IAS & IFRS applicable to company investments IAS 27 separate financial statements IAS 28 investments in associates & joint ventures IFRS 10 consolidated financial statements IFRS 11 joint arrangements IFRS 12 disclosure of interests in other entities IFRS 13 fair value measurement

company investment relationships % Holding in equity Relationship Standard 10% - 19% Trade investment IAS 27 20% - 49% Associate IAS 28 50% Joint venture IAS 28 51% - 89% Subsidiary IFRS 10 90% - 100% Subsidiary/partner IFRS 11

Relationship accounting method Trade investment Non-current or current asset Associate Net equity accounting Gross equity accounting accepted Joint venture Proportional preferred Subsidiary Acquisition accounting Merger accounting Partner Also known as pooling of interests

Group balance sheets - the main issues Subsidiary company reserves Group shareholding in subsidiary Goodwill arising on acquisition Inter-company activity Inter-company dividends

Group share of subsidiary company reserves Pre-acquisition - non-distributable so capitalise and / or Post acquisition - distributable thus part of group retained profits

Group shareholding in subsidiary Wholly-owned Minority interest (non controlling interest) Preference shares

Goodwill arising on acquisition Positive capitalise as non-amortisable, intangible, non-current asset Negative write back to reserves

Inter-company activity balance inter-company accounts unrealised profits inter-company trading

Inter-company dividends Always eliminate in the consolidation The only subsidiary dividend that will appear in the consolidated balance sheet is that payable to minority shareholders

Group structure P plc and S plc are seen as a single economic unit

SIMPLE GROUP STRUCTURE (1) Parent company P 100% Subsidiary company A

SIMPLE GROUP STRUCTURE (2) Parent company P 80% Subsidiary company A 20% Minority interest

SIMPLE GROUP STRUCTURE (3) Parent company P 100% 100% Subsidiary company A Subsidiary company B

SIMPLE GROUP STRUCTURE (4) Parent company P 80% 60% Subsidiary company A Subsidiary company B 20% 40% Minority interest Minority interest

Acquisition Accounting Consolidated statements Balance sheets

P plc and S plc are both incorporated on 1 January 2012 EXAMPLE 1 (a) P plc and S plc are both incorporated on 1 January 2012 P plc has a share capital of €400m S plc has a share capital of €150m P plc purchased all of the shares in S plc on 1 January 2012 at par

BALANCE SHEETS AT 01 JANUARY 2012 P plc S plc €m €m Sundry assets 500 250 Shares in S plc at cost 150 - Sundry liabilities (250) (100) Net assets 400 150 Ordinary shares of 100p each 400 150

BALANCE SHEETS AT 01 JANUARY 2012 P plc S plc Group €m €m €m Sundry assets 500 250 750 Shares in S plc at cost 150 - - Sundry liabilities (250) (100) (350) Net assets 400 150 400 Ordinary shares of 100p each 400 150 400 Shares in S plc have now been removed from both balance sheets

P plc and S plc are both incorporated on 1 January 2012 EXAMPLE 1 (b) P plc and S plc are both incorporated on 1 January 2012 P plc has a share capital of €400m S plc has a share capital of €150m P plc purchased all of the shares in S plc on 1 January 2012 at par P plc and S plc have been trading for one year

BALANCE SHEETS AT 31 DECEMBER 2012 P plc S plc €m €m Sundry assets 680 345 Shares in S plc at cost 150 - Sundry liabilities (270) (125) Net assets 560 220 Ordinary shares of 100p each 400 150 Retained profit 160 70 560 220

BALANCE SHEETS AT 31 DECEMBER 2012 P plc S plc Group €m €m €m Sundry assets 680 345 1025 Shares in S plc at cost 150 - - Sundry liabilities (270) (125) (395) Net assets 560 220 630 Ordinary shares of 100p each 400 150 400 Retained profit 160 70 230 560 220 630

X plc and Y plc have both been trading since 1 January 2012 EXAMPLE 2 X plc and Y plc have both been trading since 1 January 2012 X plc purchased all of the shares in Y plc on 31 December 2012 at a price of €310m

BALANCE SHEETS AT 31 DECEMBER 2012 X plc Y plc €m €m Sundry assets 900 550 Shares in Y plc at cost 310 - Sundry liabilities (420) (240) Net assets 790 310 Ordinary shares of 100p each 500 200 Retained profit 290 110 Capital employed 790 310

BALANCE SHEETS AT 31 DECEMBER 2012 X plc Y plc Group €m €m €m Sundry assets 900 550 1,450 Shares in Y plc at cost 310 - - Sundry liabilities (420) (240) (660) Net assets 790 310 790 Ordinary shares of 100p each 500 200 500 Retained profit 290 110 290 Capital employed 790 310 790

EXAMPLE 3 On 31 December 2012 T plc purchased 60% of the ordinary share capital of U plc When T plc purchased the shares in U plc the balances on U plc’s reserves were as follows: Share premium €400m Revaluation reserve €200m Retained profits €300m T plc paid €1,500m for the shares in U plc

BALANCE SHEETS AT 31 DECEMBER 2012 T plc U plc Sundry assets 3,800 3,100 Shares in U plc at cost 1,500 - Sundry liabilities (2,900) (1,100) Net assets 2,400 2,000 Ordinary shares of 100p each 1,000 800 Share premium 500 400 Revaluation reserve 400 300 Retained profit 500 500 Capital employed 2,400 2,000

Analysis of equity in U plc Group share - 60% Minority interest 40% U plc Equity Purchased by T plc Earned by the Group Share capital 800 480 320 Share premium 400 240 160 Revaluation reserve 200 120 80 Revaluation reserve 100 60 40 Retained profit 300 180 120 Retained profit 200 120 80 Net equity/net assets 2,000 1,020 180 800 Amount paid by T plc 1,500 Difference - Goodwill 480

T plc Group Consolidated Balance Sheet As at 31 December 2012 Sundry assets 6,900 Goodwill 480 Sundry liabilities (4,000) Net assets 3,380 Share capital 1,000 Share premium 500 Revaluation reserve 460 Retained profit 620 Shareholders’ funds 2,580 Minority interest 800 Capital employed 3,380

Example 4 On the day that B plc was incorporated A plc purchased all of B plc’s ordinary share capital at a cost of 100,000 A plc purchased the whole of the ordinary share capital of C plc when the retained profit of C plc amounted to 15,000 paying 135,000

Balance Sheets at 30 September 2013 A plc B plc C plc Shares in subsidiaries 235,000 Sundry net assets 275,000 220,000 200,000 Total net assets 510,000 220,000 200,000 Ordinary share capital 350,000 100,000 100,000 Retained profits 160,000 120,000 100,000 Capital employed 510,000 220,000 200,000

Analysis of equity in B plc Group share - 100% B plc Equity 000 Minority interest 0% Purchased by A plc Earned by the Group Share capital 100 100 Pre-acquisition retained profit Post-acquisition retained profit 120 120 Net equity/net assets 220 100 120 Amount paid by A plc 100 Goodwill

Analysis of equity in C plc Group share - 100% C plc Equity 000 Minority interest 0% Purchased by A plc Earned by the Group Share capital 100 100 Pre-acquisition retained profit 15 15 Post-acquisition retained profit 85 85 Net equity/net assets 200 115 85 Amount paid by A plc 135 Goodwill 20

B plc since acquisition C plc since acquisition GROUP RETAINED PROFIT A plc 160,000 B plc since acquisition 120,000 C plc since acquisition 85,000 Balance at 30 September 2013 365,000

A plc Group Consolidated Balance Sheet As at 30 September 2013 Sundry net assets 695,000 Goodwill 20,000 Net assets 715,000 Share capital 350,000 Retained profit 365,000 Capital employed 715,000

Example 5 On the day that E plc was incorporated D plc purchased 60% of E plc’s ordinary share capital at a cost of 120,000 D plc purchased 80% of the ordinary share capital of F plc on 1 October 2009 when the retained profit of F plc amounted to 100,000 paying 350,000

Balance Sheets at 30 September 2013 D plc E plc F plc Shares in subsidiaries 470,000 Sundry net assets 515,000 350,000 450,000 Total net assets 985,000 350,000 450,000 Ordinary share capital 500,000 200,000 250,000 Retained profits 485,000 150,000 200,000 Capital employed 985,000 350,000 450,000

Analysis of equity in E plc Group share - 60% E plc Equity 000 Minority interest 40% Purchased by D plc Earned by the Group Share capital 200 120 80 Pre-acquisition retained profit Post-acquisition retained profit 150 90 60 Net equity/net assets 350 120 90 140 Amount paid by D plc 120 Goodwill

Analysis of equity in F plc Group share - 80% F plc Equity 000 Minority interest 20% Purchased by D plc Earned by the Group Share capital 250 200 50 Pre-acquisition retained profit 100 80 20 Post-acquisition retained profit 100 80 20 Net equity/net assets 450 280 80 90 Amount paid by D plc 350 Goodwill 70

E plc since acquisition F plc since acquisition GROUP RETAINED PROFIT D plc 485,000 E plc since acquisition 90,000 F plc since acquisition 80,000 Balance at 30 September 2013 655,000

D plc Group Consolidated Balance Sheet As at 30 September 2013 Sundry net assets 1,315,000 Goodwill 70,000 Net assets 1,385,000 Share capital 500,000 Retained profit 655,000 Shareholders’ funds 1,155,000 Minority interest (140,000 + 90,000) 230,000 Capital employed 1,385,000

COMPLEX GROUP STRUCTURE (1) Parent company P 100% Subsidiary company A 100% Subsidiary company B

COMPLEX GROUP STRUCTURE (2) Parent company P 100% Subsidiary company A 80% Subsidiary company B 20% Minority interest

COMPLEX GROUP STRUCTURE (3) Parent company P 60% Subsidiary company A 40% Minority interest 80% Subsidiary company B 20% Minority interest

Parent company P has a controlling interest in subsidiary A due to the majority (60%) shareholding Subsidiary A has a controlling interest in subsidiary B due to the majority (80%) shareholding Because parent P controls subsidiary A and subsidiary A controls subsidiary company B P therefore controls subsidiary company B even though the effective mathematical shareholding of P in B is 48% (60% x 80%)

There is a direct minority interest in subsidiary A of 40% There is a direct minority interest in subsidiary B of 20% There is an indirect minority interest in subsidiary B of 32% (40% x 80%)

SUMMARY OF SHAREHOLDINGS In subsidiary A: Group 60% 100% Minority 40% In subsidiary B: Group - indirect 48% 100% Minority - Direct 20% 52% Minority - Indirect 32%

COMPLEX GROUP STRUCTURE Parent company P 60% 20% Subsidiary company A 40% Minority interest 60% Subsidiary company B 20% Minority interest

Parent company P has a controlling interest in subsidiary A due to the majority (60%) shareholding Subsidiary A has a controlling interest in subsidiary B due to the majority (60%) shareholding P has a direct interest in subsidiary B 20% and an indirect interest through subsidiary A 36% (60% x 60%) - the total effective mathematical shareholding of P in B is 56% (20% + 36%)

SUMMARY OF SHAREHOLDINGS In subsidiary A: Group 60% 100% Minority 40% In subsidiary B: Group - Direct 20% 56% Group - Indirect 36% 100% Minority - Direct 20% 44% Minority - Indirect 24%

CONTROLLING INTEREST Note that a parent company can have a controlling interest in a subsidiary even though the effective mathematical shareholding is less than 50%

EXAMPLE 6 A plc purchased 60% of the ordinary shares in B plc on 1 January 2010 at a cost of €4,000. B plc’s retained profit was €1,000 P plc purchased 60% of the ordinary shares in A plc on 1 January 2011 at a cost of €15,000. A plc’s retained profit was €5,000 B plc’s retained profit at 1 January 2011 was €2,000

Balance Sheets at 31 December 2013 P plc A plc B plc Sundry net assets 40,200 22,000 9,000 Shares in subsidiary at cost 15,000 4,000 Net assets 55,200 26,000 9,000 Ordinary share capital 25,000 10,000 5,000 Retained profit 30,200 16,000 4,000 Capital employed 55,200 26,000 9,000

Consolidation will take place from 1 January 2011 The acquisition on 1 January 2010 is not relevant

SUMMARY OF SHAREHOLDINGS In subsidiary A: Group 60% 100% Minority 40% In subsidiary B: Group - indirect 36% 100% Minority - Direct 40% 64% Minority - Indirect 24%

Analysis of equity in A plc Group share - 60% Minority interest 40% A plc Equity Purchased by P plc Earned by the Group Share capital 10,000 6,000 4,000 Retained profit 5,000 3,000 2,000 Retained profit 11,000 6,600 4,400 Net equity/net assets 26,000 9,000 6,600 10,400 Amount paid by P plc 15,000 Goodwill 6,000

Analysis of equity in B plc Group share - 36% Minority interest 64% B plc Equity Purchased by P plc Earned by the Group Share capital 5,000 1,800 3,200 Retained profit 2,000 720 1,280 Retained profit 2,000 720 1,280 Net equity/net assets 9,000 2,520 720 5,760 Amount paid by P via A (4,000) (60:40) 2,400 (1,600) Goodwill (capital reserve) (120) 4,160

P plc Group Consolidated Balance Sheet As at 31 December 2013 Sundry net assets 71,200 Goodwill (6000 – 120) 5,880 Net assets 77,080 Share capital 25,000 Retained profit 30200+6600+720 37,520 Shareholders’ funds 62,520 Minority interest 10400+4160 14,560 Capital employed 77,080

EXAMPLE 7 A plc purchased 60% of the ordinary shares in B plc on 1 January 2010 at a cost of 4,000. B plc’s retained profit was 1,000 P plc purchased 60% of the ordinary shares in A plc on 1 January 2011 at a cost of 15,000. A plc’s retained profit was 5,000 P plc purchased 20% of the ordinary shares in B plc on 1 January 2011 at a cost of 3,000. B plc’s retained profit was 2,000

Balance Sheets at 31 December 2013 P plc A plc B plc Sundry net assets 37,200 22,000 9,000 Shares in subsidiary at cost 18,000 4,000 Net assets 55,200 26,000 9,000 Ordinary share capital 25,000 10,000 5,000 Retained profit 30,200 16,000 4,000 Capital employed 55,200 26,000 9,000

Consolidation will take place from 1 January 2011 The acquisition on 1 January 2010 is not relevant

SUMMARY OF SHAREHOLDINGS In subsidiary A: Group 60% 100% Minority 40% In subsidiary B: Group - Direct 20% 56% Group - Indirect 36% 100% Minority - Direct 20% 44% Minority - Indirect 24%

Analysis of equity in A plc Group share - 60% Minority interest 40% A plc Equity Purchased by P plc Earned by the Group Share capital 10,000 6,000 4,000 Retained profit 5,000 3,000 2,000 Retained profit 11,000 6,600 4,400 Net equity/net assets 26,000 9,000 6,600 10,400 Amount paid by P plc 15,000 Goodwill 6,000

Analysis of equity in B plc Group share - 56% Minority interest 44% B plc Equity Purchased by P plc Earned by the Group Share capital 5,000 2,800 2,200 Retained profit 2,000 1,120 880 Retained profit 2,000 1,120 880 Net equity/net assets 9,000 3,920 1,120 3,960 Amount paid by P 3,000 Amount paid by P via A (4,000) (60:40) 2,400 (1,600) Goodwill 1,480 2,360

P plc Group Consolidated Balance Sheet As at 31 December 2013 Sundry net assets 68,200 Goodwill 6000+1480 7,480 Net assets 75,680 Share capital 25,000 Retained profit 30200+6600+1120 37,920 Shareholders’ funds 62,920 Minority interest 12,760 Capital employed 75,680

What if a company has insufficient cash to purchase the shares in a subsidiary company? Sometimes an acquiring company will issue new shares in exchange for the shares in a subsidiary When acquisition accounting is used to report a business combination any shares issued will be recorded as issued at the market value

EXAMPLE 8 X plc wishes to acquire all of the ordinary shares in Y plc by means of a share exchange The capitals of the two companies before the acquisition are as follows: X plc Y plc Ordinary shares of €1 5.00m 2.00m Retained profits 11.00m 4.50m Total capital employed 16.00m 6.50m The market price of the shares are X plc €5.00 and Y plc €4.00

4 shares in X plc are worth 5 shares in Y plc thus X plc will issue 1 4 shares in X plc are worth 5 shares in Y plc thus X plc will issue 1.6m new shares in exchange for the 2m shares in Y plc. The total market value of these shares @ €5 each is €8m, i.e. 2m shares in Y plc @ €4 each The capitals of the two companies after the acquisition are as follows: X plc Y plc Ordinary shares of €1 6.60m 2.00m Share premium 6.40m 0.00m Retained profits 11.00m 4.50m Total capital employed 24.00m 6.50m Note - goodwill will be €1.5m (8m - 6.5m)