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© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 3.5 Section 9 Consolidated and Separate Financial Statements Section 19 Business Combinations and Goodwill
© 2011 IFRS Foundation 2 This PowerPoint presentation was prepared by IFRS Foundation education staff as a convenience for others. It has not been approved by the IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training on the IFRS for SMEs. However, if you make any changes to the PowerPoint presentation, your changes should be clearly identifiable as not part of the presentation prepared by the IFRS Foundation education staff and the copyright notice must be removed from every amended page. This presentation may be modified from time to time. The latest version may be downloaded from: http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm The accounting requirements applicable to small and medium ‑ sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.
© 2011 IFRS Foundation 3 Section 9 – scope Section 9 –specifies the circumstances in which an entity presents consolidated financial statements (CFSs) –describes the procedures for preparing consolidated financial statements –provides guidance on separate financial statements & combined financial statements
© 2011 IFRS Foundation 4 Section 19 – scope Section 19 –defines business combination (Bus Com) –describes procedures for identifying the acquirer –describes procedures for measuring the costs of the Bus Com –allocate the cost of the Bus Com to the assets acquired and liabilities & contingent liabilities assumed –specifies disclosures for Bus Coms
© 2011 IFRS Foundation 5 The IFRS for SMEs Section 9 Consolidated and Separate Financial Statements When to consolidate?
© 2011 IFRS Foundation 6 Section 9 – consolidated statements Consolidated financial statements (CFSs) present financial information about the group as a single economic entity A group = a parent and all its subsidiaries (Sub) A Sub is an entity that is controlled by another entity (known as the parent) –a Sub need not be incorporated (eg partnership)
© 2011 IFRS Foundation 7 Section 9 – who prepares CFSs? A parent presents CFSs unless: (i) no Subs other than Sub acquired to disposing of within 1 yr (account for at FV if publicly traded, otherwise cost- impairment model); or (ii) if both: –the parent is itself a subsidiary, & –its ultimate parent (or any intermediate parent) produces CFSs that comply with full IFRSs or the IFRS for SMEs
© 2011 IFRS Foundation Section 9 – who prepares? examples Entity A owns 75% of B. Entity B owns 80% of C. In each scenario below, is B required to prepare CFSs? i: A complies with the IFRS for SMEs. ii: A complies with full IFRSs. iii: A prepares local GAAP CFSs. iv: B is a venture capital organisation. 8
© 2011 IFRS Foundation 9 Section 9 – control Control is the power to govern the financial & operating policies of an entity so as to obtain benefits from its activities Identifying control requires judgement Rebuttable presumption –A controls B if it owns (directly or indirectly through its Subs) >50% of B’s voting power Need not own shares to control –eg special purpose entity (SPE)
© 2011 IFRS Foundation 10 Section 9 – control continued Control exists if A owns <50% & has power: –over >50% of B’s voting power; –to govern B under statute or agreement; –to appoint or remove >50% of members of board that controls B; or –to cast >50% of votes at board meetings. Control can also be achieved through currently exercisable options or convertible instruments
© 2011 IFRS Foundation Section 9 – control? examples In the absence of evidence to the contrary, in each scenario below, does A control Z? i: A owns 100% of Z. ii: A owns 51% of Z. iii: A owns 50% of Z. iv: A owns 50% of Z and holds currently exercisable options to acquire another 100 shares in Z. v: Same as Ex iv except B owns the options. 11
© 2011 IFRS Foundation 12 Section 9 – example SPE A pharmaceutical manufacturer (entity A) established a viral research centre (RC) at a university. –A determined sole & unalterable purpose of RC = research & develop immunisation & cures for viruses that cause human suffering. –RC is owned and staffed by the university.
© 2011 IFRS Foundation 13 Section 9 – example SPE continued All costs of establishing & running RC are paid by the university from the proceeds of a grant from A. –the budget for the research centre is approved by A yearly in advance. A benefits from the research centre: –by association with the university; & –through exclusive right to patent any immunisations & cures developed.
© 2011 IFRS Foundation 14 The IFRS for SMEs Section 19 Business Combinations and Goodwill What is a business combination and how to account for it?
© 2011 IFRS Foundation 15 Section 19 – business combinations A business combination is the bringing together of separate entities or businesses into one reporting entity. One entity (the acquirer) obtains control of one or more other businesses (the acquiree). Acquisition date = date on which the acquirer effectively obtains control of the acquiree.
© 2011 IFRS Foundation 16 Section 19 – accounting Purchase method used for all Bus Coms –1 st identify the acquirer –2 nd measure the cost of the Bus Com (A) –3 rd allocate the cost of the Bus Com to the assets acquired and liabilities & contingent liabilities assumed (B) –4 th recognise asset (goodwill) = the excess of (A) over the acquirer’s interest in (B)
© 2011 IFRS Foundation 17 Section 19 – identifying the acquirer Sometimes difficult to identify acquirer. Acquirer usually is the entity: –with the greater pre-Bus Com fair value –paying cash (if settling in cash) –that issues the shares (if settling in shares). BUT reverse acquisitions –whose management is able to dominate the combined entity
© 2011 IFRS Foundation Section 19 – examples identify acquirer Who is the acquirer? i: Entities A & B combine their businesses by forming entity C. C issues 30 & 20 shares to A’s & B’s shareholders respectively in exchange for A’s & B’s businesses. ii: Same as i, except 20 shares issued to each of A’s & B’s shareholders. C had 9 board members 5 appointed by A’s shareholders (4 by B’s). 18
© 2011 IFRS Foundation Section 19 – examples identify acquirer Who is the acquirer? iii: On 31/12/20X0 A has 100 shares in issue. On 1/1/20X1 A issued 200 new A shares to the owners of B in exchange for all of B’s shares. 19
© 2011 IFRS Foundation 20 Section 19 – cost of a Bus Com Cost of a Bus Com: –FV of assets given, liabilities incurred or assumed, & equity instruments issued by the acquirer, in exchange for control of the acquiree; plus –costs directly attributable to the Bus Com, eg directly attributable advisory, legal, accounting, valuation & other professional or consulting fees.
© 2011 IFRS Foundation Section 19 – cost of a Bus Com What is the cost of the Bus Com? i: Entity A acquires 75% of entity B in exchange for CU85,000 cash & 1,000 entity A shares (fair value = CU10,000) issued for the transfer. Entity A incurred CU5,000 advisory and legal costs directly attributable to the business combination & CU1,000 share issue expenses. 21
© 2011 IFRS Foundation 22 Section 19 – adjust cost of Bus Com When Bus Com agreement provides for contingent (on future events) consideration –if probable measured reliably: include in cost of the Bus Com at acquisition date –otherwise exclude from cost of Bus Com –but if subsequently becomes probable & can be measured reliably, adjustment to the cost of the combination
© 2011 IFRS Foundation 23 Section 19 – allocate cost of Bus Com At acquisition date, allocate cost of a Bus Com by: –recognising the acquiree’s identifiable assets & liabilities & (if FV can be measured reliably) contingent liabilities at their fair values (on date of acquisition) –any difference between the cost of the Bus Com & the acquirer’s interest in the net FV of the identifiable assets, liabilities & provisions for contingent liabilities recognised as goodwill or ‘negative goodwill’.
© 2011 IFRS Foundation 24 Section 19 – ‘negative goodwill’ If, at acquisition date, acquirer’s interest in net FV of the identifiable assets, liabilities & contingent liabilities recognised > cost of Bus Com: – reassess the identification & measurement of the acquiree’s assets, liabilities & provisions for contingent liabilities & the measurement of the cost of the combination –recognise immediately in profit or loss any excess remaining after that reassessment.
© 2011 IFRS Foundation Section 19 – allocate cost of Bus Com Ex i: Entity A pays 1,100 for 100% of entity B. On acq. date net FV of B’s identifiable assets, liabilities & contingent liabilities = 1,000. ii: Same as i except A pays 900. iii: Same as i except A acquires 90% of B (still pays CU1,100). 25
© 2011 IFRS Foundation 26 Section 19 – goodwill after acquisition After initial recognition, measure goodwill at cost less accumulated amortisation and accumulated impairment losses: –if cannot estimate reliably useful life of goodwill, it is presumed to = 10 yrs. –see Section 27 for impairment. Note: do not recognise internally generated goodwill
© 2011 IFRS Foundation Section 19 – examples goodwill i: On 1/1/20X1 entity A pays 1,100 for 100% of entity B. On acq. date net FV of B’s identifiable assets, liabilities & contingent liabilities = 1,000. Est useful life of goodwill = 5 yrs ii: Same as i except useful life = 20 yrs. iii: Same as i except cannot estimate useful life of goodwill. 27
© 2011 IFRS Foundation 28 Section 19 – provisional amounts If initial accounting for Bus Com is not complete at first reporting date after Bus Com recognises provisional amounts: –if new info <12 months after acquisition date, retrospectively adjust provisional amounts recognised –thereafter, adjust initial accounting for Bus Com only to correct material prior period error (see Section 10).
© 2011 IFRS Foundation Section 19 – examples provisional am’ts i: 1/9/20X1 entity A acquires 100% of entity B in exchange for CU100,000 cash when the fair value of B’s assets less FV of B’s liabilities & contingent liabilities = CU90,000, including provisional valuation of CU20,000 for a plot of land. Useful life of goodwill = 10 yrs. On 1/6/20X2 receive independent valuation of land at 1/9/20X1 = CU25,000. 29
© 2011 IFRS Foundation Section 19 – examples provisional am’ts ii: Same as i except independent valuation of land received on 1/12/20X2. iii: Same as i except independent valuation of land received on 1/2/20X3. iv: Same as i except on 1/2/20X3 the entity discovered that in error it had omitted the land from the initial accounting for the business combination. 30
© 2011 IFRS Foundation 31 Section 19 – goodwill disclosure Disclose a reconciliation of CA of goodwill at the beginning & end of the reporting period, showing separately –changes arising from new Bus Coms –impairment losses –disposals of previously acquired businesses –other changes Need not present comparatives
© 2011 IFRS Foundation 32 Section 19 – Bus Coms disclosure For each Bus Com in the period disclose: –names & descriptions of combining businesses –acquisition date (control date) –% of voting equity instruments acquired –cost of the Bus Com & describe components (eg cash & shares) –amounts recognised at acquisition date for each class of the acquiree’s assets, liabilities, contingent liabilities & goodwill. –amount of ‘negative goodwill’ & line item in income statement (or SOCI or SOI&RE)
© 2011 IFRS Foundation 33 The IFRS for SMEs Section 9 Consolidated and Separate Financial Statements How to consolidate?
© 2011 IFRS Foundation 34 Section 9 – consolidation procedures Principle: Group = 1 economic entity Consolidation procedures: –combine financial statements parent & its Subs line by line –eliminate parent’s invest in Sub & the parent’s portion of equity of each Sub –allocate non-controlling interest (NCI) their share of comprehensive income & net assets of Subs & present separately from the interest of owners of the parent (even if NCI becomes a deficit balance) –eliminate intragroup balances & transactions
© 2011 IFRS Foundation 35 Section 9 – example: procedures i. On 1/1/20X1 entity A acquires 100% of entity B for CU1,000 when B’s share capital & reserves = CU700 (net FV of B’s assets, & liabilities = CU800). B has no contingent liabilities. The CU100 difference between CA & FV is i.r.o. a machine with 5 yrs remaining useful life and nil residual value. B’s profit for the year ended 31/12/20X1 = CU400. In 20X1 A sold inventory which cost it 100 to B for 150. At 31/12/20X1 B’s inventory included CU60 inventory bought from A. Ignore taxation effects.
© 2011 IFRS Foundation 36 Section 9 – example: eliminate investment i. continued : proforma journal entry at acquisition to eliminate A’s investment in B; recognise goodwill; & eliminate B’s share capital & reserves accumulated before it became part of the group. Property, plant & equipment100 B’s at-acquisition share capital & reserves 700 Goodwill (asset)200 A’s investment in B1,000
© 2011 IFRS Foundation 37 Section 9 – example: adjusting consolidated depreciation i. continued: proforma journal entry to increase depreciation to group values (remaining estimated useful life = 5 yrs): Profit or loss20 Property, plant & equipment20
© 2011 IFRS Foundation 38 Section 9 – example: amortise goodwill i. continued : proforma journal entry to amortise goodwill (assumed useful life = 10 years): Profit or loss20 Goodwill (asset)20
© 2011 IFRS Foundation 39 Section 9 – example: unrealised profit i. continued : proforma journal entry to eliminate intragroup sale of inventory and the unrealise profit in inventories (ignoring tax effects): Profit or loss (revenue)150 Profit or loss (COS)150 Profit or loss (COS)20 Inventory (asset)20
© 2011 IFRS Foundation 40 Section 9 – non-controlling interest Non-controlling interest (NCI) in net assets consists of: –the amount of the NCI recognised in accounting for Bus Com at date of acquisition; plus –the NCI’s share of recognised changes in equity (ie recognised changes in Sub’s net assets) since the date of the combination.
© 2011 IFRS Foundation 41 Section 9 – example: NCI i. On 1/1/20X1 entity A acquires 75% of entity B for CU1,000 when B’s share capital & reserves = CU700 (net FV of B’s assets, & liabilities = CU800). B has no contingent liabilities). The CU100 difference between CA & FV is i.r.o. a machine with 5 yrs remaining useful life and nil residual value. Ignore taxation effects.
© 2011 IFRS Foundation 42 Section 9 – example: NCI continued i. continued : B’s profit for the year ended 31/12/20X1 = CU400. In 20X1 A sold inventory which cost it 100 to B for 150. At 31/12/20X1 B’s inventory included CU60 inventory bought from A.
© 2011 IFRS Foundation 43 Section 9 – example: eliminate investment i. continued : proforma journal entry at acquisition is: Property, plant & equip.100 B’s at-acquisition share capital & reserves 700 Goodwill400 Non-controlling interest200 A’s investment in B1,000
© 2011 IFRS Foundation 44 Section 9 – example: adjusting consolidated depreciation i. continued: proforma journal entry to increase depreciation to group values (remaining estimated useful life = 5 yrs): Profit or loss20 Property, plant & equipment20
© 2011 IFRS Foundation 45 Section 9 – example: amortise goodwill i. continued : proforma journal entry to amortise goodwill (assumed useful life = 10 years): Profit or loss40 Goodwill (asset)40
© 2011 IFRS Foundation 46 Section 9 – example: allocate profit i. continued: proforma journal entry allocating the NCI their share of B’s profit for the year: NCI profit allocation95 NCI (equity)95 Calculation: Profit400 Depreciation adjust (20) 380 25% attributable to NCI 95
© 2011 IFRS Foundation 47 Section 9 – example: NCI i. continued : proforma journal entry to eliminate downstream intragroup sale of inventory and the unrealised profit in inventories (ignoring tax effects): Profit or loss (revenue)150 Profit or loss (COS)150 Profit or loss (COS)20 Inventory (asset)20
© 2011 IFRS Foundation 48 Section 9 – example: NCI upstream sale ii. continued : Same as i except upstream sale of inventory (ie from B to A) Same proforma journal entries as in example i & an additional journal entry (below) to eliminate from NCI their share of the unrealised profit: NCI (equity)5 NCI profit allocation5
© 2011 IFRS Foundation 49 Section 9 – other consolidation issues Uniform reporting date (unless impracticable) Uniform accounting policies Income & expenses of a Sub are included in CFSs from the acquisition date until the date on which the parent ceases to control the Sub. Presentation currency
© 2011 IFRS Foundation 50 Sections 9 & 30 – presentation currency Entity’s functional currency (measurement currency) is determined in accordance with ¶30.2–30.5 but can choose any presentation currency When a group contains individual entities with different functional currencies –income & expense and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented
© 2011 IFRS Foundation 51 Sections 9 & 30 – translate foreign operations Translate foreign operations into presentation currency of CFSs –translate assets & liabilities at the closing rate on reporting date; –translate income & expenses at exchange rates at the dates of the transactions (can use average rate if diff not material); & –recognise resulting exchange differences in OCI –if partly owned sub allocate part to NCI
© 2011 IFRS Foundation Sections 9 & 30 – example foreign operation i: On 1/1/20X1 A paid CU60,000 to acquire 75% of B for FCU7,500 when B’s only assets were cash FCU1,000 & machine FCU9,000. CU = functional currency of A & presentation currency of group. FCU = functional currency of B. 52
© 2011 IFRS Foundation Sections 9 & 30 – example foreign operation i continued : 53 Trial balances 31/12/20X1AB CUFCU Share capital(100)(1,000) Opening retained earnings(80,000)(9,000) Profit for the year(10,000)(5,000) Investment in B60,000 Machine6,000 Cash30,1009,000
© 2011 IFRS Foundation Sections 9 & 30 – example foreign operation i continued : Translate B’s trial balance 54 FCU Exch rate CU Share capital(1,000) × 8 actual (8,000) Retained earnings(9,000) × 8 actual (72,000) Profit for the year(5,000) × 7.5 actual (37,500) Machine6,000 × 7 closing 42,000 Cash9,000 × 7 closing 63,000 Translation difference Balancing 12,500
© 2011 IFRS Foundation Sections 9 & 30 – example foreign operation i continued : Consolidated SOCI (working) 55 ABAdjustConsol Profit10,00037,50047,500 OCI(12,500) C income35,000 AllocationOwners’ of parentNCI Profit38,125 (ie 10,000A + 75% × 37,500B) 9,375 (ie 25% × 37,500B) OCI(9,375) (ie 75% × -12,500) (3,125) (ie 25% × -12,500)
© 2011 IFRS Foundation Sections 9 & 30 – example foreign operation i continued : Consolidated SOFP (working) 56 AB Adjust Consol Share capital 1008,000 (8,000) 100 R earning90,00097,000 (78,250) 108,750 NCI 26,250 Invest in B60,000 (60,000) Machine42,000 Cash30,10063,00093,100
© 2011 IFRS Foundation 57 Sections 9 & 30 – translate foreign operations Other issues: In CFSs exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation are recognised in OCI. exchange gains/losses on other intragroup monetary items are recognised in consolidated profit or loss –such gains/losses are not eliminated because of exposure to currency fluctuations
© 2011 IFRS Foundation 58 Sections 9 & 30 – disposal of subsidiary Gain or loss on disposal of a Sub = –proceeds from disposal of Sub; less –CA of its net assets measured from group’s perspective at the date of disposal (excluding cumulative exchange differences that relate to a foreign subsidiary recognised in equity in accordance with Section 30 Foreign Currency Translation)
© 2011 IFRS Foundation 59 Section 9 – disposal of subsidiary Entity ceases to be a Sub but investor still holds investment in former Sub, account for investment as: –financial instrument (Sec 11 & 12); –associate (if significant influence); or –jointly controlled entity (if joint control) Group CA of investment at the date that the entity ceases to be a subsidiary is regarded as the cost on initial measurement of the financial asset.
© 2011 IFRS Foundation 60 Section 9 – consolidation disclosures Disclose –fact ‘consolidated financial statements’ –basis for concluding control exists if parent does not own >50% of voting power –differences in reporting dates of parent & Subs –nature & extent of significant restrictions on ability of Sub to transfer funds to the parent as cash dividends or to repay loans
© 2011 IFRS Foundation 61 Section 9 – separate financial statements IFRS for SMEs does not require presentation of separate financial statements (SFSs) primary financial statements of an entity that does not have a Sub are not SFSs –entity that is not a parent but is an investor in an Ass or has a venturer’s interest in a JV presents its primary financial statements in compliance with Sec 14 or 15 respectively –it may also elect to present separate financial statements
© 2011 IFRS Foundation 62 Section 9 – SFSs acc policy choice If prepare SFSs described as conforming to the IFRS for SMEs –comply with all of the requirements of the IFRS for SMEs –account for investments in Subs, Ass & JCEs either: (i) at cost less impairment; or (ii) at FV. – can elect different policy for different class (eg only Ass at FV)
© 2011 IFRS Foundation 63 Section 9 – SFSs disclosures If prepared, SFSs shall disclose: –fact ‘separate financial statements’ –description of the methods used to account for the investments in Subs, JCEs & Ass –identify the consolidated financial statements or other primary financial statements to which they relate.
© 2011 IFRS Foundation 64 Section 9 – combined financial statements IFRS for SMEs does not require presentation of combined financial statements (CombFSs) CombFSs are a single set of financial statements of two or more entities controlled by a single investor
© 2011 IFRS Foundation 65 Section 9 – Combined financial statements If prepare CombFSs described as conforming to the IFRS for SMEs –comply with all of the requirements of the IFRS for SMEs –similar to consolidation, eg eliminate intercompany transactions & balances; same reporting dates (unless impracticable); & uniform accounting policies
© 2011 IFRS Foundation 66 Section 9 – CombFSs disclosures If prepared, CombFSs shall disclose: –fact ‘combined financial statements’ –the reason why prepared. –basis for determining which entities are included –basis of preparation of the combined financial statements. –the related party disclosures required by Section 33.
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