CIMA-F2-Financial-Management1

Goodwill and non-controlling interests

Test your understanding 8 - Satago

Papilla acquired 70% of Satago three years ago, when Satago's
retained earnings were $500,000.

The financial statements of each company for the year ended 31 March
20X7 are as follows:

Statements of financial position as at 31 March 20X7

Non-current assets P S
Property, plant and equipment $000 $000
Investment in S at cost
1,000 400
600 –

Current assets 300 600
–––– ––––
1,900 1,000
–––– ––––

Share capital 200 150
Share premium 50 –
Retained earnings
1,364 700

Non-current liabilities 100 90

Current liabilities 186 60
Statement of changes in equity –––– ––––
1,900 1,000
–––– ––––

Equity b/f P S
Comprehensive income $000 $000
Dividends 1,575
770
Equity c/f 89 100
(50) (20)
–––– ––––
1,614 850
–––– ––––

188 KAPLAN PUBLISHING

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chapter 6

Statements of comprehensive income for the year ended 31
March 20X7

Revenue P S
Cost of sales $000 $000
1,000
Gross profit (750) 260
Operating expenses –––– (80)
––––
Profit from operations 250 180
Finance costs (60) (35)
Investment income –––– ––––
190 145
Profit before tax (25) (15)
Tax
24 –
Profit after tax –––– ––––

Other comprehensive income 189 130
(100) (30)
Total comprehensive income ––––
––– 100
89 ––––

––– –
– –––
100
––– –––
89

–––

You are provided with the following additional information:

(1) Goodwill has been impaired by $39,000 of which $13,000 relates to
the current year.

(2) During the year Papilla transferred a lorry to Satago for $15,000.
The lorry has a useful economic life of 5 years and was 2 years old
at the start of the year. It had originally cost $20,000 and has no
residual value.
A full years depreciation is charged in the year of acquisition and
none in the year of disposal.

(3) Satago sold some goods to Papilla for $40,000 at a mark-up of
20%. 45% of the inventory remained unsold at the year-end.

(4) Satago had land in its balance sheet at the date of acquisition with a
carrying value of $100,000 but a fair value of $120,000.

(5) Papilla charges Satago a management charge of $5,000 per
annum which is reflected in Papilla's revenue and Satago's
operating expenses.

(6) Satago owes Papilla $6,000 at the year-end, recorded under
payables.

KAPLAN PUBLISHING 189

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Goodwill and non-controlling interests

Required:
Prepare the consolidated statement of financial position and
consolidated statement of comprehensive income for the year ended 31
March 20X7.
Prepare the consolidated statement of changes in equity.
Note: Papilla uses the proportionate method for valuing goodwill.

190 KAPLAN PUBLISHING

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chapter 6

9 Chapter summary

KAPLAN PUBLISHING 191

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Goodwill and non-controlling interests

Test your understanding answers

Test your understanding 1
(a) Full method

(W2) Net assets of subsidiary

Acquisition Reporting

date date

$000 $000

Share capital 5,000 5,000
Retained earnings
8,400 8,600
(W3) Goodwill
––––– –––––

13,400 13,600

––––– –––––

Consideration paid by the parent 10,600
P's % of S's net assets at acquisition
(75% x 13,400) (W2) (10,050) 550
–––––
Fair value of NCI at acquisition
NCI's % of S's net assets at acquisition 3,500
(25% x 13,400) (W2)
(3,350)
Goodwill at acquisition –––––

(W4) Non-controlling interest 150
NCI% of sub’s net assets at reporting date –––
(25% x 13,600 (W2)) 700
Plus: NCI share in goodwill (W3) –––

3,400

150
––––
3,550
––––

192 KAPLAN PUBLISHING

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chapter 6

(b) Proportionate method 10,600
(W3) Goodwill
(10,050)
Consideration paid by the parent –––––
P's % of S's net assets at acquisition 550
(75% x 13,400) (W2) –––––

Goodwill at acquisition 3,400

(W4) Non-controlling interest ––––
3,400
NCI% of sub’s net assets at reporting date ––––
(25% x (13,600 (W2))

Test your understanding 2 - Rosa
(a) Goodwill calculation using the proportion of net assets method:

Cost of investment (80% x 600) $
Less: share of net assets at acquisition 800
480
Goodwill – parent's share ––––
320
––––

(b) Goodwill calculation using the full goodwill method:

Goodwill – parent share (part a) 160 $
Fair value of NCI (20% x 100 x $8) (120) 320
NCI share of net assets at acquisition (20% × 600) –––––
40
Goodwill – NCI share ––––

Total goodwill at acquisition date 360
––––

KAPLAN PUBLISHING 193

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Goodwill and non-controlling interests

Test your understanding 3
Workings

(W2) Net assets of subsidiary

Acquisition Reporting

date date

Share capital $000 $000
Retained earnings 1,000 1,000
1,100 1,340

Other reserves – –

––––– –––––

2,100 2,340

––––– –––––

(W3) Goodwill

$000 $000

Consideration paid by the parent 1,900
P's % of fair value of S's net assets at acquisition (1,575)
(75 x 2,100 (W2))
–––––

Parent's share in goodwill 325
NCI share in goodwill 100

–––––

Gross goodwill at acquisition 425
Impairment (40)

–––––

Goodwill at reporting date 385

–––––

(W4) Non-controlling interests

$000

NCI% of sub’s net assets at reporting date 585
25% x 2,340 (W2) 100
Plus: NCI share in goodwill (W3)

Less: impairment (25% x 40) (10)

–––––

NCI at reporting date 675

–––––

(W5) Retained earnings

$000

Parent 3,250
Sub (75% × (2,340 – 2,100) (W2)) 180
Impairment (75% x 40) (30)

–––––

3,400

–––––

194 KAPLAN PUBLISHING

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chapter 6

Test your understanding 4 - Thunder and Lightning

Consolidated statement of comprehensive income for year ended

31 December 20X6

Thunder Lightning Adj Total

$ $$$

Revenue 85,000 42,000 (10,000) 117,000

Cost of sales (32,500) (12,500) 10,000 (37,500)

PUP (W2) (500)

Depreciation on fair value (2,000)
adjustment (W3)

–––––

Gross profit 79,500

Operating costs (21,750) (11,250) (36,000)

Impairment (3,000)

–––––

Operating profit 43,500

Investment income 800 –

Interco dividend (80% x 1,000) (800)

Finance costs (4,550) (1,500) (6,050)

–––––

Profit before tax 37,450

Tax (8,000) (5,000) (13,000)

––––– –––––

Profit for the year 6,750 24,450

––––– –––––

Other comprehensive income:

Revaluation gain 5,000 2,000 7,000

––––– –––––

Total comprehensive income 8,750 31,450

––––– –––––

Profit attributable to:

NCI (20% x 6,750) 1,350

Parent shareholders (ß) 23,100

–––––

24,450

–––––

KAPLAN PUBLISHING 195

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Goodwill and non-controlling interests 1,750
29,700
Total comprehensive income attributable to: –––––
NCI (20% x 8,750) 31,450
Parent shareholders (ß) –––––

Workings

(W1) Group structure

Thunder

80% ↓ 1 January 20X5 i.e. 2 years

Lightning

(W2) PUP

Profit on sale 20% x 10,000 $
Profit in inventory ¼ x 2,000 2,000

500

(W3) Depreciation adjustment

Annual depreciation on fair value adjustment is:
20,000 x 1/10 = 2,000

Test your understanding 5 - Thunder and Lightning continued

Consolidated statement of changes in equity for the year ended
31 December 20X6

Equity b/f Attributable to parent Attributable to NCI
Comprehensive shareholders shareholders
income
Dividends $ $
166,400 25,600
Parent
Sub: 20% x 29,700 1,750
1,000
(10,000) (200)
Equity c/f
––––– –––––
186,100 27,150
–––––
–––––

196 KAPLAN PUBLISHING

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chapter 6

Workings
(W1) Group structure

Thunder

80% ↓ 1 January 20X5
Lightning 2 years

(W2) Net assets of Lightning

Acquisition B/f C/f
date i.e. reporting
$
Net assets (per Q) $ 80,000 date
Fair value 65,000 20,000
adjustment (TYU 4) 20,000 $
Depreciation 92,750
adjustment (TYU 4) – 20,000

––––– (2,000) (4,000)
85,000
––––– ––––– –––––
98,000 108,750
–––––
–––––

(W3) Goodwill

Parent's share of goodwill (ß) $
NCI share of goodwill (given in TYU 4) 34,000

Full goodwill (given in TYU 4) 6,000
Impairment (given in TYU 4) –––––
40,000
Full goodwill at reporting date
(3,000)
(W4) NCI –––––
37,000
–––––

NCI b/f 20% x 98,000 $
Share of net assets b/f (W2) 19,600

NCI goodwill (W3) 6,000
Impairment b/f –

–––––
25,600
–––––

KAPLAN PUBLISHING 197

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Goodwill and non-controlling interests 20% x 108,750 $
(W2) 21,750
NCI c/f at reporting date
Share of net assets c/f 20% x 3,000 (W3) 6,000
(600)
NCI goodwill (W3) –––––
Impairment c/f 27,150
–––––
(W5) Equity attributable to parent shareholders
$
Equity b/f 80% x (98,000 – 156,000
Thunder equity b/f per Q 85,000) (W2)
Lightning 10,400

Impairment b/f –
–––––
Equity c/f at reporting date 80% x (108,750 – 166,400
Thunder equity c/f per Q 85,000) (W2) –––––
PUP (TYU 4)
Share of Lightning's profits 80% x 3,000 (W3) $
170,000
Impairment c/f
(500)
19,000

(2,400)
–––––
186,100
–––––

198 KAPLAN PUBLISHING

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chapter 6

Test your understanding 6 - Villa and Wolves

Consolidated statement of comprehensive income

Villa Wolves Baggies Adj Total
3/12

$000 $000 $000 $000 $000

Revenue 960 600 200 (90) 1,670

Cost of sales (400) (200) (150) 90

PUP (W2) (2) (662)

––––

Gross profit 1,008

Dist costs (60) (50) (10) (120)

Admin (100) (80) (5)

Depreciation adj (W3) (5)

Impairment (34 + 10) (44) (234)

––––

Operating profit 654

Dividend income 94 –

Interco ((80% x 100) + (70% x 20)) (94)

––––

Profit before tax 654

Tax (90) (60) (4) (154)

–––– –––– ––––

Net profit 203 31 500

–––– –––– ––––

Other comprehensive income –– – –

–––– –––– ––––

Total comprehensive income 203 31 500

–––– –––– ––––

Attributable to: (40.6) (9.3) 49.9
Non-controlling interests
(20% × 203) + (30% × 31) 450.1
Parent shareholders (ß) ––––

500
––––

KAPLAN PUBLISHING 199

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Goodwill and non-controlling interests

Consolidated statement of changes in equity

Equity b/f Parent NCI
shareholders shareholders
Acquisition of sub (W6)
Comprehensive income (CIS) 1288.8 147.2
Dividends paid (W5) (W6)
135.9
Parent 450.1 49.9
Wolves: 20% x 100
Baggies: 30% x 20 (150) (20)
(6)
Equity c/f ––––––
––––––
1,588.9
307
––––––
––––––

Workings
(W1) Group structure

(W2) Wolves sells the goods and so has the profit and takes the PUP

PUP on inventory = 25
( ––– × 30 ) = 6 This is the c/f pup.
PUP on opening
inventory = 125

25
( ––– × 20 ) = 4 This is the b/f

125 pup.

200 KAPLAN PUBLISHING

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chapter 6

The opening PUP reduced cost of sales and the closing PUP
increases cost of sales so there is an overall increase in cost of
sales of 2.

The intra-group trading is 90 for the period.

(W3) Depreciation adjustment

The fair value adjustment on non-current assets is $25,000. The
remaining life is five years and so the depreciation is $5,000 per
year.

(W4) Net assets – Wolves

Share capital Acquisition B/f C/f
Reserves $$$

Equity (given in SOCE b/f and c/f) 500 – –
Fair value adj 100 – –
Depreciation adjustment –––– –––– ––––
600 730 840
B/f: 3 years x 5
C/f: 4 years x 5 25 25 25
PUP (W2)
(15)
(20)

(4) (6)
–––– –––– ––––

625 736 839

Net assets – Baggies

B/f Acq'n C/f
$
$$
464
Equity (given in SOCE b/f and c/f) 360 453

Equity at acquisition date = 360 + (9/12 x 124) = 453

KAPLAN PUBLISHING 201

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Goodwill and non-controlling interests

(W5) Parent's equity = share capital + reserves

Villa per question B/f C/f
Wolf – post acquisition profits $ $
(80% × (736 – 625)) (W4)
(80% × (839 – 625)) (W4) 1,200 1,454
Baggies – post acquisition profits
(70% x (464 – 453)) (W4) 88.8
Impairment (current year) 171.2

– 7.7
––––– (44)
1288.8 –––––
1588.9

(W6) NCI equity

Wolves b/f 20% × 736 (W4) $$
147.2
––––

Acq’n of Baggies 30% × 453 (W4) 167.8 135.9
139.2 ––––
Wolves c/f 20% × 839 (W4) ––––
Baggies c/f 30% × 464 (W4) 307
––––

(W7) Alternative calculation of non-controlling interest for CSCI

Wolves
20% x (210 – 2 (PUP) – 5 (Depn adj)) = 40.6

Baggies
30% x (3/12 x 124) = 9.3

202 KAPLAN PUBLISHING

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chapter 6

Test your understanding 7 - Jet

Consolidated statement of financial position as at 30 September
20X7

Non-current assets $000
Goodwill (W3)
Property, plant and equipment 2,245
(28,000 + 10,900 – 600 + 1,600 – 1,200) 38,700
Investments (10,200 + 0 – 9,000)
Current assets 1,200
Inventory (10,000 + 4,850 – 66)
Receivables (8,260 + 2,000) 14,784
Cash (1,130 + 0) 10,260

Share capital 1,130
Share premium
Retained earnings (W5) –––––––

Non-controlling interests (W4) 68,319

Non-current liabilities –––––––
7% loan note (0 + 1,000)
Current liabilities 14,000
Trade and other payables (14,360 + 1,800) 8,000
Bank overdraft (450 + 500)
Income tax (2,480 + 600) 23,616

–––––––

45,616
1,513

–––––––

47,129

1,000

16,160
950

3,080

–––––––

68,319

–––––––

Workings
(W1) Group structure

KAPLAN PUBLISHING 203

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Goodwill and non-controlling interests

(W2) Net assets of subsidiary

Share capital Acquisition Reporting
Share premium date date
Revaluation reserve 2,000 2,000
Policy adjustment 880 880
Retained earnings 300 900
Fair value – contingent liability
Fair value – equipment (8,600 – 2,050 (600*)
7,000) (100) 10,070
1,600
– dep’n (1,600 × ¾) –
1,600

––––– (1,200)
6,730 –––––
––––– 13,650
–––––

* The parent company does not have a revaluation policy. The
group accounting policies must be aligned which means reversing
out the effect of the revaluation gain post acquisition.

(W3) Goodwill 9,000
Consideration paid by the parent
Shares (2,000/0.25 × 90% × ½ × 2.50) (6,057) 2,943
P's % of S's net assets at acquisition ––––
(90% x 6,730 (W2))
915
Fair value of NCI at acquisition
NCI's % of S's net assets at acquisition (673)
(10% x 6,730 (W2)) –––––

Goodwill on acquisition 242
Impairment –––––
3,185
Goodwill at reporting date (940)
–––––
2,245
–––––

204 KAPLAN PUBLISHING

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(W4) NCI chapter 6
NCI% of sub’s net assets at reporting date
(10% × 13,650 (W2)) 1,365
Plus: NCI share in goodwill (W3) 242
Less: NCI share of impairment
(10% x 940) (94)
–––––
(W5) Retained earnings 1,513
K (18,300 – 66 (W6)) –––––
S (90% × (13,650 – 6,730)(W2))
P's share of impairment (90% x 940) 18,234
6,228
(W6) PUP – Inventory (846)
Profit on sale (20/120 × 990) –––––
Profit in inventory (40% × 165)
23,616
–––––

165

66

KAPLAN PUBLISHING 205

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Goodwill and non-controlling interests

Test your understanding 8 - Satago
Consolidated statement of financial position as at 31 March 20X7

Non-current assets $000
Goodwill (W3)
Property, plant and equipment (1,000 + 400 + 20 – 2) 92
1,418
Current assets (300 + 600 – 6 – 3)
891

––––––

2,401

––––––

Share capital 200
Share premium 50
Retained earnings (W5)
1,446.9
Non-controlling interests (W4)
–––––––
Non-current liabilities (100 + 90)
1,696.9
260.1

–––––––

1,957
190

Current liabilities (200 + 60 – 6) 254

–––––––

2,401

–––––––

206 KAPLAN PUBLISHING

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chapter 6

Consolidated statement of comprehensive income for the year
ended 31 March 20X7

Revenue P S Adj Total
$000 $000 $000 $000
1,000 (40)
260 1,215
(5)

Cost of sales (750) (80) 40
– PUP (W6)/(W7) (2) (3)
(795)
Gross profit (60) (35)
Operating expenses (13) –––––
– Impairment
420
Profit from operations (25) (15) 5
Finance costs 24 –
Investment income (103)
Interco (70% x 20)
–––––
Profit before tax (100) (30)
Tax – 317
––––– (40)
Profit after tax
97 (14) 10
Other comprehensive income
––––– –––––
Total comprehensive income
– 287
Attributable to: (130)
Non-controlling interests (30% × 97) –––––
Parent shareholders (balance) –––––
97
157
–––––
–––––

–

–––––

157

–––––

29.1
127.9

–––––

157

–––––

KAPLAN PUBLISHING 207

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Goodwill and non-controlling interests

Consolidated statement of changes in equity

Equity b/f (W8) Parent NCI
Comprehensive income shareholders shareholders
Dividends
$000 $000
Equity c/f 1,633 237
127.9 29.1
(6)
(50)
–––––––
–––––––
260.1
1,710.9
–––––––
–––––––

Workings
(W1) Group structure

Papilla

70% ↓ 3 years

Satago

(W2) Net assets of subsidiary

Share capital Acquisition Brought Reporting
Retained earnings forward date
B/f: 700 – (100 – 20) 150 150
Fair value – land 500 150 700
PUP (W7)
20 620 20
– 20 (3)
––––
–––– –––– 867
670 790 ––––

–––– ––––

(W3) Goodwill 600
(469)
Cost of investment ––––
Fair value of net assets acquired (70% × 670) (W2)
131
Goodwill on acquisition (39)
Impairment ––––

Goodwill at reporting date 92
––––

208 KAPLAN PUBLISHING

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(W4) NCI chapter 6
30% × 867 (W2)
260.1
(W5) Retained earnings ––––
P (1,350 – 2 (W6))
S (70% × (867 – 670)) 1,348
Impairment 137.9

(W6) PUP – Non-current asset (39)
NBV in books (15 – (15/3yrs)) –––––
NBV should be (20 – (20 × 1/5 × 3yrs) 1,446.9
PUP –––––

(W7) PUP – Inventory 10
Profit on sale (20/120 × 40) 8
Profit in inventory (45% × 6.7)
––
(W8) Equity – b/f 2
Parent shareholders
P 6.7
S (70% × (790 – 670)) (W2) 3
Impairment (39 – 13)
1,575
Non-controlling interest shareholders 84
30% × 790 (W2)
(26)
–––––
1,633
–––––

237

KAPLAN PUBLISHING 209

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Goodwill and non-controlling interests

210 KAPLAN PUBLISHING

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chapter

7

Changes in group structure

Chapter learning objectives

On completion of their studies students should be able to:

• Prepare consolidated financial statements for a group of

companies;

• Explain the treatment in consolidated financial statements of

piece-meal and mid year acquisitions and disposals;

• Explain the accounting for reorganisations and capital

reconstruction schemes.

211

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Changes in group structure
1 Session content

2 Step acquisitions

So far we have considered the situations of the parent company acquiring
shares in a single transaction which has resulted in the investment either
being classified as a subsidiary, associate or joint venture. If the purchase
of shares does not result in any of these classifications, the investment is
simply classified as a trade investment.

However, it is possible that having purchased some shares, the parent
subsequently purchases further shares. This is referred to as a step
acquisition or sometimes, a piecemeal acquisition.

The possible scenarios can be classified into three situations:

(1) Non-control to non-control

E.g. a company acquires 10% of the equity shares and subsequently
purchases a further 30% to now hold 40%.

212 KAPLAN PUBLISHING

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chapter 7

This situation is less examinable and is considered within the expandable
text below.

(2) Non-control to control

E.g. a company acquires 40% of the equity shares and subsequently
purchases a further 20% to now hold 60%.

(3) Control to Control

E.g. a company acquires 60% of the equity shares and subsequently
purchases a further 15% to now hold 75%.

These two situations are more examinable and are considered in further
detail below.

Non-control to non-control

3 Non-control to control

This scenario is accounted for as if the previously held interest has been
disposed of at its current fair value and the controlling shareholding is then
subsequently acquired. Therefore, it is necessary to:

(1) Remeasure the previously held interest to fair value
(2) Recognise any resulting gain or loss within the income statement (and

so retained earnings)

The date on which control is achieved is considered to be the acquisition
date. From this date, the investment is classified as a subsidiary and
acquisition accounting is used. This means:

• consolidate income, expenses, assets and liabilities in full on a line by

line basis

• recognise goodwill
• recognise non-controlling interests

KAPLAN PUBLISHING 213

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Changes in group structure

For the purposes of calculating goodwill, the cost of the investment is made
up of:

Fair value of previously held interest X
Fair value of consideration to acquire additional interest X
––
Fair value of P's controlling shareholding at acquisition date i.e. cost X
of investment
––

Example 1

Example 1 answer

Test your understanding 1 - Major and Tom

The statements of financial position of two companies, Major and Tom

as at 31 December 20X6 are as follows:

Major Tom

$000 $000

Investment 160

Sundry assets 350 250

_____ _____

510 250

_____ _____

Equity share capital 200 100

Reserves 250 122
Liabilities 60 28

_____ _____

510 250

_____ _____

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chapter 7

Major acquired 40% of Tom on 31 December 20X1 for $90,000. At this
time the reserves of Tom stood at $76,000. A further 20% of shares in
Tom was acquired by Major three years later for $70,000. On this date,
the fair value of the existing holding in Tom was $105,000. Tom’s
reserves were $100,000 on the second acquisition date.

Required:

Prepare the consolidated statement of financial position for the Major
group as at 31 December 20X6, assuming that it is group policy to value
the NCI using the proportion of net assets method.

Test your understanding 2 - Heat and Wave

The statements of financial position of two companies, Heat and Wave

as at 30 June 20X5 are as follows:

Heat Wave

$000 $000

Investment 142 –

Sundry assets 358 225

_____ _____

500 225

_____ _____

Equity share capital 250 150

Reserves 200 55
Liabilities 50 20

_____ _____

500 225

_____ _____

Heat acquired 35% of Wave on 1 July 20X3 for $62,000 when the
reserves of Wave stood at $30,000. A further 40% of shares was
acquired by Heat one year later for $80,000 when Wave's reserves were
$45,000. On 1 July 20X4 the fair value of the existing holding in Wave
was $70,000 and the fair value of the NCI share in Wave was $50,000.

Required:

Prepare the consolidated statement of financial position for the Heat
group as at 30 June 20X5, assuming that it is group policy to value the
NCI using the full method.

KAPLAN PUBLISHING 215

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Changes in group structure
Non-control to control: W5 alternative calculation

4 Control to control

Where the parent already owns a controlling shareholding and subsequently
purchases additional shares, they are simply purchasing the shares from the
NCI shareholders. This means that the transaction is between the owners of
the group, with the parent’s share increasing and the NCI’s share
decreasing.

For example if the parent holds 80% of the shares in a subsidiary and buys
5% more the relationship remains one of a parent and subsidiary. As such,
the subsidiary will be consolidated in the group accounts in the normal way
but the NCI has decreased from 20% to 15%.

Where there is such a transaction:

• There is no change in the goodwill asset

• The income, expenses, assets and liabilities continue to consolidated

line by line

• If the step acquisition happens mid-year, it will be necessary to time

apportion profits when determining the NCI share of profits

• No gain or loss arises as this is a transaction within equity i.e. a

transaction between owners

• A difference may arise that will be taken to equity which can be

determined using the following proforma.

Cash paid $
Transfer from NCI to reduce NCI X
(X)
Difference to equity ––––
X
––––

The transfer from NCI will represent the proportionate reduction in the NCI’s
equity figure (i.e. the NCI’s share of net assets and goodwill under full
goodwill) as at the date of the step acquisition which the parent is effectively
purchasing from the NCI.

Example 2

Example 2 answer

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chapter 7

Test your understanding 3 - Gordon and Mandy

Gordon has owned 80% of Mandy for many years.

Gordon is considering acquiring more shares in Mandy, which will
decrease the NCI.

The net assets of Mandy are currently $400,000 and the gross goodwill
is $165,000 of which $40,000 is attributable to NCI.

Gordon's options are to either:

(a) Buy 10% of Mandy's shares for $50,000; or
(b) Buy 15% of Mandy's shares for $95,000.

Required:

Calculate the difference arising that will be taken to equity for each
situation.

5 Disposal scenarios

During the year, the parent may sell some or all of its shares in the
subsidiary.

Possible situations include:

(1) the disposal of all the shares held in the subsidiary;
(2) the disposal of part of the shareholding, leaving a residual holding after

the sale which is regarded as a trade investment;
(3) the disposal of part of the shareholding, leaving a residual holding after

the sale which is regarded as an associate; or
(4) the disposal of part of the shareholding, leaving a controlling interest

after the sale.

In situations (1), (2) and (3) the parent loses the ability to be able to control
the investment i.e. there is no longer a subsidiary.

However, in situation (4) a subsidiary still exists as the parent company is
still able to control the entity.

KAPLAN PUBLISHING 217

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Changes in group structure

Consequently, these two situations – control is lost and control is
maintained – these are dealt with separately within the group financial
statements. This will be discussed further in sections 8 and 12 below.

However, regardless of the above, the disposal of shares must also be
recorded within the parent’s individual financial statements.

6 Gain on disposal in parent's financial statements

In all of the above scenarios, the gain on disposal in the parent's accounts
is calculated as follows:

$

Sale proceeds X

Carrying amount (usually cost) of shares sold (X)

___

X

Tax – amount or rate given in question (X)

___

Net gain to parent X

___

The tax arising as a result of the disposal is always calculated based on the
gain in the parent’s books. This is because the the parent company and
subsidiary company are distinct separate legal entities – the group does not
legally exist. Tax can only be calculated in relation to a legal entity.

However, the link to the group accounts is that the tax arising on the gain
forms part of the parent’s tax charge and so forms part of the group’s tax
charge. The group’s tax charge is simply arrived at by adding together the
parent and subsidiary’s tax charge, like all other expenses.

7 Group financial statements

In the group accounts, accounting for the sale of shares in a subsidiary will
depend on whether the transaction causes control to be lost or whether after
the sale, control is maintained.

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chapter 7

The basic principles to be applied can be summarised as follows:

Control lost Control retained

Consolidated Gain or loss to the group No gain or loss is
statement of is calculated and recorded.
comprehensive included in the group
income (CSCI) gain CSCI for the year.
or loss

CSCI consolidation Subsidiary's income and Subsidiary's income and
expenses will be expenses will be
consolidated up to the consolidated for the
date of disposal i.e. they year.
will be time apportioned
in the case of a mid year
disposal.

Consolidated Subsidiary's assets and Subsidiary's assets and
statement of
financial position liabilities are no longer liabilities are still added
(CSFP)
consolidation added across. across at year end.

Goodwill Goodwill is eliminated. Goodwill remains the
same.

NCI NCI is eliminated. NCI is increased to

reflect the higher

percentage of the

subsidiary not owned by

the parent entity.

8 Accounting for a disposal where control is lost

Where control is lost (i.e. the subsidiary is completely disposed of or
becomes an associate or investment), the group:

• Recognises

– the consideration received

– any investment retained in the former subsidiary at fair value on the
date of disposal

KAPLAN PUBLISHING 219

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Changes in group structure

• Derecognises

– the assets and liabilities of the subsidiary at the date of disposal

– unimpaired goodwill in the subsidiary at the date of disposal

– the non-controlling interest at the date of disposal (including any
components of other comprehensive income attributable to them)

• Any difference between these amounts is recognised as an exceptional

gain or loss on disposal in the group statement of comprehensive
income.

The following is a proforma that can be used to calculate the exceptional
gain or loss on disposal:

Proceeds X
Fair value of retained interest X
___
Less: carrying value of subsidiary disposed of: X
Net assets of subsidiary at disposal date
Unimpaired goodwill at disposal date X
Less: NCI at disposal date X
(X)
Gain/loss to the group ___

(X)
___
X
___

The gain to the group is presented on the consolidated statement of
comprehensive income after operating profit.

9 Group accounts – entire disposal

Example 3

Example 3 answer

Test your understanding 4 - Snooker

Snooker purchased 80% of the shares in Billiards for $100,000 when
the net assets of Billiards had a fair value of $50,000. Goodwill was
calculated using the full method and amounted to $60,000 of which
$10,000 was attributable to NCI. Goodwill has not suffered any
impairment to date.

220 KAPLAN PUBLISHING

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chapter 7

Snooker has just disposed of its entire shareholding in Billiards for
$300,000, when the net assets were stated at $110,000. Tax is payable
by Snooker at 30% on any gain on disposal of shares.

Required:

(a) Calculate the gain or loss arising to the parent company on disposal
of shares in Billiards.

(b) Calculate the gain or loss arising to the group on disposal of the
controlling interest in Billiards.

Test your understanding 5 - Padstow

Padstow purchased 80% of the shares in St Merryn four years ago for
$100,000. On 30 June 20X6 it sold all of these shares for $250,000. The
net assets of St Merryn at acquisition were $69,000 and at disposal
were $88,000. Fifty per cent of the goodwill arising on acquisition has
been written off.

Tax is charged at 30%. The Padstow Group values the non-controlling
interest using the proportion of net assets method.

Required:

What profits/losses on disposal are reported in:

(a) Padstow's individual income statement
(b) the consolidated income statement.

10 Group accounts – disposal of subsidiary to become an
associate

This situation is where the disposal results in the subsidiary becoming an
associate, e.g. 90% holding is reduced to a 40% holding.

It is accounted for as if the group have disposed of the whole subsidiary and
reacquired the remaining interest at the date of disposal. The remaining
interest is therefore measured at fair value at the date of disposal and
recorded by:

Dr Investment
Cr Gain on disposal

The fair value of the investment then becomes the “cost” of the investment
for the purposes of subsequent equity accounting of the associate.

KAPLAN PUBLISHING 221

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Changes in group structure

Consolidated statement of comprehensive income

• Pro rate the subsidiary’s results for the year and :

– consolidate the results line by line up to the date of disposal
– equity account for the results after the date of disposal by including

a single line representing the share of associate's profits

• Include the exceptional group gain or loss on disposal.

Consolidated statement of financial position

• Equity account for the associate at the year end, by including a single

line representing the fair value of the investment retained plus the share
of post acquisition profits.

Example 4

Example 4 answer

Test your understanding 6 - Hague

Hague has held a 60% investment in Maude for several years, using the
full goodwill method to value the non-controlling interest. Half of the
goodwill has been impaired. A disposal of this investment has been
made on 31 October 20X5. Details are:

Cost of investment $
Maude – Fair value of net assets at acquisition 6,000
Maude – Fair value of a 40% investment at acquisition date 2,000
Maude – Net assets at disposal 1,000
Maude – Fair value of a 30% investment at disposal 3,000
Maude – Profit for the year ended 31 December 20X5 3,500
2,200

Required:

(a) Assuming a full disposal of the holding and proceeds of $10,000,
calculate the profit/loss arising:
(i) in Hague's individual accounts

(ii) in the consolidated accounts.

Tax is 25%.

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chapter 7

(b) Assuming a disposal of half the holding and proceeds of $5,000:
(i) calculate the profit/loss arising in the consolidated accounts

(ii) explain how the residual holding will be accounted for and
calculate the figures for inclusion in Hague's consolidated
income statement for the year ended 31 December 20X5 and
consolidated statement of financial position at 31 December
20X5.

Ignore tax.

Test your understanding 7 - Kathmandu

The statements of comprehensive income and statements of changes in
equity for the year ended 31 December 20X9 are as follows:

Income statement Kathmandu Nepal
$ $
Revenue
Operating costs 553,000 450,000
(450,000) (400,000)
Operating profits ________ ________
Dividends receivable
103,000 50,000
Profit before tax 8,000 –
Tax
________ ________
Profit after tax 111,000 50,000
Other comprehensive income (40,000)
(14,000)
Total comprehensive income ________ ________
71,000
– 36,000
–
________
71,000 ________
36,000
________
________

Statement of changes in equity

Equity b/f Kathmandu Nepal
Profit after tax 200,000 130,000
Dividend paid 71,000
(25,000) 36,000
Equity c/f (10,000)
________ ________
246,000 156,000
________
________

KAPLAN PUBLISHING 223

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Changes in group structure

Additional information

• On 1 January 20X5 Kathmandu acquired 70% of the shares of

Nepal for $100,000 when the fair value of Nepal's net assets were
$120,000. Nepal has equity capital of $50,000. At that date, the fair
value of the goodwill attributable to the non-controlling interest was
$2,000.

• Nepal paid its 20X9 dividend in cash on 31 March 20X9.

• Goodwill is to be accounted for using the full method. No goodwill

has been impaired.

Required:

(a) (i) Prepare the consolidated statement of comprehensive income
for the year ended 31 December 20X9 for the Kathmandu
group on the basis that Kathmandu sold its holding in Nepal on
1 July 20X9 for $200,000. This disposal is not yet recognised
in any way in Kathmandu group’s income statement.

(ii) Prepare the group statement of changes in equity at 31
December 20X9.

Ignore tax on the disposal.

(b) (i) Prepare the consolidated statement of comprehensive income
for the year ended 31 December 20X9 for the Kathmandu
group on the basis that Kathmandu sold half of its holding in
Nepal on 1 July 20X9 for $100,000 This disposal is not yet
recognised in any way in Kathmandu group’s income
statement. The residual holding of 35% has a fair value of
$100,000 and leaves the Kathmandu group with significant
influence.

(ii) Prepare the group statement of changes in equity at 31
December 20X9.

Ignore tax on the disposal.

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chapter 7

11 Group accounts – disposal of a subsidiary to become a trade
investment

This situation is where the subsidiary becomes a trade investment, e.g. 90%
holding is reduced to a 10% holding.

It is again accounted for as if the group have disposed of the whole
subsidiary and reacquired the remaining interest at the date of disposal.
The remaining interest is therefore measured at fair value of the date of
disposal and recorded by:

Dr Investment
Cr Gain on disposal

Consolidated statement of comprehensive income

• Pro rate the subsidiary’s results up to the date of disposal and then:

– consolidate the results up to the date of disposal
– only include dividend income after the date of disposal.

• Include the group gain on part disposal.

Consolidated statement of financial position

• Recognise the holding retained as an investment, measured at fair

value. This will initially be at cost i.e. the fair value at the date of
disposal, but may subsequently be remeasured to fair value at the
reporting date under the rules of IAS 39: Financial Instruments (see later
chapter)

12 Accounting for a disposal where control is retained

From the perspective of the group accounts, where there is a sale of shares
but the parent still retains control, there is simply a transaction between
owners, with the parent’s share decreasing and the NCI’s share increasing.

For example if the parent holds 80% of the shares in a subsidiary and sells
5%, the relationship remains one of a parent and subsidiary and as such will
remain consolidated in the group accounts in the normal way, but the NCI
has risen from 20% to 25%.

Where there is such an increase in the non-controlling interest:

• No gain or loss on disposal is calculated
• No adjustment is made to the carrying value of goodwill

KAPLAN PUBLISHING 225

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Changes in group structure

• The difference between the proceeds received and change in the non-

controlling interest is accounted for in shareholders’ equity as follows:

Cash proceeds received $
Transfer to NCI to increase NCI X
(X)
Difference to equity ––––
X
––––

The transfer to NCI will represent the share of the net assets and goodwill of
the subsidiary at the date of disposal which the parent has effectively sold to
the NCI.

Consolidated statement of comprehensive income

• Consolidate the subsidiary’s results for the whole year.

• Calculate the non-controlling interest relating to the periods before and

after the disposal separately and then add together.

For example, if the shares are sold on 1 November and year end is 31
December:

( 10 / 12 × profit × 20%) + ( 2 / 12 × profit × 25%)

Consolidated statement of financial position

• Consolidate as normal, with the non-controlling interest valued by

reference to the year-end holding

• Take the difference between proceeds and the transfer to the NCI to

parent shareholders' equity as previously discussed.

Example 5

Example 5 answer

Test your understanding 8 - David and Goliath

David has owned 90% of Goliath for many years and is considering
selling part of its holding, whilst retaining control of Goliath.

The net assets of Goliath are currently $350,000 abd the gross goodwill
is $175,000 of which $15,000 is attributable to NCI.

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chapter 7

David's options are to either:

(a) Sell 5% of the Goliath shares for $60,000; or
(b) Sell 25% of the Goliath shares for $100,000.

Required:

Calculate the difference arising that will be taken to equity for each
situation.

Test your understanding 9 - Cagney and Lacey

The draft accounts of two companies at 31 March 20X1 were as follows.

Statements of financial position Cagney Lacey
Group
Investment in Lacey at cost
Sundry assets $$

Equity capital ($1 shares) 3,440 –
Retained earnings
Sundry liabilities 41,950 9,500
Sales proceeds of disposal (suspense account)
______ ______

45,390 9,500

______ ______

20,000 3,000

11,000 3,500

5,500 3,000

8,890 –

______ ______

45,390 9,500

______ ______

KAPLAN PUBLISHING 227

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Changes in group structure

Statements of comprehensive income Cagney Lacey
Group
Revenue $ $
Cost of sales 31,590 11,870
(5,820)
Gross profit (15,290) _______
Distribution costs _______
Administrative expenses 6,050
16,300 (2,000)
Profit before tax (3,000)
Tax (250)
(350) _______
Profit after tax for the year _______
Other comprehensive income 3,800
12,950 (2,150)
Total comprehensive income (5,400) ______
_______
1,650
7,550 –
–
_______
_______ 1,650
7,550
_______
_______

The companies equity on 1 April 20X0 were as follows

Equity brought forward Cagney Lacey
$ $

23,450 4,850

Cagney had acquired 90% of Lacey when the reserves of Lacey were
$700. Goodwill of $110 has been fully impaired. The Cagney group
includes other fully owned subsidiaries.

On 31 December 20X0, Cagney sold 15% of the shares in Lacey .

Goodwill is calculated on a proportionate basis.

Required

Prepare the Cagney Group statement of financial position at 31 March
20X1 and statement of comprehensive income for the year ended 31
March 20X1. Also prepare the statement of changes in equity for the
current year.

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chapter 7

13 Business reorganisations
Reasons for reorganisation

There are a number of reasons why a group may wish to reorganise. These
include the following.

• A group may wish to list on a public stock exchange. This is usually

facilitated by creating a new holding company and keeping the
business of the group in subsidiary entities.

• Reorganisation is forced by a group of stakeholders e.g. by lender

where debt covenants are breached.

• The ownership of subsidiaries may be transferred from one group

company to another. This is often the case if the group wishes to sell a
subsidiary, but retain its trade.

• Part of a business is hived off into a separate group (a 'demerger'

arrangement).

• An unlisted entity may purchase a listed entity with the aim of achieving

a stock exchange listing itself. This is called a reverse acquisition.

Types of group reorganisations

There are a number of ways of effecting a group reorganisation. The type of
reorganisation will depend on what the group is trying to achieve.

New holding company

A group might set up a new holding entity for an existing group in order to
improve co-ordination within the group or as a vehicle for flotation.

• H becomes the new holding entity of S.

• Usually, H issues shares to the shareholders of S in exchange for

shares of S, but occasionally the shareholders of S may subscribe for
shares in H and H may pay cash for S.

KAPLAN PUBLISHING 229

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Changes in group structure

IFRS 3 excludes from its scope any business combination involving entities
or businesses under ‘common control’, which is where the same parties
control all of the combining entities/businesses both before and after the
business combination.

As there is no mandatory guidance in accounting for these items, the
acquisition method should certainly be used in examination questions.

Change of ownership of an entity within a group

This occurs when the internal structure of the group changes, for example, a
parent may transfer the ownership of a subsidiary to another of its
subsidiaries.

The key thing to remember is that the reorganisation of the entities within the
group should not affect the group accounts, as shareholdings are transferred
from one company to another and no assets will leave the group.

The individual accounts of the group companies will need to be adjusted for
the effect of the transfer.

The following are types of reorganisation:

(a) Subsidiary moved up

This can be achieved in one of two ways.

(i) S transfers its investment in T to H as a dividend in specie. If this is
done then S must have sufficient distributable profits to pay the
dividend.

(ii) H purchases the investment in T from S for cash. In practice the
purchase price often equals the fair value of the net assets acquired, so
that no gain or loss arises on the transaction.

Usually, it will be the carrying value of T that is used as the basis for the
transfer of the investment, but there are no legal rules confirming this.

A share-for-share exchange cannot be used as in many jurisdictions it is
illegal for a subsidiary to hold shares in the parent company.

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chapter 7

(b) Subsidiary moved down

This reorganisation may be carried out where there are tax advantages in
establishing a ‘sub-group’, or where two or more subsidiaries are linked
geographically.

This can be carried out either by:

(i) a share-for-share exchange (S issues shares to H in return for the
shares in T)

(ii) a cash transaction (S pays cash to H).
(c) Subsidiary moved along

This is carried out by T paying cash (or other assets) to S. The
consideration would not normally be in the form of shares because a typical
reason for such a reconstruction would be to allow S to be managed as a
separate part of the group or even disposed of completely. This could not be
achieved effectively were S to have a shareholding in T.

If the purpose of the reorganisation is to allow S to leave the group, the
purchase price paid by T should not be less than the fair value of the
investment in U, otherwise S may be deemed to be receiving financial
assistance for the purchase of its own shares, which is illegal in many
jurisdictions.

KAPLAN PUBLISHING 231

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Changes in group structure

Reverse acquisitions

Definition

A reverse acquisition occurs when an entity obtains ownership of the
shares of another entity, which in turn issues sufficient shares so that the
acquired entity has control of the combined entity.

Reverse acquisitions are a method of allowing unlisted companies to obtain
a stock exchange quotation by taking over a smaller listed company.

For example, a private company arranges to be acquired by a listed
company. This is effected by the public entity issuing shares to the private
company so that the private company’s shareholders end up controlling the
listed entity. Legally, the public entity is the parent, but the substance of the
transaction is that the private entity has acquired the listed entity.

Test your understanding 10 - Henderson

Below are the income statements for the year ended 31 March 20X7
and statements of financial position as at 31 March 20X7 of Henderson
and Springdale:

Statements of comprehensive income for the year ended 31

March 20X7

Henderson Springdale

$000 $000

Revenue 23,700 15,900

Cost of sales (7,510) (6,800)

––––– –––––

Gross profit 16,190 9,100

Operating expenses (3,520) (2,240)

––––– –––––

Profit from operations 12,670 6,860

Finance cost (1,000) (540)

––––– –––––

Profit before tax 11,670 6,320

Tax (3,500) (1,880)

––––– –––––

Net profit 8,170 4,440

Other comprehensive income ––

––––– –––––

Total comprehensive income 8,170 4,440

––––– –––––

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chapter 7

Statements of financial position as at 31 March 20X7

Henderson Springdale

$000 $000 $000 $000

Assets

Non-current assets

Tangible 89,710 89,560

Investments 70,000 –

––––– –––––

159,710 89,560

Current assets

Inventory 1,860 1,115

Receivables 2,920 1,960

Cash 4,390 1,870

––––– –––––

9,170 4,945

––––– –––––

168,880 94,505

––––– –––––

Equity and liabilities

Issued share capital ($1 50,000 40,000
shares)

Retained earnings 89,430 36,930

––––– –––––

139,430 76,930

Non-current liabilities 25,000 14,000

Current liabilities

Trade payables 1,240 1,675

Taxation 3,210 1,900

––––– –––––

4,450 3,575

––––– –––––

168,880 94,505

––––– –––––

KAPLAN PUBLISHING 233

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Changes in group structure

(1) Henderson acquired 40% of the equity share capital of Springdale
on 1 April 20X2 at a cost of $27 million. At this date the balance on
Springdale’s retained earnings was $22.45 million. A fair value
exercise was carried out but at this time it was determined that the
carrying value of Springdale’s net assets was a reasonable
approximation of their fair value.

(2) Henderson acquired a further 35% shareholding in Springdale on 1
July 20X6 at a cost of $35 million. At this date, it was determined
that the fair value of the original 40% holding in Springdale was $30
million.

(3) At 1 July 20X6 non-current assets held by Springdale were
determined to have a fair value of $2 million in excess of their
carrying value. These assets had a remaining life of 10 years at this
date. Depreciation is charged to operating expenses.

(4) After 1 July 20X6, Henderson sold goods to Springdale for $2.4
million at a mark-up of 20% on cost. Springdale still held one fifth of
these goods at the year-end. At the year-end Henderson’s books
showed a receivable of $800,000 in respect of the transaction. This
disagreed to the corresponding balance in Springdale’s books due
to cash in transit at the year-end of $50,000.

(5) Henderson’s policy is to value non-controlling interests at acquisition
at their fair value. The fair value of the non-controlling interests at 1
July 20X6 was measured at $20 million.

(6) As at 31 March 20X7 goodwill was reviewed from impairment and it
was determined that an impairment loss of $1 million should be
recorded. The impairment loss should be charged to operating
expenses.

Required:

Prepare the consolidated statement of comprehensive income for the
year ended 31 March 20X7 and the consolidated statement of financial
position as at 31 March 20X7 for the Henderson group.

234 KAPLAN PUBLISHING

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chapter 7

Test your understanding 11 - Howard

Howard, Sylvia and Sabrina are three entities preparing their financial
statements under International Accounting Standards. Their income
statements for the year ended 30 September 20X5 and summarised
statements of financial position as at that date are given below:

Statements of comprehensive income for the year ended 30
September 20X5

Howard Sylvia Sabrina

$000 $000 $000

Revenue 80,000 60,000 50,000

Cost of sales (35,000) (40,000) (16,000)

––––– ––––– –––––

Gross profit 45,000 20,000 34,000

Operating expenses (20,000) (8,000) (20,000)

––––– ––––– –––––

Profit from operations 25,000 12,000 14,000

Finance cost (3,000) (2,000) (4,000)

––––– ––––– –––––

Profit before tax 22,000 10,000 10,000

Tax (7,000) (4,000) (2,000)

––––– ––––– –––––

Net profit 15,000 6,000 8,000

Other comprehensive income –––

––––– ––––– –––––

Total comprehensive income 15,000 6,000 8,000

––––– ––––– –––––

KAPLAN PUBLISHING 235

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Changes in group structure

Statements of financial position as at 30 September 20X5

Howard Sylvia Sabrina
$000 $000 $000

Assets 160,000 60,000 64,000
Non-current assets 80,000 – –
Tangible –––––
Investments ––––– –––––
240,000 60,000 64,000
Current assets 65,000 50,000 36,000
––––– ––––– –––––
Equity and liabilities 110,000 100,000
Share capital ($1 shares) 305,000 ––––– –––––
Retained earnings –––––

Non-current liabilities 50,000 20,000 15,000
Current liabilities 185,000 43,000 42,000
––––– –––––
––––– 63,000 57,000
235,000 18,000 20,000
29,000 23,000
25,000 ––––– –––––
45,000 110,000 100,000
––––– ––––– –––––
305,000
–––––

Note 1 – Investments by Howard in Sylvia

On 1 October 20X3, Howard acquired 70% of the equity share capital of
Sylvia for $45 million in cash, when the balance on Sylvia’s retained
earnings was $28 million. It was determined that at this date land with a
carrying value of $40 million had a fair value of $45 million.

On 1 April 20X5, Howard acquired a further 10% of the equity shares
paying $10 million in cash.

Note 2 – Investment by Howard in Sabrina

On 1 January 20X2, Howard acquired 60% of the equity shares of
Sabrina for $21 million in cash, when the balance on Sabrina’s retained
earnings was $15 million. It was determined that the book value of
Sabrina’s net assets on 1 January 20X2 were equal to their fair values.

On 1 July 20X5, Howard disposed of all of its shareholding in Sabrina
for $50m cash. It is estimated that tax of $3m will be payable on the gain
on disposal. Howard has not yet recorded the disposal in its financial
statements.

236 KAPLAN PUBLISHING

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chapter 7

Note 3 – Intra-group trading

During the year ended 30 September 20X5, Sylvia sold goods to
Howard for $7m. These goods were sold at a mark-up on cost of 25%.
$2m of these goods are included in Howard’s closing inventory, all of
which were purchased by Howard in the last six months of the year.

Note 4 – Goodwill

Howard’s policy is to calculate goodwill using the full goodwill method.
The fair value of the non-controlling interests in Sylvia and Sabrina at
their relevant dates of acquisition were $17.4 million and $13 million
respectively. Since acquisition, no impairments of goodwill have arisen.

Required:

Prepare the consolidated statement of comprehensive income of the
Howard group for the year ended 30 September 20X5 together with a
consolidated statement of financial position as at that date.

KAPLAN PUBLISHING 237

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