BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements

Complex Group Structures

CHAPTER 5
IFRS 10 / MFRS 10 Consolidated Financial Statements
Complex Group Structures

1.0 Introduction

The complex group structure can be classified as:

a) Vertical group (Sub-subsidiary)- a parent entity has a direct controlling interest in a
subsidiary and that subsidiary has a controlling interest in another entity.

b) Mixed group (D-Shaped Group)– a parent entity has a direct controlling interest in a
subsidiary and both the parent and subsidiary together hold a controlling interest in
another entity.
Note:

Unless specified otherwise, we have assumed that a shareholding of more than

50%=control

Illustration 1 (Vertical group or Sub-subsidiary)

Suppose P owns 70% of the equity of S, S owns 80% of the equity of SS. What is P’s
effective holding in SS?

Solution:

Illustration 2 (Mixed group/D-Shaped Group)

Suppose P owns 60% of S, S owns 25% of SS and P owns 30% of SS. What is P’s effective
holding in SS?

Solution:

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Illustration 3

On 1 April 20X0, Premium Bhd. (Premium) acquired 60% shareholding in Regular Bhd.
(Regular). On 30 June 20X5, Basic Bhd. (Basic) acquired 80% shareholding in Premium.

The retained earnings of Premium and Regular at the respective dates of acquisition were as
follows:
Premium Regular
RM’mil RM’mil
1 April 20X0 128 88
30 June 20X5 353 245

At the respective acquisition dates, the book values of the identifiable net assets were
equivalent to fair values except for a building owned by Premium which had a fair value in
excess of its book value by RM2 million as at 30 June 20X5. The building is depreciated on
a straight line basis with a remaining useful life of 20 years at the date of acquisition. The
depreciation on building is charged to cost of sales.

The following are financial statements of the three companies for the year ended 31 December
20X14:

Statement of profit or loss for the financial year ended 31 December 20X14
Basic Premium Regular
RM’mil RM’mil RM’mil
Sales 597 315 564
Cost of goods sold (99) (167) (224)
Gross profit 498 148 340
Administrative expenses (95) (18) (44)
Finance costs (12) (11) (3)
Profit before tax 391 119 293
Income tax expenses (13) (5) (13)
Profit for the year 378 114 280

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Statement of financial position as at 31 December 20X14

Basic Premium Regular
RM’mil RM’mil RM’mil
Non-current assets
Property, plant and equipment 2,418 1,920 1,982
Investment in Premium 700 - -
Investment in Regular - 400 -
3,118 2,320 1,982
Current assets
Inventories 532 235 192
Trade receivables 721 562 432
Cash and bank 142 77 81
1,395 874 705
4,513 3,194 2,687

Equity
Ordinary shares 500 400 400
Retained earnings 1,842 1,524 1,477
2,342 1,924 1,877
Non-current liabilities
Deferred tax liabilities 765 11 21
Long-term loan 500 425 145
1,265 436 166

Current liabilities
Trade payables 823 768 562
Current tax liabilities 83 66 82
906 834 644
4,513 3,914 2,687

Additional information:

1. During the financial year, Regular sold goods of RM15 million to Basic at a mark-up of
20%. As at year end, one-fifth of the goods remained in the inventories of Basic.

2. It is the Group’s policy to value non-controlling interests using fair value method. At 1
April 20X0, the 40% non-controlling interest in Regular was valued at RM300 million.
At 30 June 20X5, the 20% non-controlling interest in Premium was valued at RM105
million and the 52% non-controlling interest in Regular was valued at RM380 million.

3. At year end, an impairment test revealed that goodwill of Regular has to be written down
by 20%. No impairment loss on goodwill was previously recognised.

4. Any tax effects on fair value adjustments and intra-group transactions are to be ignored.

5. Premium and Regular have 400,000 shares in issue.

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Required:
a) Prepare the consolidated statement of profit or loss of Basic Group for the year ended 31 December
20X14.

b) Prepare the consolidated statement of financial position of Basic Group as at 31 December 20X14.

Solution:

W1
Group structure:

Basic

30/6/05
80%

Premium

1/4/00
60% Effective inter est in Regular: 80%x60%=48%
Regular

Regular became part of the Basic group on 30 June 20X5

Effective interest in Regular = 80% x 60% = 48%
Non-controlling interests = 52%

W2
Goodwill
Premium Regular
RM’mil RM’mil
Fair value of consideration
NCI at fair value /

Less: Fair value of net assets

Ordinary shares
Retained earnings
Fair value adjustment

Goodwill at acquisition
Less: Impairment loss
Goodwill at year end

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

W3
Group retained earnings:
Basic Premium Regular
RM’mil RM’mil RM’mil
As per question
Less: Pre-acquisition retained earnings

Depreciation of building

Unrealised profit on inventories

Impairment loss
Share of post-acquisition profits
Premium: 80%
Regular: 48%

W4
Non-controlling interests:

Premium Regular
RM’mil RM’mil
At acquisition date
Add: Share of post-acquisition profits

Less: Impairment loss

Less: Indirect holding

Total =

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Basic Group
Consolidated statement of financial position as at 31 December 20X14

RM’000
Non-current assets
Property, plant and equipment
Goodwill

Current assets
Inventories
Trade receivables
Cash and bank

Equity
Share capital
Retained earnings

Non-controlling interests

Non-current liabilities
Deferred tax liabilities
Long-term loan

Current liabilities
Trade payables
Current tax liabilities

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Basic Group
Consolidated statement of profit or loss for the year ended 31 December 20X14

RM’mil
Sales
Cost of goods sold
Gross profit
Administrative expenses
Finance costs
Profit before tax
Income tax expenses
Profit for the year

Profit attributable to:

Owners of the parent
Non-controlling interest

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Illustration 4

On 1 July 20X8, Mesi Bhd. (Mesi) acquired 70% interest in Khaiyam Bhd. (Khaiyam) for a
consideration of RM210 million when Khaiyam’s retained earnings amount was RM100 million.
On 30 June 20X12, Mesi acquired 5 million ordinary shares of Hanif Bhd. (Hanif) for a
consideration of RM28 million. On the same day, Khaiyam purchased 35 million shares of Hanif
for RM168 million when Hanif’s retained earnings stood at RM90 million.
The summarised financial statements of the three companies for the year ended 30 June 20X15
are as follows:
Statement of financial position as at 30 June 20X15
Mesi Khaiyam Hanif
RM’mil RM’mil RM’mil
ASSETS
Non-current assets
Property, plant and equipment 1,430 389 409
Intangible assets 876 - -
Investment 321 204 -
2,627 593 409
Current assets
Inventories 113 43 54
Trade receivables 764 64 62
Cash and bank balances 953 51 68
1830 158 184
4,457 751 593
EQUITY AND LIABILITIES
Equity
Ordinary shares 200 50 50
Share premium 400 50 70
Retained earnings 1,170 165 98
1,770 265 218
Non-current liabilities
Deferred tax liabilities 430 30 20
Long-term borrowings 1,500 400 280
1,930 430 300
Current liabilities
Trade payables 657 48 65
Current tax liabilities 100 8 10
757 56 75
4,457 751 593

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Illustration 4 (continued)

Additional information:
1. The following were the fair values of net assets of Khaiyam and Hanif at the respective
dates of acquisition:

Khaiyam Hanif
RM’mil RM’mil
1 July 20X8 220 162
30 June 20X12 370 220

Any excess of the fair value over the net assets of Khaiyam and Hanif is due to an
increase in the value of non-depreciable land and note 2 below.

2. On the acquisition of Khaiyam by Mesi, an intangible asset of Khaiyam was valued at

RM15 million and this intangible asset has not been capitalised in Khaiyam’s statement
of financial position. The fair value of the net assets of Khaiyam above has included the
value of this intangible asset. The Group’s policy is to amortise intangible assets over 15
years.

3. During the financial year, Mesi bought goods of RM8 million from Khaiyam at a mark-
up of 25%. As at year end, a quarter of the goods remained in the inventories of Mesi.

4. Included in the trade payables balance of Mesi was an amount of RM23 million owing to
Khaiyam. The amount did not correspond with the trade receivables amount in
Khaiyam’s book. The difference was due to a cheque of RM1 million remitted to
Khaiyam on 29 June 20X15. Khaiyam only received the cheque on 3 July 20X15.

5. It is the Group’s policy to value non-controlling interests at the proportionate share of the
fair value of subsidiary’s net assets.

6. No impairment loss occurred at year end. Any tax effects on fair value adjustments and
intra-group transactions are to be ignored.

7. Khaiyam and Hanif have 50 million shares in issue.

Required:

Prepare the consolidated statement of financial position of Mesi Group as at 30 June 20X15.

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 BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Solution:
W1
Group structure:

Mesi
30/6/X12
1/7/X8 5/50= 10%
70%

Khaiyam Hanif
30/6/X12
35/50 = 70%

Hanif became part of the Mesi group on 30 June 20X12

Effective interest inHanif = 10% + (70%x70%)
= 59% /
Non-controlling interests = 41%
W2
Goodwill
Khaiyam Hanif
RM’mil RM’mil
Consideration transferred
Consideration transferred: Indirect holding in Hanif
NCI

Less: Fair value of net assets

Ordinary shares
Share premium
Retained earnings
FV adjustment:
Intangible asset
Land (balancing)

Total=

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

W3
Group retained earnings:
Mesi Khaiyam Hanif
RM’mil RM’mil RM’mil
As per question
Less: Pre-acquisition retained earnings

Amortisation of intangible asset

Unrealised profit on inventories

Share of post-acquisition profits

Khaiyam
Hanif

W4 Non-controlling interests:
Khaiyam Hanif
RM’mil RM’mil
At acquisition date
Less: Indirect holding in Hanif
Add: Share of post-acquisition profits

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BBFA3044 Advanced Accounting Practice CHAPTER 5 Consolidated financial statements
Complex Group Structures

Mesi Group
Consolidated statement of financial position as at 30 June 20X15
RM’mil
Non-current assets
Property, plant and equipment
Intangible assets
Investment
Goodwill

Current assets
Inventories
Trade receivables
Cash and bank

Equity
Share capital
Share premium
Retained earnings

Non-controlling interests

Non-current liabilities
Deferred tax liabilities
Long-term borrowings

Current liabilities
Trade payables
Current tax liabilities

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