Loan notes (500 + 300)
–

800

Current liabilities 800
Trade payables (520 + 330 – 50) 400
Tax (330 + 70) –––––
4,816
–––––

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chapter 5

Workings:
(W1) Group structure

(W2) Net assets of subsidiary

Share capital Acquisition Reporting
Share premium date date
Retained earnings 500 500
Fair value adjustment – plant 80 80
Depreciation on FV adjustment (50 870 400
× 3/5) 50 50
PUP (W7) (30)
–
Net assets of associate ––––– (20)
1,500 ––––
Share capital –––––
Retained earnings (see below) 980
Acquisition ––––
date
250 Reporting
750 date
250
––––– 1,200
1,000
––––– –––––
1,450
–––––

Retained earnings at reporting date per question 1,200
Post acquisition profit (9/12 × 600) (450)
–––––
Retained earnings at acquisition
750
–––––

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Associates and joint ventures 2,675

(W3) Goodwill (1,500)
–––
Cost of investment (500 × $5.35)
Fair value of net assets acquired 1,175
100% × 1,500 (W2) (470)

Goodwill on acquisition –––
Impairment (40% × 1,175) 705
–––
Goodwill at reporting date
1,145
(W4) Non-controlling interest (9)

N/A (520)
135
(W5) Group retained earnings
(485)
Parent –––
PUP (W8) 266
Subsidiary (100% × (980 – 1,500) (W2)) –––
Associate (30% × (1,450 – 1,000) (W2))
Impairment (15 + 470 (W3))

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(W6) Investment in associate 500
135
Cost of investment (15)
(See below) –––
Share of post acquisition profits 620
30% x (1,450 – 1,000) (W2) –––
Less: impairment
75
Cost of investment 100
Shares purchased in A 500
30% x 250
Shares in P given in consideration 500
75 x 4/3 100
Value of P shares given as consideration 400
100 shares x $5
80
Adjustment required in P's books to record investment: 20
Dr Investment
Cr Share capital 50
Cr Share premium 30

(W7) PUP – Subsidiary 9

Profit on sale (25/125 × 400)
Profit in inventory (1/4 × 80)

(W8) PUP – Associate

Profit on sale (150 – 100)
Profit in inventory (90/150 × 50)
Group share (30% × 30)

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Associates and joint ventures

Test your understanding 3

Barbie consolidated income statement for the year ended 31
December 20X8

Barbie Ken Adjustments Consolidated

$000 $000 $000 $000

Revenue 385 100 485.0
Cost of sales
(185) (60) (245.0)
Gross profit
Operating expenses _____
Impairment in subsidiary
240.0
Profit from operations
Share of profits of (50) (15) (68.0)
associate company (W2)
(3)
Profit before tax
Taxation _____

Profit for the year 172.0
Other comprehensive
income 3.4

Total comprehensive (50) (12) _____
income ___ 175.4
13 (62.0)
Amount attributable to: _____
Non-controlling interests –– 113.4
(N/A)
Parent shareholders _

___ _____
13 113.4

_____

_

113.4
_____
113.4
_____

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Workings
(W1) Group structure

(W2) Share of profit of associate 6

Share of associate profit for the year (0.6)
(30% × $20) (2)
Less:
PUP (30% x $2) ___
Impairment 3.4

___

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Associates and joint ventures

Test your understanding 4

Consolidated statement of financial position as at 31 December
20X7

Non-current assets $000
710
Goodwill (500 + 210) (W3)
Property, plant and equipment (5,650 + 7,400 + (30% x 14,640
1,300) + 2,000 − 800 (W2))
–––––
15,350

Current assets

Inventory (2,800 + 1,800 + (30% x 850) − 60 – 12 (W6)) 4,783

Receivables (2,980 + 1,320 + (30% x 640) − 250 – 30 (W6)) 4,212

Bank (1,170 + 980 + (30% x 430)) 2,279

–––––

26,624

–––––

Equity

Share capital 2,600

Share premium 2,400

Retained earnings (W5) 10,513

Non-controlling interests (W4) –

Non-current liabilities 5,440
Loans (3,500 + 1,700 + (30% x 800))

Current liabilities 4,535
Payables (3,150 + 1,500 + (30% x 550) − 250 – 30 (W6)) 1,136
Taxation (800 + 300 + (30% x 120)) –––––
26,624
–––––

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chapter 5

Workings
(W1) Group structure

(W2) Net assets of S

Acquisition Reporting
date
Share capital 3,000 3,000
Retained earnings 1,000 5,000
Fair value adjustment 2,000 2,000
Depreciation adjustment (2,000 x (800)
4/10) –
––––
Net assets of X –––– 9,200
6,000 ––––
––––
Reporting
Acquisition date
1,000
Share capital 1,000 750
Retained earnings 300 ––––
1,750
–––– ––––
1,300
––––

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Associates and joint ventures

(W3) Goodwill

SX

Cost of investment

Cash 1,500 (30% × 1,000 × 600
$2)

Shares (100% x 3,000 x 2/3 x 5,000
$2.50)

––––

6,500

Fair value of net assets acquired

S: 100% × 6,000 (6,000)

X: 30% × 1,300 (390)

–––– ––––

Goodwill 500 210

–––– ––––

(W4) NCI

N/A

(W5) Retained earnings

P 7,250
PUP (60 + 12) (W6) (72)
S (100% × (9,200 − 6,000) (W2))
X (30% × (1,750 − 1,300) (W2)) 3,200
135
(W6) PUP and intra-group balances
–––––
10,513
–––––

S Profit in inventory = 20/120 × $360,000 = $60,000
↓ Inventory and ↓ W5
Eliminate intra-group balance of $250,000

X Profit in inventory = 20/120 × $240,000 = $40,000
Group share = 30% × $40,000 = $12,000
↓ Inventory and ↓ W5
Eliminate inter-company balance of $100,000 x 30% =
$30,000

164 KAPLAN PUBLISHING

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chapter 5

Test your understanding 5 - H, S & A

Group statement of comprehensive income for the year ended 30
June 20X8

H S Adjustments Consolidated

$$ $ $

Revenue 500,000 200,000 (10,000) 690,000

Operating costs (400,000) (140,000) 10,000 (533,200)

Impairment in S (1,200)

Depreciation on fair (1,000)
value adjustment
(W2)

PUP (W2) (1,000)

_______

Profit from 156,800
operations

Share of profit of 7,650
associate
((30% × 26,000) –
goodwill impairment
150)

_______

Profit before tax 164,450

Tax (23,000) (21,000) (44,000)

_______

Profit for the period 120,450

Other –– –
comprehensive
income

_______ _______

Total comprehensive 37,000 120,450
income

_______

Attributable to:

Non-controlling –
interests

Parent shareholders 120,450

_______

120,450

_______

KAPLAN PUBLISHING 165

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Associates and joint ventures

Consolidated statement of financial position as at 30 June 20X8

$

Goodwill (W3) 10,500

Investment in associate (W6) 21,750

Tangible non-current assets

(87,000 + 88,000 + 10,000 FV – 3,000 FV

depreciation (W2)) 182,000

Current assets (74,000 + 40,000 – 1,000 PUP (W2)) 113,000

_______

327,250

_______

Equity capital 200,000

Retained earnings (W5) 123,250

Non-controlling interest (W4) –

Liabilities (2,000 + 2,000) 4,000

_______

327,250

_______

Workings

(W1) Group structure

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chapter 5

(W2) Net assets Acquisition Reporting
date date
Subsidiary $ $

Share capital 75,000 75,000
Retained earnings 15,000 51,000
Fair value adjustment 10,000 10,000
Depreciation on fair value adjustment (3,000)
(3/10 × 10,000) –
PUP (10,000 x 20% x 50%)
(1,000)
_______ _______
100,000 132,000
_______ _______

Associate Acquisition Reporting
date date
Share capital $ $
Retained earnings
35,000 35,000
10,000 34,000
_______ _______
45,000 69,000
_______ _______

(W3) Goodwill S
$
Cost of investment 115,000
Fair value of net assets at acquisition
(100% x 100,000 (W2)) (100,000)
______
Less: impairment loss (30% x 15,000) 15,000
(4,500)

_______
10,500

_______

KAPLAN PUBLISHING 167

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Associates and joint ventures $
(W4) Non-controlling interest 89,000
N/A (4,950)
(W5) Retained earnings
Parent 32,000
Less: Impairments (4,500 (W3) + 450) 7,200
Share of post acquisition profits
S: 100% × (132,000 – 100,000) (W2) _______
A: 30% × (69,000 – 45,000) (W2) 123,250
_______
(W6) Investment in associate
Cost $
Share of post acquisition profits 15,000
30% × (69,000 – 45,000) (W2)
7,200
Less: impairment ______
22,200

(450)
______
21,750
______

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chapter

6

Goodwill and non-controlling
interests

Chapter learning objectives

On completion of their studies students should be able to:

• Prepare consolidated financial statements for a group of

companies (including the statement of changes in equity);

• Explain the treatment in consolidated financial statements of non-

controlling interests and goodwill (including its impairment).

169

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Goodwill and non-controlling interests
1 Session content

2 IFRS 3 Business Combinations

A business combination is the bringing together of separate entities into
one economic entity.

Therefore IFRS 3 applies to the situation of a parent company acquiring a
subsidiary.

Aspects of IFRS 3 that we have already seen are:

• All combinations to be accounted for by applying the purchase method,

i.e. acquisition accounting.

• The acquirer recognises the acquiree's identifiable assets, liabilities

and contingent liabilities at their fair values at the acquisition date.

• The acquirer also recognises goodwill which is capitalised and then

subjected to an annual impairment review.

• IFRS 3 tells us how to measure goodwill in the various scenarios that an

entity might encounter.

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chapter 6

3 Goodwill

In the early group accounts chapters of this text, only fully owned (100%)
subsidiaries have been considered.

By definition, a subsidiary is an entity that is controlled by another entity –
the parent. Control is normally achieved by the parent owning a majority i.e.
more than 50% of the equity shares of the subsidiary.

When the parent owns less than 100% of the subsidiary’s shares, the other
shareholders are referred to as the non-controlling interests.

In this scenario, both the parent shareholders and NCI are considered to be
shareholders of the group and so both of their ownership interests needs to
be reflected within the equity section of the CSFP.

IFRS 3 (2008) allows two ways of measuring the NCI at the date of
acquisition. This in turn results in two ways of measuring goodwill.

KAPLAN PUBLISHING 171

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Goodwill and non-controlling interests

Fair value/full method

Under this method, 100% of the subsidiary’s goodwill will be recorded in the
CSFP as follows:

(W3) Goodwill

Consideration paid by the parent X X
P's % of fair value of S's net assets at acquisition (e.g. (X)
80%) X*
–– ––
Parent's share in goodwill X
Fair value of NCI holding at acquisition X ––
NCI's % of fair value of S's net assets at acquisition (X)
(e.g. 20%)
––
NCI share in goodwill

Gross goodwill at acquisition

The NCI figure for the equity section of the CSFP is calculated in W4. At the
date of acquisition, the NCI’s are measured at fair value – this is made up of
their share of the subsidiary’s net assets at acquisition and their share of
goodwill.

At the reporting date therefore, the NCI figure is made up of their share of
the subsidiary's net assets at the reporting date plus their share of goodwill:

(W4) Non-controlling interest

NCI% of S’s net assets at reporting date X
Plus: NCI share in goodwill X*
––
NCI at reporting date X
––

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chapter 6

Proportionate/partial method

Under this method, only the parent’s share of the goodwill is recorded in the
CSFP. It will be calculated as follows:

(W3) Goodwill

Consideration paid by the parent X
P's % of fair value of S's net assets at acquisition (e.g. 80%) (X)
––
Goodwill at acquisition X
––

When using this method, the NCI’s share of goodwill is not being recognised
i.e. the NCI’s are simply measured at their proportion of the sub’s net assets
at acquisition. Therefore, when considering the NCI figure for the CSFP W4
simply becomes:

(W4) Non-controlling interest

NCI% of subsidiary’s net assets at reporting date X
––

Positive goodwill is to be capitalised and subjected to annual impairment
reviews.

A discount on acquisition or "negative goodwill" is to be recognised
immediately in the consolidated income statement as income and therefore
an increase to group retained earnings.

Alternative calculation for full method

IFRS 3 concepts

Example 1

Example 1 answer

Example 1 answer - alternative to full method

KAPLAN PUBLISHING 173

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Goodwill and non-controlling interests

Test your understanding 1

Duke purchased 75% of the ordinary share capital of York for $10.6m on
31 March 20X3. York's share capital comprises of 5 million $1 shares
and it held retained earnings of $8.4m at the acquisition date. The non-
controlling interest in York is valued at $3.5m on 31 March 20X3.

At 31 December 20X3, York's retained earnings stood at $8.6m. There
was no impairment of goodwill for the current year.

Required:

Calculate the value of goodwill and non-controlling interest to be included
in Duke Group’s consolidated financial statements for the year ended 31
December 20X9 using:

(a) The full method
(b) The proportionate method

4 Non-controlling interest's share of goodwill

In exam questions, there are several ways that the examiner might deal with
this information:

(1) Give you the NCI’s share of goodwill as at acquisition.
This should be added to the parent’s share of goodwill calculated in W3
to achieve gross goodwill and should be added to NCI’s share of net
assets in W4 to achieve NCI figure for CSFP.

(2) Give you the fair value of the NCI holding as at acquisition.
This should be used to calculate the NCI’s share of goodwill in W3. The
NCI’s share of goodwill is then included in W4.

(3) Give you the subsidiary’s share price as at acquisition.
This should be used to calculate the fair value of the NCI holding at
acquisition. This in turn is used to calculate the NCI’s share of goodwill
in W3. The NCI’s share of goodwill is then included in W4.

The fair value of the NCI holding at the date of acquisition is the fair value of
their shares of the subsidiary. The fair value of shares is normally the
market value of the shares. Therefore, the subsidiary’s share price at
acquisition can be used to value the NCI holding of the subsidiary.

174 KAPLAN PUBLISHING

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chapter 6

Illustration

In the example above, the fair value of NCI in Nottingham at acquisition
date was given as $2,700.

The question could however have stated:

(1) The NCI share in goodwill is $700

The goodwill calculation would then be: 5,500

Consideration paid by the parent (3,000)
P's % of S's net assets at acquisition –––––
(60% x 5,000)
2,500
Parent share in goodwill 700
NCI share in goodwill
––––
Goodwill at acquisition 3,200
––––

The NCI's share of goodwill of $700 is then added to W4 – see answer
to example 2.

(2) Nottingham’s share price just before the acquisition date was $2.25
per share.

The fair value of the NCI holding can then be calculated as:

3,000 shares x 40% x $2.25 = $2,700

This is then used in W3 to calculate NCI's share of goodwill – see
answer to example 2.

Test your understanding 2 - Rosa

Rosa acquires 80% of the Parks’ share capital by paying cash of $800.
Parks has 100 $1 nominal value shares.

At the date of acquisition the fair value of the net assets of the Parks is
$600 and the market value of a Parks' share is $8.

KAPLAN PUBLISHING 175

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Goodwill and non-controlling interests

Required:

(a) Calculate the goodwill arising valuing the NCI using the proportion of
the net assets method.

(b) Calculate the goodwill arising valuing the NCI using the full goodwill
method.

5 Impairment of goodwill

Goodwill must be tested annually for impairment i.e. any fall in its value. In
an exam question, this will either be given to you as an amount or you will be
required to calculate it as a percentage of the original value of goodwill.

How the adjustment is made depends on which method of accounting for
goodwill is adopted.

Proportionate method

Cr Goodwill (W3) ↓
Dr Group RE (W5) ↓

Full method

Cr Goodwill (W3) ↓

Dr NCI (W4) – NCI% x impairment ↓

Dr Group RE (W5) – P% x impairment ↓

Test your understanding 3

Wind purchased 75% of Rain on 1 February 20X0 for $1.9m when
Rain's retained earnings amounted to $1.1m. Rain's share capital is 1
million $1 shares. The NCI share in goodwill is $100,000.

During the year ended 31 January 20X1, Rain made a profit of
$240,000 but goodwill was impaired by $40,000 on the full grossed up
value of goodwill.

Wind's retained earnings were $3.25m on 31 January 20X1.

Required:

Prepare workings 2, 3, 4 and 5 including the effect of the impairment if
Wind’s policy is to use the full method of accounting for goodwill.

176 KAPLAN PUBLISHING

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chapter 6

6 Consolidation techniques – updated workings

You should continue to use the five standard workings introduced and
practiced in the "Accounting for subsidiaries" chapter.

This chapter has introduced the choices in calculating goodwill and has
shown the calculation of NCI for the consolidated statement of financial
position.

The five standard workings for the consolidated statement of financial
position are recreated below for your ease of use.

Standard consolidated statement of financial position (CSFP)
workings
(W1) Group structure

Parent

% ↓ Date of acquisition

Subsidiary

(W2) Net assets of subsidiary Acquisition Reporting

Share capital date date
Retained earnings
Other reserves XX
Fair value (FV) adjustments
Depreciation on FV adj XX
Inventory PUP (if S is selling)
XX

XX

– (X)

– (X)

––––– –––––

XX

––––– –––––

to W3 to W4

Difference between totals
in columns to W5

KAPLAN PUBLISHING 177

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Goodwill and non-controlling interests

(W3) Goodwill
Fair value/full method

Consideration paid by the parent X
P's % of S's net assets at acquisition (e.g. 80%) (W2) (X)
––

Fair value of NCI at acquisition X X
NCI's % of S's net assets at acquisition (e.g. 20%) (X)
(W2) X*
–– ––
X
Goodwill at acquisition (X)
Less: impairment ––
X
Goodwill at reporting date ––

Proportionate/partial method X X
Consideration paid by the parent (X) X*
P's % of S's net assets at acquisition (e.g. 80%) (W2) –– (X)
X ––
Goodwill at acquisition (X) X
Less: impairment –– ––
X X
Goodwill at reporting date –– ––

(W4) Non-controlling interest

Fair value/ full method

NCI% of subsidiary’s net assets at reporting date (e.g. 20%)
(W2)
Plus: NCI share in goodwill (W3)
Less: impairment

Proportionate/partial method

NCI% of subsidiary’s net assets at reporting date (e.g. 20%)
(W2)

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chapter 6

(W5) Group reserves

Parent Retained Other
Inventory PUP (if P is selling) earnings reserves
Sub (e.g. 80% × post-acq reserves
(W2)) X X
Impairment (P's share) (X) –
X X

(X) –
–––– ––––

X X
–––– ––––

Note: In W5, the impairment loss that is deducted from group retained
earnings should equate to the parent's share of the impairment loss. Under
the proportionate method, this is the same amount that has been deducted
in W3. Under the full method, apply the parent's share to the amount
deducted in W3.

All adjustments discussed in the accounting for subsidiaries chapter should
be dealt with in the same way, regardless of the introduction of NCI. For
example:

• Fair value adjustments
• Depreciation on fair value adjustments
• Intra-group balances cancellation
• Inventory and NCA PUPs

7 NCI and the consolidated statement of comprehensive income
(CSCI)

The principles for dealing with NCI on the consolidated statement of
comprehensive income are straightforward.

Deal with revenue down to profit after tax and other comprehensive income
in the same way as before. Refer back to chapter 4 for these rules.

The parent and subsidiary's income and expenses are added together to
signify that the parent has control over the subsidiary's policies to generate
income and control expenses.

The fact that the ownership of the group is split between the parent and the
NCI shareholders is dealt with by extending CSCI proforma to show how the
group’s profit and group’s total comprehensive income is owned by the
parent and NCI shareholders.

KAPLAN PUBLISHING 179

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Goodwill and non-controlling interests

The profit and total comprehensive income attributable to NCI should be
calculated and then the amounts attributable to the parent shareholders will
be determined as balancing figures.

The profit and total comprehensive income attributable to the NCI will be
calculated as:

NCI % x subsidiary’s profit for the year X
(after consolidation adjustments) ––

NCI % x subsidiary’s total comprehensive income for the year(after X
consolidation adjustments) ––

Illustration
Consolidated statement of comprehensive income (CSCI)

Revenue P S Adj Total
↓ $000 $000 $000 $000
↓
XX X
Profit for the year/profit after tax (PAT) ↓
––– ↓
Other comprehensive income: X –––
Gains on property revaluation ––– X
Available for sale financial assets –––
XX
XX X
X
Other comprehensive income for the year ––– –––
X X
Total comprehensive income for the year ––– –––
X
Profit attributable to: –––
Parent shareholders (ß)
NCI shareholders (NCI% x S's PAT) X
X
Total comprehensive income attributable to: –––
Parent shareholders (ß) X
NCI shareholders (NCI% x S's total comprehensive income) –––

X
X
–––
X
–––

180 KAPLAN PUBLISHING

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chapter 6

Example 2

Example 2 answer

Test your understanding 4 - Thunder and Lightning

On 1 January 20X5, Thunder acquired 80% of the equity share capital of
Lightning, when the net assets of Lightning were $65,000. Below are the
income statements of Thunder and Lightning for the year ended 31
December 20X6:

Revenue Thunder Lightning
Cost of sales $ $

Gross profit 85,000 42,000
Operating costs (32,500) (12,500)

Operating profit ––––– –––––
Investment income 52,500 29,500
Finance costs (21,750) (11,250)
––––– –––––
Profit before tax 30,750 18,250
Tax
800 (1,500)
Profit for the year (4,550) –––––
––––– 16,750
Other comprehensive income: 27,000 (5,000)
Revaluation gain (8,000) –––––
––––– 11,750
Total comprehensive income 19,000 –––––
–––––
2,000
5,000 –––––
––––– 13,750
24,000 –––––
–––––

During the year Thunder sold $10,000 of goods to Lightning at a profit
margin of 20%. A quarter of these goods remain in the inventory of
Lightning at the reporting date.

On acquisition, a fair value adjustment is recorded to increase plant and
equipment of Lightning by $20,000. The plant had a remaining life of 10
years at this time. Depreciation is charged to cost of sales.

KAPLAN PUBLISHING 181

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Goodwill and non-controlling interests

Thunder’s group policy is to record the non-controlling interests at fair
value at acquisition i.e. to measure goodwill in full. The goodwill arising
on acquisition was $40,000 of which $6,000 was attributable to the non-
controlling interests.

As at 31 December 20X5 goodwill was reviewed for impairment, but
none had arisen. As at 31 December 20X6, an impairment loss of
$3,000 had arisen, which should be charged to operating costs.

In the year ended 31 December 20X6, Lightning paid a dividend of
$1,000.

Required:

Prepare the consolidated statement of comprehensive income for the
Thunder group for the year ended 31 December 20X6.

Mid year acquisition of subsidiary

8 NCI and the consolidated statement of changes in equity

As discussed in chapter 4, the statement of changes in equity explains the
movement in the equity section of the statement of financial position from the
previous reporting date to the current reporting date.

For the purposes of the exam, the consolidated statement of changes in
equity (CSOCE) should be made up of two columns:

• the equity attributable to parent shareholders i.e. the aggregate of share

capital, share premium and retained earnings.

• the equity attributable to NCI shareholders

Therefore the CSOCE is presented as follows:

Equity b/f Attributable to Non-controlling
Comprehensive income parent's interests
Dividends
shareholders $000
P's dividend $000 X
NCI% x S's dividend X X
X (X)
Equity c/f
(X) (X)
––––
––––
X X
––––
––––

182 KAPLAN PUBLISHING

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chapter 6

Comprehensive income

The comprehensive income of the group is split between the parent and NCI
shareholders at the foot of the CSCI. These figures are carried directly to
the CSOCE.

Dividends

The CSOCE shows the dividends which are leaving the group i.e. the
parent’s dividend in full and the share of the subsidiaries dividend belonging
to non-controlling interests.

The share of the sub’s dividend that has been paid to the parent
shareholders will have been eliminated from the group accounts as an
intercompany transaction.

Equity b/f attributable to parent shareholders

The equity b/f attributable to the parent shareholders is the share capital,
share premium and retained earnings per the CSFP as at the start of the
year i.e. the end of last year.

Share capital and share premium balances in the group accounts are those
of the parent company only.

Retained earnings is calculated using W5. Therefore retained earnings b/f
is calculated by preparing W5 as at the start of the year (or end of last year).

Equity b/f attributable to non-controlling interests

This is the NCI figure per W4 (and per the CSFP) as at the start of the year
i.e. the end of last year. Remember that W4 is influenced by the group’s
policy on goodwill.

Mid-year acquisition of subsidiary

When a subsidiary has been acquired mid-year, there are no NCI
shareholders at the start of the year and therefore no equity b/f attributable to
NCI.

However, the acquisition of the subsidiary results in NCI being recognised
within equity, either at fair value or their proportion of the subsidiary’s net
assets. This movement within equity therefore needs to be reflected in the
CSOCE (see Example 5).

Example 3

KAPLAN PUBLISHING 183

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Goodwill and non-controlling interests
Example 3 answer

Test your understanding 5 - Thunder and Lightning continued

On 1 January 20X5 Thunder acquired 80% of the equity share capital of
Lightning, when the net assets of Lightning were $65,000. Below are the
statements of changes in equity for Thunder and Lightning for the year
ended 31 December 20X6:

Equity b/f Thunder Lightning
Comprehensive income $ $
Dividends
156,000 80,000
Equity c/f 24,000 13,750
(1,000)
(10,000) ––––––
–––––– 92,750
170,000 ––––––
––––––

Required:

Using the above, and the information from TYU 4, prepare the
consolidated statement of changes in equity for the Thunder group for
the year ended 31 December 20X6.

Note: The total comprehensive income attributable to NCI for the year
ended 31 December 20X6 was $1,750 and attributable to parent
shareholders was $29,700.

Test your understanding 6 - Villa and Wolves

Villa acquired 400,000 ordinary shares of Wolves on 1 January 20X1 for
$840,000. At this time the ordinary share capital had a $1 nominal value
and totalled $500,000. The reserves at this date stood at $100,000.
Goodwill impairment this year amounts to 10% of the original goodwill
value of $340,000, calculated on the proportionate basis. There had
been no impairments in previous years.

The fair value of the non-current assets of Wolves at the date of
acquisition was $25,000 in excess of its book value. The non-current
asset concerned had five years remaining in its useful economic life
from the date of acquisition of the subsidiary and depreciation is treated
as an administration expense.

184 KAPLAN PUBLISHING

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chapter 6

Wolves sold $90,000 of goods (at selling price) to Villa during the year
and $30,000 of these goods remained in the inventory of Villa at the end
of the year. At 1 January 20X4 $20,000 if goods purchased from Wolves
was in Villa's inventory. The transfer price is arrived at by taking 25% on
cost.

Villa acquired 70% of Baggies on the 1 October 20X4 and the
impairment of goodwill relevant to this acquisition has already been
calculated at $10,000 for the period to 31 December 20X4. The
goodwill in Baggies is also calculated using the proportionate method.

The following statements of comprehensive income relate to the year
ended 31 December 20X4.

Revenue Villa Wolves Baggies
Cost of sales $000 $000 $000
600 800
Gross profit 960 (200) (600)
Distribution costs (400) ––– –––
Administration expenses 400 200
––– (50) (40)
Operating profit 560 (80) (20)
Dividend income (60) ––– –––
(100) 270 140
Profit before tax –––
Taxation 400 ––– –––
270 140
Profit for the year 94 (60) (16)
––– ––– –––
Other comprehensive income 494 210 124
(90) ––– –––
Total comprehensive income –––
404 – –
––– ––– –––
210 124
– ––– –––
–––
404
–––

Statements of changes in equity for the year ended 31 December 20X4

Equity b/f Villa Wolves Baggies
Comprehensive income $000 $000 $000
Dividends paid 1 December 20X4 1,200 730 360
210 124
Equity c/f 404 (100) (20)
(150) ––– –––
–––– 840 464
1,454 ––– –––
––––

KAPLAN PUBLISHING 185

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Goodwill and non-controlling interests

Required:

Prepare a consolidated statement of comprehensive income and
consolidated statement of changes in equity for the year ended 31
December 20X4.

Test your understanding 7 - Jet

Jet acquired 90% of Hunter on 1 October 20X4. Jet paid $2.50 cash
immediately for every 2 shares acquired.

The statements of financial position for the two companies at the year
ended 30 September 20X7 are below:

Jet Hunter
$000 $000

Non-current assets 28,000 10,900
Property, plant and equipment 10,200 –
Investments
Current assets 10,000 4,850
Inventory 8,260 2,000
Receivables 1,130
Cash –
–––––––
Share capital 25c each –––––––
Share premium 57,590
Revaluation Reserve 17,750
Retained earnings –––––––
–––––––
Non-current liabilities 14,000
7% loan note 8,000 2,000
Current liabilities – 880
Trade and other payables 900
Bank overdraft 18,300
Income tax 10,070
–––––––
–––––––
40,300
13,850
–––––––
–––––––

– 1,000

14,360 1,800
450 500
600
2,480
–––––––
–––––––
600
57,590
–––––––
–––––––

186 KAPLAN PUBLISHING

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chapter 6

The following information is relevant:

(1) At the date of acquisition Hunter's retained earnings were $2.05
million and the balance on the revaluation reserve was $300,000.
There have been no entries to the share premium account since
acquisition.

At the date of acquisition Hunter was being sued by Trojan for
breach of copyright. The lawyers advised at this time that it was
unlikely that Hunter would have to pay any damages. The fair value
of the contingent liability was assessed as $100,000. This claim has
since been settled out of court.

Hunter also had some equipment with a carrying amount of $7
million and whose fair value was $8.6 million. The remaining useful
economic life of the equipment was 4 years from acquisition.

Hunter has a revaluation policy for land and buildings. Since
acquisition Hunter has recorded a revaluation surplus of $600,000
on land. This is fully accounted for in the statement of financial
position.

Jet has a policy of holding all non-current assets at historic cost.
(2) During the year Jet made sales totalling $990,000 of its latest

Travelator product to Hunter. Hunter had only managed to sell on
60% of these goods at the year-end. Jet charges a mark-up on cost
of 20%.
(3) Accumulated impairment losses in relation to goodwill are
$940,000.
(4) The fair value of NCI at the date of acquisition was $915,000.

Required:

Prepare the consolidated statement of financial position (CSFP) as at
30 September 20X7 using the full method.

KAPLAN PUBLISHING 187

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