1. Gary Leung www.garyleung.hk
ACCA Paper P2 (HKG) Corporate Reporting- Consolidated Financial Statements (Complex) 7 Sept. 2012
Gary Leung
ACCA P2- Dec 2012 1

2. Contents Type of Structure Status of investments Techniques
Timing of acquisitions
ACCA P2- Dec 2012 2

3. Type of Structure A subsidiary is a company controlled by another.
In practice this control might be achieved through complicated chains of control.
Two common type of structure
Vertical group
Mixed group (“D” shaped groups)
ACCA P2- Dec 2012

4. Vertical group P 70% P controls T through its control of S S
60% SS is the subsidiary of P
SS SS can be referred to as a sub-subsidiary or indirect subsidiary
ACCA P2- Dec 2012

5. Status of investments Status is always based on control P
70% P owns 70% of S and
therefore controls it. S
60% S owns 60% of SS and SS
P controls SS by controlling
∴ SS is a subsidiary
ACCA P2- Dec 2012

6. Status of investments Effective interest in the sub-subsidiary SS is
In the above illustration P effectively owns
Effective interest 70% × 60% = 42% of SS.
NCI (100% - 42%) = 58%
This is a useful tool to bring to the consolidation but it is irrelevant in deciding the status of the investment.
ACCA P2- Dec 2012

7. Techniques
2 possible approaches (direct or indirect) to consolidations involving sub. subsidiaries.
Indirect approach (2 stages)
1. Consolidate SS into S to give the S group accounts.
2. Consolidate the S group into P.
− This technique is too slow for exam purposes when it comes to dealing with sub subsidiaries. Always use the direct method.
− But it must be used to consolidate sub associates.
3. In practice, consolidated accounts for complex groups are prepared in indirect approach.
ACCA P2- Dec 2012

8. Techniques Direct Approach
Carry out the consolidation using the effective rate.
P P
70% 70% × 60%
S = 42%
60%
SS SS
In effect we have changed to
P P
70% 70% 42% S
60% S SS
(as a subsidiary) SS
ACCA P2- Dec 2012

9. Direct Approach- Technique
Step 1 Calculate the effective holding.
Step 2 Consolidate as normal subject to 2 important points
Dividends are paid to real shareholders not effective shareholders.
Cost of investment in the sub subsidiary [i.e. that appears in the main subsidiary’s accounts] is split:
P’s share is used to calculate goodwill
Cost of investment of S in SS A
Less: cost of indirect non-controlling interest in SS (X)#
Cost of parent ‘s investment in SS B
# cost of investment of S in SS X % share from S by P
the balance (A – B= X) is reduced the non-controlling interest. (i.e. cost of indirect non-controlling interest in SS)
Step 3 Proceed with the consolidation as normal.
ACCA P2- Dec 2012

10. Illustration 1 Statements of financial position as at 31 December 2011
P S T
$ $ $
Cost of investment
in S
in T
Other assets 1,
1,800 1,
Share capital
Retained earnings 1,600 1,
Further information
(a) P bought 70% of S two years ago when S’s retained earnings stood at $500 Later (1 year ago) S bought 60% of T when T’s retained earnings were $200.
(b) The non-controlling interest is valued at their proportionate share of the subsidiary’s identifiable net assets.
(c) Goodwill to the extent of $112 has been impaired in respect of the holding in S and by $37.8 in respect of the holding in T.
Required:
Prepare the consolidated statement of financial position of the P group as at 31 December 2011.
ACCA P2- Dec 2012

11. Illustration 1
Consolidated statement of financial position as at 31 December 2011 $
Assets
Goodwill ( )
Other Assets(1, ) 2,600.0
2,919.2
Share capital
Retained earnings 2,101.2
Non-controlling interest 618
ACCA P2- Dec 2012

12. Illustration 1 (W1) Group structure P P 70% S 42% NCI 58% 60% T T
(W2) Net assets summary
S Ltd
At At
consolidation acquisition
Share capital
Retained earnings
per Q 1, 1,
T Ltd
per Q
ACCA P2- Dec 2012

13. Illustration 1 (W3) Goodwill Cost $ $ Investment in S 700
Investment in T
Less: indirect holding adjustments ( 450X 30%) (135)
Share of net assets
70% × 600 (W3) (420)
42% × 300 (W3) (126)
Asset (balance)
Impaired (given)
(W4) Non-controlling interest $
In S 30% × 1,350 (W2)
In T 58% × 600 (W2)
S Inc’s non-controlling share of cost of
investment in T (30% × 450) (135)
____
618
ACCA P2- Dec 2012

14. Illustration 1 Consolidated retained earnings All of P 1,600
Share of S
70% (1,250 − 500) (W2) 525
Share of T
42% (500 − 200) (W2) 126
Goodwill ( )(W3) (149.8)
_______
2,101.2
ACCA P2- Dec 2012

15. Illustration 2 –full goodwill method
The following are the statement of financial position at 31 December 2011
G Ltd A Ltd B Ltd
45,000 shares in A Ltd 65,000
30,000 shares in B Ltd 55,000
Other net assets 80,000 33,000 75,000
145,000 88,000 75,000
Share capital ($1 shares) 100,000 60, ,000
Retained earnings 45, ,000 25,000
The inter-company shareholdings were acquired on 1 Jan 2011 when the retained earnings were 10,000 and 8,000 of A Ltd and B Ltd respectively. At that date, the fair value of the non-controlling interest in A was $20,000. The fair value of the total non-controlling interest (direct and indirect) in B was $50,000.
Required:
Prepare the consolidated statement of financial position, assuming any goodwill has been fully impaired. It is group policy to value the non-controlling interest using the full goodwill method.
ACCA P2- Dec 2012

16. Illustration 2
Consolidated statements of financial position as at 31 December 2011.
Other net assets 188,000
Share capital ,000
Retained earnings ,938
NCI ,062
188,000
ACCA P2- Dec 2012

17. Illustration 2 Working 1 G: G 75%, NCI 25% A:
A 60%, NCI 40%
B: Effective shares = 75% X 60% = 45%
NCI effective shares = 100% - 45% = 55%
Or 40% directly + 25% X 60% = 55% indirectly.
ACCA P2- Dec 2012

18. Illustration 2 2) Net assets working Acquisition Balance sheet date
A Ltd
Share capital 60, ,000
P&L 10, , , ,000
B Ltd
Share capital 50, ,000
P&L 8, ,000
58, ,000 18
ACCA P2- Dec 2012

19. Illustration 2 3) Working Goodwill A Ltd Purchase consideration 65,000
NCI ,000
Less: Net assets (70,000)
Goodwill ,000
Breakdown of Goodwill
Parent (65,000 – 75% x 70,000) 12,500
NCI ( 20,000 – 25% X 70,000) ,500
B Ltd
Purchase consideration ,000
Less: indirect holding adjustment (55,000 X 25%) (13,750)
NCI ,000
Less: Net assets (58,000)
Goodwill ,250
Parent (41,250 – 58,000 X 45%) 15,150
NCI ( 50,000 – 58,000 X 55%) 18,100 19
ACCA P2- Dec 2012

20. Illustration 2 3) NCI working A Ltd 25% X 88,000 22,000
Less: NCI of A’s investment
in B Ltd (55,000 X 25%) (13,750)
B Ltd
55% X 75, ,250
NCI –Goodwill A 2,500
NCI – Goodwill B 18,100
70,100
Less: impairment of Goodwill
A (15,000 X 25% ) (3,750)
B (33,250 X 55% ) (18,288) ,062 20
ACCA P2- Dec 2012

21. Illustration 2 W4) Retained Earnings Retained Earnings of G 45,000
Group share of post-acq. Profits
A ( 18,000 X 75%) 13,500
B (17,00 X 45%) 7,650
Goodwill written off
A ( 15,000 X 75%) (11,250)
B ( 33,250 X 45%) (14,962)
39,938
ACCA P2- Dec 2012

22. Mixed group structuresA
60%
B %
30% C
ACCA P2- Dec 2012

23. Mixed group structures
Effective interest of C as follows:
A’s direct interest in C 25%
A’s indirect interest (via B) ( 60% X 30%) 18%
A’s effective interest in C 43%
NCI %
ACCA P2- Dec 2012

24. Illustration 3
The statements of financial position of three companies are as follows:
Alpha Beta Gamma
$000 $000 $000
Investments
Assets 1, 1,
Share capital ($1)
Accumulated profits 1,
Liabilities 1,
ACCA P2- Dec 2012

25. Illustration 3
Alpha acquired a 80% shareholding in Beta for consideration of $350,000
Beta acquired a 60% shareholding in Gamma for consideration of $120,000
Alpha acquired a 20% shareholding in Gamma for consideration of $50,000
All the investments were made at the same date.
At the date of acquisition the carrying values of the assets and liabilities were the same as the fair values.
Details of the accumulated profits and the fair value of the effective NCI at acquisition are as follows:
$000 Beta Gamma Beta Gamma
Acc. Profits Fair value of
the effective
NCI
Alpha has a policy of always calculating goodwill at Full, the impairment reviews reveal no impairment losses are to be recorded. No shares have been issued since the date of acquisition.
Required
Prepare the consolidated statement of financial position of the Alpha Group.
ACCA P2- Dec 2012

26. Illustration 3 W1) Group structure Alpha 80% Beta NCI 20%
Alpha 68% Gamma NCI 32%
Alpha’s effective interest in Gamma
Alpha’s direct interest in Gamma 20%
Alpha’s indirect interest in Gamma ( 80% X 60%) 48%
Alpha’s effective interest in Gamma %
Effective NCI in Gamma 32%
ACCA P2- Dec 2012

27. Illustration 3 W2) indirect holding adjustment
There will be an indirect holding adjustment in respect of Beta’s investment in Gamma
The NCI in Beta Beta’s cost of investment
in Gamma
20% X $120,000 = $24,000
ACCA P2- Dec 2012

28. Illustration 3 W3) Net assets Beta Gamma DOA Y.E. DOA Y.E.
$000 $000 $000 $000
Share capital
Acc. Profits
The post acquisition profit of Beta is $300,000 ($600,000 - $300,000)
The post acquisition profits of Gamma is $125,000 ($250,000 – 125,000)
ACCA P2- Dec 2012

29. Illustration 3 Beta’s gross goodwill $000 Cost of the investment 350
Fair value of the NCI at DOA 90
Less: net assets at DOA (300)
Goodwill
Gamma’s gross goodwill
Cost of the investment by Alpha 50
Cost of the investment by Beta 120
Less: the indirect holding adjustment (24)
Fair value of the NCI at DOA 50
Less: net assets at DOA 125
Goodwill
ACCA P2- Dec 2012

30. Illustration 3 216 W4) NCI $000 Fair value of Beta at acquisition 90
Fair value of Gamma at acquisition 50
Less: the indirect holdings adjustments (24)
Plus: the NCI% of Beta’s post acq. Profits ( 20% X 300) 60
Plus: the NCI% of Gamma’s post acq. Profits ( 32% X 125) 40
216
ACCA P2- Dec 2012

31. Illustration 3 W5) Accumulated profits $000
Parent’s accumulated profits
Plus the parent’s % of Beta’s post acquisition profits (80% X 300) 240
Plus the parent’s % of Gamma’s post acquisition profits (68% X 125) 85
1,125
ACCA P2- Dec 2012

32. Illustration 3 Alpha Group statement of financial position $000
Goodwill
Assets (1, ) 2, ,241
Share capital ($1)
Accumulated profits 1,125
NCI
Equity ,541
Liabilities ( ) 700
2,241
ACCA P2- Dec 2012

33. Timing of acquisitions
What is the date of acquisition of the sub - subsidiary?
This is important for deciding reserves of the date of acquisition.
For the calculation of pre- and post-acquisition profits of SS Ltd. The date the SS Ltd comes under the control of the P Ltd is either:
1) The date P acquired S if S already holds shares in SS, or
2) If S acquires shares in SS later, then that later date.
ACCA P2- Dec 2012

34. Illustration 4
P bought 80% of S at 31 March S bought 60% of T on 14 July 2011
Date of acquisition of T = 14 July 2011.
ACCA P2- Dec 2012

35. Illustration 5
P bought 80% of S at 31 March S already owned 60% of T at 31 March 2009.
Date of acquisition of T = 31 March 2010.
ACCA P2- Dec 2012

36. Consolidated Statement of profit or loss and other comprehensive income
These present no real problem. Calculate the effective rate and consolidate as normal.
There is one complication.
If the sub subsidiary has declared a dividend and the main subsidiary has accounted for its share through profit or loss this will be part of the subsidiary’s profit before tax.
It must be eliminated (as a consolidation adjustment) during the non-controlling interest calculation.
ACCA P2- Dec 2012

37. Illustration 6 P S T Consolidated Operating profit 1,200 600 500 2,300
Dividend receivable
from T − 120* − −
____ ____ ____ ____
1, ,300
Taxation (400) (250) (100) (750)
PAT ,550
Non-controlling interest (W) (278)
,272
Extract from SOCIE
Dividends (300) (200) *(200) (300)
ACCA P2- Dec 2012

38. Illustration 6 P P 80% S 48% 60% NCI = 52% T T
Non-controlling interest
In S 20% × (470 − 120) 70
In T 52% ×
____
278
ACCA P2- Dec 2012