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CONSOLIDATIONS

IFRS 10
IAS 27

Key definitions
Consolidated financial statements Financial statements of a group in which A, L, OE, I and E of parent and its subsidiaries are presented as those of a single economic entity Parent An entity that controls one or more entities Subsidiary An entity that is controlled by another entity Control
(IFRS 10: Appendix A)
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Control
IFRS 10 identifies three elements of control 1. Power over investee 2. Exposure, or rights to variable returns from involvement with the investee 3. Ability to use power over the investee to affect the amount of the investors returns
(IFRS 10:7)

An investor must possess all three elements to conclude it controls an investee. Conclusion is reassessed if there is an indication to at least one of the three elements.
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Elements of control: (1) Power

The investor has existing rights that gives it the ability to direct

the relevant activities (activities that significantly affect the investees returns) Power arises through

Voting rights such as when power over an investee is obtained directly and solely from the voting rights granted by equity instruments such as shares (often straightforward) Contractual arrangements when power results from one or more contractual arrangements (often more complex)

(IFRS 10:11)

Investor may have special relationship with investee that

indicates that it has power over the investee

Investees operations are dependant on the investor Investees key management personnel are current or previous

employees of the investor Significant portion of the investees activities are conducted for the investor.
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Elements of control: Power (ctd )


Substantive v protective rights IFRS 10 specifies that only substantive rights are considered in assessing power

Gives holder practical ability to exercise the rights when decisions need to be made

Investor with protective rights would not have power over an

investee

Eg, Right to approve new debt financing


(IFRS 10:11-14)

Considerations relating to voting rights Power with a majority of voting rights Majority of voting rights but no power Power without a majority of voting rights
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Power with a majority of voting rights


An investor that holds more than half of the voting rights of

an investee has power in the following situations


the relevant activities are directed by a vote of the holder of

the majority of the voting rights, or a majority of the members of the governing body that directs the relevant activities are appointed by a vote of the holder of the majority of the voting rights
(IFRS 10: B35)

Majority of voting rights but no power


For an investor that holds more than half of the voting rights of

an investee, to have power over an investee,


the investors voting rights must be substantive and must provide the investor with the current ability to direct the

relevant activities

If another entity has existing rights that provide that entity with

the right to direct the relevant activities and that entity is not an agent of the investor, the investor does not have power over the investee. An investor does not have power over an investee, even though the investor holds the majority of the voting rights in the investee, when those voting rights are not substantive.
Eg, if the relevant activities are subject to direction by a

government, court, administrator or regulator.


(IFRS 10: B36, B37) 7

Power without a majority of voting rights


An investor can have power even if it holds less than a

majority of the voting rights of an investee, for example, through:


a contractual arrangement between the investor and other

vote holders rights arising from other contractual arrangements the investors voting rights potential voting rights a combination of the above
(IFRS 10: B38)

Example 1: Power, voting rights


An investor acquires 48 per cent of the voting rights of an investee. The remaining voting rights are held by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. When assessing the proportion of voting rights to acquire, on the basis of the relative size of the other shareholdings, the investor determined that a 48 per cent interest would be sufficient to give it control. In this case, on the basis of the absolute size of its holding and the relative size of the other shareholdings, the investor concludes that it has a sufficiently dominant voting interest to meet the power criterion without the need to consider any other evidence of power.
(IFRS 10: B43, Eg 4)
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Example 2: Power, voting rights


Investor A holds 40 per cent of the voting rights of an investee and twelve other investors each hold 5 per cent of the voting rights of the investee. A shareholder agreement grants investor A the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities. To change the agreement, a twothirds majority vote of the shareholders is required. In this case, investor A concludes that the absolute size of the investors holding and the relative size of the other shareholdings alone are not conclusive in determining whether the investor has rights sufficient to give it power. However, investor A determines that its contractual right to appoint, remove and set the remuneration of management is sufficient to conclude that it has power over the investee.
(IFRS 10: B43, Eg 5)
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Example 3: Power, voting rights


Investor A holds 45 per cent of the voting rights of an investee. Two other investors each hold 26 per cent of the voting rights of the investee. The remaining voting rights are held by three other shareholders, each holding 1 per cent. There are no other arrangements that affect decisionmaking. In this case, the size of investor As voting interest and its size relative to the other shareholdings are sufficient to conclude that investor A does not have power. Only two other investors would need to co-operate to be able to prevent investor A from directing the relevant activities of the investee.
(IFRS 10: B44, Eg 6)
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Elements of control: Power (ctd )


Relevant activities for entities whose operations are

directed through voting rights are generally its operating and financing activities.
May be situations where voting rights are less relevant

because rights relate to administrative tasks only Analysis of investors contractual and non-contractual rights may be necessary

Appoint key management personnel Veto significant transactions

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Example: Power, relevant activities


Two investors form an investee to develop and market a medical product. One investor is responsible for developing and obtaining regulatory approval of the medical product. Once the regulator has approved the product, the other investor will manufacture and market it. If all the activitiesdeveloping and obtaining regulatory approval as well as manufacturing and marketing of the medical productare relevant activities, each investor needs to determine whether it is able to direct the activities that most significantly affect the investees returns. Accordingly, each investor needs to consider whether developing and obtaining regulatory approval or the manufacturing and marketing of the medical product is the activity that most significantly affects the investees returns and whether it is able to direct that activity. In determining which investor has power, the investors would consider: (a) the purpose and design of the investee; (b) the factors that determine the profit margin, revenue and value of the investee as well as the value of the medical product; (c) the effect on the investees returns resulting from each investors decision-making authority with respect to the factors in (b); and (d) the investors exposure to variability of returns (IFRS 10:B13,13 1) Eg

Elements of control: (2) Exposure, or rights to variable returns


Returns must have the potential to vary as a result of the

investees performance Can be positive, negative or both Examples


Change in value of investment
Dividends or interest

Management or service fees


(IFRS 10:15)

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Elements of control: (3) Ability to use power to affect returns


This considers the interaction between the first two control

concepts An investor with decision-making rights determines whether it is a principal or an agent.


An investor that is an agent does not control an investee when

it exercises decision-making rights delegated to it.


(IFRS 10:17, 18)

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CONSOLIDATION OF WHOLLY OWNED SUBSIDIARY AT ACQUISITION


Parent / subsidiary relationship comes about as a result

of a business combination
IFRS 3 defines a business combination as a transaction or

event in which the acquirer obtains control of one or more businesses IFRS 3 requires acquisition method to be used

Identification of acquirer Determination of acquisition date Recognition and measurement of Identifiable assets and liabilities assumed Any non-controlling interest in subsidiary Recognition and measurement of goodwill or gain from bargain purchase option
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Recognition and measurement of goodwill or gain from bargain purchase option


Internally generated goodwill not recognised as intangible

asset When goodwill is purchased in a business combination, it may be recognised as an intangible asset
GW is defined in IFRS 3 as the excess of the acquisition date fair value of the consideration transferred over the acquisition date fair value of the net amount of identifiable assets acquired and liabilities assumed
(this definition will be modified when dealing with partly-owned subsidiaries and non-controlling interests)

GW is thus the future economic benefits arising from assets

that are not capable of being individually identified and separately recognised.
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Eg 1- Consolidation at acquisition: Goodwill


P plc
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1 (a) (b)

S plc
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1

(c)
125 25

Other assets

Other assets Investment in S Share capital Retained earnings

120
30

105 45

30 30

150 100 50 150

150

150

100 50 150

100 50 150

Share capital Retained earnings

20 10 30

On 31 December 20X1 P Limited acquired 100% of the ordinary share capital of S plc for (a) 30 (b) 45 (c) 25 The other assets of S plc consist of inventory and accounts receivable which are considered to be fairly valued. Required: Prepare a consolidated SOFP at 31 December 20X1.
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Eg 1 - Procedure
Analyse equity of subsidiary for at acquisition adjustments Offset (eliminate) the carrying amount of the parents investment in the subsidiary (in Ps records as a Dr balance) against the capital and reserves of S at date of acquisition (in Ss records as Cr balances) Combine like items of assets, liabilities, equity, income and expenses of the parent with those of its subsidiary
(IFRS 10:B86)

On the consolidated SOFP, the assets and liabilities of S

replace the amount recorded by P as its investment in S.

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Eg 1- Workings
Analysis of equity of S At acquisition
(a)
SC RE Inv in S 20 10 30 30 -

(b)
20 10 30 45 15 GW

(c)
20 10 30 25 (5) BPO

Pro-forma consolidating j/e


Dr SC RE GW 20 10 Cr Dr 20 10 15 Cr Dr 20 10 Cr

Inv in S
Gain

30

45

25
5
20

Eg 1 - Solution
P & S GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x1 (a)
Other assets Goodwill Share capital (120 + 30) / (105 + 30) / (125 + 30) [15 (Dr GW)] 150 [100 + 30 30 (Dr SC)] 100 150

(b)
135 15 150 100

(c)
155 155 100

Retained earnings

(a) + (b) [50 + 10 -10 (Dr RE)] (c) [50 + 10 -10 (Dr RE) + 5 Cr Gain]

50
150

50
150

55
155

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Principles learnt
On consolidated SOFP,
Group share capital is the share capital of P only
Group RE is RE of P, plus RE of S

Post acquisition (thus eliminate at acquisition)

Investment in S (from Ps TB) does not appear

Other assets and liabilities of P and S are summed

together

The consolidation adjustments are not recorded in

the records of P or S
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Change in value of non depreciable assets of subsidiary


An arms-length transaction involving the transfer of

ownership of shares in a subsidiary may be a reliable indicator of major asset held by the subsidiary Adjustments are made to identifiable tangible assets on the basis of
specific information regarding the valuation of those assets implied information by examining the SOFP of the

subsidiary

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Eg 2 - Consolidation at acquisition: Excess attributable to non-depreciable asset


P plc
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1 (a) (b) (c)

S plc
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1 125
25 150

Other assets Investment in S


Share capital Retained earnings

120
30

105
45 150

Land Other assets

25
5

30 Share capital Retained earnings 20 10 30

150 100 50 150

100 50 150

100 50 150

On 31 December 20X1 P Limited acquired 100% of the ordinary share capital of S plc for (a) 30, when FV of land is 25 (b) 45, when FV of land is 40 (c) 25, when FV of land is 20 Required: Prepare a consolidated SOFP at 31 December 20X1. Ignore tax
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Eg 2 - Workings
Analysis of equity of S At acquisition
SC RE (a) 20 10 30 (b) 20 10 (c) 20 10

Land (37 25) / (20 25) Inv in S 30


-

12
42

(5)
25

45
3 GW

25
-

Pro-forma consolidating j/e


Dr
SC RE Land GW Inv in S 30 20 10

Cr

Dr
20 10 12 3

Cr

Dr
20 10

Cr

5 45
25 25

Eg 2 - Solution
P & S GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x1 (a)
Land Goodwill Other assets (25) / [25 + 12 (Dr Land)] / [25 5 (Cr Land)] [3 (Dr GW)] (120 + 5) / (105 + 5) / (125 + 5) 125 150 25

(b)
37 3 110 150

(c)
20 130 150

Share capital
Retained earnings

[100 + 30 30 (Dr SC)]


[50 + 10 -10 (Dr RE)]

100
50 150

100
50 150

100
50 150

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Principles learnt
The change in the fair value of the land
has not been recorded in the financial statements of S
has been recorded as a consolidation adjustment only.

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CONSOLIDATION OF WHOLLY OWNED SUBSIDIARY AFTER ACQUISITION


Analyse equity of subsidiary
At date of acquisition for at acquisition adjustments

to establish the fair value of the identifiable net assets of the subsidiary to calculate goodwill or bargain purchase option

The period between the date of acquisition and

the start of the current financial year to establish the post-acquisition profits or losses of the subsidiary attributable to the parent company for adjustments at beginning of current year The current year profit of the subsidiary company and any dividends paid for current year adjustments
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Example 3: Consolidation after acquisition


P plc
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1

S plc
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X1

Net assets

Share capital Retained earnings

150 150 100 50 150

Net assets Share capital Retained earnings

30 30 20 10 30

On 1 January 20X2 P Limited acquired 100% of the share capital of S Limited for 30.

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Example 3: Consolidation after acquisition . . .


Trial balances of P plc and S plc at 31 December 20x2 and 20x3 are as follows:
TRIAL BALANCES Net assets Investment in S Share capital Retained earnings boy Profit for period 31/12/20x3 P 220 30 250 100 90 60 S 47 47 20 15 12 P 160 30 190 100 50 40 31/12/20x2 S 35 35 20 10 5

250

47

190

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Required: Prepare consolidated financial statements for 20x2 and 20x3.


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Eg 3 - Workings
Analysis of equity of S
31/12/20x3
At acquisition SC RE Inv in S Beginning of year 20 10 30 30 15 (31/12/x2)
Cr Pro-forma Dr Dr

31/12/20x2
Pro-forma

20 10 30 30 10

Dr Dr

Cr

Beginning of year
RE at boy (31/12/x1)

RE at acquisition Current year


Profit

(10)
5 12

(10)
5
31

Eg 2 Workings . . .
Pro-forma consolidating j/e
20x3 Dr At acq SC RE Inv in S 20 10 30 20 10 30 Cr Dr 20x2 Cr

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Eg 3 - Solution
P & S GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20x3
Profit for the period 72 (60 + 12) 45

20x2
(40 + 5)

P & S GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER
20x3
SC Bal at boy Profit for period Bal at eoy 100 100 RE 95 72 167 100 (90 + 15 10)

20x2
SC 100 RE 50 45 95 (50 + 10 10)

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Eg 3 Solution . . .
P & S GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x3
Net assets 267 267 (220 + 47) 195 195

20x2
(160 + 35)

Share capital
Retained earnings

100
167 267

P only, or (100 + 20 20)


From SOCIE, or [(90 + 15 10) + 72]

100
95 195

P only, or (100 + 20 20))


From SOCIE, or [(50 + 10 -10) + 45]

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Principles learnt
Group RE at beginning of year =

Ps RE at beginning of year plus Ps share of Ss post acquisition RE at beginning of year

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