Chapter18-ConSFP

8/13/2019 Chapter18-ConSFP

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Chapter 18 Consolidated Statement of Financial Position

1. Objectives

1.1 Define a parent, a subsidiary, a group, non-controlling interest, group accounts and

consolidated financial statements.

1.2 Discuss the legal requirements of group accounts and the relevant requirements of

HKA 2!.

1." #$plain the disclosure requirements of group accounts under HKA 2!.

1.% #$plain the consolidation procedures and relevant conceptual issues, in particular,

&ith regard to'

(i) good&ill*

(ii) non-controlling interest.

1.+ repare the consolidated statement of financial position for a group of companies &ith

a simple structure.

D i s c l o s u r e

A c c o u n t i n g f o r u b s i d i a r i e s i n t h e

, a r e n t s o & n i n a n c i a l t a t e m e n t s

. o o d & i l l / o n - c o n t r o l l i n g

0 n t e r e s t

t e p s o f s t a t e m e n t o f

f i n a n c i a l p o s i t i o n

c o n s o l i d a t i o n

D e f i n i t i o n s

2. Definitions

2.1 Definitions

(a) ubsidiary An entity that is controlled by another entity (no&n as the

parent).

0n accordance &ith ection 2(%) of the 3ompanies 4rdinance, a subsidiary

shall be deemed to be a subsidiary of another company if that another

company'

(i) controls the composition of the board of directors of the investee

company* or

(ii) controls more than +56 of the voting po&er of the investee company* or

(iii) o&ns more than +56 of the issued equity share capital of the investee

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company.

HKA 2! &idens the definition of a subsidiary based on the concept of

control. 0t defines a subsidiary as an enterprise that is controlled by anotherenterprise (no&n as the parent). or this purpose, controlis defined as the

power to govern the financial and operating policiesof another enterprise

so as to obtain benefitsfrom its activities.

Adopting the &ide definition of a subsidiary in HKA 2! could result in an

enterprise being classified as a subsidiary &hen the enterprise does not meet

the legal definition of a subsidiary under the 3ompanies 4rdinance.

(b) arent is an entity that has one or more subsidiaries.(c) roup companies consist of a holding company and its subsidiaries.

(d) roup accounts are the financial statements of a group of companies.

(e) 3onsolidated financial statements is one particular form of group accounts

that represent the financial information as if they &ere the financial statement

of a single entity.

(f) /on-controlling interest (8inority interests) is the entity in a subsidiary not

attributable, directly or indirectly, to a parent.

(g) re-acquisition profits are the reserves &hich e$ist in a subsidiary company

at the date &hen it is acquired. 9hey are capitali:ed at the date of acquisition

by including them in the good&ill calculation.

(h) ost-acquisition profits are profits made and included in the retained

earnings of the subsidiary company follo&ing acquisition. 9hey are included

in group retained earnings.

3. Control and Special Purpose ntit!

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8 e a n i n g o f

3 o n t r o l

0 n c l u s i o n s # $ c l u s i o n s D i f f e r e n t

A c c o u n t i n g

, o l i c i e s

D i s c l o s u r e

; e q u i r e m e n t s

A c c o u n t i n g f o r

u b s i d i a r i e s

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(A) Concept of control

".1 Definition

HKA 2! establishes a parent-subsidiary relationship on the concept of control.

Control is the power to govern the financial and operating policies of an

enterpriseso as to obtain benefitsfrom its activities.

".2 3ontrol is presumed to e$ist &hen the parent o&ns, directly or indirectly through

subsidiaries, more than one half of the voting po&er of an enterprise. 3ontrol also

e$ists even &hen the parent o&ns one half or less of the voting po&er of an enterprise

&hen there is'

(i) po&er over more than one half of the voting rights by virtue of an agreement

&ith other investors*

(ii) po&er to govern the financial and operating policies of the enterprise under a

statute or an agreement*

(iii) po&er to appoint or remove the matd purchases ?,555 class A ordinary shares.

(b) A=3 >td purchases 15,555 class = and %,555 class A ordinary shares.

!olution

(a) A=3 >td has purchased ?,555 of the 15,555 class A voting shares. @ith ?56

of the voting shares A=3 should control amson. amson should therefore be

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treated as a subsidiary.

(b) A=3 >td has purchased %,555 of the 15,555 class A voting shares and 15,555

class = non-voting shares. As A=3 has less than +56 of the voting share this

time, it probably &ill not be able to control amson. amson &ill not be asubsidiary.

(") !pecial purpose entit#

".% pecial purpose entities (#s) (also no&n as vehicles and quasi-subsidiaries) are

legally independent entities that are used to tae on the loans or liabilities of another

enterprise. An enterprise (often referred to as the sponsor) &ill sell assets to the #,

but retain the right to use the asset and gain from any future increase in its value. 9he

# normally has no assets or capital of its o&n. 0t &ill borro& the money needed to

buy the asset from a capital providerB.

".+ 9he purpose of #s is to remove assets and liabilities from the balance sheet of the

sponsor. 9his has the effect of improving the return on capital employed and gearing

of the sponsor.

".? HKA-0nt 12 3onsolidation pecial urpose #ntitiesB states that an enterprise

should consolidate an # if it controlsthat #. A reporting enterprise probably has

control over an # if'

(i) in substance, the activities of the # are being conducted on behalf of the

enterprise according to its specific business needs so that the enterprise obtains

benefits from the #Cs operation*

(ii) in substance, the enterprise has the decision-maing po&ers to obtain the

ma


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%.1 9he rules on e$clusion of subsidiaries from consolidation are necessarily strict,

because this is a common method used by enterprises to manipulate their results. 0f a

subsidiary &hich carries a large amount of debt can be e$cluded, then the gearing of

the group as a &hole &ill be improved. 0n other &ords, this is a &ay of taing debtoff

the balance sheet.

%.2 $e# %oint

HKA 2! prescribes only one circumstance&hen a subsidiary should be e$cluded

from consolidation. 9his happen &hen there is evidence that if there are severe

restrictions on the abilit# of the subsidiar# to act independentl# that are so great

that control is lost, then it should not be consolidated. 0n particular, it notes that loss

of control could occur &hen the subsidiary becomes sub


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1% segment information

0mmaterial /ot applicable 4ptional

%.7 Example '(a) E, an international manufacturing group, has a subsidiary undertaing, F,

&hich is an insurance company. 3an the group be e$empted from consolidating

F on the grounds of different activitiesG

(b) A o&ns a subsidiary undertaing, , &hich is located in an African state &here

the overnment has for a number of years fro:en all remittances out of the

country by private individuals and companies.

Does A need to include in its consolidated accountsG

!olution

(a) F must be included under HKA 2!.

(b) 0t depends on &hether A controls . 3ontrol is defined as the po&er to govern

the financial and operating policies so as to obtain benefit. 9he current free:e on

remittances does not in itself prove that A does not control . o should be

included. 9he actual relationship bet&een A and must be investigated to

decide &hether control e$ists.

(") Exemption from preparing group accounts

%. A parent need not presentconsolidated financial statements if and only if'

(i) it is a wholl#*owned subsidiar# or it is a partiall# owned subsidiar# of

another entity and its other o&ners, including those not other&ise entitled to

vote, have been informed about, and do not re


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(A) Reporting dates

+.1 =oth ection 12!(1) of the 3ompanies 4rdinance and HKA 2! requires that the

financial year-ends of all group companies must coincide.

+.2 0f the subsidiary does not prepare conterminous financial statements to the same

reporting date as the parent, the financial statements of that subsidiary should be

ad


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(. Disclosure %e)uirements

?.1 9he disclosures required by HKA 2! are as follo&s'

(i) 9he reasons for not consolidating the subsidiaries, their summari:ed financial

information, either individually or in groups, including the amount of total

assets, total liabilities, revenues and profit or loss.

(ii) 9he reasons for consolidating the subsidiaries &hich the parent does not have

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*. +he ,asic Consolidation of Statement of Financial Position

1 . h a r e h o l d i n g s

i n u b s i d i a r y

2 . 3 o n s o l i d a t i o n

A d < u s t m e n t s

a i r H a l u e

3 o n s i d e r a t i o n

" . / e t A s s e t s

H a l u e o f

u b s i d i a r y

, o s i t i v e

o o d & i l l

/ e g a t i v e

o o d & i l l

3 o s t o f 0 n v e s t m e n t

3 o m p u t a t i o n

% . o o d & i l l

3 a l c u l a t i o n

, r o p o r t i o n o f

/ e t A s s e t s

8 e t h o d

a i r H a l u e

8 e t h o d

+ . / o n - c o n t r o l l i n g

0 n t e r e s t


? . r o u p

; e s e r v e s


t e p s i n

3 o n s o l i d a t i o n

!.1 !teps for %reparing the Consolidated !tatement of +inancial %osition

(@1) hareholding in the subsidiary

(@2) 3onsolidation ad


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air value of net assets at acquisition (@2) (E)

ood&ill on acquisition E

0mpairment of good&ill (E)

3arrying good&ill E

(J) 0f fair value method adopted, /30 value fair value of /30Cs holding at

acquisition (number of shares ,C- own . subsidiar# share price).

(J) 0f proportion of net assets method adopted, ,C- value / ,C- 0 . fair value of

net assets at acquisition(from @2).

(@+) /on controlling interest

I

/30 value at acquisition (as in @") E

/30 share of post-acquisition reserves (@2) E

/30 share of impairment (fair value method only) (E)

E

(@?) roup retained earnings

I

Cs retained earnings (1556) E

Cs 6 of subCs post-acquisition retained earnings E

>ess' arent share of impairment (@") (E)

E

(A) oodwill

!.2 oodwill

ood&ill is an asset representing the future economic benefits arising from other

assets acquired in a business combination that are not individually identified and

separately recogni:ed.

oodwill arising on consolidation is the difference bet&een the cost of an

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acquisition and the fair value of the subsidiaryCs net assets acquired.

!."reatment of oodwill(a) %ositive goodwill'

(i) Capitalisedas an intangible non-current asset.

(ii) ested annuall#for possible impairments.

(iii) Amortisationof good&ill is not permittedby the standard.

(b) -mpairmentof positive good&ill'

0f good&ill is considered to have been impaired during the post-acquisition

period it must be reflected in the group financial statements. Accounting forthe impairment differs according to the policy follo&ed to value the non-

controlling interests.

(i) roportion of net assets method'

Dr roup reserves

3r ood&ill

(ii) air value method the good&ill in the statement of financial position

includes good&ill attributable to the non-controlling interest. 0n this

case the double entry &ill reflect the non-controlling interest

proportion based on their shareholding as follo&s'

Dr roup reserves (6 of impairment attributable to the parent)

Dr ,C-(6 of impairment attributable to /30)

3r ood &ill

(c) ,egative goodwill

(i) Arises &here the cost of the investment is less than the value of net

assets purchased.

(ii) HK; " does not refer to this as negative good&ill (instead it is

referred to as a bargain purchase), ho&ever this is the commonly

used term.

(iii) 8ost liely reason for this to arise is a misstatement of the fair values

of assets and liabilities and accordingly the standard requires that the

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calculation is revie&ed.

(iv) After such a revie&, any negative goodwill remaining is credited

directl# to the income statement.

!.% Example 2

9he follo&ing statements of financial position &ere e$tracted from the boos of t&o

companies at "1 December 2515.

H >td >td

,on*current assets I I

roperty, plant and equipment !+,555 11,555

0nvestments in 2!,555 -

152,555 11,555

Current assets 21%,555 "",555

otal assets "1?,555 %%,555

Equit# and liabilities

Equit#

hare capital 75,555 %,555hare premium 25,555 ?,555

;etained earnings %5,555 ,555

1%5,555 1,555

Current liabilities 1!?,555 2+,555

otal equit# and liabilities "1?,555 %%,555

H acquired all of the share capital of one year ago. 9he retained earnings of stood

at I2,555 on the day of acquisition. ood&ill is calculated using the proportion of net

asset method. 9here has been no impairment of good&ill since acquisition.

repare the consolidated statement of financial position of H >td as at "1 December

2515.

!olution

@1 hareholdings in >td.

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6

roup 155

/on-controlling interest -

155

@2 /et asset of >td

At date of

acquisition

At the

reporting date

I I

hare capital %,555 %,555

;eserves'

hare premium ?,555 ?,555

;etained earnings 2,555 ,555

12,555 1,555

@" 3alculation of ood&ill

I

arent holding (investment) at fair value 2!,555

>ess' air value of net assets at acquisition (@2) (12,555)

ood&ill on acquisition 1+,555

@% /on-controlling interest

/ot applicable to this e$ample as >td is 1556 o&ned.

@+ roup retained earnings

I

H >td' %5,555

>td' 1556 $ (1,555 12,555) !,555

%!,555

3onsolidated statement of financial position as at "1 December 2515

,on*current assets I555

ood&ill (@") 1+

roperty, plant and equipment (!+,555 L 11,555) 7?

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Current assets(21%,555 L "",555) 2%!

otal assets "%7


Equit#

hare capital (H >td only) 75

hare premium (H >td only) 25

roup retained earnings (@+) %!

1%!

Current liabilities(1!?,555 L 2+,555) 251

otal equit# and liabilities "%7

(") ,on*controlling interests

!.+ Computation of ,on*controlling -nterests

HK; " allo&s t&o alternative &ays of calculating non-controlling interest in the

group statement of financial position. /on-controlling interest can be valued at'

(a) %roportion of net assets method /30 value/ ,C- 0 . fair value of net

assets at acquisition* or(b) +air (full) value method /30 value fair value of ,C-3s holding at

acquisition(number of shares ,C- own . subsidiar# share price).

!.? Example 4 5 %roportion of net assets method

9he draft statements of financial position of H >td and >td on "1 December 2515

are as follo&s.

H >td >td,on*current assets I555 I555

roperty, plant and equipment 5 155

0nvestments in at cost 115 -

255 155

Current assets +5 "5

otal assets 2+5 1"5


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Equit#

hare capital I1 155 155

;etained earnings 125 25

225 125

Current liabilities "5 15

otal equit# and liabilities 2+5 1"5

H >td had bought 756 of the ordinary shares of >td on 1 Manuary 2515 &hen the

retained earnings of >td &ere I1+,555. /o impairment of good&ill has occurred to

date.


2515, assuming that the H group values the non-controlling interest using the

proportion of net assets method.

!olution

@1 hareholdings in >td.

6

roup 75

/on-controlling interest 25

155

@2 /et asset of >td

At date of

acquisition

At the

reporting date

I555 I555

hare capital 155 155;etained earnings 1+ 25

/et assets 11+ 125

@" 3alculation of ood&ill

I555

arent holding (investment) at fair value 115

/30 value at acquisition (256 $ 11+ (@2)) 2"

1""

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>ess' air value of net assets at acquisition (@2) (11+)

ood&ill on acquisition 17

@% /on-controlling interestI555

/30 value at acquisition (@") 2"

/30 share of post acquisition reserves N256 $ (125 11+)O 1

2%

@+ roup retained earnings

I555

H >td 125 >td' 756 $ (125 11+(@2)) %

12%

3onsolidated statement of financial position as at "1 December 2515

,on*current assets I555

ood&ill (@") 17

roperty, plant and equipment (5,555 L 155,555) 15

257

Current assets(+5,555 L "5,555) 75

otal assets 277


Equit#

hare capital (H >td only) 155

;etained earnings (@+) 12%

22%

,on*controlling interest (64) 2%

2%7

Current liabilities ("5,555 L 15,555) %5

otal equit# and liabilities 277

!.! Exercise 1 5 +air value method

9he draft statements of financial position of H >td and >td on "1 December 2515

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are as follo&s.

H >td >td

,on*current assets I Iroperty, plant and equipment 7+,555 17,555

0nvestments in at cost ?5,555 -

1%+,555 17,555

Current assets 1?5,555 7%,555

otal assets "5+,555 152,555


Equit#

hare capital I1 ?+,555 25,555

hare premium "+,555 15,555

;etained earnings !5,555 2+,555

1!5,555 ++,555

Current liabilities 1"+,555 %!,555

otal equit# and liabilities "5+,555 152,555

H >td had bought 756 of the ordinary shares of >td on 1 Manuary 2515 &hen theretained earnings of >td &ere I25,555. 4n this date, the fair value of the 256 non-

controlling shareholding in >td &as I12,+55.

/o impairment of good&ill has occurred to date.

Required

repare the consolidated statement of financial position of H >td as at "1 December2515, assuming that the H group values the non-controlling interest using the fair

value method.

!olution

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(C) +air value of consideration and net assets

!.7 +air value of consideration and net assets

9o ensure that an accurate figure is calculated for good&ill'(a) the considerationpaid for a subsidiary must be accounted for at fair value*

(b) the subsidiar#3s identifiable assets and liabilities acquired must be

accounted for at their fair values.

!. 9he subsidiaryCs identifiable assets and liabilities are included in the consolidated

accounts at their fair value for the follo&ing reasons.

(a) 3onsolidated accounts are prepared from the perspective of the group, rather

than from the perspectives of the individual companies. 9he boo values of thesubsidiaryCs assets and liabilities are largely irrelevant, because the

consolidated accounts must reflect their cost to the group, not their original

cost to the subsidiary. 9he cost to the group is their fair value at the date of

acquisition.

(b) urchased good&ill is the difference bet&een the value of an acquired entity

and the aggregate of the fair value of that entityCs identifiable assets and

liabilities. 0f fair values are not used, the value of good&ill &ill be

meaningless.

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(D) Calculation of cost of investment

!.15 he cost of acquisition

9he cost of acquisition includes the follo&ing elements'

(a) Cash paid* and

(b) fair value of an# other consideration, i.e. deferredP contingent considerations

and share e$changes.

!.11 -ncidental costs of acquisition such as legal, accounting, valuation and other

professional fees should be expensed as incurred. 9he issue costs of debt or equit#

associated &ith the acquisition should be recogni7ed in accordance with &$A! 28.

(a) Deferred and contingent consideration

!.12 0n some situations not all of the purchase consideration is paid at the date of the

acquisition, instead a part of the payment is deferred until a later date deferred

consideration.

(a) Deferred considerationshould be measured at fair valueat the date of the

acquisition, i.e. a promise to pay an agreed sum on a predetermined date in the

future ta9ing into account the time value of mone#.

(b) 9he fair value of any deferred consideration is calculated by discounting the

amounts payable to present value at acquisition.

(c) #ach year the discount is then unwound. 9his increases the deferred liability

each year (to increase to future cash liability) and the discount is treated as a

finance cost.

(b) Share exchange

!.1" 4ften the parent company &ill issue shares in its o&n company in return for the shares

acquired in the subsidiary. 9he share price at acquisition should be used to record the

cost of the shares at fair value.

!.1% Example : 5 Calculation of cost of investment

H >td acquires 2% million I1 shares (756) of the ordinary shares of >td by offering

a share-for-share e$change of t&o shares for every three shares acquired in >td and

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their fair value for the purposes of the calculation of good&ill and production of

consolidated accounts.

!.1? Adtd >td

,on*current assets I555 I555

roperty, plant and equipment +,+55 1,+55

0nvestments in at cost 1,555 -

?,+55 1,+55

Current assets

0nventory ++5 155

;eceivables %55 255

3ash 255 +5

otal assets !,?+5 1,7+5


Equit#hare capital 2,555 +55

;etained earnings 1,%55 "55

",%55 755

,on*current liabilities ",555 %55

Current liabilities 1,2+5 ?+5

otal equit# and liabilities !,?+5 1,7+5

At acquisition the fair values of >tdCs plant e$ceeded its boo value by I255,555.

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9he plant had a remaining useful life of five years at this date.

or many years >td has been selling some of its products under the brand name of

pearmintB. At the date of acquisition the directors of H >td valued this brand atI2+5,555 &ith a remaining life of 15 years. 9he brand is not included in >tdCs

statement of financial position.

9he consolidated good&ill has been impaired by I2+7,555.

9he H roup values the non-controlling interest using the fair value method. At the

date of acquisition the fair value of the 256 non-controlling interest &as I"75,555.

Required


2515.

!olution

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Chapter18-ConSFP

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