Consolidation - Recap

By. Vicky Xu
Consolidation

< 20% Financial asset – FVTPL/FVTOCI

20%-50% Significant influence - Associate – Equity method
50% Joint control - Joint venture – Equity method
> 50% Control - Subsidiary – Acquisition accounting
Consolidation

• Step – acquisition & Disposal 2020/9&12 Q1a

• Foreign subsidiary 2019/3&6 Q1, 2020/3 Q1
• CSOCF 2018/9 Q4, 2018/12 Q1, 2020/9&12 Q1b

+ Goodwill and impairment 2019/9&12 Q1

+ Associate 2018/9 Q1a ii
+ Joint arrangement 2019/3&6 Q3a i, 2019/9&12 Q3b i
+ Accounting standard, etc.
Recap

1) Consideration transferred
2) Pre-acquisition equity - Goodwill
3) Post-acquisition equity – Adjustments
Consideration transferred

The consideration transferred in a business combination is measured

at fair value.
Dr Investment in subsidiary
Cr 12345

1) Cash
2) Share exchange
3) Loan note (NCL)
4) Deferred cash (CL)
5) Contingent consideration
Consideration transferred

Example: Share exchange & Loan note

On 1 October 2012, Paradigm acquired 75% of Strata’s equity shares
by means of a share exchange of two new shares in Paradigm for
every five acquired shares in Strata. In addition, Paradigm issued to
the shareholders of Strata a $100 10% loan note for every 1,000
shares it acquired in Strata. Paradigm has not recorded any of the
purchase consideration, although it does have other 10% loan notes
already in issue.
The market value of Paradigm’s shares at 1 October 2012 was $2
each.
Consideration transferred

Share (75%*20000*2/5*2) 12,000

Loan note (75%*20000*1/1000*100) 1,500
13,500

Dr Investment in subsidiary 13,500

Cr Share capital 6,000
Dr Share premium 6,000
Cr Loan note 1,500
Consideration transferred

Example: Cash & Contingent consideration

On 1 April 2013, Polestar acquired 75% of the equity share capital of
Southstar. Southstar had been experiencing difficult trading
conditions and making significant losses. In allowing for Southstar’s
difficulties, Polestar made an immediate cash payment of only $1·50
per share.
Consideration transferred

In addition, Polestar will pay a further amount in cash on 30

September 2014 if Southstar returns to profitability by that date. The
value of this contingent consideration at the date of acquisition was
estimated to be $1·8 million, but at 30 September 2013 in the light
of continuing losses, its value was estimated at only $1·5 million.
The contingent consideration has not been recorded by Polestar.
Overall, the directors of Polestar expect the acquisition to be a
bargain purchase leading to negative goodwill.
At the date of acquisition shares in Southstar had a listed market
price of $1·20 each.
Consideration transferred

Cash (75%*6000/0.5*1.5) 13,500

Contingent consideration 1,800
15,300

Dr Investment in subsidiary 1,800

Cr Contingent consideration 1,800
Dr Contingent consideration 300
Cr RE(P) 300
Consideration transferred

Example: Share exchange & Deferred cash

On 1 July 2014 Bycomb acquired 80% of Cyclip’s equity shares on
the following terms:
– a share exchange of two shares in Bycomb for every three shares
acquired in Cyclip; and
– a cash payment due on 30 June 2015 of $1·54 per share acquired
(Bycomb’s cost of capital is 10% per annum).
At the date of acquisition, shares in Bycomb and Cyclip had a stock
market value of $3·00 and $2·50 each respectively.
Consideration transferred

Share (80%*12000*2/3*3) 19,200

Deferred cash (80%*12000*1.54/1.1) 13,440
32,640

Interest exps (13440*10%*9/12) 1,008

Pre-acquisition equity - Goodwill

Consideration transferred xx
FV of NCI xx
Less: FV of net assets
Share capital xx
Retained earnings xx
Other component of equity xx
FV adjustment xx
(xx)
Goodwill xx
Pre-acquisition equity - Goodwill

FV adjustment
- Subsidiary’s assets and liabilities
- CV not equal to FV
- Adjust to FV

As per IFRS 3 Business Combination, contingent liability should be

recognised on acquisition of a subsidiary, where there is present
obligation arising as a result of a past event and the fair value can be
measured reliably, even if the settlement is not yet probable.
Pre-acquisition equity - Goodwill

(2) Dr Equity(S, pre-acquisition) FV of net assets

(4) Dr Goodwill Balancing figure
(1) Cr Investment in subsidiary FV of Consideration transferred
(3) Cr NCI FV of NCI
Post-acquisition equity – Adjustments

1) Additional depreciation/Reversal
2) Goodwill impairment
3) Unrealised profit (URP)
4) Intra-group balance
- Trade Receivables/Trade Payables
- Dividend Receivables/ Dividend Payables
- Investment/Loan note
5) Intra-group NOT balance
- Cash in transit
- Goods in transit
Post-acquisition equity – Adjustments

Additional depreciation/Reversal
Dr/Cr RE(S)
Cr/Dr PPE
Post-acquisition equity – Adjustments

Goodwill impairment
Dr RE(S)
Cr Goodwill
Post-acquisition equity – Adjustments

Unrealised profit (URP)

Dr RE(Seller)
Cr Inventory(Buyer)
Post-acquisition equity – Adjustments

Intra-group balance
Dr Payables
Cr Receivables

- Trade Receivables/Trade Payables

- Dividend Receivables/ Dividend Payables
- Investment/Loan note
Post-acquisition equity – Adjustments

Intra-group NOT balance

Dr Payables
Dr Cash/Inventory
Cr Receivables

- Cash in transit
- Goods in transit
Post-acquisition equity – Adjustments

(1) Dr RE(S, post-acquisition)

(2) Cr RE(P)
(3) Cr NCI
Consolidation – Goodwill and
impairment
By. Vicky Xu
Goodwill

IFRS 3 allows an accounting policy choice, available on a

transaction by transaction basis, to measure non-controlling interests
(NCI) either at:
• Fair value (Full goodwill), or
• NCI's proportionate share of net assets of the acquiree (Partial
goodwill)
Goodwill

Goodwill should be tested for impairment annually and reversal of

an impairment loss for goodwill is prohibited.

Goodwill, however, is not a Cash Generating Unit (CGU). The

goodwill should be combined with the whole subsidiary to calculate
impairment.
Full goodwill

Consideration transferred xx
FV of NCI xx
Less: FV of net assets
Share capital xx
Retained earnings xx
Other component of equity xx
FV adjustment xx
(xx)
Goodwill xx
Full goodwill

Impairment test at year end

Net assets at year end
Goodwill at year end
CV of subsidiary at year end > RA (given in exam)

Dr RE(S)
Cr Goodwill
Cr Other assets
2011/12 Traveler (30/11/2011)
On 1 December 2010, Traveler acquired 60% of the equity interests of
Data, a public limited company. The purchase consideration comprised
cash of $600 million. At acquisition, the fair value of the non-controlling
interest in Data was $395 million. Traveler wishes to use the ‘full goodwill’
method. On 1 December 2010, the fair value of the identifiable net assets
acquired was $935 million and retained earnings of Data were $299 million
and other components of equity were $26 million. The excess in fair value
is due to non-depreciable land.

Goodwill was impairment tested after the additional acquisition in Data on

30 November 2011. The recoverable amount of Data was $1,099 million.
2011/12 Traveler (30/11/2011)
2011/12 Traveler (30/11/2011)
Partial goodwill

Consideration transferred xx
NCI (20% of net assets) xx
Less: FV of net assets
Share capital xx
Retained earnings xx
Other component of equity xx
FV adjustment xx
(xx)
Goodwill xx
Partial goodwill

Consideration transferred xx
FV of NCI xx
Less: FV of net assets
Share capital xx
Retained earnings xx
Other component of equity xx
FV adjustment xx
(xx) @80%
Goodwill xx
Partial goodwill

Impairment test at year end

Net assets at year end
Goodwill @100% at year end
CV of subsidiary at year end > RA (given in exam)

Dr RE(P) (Impairment amount to goodwill @80%)

Cr Goodwill
Dr RE(S)
Cr Other assets
2011/12 Traveler (30/11/2011)

On 1 December 2010, Traveler acquired 80% of the equity interests

of Captive for a consideration of $541 million. The consideration
comprised cash of $477 million and the transfer of non-depreciable
land with a fair value of $64 million. The carrying amount of the
land at the acquisition date was $56 million. At the year end, this
asset was still included in the non-current assets of Traveler and the
sale proceeds had been credited to profit or loss.
2011/12 Traveler (30/11/2011)

At the date of acquisition, the identifiable net assets of Captive had a

fair value of $526 million, retained earnings were $90 million and
other components of equity were $24 million. The excess in fair
value is due to non-depreciable land. This acquisition was accounted
for using the partial goodwill method in accordance with IFRS 3
(Revised) Business Combinations.

Goodwill was impairment tested after the additional acquisition in

Data on 30 November 2011. The recoverable amount of Captive was
$700 million.
2011/12 Traveler (30/11/2011)
2011/12 Traveler (30/11/2011)
2019/12 Q1ab Luploid (30 June 20X8)

Draft an explanatory note to the directors of Luploid Co, addressing

the following:
(a) (i) How the fair value of the factory site should be determined at
1 July 20X4 and why the depreciated replacement cost of $17·4
million is unlikely to be a reasonable estimate of fair value. (7 marks)
(ii) A calculation of goodwill arising on the acquisition of Colyson
Co measuring the non-controlling interest at: – fair value; –
proportionate share of the net assets. (3 marks)
2019/12 Q1ab Luploid (30 June 20X8)

Background
Luploid Co is the parent company of a group undergoing rapid
expansion through acquisition. Luploid Co has acquired two
subsidiaries in recent years, Colyson Co and Hammond Co. The
current financial year end is 30 June 20X8.
2019/12 Q1ab Luploid (30 June 20X8)

Acquisition of Colyson Co
Luploid Co acquired 80% of the five million equity shares ($1 each)
of Colyson Co on 1 July 20X4 for cash of $90 million. The fair
value of the non-controlling interest (NCI) at acquisition was $22
million. The fair value of the identifiable net assets at acquisition
was $65 million, excluding the following asset. Colyson Co
purchased a factory site several years prior to the date of acquisition.
Land and property prices in the area had increased significantly in
the years immediately prior to 1 July 20X4.
2019/12 Q1ab Luploid (30 June 20X8)

Nearby sites had been acquired and converted into residential use. It
is felt that, should the Colyson Co site also be converted into
residential use, the factory site would have a market value of $24
million. $1 million of costs are estimated to be required to demolish
the factory and to obtain planning permission for the conversion.
Colyson Co was not intending to convert the site at the acquisition
date and had not sought planning permission at that date. The
depreciated replacement cost of the factory at 1 July 20X4 has been
correctly calculated as $17·4 million.
2019/12 Q1ab Luploid (30 June 20X8)

Suggested answer:
(i)[公允价值的定义] Fair value is defined as the price which
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date. Therefore, it is not supposed to be entity specific but rather to
be market focused.
2019/12 Q1ab Luploid (30 June 20X8)

[ 资 产 的 最 佳 用 途 假 设 ] Fair value should be measured by

consideration of the highest and best use of the asset. The highest
and best use takes into account the use of the asset which is
physically possible, legally permissible and financially feasible. And
there is a presumption that the current use would be the highest and
best use.
2019/12 Q1ab Luploid (30 June 20X8)

[结合案例: 住宅用途，法律不禁止，公司意图不相关，得到FV]
In this case, the highest and best use of the asset would appear to be
as residential property and not the current industrial use.

The alternative use must not be legally prohibited. Since several

nearby sites have been given permission to demolish the factory and
convert into residential properties, this would appear to be likely.
The intentions of Colyson are not relevant as fair value is not entity
specific. Therefore, FV of the property = 24-1 = 23; FV of net
assets= 65+23 = 88.
2019/12 Q1ab Luploid (30 June 20X8)

[DRC只能市场信息缺失时使用 ] Depreciated replacement cost

should only be considered as a possible method for estimating the
fair value of the asset when other more suitable methods are not
available, e.g. when the asset is highly specialised and market data is
therefore limited or unavailable. This is not the case here.

[市场价值上升，意味着DRC低估了资产，注意，即使不考虑转
变用途，依然是低估了资产] In any case, the rise in value of land
and properties particularly for residential use would mean that to use
depreciated replacement cost would undervalue the asset.
 2019/12 Q1ab Luploid (30 June 20X8)

(ii) Full goodwill Partial goodwill

Consideration 90 90
NCI 22 0
(-) NA (88) (70.4)
Goodwill 24 19.6
2019/12 Q1ab Luploid (30 June 20X8)

(b) Discuss the calculation and allocation of Colyson Co’s

impairment loss at 30 June 20X8 and why the impairment loss of
Colyson Co would differ depending on how non-controlling interests
are measured. Your answer should include a calculation and an
explanation of how the impairments would impact upon the
consolidated financial statements of Luploid Co. (11 marks)
2019/12 Q1ab Luploid (30 June 20X8)

Impairment of Colyson Co
Colyson Co incurred losses during the year ended 30 June 20X8 and
an impairment review was performed. The recoverable amount of
Colyson Co’s assets was estimated to be $100 million. Included in
this assessment was the only building owned by Colyson Co which
had been damaged in a storm and impaired to the extent of $4
million. The carrying amount of the net assets of Colyson Co at 30
June 20X8 (including fair value adjustments on acquisition but
excluding goodwill) are as follows:
2019/12 Q1ab Luploid (30 June 20X8)

None of the assets of Colyson Co including goodwill have been

impaired previously. Colyson Co does not have a policy of revaluing
its assets.
2019/12 Q1ab Luploid (30 June 20X8)

Suggested answer:
An impairment arises where the carrying amount of the net assets
exceeds the recoverable amount. Where there is a clear indication of
impairment, this asset should be reduced to the recoverable amount.

Where the cash flows cannot be independently determined for

individual assets, they should be assessed as a CGU, which is the
smallest group of assets which independently generate cash flows.
2019/12 Q1ab Luploid (30 June 20X8)

Impairments of cash generating units are allocated first to goodwill

and then pro rata on the other assets. It should be noted that no asset
should be reduced below its recoverable amount.
2019/12 Q1ab Luploid (30 June 20X8)

Full goodwill
Impairment loss = 106 + 24 goodwill - 100 recoverable amount = 30,
should be allocate as followed:
Land and buildings 60 4 56
Plant and machinery 15 1.25 13·75
Intangibles other than goodwill 9 0.75 8.25
Goodwill 24 24 0
Current assets (at recoverable amount) 22 0 22
Total 130 30 100
2019/12 Q1ab Luploid (30 June 20X8)
1) The damaged building should be impaired by 4 with a corresponding
charge to PL, 26 remains;
2) The goodwill 24 should therefore be written off and expensed in the
CSOPL;
3) Of the remaining 2, 1·25 will be allocated to the plant and machinery
(15/(15 + 9) x 2m) and 0·75 will be allocated to the remaining
intangibles (9/(9 + 15) x 2m). As no assets have been previously
revalued, all the impairments are charged to PL.

In summary, 24 (80% x 30) will be attributable to the owners of Luploid

and 6 (20% x 30) to the NCI in CSOCI.
2019/12 Q1ab Luploid (30 June 20X8)

Partial goodwill
When NCI is measured using the proportional share of net assets, no
goodwill is attributable to the NCI since goodwill is not included
within the individual net assets of the subsidiary. Goodwill needs to
be grossed up when an impairment review is performed so that it is
comparable with the recoverable amount.
2019/12 Q1ab Luploid (30 June 20X8)

The goodwill of 19·6 is grossed up by 100/80 to a value of 24·5.

This extra 4·9 is known as notional goodwill. Impairment loss = 106
+ 24.5 goodwill – 100 recoverable amount = 30.5, should be allocate
as followed:
Land and buildings 60 4 56
Plant and machinery 15 1.25 13·75
Intangibles other than goodwill 9 0.75 8.25
Goodwill 19.6 19.6 0
Notional goodwill (goodwill/80%*20%) 4.9 4.9 0
Current assets (at recoverable amount) 22 0 22
Total 130.5 30.5 100
2019/12 Q1ab Luploid (30 June 20X8)

1) The damaged building should be impaired by 4 with a

corresponding charge to PL, 26.5 remains;
2) Since the remaining impairment of 26·5 exceeds the value of
goodwill, the goodwill is written down to 0. Only 19·6 is
deducted in full from the owners of Luploid’s share of profits
since there is no goodwill attributable to NCI. (Note: Notional
goodwill and impairment does not impact on CSOPL).
3) The remaining $2 million impairment is allocated between plant
and machinery and intangibles, exactly the same as above.
2019/12 Q1ab Luploid (30 June 20X8)

In summary, NCI will be allocated 20% of 6 (4 + 2), i.e. 1·2.

Consolidated retained earnings will be charged with 80% of 6, i.e.
$4·8, plus $19·6 goodwill impairment (i.e. $24·4m in total).
Specimen1 Q1ai

Required:
(a) (i) Explain to the directors of Kutchen, with suitable workings,
how goodwill should have been calculated on the acquisition of
House and Mach showing the adjustments which need to be made to
the consolidated financial statements to correct any errors by the
finance director. (10 marks)
Specimen1 Q1ai

Acquisition of 70% of House

On 1 June 20X6, Kutchen acquired 70% of the equity interests of
House. The purchase consideration comprised 20 million shares of
$1 of Kutchen at the acquisition date and a further 5 million shares
on 31 December 20X7 if House’s net profit after taxation was at
least $4 million for the year ending on that date.

The market price of Kutchen’s shares on 1 June 20X6 was $2 per

share and that of House was $4·20 per share. It is felt that there is a
20% chance of the profit target being met.
Specimen1 Q1ai

In accounting for the acquisition of House, the finance director did

not take into account the non-controlling interest in the goodwill
calculation. He determined that a bargain purchase of $8 million
arose on the acquisition of House, being the purchase consideration
of $40 million less the fair value of the identifiable net assets of
House acquired on 1 June 20X6 of $48 million. This valuation was
included in the group financial statements above.
Specimen1 Q1ai

After the directors of Kutchen discovered the error, they decided to

measure the non-controlling interest at fair value at the date of
acquisition. The fair value of the non-controlling interest (NCI) in
House was to be based upon quoted market prices at acquisition.
House had issued share capital of $1 each, totalling $13 million at 1
June 20X6 and there has been no change in this amount since
acquisition.
Specimen1 Q1ai

Suggested answer:
Consideration
- Shares 20*$2 40
- Contingent consideration 5*$2*20% shares 2
42
FV of NCI 30%*13*$4.2 16.38
58.38
Less: FV of NA (48)
Goodwill 10.38
Specimen1 Q1ai
Should Did Adjustment
Dr Equity (S/Pre) 48 Dr Equity (S/Pre) 48 Dr Goodwill 10.38
Dr Goodwill – b/f 10.38 Cr Goodwill – b/f 8 Dr PL 8
Cr Invt in subsi 42 Cr Invt in subsi 40 Cr NCI 16.38
Cr NCI 16.38 Cr OCE 2

Contingent consideration should be valued at fair value and will

have to take into account any profit target set under the agreement.
Since it is felt that there is a 20% chance of the profit target being
met, the expected value should be calculated (see above) and it will
be shown in OCE.
Specimen1 Q1ai

Kutchen’s policy is to value the non-controlling interest at fair value

at the date of acquisition. For this purpose, House’s share price at
that date can be deemed to be representative of the fair value of the
shares held by the non-controlling interest.

Moreover, the FD should have undertaken a review to ensure the

identification of assets and liabilities is complete, and that
measurements appropriately reflect consideration of all available
information.
Specimen1 Q1ai

The FD has not taken into account contingent consideration and FV

of NCI. If all are considered, bargain purchase gain should be
recognised in PL.
Specimen1 Q1ai

Initial acquisition of 80% of Mach

On 1 January 20X6, Kutchen acquired 80% of the equity interests of
Mach, a privately owned entity, for a consideration of $57 million.
The consideration comprised cash of $52 million and the transfer of
non-depreciable land with a fair value of $5 million. The carrying
amount of the land at the acquisition date was $3 million and the
land has only recently been transferred to the seller of the shares in
Mach and is still carried at $3 million in the group financial
statements at 31 December 20X6.
Specimen1 Q1ai

At the date of acquisition, the identifiable net assets of Mach had a

fair value of $55 million. Mach had made a net profit attributable to
ordinary shareholders of $3·6 million for the year to 31 December
20X5.

The directors of Kutchen wish to measure the non-controlling

interest at fair value at the date of acquisition but had again omitted
NCI from the goodwill calculation. The NCI is to be fair valued
using a public entity market multiple method.
Specimen1 Q1ai

The directors of Kutchen have identified two companies who are

comparable to Mach and who are trading at an average price to
earnings ratio (P/E ratio) of 21. The directors have adjusted the P/E
ratio to 19 for differences between the entities and Mach, for the
purpose of fair valuing the NCI. The finance director has determined
that a bargain purchase of $3 million arose on the acquisition of
Mach being the cash consideration of $52 million less the fair value
of the net assets of Mach of $55 million. This gain on the bargain
purchase had been included in the group financial statements above.
Specimen1 Q1ai

Suggested answer:
Consideration
- Cash 52
- Land 5
57
FV of NCI 20%*19*$3.6 13.68
70.68
Less: FV of NA (55)
Goodwill 15.68
Specimen1 Q1ai
Should Did Adjustment
Dr Equity (S/Pre) 55 Dr Equity (S/Pre) 55 Dr Goodwill 15.68
Dr Goodwill – b/f 15.68 Cr Goodwill – b/f 3 Dr PL 3
Cr Invt in subsi 57 Cr Invt in subsi 52 Cr NCI 13.68
Cr NCI 13.68 Cr PPE 3

Net profit of Mach is $3·6 & P/E ratio (adjusted) is 19, hence, FV of
Mach is 19*$3·6=$68·4. The NCI has a 20% holding; therefore, FV
of NCI is $13·68..
 Summary
Consideration 680 Different elements?
Why includes contingent consideration?
How is each element measured?
Subsequent measurement?
FV of NCI 420 Why includes NCI？
Choice of measurement?
Impact on measurement options?
1,100
Less: FV of NA
SC -200 Recognition principles?
RE -600 Measurement principles?
FV adjustment -150 Subsequent measurement?
150
Summary

Deferred consideration:
1) Discounted to PV at DOA; 2) Unwinding of interest increase FC;
3) This would be adjusted prospectively to profit or loss rather than
adjusting the consideration and goodwill.

Contingent consideration:
1) Measured at expected value & take into account revenue or profit
target set in Sales and Purchase Agreement. 2) Re-measured at a
later date, remeasurement does not affect Goodwill, but changes in
value should be recognised in P/L.
Summary

FV of NCI:
Group policy is to value the NCI at fair value at the date of acquisition.
For this purpose, XXX’s share price at that date can be deemed to be
representative of the fair value of the shares held by the NCI.

FV of NA – Contingent liability:
As per IFRS 3 Business Combination, contingent liability should be
recognised on acquisition of a subsidiary, where there is present
obligation arising as a result of a past event and the fair value can be
measured reliably, even if the settlement is not yet probable.
Summary

Step-acquisition - Subsidiary to Subsidiary：

1) Transaction within group accounts, NCI drop 10%; 2) Goodwill
remains the same; 3) Difference between consideration paid and FV of
NCI disposed should be recognised in OCE and attributed to owners of
parent.
Consolidation – Step-acquisition
By. Vicky Xu
Step-acquisition

1 10% - 30% Associate

2 10% - 60% Consolidation
3 30% - 60% Consolidation
4 60% - 70% Control to control
5 30% - 10%
6 60% - 10%
7 60% - 30% Associate
8 70% - 60% Control to control
10% - 30%

Step 1: Recognise additional 30% in investment in associate

Dr Investment in associate (30% fair value)
Cr Cash, etc. (30% fair value)

Step 2: Transfer existing 10% to investment in associate

Dr Investment in associate (10% fair value at transfer date)
Cr FVTPL or FVTOCI (10% carrying amount at transfer date)
Cr/Dr PL
10% - 30%

Step 3: When the existing 10% is FVTOCI

Dr OCI
Cr RE
2012/12 Minny (30/11/2012)
Minny acquired a 14% interest in Puttin, a public limited company, on 1
December 2010 for a cash consideration of $18 million. The investment
was accounted for under IFRS 9 Financial Instruments and was designated
as at fair value through other comprehensive income. On 1 June 2012,
Minny acquired an additional 16% interest in Puttin for a cash
consideration of $27 million and achieved significant influence. The value
of the original 14% investment on 1 June 2012 was $21 million. Puttin
made profits after tax of $20 million and $30 million for the years to 30
November 2011 and 30 November 2012 respectively. On 30 November
2012, Minny received a dividend from Puttin of $2 million, which has been
credited to other components of equity.
2012/12 Minny (30/11/2012)
10% - 60%

Step 1: Recognise additional 50% in investment in subsidiary

Dr Investment in subsidiary (50% fair value)
Cr Cash, etc. (50% fair value)

Step 2: Transfer existing 10% to investment in subsidiary

Dr Investment in subsidiary (10% fair value at transfer date)
Cr FVTPL or FVTOCI (10% carrying amount at transfer date)
Cr/Dr PL
10% - 60%

Step 3: When the previous 10% is FVTOCI

Dr OCI
Cr RE
2012/6 Robby (31/5/2012)

On 1 June 2009, Robby acquired 5% of the ordinary shares of Zinc.

Robby had treated this investment at fair value through profit or loss
in the financial statements to 31 May 2011.

On 1 December 2011, Robby acquired a further 55% of the ordinary

shares of Zinc and gained control of the company.
2012/6 Robby (31/5/2012)

The consideration for the acquisitions was as follows:

At 1 December 2011, the fair value of the equity interest in Zinc held
by Robby before the business combination was $5 million.

It is Robby’s policy to measure the non-controlling interest at fair

value and this was $9 million on 1 December 2011.
2012/6 Robby (31/5/2012)

The fair value of the identifiable net assets at 1 December 2011 of

Zinc was $26 million, and the retained earnings were $15 million.
The excess of the fair value of the net assets is due to an increase in
the value of property, plant and equipment (PPE), which was
provisional pending receipt of the final valuations. These valuations
were received on 1 March 2012 and resulted in an additional
increase of $3 million in the fair value of PPE at the date of
acquisition. This increase does not affect the fair value of the non-
controlling interest at acquisition. PPE is to be depreciated on the
straight-line basis over a remaining period of five years.
2012/6 Robby (31/5/2012)
Lecture example

At 1/1/2015 P buy 10% in K, Cash=30, FVTPL

At 31/12/2017 10% investment CV=46
At 1/7/2018 P buy 45% in K, Cash=300, 10% investment FV=50
FV of NCI=200, FV of NA=150

(i) Calculate and explain the goodwill (4 marks)

(ii) Explain any difference: When the previous 10% shareholding is
FVTPL and FVTOCI
Lecture example

Suggested answer:
(i) Calculation
Consideration – 1st 10% 50
– 2nd 45% 300
350
FV of NCI 200
FV of NA (150)
300 [1]
Lecture example

P achieves control of K at 1/7/2018, K becomes a subsidiary and

goodwill arises. Consideration comprise of two parts: 10%
transferred from FVTPL investment and 45% purchased by cash.
Consideration plus FV of NCI exceeds FV of NA acquired, result in
Goodwill 400. 指出收购日（取得控制权），描述计算过程[1]

This is a step-acquisition. The 1st 10% investment need to be re-

measured to FV at acquisition date, i.e. 50. 指出第一笔投资要调整
到收购日当天的公允价值[1]
Lecture example

The gain of 4 (50@1/7/2018 less 46@1/1/2018) is required to be

recorded in PL. 公允价值变动的会计处理[1]
Lecture example

(ii) If the 1st 10% investment had been recorded as FVTOCI,

goodwill remains the same. 商誉不变[1]

Under FVTPL measurement, the increases in value during the past 3

years 46-30=16 should have been recorded in PL (and been
transferred to RE annually), whereas under FVTOCI measurement,
the same amount would have been recorded in OCI (and been
accumulated to OCE subsequently). 两种计量方法的不同[1]
Lecture example

When K becomes subsidiary of P, the full balance in OCE 16 should

be transferred to RE, as the 1st 10% investment is considered to be
disposed of in business combination. 如果使用了FVTOCI, 收购时
相当于处置掉了金融资产, OCE转去RE[1]
30% - 60%

Step 1: Recognise additional 20% in investment in subsidiary

Dr Investment in subsidiary (20% fair value)
Cr Cash, etc. (20% fair value)

Step 2: Transfer existing 40% to investment in subsidiary

Dr Investment in subsidiary (40% fair value at transfer date)
Cr Investment in associate (40% carrying amount at transfer date)
Cr/Dr PL
30% - 60%

Step 3: Transfer OCI to RE

Dr OCI
Cr RE
2014/12 Joey (30/11/2014)

(i) On 1 December 2011, Joey acquired 30% of the ordinary shares

of Margy for a cash consideration of $600 million when the fair
value of Margy’s identifiable net assets was $1,840 million. Joey
treated Margy as an associate and has equity accounted for Margy up
to 1 December 2013. Joey’s share of Margy’s undistributed profit
amounted to $90 million and its share of a revaluation gain
amounted to $10 million.
2014/12 Joey (30/11/2014)

On 1 December 2013, Joey acquired a further 40% of the ordinary

shares of Margy for a cash consideration of $975 million and gained
control of the company. The cash consideration has been added to
the equity accounted balance for Margy at 1 December 2013 to give
the carrying amount at 30 November 2014.
2014/12 Joey (30/11/2014)

At 1 December 2013, the fair value of Margy’s identifiable net assets

was $2,250 million. At 1 December 2013, the fair value of the equity
interest in Margy held by Joey before the business combination was
$705 million and the fair value of the non-controlling interest of
30% was assessed as $620 million. The retained earnings and other
components of equity of Margy at 1 December 2013 were $900
million and $70 million respectively. It is group policy to measure
the non-controlling interest at fair value.
2014/12 Joey (30/11/2014)

(ii) At the time of the business combination with Margy, Joey has
included in the fair value of Margy’s identifiable net assets, an
unrecognised contingent liability of $6 million in respect of a
warranty claim in progress against Margy. In March 2014, there was
a revision of the estimate of the liability to $5 million. The amount
has met the criteria to be recognised as a provision in current
liabilities in the financial statements of Margy .
2014/12 Joey (30/11/2014)

(iii) Additionally, buildings with a carrying amount of $200 million

had been included in the fair valuation of Margy at 1 December
2013. The buildings have a remaining useful life of 20 years at 1
December 2013. However, Joey had commissioned an independent
valuation of the buildings of Margy which was not complete at 1
December 2013 and therefore not considered in the fair value of the
identifiable net assets at the acquisition date.
2014/12 Joey (30/11/2014)

The valuations were received on 1 April 2014 and resulted in a

decrease of $40 million in the fair value of property, plant and
equipment at the date of acquisition. This decrease does not affect
the fair value of the non-controlling interest at acquisition and has
not been entered into the financial statements of Margy. Buildings
are depreciated on the straight-line basis and it is group policy to
leave revaluation gains on disposal in equity. The excess of the fair
value of the net assets over their carrying value, at 1 December 2013,
is due to an increase in the value of non-depreciable land and the
contingent liability.
2014/12 Joey (30/11/2014)
2020/12 Q1a Sugar (30 June 20X8)

Required:
(a) Draft an explanatory note to the directors of Sugar Co,
addressing how the initial 40% investment in Flour Co and the
additional purchase of the equity shares on 1 July 20X7 should be
accounted for in the consolidated financial statements (including the
statement of cash flows). Using the goodwill figure of $2,259,000,
calculate the cash paid to acquire control of Flour Co and include a
brief explanation as to how that cash should be accounted for in the
consolidated statement of cash flows. (10 marks)
2020/12 Q1a Sugar (30 June 20X8)

At 30 June 20X7, Sugar Co has investments in several associate

companies, including Flour Co. On 1 July 20X7 Sugar Co acquired
additional shares in Flour Co and obtained control. On 1 October
20X7 Sugar Co also acquired an associate, Butter Co. The group is
preparing the consolidated statement of cash flows for the year
ended 30 June 20X8.
2020/12 Q1a Sugar (30 June 20X8)

Acquisition of Flour Co
A 40% shareholding in Flour Co was purchased several years ago at
a cost of $10 million. This investment gave Sugar Co significant
influence in Flour Co. The consideration to acquire an additional
three million shares (30% shareholding) in Flour Co on 1 July 20X7
was in two parts: (i) cash and; (ii) a one for two share exchange
when the market price of Sugar Co shares was $6 each. In Flour
Co’s individual financial statements, the net assets had increased by
$12 million between the two acquisition dates. The carrying amount
of Flour Co’s net assets on 1 July 20X7 was as follows:
2020/12 Q1a Sugar (30 June 20X8)

The carrying amounts of the net assets at 1 July 20X7 were equal to
the fair values except for land which had a fair value $600,000 above
the carrying amount.
2020/12 Q1a Sugar (30 June 20X8)

The Sugar group values non-controlling interests (NCI) at fair value

and the share price of Flour Co at 1 July 20X7 was $3·80. This share
price should be used to value NCI at that date and to value the initial
40% equity interest in Flour Co.

Goodwill at 1 July 20X7 was correctly calculated as $2,259,000 and

has been correctly accounted for in the consolidated statement of
financial position.
2020/12 Q1a Sugar (30 June 20X8)

Suggested answer:
The acquisition of Flour Co is a step acquisition. This means the
original 40% equity interest is treated as if it is disposed and then
reacquired at fair value. The difference between the carrying amount
of the original 40% equity interest and its fair value would be
included as a gain within profit or loss. As an associate, the
investment would have been accounted for using the equity method
and would be valued at $14·8 million as at 1 July 20X7:
2020/12 Q1a Sugar (30 June 20X8)
Cost 10
Share of increase in net assets between acquisition dates $12m x 40% 4.8
Investment in associate as at 1 July 20X7 14.8

The fair value of the original 40% interest would be $15·2 million
(10m x 40% x $3·80) and so gain of $400,000 would be included
within profit or loss.
2020/12 Q1a Sugar (30 June 20X8)

Goodwill will be calculated at 1 July 20X7, the date that control is

gained, as the difference between the fair value of the consideration
and non-controlling interest and the fair value of the identifiable net
assets at acquisition. The consideration must include the fair value of
the original 40% equity interest as well as the fair value of the
additional consideration.

The fair value of the non-controlling interest at 1 July 20X7 will be

$11·4 million (10m x 30% x $3·80). The fair value of the share
exchange will be $9 million. (3 million shares acquired x ½ x $6).
2020/12 Q1a Sugar (30 June 20X8)

Goodwill has been determined to be $2,259,000 which means the

cash paid to acquire Flour Co on 1 July 20X7 must be $3 million as
follows:

Consideration
- 1st 40% 15,200
- Cash (b/f) 3,000
- Share exchange 9,000
27,200
FV of NCI 11,400
38,600
Less: FV of NA 35,741+600 (36,341)
Goodwill 2,259
2020/12 Q1a Sugar (30 June 20X8)

Cash paid to acquire Flour Co will be included within the investing

activities of the consolidated statement of cash flows. However, the
cash held by Flour Co will now be consolidated so a net outflow
arises of $1,766,000 ($3m – $1·234m).
60% - 70%

• Transaction within group accounts, NCI drop 10%;

• Goodwill remains the same;
• Difference between consideration paid and FV of NCI disposed
should be recognised in OCE and attributed to owners of parent.
2011/12 Traveler (30/11/2011)
On 1 December 2010, Traveler acquired 60% of the equity interests of
Data, a public limited company. The purchase consideration comprised
cash of $600 million. At acquisition, the fair value of the non-controlling
interest in Data was $395 million. Traveler wishes to use the ‘full goodwill’
method. On 1 December 2010, the fair value of the identifiable net assets
acquired was $935 million and retained earnings of Data were $299 million
and other components of equity were $26 million. The excess in fair value
is due to non-depreciable land.

On 30 November 2011, Traveler acquired a further 20% interest in Data for

a cash consideration of $220 million.
2011/12 Traveler (30/11/2011)
2011/12 Traveler (30/11/2011)
30% - 10%

Sales proceeds 20% x

FV of the residual interest 10% x

Less:
CV of the Investment in Associate 30% (x)
Gain/(Loss) on disposal x
2017/6 Diamond (31/3/2017)

Diamond has owned a 25% equity interest in Heart for a number of

years. Heart had profits for the year ended 31 March 2017 of $20
million which can be assumed to have accrued evenly. Heart does not
have any other comprehensive income. On 30 September 2016,
Diamond sold a 10% equity interest for cash of $42 million. Diamond
was unsure of how to treat the disposal and so has deducted the
proceeds from the carrying amount of the investment at 1 April 2016
which was $110 million (calculated using the equity accounting
method).
2017/6 Diamond (31/3/2017)

The fair value of the remaining 15% shareholding was estimated to be

$65 million at 30 September 2016 and $67 million at 31 March 2017.
Diamond no longer exercises significant influence and has designated
the remaining shareholding as fair value through other comprehensive
income.
2017/6 Diamond (31/3/2017)
2018/9 Q1a ii&iii Banana (31/6/20X7)

Required:
(ii) why equity accounting was the appropriate treatment for
Strawberry in the consolidated financial statements up to the date of
its disposal showing the carrying amount of the investment in
Strawberry just prior to disposal; (4 marks)

(iii) how the gain or loss on disposal of Strawberry should have been
recorded in the consolidated financial statements and how the
investment in Strawberry should be accounted for after the part
disposal. (4 marks)
2018/9 Q1a ii&iii Banana (31/6/20X7)

The acquisition and subsequent disposal of Strawberry

Banana had purchased a 40% equity interest in Strawberry for $18
million a number of years ago when the fair value of the identifiable
net assets was $44 million. Since acquisition, Banana had the right to
appoint one of the five directors on the board of Strawberry. The
investment has always been equity accounted for in the consolidated
financial statements of Banana. Banana disposed of 75% of its 40%
investment on 1 October 20X6 for $19 million when the fair values of
the identifiable net assets of Strawberry were $50 million. At that date,
Banana lost its right to appoint one director to the board.
2018/9 Q1a ii&iii Banana (31/6/20X7)

The fair value of the remaining 10% equity interest was $4·5 million
at disposal but only $4 million at 30 June 20X7. Banana has recorded
a loss in reserves of $14 million calculated as the difference between
the price paid of $18 million and the fair value of $4 million at the
reporting date. Banana has stated that they have no intention to sell
their remaining shares in Strawberry and wish to classify the
remaining 10% interest as fair value through other comprehensive
income in accordance with IFRS 9 Financial Instruments.
2018/9 Q1a ii&iii Banana (31/6/20X7)

Suggested answer:
(ii) If an entity holds 20% or more of the voting power of the investee,
it is presumed that the entity has significant influence unless it can be
clearly demonstrated that this is not the case. The existence of
significant influence by an entity is usually evidenced by
representation on the board of directors or participation in key policy
making processes.
2018/9 Q1a ii&iii Banana (31/6/20X7)

Banana has 40% of the equity of Strawberry and can appoint one
director to the board. It would appear that Banana has significant
influence. Strawberry should be classified as an associate and be
equity accounted for within the consolidated financial statements.

The equity method is a method of accounting whereby the investment

is initially recognised at cost and adjusted thereafter for the post-
acquisition change in the investor’s share of the investee’s net assets.
At 1/10/20X7, Investment in Associate (Strawberry) should have been
measured at 20·4 million (18 + 40%*(50 – 44)).
2018/9 Q1a ii&iii Banana (31/6/20X7)

(iii) On disposal of 75% of the 40% shares, Banana no longer

exercises significant influence over Strawberry and a profit on
disposal should have been calculated as followed:

Sales proceeds 75% 19

FV of the residual interest 25% 4.5
Less: CV of the Investment in Associate (see a ii) -20.4
Gain on disposal 3.1
2018/9 Q1a ii&iii Banana (31/6/20X7)

Banana is incorrect to have recorded a loss in reserves of $14 million

and this should be reversed. Instead, a gain of $3·1 million should
have been included within the CSOPL.

Banana does not intend to sell their remaining interest and providing
that they make an irrecoverable election, they can treat the remaining
interest at FVTOCI. The investment will be restated to $4 million at
the reporting date with a corresponding loss of $0·5 million reported
in OCI.
60% - 10% and 60% - 30%

Fair value of consideration received 50% x

Fair value of the residual interest 10% x

NCI at date control lost 40% x
Less:
Net assets at date control lost 100% (x)
Goodwill at date control lost 100% (x)
Gain/(Loss) on disposal x
2014/6 Marchant (30/4/2014)

Marchant acquired 60% of the equity interests of Option, a public

limited company, on 30 April 2012. The purchase consideration was
cash of $70 million. Option’s identifiable net assets were fair valued at
$86 million and the NCI had a fair value of $28 million at that date.
On 1 November 2013, Marchant disposed of a 40% equity interest in
Option for a consideration of $50 million. Option’s identifiable net
assets were $90 million and the value of the NCI was $34 million at
the date of disposal. The remaining equity interest was fair valued at
$40 million. After the disposal, Marchant exerts significant influence.
2014/6 Marchant (30/4/2014)

Any increase in net assets since acquisition has been reported in profit
or loss and the carrying value of the investment in Option had not
changed since acquisition. Goodwill had been impairment tested and
no impairment was required. No entries had been made in the
financial statements of Marchant for this transaction other than for
cash received.
2014/6 Marchant (30/4/2014)
Specimen2 Q1a ii Hill (30/9/20X6)

Required:
(ii) Discuss, with suitable calculations, how the investment in Doyle
should be dealt with in the consolidated financial statements for the
year ended 30 September 20X6. (7 marks)
Specimen2 Q1a ii Hill (30/9/20X6)

Disposal of 20% holding in Doyle

On 1 October 20X4, Hill purchased 60% of the ordinary shares of
Doyle. At this date, the fair value of Doyle’s identifiable net assets
was $510 million. The non-controlling interest at acquisition was
measured at its fair value of $215 million. Goodwill arising on the
acquisition of Doyle was $50 million and had not been impaired
prior to the disposal date.
Specimen2 Q1a ii Hill (30/9/20X6)

On 1 April 20X6, Hill disposed of a 20% holding in the shares of

Doyle for cash consideration of $140 million. At this date, the net
assets of Doyle, excluding goodwill, were carried in the consolidated
financial statements at $590 million.

From 1 April 20X6, Hill has the ability to appoint two of the six
members of Doyle’s board of directors. The fair value of Hill’s 40%
shareholding was $300 million at that date.
Specimen2 Q1a ii Hill (30/9/20X6)

Suggested answer:
The share sale results in Hill losing control over Doyle. The
goodwill, net assets and NCI of Doyle must be derecognized from
the consolidated statement of financial position. The difference
between the proceeds from the disposal (including the fair value of
the shares retained) and these amounts will give rise to a $47 million
profit on disposal. This is calculated as follows:
Specimen2 Q1a ii Hill (30/9/20X6)

Fair value of consideration received 20% 140

Fair value of the residual interest 40% 300

NCI at date control lost 40% 215+40%*(590-510) 247
Less:
Net assets at date control lost 100% (590)
Goodwill at date control lost 100% (50)
Gain on disposal 47
Specimen2 Q1a ii Hill (30/9/20X6)

After the share sale, Hill owns 40% of Doyle’s shares and has the
ability to appoint two of the six members of Doyle’s board of
directors. IAS 28 states that an associate is an entity over which an
investor has significant influence. Significant influence is presumed
when the investor has a shareholding of between 20 and 50%.
Representation on the board of directors provides further evidence
that significant influence exists.
Specimen2 Q1a ii Hill (30/9/20X6)

Therefore, the remaining 40% shareholding in Doyle should be

accounted for as an associate. It will be initially recognised at its fair
value of $300 million and accounted for using the equity method.
This means that the group recognises its share of the associate’s
profit after tax, which equates to $24·6 million ($123*6/12 x 40%).
As at the reporting date, the associate will be carried at $324·6
million ($300+$24·6) in the consolidated statement of financial
position.
70% - 60%

• Transaction within group accounts, NCI increase 10%;

• Goodwill remains the same;
• Difference between consideration received and FV of NCI
increased should be recognised in OCE and attributed to owners
of parent.
2014/6 Marchant (30/4/2014)
On 1 May 2012, Marchant acquired 60% of the equity interests of Nathan,
a public limited company. The purchase consideration comprised cash of
$80 million and the fair value of the identifiable net assets acquired was
$110 million at that date. The fair value of the non-controlling interest
(NCI) in Nathan was $45 million on 1 May 2012. Marchant wishes to use
the ‘full goodwill’ method for all acquisitions. The share capital and
retained earnings of Nathan were $25 million and $65 million respectively
and other components of equity were $6 million at the date of acquisition.
The excess of the fair value of the identifiable net assets at acquisition is
due to non-depreciable land.
2014/6 Marchant (30/4/2014)

Goodwill has been impairment tested annually and as at 30 April 2013

had reduced in value by 20%. However at 30 April 2014, the
impairment of goodwill had reversed and goodwill was valued at $2
million above its original value. This upward change in value has
already been included in above draft financial statements of Marchant
prior to the preparation of the group accounts.
2014/6 Marchant (30/4/2014)

Marchant disposed of an 8% equity interest in Nathan on 30 April

2014 for a cash consideration of $18 million and had accounted for the
gain or loss in other income. The carrying value of the net assets of
Nathan at 30 April 2014 was $120 million before any adjustments on
consolidation. Marchant accounts for investments in subsidiaries using
IFRS 9 Financial Instruments and has made an election to show gains
and losses in other comprehensive income. The carrying value of the
investment in Nathan was $90 million at 30 April 2013 and $95
million at 30 April 2014 before the disposal of the equity interest.
2014/6 Marchant (30/4/2014)
2014/6 Marchant (30/4/2014)
Thank You
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