Revision notes - Group accounts

A group comprises at minimum a parent and a subsidiary and the financial

statements of a subsidiary are consolidated into the group accounts using acquisition
accounting so that the assets, liabilities, equity, income, expenses and cash flows of
the parent and its subsidiaries are presented as those of a single economic entity.

A subsidiary is where there is control i.e. where all of the following elements
apply:

 power over the investee, i.e. the investor has existing rights that give it the
ability to direct the relevant activities (the activities that significantly affect the
investee's returns)
 exposure, or rights, to variable returns from its involvement with the investee
 the ability to use its power over the investee to affect the amount of the
investor's returns.

All circumstances should be considered before concluding whether the entity is

controlled.

An associate is where there is significant influence. Significant influence is the

power to participate in the financial and operating policy decisions of the investee but
is not control or joint control of those policies.

Where the investor holds 20% or more of the voting power on an investee, it will be
presumed the investor has significant influence unless it can be clearly demonstrated
that this is not the case. If the holding is less than 20%, the entity will be presumed
not to have significant influence unless such influence can be clearly demonstrated.

The existence of significant influence by an entity is usually evidenced in one or

more of the following ways:

 representation on the board of directors or equivalent governing body of the

investee;
 participation in the policy-making process, including participation in decisions
about dividends or other distributions;
 material transactions between the entity and the investee;
 interchange of managerial personnel; or provision of essential technical information

Joint ventures are defined as joint arrangements whereby the parties have
joint control of the arrangement and have rights to the net assets of the
arrangement. Joint arrangements are arrangements where two or more parties
have joint control. Joint control will only apply if the relevant activities require
unanimous consent of those who collectively control the arrangement

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Workings for the group statement of financial position

w1 Group structure

A group structure has to have at least one subsidiary, often two - and typically a
change in the group structure during the reporting period or an overseas subsidiary,
as well as possibly an associate or joint venture!

Always note the dates of acquisition and the relevant %s.

An example of a complex group structure.

A
60% / 40%

Having established the group structure, consider only one subsidiary at a time.

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w2 Net assets of the subsidiary

The net assets of the subsidiary will be represented by the equity of the subsidiary.

At acquisition At reporting date Post-acquisition

Equity share capital X X
Other components of equity X X X OCE P% w6
Retained earnings X X X
Fair value adjustment (bal fig) X X
Depreciation on FVA (X) (X)
PURP (subsidiary = seller) _ (X) (X)
Total X X X NCI% w4

It is possible that the fair value of the net assets at acquisition can be revised if the
revised information about the fair value of the net assets at acquisition is received
within 12 months of the date of acquisition.

Fair value adjustments can include intangible assets like brands which have a fair
value but cannot be recognised at the individual company stage and for contingent
liabilities that have a fair value and also cannot be recognised by the subsidiary in its
own accounts.

It is possible that deferred tax can be provided for on fair value adjustments. If the
fair value represents an increase in an asset then this is a taxable temporary
difference and creates a deferred tax liability at the given tax rate.

The NCI (w4) will take their share of the post-acquisition rise in net assets, the
parent's share has to be shown as either RE (w5) and / or OCE (Other Components
of Equity reserve) (w6).

For an overseas subsidiary, prepare the net asset working in the subsidiary's
functional currency and translate the post-acquisition profits at the average rate.

For an overseas subsidiary a group exchange difference will arise on the

retranslation of the net assets and this is recognised in OCI and will always be split
between the parent (Other Components of Equity) and the NCI. The group exchange
on net assets is a balancing figure.

In a foreign currency Translated at In $

Opening net assets X Opening rate X
Post- acquisition profit X Average rate X
Group for ex difference _ Balancing figure X / (X)
Closing net assets X Closing rate X

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w3 Goodwill

The parent's investment (the controlling interest) has to be recorded at fair value and
this is normally given, but if it is not remember that shares issued are recorded at
market value and deferred consideration discounted to the present value of the
future cash flow.

If the investment has been revalued since the date of acquisition as FVTOCI or
FVTP&L then that gain will need to be reversed in OCE or RE (as appropriate) as a
consolidation adjustment.

An accounting policy, on an acquisition by acquisition basis, determines how NCI is

measured at acquisition, and this has a direct bearing on the measurement of
goodwill and the treatment of impairment losses.

NCI at acquisition can be measured at fair value of the subsidiary's shares - (NCI% x
number of equity shares x market price = NCI) - and then goodwill will be in full and
any impairment loss split between the parent and the NCI.

NCI at acquisition can be measured as a proportion of net assets - (NCI% x fair

value of the net assets = NCI) - and then goodwill is attributable to the parent only
and any impairment loss on that goodwill is suffered by the parent only.

FV of the parent's investment X

NCI (FV or proportion of net assets) X
FV of net assets (X)
Goodwill at acquisition X
Less impairment loss (X)
Goodwill at reporting date X

The impairment loss can be given or may have to be calculated if the question
discloses the recoverable amount. The impairment review of goodwill is done at the
level of the cash-generating unit where the net assets at the reporting date and the
goodwill form the carrying amount.

Impairment review of goodwill

Carrying value = CGU = subsidiary

Year-end net assets X
Goodwill (grossed up IF only attributable to parent) X X
> Recoverable amount X
Impairment loss X

Where NCI at acquisition is measured as a proportion of net assets then goodwill is

attributable to the parent only and in the impairment review goodwill is notionally
grossed up to include notional NCI. The notional NCI in the impairment loss is not
recorded and the actual impairment loss on the goodwill is wholly charged against
RE (w5). If all the goodwill is impaired and there is still a further impairment loss

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against assets then this further impairment loss will be split between the parent’s RE
(w5) and the NCI (w4).

Step acquisition
Where there has been a step acquisition there will be two investments in the
subsidiary. The first investment must be restated to fair value from its carrying value
and the gain taken to retained earnings w5. If the first investment had been at
FVTOCI then the balance of the gains sitting in OCE is now moved to RE.

Overseas subsidiary
For an overseas subsidiary prepare the goodwill calculation in the subsidiary's
functional currency. The closing balance of goodwill will be translated at the closing
rate for inclusion in the group statement of financial position. Any impairment loss will
be translated at the average rate.

For an overseas subsidiary a group exchange difference will arise on the

retranslation of the goodwill. On the same principle as the impairment loss, if
goodwill is in full (NCI at acquisition at fair value) the exchange difference on
goodwill will be split between the parent, (w6 OCE) and the NCI (w4). However if
goodwill is attributable to the parent only then the whole of the exchange difference
on goodwill is that of the parent only (w6 OCE).

In a foreign currency Translated at In $

Opening goodwill X Opening rate X
Less impairment loss (X) Average rate (X)
Group for ex diff _ Balancing figure X / (X)
Closing goodwill X Closing rate X

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The postings to the NCI and RE and OCE should be completing the entries and
calculations from other workings.

w4 NCI (Non-Controlling Interest)

Opening balance X
Plus the % of the post-acquisition profit of subsidiary w2 X
Less the % of the impairment loss on full goodwill w3 (X)
NCI% of the group exchange difference on retranslation of net assets X / (X)
NCI% of the group exchange difference on retranslation of full goodwill X / (X)
Increase / Decrease in the NCI – control to control – w7 X / (X)
NCI at reporting date X

w5 Retained earnings

All individual companies will have retained profits in equity. The group’s retained
earnings will comprise that of the parent’s plus the group share of the post –
acquisition profits of each subsidiary, associate and joint venture less impairment
losses on goodwill.

Where the parent company has an accounting adjustment that is an expense or

profit that should have been recognised in its statement of profit or loss then that
accounting adjustment will also be used to update the group retained earnings.

Parent X
Plus the % of the post-acquisition profit w2 X
Less % or all of the impairment loss on goodwill (X)
Less PURP (P = seller) (X)
Less finance cost of unwinding the discount of deferred consideration (X)
Gain / loss on settlement / re-measurement of contingent consideration X / (X)
Plus the associate % of the post-acquisition profit w8 X
Less the impairment loss on the investment in the associate (X)
Less the associate % of the PURP (X)
Plus from OCE on a step acquisition when investment was FVTOCI X
Gain / loss on the disposal of a subsidiary w9 X / (X)
Updating / correcting the parent’s profits as necessary X / (X)
X

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w6 Other Components of Equity (OCE)

Individual companies can have reserves in equity that are not retained earnings e.g.
where they have equity settled share based payments, a re-measurement on defined
benefit pension schemes, derivatives accounted for as cash flow hedges, and
revaluations of PPE and financial assets accounted for as FVTOCI. If the balance on
the subsidiary’s OCE has moved in the post-acquisition period then the parent’s
share will be included in the group OCE.

In addition, in a group context OCE are also effected by group exchange differences
and the differences that arise when there is a change in the NCI (control to control).

Parent X
Plus the % of the subsidiary's post-acquisition w2 X
P% of the group exchange difference on retranslation of net assets w2 X / (X)
P% or all of the group exchange difference on retranslation of goodwill w3 X / (X)
Less transfer to RE on a step acquisition when investment was FVTOCI (X)
Difference arising on the increase / decrease of NCI control to control w7 X / (X)
Updating / correcting the parent’s OCE as necessary X / (X)
X
w7 Difference arising on changes in the NCI (control to control)

Where the parent buys shares from the NCI or sells shares to the NCI and retains
control this is a transaction within equity that changes the NCI. Such transactions do
not generate a gain or loss for the group as they are transaction between the parent
and the NCI and so within group equity but they do create a difference that goes to
equity (w6 Other components of equity)

Decrease in the NCI - "parent buys out the NCI"

Cash out (an investment) X
Decrease in the NCI (fraction x NCI balance) X
Difference to equity w6 X / (X)

If the cash paid exceeds the decrease in the NCI then the difference is negative that
is taken to equity (OCE), and if the cash is less, then the difference is positive.

Increase in the NCI - "parent sells a slice to the NCI"

Cash in (proceeds) X
Increase in the NCI (% x (net assets + full goodwill)) X
Difference to equity w6 X / (X)

If the cash received exceeds the increase in the NCI then the difference is positive
that is taken to equity (OCE), and if the cash is less, then the difference is negative.

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w8 Investment in the associate / joint venture (equity accounting)

Associates and joint ventures are equity accounted so the investment is updated by
the group’s share of the (retained) post-acquisition profit.

Parent's investment X
Plus the associate % of the post-acquisition retained profit X
Less the impairment loss on the investment in the associate (X)
Less the associate % of the PURP (inventory with the associate) (X)
X

With an associate PURP if the inventory is with the parent then it is deducted from
inventory.

w9 Profit (or loss) to the group on disposal of a subsidiary

When control is lost there will be a profit or loss arising on the de-recognition of the
subsidiary from the group accounts.

Proceeds X
Less all net assets (X)
Less all goodwill (X)
Plus all the NCI X
Plus the residual holding at fair value X
Group exchange difference recycled to profit or loss on disposal X / (X)
Group profit (or loss) X / (X)

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Preparing the group statement of financial position

Note – under SBR you will not be asked to prepare a full statement.

Assets

Basic rule is cross casting of the parent's and the subsidiary's assets on a line by line
basis with consolidation adjustments for –

 Overseas subsidiary, translate the assets (inc FVA) at the closing rate
 PPE, add fair value adjustments net of additional depreciation, less net PURP
on transfers
 Investment in the subsidiary, replace with goodwill net of impairment losses
 Investment in the associate, update per equity accounting
 Investments, less any loans to / investments in subsidiary's loan stock
 Inventory, less PURP, plus goods in transit
 Receivables, less any current account balances
 Cash at bank, plus any cash in transit

Equity

 Equity shares, parent only, as updated for any new issues.

 Other equity reserves per w6
 Retained earnings per w5
 NCI per w4

Liabilities

Basic rule is cross casting of the parent's and the subsidiary's liabilities on a line by
line basis with adjustments for –

 Overseas subsidiary, translate the liabilities at the closing rate

 Non-current liabilities, plus deferred consideration (as updated for finance
cost), less any inter-company loans
 Current liabilities, less any current account balances

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Proforma - group accounts
Group Statement of Comprehensive Income
(the statement of profit or loss and other comprehensive income)

Workings

Supporting workings may include many outlined above for the group statement of
financial position.

w1 Group structure - see above - (NB time apportionment is very important to note)
w2 Net assets at acquisition - see above - IF necessary to ascertain the fair value
adjustment on PPE at acquisition, in order to ascertain the additional depreciation or
group exchange difference
w3 Goodwill - see above - IF necessary to ascertain the amount of the impairment
loss or group exchange difference
w9 Gain to the group on disposal of a subsidiary - see above - IF there has been a
disposal.

In addition the following workings may be applicable.

Income from the associate / joint venture (if overseas translate at average rate)

% of the associate's PAT x time apportionment X

less any impairment loss on the investment (X)
less % the PURP where the associate is the seller (X)
X
Profit and total comprehensive income attributable to the NCI
(think DIP !)

NCI % x subsidiary's PAT x time apportionment @ average rate if FX X

Less NCI% x Depreciation on FVA (X)
Less NCI% x Impairment loss (on full goodwill) (X)
Less NCI% x PURP (subsidiary = seller) (X)
Profit / loss attributable to the NCI X / (X)

NCI% x subsidiary's other comprehensive income gains / losses X / (X)

NCI% x group exchange difference on retranslation of net assets X / (X)
NCI% x group exchange difference on retranslation of goodwill (if in full) X / (X)
Total comprehensive income attributable to the NCI X / (X)

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Preparing the group statement of comprehensive income

Note – under SBR you will not be asked to prepare a full statement.

Basic rule is cross casting of the parent's and the subsidiary's income and expenses
on a line by line basis

 Time apportion the subsidiary's results on a line by line basis from the date of
acquisition if acquired during the period.
 Time apportion the subsidiary's results on a line by line basis up to the date of
disposal where control lost during the period and not a discontinued operation
 Overseas subsidiary, translate the income and expenses at the average rate

 Revenue, less inter-company trading

 Cost of sales, less inter-company trading, plus purp, plus additional
depreciation on FVA
 Operating expenses, plus impairment loss
 Finance cost, less inter-company interest, plus the unwinding of deferred
consideration
 Investment income, less inter-company dividends, less inter-company interest
 Income from the associate / joint venture
 Exceptional gain / loss on disposal of a subsidiary (continuing operations)
 Profit / loss from discontinued operations (single line presentation of all results
including exceptional gain / loss on disposal)
 OCI - the group exchange difference arising on the retranslation of net assets
& goodwill
 Profit for the year attributable to the NCI
 Total comprehensive income attributable to the NCI

NB the group SOCI will also be updated for gains / losses arising from correcting
accounting errors.

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