11 revision of basic groups

CopyRight 2013 By 周冬华 博士 CPA Some definitions  Subsidiary - an entity which is controlled by another entity (the parent)  Control - the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

CopyRight 2013 By 周冬华 博士 CPA  IFRS 10  explains in detail the concept of “control”  investor controls an investee when the investor  -- is exposed to, or  -- has rights to  -- variable returns from its involvement, and  -- has the ability to affect those returns through its power over the investee  the IFRS extends the objective test of ownership of >50% of voting shares

CopyRight 2013 By 周冬华 博士 CPA  adopts a principles based approach  investor needs regularly to reassess whether control still exists  control exists when the investor  can exercise the majority of voting rights in the investee  is in a contractual arrangement with others giving control  holds <50% of the voting rights, but the remainder are widely distributed  holds potential voting rights which will give control at some time in the future

CopyRight 2013 By 周冬华 博士 CPA  Acquisitions - a business combination in which one of the entities (the acquirer) obtains  control over the net assets and operations of another entity (the acquiree)  in exchange for the transfer of assets, incurrance of liabilities or issue of  equity.

CopyRight 2013 By 周冬华 博士 CPA  GROUP ACCOUNTING 1. IFRS 3 （ revised ） Business Combination - Acquisition-related costs: costs relating to the acquisition must be recognized as an expense at the time of the acquisition - Contingent consideration: requires recognition of contingent consideration, measured at fair value, at the acquisition date - Goodwill arising on consolidation is the difference between the purchase consideration and the fair value of the identifiable assets and liabilities acquired.

CopyRight 2013 By 周冬华 博士 CPA IFRS 13 Fair value measurement Problems with the cost of acquisition.  the detailed terms of the consideration to be paid on acquisition could involve more than a simple cash payment.  Monetary assets and liabilities  fair value at the date of transaction  Deferred consideration  present value after taking into account any premium or discount likely to be incurred on settlement  Marketable securities  fair value ie market value at the date of issue.

CopyRight 2013 By 周冬华 博士 CPA  Unquoted securities  fair value as measured by either:  proportional interest in the acquirer’s entity, or  proportional interest in the acquiree’s entity  Direct costs  may be included as part of the cost of the investment and comprise, for example,  registration costs  issue costs  but not professional fees eg accountancy fees

CopyRight 2013 By 周冬华 博士 CPA  Contingent consideration  if the amount involved is capable of reliable measurement, then include within the cost of  investment at fair value as at date of acquisition.  reassess fair value at each successive accounting date  any change in fair value should be recognised as income or expense

CopyRight 2013 By 周冬华 博士 CPA example  Viesturs acquired 70% of Baiba on 30 September,  Consideration was:  $4,000,000 payable on 30 September, 2009  $3,000,000 payable on 30 September, 2010, and a final payment of 3 times the 2010 profits, payable on 30 September,  Viesturs' cost of capital is 10%, and Baiba anticipates 2010 profits to be $2,000,000.  Viesturs paid his accountants $80,000 in professional fees for their work involved in the takeover.

CopyRight 2013 By 周冬华 博士 CPA  Calculate:  (a) the carrying value of Viesturs' investment in Baiba  (b) the interest charge in the Statements of Comprehensive Income for 2010 and 2011  (c) the liability in Viesturs' Statements of Financial Position as at 30 September 2009 and 2010  NB – Baiba's 2010 profits, when calculated and agreed on 31 March, 2011 were in fact $2,200,000  What adjustment, if any is necessary?

CopyRight 2013 By 周冬华 博士 CPA solutions

CopyRight 2013 By 周冬华 博士 CPA

NCI and goodwill  - The non-controlling interest may be valued either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.  Examples on page 288

CopyRight 2013 By 周冬华 博士 CPA IAS 27 （ revised ） Consolidated and separate financial statements  - Requires a parent to present consolidated financial statements. - Exemption from preparing group accounts - A parent need not present consolidated financial statements if and only if all of the following hold: （ a ） The parent is itself a wholly-owned subsidiary or it is a partially owned subsidiary of another entity and its other owners, （ b ） Its securities are not publicly traded （ c ） It is not in the process of issuing securities in public securities markets, and （ d ） The ultimate or intermediate parent publishes consolidated financial statements that comply with IFRSs

CopyRight 2013 By 周冬华 博士 CPA  A parent that does not present consolidated financial statements must comply with the IAS 27 rules on separate financial statements. - Exclusion of a subsidiary from consolidation: control must actually be lost for exclusion to occur. - Uniform accounting policies: consolidated financial statements should be prepared using the same accounting policies for like transactions and other events in similar circumstances. Adjustments must be made where members of a group use different accounting policies, so that their financial statements are suitable for consolidation.

CopyRight 2013 By 周冬华 博士 CPA  Example on page 301

CopyRight 2013 By 周冬华 博士 CPA Ifrs 3 on page 309  - Restructuring and future losses: an acquirer should not recognize liabilities for future losses or other costs expected to be incurred as a result of the business combination.. an acquirer should not recognize a liability for such a restructuring plan as part of allocating the cost of the combination unless the subsidiary was already committed to the plan before the acquisition.. This prevents creative accounting. An acquirer cannot set up a provision for restructuring or future losses of a subsidiary and then release this to profit or loss in subsequent periods in order to reduce losses or smooth profits incurred.

CopyRight 2013 By 周冬华 博士 CPA IAS 28 Investments in associates  Associate: an entity, including an unincorporated entity such as a partnership, over which an investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Significant influence is the power to participate in the financial and operating policy decisions of an economic activity but is not control or joint control over those policies. Equity method: a method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.

CopyRight 2013 By 周冬华 博士 CPA  IAS 28 requires all investments in associates to be accounted for using the equity method, unless the investment is classified as held for sale in accordance with IFRS 5 in which case it should be accounted for under IFRS 5. The use of the equity method should be discontinued from the date that the investor ceases to have significant influence. From that date, the investor shall account for the investment in accordance with IAS 39 Financial instruments: recognition and measurement. The carrying amount of the investment at the date that it ceases to be an associate shall be regarded as its cost on initial measurement as a financial asset under IAS 39.

CopyRight 2013 By 周冬华 博士 CPA  Equity method should be applied in the consolidated accounts:. Statement of financial position: investment in associated at cost plus （ or minus ） the group’s share of the associate’s post-acquisition profits （ or losses ）.. Income statement （ statement of comprehensive income ） : group share of associate’s profit after tax. Upstream and downstream transactions: only the group’s share of unrealized profit is eliminated.

CopyRight 2013 By 周冬华 博士 CPA  Example on page 314

CopyRight 2013 By 周冬华 博士 CPA 4.4 consolidated statement of financial position  Upstream and downstream transactions on page315  Example on page 316  comprehensive question on page 317