1. Group Financial Reporting ACF 202 PART 1
Cynthia Fortin, CPA, CMA
Spring 2018

2. Global companies form groups

3. Group accounting
There is a need to see the overall results of a group not only that of its individual companies.

4. Group accounts framework
IAS 27 Separate financial statements
IAS 28 Investments in associates
IFRS 3 Business combinations
IFRS 10 Consolidated financial statements
IFRS 11 Joint arrangements
IFRS 12 Disclosure of interest in other entities
IFRS 36 Impairment of assets
Group accounts framework

5. How is a parent-subsidiary relationship identified?
Controls
Subsidiary
IAS 27 defines consolidated financial statements as ‘the financial statements of a group presented as those of a single economic entity.’ A group is made up of a parent and its subsidiary.
We will focus on enterprises, e.g. companies
Forms
a group

6. What is meant by control? IFRS 10
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

7. Control = Power over Group structure W1
to cast the majority of the votes at meetings of the board of directors.
more than 50% of the voting rights by virtue of agreement with other investors
to govern the financial and operating policies
to appoint or remove the majority of the members of the board of directors
holds <50% of the voting rights, but the remainder are widely distributed
Group structure W1

8. When is a parent not required to prepare CFS?
If the parent itself is a wholly owned subsidiary and its parent produces CFS that comply with IFRS
if the non current assets are immaterial.
Only if (IFRS 5) the non-current assets are held for sale or discontinued operations
If its other owners have been informed and do not object.
Group structure W1

9. Illustration
Green Co owns the following investments in other companies:
Equity shares Non-equity shares held
Violet Co % Nil
Amber Co % %
Black Co % %
Green Co also has appointed five of the seven directors of Black Co.
Which of the following investments are accounted for as subsidiaries in the consolidated accounts of Green Co Group?
A Violet only B  Amber only C  Violet and Black D  All of them
Answer
Let’s consider each of the investments in turn to determine if control exists and, therefore, if they should be accounted for as a subsidiary.
Violet Co – by looking at the equity shares, Green Co has more than 50% of the voting shares – ie an 80% equity holding. This gives them control and, therefore, Violet Co is a subsidiary.
Amber Co – you must remember to look at the equity shares, as despite having the majority of the non-equity shares, these do not give voting power. As Green Co only has 25% of the equity shares, they do not have control and, therefore, Amber Co is not a subsidiary.
Black Co – by looking at the percentage of equity shares, you may incorrectly conclude that Black Co is not a subsidiary, as Green Co has less than half of the voting rights. However, by looking at the fact that Green Co has appointed five of the seven directors, effectively they have control over the decision making in the company. This control should make you conclude that Black Co is a subsidiary.
Therefore the correct answer is C.

10. Group accounts Parent’s Financials Subsidiary’s Financials
Statement of Financial Position
Statement of Comprehensive Income
Statement of Cash Flows
Subsidiary’s Financials
Parent Group’s Financials
GROUP

11. Reasons for group accounts
Prevent preparing misleading accounts (true and fair reporting)
ensure comparability of FS and remove temptation to structure combinations to produce desired accounting results
Provide a more meaningful EPS ratio
Only the purchase method is allowed (IFRS 3)

12. Example of a Consolidated Financial Position Statement
babcock annual report.pdf
Go to page 131

13. Five key workings (W)
When considering the situation of a Parent and its Subsidiary we must determine:
W1 The Group structure
W2 Net assets of subsidiary at date of acquisition
W3 Goodwill
W4 Non-controlling interest
W5 Group retained earnings
Then prepare the group statement of financial position.

14. W1 The Group structure
Parent Controls > 50% of voting shares Subsidiary
At date of acquisiton ( doa)
GROUP

15. W1 Group structure Date of acquisition P obtains control of S
P starts directing operating and financial policies. P’s majority on BOD
Written agreement
P pays for shares and controls assets and assumes responsibility for liabilities
P for Parent
S for Subsidiary
BOD board of directors
W1 Group structure

16. W2 Net assets of Subsidiary at doa

17. W2 Net assets of Subsidiary at yearend

18. W2 subsidiary’s post acquisition Profits
From doa to yearend
At year end
At doa

19. Subsidiary’s post acquisition profits
S’s profits after date of acquisition
When there is NCI, P and NCI split them according to the % of their shareholdings.
P’s share is added in W5
NCI’s share is added in W4
Subsidiary’s post acquisition profits

20. W3 Goodwill
When P controls 100% of voting shares, fair value of the P’s investment is compared to fair value of S’s net assets at the date of acquisition (doa)
If P’s investment > S’s net assets, then the difference is purchase of Goodwill.

21. W3 Goodwill at date of acquisition
Parent’s investment
W2 Subsidiary’s net assets
GOODWILL
W3 Goodwill at date of acquisition

22. Positive goodwill Goodwill Recognized as an intangible asset
Must be subject to annual impairment tests (IAS 36)
Reflects reputation of the business:
Prospects of making future profits
Strong loyal customer base
Skilled workforce
When recognized impairment loss cannot
be reversed
Goodwill

23. Negative goodwill Goodwill
Treat as a profit immediately and include in group retained earnings
Reflects poor future prospects
Bargain purchase
Reassess amounts
Identify errors if any
If not
Goodwill

24. W4 Non-controlling interest (NCI)
Subsidiary
Voting shares
Parent
controls
NCI is nil
100%
Subsidiary
Voting shares
Parent
controls
NCI is 25% of Subsidiary’s net assets
25% of W2
75%

25. W5 Group retained earnings
Parent’s retained earnings at year end
Parent’s % of Subsidiary’s post acquisition
retained earnings refer to W2

26. Group statement of financial position
Prepare consolidation
Combine P’s assets and liabilities to S’s even if not wholly owned by P
Retained earnings include P’s share capital, retained earnings per W5 and the NCI per W4
P’s investment in S is cancelled
Goodwill per W3 is included as Intangible asset
Group statement of financial position

27. Examples Ghana Rose and Tulip Bird and Flower Zambia Jamaica Trinidad
Cyprus
Croatia
Lion
Tiger

28. A group of companies includes at a minimum, a parent (P) and its subsidiary (S).
S is an entity that is controlled by P.
P owns a majority of the ordinary shares in S. When P acquires control of another entity, it is done by acquiring shares rather than individual assets and liabilities.
The investment in P’s books is represented by the ownership of shares, which in turn represents control of the acquired entity’s net assets.
After the transaction S will continue to exist as a separate legal person with its continuing national legislative reporting responsibilities.
Groups accounts are prepared as if the group was a single entity and this reflects substance over form.
Cross cast (combine) assets and liabilities of P and S.
P’s investment in S is not a group asset, it is cancelled out when goodwill arises on consolidation.
What I need to know

29. Positive goodwill is a premium and is recorded as an intangible asset and subject to an annual impairment review
Negative goodwill is a bargain and recorded for as a group profit.
The share capital of the group is that of the P only, ever and always because the Financial statements are prepared for P’s shareholders.
Group retained earnings are P’s plus P’s % of S’s post-acquisition profits.
NCI at reporting date will be NCI at doa plus NCI % of S’s post- acquisition profits.
What I need to know

30. Multiple choice questions
Each student prepares 5 multiple choice questions with the content of Part 1.
Saves the questions on a USB key
Presents her questions on the screen in front of the class so everyone practices finding the correct answer.

31. References
ACCA_F7_S16_Notes Chapter 6 Group Accounts and Introduction Clendon, Tom (2012), “A Student's Guide to Group Accounts, 2nd Ed.” Kaplan ISBN: chapters 1, 2, 3. Elliott, Barrie and Elliott, Jamie (2011) FINANCIAL ACCOUNTING AND REPORTING, 14 th Edition, pp 553 IFRSBOX