1. FAC3704 GROUP FINANCIAL REPORTING

2. Mrs LA Jordaan Office: AJH van der Walt Building Office 2-56
E – Mail:
Tel No:

3. FAC3704 LECTURERS
Tel No:

4. VERTICAL GROUP QUESTION
AGENDA
Mrs Jordaan
OCTOBER 2016 EXAM
VERTICAL GROUP QUESTION
CHANGE IN CONTROL

5. 1. OCTOBER 2016 EXAM D Ltd JOINT VENTURE 40% A Ltd PARENT C Ltd
JOINT OPERATION
35%
B Ltd
SUBSIDIARY
80%
Part a:
Prepare the consolidated statement of profit and loss and OCI for the year ended 31 December 2016.

6. 1. OCTOBER 2016 EXAM C Ltd A Ltd JOINT OPERATION PARENT B Ltd
SUBSIDIARY
SUB ACQUIRED ON 1 SEPTEMBER 2016
Part a:
Prepare the consolidated statement of profit and loss and OCI for the year ended 31 December 2016.

7. 1. OCTOBER 2016 EXAM C Ltd A Ltd JOINT OPERATION PARENT B Ltd
SUBSIDIARY
SUB ACQUIRED ON 1 SEPTEMBER 2016
SFP: SNAP SHOT of all the assets and liabilities at year end
SPL: Subsidiary for only 4 months of the year.
Therefore include 100% of all the income and expenses of the subsidiary x 4/12 months.

8. Consolidated statement of profit or loss and OCI for year ended 31 December 2016
100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 –
31 DECEMBER 2016) + 35% JO – Intragroup tx’s
Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Gross profit
Share of profit from joint venture (profit of JV for the year x 40%)
Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Profit before tax
Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Profit for the year

9. INTRAGROUP TRANSACTION 1
Intragroup sale of inventory
Total sales for the year = R
40% of inventory in the records of P Ltd (R ) was purchased from S Ltd.
Mark up on selling price is 25%, therefore use 25/100
(if was on cost price, would have used 25/125)
Profit that S Ltd made: 40% x x 25/100 =
Important principle: For group purposes this sale never occurred! You cannot sell to “yourself”.
Which line items are affected in my consolidated AFS?
Dr Revenue
Cr Cost of sales
Dr Cost of sales
Cr Inventory
Subsidiary
Parent

10. INTRAGROUP TRANSACTION 1
Intragroup sale of inventory
TAX EFFECT?
Subsidiary
Parent
Cost of sales (debit)
Profit
Income tax
Dr Deferred tax
Cr Income tax
( x 28%)

11. Consolidated statement of profit or loss and OCI for year ended 31 December 2016
100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 –
31 DECEMBER 2016) + 35% JO – Intragroup tx’s
Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Gross profit
Share of profit from joint venture (profit of JV for the year x 40%)
Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Profit before tax
Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Profit for the year

12. INTRAGROUP TRANSACTION 2
Intragroup sale of PPE
Selling price = R
Mark up on cost price is 20%, therefore use 20/120
Profit that JV made:20/120 x =
Important principle: For group purposes this sale never occurred! You cannot sell to “yourself”.
Which line items are affected in my consolidated AFS?
Dr Share of profit from JV (other income) 8 000
Cr PPE 8 000
( x 40%)
NB. This profit was made in a prior period and therefore will have no effect on the current years statement of profit or loss!!
Will however effect retained earnings! JV
Parent

13. INTRAGROUP TRANSACTION 2
Intragroup sale of PPE
Remaining useful life of PPE is 5 years (given in question)
Unrealised profit was R8 000 (see previous slide)
Must realise (recognise) profit over the remaining useful life.
Therefore 8 000/5 = 1 600
OR x 20/120 = /5 years = x 40% =
Dr Accumulated depreciation (PPE) 1 600
Cr Share of profit from JV (depr) 1 600 JV
Parent

14. INTRAGROUP TRANSACTION 1JV
Parent
Dr Share of profit from JV (income tax) 448
Cr Deferred tax
(1 600 x 28%)

15. Consolidated statement of profit or loss and OCI for year ended 31 December 2016
100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 –
31 DECEMBER 2016) + 35% JO – Intragroup tx’s
Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Gross profit
Share of profit from joint venture (profit of JV for the year x 40%)
Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Profit before tax
Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Profit for the year

16. Consolidated statement of profit or loss and OCI for year ended 31 December 2016
100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 –
31 DECEMBER 2016) + 35% JO – Intragroup tx’s
Revenue (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Cost of sales (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Gross profit
Share of profit from joint venture (profit of JV for the year x 40%)
Other income (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) + gain on bargain purchase – intragroup dividends
Other expenses(100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s)
Profit before tax
Income tax expense (100% Parent + 100% Subsidiary x 4/12+ 35% JO – Intragroup tx’s) –
Profit for the year

17. Consolidated statement of profit or loss and OCI for year ended 31 December 2016
100% Parent + 100% Subsidiary x 4/12 months (1 SEPTEMBER 2016 –
31 DECEMBER 2016) + 35% JO – Intragroup tx’s
Profit attributable to:
Owners of the parent (balancing)
- Non controlling interests (profit of subsidiary – any intragroup transactions where the subsidiary was the SELLER) x 20%

18. 2. VERTICAL GROUPS
A Ltd
B Ltd
C Ltd

19. VERTICAL GROUPS
A Ltd acquired control over B Ltd, and B Ltd acquired control over C Ltd.
Start at the bottom of the group!
A Ltd
If C Ltd made a profit of R for the year:
How much of that profit would be:
Attributable to B Ltd? 60% x R =
Attributable to the NCI? 40% x R = 8 000
80%
B Ltd
60%
NCI (other shareholders):
R 8 000
C Ltd

20. VERTICAL GROUPS
A Ltd acquired control over B Ltd, and B Ltd acquired control over C Ltd.
If B Ltd made a profit of R for the year:
A Ltd
Total consolidated profit of B Ltd:
Profit of B Ltd R50 000
PLUS: Profit of C Ltd attributable to B Ltd R12 000 R
Attributable to A Ltd? 80% x R =
Attributable to the NCI? 20% x R =
80%
B Ltd
60%
NCI (other shareholders):
R R =
C Ltd

21. EXAM STANDARD VERTICAL GROUP QUESTION
PLEASE REFER TO QUESTION 4 OF YOUR TUT 103/3/2016
STEP 1: KEEP CALM
STEP 2: READ THE REQUIRED SECTION
What am I expected to do?
REQUIRED:
(a) Prepare only the asset section (including the deferred tax asset) of the consolidated statement of financial position of the Pearson Ltd Group as at 30 June (28)
(b) Prepare only the retained earnings and non-controlling interests columns of the consolidated statement of changes in equity of the Pearson Ltd Group for the year ended 30 June (30)

22. EXAM STANDARD VERTICAL GROUP QUESTION
PLEASE REFER TO QUESTION 4 OF YOUR TUT 103/3/2016
STEP 3: DRAW A DIAGRAM OF THE GROUP
Holding Company PEARSON LTD
Joint operation
Fredman Ltd 11
Subsidiary Morgan Ltd CONTROL
Sub-subsidiary Stanley Ltd CONTROL

23. EXAM STANDARD VERTICAL GROUP QUESTION
PLEASE REFER TO QUESTION 4 OF YOUR TUT 103/3/2016
STEP 4: ADD IN THE PERCENTAGES AND WHEN EACH ENTITY WAS ACQUIRED
Holding Company PEARSON LTD
Joint operation
Fredman Ltd 11
Subsidiary Morgan Ltd CONTROL
Sub-subsidiary Stanley Ltd CONTROL
45% (given)
/ = 73%
1 August 2010
Prior period
/ = 85%
1 August 2012
Current period
28 February 2012
Current period

24. Consolidated statement of Financial Position at 30 June 2013
SOLUTION PART A
Consolidated statement of Financial Position at 30 June 2013
PEARSON LTD GROUP
Consolidated Statement of Financial Position as at 31 December 2015
100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% sub- subsidiary + 45% JO – Intragroup tx’s
ASSETS
Non-Current assets R
Property, plant & equipment ( x 45%)
Deferred tax asset
Investments in equity instruments:
- Morgan Ltd at fair value
- Stanley Ltd at fair value
- Fredman Ltd at fair value
Goodwill
Total Non-current assets
Current assets
Trade and other receivables ( x 45%)
Cash and cash equivalents ( x 45%)
Inventory ( x 45%)
TOTAL ASSETS
Step 5
Draw up the SFP and add the “easy” figures.

25. Consolidated statement of Financial Position at 30 June 2013
SOLUTION PART A
Consolidated statement of Financial Position at 30 June 2013
PEARSON LTD GROUP
Consolidated Statement of Financial Position as at 30 June 2013 R
Investments in equity instruments:
- Morgan Ltd at fair value – = 0
- Stanley Ltd at fair value – = 0
- Fredman Ltd at fair value – = 0
Deferred tax asset = 0
Deferred tax on mark to market reserve (given)
Pearson Ltd only has investments in group companies
Therefore this mark-to-market reserve can only relate to group companies
The whole R9 324 will be eliminated!
Cannot have an investment in “yourself”, therefore must be eliminated on consolidation!!

26. INTRAGROUP TRANSACTION 1
Intragroup sale of machine (point 3)
SP =
Mark up on selling price is 25%, therefore use 25/100
(if was on cost price, would have used 25/125)
Profit that Pearson Ltd made: x 25/100 =
Important principle: For group purposes this sale never occurred! You cannot sell to “yourself”.
Which line items are affected in my consolidated AFS?
Dr Other income **Will be used later in the SCE, profit for the year
Cr PPE (machinery)
Pearson (P)
Morgan (S)

27. INTRAGROUP TRANSACTION 1
Intragroup sale of machine (point 3)
TAX EFFECT?
Pearson (P)
Morgan (S)
Other income
Profit
Income tax
Dr Deferred tax
Cr Income tax **Will be used later in the SCE, profit for the year
( x 28%)

28. Consolidated statement of Financial Position at 30 June 2013
SOLUTION PART A
Consolidated statement of Financial Position at 30 June 2013
PEARSON LTD GROUP
Consolidated Statement of Financial Position as at 31 December 2015
100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% sub- subsidiary + 45% JO – Intragroup tx’s
ASSETS
Non-Current assets R
Property, plant & equipment ( x 45%)
(PPE)
Deferred tax asset
Goodwill
Total Non-current assets
Current assets
Trade and other receivables ( x 45%)
Cash and cash equivalents ( x 45%)
Inventory ( x 45%)
TOTAL ASSETS

29. INTRAGROUP TRANSACTION 1
Intragroup sale of machine (point 3)
Morgan Ltd would have depreciated based on R /4 years x 6/12 =
Group must depreciate based on R /4 years x 6/12 =
(SP) – (profit) = (original CA before the sale)
Remember the sale never happened for group purposes!
Need to reduce the depreciation already passed by Morgan Ltd:
Dr Accumulated depreciation (PPE) 4 844
Cr Depreciation (other expenses) **Will be used later in the SCE, profit for the year
Pearson (P)
CA of Machine
Morgan (S)
CA of Machine

30. INTRAGROUP TRANSACTION 1
Intragroup sale of machine (point 3)
TAX EFFECT?
Pearson (P)
Morgan (S)
Other expenses
Profit
Income tax
Dr Income tax **Will be used later in the SCE, profit for the year
Cr Deferred tax
(4 844 x 28%)

31. Consolidated statement of Financial Position at 30 June 2013
SOLUTION PART A
Consolidated statement of Financial Position at 30 June 2013
PEARSON LTD GROUP
Consolidated Statement of Financial Position as at 31 December 2015
100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% sub- subsidiary + 45% JO – Intragroup tx’s
ASSETS
Non-Current assets R
Property, plant & equipment ( x 45%)
(PPE) (excess depr.)
Deferred tax asset – 1 356
Goodwill
Total Non-current assets
Current assets
Trade and other receivables ( x 45%)
Cash and cash equivalents ( x 45%)
Inventory ( x 45%)
TOTAL ASSETS

32. INTRAGROUP TRANSACTION 2
Intragroup sale of inventory (point 5 & 6)
In the separate records of Stanley:
Dr Trade recievables
Cr Sales
Dr Cost of sales
Cr Inventory
Record the purchase in the separate records of Morgan Ltd:
Dr Inventory
Cr Trade and other payables R
Inventory
Morgan (S)
Stanley (SS)

33. INTRAGROUP TRANSACTION 2
Intragroup sale of inventory (point 5 & 6)
Eliminate UP:
(Closing inv) x 20/120 =
Dr Cost of sales **Will be used later in the SCE, profit for the year
Cr Inventory
Tax effect?
COS PROFIT I/TAX
R =
Inventory
Morgan (S)
Stanley (SS)

34. INTRAGROUP TRANSACTION 2
Intragroup sale of inventory (point 5 & 6)
Tax effect?
COS PROFIT I/TAX
Dr Deferred tax 5 833
Cr Income tax expense **Will be used later in the SCE, profit for the year
( x 28%)
R =
Inventory
Morgan (S)
Stanley (SS)

35. Consolidated statement of Financial Position at 30 June 2013
SOLUTION PART A
Consolidated statement of Financial Position at 30 June 2013
PEARSON LTD GROUP
Consolidated Statement of Financial Position as at 31 December 2015
100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% sub- subsidiary + 45% JO – Intragroup tx’s
ASSETS
Non-Current assets R
Property, plant & equipment ( x 45%)
(PPE) (excess depr.)
Deferred tax asset –
Goodwill
Total Non-current assets
Current assets
Trade and other receivables ( x 45%) –
Cash and cash equivalents ( x 45%)
Inventory ( x 45%) –
TOTAL ASSETS

36. GOODWILL CALCULATION (sub - subsidiary)
Analysis of equity of Stanley Ltd
Acquisition date: 28/2/2012
Total At
85%
Since FV
15%
Share capital
Retained earnings
97 800
Goodwill/(GBP) (balancing)
68 000
57 800
10 200
COST + NCI
( shares x 3,00)
Goodwill attributable to Morgan Ltd.
Goodwill attributable (“that belongs to”) to NCI of Stanley Ltd

37. GOODWILL CALCULATION (sub - subsidiary)
This only happens in
a vertical group!!!
Pearson
R42 194
73%
NCI:
R10 200
Morgan
R57 800
Stanley
Goodwill
R68 000

38. GOODWILL CALCULATION (subsidiary)
Analysis of equity of Morgan Ltd
Acquisition date: 1/8/2010
Total At
85%
Since FV
15%
Share capital
Retained earnings
Adjustment for TR
( x 72%)
(28 800)
Stanley Ltd not yet acquired! Therefore no amounts of Stanley brought in yet!
Adjustment for Inv
( x 72%)
(19 440)
Goodwill/(GBP) (balancing)
COST + NCI
( shares x 3,20)
A – L = E
Trade receivables
Inventories

39. GOODWILL CALCULATION (joint operation)
Analysis of equity of Fredman Ltd
Acquisition date: 1/8/2012
Total At
45%
Share capital
Retained earnings
No NCI for
a JO!!!
Goodwill/(GBP) (balancing)
COST

40. Consolidated statement of Financial Position at 30 June 2013
SOLUTION PART A
Consolidated statement of Financial Position at 30 June 2013
PEARSON LTD GROUP
Consolidated Statement of Financial Position as at 31 December 2015
100% Parent + 100% Subsidiary (balance at year end, thus 100%) + 100% sub- subsidiary + 45% JO – Intragroup tx’s
ASSETS
Non-Current assets R
Property, plant & equipment ( x 45%)
(PPE) (excess depr.)
Deferred tax asset –
15 327
Goodwill ( x 73%)(SS) this will only ever happen in a vertical group!!! (S) + 0 (JO) – (impairment – point 9)
Total Non-current assets
Current assets
Trade and other receivables ( x 45%) –
Cash and cash equivalents ( x 45%)
Inventory ( x 45%) –
TOTAL ASSETS

41. SOLUTION PART B
PEARSON LTD GROUP
Consolidated Statement of Changes in Equity for the year ended
30 June 2013
Share capital
Retained Earnings
NCI
Balance as at 1 July 2012 #
Acquisition of subsidiary
Total comprehensive income for the year:
Profit for the year
Other comprehensive income
Ordinary dividends paid
( ) #
Balance as at 30 June 2013
# ALWAYS only parent company, therefore from TB of Pearson Ltd

42. OPENING RETAINED EARNINGS CALCULATION (sub - subsidiary)
Analysis of equity of Stanley Ltd
Acquisition date: 28/2/2012
Total
Since
85% FV
15%
Since acquisition to beginning of current year
Retained earnings
( – )
UP profit (seller)
( x 20/120 x 72%)
(10 800)
66 342
RE attributable to Morgan Ltd.
RE attributable (“that belongs to”) to NCI of Stanley Ltd.
Unrealised profit only affects the analysis, if it affects the NCI!!
Only affects the NCI when Stanley Ltd was the seller!!!

43. OPENING RETAINED EARNINGS CALCULATION (subsidiary)
Analysis of equity of Morgan Ltd
Acquisition date: 1/8/2010
Total
Since
73% FV
27%
Since acquisition to beginning of current year
Retained earnings
( – )
( )
Reversal of write downs at acquisition:
Inventory
Trade receivables
28 800
19 440
( )
Profit of Stanley attributable to Morgan
(only for vertical groups!)
( )
( )
( )
Goodwill of Stanley
(57 800)
(15 606)
Unrealised profit only affects the analysis, if it affects the NCI!!
Only affects the NCI of Morgan Ltd when Morgan Ltd was the seller!!!

44. Opening Retained earnings
NCI has its own column in SCE, therefore retained earnings is AFTER NCI has been taken out.
100% of Pearson Ltd:
Stanley Ltd: x 85% x 73% =
Morgan Ltd: x 73% = loss
Fredman Ltd: not yet acquired = No disclosure =
EQUALS = R No marks! OR
Morgan & Stanley: loss (analysis of Morgan)
EQUALS = R

45. Opening NCI NCI at acquisition date: Stanley: 108 000 Morgan: 289 440
PLUS
NCI since acq to beg of c-year:
Stanley:
Morgan: – =
EQUALS:
TIP FOR CALCULATING NCI:
TOTAL per analysis = TOTAL per NCI column

46. SOLUTION PART B
PEARSON LTD GROUP
Consolidated Statement of Changes in Equity for the year ended
30 June 2013
Share capital
Retained Earnings
NCI
Balance as at 1 July 2012 #
Acquisition of subsidiary
Total comprehensive income for the year:
Profit for the year
Other comprehensive income
Ordinary dividends paid
( ) #
Balance as at 30 June 2013
# ALWAYS only parent company, therefore from TB of Pearson Ltd

47. CONSOLIDATED PROFIT FOR THE YEAR CALC (sub - subsidiary)
Analysis of equity of Stanley Ltd
Acquisition date: 28/2/2012
Total
Since
85% FV
15%
Current year
Profit for the year
( – )
UP profit of prior year, now realised (seller)
UP profit, current year
( x 20/120 x 72%)
10 800
(15 000)
49 383
Profit attributable to Morgan Ltd.
Profit attributable (“that belongs to”) to NCI of Stanley Ltd.
Unrealised profit only affects the analysis, if it affects the NCI!!
Only affects the NCI when Stanley Ltd was the seller!!!

48. CONSOLIDATED PROFIT CALC (subsidiary)
Analysis of equity of Morgan Ltd
Acquisition date: 1/8/2010
Total
Since
73% FV
27%
Current year
Profit for the year
( – )
Goodwill impairment
(only affects NCI if full goodwill method)
( )
Dividend from Stanley
(23 800)
Profit of Stanley attributable to Morgan
(only for vertical groups!)
Unrealised profit only affects the analysis, if it affects the NCI!!
Only affects the NCI of Morgan Ltd when Morgan Ltd was the seller!!!

49. Consolidated profit for the year
PEARSON LTD:
100% of Pearson Ltd: (profit after tax)
Less: intragroup transactions where Pearson was the seller
(note these do not affect the NCI)
UP on machinery (38 750)
Add tax effect
Add depreciation reversed 4 844
Less tax effect (1 356)
Less: Intragroup div received by Pearson:
From Morgan: 73% x = (32 850)
PLUS: R (Morgan & Stanley) (analysis of Morgan)
PLUS: ( – ) x 45% = (profit of JO)
EQUALS =

50. SOLUTION PART B
PEARSON LTD GROUP
Consolidated Statement of Changes in Equity for the year ended
30 June 2013
Share capital
Retained Earnings
NCI
Balance as at 1 July 2012 #
Acquisition of subsidiary
Total comprehensive income for the year:
Profit for the year
Other comprehensive income
Ordinary dividends paid
( ) #
(16 350)**
Balance as at 30 June 2013
# ALWAYS only parent company, therefore from TB of Pearson Ltd
** Dividends paid to NCI:
4 200( x 15%)(Stanley) ( x 27%)(Morgan) =
Agrees to total of the NCI column’s of Morgan and Stanley: =
USE NCI COLUMN IN ANALYSIS TO DRAW UP NCI COLUMN IN SCE!

51. CHANGE IN CONTROL What must I be able to do?
SUB
SUBSIDIARY (80%)
(control before)
SUBSIDIARY (90%)
(control after)
SUBSIDIARY (70%)
(control before)
SUBSIDIARY (55%)
(control after)
SUBSIDIARY (65%)
(control after)
NO INVESTMENT (0%)
SUBSIDIARY (55%)
(control before)
NO INVESTMENT (0%)
SUBSIDIARY (80%)
(control after)
Investment (10%)
SUBSIDIARY (70%)
(control before)
Investment (10%)

52. QUESTIONS?

53. Wishing you the best with your studies!
FAC3704
LECTURERS