GROUP FINANCIAL REPORTING

GROUP FINANCIAL REPORTING
FAC 3704 GROUP FINANCIAL REPORTING FAC3704 GROUP FINANCIAL REPORTING

Mr Jacques van Staden Office: AJH van der Walt Building Office 2-12 E – Mail: Tel No:

FAC3704 LECTURERS Ms LA Jordaan Ms M Scott Mr J van Staden Ms B Segoaa
Tel No:

How do I prepare for FAC3704?

1. Start early

2. Know your terminology

3. Practice REGULARLY

4. Learn from your mistakes

5. Ask if something is not clear

Business combinations
STUDY UNIT 1 Business combinations

IFRS 3: BUSINESS COMBINATIONS - SUMMARY Acquisition method
Identify the acquirer and account for business combination transaction separately from related transaction Acquisition date Consideration transferred Recognition of identifiable assets and liabilities Initial measurement of fair value of identifiable assets and liabilities Entity that obtains control is acquirer Separate related transactions and apply other IFRS standards Date on which control of net assets and operations is transferred to the acquirer Use fair value at acquisition date, also for business combination achieved in stages Costs directly attributable not part of business combination Contingent consideration Assets/liabilities recognised separately Basic recognition: Meet definitions in Conceptual Framework Classifying or designating Exceptions (contingent liabilities) Fair value as at acquisition date Market values or valuation techniques Exceptions

Non-controlling interest Goodwill/Gain on bargain purchase
Measurement period Disclosure At proportionate (partial) share of net assets, or At fair value (full goodwill method) Consideration transferred + non-controlling interest + FV of previously-held interest at date of acquisition (only step acquisition) – Net assets acquired and measured in terms of IFRS 3 = Goodwill: Recognise as asset, subsequent impairment test (IAS 36) or Gain on bargain purchase: Reassess all items; if still gain, recognise at acquisition date in profit of loss Limited to one year from acquisition date Provisional values recognised if accounting incomplete Also recognise assets and liabilities that previously were not recognised even though they existed Facts and circumstances existing at acquisition date should be considered Correction of error if it becomes known after measurement period

RECOGNISING GOODWILL / GOBP – PARTIAL GW METHOD
On 1 January 20.19, P Ltd acquired 75% interest from S Ltd. From that date P Ltd had control over S Ltd as per the definition of IFRS 10. The fair value of the consideration was R The fair value of the identifiable net assets of S Ltd amounted to R The non-controlling interests are measured at its proportionate share of the aquiree’s identifiable net assets at the acquisition date. Required: Calculate goodwill / gain on bargain purchase Calculation: Consideration transferred NCI (25% x ) FV of previous held interest Less: Net identifiable assets required ( ) Goodwill

RECOGNISING GOODWILL / GOBP – FULL GW METHOD
On 1 January 20.19, P Ltd acquired 75% interest from S Ltd. From that date P Ltd had control over S Ltd as per the definition of IFRS 10. The fair value of the consideration was R The fair value of the identifiable net assets of S Ltd amounted to R The non-controlling interests are measured at fair value of R at the acquisition date. Required: Calculate goodwill / gain on bargain purchase Calculation: Consideration transferred NCI FV of previous held interest Less: Net identifiable assets required ( ) Goodwill

CONSOLIDATIONS AFTER THE DATE OF ACQUISITION
STUDY UNIT 2 CONSOLIDATIONS AFTER THE DATE OF ACQUISITION

OVERVIEW OF IFRS 10 IFRS 10 Definitions Control Does control exist? NO
Consolidated financial statements Control Group NCI Parent Separate financial statements Subsidiary Control Does control exist? Consolidate Line-by-line combination Eliminate carrying amount of investment Calculate NCI Eliminate intragroup transactions Other considerations: accounting policies reporting date Change in ownership interests, not leading to loss in control Loss of control NO YES Apply other relevant standards i.e. IFRS 9, IFRS 11 and IAS 28

WHAT IS CONTROL? An investor controls and investee when the investor is exposed or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (IFRS 10.6) Elements of control Power over the investee Exposure / rights to / variable returns from involvement of the investee The ability to use power over the investee to affect the amount of the investors returns

INTRAGROUP TRANSACTIONS
Bank Inventories PPE Tax

INTRAGROUP TRANSACTIONS (examples)
Pinetown Ltd sold inventories to Silverlake Ltd at cost plus 25%. At the end of the reporting period, Silverlake Ltd had R of inventories on hand which were purchased from Pinetown Ltd. Total sales of inventories from Pinetown Ltd to Silverlake Ltd during the current reporting period amounted to R Pinetown Ltd has a 80% interest in Silverlake Ltd and controls Silverlake Ltd. Assume a tax rate of 28% Required: Prepare the intragroup journal entries Dt. Revenue Ct. Cost of Sales Dt Cost of Sales Ct. Inventory Dt Deferred tax Ct. Income tax expense `

Silverlake Ltd sold inventories to Pinetown Ltd at cost plus 25%. At the end of the reporting period, Pinetown Ltd had R of inventories on hand which were purchased from Silverlake Ltd. Total sales of inventories from Silverlake Ltd to Pinetown Ltd during the current reporting period amounted to R Pinetown Ltd has a 80% interest in Silverlake Ltd and controls Silverlake Ltd. Assume a tax rate of 28% Required: Prepare the intragroup journal entries Dt. Revenue Ct. Cost of Sales Dt Cost of Sales Ct. Inventory Dt Deferred tax Ct. Income tax expense `

Betty Ltd is a subsidiary of Alpha Ltd. Alpha Ltd sold inventories to Betty Ltd at a profit of 25% on the cost of inventory during 20.8 and 20.9. On 31 December 20.8 Betty Ltd had inventory on hand of R , which was bought from Alpha Ltd. On 31 December 20.9 Betty Ltd had inventory on hand of R , which was bought from Alpha Ltd. Assume a tax rate of 28% Required: Prepare the intragroup journal entries Journal entries for 20.8 Dt Cost of Sales Ct. Inventory Dt Deferred tax Ct. Income tax expense `

Journal entries for 20.9 Dt Retained earnings Ct. Cost of Sales Dt Income tax expense Ct. Deferred Tax [p202 of textbook] Dt Cost of Sales Ct. Inventory Dt Deferred tax Ct. Income tax expense `

Johnny Ltd has a 100% interest in Walker Ltd since Johnny Ltd controls Walker Ltd. On 2 January 20.6 Johnny Ltd sold an office building to Walker Ltd for R The carrying amount of the building for Johnny Ltd was R Both entities year end falls on 31 December. Assume a tax rate of 28%. Required: Prepare the intragroup journal entries Journal entries for 20.6 Dt Profit on sale of buildings/ Other income 5 000 Ct. PPE Dt Deferred tax Ct. Income tax expense `

Johnny Ltd has a 100% interest in Walker Ltd since Johnny Ltd controls Walker Ltd. On 2 January 20.6 Johnny Ltd sold an office building to Walker Ltd for R The carrying amount of the building for Johnny Ltd was R Both entities year end falls on 31 December. Assume a tax rate of 28%. Required: Prepare the intragroup journal entries Journal entries for 20.7 Dt Retained Earnings Dt Deferred Tax Ct PPE

INTRA GROUP TRANSACTIONS (examples)
Captain Ltd has a 100% interest in Morgan Ltd since Captain Ltd controls Morgan Ltd. On 31 December 20.6 Morgan Ltd sold a machine to Captain Ltd for R The carrying amount of the machine for Morgan Ltd was R Depreciation is provided for at 20% per annum on the straight line method. Both entities year end falls on 31 December. Assume a tax rate of 28%. Required: Prepare the intragroup journal entries Journal entries for 20.6 Dt Profit on sale of PPE Ct. PPE Dt Deferred tax Ct. Income tax expense `

Captain Ltd has a 100% interest in Morgan Ltd since Captain Ltd controls Morgan Ltd. On 31 December 20.6 Morgan Ltd sold a machine to Captain Ltd for R The carrying amount of the machine for Morgan Ltd was R Depreciation is provided for at 20% per annum on the straight line method. Both entities year end falls on 31 December. Assume a tax rate of 28%. Required: Prepare the intragroup journal entries Journal entries for 20.7 Dt Retained Earnings Dt Deferred Tax Ct. PPE Dt Accumulated Depreciation Ct. Depreciation Dt Income tax expense Ct. Deferred tax

SUNDRY ASPECTS Sundry aspects Adjustments at acquisition date
Impairment of goodwill Losses of a subsidiary Insolvent subsidiaries Preference shares

ACCOUNTING FOR INVESTMENTS IN ASSOCIATES
STUDY UNIT 4 ACCOUNTING FOR INVESTMENTS IN ASSOCIATES

WHEN IS AN ENTITY AN ASSOCIATE
Significant influence required – power to participate in financial and operating policy decisions. Presumption that 20% or more of voting rights provides significant influence

ACCOUNTING FOR AN ASSOCIATE
COST Includes goodwill (no pro forma journal required) Any excess recognised as part of share in profit of associate / jv (pro forma journal required) Consider effect of fair value adjustments upon acquisition (No pro forma journal required at acquisition) PLUS Changes in equities since acquisition date Changes in equity since acquisition Profit and other comprehensive income of associate / jv Adjust for subsequent effect of FV adjustments at acquisition, cumulative preference shares and intragroup gains and losses Dividends received reduce investment

Only two/three line items included in financials at % interest held Investment in associate - SFP Share of profit of associate – SP/LOCI Share of other comprehensive income of associate – SP/LOCI

ACCOUNTING FOR INTERESTS IN JOINT ARRANGEMENTS
STUDY UNIT 5 ACCOUNTING FOR INTERESTS IN JOINT ARRANGEMENTS

ACCOUNTING FOR A JOINT VENTURE
Joint Ventures have rights to the net assets (equity) of the arrangement Account for the investor’s portion of the net assets using the equity method (IAS 28) Eliminate gains and losses between the investor and joint venture EQUITY ACCOUNT (IAS28) – similar to associates (study unit 4)

ACCOUNTING FOR A JOINT OPERATION
Joint Operations have rights to the assets and obligations for the liabilities of the arrangement Account for the investor’s portion of assets, liabilities, revenue and expenses in terms of IFRS 11 Eliminate gains and losses between the investor and joint operation

EXAMPLE: BLOEMBOOKS LTD
Where do I start ??? Read the required What is required ??? A statement of financial position Asset section Additional guidance All amounts should be calculated to the nearest rand Read through the question Identify entities Identify group structure Identify intercompany transactions

GROUP STRUCTURE Bloembooks Ltd 45% 30% Graffiti Ltd Butterworks Ltd
Bloembooks exercise significant influence over the over the financial and operating decisions of Graffiti. JOINT OPERATION (given) APPORTIONED ACCOUNTING IFRS 11 ASSOCIATE = EQUITY ACCOUNTING IAS 28

PREPARE THE SKELETON BLOEMBOOKS LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment Investment in Associate Deferred tax asset Total non-current assets Current assets Trade and other receivables Inventory Cash and cash equivalents Loan to Graffiti Ltd Loan to Butterworks Ltd Total current assets Total assets

FILL THE SKELETON WITH EASY MARKS
BLOEMBOOKS LTD GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( Investment in Associate ( Deferred tax asset ( Total non-current assets Current assets Trade and other receivables ( Inventory ( Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets

APPLY IFRS 11 FOR BUTTERWORKS
BLOEMBOOKS LTD GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( ( x 45%) Investment in Associate ( Deferred tax asset ( Total non-current assets Current assets Trade and other receivables ( ( x 45%) Inventory ( ( x 45%) Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets

What is a mark-to-market reserve ??? Will this affect the SFP ???
BLOEMBOOKS LTD: POINT 2 It is the accounting policy of Bloembooks Ltd to account for investments in associates in accordance with IFRS 9, Financial Instruments in their separate financial statements. Bloembooks Ltd irrevocably elected to present the subsequent changes in the fair value of the investment in other comprehensive income in the mark-to-market reserve. What is a mark-to-market reserve ??? Will this affect the SFP ??? Which accounts ???

What was the original cost of the investment in Graffiti Ltd?
BLOEMBOOKS LTD: POINT 2 What was the original cost of the investment in Graffiti Ltd? Investment at FAIR value = R Mark-to-market reserve = R Movement tax rate: 28% x 66.6% =18.648% Therefore the value attributable to the Associate is = x 100/ ( ) = Therefore the original cost of the Investment in Graffiti Ltd was R – = What is the reversing accounting entry:

BLOEMBOOKS LTD: POINT 2 Accounting entry?
Dt. Mark-to-market reserve ( x %) Dt. Deferred Tax ( x %) Ct . Investment in Associate `

FILL IN THE SKELETON BLOEMBOOKS LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( Investment in Associate ( – Deferred tax asset ( Total non-current assets Current assets Trade and other receivables ( Inventory ( Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets

COST Includes goodwill (no pro forma journal required) Any excess recognised as part of share in profit of associate / jv (pro forma journal required) Consider effect of fair value adjustments upon acquisition (No pro forma journal required at acquisition) PLUS Changes in equity since acquisition date Changes in equity since acquisition Profit and other comprehensive income of associate / jv Adjust for subsequent effect of FV adjustments at acquisition, cumulative preference shares and intragroup gains and losses Dividends received reduce investment

Calculate goodwill / gain on bargain purchase on Graffiti
Share capital ( x 30%) Retained earnings ( x 30%)* Revaluation reserve ( x 30%) EQUITY AT ACQUISITION INVESTMENT IN GRAFFITI LTD AT COST ( ) GAIN ON BARGAIN PURCHASE * – 7 200( x 72%) =

COST Includes goodwill (no pro forma journal required) Any excess recognised as part of share in profit of associate / jv (pro forma journal required) Consider effect of fair value adjustments upon acquisition (No pro forma journal required at acquisition) PLUS Changes in equity since acquisition Profit and other comprehensive income of associate / jv Adjust for subsequent effect of FV adjustments at acquisition, cumulative preference shares and intragroup gains and losses Dividends received reduce investment

Movement in equity: (1 January 2011 – 30 November 2012)
GRAFFITI Movement in equity: (1 January 2011 – 30 November 2012) Retained earnings ( – )* x 30% Revaluation reserve ( – ) x 30% SINCE ACQUISITION TO BEGINNING OF YEAR * – =

COST Includes goodwill (no pro forma journal required) Any excess recognised as part of share in profit of associate / jv (pro forma journal required) Consider effect of fair value adjustments upon acquisition (No pro forma journal required at acquisition) PLUS Changes in equity since acquisition Profit and other comprehensive income of associate / jv Adjust for subsequent effect of FV adjustments at acquisition, cumulative preference shares and intragroup gains and losses Dividends received reduce investment

Movement in equity: (Current year)
GRAFFITI Movement in equity: (Current year) Profit for the year ( – ) x 30% Revaluation reserve ( ) x 30% CURRENT YEAR

FILL IN THE SKELETON BLOOMBOOKS LTD GROUP

BUTTERWORKS LTD: POINT 3
On 31 March 2013, Butterworks sold office equipment to Bloembooks Ltd for an amount of R Butterworks originally purchased this office equipment for R on the date when the joint operation was entered into. On 1 July 2012, Butterworks established that the office equipment had a total useful life of six years. The entity’s policy is to provide for depreciation over the expected useful life of the office equipment using the straight-line method which is consistent with the allowance of the South African Revenue Service.

JOINT OPERATION SELLS TO INVESTOR (PPE)
Group Structure Sale of Equipment Bloembooks Bloembooks UPWARD !!! 45% Butterworks Butterworks (JO) What is the unrealised profit on the sale ?

Step 1: What is the carrying amount of the equipment on 31 March 2013 ? Cost price: Accumulated depreciation (1/11/2012) Depreciation (2013: 1 July 2012 – 31 March 2013) ( / 6 x 9/12) (7 500) Carrying amount Step 2: What is the unrealised profit on the sale of the equipment? Proceeds Carrying amount (52 500) Unrealised profit x Profit share of 45%(JO) = 2 475

Accounting entry? 31 March 2013 Dt. Other income Ct . PPE Dt. Deferred tax Ct . Income tax expense `

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( – 2 475 Investment in Associate ( Deferred tax asset ( Total non-current assets Current assets Trade and other receivables ( Inventory ( Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets WHAT ABOUT THE DEPRECIATION ???

Unrealised profit x Profit share of 45% = Remaining useful life 6 years x 12 months = 72 months 1 July 2012 – 31 March 2013 = (9 months) Remaining useful life as on 31 March 2013 = 63 months Therefore the depreciation is: / 63 x 8 (1 April to 30 Nov) = 314

Accounting entry? 30 November 2013 Dt. Accumulated depreciation/PPE 314 Ct. Depreciation ` Dt. Income tax expense (314 x 28%) 88 Ct. Deferred tax `

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( – Investment in Associate ( Deferred tax asset ( Total non-current assets Current assets Trade and other receivables ( Inventory ( Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets

What of the information is relevant ???
GRAFFITI LTD: POINT 4 From 1 January 2011, Graffiti Ltd purchased inventory from Bloembooks Ltd. Bloembooks Ltd sold the inventory at a profit margin of 25% on cost. Total sales amounted to R in the 2012 financial year and R in the 2013 financial year. Inventory purchased from Bloembooks Ltd that was still on hand at year-end was as follows: 30 November R 30 November R What of the information is relevant ???

INVESTOR SELLS TO ASSOCIATE (INVENTORY)
Group Structure Sale of Equipment Bloembooks Bloembooks DOWNWARD!!! 30% Graffiti Graffiti (Associate) What is the unrealised profit on the sale ?

Closing inventory x 25 / 125 x Interest in associate (30%) = 7 800

Accounting entry? Dt. Gross Profit Ct. Investment in Associate ` Dt. Deferred rax (7 800 x 28%) Ct. Income tax expense `

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( – Investment in Associate ( – 7 800 Deferred tax asset ( – Total non-current assets Current assets Trade and other receivables ( Inventory ( Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets

BUTTERWORKS LTD: POINT 5
During the current year Butterworks sold inventory to the value of R to Bloembooks Ltd at a profit mark-up of 40% on the selling price. On 30 November 2013, Bloembooks Ltd had inventory on hand amounting to R that was purchased from Butterworks.

JOINT OPERATION SELLS TO INVESTOR (INVENTORY)
Group Structure Sale of Inventory Bloembooks Bloembooks UPWARD !!! 45% Butterworks Butterworks (JO) What is the unrealised profit on the sale ?

Closing inventory x 40 / 100 x Interest in associate (45%) =

Accounting entry? Dt. Cost of Sales Ct. Inventory ` Dt. Deferred tax ( x 28%) Ct. Income tax expense `

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( – Investment in Associate ( – 7 800 Deferred tax asset ( – Total non-current assets Current assets Trade and other receivables ( Inventory ( – Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets

GRAFFITI LTD: POINT 6 The fair value of the investment in Graffiti Ltd amounted to R on 30 November 2012. IRRELEVANT : WHY ???

GRAFFITI LTD: POINT 7 Graffiti Ltd declared a dividend of R on September 2013.

DIVIDEND PAID BY ASSOCIATE
Accounting entry? Dt. Other Income ( x 30%) Ct. Investment in Associate `

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( – Investment in Associate ( – – 9 000 Deferred tax asset ( – Total non-current assets Current assets Trade and other receivables ( Inventory ( – Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd (45 000 Total current assets Total assets

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( – Investment in Associate ( – – 9 000 Deferred tax asset ( – Total non-current assets Current assets Trade and other receivables ( Inventory ( – Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 Loan to Butterworks Ltd ( – ( x 45%) Total current assets Total assets

FILL IN THE SKELETON: ADD ALL AMOUNTS UP
BLOEMBOOKS LTD GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.13 ASSETS R Non-current assets Property, plant and equipment ( – Investment in Associate ( – – 9 000 Deferred tax asset ( – 10 813 Total non-current assets Current assets Trade and other receivables ( Inventory ( – Cash and cash equivalents ( Loan to Graffiti Ltd (12 500 12 500 Loan to Butterworks Ltd ( – ( x 45%) 24 750 Total current assets Total assets

QUESTIONS?

Wishing you the best on your studies!
FAC3704 LECTURERS

GROUP FINANCIAL REPORTING

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