Group accounts

Key standards IFRS 3 Business Combinations IFRS 10 Consolidated Financial Statements IAS 27 Separate Financial Statements IAS 28 Investment in Associates IAS 31 Interest in Joint Venture IAS 21 The Effect of Changes in Foreign Exchange Rate

IASs and IFRSs Type of InvestmentKey ConceptAccounting Treatment IAS 27 Separate Financial Statements IFRS 10 Consolidated Financial Statements Subsidiary - ControlConsolidate Acquisition method IAS 31 Joint VentureJoint ControlProportion Equity Accounting IAS 28 Investment in Associates Associate Significant influence not control and joint control Equity Accounting

FV Adj inter-co G/W step acq NCI disposal group reserves Foreign Cash complex group currency flows Group A/C

Key workings (1)Group structure H H H H H S S S SS S A S JV SS

Complex group structure Vertical groups A 60% B 70% C A controls B and B controls C A owns 60% of B and B owns70% of C So A has an effective group interest in C of 60% × 70% = 42% NCI own 58% of C

Complex group structure Mixed groups H 60% 30% S T 30% H controls S and T (direct 30% + indirect 30%) H — S: 60% NCI=40% H — T: 30%+30%x60%=48% NCI = 52%

Goodwill Goodwill. Any excess of the cost of the acquisition over the acquirer's interest in the fair value of the identifiable assets and liabilities acquired as at the date of the exchange transaction. Bargain Purchase Purchase price less than the fair value of net assets acquired. Amount is recorded as a gain by the purchaser. Fair value. 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.

Key workings (1) Cost of investment Direct transaction cost ---- expensed to IS Issue cost---- deducted from proceeds Type of considerationHow to work out fair value CashAmount paid Financial instrumentsMarket value at DOA. Non-monetary assetsMarket value at DOA. Deferred cashPresent value and unwinding of discount Shares for sharesCompute market value at date of acquisition of subsidiary. Contingent considerationFV at DOA regardless of conditions are met

Key workings (2) FV of NA of Subsidiary and Associate

(3) Goodwill a. Partial Goodwill (Old method) Cost of investmentX Less: S% FV of NA at DOA (S%xaW2)(X) Goodwill on DOAX Less: impairment to date(X) Goodwill on DOCX b. Full Goodwill (new method) $ Cost of investment X Fair Value of NCI at DOA X FV of NA at DOA W2 (a) Goodwill on DOA X Less: impairment to date (X) Goodwill on DOC X

X Company acquires 100% of the equity of Y on 31 December 2008, three elements of the purchase consideration, an immediate payment of $5 million, and two further payments of $1 million if the return on capital employed (ROCE) exceed 10% in each of the subsequent financial years ending 31 December,2010 All indicators have suggested that the target will be met, X company uses a discount rate of 7% in any present value calculations. Calculate the value of the investment

Solution Cash 5m Contingent consideration -- for 09 1m / m -- for 10 1m / 1.07* m Total consideration at DOA 6.8m Dr cost of investment 6.8m Cr Cash 5m Cr payables 1.8m

(4) Non-controlling interest a. Old Method NCI% of FV of NA at DOC (NCI% x c W2) X b. New Method FV of net assets of S at DOC( (1 – S%) × c) X NCI share of Goodwill X NCI share of Impairment loss (X) X Total Non-controlling interest X NCI in income statement NCI% x (PAT – URP – Depr and other adj)

(5) Group reserves Calculated for RE and other components of equity separately

IAS 28 INVESTMENTS IN ASSOCIATES Associate: an entity in which an investor has significant influence but not control or joint control Accounting treatment Equity method: a method of accounting by which an equity investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the net assets of the associate (investee).

SIC 12 Special purpose entities （特殊目的主 体） This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity. SPEs are legally independent entities that are used to take on loans or liabilities of another entity. The purpose of SPE is to remove assets and liabilities from the B/S to improve ratios. SIC 12 states that an enterprise should consolidate an SPE if it controls that SPE.

SIC 12 SPE Controls: It benefits from the SPE ’ s activities such as providing long-term loan or essential goods/services It has decision making powers over the SPE It has rights to the majority of the SPE ’ s economic benefits It is exposed to the SPE ’ s losses.

Step Acquisition Control is achieved in two or more transactions (10%/30% → 80%) Equity transactions (between parent and NCI: 60% → 80%)

Control is achieved in two or more transactions Principles Business combination only occurs when control is established, so assume previously held interest is sold and required at FV at date of control is achieved

Control is achieved in two or more transactions Principles Gains or losses on deemed disposal → IS OCI – if from IAS 39 to S → recycle to IS -- if from IAS 28/31 to S → recycle to IS only on disposal

Equity transactions Principles Once the control is achieved, transactions whereby H acquires further equity interests from NCI are accounted for as equity transaction Adjust NCI to reflect changes

Equity transactions Principles Differences between FV of consideration paid and NCI adjusted are recognised in equity (other components of equity) No adjustment to GW and no G/L is recognised

Disposal Full disposal Partial disposal For individual account – parent Disposal proceeds X Cost of investment (X) G/L X/(X)

Disposal For group account Full disposal Disposal proceeds X CV of NA at date of disposal (X) G/W at date of disposal (X) G/L X/(X)

Disposal Partial disposal Loss of control (90% → 40%) Disposal of total interest and reacquire the residual interest at FV at the date of disposal Derecognise CV of NA and GW as a whole G/L will be taken to IS, and reclassify OCI to IS

Disposal Equity transaction (90% → 60%) Adjust NCI to reflect changes Differences between FV of consideration received and NCI adjusted are recognised in equity (other components of equity) No adjustment to GW and no G/L is recognised

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