1 Complex Groups Clean

Complex Groups: Vertical and D Shaped
Complex Groups
1. Vertical Groups
1.1: What is a vertical group?
A vertical group is created when a parent controls a
company via a shareholding in a subsidiary.
A Inc
80%
B Inc
60%
C Inc
C Inc is a subsidiary of both A and B. This is because A
Inc CONTROLS B Inc, and can therefore direct B Inc how
to cast its votes in C Inc. Given that B Inc has a controlling
interest in C Inc, A Inc therefore controls C Inc.
A Inc is entitled to 48% of Cs profits. For example, if C
pays a dividend of $100, $60 of this would go to B. If B
paid all of this out as a dividend, then $48 (80% of $60)
would go to A.
Complex Groups
expertaccountingstudent.com
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1.2 Dates
The acquisition date of company C is determined by when
company A takes control.
Example: On 1 January 20X1 A buys 72% of Bs shares.
On 1 January 20X3 B buys 63% of Cs shares.
Example 2: On 1 January 20X4 B buys 53% of Cs

shares. On 1 January 20X7 A buys 88% of Bs shares.
Conclusion: Always use the latter of the two dates to identify

when A obtains control of C. This is essential for goodwill
calculations.
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1.3 Technique
Standard workings except:
o Create table in group structure working (W1) to
allocate profits between parent and NCI.
o Allocate the cost of the investment in company C in
the ratio of the shares owned in company B by the
parent and NCI.
Parents share is ADDED to cost of investment
in Goodwill working (W3).
NCI share is DEDUCTED in NCI working (W4).
o Allocate post acquisition profits between the parent
and NCI according to the group structure working
(W1).
1.4 Example:
Botting Inc acquired 60% of Padfield Inc on 1 January
20X3, when Padfield had reserves of $2.6 million and
Steele Inc had reserves of $1.2 million.
Padfield acquired 75% of Steele inc on 1 January 20X6,
when Padfield had reserves of $4.7 million and Steele
reserves of $1.8 million.
Botting uses the fair value method to measure goodwill. At
the acquisition dates Padfield had an NCI with a fair value
of $3.8 million and Steele $3.5 million.
Complex Groups
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At 31 December 20X8 the SFPs of the companies were:
Cost in Padfield
Cost in Steele
Other assets
$1 shares
Reserves
Liabilities
Botting
$'000
4,800
Padfield
$'000
Steele
$'000
9,800
14,600
2,800
6,200
9,000
5,400
5,400
5,000
7,300
2,300
14,600
2,000
4,600
2,400
9,000
1,000
3,000
1,400
5,400
Requirement: Prepare the consolidated SFP of Botting at 31

December 20X8.
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Complex Groups
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1.5 Practice Example:
Zamora bought 55% of Cullip Incs shares on 1 July 20X1,
when Zamora had reserves of $4.5 million and Cullip $1.7
million.
Lehman Inc bought 80% of Zamora Incs shares on 1 January
20X2, when Zamora had reserves of $5.4 million and Cullip
$2.2 million.
Lehman uses the proportionate method to measure goodwill.
At 31 March 20X7, the SFPs of the three companies were:
Cost in Zamora
Cost in Cullip
Other assets
$1 shares
Reserves
Liabilities
Lehman
$'000
11,520
Zamora
$'000
Cullip
$'000
23,520
35,040
6,720
14,880
21,600
12,960
12,960
12,000
17,520
5,520
35,040
4,800
11,040
5,760
21,600
2,400
7,200
3,360
12,960
Requirement:
Prepare the consolidated SFP for Lehman at 31 March 20X7.
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2: D Shaped (Mixed) Groups
2.1 What is a D shaped group?
Both the parent and the subsidiary have an investment in
a third company, which overall is controlled by the parent.
D
15%
70%
F
40%
E
In the above scenario, F is a subsidiary of E because D
CONTROLS 55% of the votes of F.
2.2 Technique
Same as for vertical group, except the group structure
working will now contain a direct and indirect cost.
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2.3 Example:
Vicente Inc bought 60% of Inigo Incs shares on 1 August
20X1, when Inigo had reserves of $1.5 million. On 1 December
20X3 Vicente bought 25% of Calderon Incs shares, and on the
same date Inigo bought 30% of Calderons shares. At this date
Inigo had reserves of $2.3 million and Calderon $1.0 million.
Vicente uses the proportionate method to measure goodwill.
At 30 June 20X5 the SFPs of the three companies were:
Investment in Inigo
Investment in Calderon
Other assets
$1 shares
Reserves
Liabilities
Vicente
$'000
8,400
3,300
12,000
23,700
10,000
11,200
2,500
23,700
Inigo
$'000
Calderon
$'000
3,700
6,200
9,900
4,000
4,700
1,200
9,900
4,800
4,800
2,000
2,500
300
4,800
Requirement: Prepare Vicentes consolidated SFP at 30 June

20X5.
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Complex Groups
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Complex Groups
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2.4 Practice question:
On 1 September 20X1 Booker Inc bought 90% of White Incs
shares. On the same day Booker bought 20% of Virgos
shares, and White bought 35% of Virgos shares. On 1
September 20X1 the reserves of the three companies were:
Booker
White
Virgo
$6.4 million
$4.2 million
$2.2 million
Booker uses the fair value method to measure goodwill. At 1

September 20X1 the NCI of White was measured at $2.0
million and that of Virgo at $15.0 million.
At 31 March 20X7 the SFPs of the three companies were:
Investment in White
Investment in Virgo
Other assets
$1 shares
Reserves
Liabilities
Booker
$'000
20,160
7,920
28,800
56,880
24,000
26,880
6,000
56,880
White
$'000
Virgo
$'000
8,880
14,880
23,760
9,600
11,280
2,880
23,760
11,520
11,520
4,800
6,000
720
11,520
Requirement: Prepare Bookers consolidated SFP at 31 March

20X7.
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Complex Groups
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Complex Groups
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2.5 Acquisitions at different dates
If the parent acquires a NON-CONTROLLING investment
in the sub-subsidiary at a different date to that of the direct
subsidiary, it is necessary to revalue the original
investment at the date of the second acquisition.
Dr Cost of investment
Cr Group reserves
Example:
Hoskins acquired 35% of Noones shares on 1 June 20X3,
when Noone had reserves of $800,000, and measured Noone
at cost in its financial statements.
On 1 January 20X5 Hoskins bought 80% of Greers shares and
at the same date Greer bought 40% of Noone. The fair value of
Hoskins original stake in Noone was valued at $5.2 million at
this date.
At this date Greer & Noone had reserves of $2.8 million and
$2.0 million respectively. Hoskins uses the fair value method to
measure goodwill. At acquisition the NCI of Greer was
measured at $1.8 million and that of Noone at $3.5 million.
At 31 December 20X8 the SFPs of the three companies were:
Investment in Greer
Investment in Noone
Other assets
$1 shares
Reserves
Liabilities
Complex Groups
Hoskins Greer
$'000 $'000
10,080
3,960 4,440
14,400 7,440
28,440 11,880
12,000 4,800
13,440 5,640
3,000 1,440
28,440 11,880
Noone
$'000
5,760
5,760
2,400
3,000
360
5,760
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Requirement: Prepare Hoskins consolidated SFP
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1 Complex Groups Clean

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Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Example 2: On 1 January 20X4 B buys 53% of Cs

Conclusion: Always use the latter of the two dates to identify

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Requirement: Prepare the consolidated SFP of Botting at 31

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Requirement: Prepare Vicentes consolidated SFP at 30 June

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Booker uses the fair value method to measure goodwill. At 1

Requirement: Prepare Bookers consolidated SFP at 31 March

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

Complex Groups: Vertical and D Shaped

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