Consolidated financial statements Prepared by: Michael Wells Date: June 13-17, 2016 Addis Ababa

Aims Understand the concepts underlying the accounting for business combinations and presenting consolidated financial statements Understand the requirements and the judgements in accounting for business combinations and for presenting consolidated and separate financial statements in accordance with IFRS and the IFRS for SMEs

Control: understanding the economics

Economics Underlying concepts: element definitions Asset (see Conceptual Framework ¶4.4(a)) resource controlled by the entity… expected inflow of economic benefits Liability (¶4.4(b)) present obligation… expected outflow of economic benefits Equity (¶4.4(c)) assets – liabilities Income (¶4.25(a)) recognised increase in asset/decrease in liability in current reporting period that result in increased equity except… Expense (¶4.25(b)) recognised decrease in asset/increase in liability in current period that result in decreased equity except…

Economics example 1: control of a resource? Entity A owns 80% of the voting interest in Entity B. In the absence of evidence to the contrary does Entity A likely control Entity B’s economic resources (for example, its manufacturing plant)? Choose one of: Yes; or No.

Economics example 2: control of a resource? Entity A owns 30% of the voting interest in Entity B. In the absence of evidence to the contrary does Entity A likely control Entity B’s economic resources (for example, its manufacturing plant)? Choose one of: 1) Yes; or 2) No. If no, what is the resource that Entity A controls? Choose one of: 1) the investment in Entity B; 2) there is no resource under Entity A’s control; or 3) another resource (specify…).

Economics example 3: control of a resource? Entity A owns 60% of the voting interest in Entity B. Entity B owns 60% of the voting interest in Entity C. In the absence of evidence to the contrary does Entity A likely control Entity C’s economic resources? Choose one of: Yes, A directs 60% of the voting power in C through its control of B. No, A cannot direct C because it directs only 36% of the voting power in C (ie 60% × 60% = 36%).

The economics NCI: what do you think? Which element is NCI in the statement of financial position? Choose 1 of: Asset Liability Equity

Economics example: decrease interest in a subsidiary Entity B is Entity A’s only subsidiary. At 31/12/20x1, NCI is CU100 claim against the group in its statement of financial position. On 01/01/20x2 Entity A decreases its equity interest in Entity B from 80% to 60% in exchange for CU1,000 cash. From the group’s perspective does any income result from the transaction on 01/01/20x2? Choose one of: Yes, CU900 income: the group’s asset (cash) increase by CU1,000 of which only CU100 is attributable to its NCI; or No, nil income: the CU1,000 increase in the group’s asset (cash) is all directly attributable to the corresponding increase in equity (NCI by CU100 and equity attributable to A by CU900).

Degrees of influence

Degree of influence over ‘investees’ 11 o of influence Definitions Control IFRS 10: An investor controls an investee when the investor: has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to affect those returns through its power over the investee. IFRS for SMEs: control is the ability to direct the financial and operating policies of the investee. Joint control IFRS for SMEs: joint control is the contractually agreed sharing of control. Significant influence IFRS and the IFRS for SMEs: significant influence is the ability to participate in the financial and operating policies of the investee.

Degree of influence over ‘investees’ IFRS financial statements 12 o of influence IFRS accounting IFRS 12 Control Account for assets (ie controlled resources) and claims against those assets (see IFRS 10 Consolidated Financial Statements) using IFRSs Exception for investment entities: account for investment ‘assets’ (rather than the underlying controlled resources) using the fair value model ✔ Joint control (joint arrangements) Joint operation: account for assets (the controlled resources) and liabilities (the present obligations) (see IFRS 11 Joint Arrangements) using IFRSs Joint venture: account for investment asset (the controlled resource) using the equity method in accordance with IAS 28 Significant influence Account for investment asset (the controlled resource) using the equity method in accordance with IAS 28 Less than significant Account for investment asset (the controlled resource) using the fair value model in accordance with IFRS 9 ✘

Degree of influence over ‘investees’ IFRS for SME financial statements 13 o of influence IFRS for SMEs accounting Control Account for assets (ie controlled resources) and claims against those assets (see Section 9 Consolidated and Separate Financial Statements) using applicable Sections of the IFRS for SMEs Joint control (joint arrangements) Joint assets and jointly controlled operations: account for own assets and share of joint assets (the controlled resources) and liabilities and share of joint liabilities (the present obligations) (see Section 15 Investments in Joint Ventures) using applicable Sections of the IFRS for SMEs Jointly controlled entities (see Section 15 Investments in Joint Ventures) and Associates (see Section 14 Investments in Associates) account for investment asset (the controlled resource?) using: (i) the cost model; (ii) the fair value model; (iii) or the equity method as described in Section 14 Investments in Associates Significant influence Less than significant Account for investment asset (the controlled resource) using the fair value model or, ONLY if fair value cannot be measured reliably, using the cost model (see paragraph 11.4)

Separate financial statements IFRS and IFRS for SMEs 15 Degree of influence Accounting for ‘investment’ asset Control (subsidiaries) Choose from any of: cost; equity method; or fair value. Can make different choice for each of subsidiaries, joint ventures and associates Joint control (joint arrangements: joint operations and joint ventures) Significant influence (associates) Less than significant influence Same as in its consolidated financial statements Are separate financial statements consistent with the concepts in the IASB Conceptual Framework?

Does consolidation reflect economics? 16 You own a company (A). You could expand A’s business by contracting A to buy either: the shares of a competitor company (say B); or B’s business (assets, operations etc) In both alternatives, after the purchase, all of A’s and all of B’s assets are controlled by you. In other words, in both scenarios, A’s and B’s assets are available to meet claims against legal company A. Consequently, in general purpose financial statements A and B together are viewed as a single economic entity. © Michael JC Wells

Consolidated financial statements 17 To expand its market share, company A buys 75% of company B. after the purchase, all of A’s and all of B’s assets are available to meet claims against legal company A. Consequently, in general purpose financial statements A and B together are viewed as a single economic entity. the owners of the remaining 25% of B are called the non-controlling interest (NCI) in the (combined) reporting entity’s general purpose financial statements—ie when A and B are viewed as a single economic entity the NCI is equity because the group does not have a present obligation to repay the NCI. © Michael JC Wells

Assessing control

Assessing control IFRS 19 Power Exposure Link purpose and design exposure (or rights) to variable returns of the investee ability to use power over the investee to affect its own returns relevant activities decision making rights

Assessing control power: what do you think? 20 For each unrelated example below choose 1 of: ‘your’ company (A) controls Z; or A does not control Z. Example 1: A holds 48% of the voting rights of Z. The remaining voting rights held by thousands, with less than 1% each. Example 2: A holds 45% of the voting rights of Z. Two other investors each hold 26% of the voting right Remaining voting rights are held by three other shareholders (each with 1%) No other arrangements that affect decision-making © Michael JC Wells

Assessing control power: what do you think? 21 For each unrelated example below choose 1 of: ‘your’ company (A) controls Z; or A does not control Z. Example 3: A holds 40% of the voting rights of Z and 12 other investors each hold 5% of the voting right of Z. Shareholder agreement: A has the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities of Z two-third majority vote of the shareholders is required to change the agreement © Michael JC Wells

Assessing control power over relevant activities: what do you think? 22 For each unrelated example below choose 1 of: ‘your’ company (A) controls Z; or A does not control Z. Example 4: Two investors (A and B) form an investee (Z) to develop and market a medical product Investor A will develop and obtain the patent Investor B will manufacture and market the product Obtaining a patent for the product requires significant uncertainty and effort Patent results in 10 years exclusivity The 10-year exclusivity corresponds to 95% of the fair value of the patent © Michael JC Wells

Assessing control structured entities: judgement 23 Determining control requires an assessment of all relevant facts and circumstances, including: purpose and design of the investee; activities of the investee; how decisions about those activities are made; and rights held by the party involved with the investee. Particularly challenging for some structured entities: relevant activities in those entities are not usually directed by voting or similar rights; benefits or returns expected from such investments can be more difficult to assess © Michael JC Wells

Business combinations

Business combinations definitions 25 A business combination is a transaction or other event in which one entity (the acquirer) obtains control of one or more businesses (the acquiree/s). A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors… Why do these definitions matter? © Michael JC Wells

Business combinations can you identify the acquirer in each of the examples below? 26 In the absence of evidence to the contrary: Example 1: Companies A and B combine businesses by forming C. C issues 30 million and 20 million shares to A’s & B’s shareholders in exchange for A’s and B’s businesses. Example 2: same as Example 1, except: 20 million shares are issued to each of A’s & B’s shareholders. C had 9 board members, 5 appointed by A’s shareholders and 4 by B’s. Example 3: on 31 December 2014 A has 100 million shares in issue. On 1 January 2015 A issued 200 million new A shares to the owners of B in exchange for all of B’s shares. © Michael JC Wells

Business combinations costs directly attributable to a business combination 27 Examples of costs directly attributable to a business combination include: directly attributable advisory, legal, accounting, valuation and other professional or consulting fees. IFRS 3: recognise as an expense when incurred IFRS for SMEs: recognise in measurement of (ie ‘capitalised’ to) assets acquired in the business combination. Which (IFRS or the IFRS for SMEs) is more consistent with the Conceptual Framework? Why are they different? © Michael JC Wells

Business combinations contingent consideration in a business combination 28 IFRS 3: include fair value of contingent consideration in cost of the business combination. subsequent changes recognised in profit or loss of the period of change. IFRS for SMEs: if probable and can be measured reliably include contingent consideration in cost of the business combination at the acquisition date. Otherwise, exclude from cost of business combination. subsequent changes adjust to cost of the business combination (consequently usually adjusted to goodwill asset). Which (IFRS or the IFRS for SMEs) is more consistent with the Conceptual Framework? Why are they different? © Michael JC Wells

Business combinations economics of goodwill 29 Are the ‘economics’ of goodwill one or more, if any, of the following? The excess of net assets fair values over the carrying amounts. The fair value of unrecognised net assets. The fair value of the going concern element of an existing business (ie the synergies of the net assets, market imperfections, including the ability to earn monopoly profits and barriers to market entry—either legal or because of transaction costs—by potential competitors). The fair value of the expected synergies and other benefits from combining net assets and businesses. When purchasing a business, the overvaluation of the consideration paid by the acquirer stemming from errors in valuing the consideration tendered. When purchasing a business, the overpayment or underpayment by the acquirer. © Michael JC Wells

Economics example: economics of goodwill Entity A pays $78,000 to acquire 75% of the voting interest in Entity B when the fair value of Entity B’s identifiable assets less the fair value of Entity B’s liabilities and contingent liabilities is $100,000. Is the goodwill in the business combination an asset of the group? Choose one of: 1) Yes; or 2) No. (see paragraphs BC313–BC323 of the Basis for Conclusions of IFRS 3) If yes, what is the economic value of the goodwill to the group? Choose one of: 1) $3,000; 2) $4,000; 3) $3,000 or $4,000 (at the entity’s discretion); or 4) somewhere between $3,000 (if all synergies are attributable to Entity A’s CGUs) and $4,000 (if all synergies are attributable to Entity B’s CGUs).

Business combinations economics of goodwill 31 Is goodwill a wasting asset? IFRS for SMEs: amortise goodwill IFRS: do not amortise goodwill (see paragraph BC131E of the Basis for Conclusions of IAS 36) Why does IFRS require recognised goodwill be carried at its historical cost, periodically tested for impairment? (see paragraphs BC131A–BC131G of the Basis for Conclusions of IAS 36) © Michael JC Wells

Business combinations goodwill: relevant information and judgements 32 What information about an entity’s goodwill is relevant (capable of making a difference) to resource allocation decisions by the primary users—existing and potential investors, lenders and other creditors that cannot require the reporting entity to provide information directly to them—and that can be faithfully represented? What judgements and estimates are made in testing goodwill for impairment in accordance with IAS 36 Impairment of Assets? (see paragraphs BC132–BC159 of the Basis for Conclusions of IAS 36) What judgements and estimates are made when amortising goodwill in accordance with the IFRS for SMEs? © Michael JC Wells

Business combinations non-controlling interest (NCI) 33 IFRS 3: allows an accounting policy choice for measuring non- controlling interest (NCI) at the acquisition date: fair value; or NCI’s proportion of the group values of the subsidiary’s net assets. IFRS for SMEs: NCI = NCI’s proportion of the group values of the subsidiary’s net assets. Which (IFRS or the IFRS for SMEs) is more consistent with the Conceptual Framework? Why are they different? © Michael JC Wells

Business combinations test your understanding: goodwill and non-controlling interest 34 On 1 January 2015 P buys 75% of S for $78,000 cash when: fair value of S’s identifiable assets = $130,000 fair value of S’s liabilities = $20,000 fair value of S’s contingent liabilities = $10,000 On 1 January 2015 how much goodwill and NCI is recognised? Choose 1 of: Goodwill $3,000 and NCI $25,000 (when IFRS for SMEs and when IFRS 3 and all goodwill is attributable to P’s CGUs) Goodwill $4,000 and NCI $26,000 (when IFRS 3 and NCI is at fair value + all goodwill is attributable to S’s CGUs) Goodwill $3,800 and NCI $25,800 (when IFRS 3 and NCI is at fair value + the $3,000 goodwill purchased by P is attributable as follows: $2,400 to S’s CGU and $600 to P’s CGU) All of 1) to 3) above.

Consolidated financial statements

Consolidated financial statements why? 36 Provide information about economic entity investors need information about all assets and liabilities of a combined entity Definition of asset based on control with control, entity can dictate use or settlement control through an entity is indirect control Do not want legal form to dictate financial reporting (substance over form) © Michael JC Wells

Consolidated financial statements the principle 37 Consolidated financial statements present financial information about the group (the parent and all its subsidiaries) as a single economic entity. In other words, Group (the parent and all its subsidiaries) = one economic entity. subsidiary = entity that is controlled by another entity (known as the parent) © Michael JC Wells

Consolidated financial statements the principle 38 The consolidation principle—Group (the parent and its subsidiaries) = one economic entity In other words, consolidated financial statements present the group’s (the parent’s and its subsidiaries’) assets, liabilities, equity, income, expenses and cash flow as those of a single economic entity. Various methods are used to prepare consolidated financial statements (the single outcome). Understanding the principle is essential to preparing/auditing/regulating/analysing consolidated financial statements. © Michael JC Wells

01/01/2015 Group reasons (ignoring taxation effects) A B $ Carrying amount Fair value Share capital 500 B’s $100 arose before joining group 100 Retained earnings B’s $600 arose before joining group 600 Equity 1,000 700 Machine 800 Cost to the group = fair value when B joined the group Investment in B – Group has machine asset not investment Goodwill 200 Paid $1,000 – $800 identifiable net assets acquired Assets On 01/01/20X1 entity A acquires 100% of entity B. Share capital Machine

Consolidated financial statements giving effect to the principle: proforma consolidating entries 40 The consolidation can also be achieved with the following proforma journal entry at acquisition to eliminate A’s investment in B; recognise goodwill; and eliminate B’s share capital and reserves accumulated before it became part of the group. Debit Credit Asset: property, plant and equipment 100 Equity: B’s at-acquisition share capital and reserves 700 Asset: goodwill (asset) 200 Asset: A’s investment in B 1 000 © Michael JC Wells

Consolidated financial statements additional information for the year ended 31 December 2015 41 At 1 January 2015 the machine’s group carrying amount is $100 > B’s carrying amount a remaining useful life of 5 years nil residual value Consequently, for 2015 group depreciation is $20 greater than B’s In 2015 A purchased inventory for $100 and immediately sold it to B for $150 B sold inventory it purchased from A for $90 to parties outside the Group for $120 (note: B is yet to sell the remaining inventory it purchased from A for $60) Consequently, at 31 December 2015 unrealised profit = $20 $60 carrying amount of such inventory in B’s books less $40 group carrying amount and group profit for 2015 is $20 lower

$ Carrying amount Group CA Share capital 500 100 Opening RE 600 31 December 2015 Group reasons (ignoring taxation effects) A B $ Carrying amount Group CA Share capital 500 B’s $100 arose before joining group 100 Opening RE B’s $600 arose before joining group 600 Profit for 2015 110 Group perspective: $20 less profit from selling inventory; $20 more depreciation 50 Equity 1,110 1,050 800 Machine 640 $800 cost to the group – $160 group’s depreciation for 20x1 (or $560 + $80 adjust) 560 Invest in B – Group has machine + cash (not invest) 1,000 Inventory 180 Cost to group = $40 (what A paid); Cost to B = $60 (what B paid A). (or $200 - $20 adjust) 200 Cash 90 40 Goodwill $1,000 – $800 identifiable assets acquired (if using IFRS for SMEs would amortise goodwill) Assets Share capital Machine

Consolidated financial statements proforma consolidating entries: depreciation and intragroup inventory 43 The consolidation outcome can also be achieved with the following proforma journal entries: (i) to increase depreciation to group values (remaining estimated useful life = 5 years); and (ii) to eliminate the unrealised intragroup profit in inventory. Debit Credit Income: profit or loss 40 Asset: property, plant and equipment 20 Asset: inventory © Michael JC Wells

Consolidated financial statements IFRS for SMEs proforma consolidating entries amortising goodwill 44 Only if applying the IFRS for SMEs, a further proforma journal entry would be necessary to amortise goodwill (assumed useful life = 10 years): Debit Credit Expense: profit or loss (amortised goodwill) 20 Asset: goodwill © Michael JC Wells

Consolidated financial statements non-controlling interest 45 The non-controlling interests’ (NCI) claim against the group’s assets is measured at: the amount of the NCI recognised in accounting for the business combination at the acquisition date; plus the NCI’s share of post-acquisition recognised changes in the group carrying amount of the subsidiary’s assets and liabilities. © Michael JC Wells

Consolidated financial statements example: with non-controlling interest 46 On 1 January 2015 Entity A acquires 75% of Entity B for $1,000 when B’s share capital and reserves = $700 (net fair value of B’s assets and liabilities = $800). Difference in carrying amount and fair value is a machine with 5 years remaining useful life and nil residual value. All goodwill is attributable to A’s CGU. B’s profit for the year ended 31 December 2015 = $400. Ignore taxation effects. © Michael JC Wells

Consolidated financial statements example with non-controlling interest 47 Debit Credit Asset: property, plant and equipment 100 Equity: B’s at-acquisition share capital and reserves 700 Asset: goodwill 400 Asset: A’s investment in B 1 000 Equity: non-controlling interest 200 © Michael JC Wells

Consolidated financial statements example with non-controlling interest 48 Debit Credit Expense: profit or loss (depreciation) 20 Asset: property, plant and equipment (accumulated depreciation) © Michael JC Wells

Consolidated financial statements example IFRS for SMEs with non-controlling interest 49 Only if applying the IFRS for SMEs would a further proforma journal entry be necessary to amortise goodwill (assumed useful life = 10 years). In this example all the goodwill is attributable to A’s CGU. Debit Credit Expense: profit or loss (amortised goodwill) 40 Asset: goodwill © Michael JC Wells

Consolidated financial statements example with non-controlling interest (NCI) Calculation of the allocation of profit for the year (2015) to the NCI Debit Credit NCI profit allocation 95 NCI (equity) B’s profit for 2015 400 Less depreciation adjustment (20) 380 25% attributable to NCI

Consolidated financial statements expanded example with downstream sale of inventories and NCI In 2015 A sold inventory that cost A $100 to B for $150. At 31 December 2015 B’s inventory included $60 inventory bought from A. B’s profit for the year ended 31 December 2015 = $400. Ignore taxation effects. © Michael JC Wells

Consolidated financial statements expanded example with downstream sale of inventory and NCI 52 Proforma consolidating entries to eliminate downstream intra-group sale of inventories and the unrealised profit in inventories: Debit Credit Income: profit or loss (revenue) 150 Expense: profit or loss (cost of goods sold) 20 Asset: inventories

Consolidated financial statements expanded example with downstream sale of inventory and NCI 53 Calculation of the allocation of profit for the year (2015) to the NCI Debit Credit NCI profit allocation 95 NCI (equity) B’s profit for 2015 400 Less depreciation adjustment (20) 380 25% attributable to NCI © Michael JC Wells

Consolidated financial statements further expanded example now with upstream (B to A) sale of inventory 54 Same proforma journal entries as in previous example except adjustment to NCI share of profit now also adjusted for unrealised profit in intragroup inventory: Debit Credit NCI profit allocation 90 NCI (equity) B’s profit for 2015 400 Less depreciation adjustment (20) Less inventory adjustment 360 25% attributable to NCI © Michael JC Wells

Consolidated financial statements some other consolidation issues 55 Uniform reporting date (unless impracticable) Uniform accounting policies Income and expenses of a subsidiary are included in consolidated financial statements from the acquisition date until the date on which the parent ceases to control its subsidiary Presentation currency © Michael JC Wells

Consolidated financial statements presentation currency 56 A Group can choose to present its consolidated financial statements in any presentation currency When a Group contains individual entities with different functional currencies income and expense and financial position of each ‘underlying’ entity are expressed in a common currency so that consolidated financial statements may be presented © Michael JC Wells

Consolidated financial statements translating into the presentation currency 57 To translate foreign operations into the presentation currency of the consolidated financial statements: translate assets and liabilities at the closing rate on reporting date; translate income and expenses at exchange rates at the dates of the transactions (can use average rate if difference is not material); and recognise resulting exchange differences in other comprehensive income (OCI) if partly owned subsidiary, allocate relevant part to the non-controlling interest (NCI) © Michael JC Wells

Consolidated financial statements disposal of subsidiary 58 IFRS: gain or loss on disposal of a subsidiary = proceeds from disposal of a subsidiary; less carrying amount of its net assets measured from the Group’s perspective at the date of disposal adjusted for recycling of cumulative exchange differences that relate to a foreign subsidiary recognised in equity (in accordance with IAS 21) IFRS for SMEs: gain or loss on disposal of a subsidiary = proceeds from disposal of subsidiary; less carrying amount of its net assets measured from the Group’s perspective at the date of disposal (without recycling cumulative exchange differences that relate to a foreign subsidiary recognised in equity in accordance with Section 30 Foreign Currency Translation) © Michael JC Wells

Consolidated financial statements lose control over subsidiary but retain interest (investment) in it 59 Entity ceases to be a subsidiary but investor still holds investment in former subsidiary, account for investment as: financial instrument; associate (if significant influence); or joint venture (if joint control) IFRS: remeasure remaining interest when control is lost and recognise gain or loss. IFRS for SMEs: no remeasurement of remaining interest— group carrying amount becomes cost on initial measurement of the financial asset. © Michael JC Wells

Consolidated financial statements test your understanding: acquisition of the NCI 60 Since its formation Z was owned 75% by A and 25% by B. When Z’s equity was $100,000, A acquires B’s 25% interest in Z at its fair value of $60,000. How would A present the acquisition of the shares in Z in its consolidated statement of changes in equity? Choose one of: $25,000 as a reduction in NCI? $60,000 as a reduction in NCI? $25,000 as a reduction in NCI and $35,000 as a reduction in equity attributable to the controlling shareholder (eg retained earnings). © Michael JC Wells

Consolidated financial statements test your understanding: sale of shares in subsidiary without loosing control 61 Since its formation Z was owned 75% by A and 25% by B. When Z’s equity is $100,000, A sells a 25% interest in Z at its fair value of $60,000 (A now owns 50% of Z but A still controls Z). How would A present the disposal of the shares in Z in its consolidated statement of changes in equity? Choose one of: $25,000 as an increase in NCI? $60,000 as an increase in NCI? $25,000 as an increase in NCI and $35,000 as an increase in equity attributable to the controlling shareholder (eg retained earnings). © Michael JC Wells

Consolidated financial statements test your understanding: sale of shares in subsidiary and control lost Since its formation Z was owned 75% by A and 25% by B. When Z’s equity is CU100,000, A sells a 25% interest in Z at its fair value of $60,000 (A now owns 50% and A loses control of Z). How would the group present the effects of this transaction in its consolidated profit or loss? Choose one of: $70,000 recognising gain on 50% of Z continuing to hold $35,000 gain on 25% of Z sold $105,000 income ($70,000 recognising gain on 50% of Z continuing to hold + $35,000 gain on 25% sold) $105,000 if using IFRS and $35,000 if using IFRS for SMEs (see paragraph 9.19 of the IFRS for SMEs) © Michael JC Wells

Treasury shares

Equity instrument treasury shares Equity instruments that an entity or group hold(s) in itself Treasury shares are deducted from equity Gain or loss on purchase/sale of treasury shares recognised directly in equity

Example 1: acquisition of treasury shares 65 Transaction: on 1 January 2016 it pays $1,500 million (fair value) to buy 20% of its issued ordinary shares in a deep and liquid market. Economics: Company A pays $1,500 million to extinguish former shareholders’ $1,500 million claim against its assets. Accounting: Debit: equity treasury shares $1,500 million (ie reduce equity by $1,500 million) Credit: asset cash $1,500 million (ie reduce asset cash by $1,500 million) © Michael JC Wells

Example 2 treasury shares Entity B is a 100% owned subsidiary of Entity A On 1 March 20x1, Entity B purchased 100 shares in Entity A at a price of $200 each On 30 June 20x1, Entity B still held the shares. The share price on that day was $225

Example 2 treasury shares continued Group journal entries Debit: consolidated equity 20,000 Credit: cash 20,000 To record the purchase of treasury shares on 1 March 20x1 Net effect: reduction in Group cash of $20,000 and reduction in group equity of $20,000

Example 2 treasury shares continued Journal entries: Entity B’s separate financial statements Debit: investment in shares 20,000 Credit: cash 20,000 To record the purchase of shares on 1 March 20x1 Debit: investment in shares 2,500 Credit: profit on shares 2,500 To record the change in the fair value of investment to 30 June 20x1 Net effect of reduction in cash $20,000, Increase in investments $22,500 and profit $2,500

Example 2 treasury shares continued Consolidating journal entries (only if starting point was separate financial statement information) Debit: consolidated equity 20,000 Credit: investment in shares 20,000 To eliminate the purchase of treasury shares on 1 March 20x1 Debit: profit on shares 2,500 Credit: investment in shares 2,500 To eliminate the recorded price increase to 30 June 20x1 Net effect, reduction in Group cash of $20,000 and reduction in group equity of $20,000

Separate financial statements

Separate financial statements IFRS and the IFRS for SMEs 71 Neither IFRS nor the IFRS for SMEs require presentation of separate financial statements. However, if an entity does present separate financial statements it must account for investments in subsidiaries, associates and relevant joint arrangements in separate financial statements using: cost less impairment; at fair value; the equity method; or can elect different policy from 1) to 3) above for each ‘investment’ category. © Michael JC Wells

Joint arrangements

Joint arrangements IFRS 11 Joint Arrangements Joint control exists where the parties, or a group of parties, have joint control of the arrangement. Two types of joint arrangements: Joint operations Parties that have rights to the assets and obligations for the liabilities relating to the arrangement are parties to a joint operation. A joint operator accounts for assets, liabilities and corresponding revenues and expenses arising from the arrangement. 2. Joint ventures Parties that have rights to the net assets of the arrangement are parties to a joint venture. A joint venturer accounts for an investment in the arrangement (the joint venture) using the equity method.

IFRS 12 Disclosure of Interests in Other Entities

Scope Combined disclosure Standard for: subsidiaries; joint arrangements; associates; and unconsolidated structured entities.

Disclosure objective To disclose information that helps users of financial statements evaluate: the nature of, and risks associated with, an entity’s interests in other entities; and the financial effects of those interests on the entity’s financial position, financial performance and cash flows.

Satisfying the disclosure objective Disclose significant judgements and assumptions made information about interests in: subsidiaries joint arrangements and associates unconsolidated structured entities any additional information that is necessary to meet the disclosure objective

For subsidiaries disclose… The composition of the group (including any changes) Involvement of NCI in the group’s activities (including profit or loss allocation and summarised financial information for subsidiaries with large NCI) The effect of significant or unusual restrictions on assets and liabilities The nature of, and changes in, the risks associated with structured entities

For unconsolidated structured entities disclose… Nature, extent and financial effects of interests. For example: nature, purpose, size, activities and financing for sponsors not providing other risk disclosures type of income earned the carrying amount of all assets transferred Nature of and changes in risks associated with interests carrying amount of the assets and liabilities recognised maximum exposure to loss and comparison to carrying amounts non-contractual support provided

For joint arrangements and associates disclose… Nature, extent and financial effects of interests eg: name and nature when individually-material summarised financial information for each individually-material JV and associate, and in total for all others fair value where individually material if quoted unrecognised share of losses of JVs and associates nature and extent of restrictions on transfer of funds Nature of and changes in risks associated with interests commitments and contingent liabilities