32-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter 32 Further consolidation issues IV: Accounting for changes in degree of ownership of a subsidiary

32-2 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Learning objectives Understand how to account for incremental investments in a subsidiary Understand how to account for the disposal of a subsidiary from the perspective of both the parent entity and from the perspective of the economic entity

32-3 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Increase in the ownership interest held in a subsidiary It is common for a parent entity to acquire additional shares in a subsidiary over time According to par. 58 of AASB 3 Business Combinations A business combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases. If so, each exchange transaction shall be treated separately by the acquirer, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of any goodwill associated with that transaction. This results in a step-by-step comparison of the cost of the individual investments with the acquirer’s interest in the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities at each step.

32-4 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Increase in ownership interest (cont) Hence, AASB 3 requires –Each individual investment in the subsidiary is accounted for separately, meaning that we will have multiple consolidation elimination entries. –Once control of the subsidiary is established, the consolidation worksheet entries will eliminate the various investments in the subsidiary against the parent entity’s respective share of the subsidiary’s net identifiable assets as at the respective investment dates (at fair value). This will include investments made prior to gaining control of the subsidiary. –Because eliminations of each investment are made as at the various investment dates we need to restate the subsidiary’s assets to fair value as at each exchange date. This means that we might have numerous entries to revalue the net assets to fair value. Refer to Worked Example 32.2

32-5 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Increase in ownership interest (cont) For each investment elimination we will calculate a separate amount of goodwill. This means that the total goodwill acquired for a subsidiary could be the sum of a number of individual transaction calculations as reflected in a number of investment elimination entries. As with all consolidations, dividends paid or declared by a subsidiary are to be treated as coming from either post- investment or pre-investment reserves. The general principle applies that if the dividends are paid out of profits earned since investment date they are treated as post-investment dividends. If dividends are paid out of pre-investment profits the payment will act to reduce the amount of the investment as recorded in the accounts of the parent entity. Where there have been multiple investments in a subsidiary any dividend received by the parent entity could be deemed to be partly out of pre-investment profits and partly from post- acquisition profits, depending upon the dates of the various investments

32-6 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Increase in the ownership interest held in a subsidiary (cont.) Journal entries To revalue non-current assets to fair value DrProperty, plant and equip. Cr Revaluation reserve To eliminate investment in subsidiary and recognise goodwill (each acquisition to be accounted for separately) DrShare capital DrRetained earnings DrRevaluation reserve DrGoodwill Cr Investment in subsidiary

32-7 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Increase in the ownership interest held in a subsidiary (cont.) Journal entries (cont.) To recognise impairment – if any - of goodwill (separately for each acquisition) DrImpairment loss—goodwill Cr Accumulated impairment losses— goodwill

32-8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Increase in the ownership interest held in a subsidiary (cont.) To eliminate dividends proposed by subsidiary DrDividend payable (balance sheet) Cr Dividend proposed (statement of changes in equity) Dr Dividend income (income statement) Cr Dividend receivable (balance sheet)

32-9 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Sale of shares in a subsidiary When a parent entity sells shares in a subsidiary –profit or loss in its own individual accounts will be different from the profit or loss required to be shown in consolidated accounts AASB 127 requires that in the separate financial statements of the parent entity, investments in subsidiaries etc. are to be measured at either –cost; or –in accordance with AASB 139, i.e. at fair value

32-10 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Sale of shares in a subsidiary (cont.) From the parent’s perspective, profit or loss on sale of shares is the difference between –carrying value of shares; and –fair value of sales proceeds Carrying value –is the amount shown in the financial statements for a particular asset or liability From group’s perspective: –consideration to be given to economic entity’s share of post-acquisition profits and reserve movements before determining profit or loss on sale of shares

32-11 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Calculating profit on sale of subsidiary Cost of investment in subsidiary$XXX plus: Parent’s share of post-acquisition movement in retained earnings $XXX Parent’s share of post-acquisition movement in other reserves $XXX less: Accumulated goodwill impairment losses attributable to the purchased goodwill and recognised up until the date of disposal($XXX) $XXX less: Proceeds from the sale of the investment in the subsidiary$XXX Loss (gain) to the economic entity resulting from the disposal of the subsidiary$XXX

32-12 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Revenues and expenses of sold subsidiary Where a parent sells its interest in a subsidiary it is a requirement that any profit or loss generated by the subsidiary is to be recorded in the consolidated financial statements for the period of the year during which the parent entity had control of the subsidiary. As paragraph 30 of AASB 127 states The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date as defined in AASB 3. The income and expenses of a subsidiary are included in the consolidated financial statements until the date on which the parent ceases to control the subsidiary.

32-13 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Consolidation adjustments As we know, in the consolidated financial statements the consolidated retained earnings will include the parent entity’s retained earnings plus its share of the subsidiaries’ post- acquisition movements in retained earnings. In the period following the sale of a subsidiary the opening balance of retained earnings will be required to be equal to the closing balance as shown in the preceding period. To do this, and in the case of a prior period sale of a subsidiary, it will be necessary to make a consolidation adjusting journal entry that includes the parent’s share of the post-acquisition movements in retained earnings of the former subsidiary. Similarly, consolidation adjusting journal entries will be needed so that that the consolidated financial reports include the parent’s share of the post-acquisition movements in other reserves of the sold subsidiary.

32-14 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Recognition of minority interests The consolidated financial statements are to include all of the revenues and expenses of the subsidiary (subject to adjustments for intragroup transactions) for the period that the parent controlled the subsidiary. Because we are including all of the revenues and expenses of the sold subsidiary for the period during which the parent entity had control, we will also be required to separately disclose the minority interests in the consolidated profit after tax. The assets, liabilities and equity accounts of a sold subsidiary will not be shown in the consolidated financial statements Consider Worked Examples 32.4 and 32. 5

32-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Sale of shares in a subsidiary (cont.) Journal entries To record sale of shares in parent’s own journal DrCash CrInvestment in X Ltd CrProfit on sale of investment

32-16 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Sale of shares in a subsidiary (cont.) Consolidation adjusting journal entries DrProfit on sale of investment Dr Loss on sale of subsidiary Cr Profit after tax Cr Retained earnings Cr Revaluation reserve Balance in revaluation reserve can be transferred to retained profits DrRevaluation reserve Cr Retained earnings

32-17 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Summary To account for the acquisition of additional ownership interests in an entity, it is necessary, on consolidation, to eliminate each investment acquisition separately. While control might not be established until some time after the initial investments in a subsidiary, the step-by-step approach requires that the parent entity recognise its share in post- acquisition profits and changes in reserves in respect of each investment that ultimately culminates in control being established. So, for multi-stage acquisitions, we recognise the parent entity’s share of changes in retained earnings and other reserves as they relate to each investment, and not only from that point in time at which an investment is made that ultimately confers control. In relation to the sale of shares held in a subsidiary, the profit or loss recorded for the sale of the subsidiary in the separate accounts of the parent entity will be different from the profit or loss shown in the consolidated accounts.

32-18 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Summary (cont.) From the parent entity’s perspective, the gain or loss on the sale of a subsidiary will be the difference between the proceeds of the sale (measured at fair value), and the carrying amount of the investment (which could be measured at cost). From the economic entity’s perspective, the calculation of profit on sale must consider the economic entity’s share of the subsidiary’s post-acquisition profits and reserve movements. The economic entity’s profit or loss on sale of a subsidiary will be calculated as the difference between the sale proceeds and: –the total of the cost of the investment, –plus the economic entity’s share of the post-acquisition movements in retained earnings/losses and other reserves, –less the sum of the accumulated goodwill impairment