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2. Learning Objectives:By the end of this lecture,
3. Learning Objectives:understand how and why to eliminate
4. IntroductionTan & Lee Chapter 2© 2009Parent-Subsidiary Relationship
5. Consolidation ProcessConsolidation is the process of preparing
6. Introduction (contunied) The purpose of this
7. What are inter-corporate transactions?During financial period, it
8. Pre acquisition profits Any profits or losses
9. The fair values of these net assets
10. Post-acquisition profits These are any profits or
11. For example:On January 1, 2015 Red Company
12. By the end of the year:Reserves –
13. Show the amount of Goodwill and capital
14. Calculation of GoodwillInvestment in cost –
15. Capital and Reserves’ partShare capital of Parent
16. Fair ValuesFair value of assets and liabilities
17. Fair value of net assets acquiredIFRS 3
18. For exampleNCA of the Subsidiary – 11,000$Yet,
19. Calculation of GoodwillInvestment in cost –
20. Capital and Reserves’ partShare capital of Parent
21. Some examples of Inter-entity Transactionspreferred shares held
22. Current accountsIf P and S trade with
23. These are amounts owing within the group
24. Cash/goods in transitAt the year end, current
25. Cash/goods in transitcash in transit adjusting entry
26. Unrealised profitProfits made by members of a
27. Unrealised profit may arise within a group
28. Current accounts must be cancelledWhere goods are
29. If the seller is the parent companythe
30. If the seller is the subsidiarythe profit
31. For exampleMany group – parentFew – subsidiaryMany
32. IFRS 3 NCIIFRS 3 allows for 2
33. Method 2NCI is measured at FV at
34. IFRS 3 revision (2008) IFRS 3 now
35. Non-Controlling Interests’ Share of GoodwillUnder the fair
36. Non-Controlling Interests’ Share of GoodwillUnder the fair
37. Non-Controlling Interests’ Share of GoodwillUnder the 2nd
38. Non-Controlling Interests’ Share of GoodwillUnder the 2nd
39. exampleOn January 2000, Bird plc acquired 80%
40. Goodwill in the balance sheetGoodwill Method 1
41. Preferred shares Parent's share of the preferred
42. Preferred shares On consolidation the preferred shares
43. Any preferred shares not held by the
44. Bonds Any bonds in the subsidiary's
45. ExampleOn January 2015 Prose acquired 80% of
46. Capital Structure and Liability of the SubsidiaryEquity
47. Calculation of GoodwillThe cost of investment –
48. Calculation of NCINote that bonds are not
49. Inter-company balances arising from sales or other transactions Eliminating Inter-company balancesReconciling inter-company balancesJune 2013Dr Vidya Kumar
50. Inter-company dividends payable/receivable it is necessary to
51. Dividends (continued)If the subsidiary company has declared
52. Dividends (continued)If there is a non-controlling interest
53. Declared but not yet paid dividends with
54. Cancellation of Dividends Declared Original Entry:Dr
55. Cancellation of Dividends Declared if the
56. In that case, parent company will have
57. Dividends paid from post acquisition profits
58. Dividends paid from pre - acquisition
59. Dividends or interest paid out of pre-acquisition
60. ExampleBow plc acquired 75% of the shares
61. 80,000 – 3,000 = 77,000June 2013Dr Vidya Kumar
62. Unrealised profit on inter-company sales Where
63. Intercompany salesFrom the group’s perspective, revenue should
64. Interest ( on intra group loans) Remove
65. DividendsPaid out of pre-acquisition profit ( it
66. Paid out of post-acquisition profit Dr dividend
67. Intragroup TransactionsIntragroup transactions are eliminated to:Show the
68. Intragroup TransactionsTan & Lee Chapter 3© 2009Extract
69. Unrealised profit on inter-company sales Profits and
70. Provision for unrealized profit affecting a non-controlling
71. Intra-group sales of non-current assetsIn their individual
72. The double entry:Sale by parentDr Group RECr
73. example P Co owns 60% of S
74. RE (extract)June 2013Dr Vidya Kumar
75. notesThe NCI in the RE of S
76. Transfers of Fixed AssetsWhen fixed assets (FA)
77. Adjustments of Transfers of Fixed AssetsTan &
78. Adjustments of Transfers of Fixed AssetsTan &
79. Impact on NCI When an Unrealized Profit
80. Illustration 3: Downstream Transfer of Fixed Assets1
81. Illustration 3: Downstream Transfer of Fixed AssetsTan
82. Illustration 3: Downstream Transfer of Fixed AssetsTan
83. Illustration 3: Downstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009
84. Illustration 3: Downstream Transfer of Fixed AssetsTan
85. Illustration 3: Downstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009
86. Illustration 4: Upstream Transfer of Fixed AssetsAssume
87. Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 200931 Dec 20X2
88. Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009
89. Illustration 4: Upstream Transfer of Fixed AssetsTan
90. Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 200931 Dec 20X3
91. Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009
92. Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009
93. ContentTan & Lee Chapter 4© 2009Elimination of
94. Transfers of Assets at a LossNeed to
95. Illustration 5: Unrealized Loss Arising From Intragroup
96. Illustration 5: Unrealized Loss Arising From Intragroup
97. ConclusionsOnly transactions with 3rd parties should be
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Learning Objectives:By the end of this lecture, you should be able to:account for post –acquisition profits of a subsidiaryeliminate inter-company balances and deal with reconciling itemsaccount for unrealized profits on inter-company transactionsJune 2013Dr Vidya Kumar

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Экономика
Further aspects of Consolidated Accounts Balance Sheets

FURTHER ASPECTS OF CONSOLIDATED ACCOUNTS BALANCE SHEETS CHAPTER 23 Unit 6June 2013Dr Vidya Kumar

Learning Objectives:By the end of this lecture, you should be able to:account

Learning Objectives:understand how and why to eliminate intra-group dividends on consolidation;understand how

IntroductionTan & Lee Chapter 2© 2009Parent-Subsidiary Relationship

Consolidation ProcessConsolidation is the process of preparing and presenting the financial statements

Introduction (contunied) The purpose of this topic is to extend your

What are inter-corporate transactions?During financial period, it is common for separate legal

Pre acquisition profits Any profits or losses of a subsidiary made before

The fair values of these net assets will appear in goodwill calculation.They

Post-acquisition profits These are any profits or losses made after the date

For example:On January 1, 2015 Red Company acquired Black Company when its:Reserves

By the end of the year:Reserves – 15,000$Retained Earnings – 17,000$ Share

Show the amount of Goodwill and capital and reserves’ part First, we

Calculation of GoodwillInvestment in cost –

Capital and Reserves’ partShare capital of Parent – 60,000$Reserves – 25,000$Retained Earnings

Fair ValuesFair value of assets and liabilities is defined in IFRS 13

Fair value of net assets acquiredIFRS 3 revised requires that the subsidiary’s

For exampleNCA of the Subsidiary – 11,000$Yet, its fair value is at

Some examples of Inter-entity Transactionspreferred shares held by a parent in its

Current accountsIf P and S trade with each other then this will

These are amounts owing within the group rather than outside the group

Cash/goods in transitAt the year end, current accounts may not agree, owing

Cash/goods in transitcash in transit adjusting entry is:Dr Cash in transit Cr

Unrealised profitProfits made by members of a group on transactions with other

Unrealised profit may arise within a group scenario on:inventory where companies trade

Current accounts must be cancelledWhere goods are still held by a group

If the seller is the parent companythe profit element is included in

If the seller is the subsidiarythe profit element is included in the

For exampleMany group – parentFew – subsidiaryMany buys 1,000$ worth goods for

IFRS 3 NCIIFRS 3 allows for 2 different methods of measuring the

Method 2NCI is measured at FV at the date of acquisition plus

IFRS 3 revision (2008) IFRS 3 now introduces the option to value

Non-Controlling Interests’ Share of GoodwillUnder the fair value option:FV is determined by

Non-Controlling Interests’ Share of GoodwillUnder the fair value option:Journal entry to record

Non-Controlling Interests’ Share of GoodwillUnder the 2nd option:NCI is a proportion of

Non-Controlling Interests’ Share of GoodwillUnder the 2nd option:Journal entry to record NCI

exampleOn January 2000, Bird plc acquired 80% of the 10,000 of 1$

Goodwill in the balance sheetGoodwill Method 1 + attributable goodwill In our

Preferred shares Parent's share of the preferred shares in the subsidiary's statement

Preferred shares On consolidation the preferred shares purchased by the parent and

Any preferred shares not held by the parent are part of the

Bonds Any bonds in the subsidiary's statement of Financial position that

ExampleOn January 2015 Prose acquired 80% of the equity shares in Verse

Capital Structure and Liability of the SubsidiaryEquity – 11,000Preferred shares – 8,000Retained

Calculation of GoodwillThe cost of investment –

Calculation of NCINote that bonds are not included in the calculation of

Inter-company balances arising from sales or other transactions Eliminating Inter-company balancesReconciling inter-company balancesJune 2013Dr Vidya Kumar

Inter-company dividends payable/receivable it is necessary to eliminate all dividends paid/payable to

Dividends (continued)If the subsidiary company has declared a dividend before the year-end,

Dividends (continued)If there is a non-controlling interest in the subsidiary, the non-cancelled

Declared but not yet paid dividends with 100% of acquisitionThe subsidiary declares

Cancellation of Dividends Declared Original Entry:Dr Dividends Receivable (P) 1,000$Cr

Cancellation of Dividends Declared if the rate of acquisition 80% Original

In that case, parent company will have only 800$ to be receivedThe

Dividends paid from post acquisition profits Only dividends paid externally should

Dividends paid from pre - acquisition profits If an entity pays

Dividends or interest paid out of pre-acquisition profitIn that case, dividends or

ExampleBow plc acquired 75% of the shares in Tie plc on January

80,000 – 3,000 = 77,000June 2013Dr Vidya Kumar

Unrealised profit on inter-company sales Where sales have been made between

Intercompany salesFrom the group’s perspective, revenue should not be recognised until inventory

Interest ( on intra group loans) Remove interest received and paid from

DividendsPaid out of pre-acquisition profit ( it is actually return on investment

Paid out of post-acquisition profit Dr dividend income parent’s bookCr dividend

Intragroup TransactionsIntragroup transactions are eliminated to:Show the financial position, performance and cashflow

Intragroup TransactionsTan & Lee Chapter 3© 2009Extract of consolidation worksheet Note: Without

Unrealised profit on inter-company sales Profits and losses resulting from intra group

Provision for unrealized profit affecting a non-controlling interest the non-controlling interest must

Intra-group sales of non-current assetsIn their individual accounts, the companies concerned will

The double entry:Sale by parentDr Group RECr NCAWith the profit on disposal,

example P Co owns 60% of S co and on 1January 2001

notesThe NCI in the RE of S is 40%40%x15,750 $= $ 6,300The

Transfers of Fixed AssetsWhen fixed assets (FA) are transferred at a marked-up

Adjustments of Transfers of Fixed AssetsTan & Lee Chapter 4© 2009Restate the

Adjustments of Transfers of Fixed AssetsTan & Lee Chapter 4© 2009The profit

Impact on NCI When an Unrealized Profit Arises from an Intragroup Transfer

Illustration 3: Downstream Transfer of Fixed Assets1 Jan 20X2: P sold equipment

Illustration 3: Downstream Transfer of Fixed AssetsTan & Lee Chapter 4© 200931

Illustration 3: Downstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009NBV:

Illustration 3: Downstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009

Illustration 3: Downstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009When

Illustration 4: Upstream Transfer of Fixed AssetsAssume illustration 3, except that S

Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 200931 Dec 20X2

Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 2009

Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4© 200931 Dec 20X3

ContentTan & Lee Chapter 4© 2009Elimination of intragroup transactions and balancesElimination of

Transfers of Assets at a LossNeed to reassess whether the loss is

Illustration 5: Unrealized Loss Arising From Intragroup TransfersParent transferred inventory to subsidiary

Illustration 5: Unrealized Loss Arising From Intragroup TransfersParent transferred fixed asset to

ConclusionsOnly transactions with 3rd parties should be shown in consolidated financial statementsIntra-group

Слайды презентации

Слайд 2 Learning Objectives:
By the end of this lecture, you

Learning Objectives:By the end of this lecture, you should be able

should be able to:
account for post –acquisition profits of

a subsidiary
eliminate inter-company balances and deal with reconciling items
account for unrealized profits on inter-company transactions

June 2013

Dr Vidya Kumar

Слайд 3 Learning Objectives:
understand how and why to eliminate intra-group

Learning Objectives:understand how and why to eliminate intra-group dividends on consolidation;understand

dividends on consolidation;
understand how to account for intra-group sales

of inventory;
understand how to account for intra-group sales of non-current assets

June 2013

Dr Vidya Kumar

Слайд 4 Introduction
Tan & Lee Chapter 2
© 2009
Parent-Subsidiary Relationship

Слайд 5 Consolidation Process
Consolidation is the process of preparing and

Consolidation ProcessConsolidation is the process of preparing and presenting the financial

presenting the financial statements of a group as an

economic entity
No ledgers for group entity
Consolidation worksheets are prepared to:
Combine parent and subsidiaries financial statements
Adjust or eliminate intra-group transactions and balances
Allocate profit to non-controlling interests

Tan & Lee Chapter 3

Parent’s Financial Statements

Subsidiaries' Financial Statements

+/-

Consolidation adjustments and eliminations

Consolidated financial statements

Legal entities

Economic entity

Слайд 6 Introduction (contunied)
The purpose of this topic is to

Introduction (contunied) The purpose of this topic is to extend

extend your knowledge regarding consolidations by considering the effect

of inter-corporate transactions on the consolidation process.
Specifically, a range of inter-corporate transactions are considered including: sale of a non-current asset, dividends, as well as the sale and purchase of inventory.

June 2013

Dr Vidya Kumar

Слайд 7 What are inter-corporate transactions?
During financial period, it is

What are inter-corporate transactions?During financial period, it is common for separate

common for separate legal entities within an economic entity

to transact with each other;
The effects of all transactions between entities within the group are eliminated in full;

June 2013

Dr Vidya Kumar

Слайд 8 Pre acquisition profits
Any profits or losses of a

Pre acquisition profits Any profits or losses of a subsidiary made

subsidiary made before the date of acquisition are referred

to as pre-acquisition profits in the consolidated statements;
These are represented by net assets that exist in the subsidiary on the date of acquisition.

June 2013

Dr Vidya Kumar

Слайд 9
The fair values of these net assets will

The fair values of these net assets will appear in goodwill

appear in goodwill calculation.

They are capitalized at the date

of acquisition by including them in the goodwill calculation.

June 2013

Dr Vidya Kumar

Слайд 10 Post-acquisition profits
These are any profits or losses made

Post-acquisition profits These are any profits or losses made after the

after the date of acquisition;
They will be included

in the group consolidated statement of comprehensive income;
They will appear in the retained earnings figure in the statement of financial position.

June 2013

Dr Vidya Kumar

Слайд 11 For example:
On January 1, 2015 Red Company acquired

For example:On January 1, 2015 Red Company acquired Black Company when

Black Company when its:
Reserves – 12,000$
Retained Earnings – 15,000$

Share capital – 20,000
(1 share cost 1$)
18,000 shares were bought by a parent company for 50,000 $

June 2013

Dr Vidya Kumar

Слайд 12 By the end of the year:
Reserves – 15,000$
Retained

By the end of the year:Reserves – 15,000$Retained Earnings – 17,000$

Earnings – 17,000$
Share capital – 20,000

June 2013
Dr Vidya

Kumar

Слайд 13 Show the amount of Goodwill and capital and

Show the amount of Goodwill and capital and reserves’ part First,

reserves’ part
First, we need to distinguish pre- and

post acquisition profit of the Subsidiary;

June 2013

Dr Vidya Kumar

Слайд 14 Calculation of Goodwill
Investment in cost –

50,000$
Less:

90% of NA
Reserves – 12,000$
Retained Earnings – 15,000$
Share capital – 20,000 (42,300)
Goodwill as on the day
Of acquisition 7,700

June 2013

Dr Vidya Kumar

Слайд 15 Capital and Reserves’ part
Share capital of Parent –

Capital and Reserves’ partShare capital of Parent – 60,000$Reserves – 25,000$Retained

60,000$
Reserves – 25,000$
Retained Earnings – 30,000$
When consolidated with its

Subsidiary:
Share capital – 60,000$
Reserves – 27,700
25,000 +(3,000 x0,9)
Retained Earnings – 31,800
30,000 + (2,000x0,9)
Non-controlling Interest 5,200
(52,000 x 0,1)
124,700 $

June 2013

Dr Vidya Kumar

Слайд 16 Fair Values
Fair value of assets and liabilities is

Fair ValuesFair value of assets and liabilities is defined in IFRS

defined in IFRS 13
Fair value measurement as the

price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price).

June 2013

Dr Vidya Kumar

Слайд 17 Fair value of net assets acquired
IFRS 3 revised

Fair value of net assets acquiredIFRS 3 revised requires that the

requires that the subsidiary’s assets and liabilities are recorded

at their fair value for the purposes of the calculation of goodwill and production of consolidated accounts.
Adjustments will therefore be required where the subsidiary’s accounts themselves do not reflect fair value.

June 2013

Dr Vidya Kumar

Слайд 18 For example
NCA of the Subsidiary – 11,000$
Yet, its

For exampleNCA of the Subsidiary – 11,000$Yet, its fair value is

fair value is at 11,600$
The adjustment is made with

regard to extra 600$ above book value;
The accounting entry is as follows:
Dr NCA 600$
Cr Revaluation reserve 600$

June 2013

Dr Vidya Kumar

Слайд 19 Calculation of Goodwill
Investment in cost –

50,000$
Less:

90% of NA
Reserves – 12,000$
Retained Earnings – 15,000$
Share capital – 20,000
Revaluation Reserve – 600$ (42,840)
Goodwill as on the day
Of acquisition 7,160

June 2013

Dr Vidya Kumar

Слайд 20 Capital and Reserves’ part
Share capital of Parent –

60,000$
Reserves – 25,000$
Retained Earnings – 30,000$
When consolidated with its

Subsidiary:
Share capital – 60,000$
Reserves – 27,700
25,000 +(3,000 x0,9)
Retained Earnings – 31,800
30,000 + (2,000x0,9)
Non-controlling Interest 5,260
(52,600 x 0,1)
124,760 $

June 2013

Dr Vidya Kumar

Слайд 21 Some examples of Inter-entity Transactions
preferred shares held by

Some examples of Inter-entity Transactionspreferred shares held by a parent in

a parent in its subsidiary
bonds held by a parent

in its subsidiary
payment of management fees to a group member
inter-entity sales of inventory
inter-entity sales of non-current assets
inter-entity loans
inter-entity dividends payable/receivable

June 2013

Dr Vidya Kumar

Слайд 22 Current accounts
If P and S trade with each

Current accountsIf P and S trade with each other then this

other then this will probably be done on credit

leading to:
receivables (current) account in one company’s SFP
payables (current) account in the other company’s SFP.

June 2013

Dr Vidya Kumar

Слайд 23
These are amounts owing within the group rather

These are amounts owing within the group rather than outside the

than outside the group and therefore they must not

appear in the consolidated statement of financial position.
They are therefore cancelled against each other on consolidation.

June 2013

Dr Vidya Kumar

Слайд 24 Cash/goods in transit
At the year end, current accounts

Cash/goods in transitAt the year end, current accounts may not agree,

may not agree, owing to the existence of in

transit items such as goods or cash.
The usual rules are as follows:
If the goods or cash are in transit between P and S, make the adjusting entry to the statement of financial position of the recipient:

June 2013

Dr Vidya Kumar

Слайд 25 Cash/goods in transit
cash in transit adjusting entry is:
Dr

Cash/goods in transitcash in transit adjusting entry is:Dr Cash in transit

Cash in transit
Cr Receivables current account
goods in transit

adjusting entry is:
Dr Inventory
Cr Payables current account

June 2013

Dr Vidya Kumar

Слайд 26 Unrealised profit
Profits made by members of a group

Unrealised profitProfits made by members of a group on transactions with

on transactions with other group members are:
recognized in the

accounts of the individual companies concerned, but
in terms of the group as a whole, such profits are unrealised and
Must be eliminated from the consolidated accounts.

June 2013

Dr Vidya Kumar

Слайд 27
Unrealised profit may arise within a group scenario

Unrealised profit may arise within a group scenario on:inventory where companies

on:
inventory where companies trade with each other
Noncurrent assets where

one group company has transferred an asset to another.

June 2013

Dr Vidya Kumar

Слайд 28
Current accounts must be cancelled
Where goods are still

Current accounts must be cancelledWhere goods are still held by a

held by a group company, any unrealised profit
must be

cancelled.
Inventory must be included at original cost to the group (i.e. cost to the
company which then sold it).

June 2013

Dr Vidya Kumar

Слайд 29 If the seller is the parent company
the profit

If the seller is the parent companythe profit element is included

element is included in the holding company’s accounts and

relates entirely to the group.
Adjustment required:
Dr Group retained earnings
Cr Group inventory

June 2013

Dr Vidya Kumar

Слайд 30 If the seller is the subsidiary
the profit element

If the seller is the subsidiarythe profit element is included in

is included in the subsidiary company’s accounts and relates

partly to the group, partly to noncontrolling interests (if any).
Adjustment required:
Dr Subsidiary retained earnings
Cr Group inventory

June 2013

Dr Vidya Kumar

Слайд 31 For example
Many group – parent
Few – subsidiary
Many buys

For exampleMany group – parentFew – subsidiaryMany buys 1,000$ worth goods

1,000$ worth goods for resale and sells them to

Few for 1,500
Profit made – 500$
Few has not sold the goods purchased;
No profit is made by the group;
500$ is unrealized profit;
It is removed from consolidated FS

June 2013

Dr Vidya Kumar

Слайд 32 IFRS 3 NCI
IFRS 3 allows for 2 different

IFRS 3 NCIIFRS 3 allows for 2 different methods of measuring

methods of measuring the NCI in the statement of

FP;
Method 1 proportionate share of the net assets of the subsidiary at the date of acquisition plus the relevant share of changes in the post-acquisition NA of the subsidiary
Each reporting date the NCI is measured as the share of the NA of the subsidiary

June 2013

Dr Vidya Kumar

Слайд 33 Method 2
NCI is measured at FV at the

Method 2NCI is measured at FV at the date of acquisition

date of acquisition plus the relevant share of changes

in the post-acquisition NA of the acquired subsidiary
Each reporting date, the NCI is measured as the share of the NA of the subsidiary plus goodwill that has been apportioned to the NCI

June 2013

Dr Vidya Kumar

Слайд 34 IFRS 3 revision (2008)
IFRS 3 now introduces

IFRS 3 revision (2008) IFRS 3 now introduces the option to

the option to value NCI at fair value. This

affects the goodwill and NCI calculations.
Three Options ;-
You are told what the fair value of NCI is
You may be given the share price at the date of acquisition
You may be given the goodwill attributable to NCI

Слайд 35 Non-Controlling Interests’ Share of Goodwill
Under the fair value

Non-Controlling Interests’ Share of GoodwillUnder the fair value option:FV is determined

option:
FV is determined by either the active market prices

of subsidiary’s equity share at acquisition date or other valuation techniques
FV per share of NCI may differ from parent due to control premium paid by parent
NCI comprises of 3 items:

Tan & Lee Chapter 3

Слайд 36 Non-Controlling Interests’ Share of Goodwill
Under the fair value

Non-Controlling Interests’ Share of GoodwillUnder the fair value option:Journal entry to

option:
Journal entry to record NCI at fair value (re-enacted

each year):

Tan & Lee Chapter 3

Слайд 37 Non-Controlling Interests’ Share of Goodwill
Under the 2nd option:
NCI

Non-Controlling Interests’ Share of GoodwillUnder the 2nd option:NCI is a proportion

is a proportion of the acquiree’s identifiable net assets
NCI

comprises of 2 items:

Tan & Lee Chapter 3

Слайд 38 Non-Controlling Interests’ Share of Goodwill
Under the 2nd option:
Journal

Non-Controlling Interests’ Share of GoodwillUnder the 2nd option:Journal entry to record

entry to record NCI (re-enacted each year):

Tan & Lee

Chapter 3

Слайд 39 example
On January 2000, Bird plc acquired 80% of

exampleOn January 2000, Bird plc acquired 80% of the 10,000 of

the 10,000 of 1$ ordinary shares in Flower plc

for 1,50$
The fair value is 2,900$
To calculate attributable goodwill:
FV of NCI – 2,900$
20% of NA (14,000x0,2) (2,800)
Attributable goodwill 100

June 2013

Dr Vidya Kumar

Слайд 40 Goodwill in the balance sheet
Goodwill
Method 1 +

Goodwill in the balance sheetGoodwill Method 1 + attributable goodwill In

attributable goodwill
In our case, 800 + 100 =

900$
NCI – 2,800+ 100= 2,900$

June 2013

Dr Vidya Kumar

Слайд 41 Preferred shares
Parent's share of the preferred shares in

Preferred shares Parent's share of the preferred shares in the subsidiary's

the subsidiary's statement of Financial position will represent the

part of the net assets acquired;
and will be included in the calculation of goodwill.

June 2013

Dr Vidya Kumar

Слайд 42 Preferred shares
On consolidation the preferred shares purchased by

Preferred shares On consolidation the preferred shares purchased by the parent

the parent and included in the cost of investment

will be cancelled out against the liability of the subsidiary.

June 2013

Dr Vidya Kumar

Слайд 43
Any preferred shares not held by the parent

Any preferred shares not held by the parent are part of

are part of the NCI;
Parent company can buy different

proportions of preferred shares even less than 50%
They are cancelled at the purchase rate;

June 2013

Dr Vidya Kumar

Слайд 44 Bonds
Any bonds in the subsidiary's statement of Financial

Bonds Any bonds in the subsidiary's statement of Financial position

position that have been acquired by the parent will

represent the part of the net assets acquired;
and will be included in the calculation of goodwill.

June 2013

Dr Vidya Kumar

Слайд 45 Example
On January 2015 Prose acquired
80% of the

ExampleOn January 2015 Prose acquired 80% of the equity shares in

equity shares in Verse for 21,000$
20% of the

preferred shares for 2,000$
And 10% of the bonds for 900$
RE – 4,000$
FV of land in Verse was 1,000$ above its book value

June 2013

Dr Vidya Kumar

Слайд 46 Capital Structure and Liability of the Subsidiary
Equity –

Capital Structure and Liability of the SubsidiaryEquity – 11,000Preferred shares –

11,000
Preferred shares – 8,000
Retained Earnings – 4,000

Long-term liability
Bonds –

7,000

June 2013

Dr Vidya Kumar

Слайд 47 Calculation of Goodwill
The cost of investment –

Calculation of GoodwillThe cost of investment – 24,000$(21,100$+2,000$

24,000$
(21,100$+2,000$ + 900$)
Less:

FV of NA in Subsidiary
Equity (11,000x0,8) 8,800
RE (4,000x0,8) 3,200
Fair Value adjustments
(1,000x0,8) 800
Preferred shares
(8,000x0,2) 1,600
Bonds (7,000x0,1) 700 (15,100)
Goodwill 8,900

June 2013

Dr Vidya Kumar

Слайд 48 Calculation of NCI
Note that bonds are not included

Calculation of NCINote that bonds are not included in the calculation

in the calculation of NCI
The rate of preferred

shares will go to the NCI (100%-20%=80%)
So, 8,000x0,8 = 6,400$
The other acquired financial assets will be valued at 20%

June 2013

Dr Vidya Kumar

Слайд 49 Inter-company balances arising from sales or other transactions
Eliminating

Inter-company balances
Reconciling inter-company balances

June 2013
Dr Vidya Kumar

Слайд 50 Inter-company dividends payable/receivable
it is necessary to eliminate all

Inter-company dividends payable/receivable it is necessary to eliminate all dividends paid/payable

dividends paid/payable to other entities within the group;
all dividends

received/receivable from other entities within the group
Only dividends paid externally should be shown in consolidated financial statements;
On consolidation intra group balances, transactions, income and expenses shall be eliminated in full.

June 2013

Dr Vidya Kumar

Слайд 51 Dividends (continued)
If the subsidiary company has declared a

Dividends (continued)If the subsidiary company has declared a dividend before the

dividend before the year-end, this will appear in the

current liabilities of the subsidiary company and in the current assets of the parent company
It must be cancelled before preparing the consolidated statement of financial position
If the subsidiary is wholly owned by the parent the whole amount will be cancelled.

June 2013

Dr Vidya Kumar

Слайд 52 Dividends (continued)
If there is a non-controlling interest in

Dividends (continued)If there is a non-controlling interest in the subsidiary, the

the subsidiary, the non-cancelled amount of the dividend payable

in the subsidiary's statement of financial position will be the amount payable to the non-controlling interest and will be reported as a part of non-controlling interest in the consolidated statement of financial position.
Where a dividend has not been declared by the year-end date there is no liability under IAS l0
For Events After the Balance Sheet Date there should, therefore, be no liability reported under International Accounting Standards.

June 2013

Dr Vidya Kumar

Слайд 53 Declared but not yet paid dividends with 100%

Declared but not yet paid dividends with 100% of acquisitionThe subsidiary

of acquisition
The subsidiary declares the payment of 1000$ dividends;
It

creates Dividends Payable
The parent company after the notification creates an account as its Current asset – Dividends Receivable
These are canceled when preparing consolidated statement of FP

June 2013

Dr Vidya Kumar

Слайд 54 Cancellation of Dividends Declared
Original Entry:
Dr Dividends Receivable (P)

1,000$
Cr Dividends Payable (S)

1,000$

To cancel:
Dr Dividends Payable (S) 1,000$
Cr Dividends Receivable (P) 1,000$

June 2013

Dr Vidya Kumar

Слайд 55 Cancellation of Dividends Declared if the rate of

Cancellation of Dividends Declared if the rate of acquisition 80%

acquisition 80%
Original Entry:
Dr Dividends Receivable (P) 800$
Cr Dividends

Payable (S) 800$

To cancel:
Dr Dividends Payable (S) 800$
Cr Dividends Receivable (P) 800$

June 2013

Dr Vidya Kumar

Слайд 56
In that case, parent company will have only

In that case, parent company will have only 800$ to be

800$ to be received
The subsidiary – 1,000$ to be

paid
200$ remains in the Consolidated FS

June 2013

Dr Vidya Kumar

Слайд 57 Dividends paid from post acquisition profits
Only dividends paid

Dividends paid from post acquisition profits Only dividends paid externally

externally should be shown in the consolidated financial statements

June

2013

Dr Vidya Kumar

Слайд 58 Dividends paid from pre - acquisition profits
If an

Dividends paid from pre - acquisition profits If an entity

entity pays dividends out of profits earned before acquisition,

it is effectively returning part of the net assets originally acquired (return of part of investment in subsidiary)
not to be accounted for as revenue of investor if dividends are received from pre-acquisition reserves including from pre-acquisition retained earnings,
So, the amount of purchase consideration is correspondingly reduced

June 2013

Dr Vidya Kumar

Слайд 59 Dividends or interest paid out of pre-acquisition profit
In

Dividends or interest paid out of pre-acquisition profitIn that case, dividends

that case, dividends or interest paid will come out

of the net asset acquired at the date of acquisition,
It is not an income but a return of part of the purchase price

June 2013

Dr Vidya Kumar

Слайд 60 Example
Bow plc acquired 75% of the shares in

ExampleBow plc acquired 75% of the shares in Tie plc on

Tie plc on January 1, 2001 for 80,000$
RE balance

– 40,000$
No goodwill
On 10 January 2001, Bow received a dividend of 3,000$ from Tieout of profits for the year ended 31.12.2000

June 2013

Dr Vidya Kumar

Слайд 61 80,000 – 3,000 = 77,000
June 2013
Dr Vidya Kumar

Слайд 62 Unrealised profit on inter-company sales
Where sales have been

Unrealised profit on inter-company sales Where sales have been made

made between two companies within the group, there may

be an element of profit that has not been realized by the group
If the goods have not, then sold on to a third been party before the year-end.
This is called a provision for unrealised profit
Inter-company profits and losses, sales, income and expenses, receivables and liabilities between companies have to be eliminated.

June 2013

Dr Vidya Kumar

Слайд 63 Intercompany sales
From the group’s perspective, revenue should not

Intercompany salesFrom the group’s perspective, revenue should not be recognised until

be recognised until inventory is sold to parties outside

the group.
There is a need to eliminate any unrealised profits from the consolidated accounts.
Unrealised profits result from stock, which is sold within the group for a profit, remaining on hand within the group at the end of the period.

June 2013

Dr Vidya Kumar

Слайд 64 Interest ( on intra group loans)
Remove interest received

Interest ( on intra group loans) Remove interest received and paid

and paid from finance costs and investment income
Dr

Interest incomes (Parent)
Cr Interest expenses (subsidiary)

Dr interest receivable (Parent)
Cr interest payable (subsidiary)

Слайд 65 Dividends
Paid out of pre-acquisition profit ( it is

DividendsPaid out of pre-acquisition profit ( it is actually return on

actually return on investment on purchase price)

Dr Dividend income

– Retained earnings
(Parent’s book)
Cr investment in subsidiary

Dr Dividend payable (Subsidiary’s book)
Cr Dividend expense – Retained earnings

Слайд 66 Paid out of post-acquisition profit
Dr dividend income

parent’s book
Cr dividend receivable

Dr dividend payable Subsidiary’s book
Cr dividend

declared / expense

Слайд 67 Intragroup Transactions
Intragroup transactions are eliminated to:
Show the financial

Intragroup TransactionsIntragroup transactions are eliminated to:Show the financial position, performance and

position, performance and cashflow of the economic (not legal)

entity
Avoid double counting of transactions

Example:

Parent sold inventory to subsidiary for $2M
The original cost of inventory is $1M
Subsidiary eventually sold the inventory to external parties for $3M

Q: What is the journal entry to eliminate intragroup sales transaction?

Tan & Lee Chapter 3

consolidation worksheet

Note: Without elimination the consolidated sales and

cost of sales figures will be overstated by $2 M.

Слайд 69 Unrealised profit on inter-company sales
Profits and losses resulting

Unrealised profit on inter-company sales Profits and losses resulting from intra

from intra group transactions that are recognised in assets

such as inventory and fixed assets are eliminated in full.

June 2013

Dr Vidya Kumar

Слайд 70 Provision for unrealized profit affecting a non-controlling interest
the

Provision for unrealized profit affecting a non-controlling interest the non-controlling interest

non-controlling interest must be charged with their share of

any provisions for unrealized profit.

June 2013

Dr Vidya Kumar

Слайд 71 Intra-group sales of non-current assets
In their individual accounts,

Intra-group sales of non-current assetsIn their individual accounts, the companies concerned

the companies concerned will treat the transfer just like

a sale between unconnected parties;
The selling company will record a profit or loss on sale
The purchasing company will record the asset at the amount paid to acquire it
Then, it will use this amount as a basis to calculate depreciation

June 2013

Dr Vidya Kumar

Слайд 72 The double entry:
Sale by parent
Dr Group RE
Cr NCA
With

The double entry:Sale by parentDr Group RECr NCAWith the profit on

the profit on disposal, less the additional depreciation
Sale by

subsidiary
Dr Group RE (P’s share of S)
Dr NCI (NCI’s share of S)
Cr NCA

June 2013

Dr Vidya Kumar

Слайд 73 example
P Co owns 60% of S co and

example P Co owns 60% of S co and on 1January

on 1January 2001 S co sells plant costing 10,000$

to P for 12,500
The companies make up accounts to 31 December 2001
Their balances:
P Co after charging depreciation of 10% on plant - 27,000$
S co including profit on sale of a plant – 18,000$

June 2013

Dr Vidya Kumar

Слайд 74 RE (extract)
June 2013
Dr Vidya Kumar

Слайд 75 notes
The NCI in the RE of S is

notesThe NCI in the RE of S is 40%40%x15,750 $= $

40%
40%x15,750 $= $ 6,300
The profit on the transfer less

related depreciation of $2,250 (2,500-250)will be deducted from the CA of the plant to write it down to cost to the group

June 2013

Dr Vidya Kumar

Слайд 76 Transfers of Fixed Assets
When fixed assets (FA) are

Transfers of Fixed AssetsWhen fixed assets (FA) are transferred at a

transferred at a marked-up price
The unrealized profit must be

eliminated from the carrying amount of FA
It is as though the transfer did not take place from the group’s perspective

Tan & Lee Chapter 4

Слайд 77 Adjustments of Transfers of Fixed Assets
Tan & Lee

NBV at the point of transfer
Profit on sale of FA is adjusted out of:
Consolidated income statement if sale occurred in the same period
Opening RE if sale occurred in the previous period
3. Subsequent depreciation is based on original cost of asset & estimated useful life (including revision of estimate)
The difference between the old and new depreciation is adjusted to:
Consolidated income statement for current year
Opening RE for prior year accumulated depreciation

Слайд 78 Adjustments of Transfers of Fixed Assets
Tan & Lee

Adjustments of Transfers of Fixed AssetsTan & Lee Chapter 4© 2009The

FA is realized through the higher or lower depreciation charge subsequently
Tax effect must be adjusted on the unrealized profit and subsequent corrections of depreciation

Слайд 79 Impact on NCI When an Unrealized Profit Arises

Impact on NCI When an Unrealized Profit Arises from an Intragroup

from an Intragroup Transfer of FA
Downstream sales:
No impact on

NCI

Upstream sales:
NCI is adjusted for:
Unrealized profit on sale of FA
Correction of over/under-depreciation
Tax effect on unrealized profit
Tax effect on correction of over/under-depreciation

Tan & Lee Chapter 4

Слайд 80 Illustration 3: Downstream Transfer of Fixed Assets
1 Jan 20X2:

Illustration 3: Downstream Transfer of Fixed Assets1 Jan 20X2: P sold

P sold equipment to S for $360,000
The original cost

of the equipment was $400,000
The remaining useful life was 10 years from the original purchase date
The remaining useful life is 8 years from the date of transfer
Assume a tax rate of 20%

Tan & Lee Chapter 4

Слайд 81 Illustration 3: Downstream Transfer of Fixed Assets
Tan & Lee

Слайд 82 Illustration 3: Downstream Transfer of Fixed Assets
Tan & Lee

Chapter 4
© 2009

NBV: $315,000
NBV: $280,000
Depreciation
Depreciation
$360,000

$320,000
8 yrs
8 yrs
Transfer
No Transfer
Dep exp:

$45,000

Dep Exp: $40,000

Excess5K

Слайд 83 Illustration 3: Downstream Transfer of Fixed Assets
Tan & Lee

Слайд 84 Illustration 3: Downstream Transfer of Fixed Assets
Tan & Lee

Слайд 85 Illustration 3: Downstream Transfer of Fixed Assets
Tan & Lee

Слайд 86 Illustration 4: Upstream Transfer of Fixed Assets
Assume illustration 3,

Illustration 4: Upstream Transfer of Fixed AssetsAssume illustration 3, except that

except that S transfers to P
1 Jan 20X2 S

sold equipment to P for $360,000
The original cost of equipment was $400,000
The remaining useful life is 8 years from date of transfer
Net profit after tax of S for YE 31 Dec 20X2 : 500,000
YE 31 Dec 20X3 : 800,000
Assume a tax rate of 20%

Original cost
$400,000

Before Transfer

After Transfer

Transfer price
$360,000

40,000

Profit on sale

Tan & Lee Chapter 4

Acc Dep. = $80,000

Net book value = $320,000

Слайд 87 Illustration 4: Upstream Transfer of Fixed Assets
Tan & Lee

Слайд 88 Illustration 4: Upstream Transfer of Fixed Assets
Tan & Lee

Слайд 89 Illustration 4: Upstream Transfer of Fixed Assets
Tan & Lee

Illustration 4: Upstream Transfer of Fixed AssetsTan & Lee Chapter 4©

affect NCI’s share of profit as unrealized profit resides in S

Слайд 90 Illustration 4: Upstream Transfer of Fixed Assets
Tan & Lee

Слайд 91 Illustration 4: Upstream Transfer of Fixed Assets
Tan & Lee

Слайд 92 Illustration 4: Upstream Transfer of Fixed Assets
Tan & Lee

ContentTan & Lee Chapter 4© 2009Elimination of intragroup transactions and balancesElimination

transactions and balances
Elimination of realized intragroup transactions
Elimination of intragroup

balances
Adjustment of unrealized profit or loss arising from intercompany transfers
Impact on non-controlling interests arising from adjustments of unrealized profit or loss
Special considerations for intercompany transfers of fixed assets
Special accounting considerations when intragroup transfers are made at a loss

7. Special accounting considerations when intragroup transfers are made at a loss

Слайд 94 Transfers of Assets at a Loss
Need to reassess

Transfers of Assets at a LossNeed to reassess whether the loss

whether the loss is indicative of impairment loss

If it

is indicative of impairment loss:
Unrealized loss is not adjusted out of the carrying amount of asset
Only reverse the sales and cost of sale (to the extent of the sales) for inventory
Only reverse the excess over cost and accumulated depreciation (to the extent of the sales) for FA

If it is not indicative of impairment loss:
Same treatment as with unrealized profit
Unrealized loss is adjusted out of the carrying amount of asset
Realized only when the inventory is sold to 3rd party or under/over- depreciation of FA is corrected

Tan & Lee Chapter 4

Слайд 95 Illustration 5: Unrealized Loss Arising From Intragroup Transfers
Parent transferred

Illustration 5: Unrealized Loss Arising From Intragroup TransfersParent transferred inventory to

inventory to subsidiary during the year ended 31 Dec

20X6

The loss on transfer indicated an impairment loss on the inventory

What is the consolidation journal entry?

Tan & Lee Chapter 4

Слайд 96 Illustration 5: Unrealized Loss Arising From Intragroup Transfers
Parent transferred

Illustration 5: Unrealized Loss Arising From Intragroup TransfersParent transferred fixed asset

fixed asset to subsidiary during the year ended 31

Dec 20X6
Transfer price $120,000
Original Cost $200,000
Acc. Dep ($ 50,000)
NBV $150,000
Loss on transfer $ (30,000)

The loss on transfer indicated an impairment loss on the fixed asset

What is the consolidation journal entry?

Tan & Lee Chapter 4

Слайд 97 Conclusions
Only transactions with 3rd parties should be shown

ConclusionsOnly transactions with 3rd parties should be shown in consolidated financial

in consolidated financial statements
Intra-group transactions and balances must be

eliminated after reconciliation of balances
Unrealized profit or loss in inventory or fixed assets must be adjusted
Upstream transfers will impact NCI
Tax effects on profit adjustments must be made
Special considerations for transfers at a loss