IFRS 3 &

IFRS 10
Changes in Group Structure
11
STEP ACQUISITION |1
A step acquisition occurs when the parent entity acquires control of subsidiary in stages
(sometimes referred to as piecemeal acquisition). IFRS 3 states that acquisition accounting
is only applied when control is achieved.

FURTHER SHARES TO ACHIEVE CONTROL

If equity shareholding is subsequently increased and control is achieved, the following
adjustments are made:
(a) previously held equity investment is re-measured to its fair value at the date control is
acquired.
(b) any resulting gain or loss is recognized in profit or loss.

For example if the fair value at the date of control acquisition is higher than existing carrying
amount, the following entry is passed (in opposite case, it will be reversed):
Investment XX
(-) ?
RE / Other Income (Parent) XX
Investment restated to fair value
Fair value at acquisition date – carrying amount

In statement of profit or loss and other comprehensive income, if subsidiary is acquired

part way through the year, then the subsidiary’s results should only be consolidated from the
date of acquisition, i.e. the date on which control is obtained. For this purpose, it is often
assumed that profit accrues evenly throughout the year.
QUESTION 01
The statements of financial positions of two companies, A and B as at 31 December 2006
are as follows:
A Ltd B Ltd
Rs. Rs.
Investment 160,000
Property, plant and equipment 290,000 222,000
Current assets 100,000 80,000
550,000 302,000
Ordinary share capital (Rs.1 shares) 200,000 100,000
Retained Earnings 250,000 122,000

Long term loans 60,000 50,000

Current liabilities 40,000 30,000
550,000 302,000

A acquired 40% of B on 31 December 2001 for Rs.90,000. At this time the reserves of B
stood at Rs.76,000. A further 20% of shares in B were acquired by A three years later for
Rs.70,000. On this date, the fair value of the existing holding in B was Rs.105,000. B’s
reserves were Rs.100,000 on the second acquisition date.

Required:
Produce the consolidated SFP of the A group at 31 December 2006, assuming that it is a
group policy to value the NCI using the proportion of net asset method.
 ICMAP S1 AFA&CR

FURTHER SHARES IN EXISTING SUBSIDIARY

This is the case where a parent entity acquires further shares in an existing subsidiary. In
this case:
(a) goodwill is not re-measured
(b) no gain or loss is recognized in PL
(c) all calculations are based on group and NCI share as at when control was first
2| acquired
(d) any difference between change in NCI and FV of consideration paid is recognized
directly in equity.

NCI [decrease in NCI] XX

(-) ? RE (parent) [directly in equity] β XX XX
Cash / Consideration at fair value / Investment XX
Further shares after acquisition
This entry is passed at year end. Post acquisition changes are automatically accounted for.

QUESTION 02
The statements of financial positions of two companies, C and D as at 31 December 2001
are as follows:
C Ltd D Ltd
Rs.000
Investment in D Ltd 400
Property, plant and equipment 600 550
Current assets 100 80
1,100 630
Ordinary share capital (Rs.1 shares) 200 100
Retained Earnings 800 450

Long term loans 60 50

Current liabilities 40 30
1,100 630

C acquired its holding in D Ltd as follows:

Date Proportion acquired Cost of investment D’s Retained earnings
% Rs.000
30 September 2000 60 250 300
31 July 2001 20 150 400

Goodwill is calculated on the proportion of net assets method.

Required:
Produce the consolidated SFP of the C group at 31 December 2001, assuming that it is a
group policy to value the NCI using the proportion of net asset method.

In statement of profit or loss and other comprehensive income, NCI relating to the
periods before and after the further acquisition are calculated separately and then added
together.

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 Class Notes

DISPOSAL
When a parent entity disposes of all or part of its interest in a subsidiary, this is reflected
both in parent’s separate financial statements and in the group accounts.

SEPARATE FINANCIAL STATEMENTS

The following journal entry is passed:
|3
Cash / Consideration received XX
(-) ? Other income in PL (gain or loss) β XX XX
Investment [carrying amount of shares sold] XX
Disposal of investment in Subsidiary (in separate FS)
The gain is reported in PL. {this entry if already passed needs to be reversed before
passing entry for disposal in consolidation.

CONSOLIDATION: CONTROL LOST

Where control is lost (i.e. the subsidiary is wholly disposed of, becomes an associate or
becomes an investment under IFRS 9), the following adjustment is needed in consolidated
accounts:
Cash / Consideration XX
Investment (retained, if any) [at fair value] XX
NCI [balance at disposal date] XX
(-) ?
Net assets of Subsidiary [balance at disposal date] XX
Goodwill [at disposal date] XX
RE / Other income (parent) β XX XX
Disposal of subsidiary: Control lost
This entry is passed at disposal date.

After the disposal, the income, expenses, assets and liabilities of the ex-subsidiary can no
longer be consolidated on line by line basis.; instead they must be accounted for under
equity method (if it becomes an associate) or under IFRS 9 (if it becomes trade investment
etc) or not be accounted for at all (if whole interest has been disposed of).

In the statement of profit or loss and other comprehensive income, results are
consolidated up to the date of disposal and afterwards the relevant standard (IAS 28 or IFRS
9) is applied. Also the gain on disposal (as calculated above) is included. In case subsidiary
was under the scope of IFRS 5, its operations are presented in a separate single line item as
discontinued operations.
QUESTION 03
T Limited disposed of a 25% holding in P Limited on 30 June 2006 for Rs.125,000. A 70%
holding in P Limited has been acquired five years prior to this. Goodwill on the acquisition
has been fully impaired.

Details of P Limited are as follows:

Rs.
Net assets at 31 Dec 2005 290,000
Profit for the year ended 31 Dec 2006 (assumed to accrue evenly) 100,000
Fair value of a 45% holding at 30 June 2006 245,000

Ignoring tax and assuming that the proportion of net assets method is used to value the NCI,
what gain on disposal is reported in T Group accounts in the year ended 31 Dec 2006?

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 ICMAP S1 AFA&CR

CONSOLIDATION: CONTROL NOT LOST

This is the case where a parent entity disposes some shares in a subsidiary but still retains
the control. In this case:
(a) goodwill is not re-measured
(b) no gain or loss is recognized
(c) all calculations are based on group and NCI share as at when control was first
4| acquired
(d) any difference between change in NCI and FV of consideration received is
recognized directly in equity.

The journal entry is:

Cash / Consideration XX
(-) ? RE [directly in equity] β XX XX
NCI [increase in NCI] XX
Disposal of investment in subsidiary: Control not lost
This entry automatically includes effect of post disposal changes, therefore, this entry is
passed at year end and not at the date of disposal.

In the statement of profit or loss and other comprehensive income, subsidiary results
are consolidated for the whole year. However, NCI relating to the periods before and after
the disposal are calculated separately and then added together.

QUESTION 04
Until 30 Sep 2007, Juno held 90% of Hera. On that date it sold 15% for Rs.100,000. Prior to
the disposal, the non controlling interest was valued (using the full goodwill method) at
Rs.65,000. After the disposal, the non controlling interest is valued at Rs.180,000.

How should the disposal transaction be accounted for in the Juno Group accounts?

QUESTION 05 PE 501 Jun 2011 3a

P Company bought 80% of the equity share capital of S Company for Rs. 350 million on
December 31, 2005. At that date S Company’s retained earnings’ balance was Rs. 200
million. The balance sheets of the two companies as at December 31, 2010 are given below:
P Co S Co
Rs. in million Rs. in million
Non-current assets 375 295
Investment in S Co 350 -
Net current assets 380 315
1105 610

Ordinary shares or Rs.10 each 600 190

Retained earnings 505 420
1105 610

No impairment of goodwill took place since acquisition.

Required:
Prepare the consolidated balance sheet as at December 31, 2010 provided that P Company
sold its entire holding in S Company for Rs. 750 million on December 31, 2010.
(07)

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 Class Notes

QUESTION 06 PE 501 Feb 2013 2

Below are the summarized statements of financial position of Coffee Co., and Tea Co.,
(listed companies) as at December 31, 2012:
Coffee Co. Tea Co.
Non-Current Assets (Rs. .000.) (Rs. .000.)
Property, plant and equipment (PPE) 40,000 9,000
Investment in equity instruments of Tea Co. 8,050 - |5
48,050 9,000
Current Assets
Inventory 8,000 1,500
Accounts receivable 2,000 300
Cash and bank 1,500 200
11,500 2,000
Total Assets 59,550 11,000

Equity
Share capital 10,000 1,000
Reserve 39,550 8,200
49,550 9,200
Liabilities 10,000 1,800
Total Equity and Liabilities 59,550 11,000

Coffee Co., acquired shares in Tea Co., in two stages as follows:

Fair value of
Reserves at
No. of Consideration net assets at Fair value per
Date acquisition
shares (Note 1) (Rs.) acquisition share (Rs.)
(Rs.)
(Rs.)
01/01/2012 250,000 2,450,000 6,800,000 8,500,000 9.800
30/09/2012 450,000 5,006,250 7,800,000 9,800,000 11.125

Note 1:
Consideration paid is equivalent to fair value of shares acquired at that date. Coffee Co.,
holds all investments in subsidiaries and associate at fair value through other
comprehensive income in its separate financial statements. At December 31, 2012, the fair
value of Coffee Co's., 70% holding in Tea Co., was Rs.8,050,000.

The difference of the fair value of the identifiable assets and liabilities of Tea Co., and their
book value relates to the value of land. The land had not been sold till December 31, 2012.

On January 1, 2012, Coffee Co., granted 250 shares to each of its 1,500 employees on
condition that they will work for three years for the company. During 2012 only 30 employees
had left the company and it is estimated that another 90 employees will leave in two-year
time.

The fair value of each share option at the grant date was Rs.8. These options have not been
accounted for in the financial statements.

Income and expenses are assumed to accrue evenly over the year. Neither company paid
dividends during the year and Coffee Co., measures non-controlling interests at the date of
acquisition at fair value.

Assume no impairment losses during the year.

Required:
Prepare Consolidated Statement of Financial Position as on December 31, 2012.
(20)

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 ICMAP S1 AFA&CR

QUESTION 07 Disposal PE Aug 2013 Q3

Following statements of profit or loss relate to Pink Company and Red Company, for the
year ended June 30, 2012:
Rs. in million
Pink Co. Red Co.
6| Revenue 1,200 800
Cost of sales (700) (500)
Gross profit 500 300
Operating expenses (150) (100)
Other income 25 -
Finance costs (20) (15)
Profit / (Loss) before tax 355 185
Income tax expense (105) (30)
Profit / (Loss) after tax 250 155
Retained earnings b/f 150 125
Dividend (25) (30)
375 250

Following additional information is available relating to Pink Group:

(i) On July 1, 2007, Pink Company acquired 80% shares of Red Company for Rs.125
million when the fair value of Red Company.s net assets was Rs.140 million. Red
Company has share capital of Rs.80 million. At that date, the fair value of non-
controlling interest was Rs.35 million.

(ii) Red Company paid cash dividend in September 2011, for the year ended June 30,
2011.

(iii) During the year Pink Company sold inventory of Rs.20 million to Red Company, on
which Pink Company charged 20% profit on selling price. This inventory was sold to
third parties before April 1, 2012.

(iv) Pink Company sold half of its holding in Red Company on April 1, 2012 for Rs.150
million. This disposal has not yet recognized in any way in group statement of
financial position. The residual holding has a fair value of Rs.120 million and leaves
the Pink Company with significant influence. Goodwill is to be accounted for based
upon fair value of non controlling interest. No goodwill has been impaired.

Required:
(a) Prepare the Group Statement of Profit or Loss for the year ended June 30, 2012.
(Ignore taxation impact). (16)
(b) Compute the Group Retained Earnings as at June 30, 2012. (04)

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 Class Notes

ANSWERS 11
ANSWER 01
A Group
SFP as at 31 December 20X6 |7
Rs. Rs.
PPE Rs.290,000+222,000 512,000
Goodwill W3 55,000 567,000

Current assets Rs.100,000+80,000 180,000

747,000

Share Capital 200,000

Retained earnings W6 278,200
478,200
NCI W5 88,800 567,000

Long term loans Rs.60,000+50,000 110,000

Current Liabilities Rs.40,000+30,000 70,000

747,000

W1 GROUP STRUCTURE
B Subsidiary Acquisition: 31 Dec 2004 Group 40 % + 20% = 60% NCI 40%
Rs.

W2 NET ASSETS (of subsidiaries) AT ACQUISITION B Ltd

Equity share capital 100,000
Retained earnings (pre) 100,000
200,000

W3 GOODWILL B Ltd
Investment [160,000 + 15,000 J1] 175,000
Less: [200,000 W2 x 60%] (120,000)
55,000

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

B Ltd
Balance 22,000
22,000

W5 NON CONTROLLING INTEREST B Ltd

[200,000 W2 x 40%] 80,000
[22,000 W4 x 40%] 8,800
88,800

W6 GROUP RESERVES RE
Parent reserves 250,000
J1 15,000
265,000
B Limited [22,000 W4 x 60%] 13,200
278,200

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 ICMAP S1 AFA&CR

Rs.
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment 15,000
(-) 1
Retained earnings (Parent) 15,000
The fair value increase in existing investment: Rs.105,000 - Rs.90,000 = Rs.15,000
8|

ANSWER 02
C Group - SFP as at 31 December 20X1
Rs.000 Rs.000
PPE Rs.600+550 1,150
Goodwill W3 10 1,160

Current assets Rs.100+80 180

1,340

Share Capital 200

Retained earnings W6 850
1,050
NCI W5 110 1,160

Long term loans Rs.60+50 110

Current Liabilities Rs.40+30 70

1,340

W1 GROUP STRUCTURE
D Subsidiary Acquisition: 30 Sep Group 60% NCI 40%
2000
Rs.000
The current group share is 80% (i.e. 60% + 20%) and NCI is 20%. (Decrease in NCI 20%)

W2 NET ASSETS (of subsidiaries) AT ACQUISITION D Ltd

Equity share capital 100
Retained earnings (pre) 300
400

W3 GOODWILL D Ltd
Investment [400 - 150 J1] 250
Less: [400 W2 x 60%] (240)
10

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

D Ltd
Balance 150
150

W5 NON CONTROLLING INTEREST D Ltd

[400 W2 x 40%] 160
[150 W4 x 40%] 60
220
J1 (110)
110

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 Class Notes

W6 GROUP RESERVES RE
Parent reserves 800
J1 (40)
760
D Limited [150 W4 x 60%] 90
850
|9
Rs. 000
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

NCI 110
(-) 1 RE (C Ltd) 40
Investment in D (extra) 150
Decrease in NCI = Rs.160+60 =Rs.220 /40% x 20% =Rs.110

ANSWER 03

DR Rs. CR Rs.
Cash/Bank 125,000
Investment in Associate 245,000
NCI (30% x (Rs.290,000 + (100,000 x 6/12)) 102,000
Net Assets (Rs.290,000 + (100,000 x 6/12) 340,000
RE (Gain on disposal) 132,000

ANSWER 04

DR Rs. CR Rs.
Cash/Bank 100,000
RE 15,000
NCI (Rs.180,000 - Rs.65,000) 115,000

ANSWER 05 PE 501 Jun 2011 3a

P Co
Consolidated Statement of Financial Position
As at December 31, 2010
Non-current assets Rs. m
Property, plant and equipment 375 375
Investment 350 – 350 J1 0

Current assets 380 + 750 J1 1,130

1,505

Equity
Share Capital 600
Retained earnings 505 + 400 J1 905

1,505
Cash 750
(-) 1 Investment in S 350
RE (P) 400
Gain on disposal recognised in individual financial statements.

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 ICMAP S1 AFA&CR

Note: Consolidated financial statements cannot be prepared because P Co has no

subsidiary as at the year end.

ANSWER 06 PE 501 Feb 2013 2

Coffee Group
Consolidated Statement of Financial Position
10| As at December 31, 2012
Non-current assets Rs.000
Property, plant and equipment 40,000 + 9,000 + 1,000 J2 50,000
Goodwill W3 1,325
51,325
Current assets
Inventories 8,000 + 1,500 9,500
Receivables 2,000 + 300 2,300
Cash 1,500 + 200 1,700
13,500

64,825

Equity
Share Capital 10,000
Share options J3 920
Retained earnings W6 38,647.5
49,567.5
Non controlling interest W5 3,457.5
53,025

Liabilities 10,000 + 1,800 11,800

64,825

W1 GROUP STRUCTURE
Tea Co Subsidiary Acquisition: 30 Sep Group 25% + 45% = 70% NCI 30%
2012
Rs.000

W2 NET ASSETS (of subsidiaries) AT ACQUISITION Tea

Equity share capital 1,000
Retained earnings (pre) 7,800
J2 1,000
9,800

W3 GOODWILL Tea
Investment [8,050 – 262.5 J1] 7,787.5
Less: [9,800 W2 x 70%] (6,800)
927.5
FV of NCI 1,000 x 30% x 11.125 3,337.5
[9,800 W2 x 30%] (2,940)
397.5
1,325

W4 POST ACQUISITION RESERVES (of subsidiaries)

S
[8,200 – 7,800] 400
400

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 Class Notes

W5 NON CONTROLLING INTEREST S

[9,800 W2 x 30%] 2,940
NCI goodwill W3 397.5
[400 W4 x 30%] 120
3,457.5

W6 GROUP RESERVES RE | 11
Parent reserves 39,550
J1 (262.5)
J3 (920)
38,367.5
S [400 W4 x 70%] 280
38,647.5

RE (Coffee) 262.5
(-) 1
Investment in Tea 262.5
Fair value of investment (old and new) at acquisition = 700 shares x Rs. 11.125 = Rs.
7,787.5
Book value is Rs. 8,050
Investment to be decreased by Rs. 262.5

PPE 1,000
(-) 2
Reserve (Pre Tea) 1,000
Fair value at acquisition Rs. 9,800 – Book value at acquisition [1,000 + 7,800] = 1,000

RE (Coffee) 920
(-) 3
Share options 920
[1,500 – 30 – 90] employees x 250 options x Rs. 8 fair value x 1/3 vesting period = Rs. 920

ANSWER 07 Disposal PE Aug 2013 Q3

Pink Group
Consolidated Statement of Profit or loss
For the year ended 30 June 2012
Pink Red 9/12 Adj. Rs. m
Revenue 1,200 600 (20 J1) 1,780
Cost of sales (700) (375) ( - 20 J1) (1,055)
Gross profit 725
Operating expenses (150) (75) (225)
Other income 25 0 (24 J2) 1
Finance costs (20) (11.25) (31.25)
Gain on disposal 24 J3 24
Share of from 15.5 J4 15.5
associate
Profit before tax 509.25
Taxation (105) (22.5) (127.5)
Profit after tax 116.25 381.75
NCI [116.25 x 20%] (23.25)
Profit attributable to parent 358.50

Retained earnings (Group) Rs.

b/f 150 + (205 -140) x 80% 202
Group PAT 358.50
Dividend (25)
c/f 535.50

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 ICMAP S1 AFA&CR

W1 GROUP STRUCTURE
Red Subsidiary Acquisition: - Group = 80% NCI 20%
Control lost disposal becoming 40% associate after 9 months Rs. m

Revenue 20
(iii) 1
Cost of sales 20
12| Intra group trading cancelled

Other income 24
(ii) 2
Dividend paid by S 24
30 x 80% = 24

Cash 150
Investment in A 120
NCI 58.25 + 35 – (140 x 20%)GW 65.25
(iv) 3
Gain on dispoal (P) 24
NA 80 + 125 + 155 x 9/12 – 30 dividend 291.25
Goodwill 125 – (140 x 80%) + 35 – (140 x 20%) 20
30 x 80% = 24

Investment in A 15.5
(iv) 4
Share of profit 15.5
155 x 40% x 3/12= 15.5

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