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ACCA Paper P2 (HKG) Corporate Reporting- Consolidated Financial Statements (Complex) 7 Sept. 2012 Gary Leung www.garyleung.hk 11ACCA P2- Dec 2012.

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Presentation on theme: "ACCA Paper P2 (HKG) Corporate Reporting- Consolidated Financial Statements (Complex) 7 Sept. 2012 Gary Leung www.garyleung.hk 11ACCA P2- Dec 2012."— Presentation transcript:

1 ACCA Paper P2 (HKG) Corporate Reporting- Consolidated Financial Statements (Complex) 7 Sept Gary Leung 11ACCA P2- Dec 2012

2 Contents Type of Structure Status of investments Techniques Timing of acquisitions 22ACCA P2- Dec 2012

3 Type of Structure A subsidiary is a company controlled by another. In practice this control might be achieved through complicated chains of control. Two common type of structure – Vertical group – Mixed group (“D” shaped groups) ACCA P2- Dec 20123

4 Vertical group P 70% P controls T through its control of S S 60% SS is the subsidiary of P SS SS can be referred to as a sub-subsidiary or indirect subsidiary ACCA P2- Dec 20124

5 Status of investments Status is always based on control P 70% P owns 70% of S and therefore controls it. S 60%S owns 60% of SS and therefore controls it. SS P controls SS by controlling S ∴ SS is a subsidiary ACCA P2- Dec 20125

6 Status of investments Effective interest in the sub-subsidiary SS is – In the above illustration P effectively owns Effective interest 70% × 60% = 42% of SS. NCI (100% - 42%) = 58% – This is a useful tool to bring to the consolidation but it is irrelevant in deciding the status of the investment. ACCA P2- Dec 20126

7 Techniques 2 possible approaches (direct or indirect) to consolidations involving sub. subsidiaries. Indirect approach (2 stages) 1. Consolidate SS into S to give the S group accounts. 2. Consolidate the S group into P. − This technique is too slow for exam purposes when it comes to dealing with sub subsidiaries. Always use the direct method. − But it must be used to consolidate sub associates. 3. In practice, consolidated accounts for complex groups are prepared in indirect approach. ACCA P2- Dec 20127

8 Techniques Direct Approach Carry out the consolidation using the effective rate. P 70% 70% × 60% S = 42% 60% SSSS In effect we have changed to P 70% 70% 42% S 60% S SS (as a subsidiary) SS ACCA P2- Dec 20128

9 Direct Approach- Technique Step 1 Calculate the effective holding. Step 2 Consolidate as normal subject to 2 important points – Dividends are paid to real shareholders not effective shareholders. – Cost of investment in the sub subsidiary [i.e. that appears in the main subsidiary’s accounts] is split: P’s share is used to calculate goodwill – Cost of investment of S in SS A – Less: cost of indirect non-controlling interest in SS(X)# – Cost of parent ‘s investment in SSB – # cost of investment of S in SS X % share from S by P the balance (A – B= X) is reduced the non-controlling interest. (i.e. cost of indirect non-controlling interest in SS) Step 3 Proceed with the consolidation as normal. ACCA P2- Dec 20129

10 Illustration 1 Statements of financial position as at 31 December 2011 P S T $ $ $ Cost of investment in S 700 in T 450 Other assets 1, ,800 1, Share capital Retained earnings 1,600 1, ,800 1, Further information (a) P bought 70% of S two years ago when S’s retained earnings stood at $500 Later (1 year ago) S bought 60% of T when T’s retained earnings were $200. (b) The non-controlling interest is valued at their proportionate share of the subsidiary’s identifiable net assets. (c) Goodwill to the extent of $112 has been impaired in respect of the holding in S and by $37.8 in respect of the holding in T. Required: Prepare the consolidated statement of financial position of the P group as at 31 December ACCA P2- Dec

11 Illustration 1 Consolidated statement of financial position as at 31 December 2011 $ Assets Goodwill ( ) Other Assets(1, )2, ,919.2 Share capital 200 Retained earnings 2,101.2 Non-controlling interest 618 2,919.2 ACCA P2- Dec

12 Illustration 1 (W1) Group structure P 70% S 42% NCI 58% 60% T (W2) Net assets summary S Ltd At At consolidation acquisition Share capital Retained earnings per Q 1, , T Ltd At At consolidation acquisition Share capital Retained earnings per Q ACCA P2- Dec

13 Illustration 1 (W3) Goodwill Cost $ $ Investment in S 700 Investment in T 450 Less: indirect holding adjustments ( 450X 30%)(135) Share of net assets 70% × 600 (W3) (420) 42% × 300 (W3) (126) Asset (balance) Impaired (given) (W4) Non-controlling interest $ In S 30% × 1,350 (W2) 405 In T 58% × 600 (W2) 348 S Inc’s non-controlling share of cost of investment in T (30% × 450) (135) ____ 618 ____ ACCA P2- Dec

14 Illustration 1 Consolidated retained earnings All of P 1,600 Share of S 70% (1,250 − 500) (W2) 525 Share of T 42% (500 − 200) (W2) 126 Goodwill ( )(W3) (149.8) _______ 2,101.2 _______ ACCA P2- Dec

15 Illustration 2 –full goodwill method The following are the statement of financial position at 31 December 2011 G LtdA Ltd B Ltd 45,000 shares in A Ltd65,000 30,000 shares in B Ltd55,000 Other net assets80,00033,00075, ,00088,00075,000 Share capital ($1 shares) 100,00060,000 50,000 Retained earnings45,000 28,00025, ,00088,00075,000 The inter-company shareholdings were acquired on 1 Jan 2011 when the retained earnings were 10,000 and 8,000 of A Ltd and B Ltd respectively. At that date, the fair value of the non-controlling interest in A was $20,000. The fair value of the total non- controlling interest (direct and indirect) in B was $50,000. Required: Prepare the consolidated statement of financial position, assuming any goodwill has been fully impaired. It is group policy to value the non-controlling interest using the full goodwill method. 15ACCA P2- Dec 2012

16 Illustration 2 Consolidated statements of financial position as at 31 December Other net assets188,000 Share capital100,000 Retained earnings 39,938 NCI 48, ,000 16ACCA P2- Dec 2012

17 Illustration 2 Working 1 G: G 75%, NCI 25% A: A 60%, NCI 40% B: Effective shares = 75% X 60% = 45% NCI effective shares = 100% - 45% = 55% Or 40% directly + 25% X 60% = 55% indirectly. 17ACCA P2- Dec 2012

18 18 Illustration 2 2) Net assets working Acquisition Balance sheet date A Ltd Share capital60,000 60,000 P&L10,000 28,000 70,000 88,000 B Ltd Share capital50,000 50,000 P&L 8,000 25,000 58,000 75,000 ACCA P2- Dec 2012

19 19 Illustration 2 3) Working Goodwill A Ltd Purchase consideration 65,000 NCI 20,000 Less: Net assets (70,000) Goodwill15,000 Breakdown of Goodwill – Parent (65,000 – 75% x 70,000)12,500 – NCI ( 20,000 – 25% X 70,000) 2,500 B Ltd Purchase consideration 55,000 Less: indirect holding adjustment (55,000 X 25%) (13,750) NCI 50,000 Less: Net assets (58,000) Goodwill 33,250 Breakdown of Goodwill – Parent (41,250 – 58,000 X 45%)15,150 – NCI ( 50,000 – 58,000 X 55%)18,100 ACCA P2- Dec 2012

20 20 Illustration 2 3) NCI working A Ltd 25% X 88,000 22,000 Less: NCI of A’s investment in B Ltd (55,000 X 25%)(13,750) B Ltd 55% X 75,00041,250 NCI –Goodwill A2,500 NCI – Goodwill B18,100 70,100 Less: impairment of Goodwill A (15,000 X 25% )(3,750) B (33,250 X 55% )(18,288) 48,062 ACCA P2- Dec 2012

21 Illustration 2 W4) Retained Earnings Retained Earnings of G45,000 Group share of post-acq. Profits A ( 18,000 X 75%)13,500 B (17,00 X 45%) 7,650 Goodwill written off A ( 15,000 X 75%)(11,250) B ( 33,250 X 45%) (14,962) 39,938 21ACCA P2- Dec 2012

22 Mixed group structures A 60% B 25% 30% C ACCA P2- Dec

23 Mixed group structures Effective interest of C as follows: A’s direct interest in C25% A’s indirect interest (via B) ( 60% X 30%)18% A’s effective interest in C43% NCI57% ACCA P2- Dec

24 Illustration 3 The statements of financial position of three companies are as follows: Alpha Beta Gamma $000$000$000 Investments Assets 1, , Share capital ($1) Accumulated profits , Liabilities , ACCA P2- Dec

25 Illustration 3 Alpha acquired a 80% shareholding in Beta for consideration of $350,000 Beta acquired a 60% shareholding in Gamma for consideration of $120,000 Alpha acquired a 20% shareholding in Gamma for consideration of $50,000 All the investments were made at the same date. At the date of acquisition the carrying values of the assets and liabilities were the same as the fair values. Details of the accumulated profits and the fair value of the effective NCI at acquisition are as follows: $000BetaGammaBetaGamma Acc. Profits20075 Fair value of the effective NCI9050 Alpha has a policy of always calculating goodwill at Full, the impairment reviews reveal no impairment losses are to be recorded. No shares have been issued since the date of acquisition. Required Prepare the consolidated statement of financial position of the Alpha Group. ACCA P2- Dec

26 Illustration 3 W1) Group structure Alpha 80% Beta NCI 20% Alpha 68% Gamma NCI 32% Alpha’s effective interest in Gamma Alpha’s direct interest in Gamma20% Alpha’s indirect interest in Gamma ( 80% X 60%) 48% Alpha’s effective interest in Gamma 68% Effective NCI in Gamma32% ACCA P2- Dec

27 Illustration 3 W2) indirect holding adjustment There will be an indirect holding adjustment in respect of Beta’s investment in Gamma The NCI in Beta Beta’s cost of investment in Gamma 20% X $120,000= $24,000 ACCA P2- Dec

28 Illustration 3 W3) Net assets BetaGamma DOAY.E.DOA Y.E. $000$000$000$000 Share capital Acc. Profits The post acquisition profit of Beta is $300,000 ($600,000 - $300,000) The post acquisition profits of Gamma is $125,000 ($250,000 – 125,000) ACCA P2- Dec

29 Illustration 3 Beta’s gross goodwill $000 Cost of the investment 350 Fair value of the NCI at DOA90 Less: net assets at DOA(300) Goodwill140 Gamma’s gross goodwill Cost of the investment by Alpha50 Cost of the investment by Beta120 Less: the indirect holding adjustment (24) Fair value of the NCI at DOA 50 Less: net assets at DOA125 Goodwill 71 ACCA P2- Dec

30 Illustration 3 W4) NCI$000 Fair value of Beta at acquisition90 Fair value of Gamma at acquisition50 Less: the indirect holdings adjustments(24) Plus: the NCI% of Beta’s post acq. Profits ( 20% X 300) 60 Plus: the NCI% of Gamma’s post acq. Profits ( 32% X 125) ACCA P2- Dec

31 Illustration 3 W5) Accumulated profits $000 Parent’s accumulated profits 800 Plus the parent’s % of Beta’s post acquisition profits (80% X 300) 240 Plus the parent’s % of Gamma’s post acquisition profits (68% X 125)85 1,125 ACCA P2- Dec

32 Illustration 3 Alpha Group statement of financial position $000 Goodwill211 Assets (1, )2,030 2,241 Share capital ($1)200 Accumulated profits 1,125 NCI216 Equity1,541 Liabilities ( )700 2,241 ACCA P2- Dec

33 Timing of acquisitions What is the date of acquisition of the sub - subsidiary? This is important for deciding reserves of the date of acquisition. For the calculation of pre- and post- acquisition profits of SS Ltd. The date the SS Ltd comes under the control of the P Ltd is either: 1) The date P acquired S if S already holds shares in SS, or 2) If S acquires shares in SS later, then that later date. ACCA P2- Dec

34 Illustration 4 P bought 80% of S at 31 March S bought 60% of T on 14 July 2011 Date of acquisition of T = 14 July ACCA P2- Dec

35 Illustration 5 P bought 80% of S at 31 March S already owned 60% of T at 31 March Date of acquisition of T = 31 March ACCA P2- Dec

36 Consolidated Statement of profit or loss and other comprehensive income These present no real problem. Calculate the effective rate and consolidate as normal. There is one complication. – If the sub subsidiary has declared a dividend and the main subsidiary has accounted for its share through profit or loss this will be part of the subsidiary’s profit before tax. – It must be eliminated (as a consolidation adjustment) during the non-controlling interest calculation. ACCA P2- Dec

37 Illustration 6 P S T Consolidated Operating profit 1, ,300 Dividend receivable from T − 120* − − ____ ____ ____ ____ 1, ,300 Taxation (400) (250) (100) (750) ____ ____ ____ ____ PAT ,550 Non-controlling interest (W) (278) ____ ____ ____ ____ ,272 ____ ____ ____ ____ Extract from SOCIE Dividends (300) (200) *(200) (300) ACCA P2- Dec

38 Illustration 6 P P 80% S 48% 60% NCI = 52% T T Non-controlling interest In S 20% × (470 − 120) 70 In T 52% × ____ 278 ____ ACCA P2- Dec


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