Learning Area 8 Chapter 11: Group accounts and insurance company accounts

What should you know? Knowledge of holding companies, subsidiaries and associates etc. Be able to calculate goodwill Understand group AFS

Example: Group Sanlam Limited 100% Sanlam Life Insurance Company Limited m/For+Individuals/Sanlam+Sky+Solutions/About+Us/Structure /

Subsidiary companies p2 Holding company holds a controlling interest in subsidiary company. Controlling interest if: >50% shares/voting rights Right to appoint/remove the board Holding company owns 100% of subsidiary’s shares: Wholly owned subsidiary Holding company owns less than 100%: Partially owned subsidiary

Subsidiary companies p3 Subsidiary company: own AFS Holding company: own AFS and consolidated AFS Purpose: to present group as single economic unit What is consolidated AFS? Adding across statements Eliminating Intra-group transactions (i.e. eliminating double counting problems) Why consolidated AFS? Control Investors’ interest

Subsidiary companies p3 & p4 H BSS BSGroup BS R’000 Non-current assets86 Investment in S Ltd10- Current assets1210 Total assets3016 Share capital (R1 shares)2010 Current liabilities106 Total equity and liabilities3016

Subsidiary companies p3, 4 & 5 H BSS BSGroup BS R’000 Non-current assets8614 Investment in S Ltd10-- Current assets Total assets Share capital (R1 shares) Current liabilities10616 Total equity and liabilities301636

Goodwill p5 Goodwill = Cost of acquisition – book value of shares acquired Cost of acquisition = Cash paid + market value of shares / debt paid to subsidiary’s shareholders Why pay more than book value? - Holding company is paying for intangibles such as :  Reputation of subsidiary  Customer base  Loyal workforce All separate identifiable assets should be recognised before goodwill is calculated e.g. trademarks etc. Test annually for impairment

Accounting for goodwill p7 H BSS BSGroup BS R’000 Non-current assets - Other8614 -Goodwill Investment in S Ltd11- Current assets Total assets Share capital (R1 shares)2010 Current liabilities10616 Total equity and liabilities301636

Accounting for goodwill p7 H BSS BSGroup BS R’000 Non-current assets - Other8614 -Goodwill1 Investment in S Ltd11-- Current assets Total assets Share capital (R1 shares) Current liabilities10616 Total equity and liabilities301636

Goodwill p8 What happens if Company H bought Company S for an amount lower than book value? -Therefore goodwill will be a negative amount -Negative amount added to the “other reserves” item (so that “other reserves” increase) Question 11.1 Solution 11.1.docx

Non-controlling interests p9 If holding company owns <100%...still consolidated AFS (add 100% of Subsidiaries’ assets, liabilities, income, expenses), but: Non-controlling interest to account for ‘minority Shareholder’s share in net assets of Subsidiary’ Example p9 LA8 Non-controlling interest example.docxLA8 Non-controlling interest example.docx

Associated companies p12 Is a company over which the holding company has significant influence, but no control! Usually between 20% and 50% shareholding Do not include 100% income, expenses, assets, liabilities (as no control) Include: I/S: % of profit as a single line: income from associate BS: Investment…increases by % income per income statement and decreases by dividends paid.

Interpretation of consolidated AFS p12 Group has no legal entity BUT - controlled by same shareholders, therefore an accounting entity for which group AFS is compiled In theory – it is possible for subsidiary to fail without receiving support from group members. In practice – almost impossible since one of group members will bail out struggling company. Why?..... It poses a reputational risk!!

Summary SubsidiaryAssociateInvestment Controlling interest: ->50% - appoint board of directors Significant influence - 20 – 50% <20%, if not S or A Consolidate 100% of A, L, I, E Non-controlling interest One line in I/S (income from associate) and BS (investment in associate) BS: cost/market value I/S: Dividend income

Insurance company accounts p Uncertainties When claims are to be paid and how much? How many future premiums to be received Profits: how much and when to recognise Additional liabilities: future claims – calculated by actuaries AFS differ from normal companies’ AFS Only short theory questions p14 – 19 in test and exam (Tested later in studies in the relevant specialist subjects General and Life)

HOMEWORK Question 11.2 (p12 Subsidiaries and associates) Question 11.3 (p13 Definitions)