Basic Group Accounts – F1 Syllabus – Part 3 - PowerPoint Presentation

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Basic Group Accounts – F1 Syllabus – Part 3

Management Level – Paper F2Advanced Financial Reporting

Lecture - 021

Vidya Rajawasam

ACMA CGMA MBA

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Basic Group Accounts – F1

We have discussed the subject area related Basic Group Accounts – F1 Syllabus in our previous lecture.

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Basic Group Accounts – F1 In this lecture we will discuss the Basic Group Accounts – F1 Syllabus Non controlling interest Basic Group Accounts Calculations

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Non controlling interest – (previously known as minority interest)

Where the parent company has less than 100% ownership in equity shares, the share of the net assets of subsidiaries owned by other parties is shown separately under equity. Basic Group Accounts – F1

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Non controlling interest – (previously known as minority interest)

The parent company may acquire equity shares in another company which are less than 100%, but they still have majority of the equity shares. This means there are third party shareholders that need to be accounted for. Basic Group Accounts – F1

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Non controlling interest – (previously known as minority interest)

To adjust for the less than 100% ownership, the NCI share of the subsidiary is included under equity in the consolidated statement of financial position. The basic calculation of NCI in the consolidated statement of financial position: Basic Group Accounts – F1

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Non controlling interest – (previously known as minority interest)

Net assets of subsidiary at balance sheet date X Consolidation adjustments X / (X) Revised nets assets of subsidiary at balance sheet date X NCI (revised net assets x NCI %) XBasic Group Accounts – F1

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Accounting for non-controlling interests

Earlier in the chapter the following accounting technique for acquisitions was explained: All the results and the assets and liabilities that are under the control of the parent are combined together to show single totals for each item in the financial statements. This means that the revenue and expenses, assets and liabilities of the entities in the group are added together, line by line.Basic Group Accounts – F1

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Accounting for non-controlling interests

The existence of NCI makes no difference at all to the application of the principle of control. The assets and liabilities of the subsidiary are under the control of the parent regardless of the fact that NCI exist, and therefore the revenue and expenses, assets and liabilities of the entities in the group are added together, line by line. Basic Group Accounts – F1

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Accounting for non-controlling interests

NCI are recognised within equity in the consolidated financial statements. IFRS (revised) permits a choice of accounting treatment for the measurement of NCI: Either: (a) NCI should be measured at fair value; or (b) NCI should be measured at the proportionate share of the acquiree’s identifiable net assets.Basic Group Accounts – F1

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Accounting for non-controlling interests

A great deal of discussion preceded the issue of IFRS 3 (revised) on the issue of measurement of NCI. The IASB would have preferred to have option (a) as the only treatment, however many of its constituents objected because it would be difficult and expensive to undertake this measurement exercise. Where the equity instruments of the subsidiary are themselves quoted on an active market, the exercise of valuing NCI is straightforward. If not, it is likely to involve estimation and assumptions about (eg.) an appropriate discounting for the fact the interests are non-controlling and therefore worth less.Basic Group Accounts – F1

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Example

The statements of financial positions of E and its subsidiary F at 31 December 20X3 were as follows: Basic Group Accounts – F1

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E acquired 18,000 shares in F on 31 December 20X0 when F’s retained earnings were $10,000.

Required: prepare the consolidated statement of financial position for the E group as at 31 December 20X3, under each of the two following assumptions: 1. It is the E group’s policy to value non-controlling interests at acquisition at its proportionate share of the fair value of the subsidiary’s identifiable net assets. 2. It is the E group’s policy to value non-controlling interests at fair value. The fair value of the NCI in F at the date of acquisition was estimated to be $2,500. Note: It can be assumed that no fair value adjustments were required to F’s net assets at the date of acquisition.

Basic Group Accounts – F1

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Solution,

First, the group structure must be established. E owns 18,000 of the 20,000 shares of F: a shareholding of 90%. This means that the NCI is 10% (100% 90%). Workings 1. Non-controlling interests This is 10% of the net assets of F at 31 December 20X3: 10% $39,000 $3,900..

Basic Group Accounts – F1

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Solution,

. Basic Group Accounts – F1

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Solution,

Basic Group Accounts – F1

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Review MCQs

In group consolidated financial statements, the subsidiary reserves are ? a) Completely ignored b) Both pre and post acquisition reserves are included. c) Only post acquisition reserves are included. d) Non of the aboveBasic Group Accounts – F1

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Review MCQs

In group consolidated financial statements, the subsidiary reserves are ? a) Completely ignored b) Both pre and post acquisition reserves are included. c) Only post acquisition reserves are included. d) Non of the aboveBasic Group Accounts – F1

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Review MCQs

A parent company is excluded from preparing consolidated financial statements a) When the parent company has too many foreign subsidiaries. b) When the ultimate parent company produces consolidated financial statements; c) When the parent company is located in a foreign country. d) Non of the above.

Basic Group Accounts – F1

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Review MCQs

A parent company is excluded from preparing consolidated financial statements a) When the parent company has too many foreign subsidiaries. b) When the ultimate parent company produces consolidated financial statements; c) When the parent company is located in a foreign country. d) Non of the above.

Basic Group Accounts – F1

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Example 1

On 31 December 20X4 AB acquired 100% of the ordinary share capital of its subsidiary, CD for $50,000. The statements of financial positions of the individual entities at that date were: Basic Group Accounts – F1

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Basic Group Accounts – F1

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Requirement

Prepare the consolidated statement of financial position for the AB Group at 31 December 20X4. Basic Group Accounts – F1

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Basic Group Accounts – F1

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Basic Group Accounts – F1

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Example 2

This question relates to AB and CD (facts of the acquisition as in Example 1) one year on from the acquisition. The statements of financial positions of the two entities at 31 December 20X5 were as follows:Basic Group Accounts – F1

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Basic Group Accounts – F1

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Requirement

Prepare the consolidated statement of financial position for the AB Group at 31 December 20X5..Basic Group Accounts – F1

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Solution – 2

Basic Group Accounts – F1

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Solution – 2

Basic Group Accounts – F1

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Solution – 2

Basic Group Accounts – F1

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Example – 3

AX acquired 30,000 of the 50,000 issued ordinary voting shares of CY on 1 April 20X7, for $60,000. Retained earnings of CY at that date were $25,000. The acquisition was sufficient to give it control over CY’s operating and financial policies. The statements of financial positions of the two entities were as follows on 31 March 20X8: Basic Group Accounts – F1

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Example – 3

Basic Group Accounts – F1

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Example – 3

It is the group’s policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary’s identifiable net assets. Requirement Prepare the consolidated statement of financial position for the AX Group at 31 March 20X8. Basic Group Accounts – F1

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Solution – 3

First, the group structure must be established. AX owns 30,000 of the 50,000 shares of F: a shareholding of 60%. This means that the NCI is 40% (100% 60%). Basic Group Accounts – F1

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Solution – 3

Basic Group Accounts – F1

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Basic Group Accounts – F1

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Review MCQs

The goodwill on acquisition is dealt through following Accounting standard? a) IAS 27 b) IFRS 10 c) IFRS 3 d) Non of the above

Basic Group Accounts – F1

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Review MCQs

The goodwill on acquisition is dealt through following Accounting standard? a) IAS 27 b) IFRS 10 c) IFRS 3 d) Non of the above

Basic Group Accounts – F1

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Review MCQs

The Goodwill on acquisition results from? a) When the value of the subsidiary exceeds the value of the net assets. b) When the value of the subsidiary does not exceed the value of the net assets. c) When a premium price was agreed d) Non of the above

Basic Group Accounts – F1

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Review MCQs

The Goodwill on acquisition results from? a) When the value of the subsidiary exceeds the value of the net assets. b) When the value of the subsidiary does not exceed the value of the net assets. c) When a premium price was agreed d) Non of the above

Basic Group Accounts – F1

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Basic Group Accounts – F1

Lecture Summary Basic Group Accounts – F1 Syllabus –Part 3Non controlling interest Basic Group Accounts Calculations

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Basic Group Accounts – F1 Syllabus – Part 3

Management Level – Paper F2Advanced Financial Reporting

Lecture - 021

Vidya Rajawasam

ACMA CGMA MBA