1. CHAPTER 12 Group financial statements

2. Contents Introduction – Company groups
Rationale for group financial statements
Current practice
Acquisition accounting
Associated companies
Joint ventures

3. Group financial statements
Group (or consolidated) financial statements are the financial statements of a set of two or more enterprises organised as an economic entity
Group is defined according to concept of “control”
Control = power (de jure or de facto) to govern the financial and operating policies of an entity so as to obtain benefits from its activities (IFRS)

4. Company groups Company group characteristics Group expansion
Vertical group
Horizontal group
Conglomerate
Group expansion
Development of new subsidiaries
Acquisition by takeover of other companies
Meger between companies

5. Shares - Rights Membership rights : Equity rights:
Influence on management, voting power
Equity rights:
Right to participate in distribution of profits + equivalent part of liquidation balance
In principle: rights are proportional to capital share
Exceptions: preferent shares, limitations to voting power, multiple votes per share,...

6. Types of participating shareholdings
Type of relationship
Amount of voting rights
Qualification of shareholdings 1
Control
50% +1
Subsidiary 2
Significant influence
>= 20%
Associated company 3
Only financial
< 20%
Financial investment

7. Group structure Enterprise A Enterpise B Enterprise C Enterprise D
100%
25%
51%
Enterpise B
Enterprise C
Enterprise D 9%
100%
Enterprise E
Enterprise F

8. Rationale for group financial statements
Interdependent relationships within a group (patrimonial, contractual, personal ties)
Loss of part of their independence of individual entities
Common or unified management
Economic interest of the group > individual interests of legal entities involved
It is economically more relevant to present the financial statement of the economic whole as an aggregate of all assets and liabilities under unified control

9. From individual to group accounts
Co. W
Co. X
W Group
€’000
Tangible assets
500
1000
1500
Investment in subsidiary -
Current assets
250
350
600
Totals
1250
1350
2100
Shares
Reserves
300
(50)
800
450
750
LT debt
700
Trade creditors
150
200
Debt/Equity ratio
37.5%
155%
133%

10. Current practice IAS 27 Consolidated and Separate Financial Statements
IFRS 3 Business Combinations
IAS 28 Investments in Associates
IAS 31 Investments in Joint Ventures
Seventh EC Company law Directive

11. Offsetting the investment in a subsidiary
Holding
S Co.
Elimination
Group €m
Net fixed assets
100 20 -
120
Investment in subsidiary 25
(25)
Current assets 30 10 40
Totals
155
160
Share capital 70
Reserves
Current liabilities 15 5
Long-term liabilities

12. Acquisition accounting
Purchase method of accounting
Fair value adjustments of acquired assets and liabilities
Subsequent measurement of goodwill
Minority interests
Merger accounting
Group income statement

13. Purchase method of accounting
Acquisition (or purchase method of) accounting is the method used to account for business combinations
Goodwill arises as a consolidation difference if the purchase cost of the investment is not equal to the book value of equity in the subsidiary

14. Goodwill as consolidation difference
Holding
S Co.
Elimination
Group €m
Net fixed assets
100 20 -
120
Investment in subsidiary 38
(38)
Goodwill 13
Current assets 17 10 27
Totals
155 30
(25)
160
Share capital 70
(20)
Reserves 5
(5) 25
Current liabilities 15
Long-term liabilities 40

15. Fair value adjustments of acquired assets and liabilities
The individual assets and liabilities of the acquired company have to be revised to their fair value at acquisition date
This exercise may imply (de-)recognition of new (old) assets and liabilities
Goodwill will be the difference between the revalued net assets and the investment by the parent
The fair value at acquisition date is considered to be the historical cost from the point of view of the parent

16. Fair value adjustments applied
Book value
of S
Adjustment
Fair value
balance sheet €m
Fixed assets
- Intangible - 10
- Tangible 20
Current assets
Totals 30 40
Share capital
Reserves 5 15 25 35
Current liabilities

17. Goodwill after fair value adjustments
Holding
Revised S
Elimination
Group €m
Net fixed assets
- Goodwill
- Other intangibles
- Tangibles -
100 10 20 3
120
Investment in S 38
(38)
Current assets 17 27
Totals
155 40
(35)
160
Share capital 70
(20)
Reserves 30 15
(15) 35
Current liabilities 5
Long-term liabilities

18. Subsequent measurement of goodwill
IAS before European Accounting Directives:
Amortise goodwill on a systematic basis over the best estimate of its useful life
Rebuttable assumption of a maximum of 20 years
IFRS 3 “Business Combinations” (2004):
Test goodwill for impairment annually (or more frequently if indications)

19. Minority interests
Minority interests (or non-controlling interests) appear if the group does not own 100% of the shares in a subsidiary
They represent the part of the net assets and profit or loss of the subsidiary attributable to the equity interests that are not owned

20. Minority interests applied
L Co.
M. Co
Elimination
Group
€’000
Intangibles -
280
Tangibles
1200
300
1500
Investment in M
600
(600)
Current assets
550
225
775
Totals
2350
525
(320)
2555
Share capital
800
(300)
Reserves
1150
100
(100)
Minority interests 80
1950
400
2030
Current liabilities
200
125
325
LT Creditors

21. Merger accounting
Two companies can combine by merging their activities and managements without one of them acquiring the other
Two types of merger
Fusion
Pooling of interests
IFRS3 Business Combinations (2004) banned merger accounting methods

22. Illustration - Merger accounting
Company A
before merger
Issue shares
after merger
Company B
Adjust
Group €m
Assets
Tangibles
1200
900
2100
Investment in B
+500
500 -
-500
Current assets
420
350
770
Totals
1620
2120
1250
2870
Financing
Share capital
300
800
-300
Reserves
730
-730
+530
950
Debt
600
Trade payables
220
520

23. Illustration - Acquisition accounting
Company A
before merger
Issue shares
after merger
Company B
Adjust
Group €m
Assets
Goodwill -
+ 470
470
Tangible assets
1200
900
2100
Investment in B
+1500
1500
-1500
Current assets
420
350
770
Totals
1620
3120
1250
-1030
3340
Financing
Share capital
300
+500
800
-300
Reserves
+1000
1420
730
-730
Debt
600
Trade payables
220
520

24. Group income statement
In the group income statement, the effect of intra-group transactions has to be eliminated
Only income and expenses recognized with regard to parties outside the group will be retained
Follow-up effects of fair value adjustments over time have to be integrated
Amortization of goodwill or impairment losses on goodwill may also significantly impact the group income statement

25. Intra-group transactions
Subsidiary A
Expenses
1200
Sales to B
1500
Profit
300
Subsidiary B
Purchases from A
Other expenses
5000
Sales to C
7500
1000
Subsidiary C
Purchases from B
500
Sales to retailers
8500
Totals
15700
17500
1800

26. Fig.12.1 Consolidation procedures
Adjust recognition criteria / measurements of financial statements of subsidiaries to uniform principles (IFRS)
Aggregation of financial statements of all subsidiaries
Fair value adjustments / Remove investment in subsidiaries / Identify goodwill and minority interests
Deduct amortization/ impairment losses on goodwill / Follow-up of fair value adjustments
Remove intra-group transactions and balances
Group financial statements

27. Associated companies
Associated companies are companies in which the investor company has “significant influence”
Different types of relationships between investor company and investee company mainly according to voting rights under control
Accounting rules differ according to the type of relationship

28. Types of participating shareholdings (bis)1
Control
50% +1
Subsidiary
Acquisition accounting 2
Significant influence
>= 20%
Associated company ? 3
Only financial
< 20%
Financial investment
“Fair Value”
Or “At Cost
(Locom)”

29. Illustration - Associated company
Company C
ASSETS
Tangible fixed assets
600
Current assets
300
Total
900
FINANCING
Share capital
400
Reserves 50
450
Payables
200
Debt
250
Company A buys 20% of Company C

30. Illustration - Equity method
Co A
Co C
Group
Net fixed assets
1050
Investment in C
150
- 150
Goodwill -
+60 60
Equity value
+90 90
Current assets
420
Totals
1620
Share capital
300
Reserves
720
Payables
Debt
600

31. Illustration - Proportionate consolidation
Co A
Co C (20%)
Eliminations
Group
Net fixed assets
1050
120 -
1170
Investment in C
150
-150
Goodwill
+ 60 60
Current assets
420
480
Totals
1620
180
-90
1710
Share capital
300 80
-80
Reserves 10
-10
720 90
Payables 40
340
Debt
600 50
650

32. IAS 28 Investments in Associates
IAS 28 Investments in Associates assumes significant influence if the investor holds at least 20 per cent of the voting rights of the investee
IAS 28 requires the equity method to account for associated companies
The part of the investor in the profit and loss of the associated company is introduced as a separate caption in the group income statement (“income from associates”)

33. Joint ventures
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to jount control (IAS 31 Investments in Joint Ventures)
IFRS recognizes three kinds of arrangement:
Jointly controlled operations
Jointly controlled assets
Jointly controlled entities
IFRS recommends use of proportionate consolidation for jointly controlled entities