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Session 3 & 4: Consolidated SFP
Accounting for Groups:

Consolidated Statement of
Financial Position
Sessions 3 & 4
AC3091: Financial Reporting
Learning Outcomes
describe a group
compute the value of goodwill and noncontrolling (minority) interest
describe the rationales used to develop
different models of consolidation
(acquisition, merger, equity, proportional)
prepare consolidated balance sheet using
the acquisition, equity and proportional
consolidation methods
Relevant Accounting Standards

o IFRS 3 Business Combinations (revised 2008)
o IFRS 10 Consolidated Financial Statements
(from 2013 onwards)
o IAS 27 Separate Financial Statements
o IAS 36 Impairment of Assets.
o IAS 38 Intangible Assets
Accounting for Groups

Definition of group
Exists where one enterprise controls, either
directly or indirectly, another enterprise
Consists of a parent and its subsidiaries
(IFRS 10)
Parent
An entity that controls one or more entities
Subsidiary
An entity that is controlled by another entity

Control
An investor controls an investee when it is
exposed, or has rights, to v
from its involvement with the investee and
has the a
through its p
over the investee
Control
Rights to variable
returns
Ability to affect
variable returns
Power over
investee

Investor has control over investee if
investor has ALL the following:
power over the investee;
exposure, or rights, to variable returns from
its involvement with the investee; and
the ability to use its power over the investee
to affect the amount of the investors returns
Test of Control : Power
Power
Relevant
Activities
existing r
that give
investor the current ability to direct
the relevant activities
a
that significantly
affect the investees returns

Examples of rights include:
voting rights (or potential voting rights) of an investee
rights to appoint, reassign or remove members of an
investees key management personnel who have the
ability to direct the relevant activities;
rights to appoint or remove another entity that directs
the relevant activities;
rights to direct the investee to enter into, or veto any
changes to, transactions for the benefit of the investor;
and
other rights (such as decision-making rights specified in
a management contract) that give the holder the ability
to direct the relevant activities

Potential voting rights
Instruments which have the potential, if exercised or
converted, to give the entity voting power
E.g. share options, convertible notes
Given due consideration when assessing capacity to control
As per Basis for Conclusions to IFRS 10
Potential voting rights can give the holder the current
ability to direct the relevant activities
This will be the case if those rights are substantive and on
exercise or conversion (when considered together with
any other existing rights the holder has) they give the
holder the current ability to direct the relevant activities
The holder of such potential voting rights is, in effect, in
the same position as a passive majority shareholder

Delegation of power
Whether power to be exerted over the entity is being
used in the context of an agency relationship, or is
power being exercised to benefit the investor directly
If an entity has power, but is acting under the direction of
another entity - perhaps as an agent of that other entity then control would not be deemed to exist and the entity
would not be required to consolidate the entity over which it
had power

Examples of r
include:
a) selling and purchasing of goods or services;

b) managing financial assets during their life (including
upon default);
c) selecting, acquiring or disposing of assets;
d) researching and developing new products or
processes; and
e) determining a funding structure or obtaining funding.
Test of Control : Variable Returns

r
Variable
Returns
as a result
of the performance of an investee
can be only positive, only negative or
both positive and negative
p
from its involvement as a result of the
investees performance
Exposure/ assessed based on substance of

arrangement regardless of legal form of
Rights
returns
Test of Control : Variable Returns

Examples of returns include:
a) Dividends, interest and changes in the value of
the investment
b) remuneration for servicing assets or liabilities
c) returns that are not available to other interest
holders
Test of Control : Power & Returns

Link between power and returns
ability to use its power to affect the investors
returns from its involvement with the investee
an investor with decision-making rights shall
determine whether it is a principal or an agent.
an agent does not control an investee when it
exercises decision-making rights delegated to it
Accounting Requirements
An entity that is a parent shall present
consolidated financial statements
Results and financial position of a group as if it
were operating as a single economic entity
consolidated statement of comprehensive income
will show the financial results derived from
operations with external parties
consolidated statement of financial position will
show the total assets controlled by the economic
entity and the total liabilities owed to parties outside
the economic entity
Exemptions from consolidation
Parent is a wholly-owned or partially-owned
subsidiary and owners do not object to it not
preparing consolidated financial statements
Its securities are not publicly traded
It is not in the process of issuing securities
Ultimate/immediate parent publishes
consolidated financial statements and comply
with IFRS
Consolidated
Statement of
Comprehensive
Income
Consolidated
Statement of
Financial
Position
Consolidated
Statement of
Cash Flows
Consolidated
Financial
Statements
Parent
company
financial
statements
Models of Group Accounting
Method
Description
Entity model
Stresses on common control regardless
(Economic entity
of ownership
model)
Does not makes a distinction between
different shareholders (controlling and
non-controlling) in the companies that
comprise the group
Non-controlling interests are treated as
part of consolidated equity
All assets and liabilities of the parent
entity and subsidiaries included
% of parent +
% of subsidiary
Method
Description
Proprietary
model
Stresses on ownership interest rather

than control
Shareholders of parent are the only
relevant users and they are only
interested in equity shares they own
Non-controlling interest is not included
entity and only a proportionate share of
the subsidiaries assets and liabilities
included:
% of parent + parents share in
subsidiary
10
Method
Description
Parent entity
model

and subsidiaries are included
of parent +
of subsidiary
Non-controlling interest typically treated
as a liability
Methods of Consolidation
Method
Description
Acquisition
method
Used to account for holding company

(or parent) to subsidiary relationships
The acquirer purchases the interests of
the acquired companys shareholders
Merger or
pooling of
interest method
Formerly used in accounting for

combinations of equal entities
The two parties combine to create a
new entity (i.e. the uniting of the
interests of two formerly distinct
shareholder groups)
Banned under IFRS 3
11
Method
Description
Equity method
Typically used in group accounting for

associates
Investment by the holding company into
another company treated at cost and
adjusted thereafter for share of profits
Proportional
method
Typically used in group accounting for

joint ventures.
Derived from the proprietary model of
accounting
Acquisition vs. Merger Methods

Acquisition
Merger (pooling of interest)
Shares issued
accounted for at fair
value
Shares issued accounted for

at nominal value (i.e. no
share premium account)
Assets & liabilities of

acquired are
consolidated at fair
values
Assets & liabilities of

combining entities are
consolidated at book values
Goodwill on
consolidation may arise
No goodwill, either positive

or negative, is recorded
12
Acquisition vs. Merger Methods

Acquisition
Merger (pooling of interest)
Reserves and profits of

Reserves and current-year
acquired are eliminated
profit are added together as
at acquisition date; only
if combination occurs since
post-acquisition reserves
commencement of business
and profit are included in
consolidated statements
(Ng. E.J; 2013)
Merger method has been disallowed. Except for

businesses under common/shared control, all other
business combinations are to use acquisition method.
(IFRS 103)
Accounting for Subsidiaries:

Acquisition Method
Steps in preparing consolidated accounts at
date of acquisition:
1) Identify parent and subsidiary in group structure
2) Ascertain net assets of subsidiary at acquisition
date and at balance sheet date
3) Calculate goodwill on acquisition
4) Calculate non-controlling interest (NCI)
5) Calculate reserves for the Group.
13
Financial Position
Principles in preparing consolidated statement
of financial position:
Add together items owned/owed by each entity
(e.g. assets owned; liabilities to external parties)
Cancellation of like items internal to group (e.g.
intra-group transactions/debts)
Consolidate as if group owned everything and then
show extent to which group does not own
everything
Consolidated statements should be prepared using
uniform accounting policies for like transactions and
other events in similar circumstances
Financial Position
Should NOT show

Share capital
Unrealised
Investment
& preprofits, interin subsidiary acquisition
company
reserves of
account
debt/trading
subsidiary
14
Financial Position
Points to note:
Share capital shown is the share capital of the
parent only
Reserves shown comprise of reserves of the
parent, plus the groups share of the profits earned
by subsidiary less any dividends paid by subsidiary
Amount by which subsidiary is financed by
outsiders is presented under Non-Controlling
Interests (NCI) within equity but separate from
parents shareholders
NCI: Equity in a subsidiary not attributable, directly or
indirectly, to a parent
Illustration 1: Basic Consolidation

P Ltd acquired 100% of the issued share capital of S Ltd on
31 December 20X9 for total consideration of 200,000.
Balance sheets as at 31 Dec 20X9
P Ltd
S Ltd
000
000
Property, plant & equipment
300
150
Investment in S Ltd
200
Accounts receivables
150
50
100
Bank
700
250
Share capital
400
150
Retained earnings
200
50
Accounts payable
100
50
700
250
Required:
Prepare a consolidated balance sheet of P Ltd group.
15
Goodwill
Excess of cost over acquirers interest in the
net fair value of identifiable assets, liabilities
and contingent liabilities [IFRS 3]
Represents future economic benefits arising
from assets acquired that are not individually
identified and separately recognised
Recognised as
balance sheet
Subsequently measured at
in
under IAS 36 Impairment

of Assets
Illustration 2: Goodwill
P Ltd
S Ltd
000
000
300
150
Investment in S Ltd
200
150
50
70
Bank
700
220
Share capital
400
120
Retained earnings
200
50
Accounts payable
100
50
700
220
Required:
16
Negative Goodwill
Arises when cost of purchase is less than
value of company acquired
acquirers interest in the net fair value of identifiable
assets, liabilities and contingent liabilities exceeds
cost of business combination
Possibly a result of bargain purchase

e.g. forced sale in which the seller is acting under
compulsion
Gain is recognised in
Negative Goodwill
Before recognising a gain on a bargain
purchase, the acquirer shall:
reassess whether it has correctly identified all
of the assets acquired and all of the liabilities
assumed and shall recognise any additional
assets or liabilities that are identified in that
review
review the procedures used to measure the
amounts required to be recognised at the
acquisition date
17
Illustration 3: Negative Goodwill

P Ltd
S Ltd
000
000
300
150
Investment in S Ltd
150
150
Bank
100
70
700
220
Share capital
400
120
Retained earnings
200
50
Accounts payable
100
50
700
220
Required:
Asset Revaluation
All identifiable assets and liabilities of the
acquiree should be measured and restated to
their
If net assets not stated at fair value,
adjustments may be made by:
Acquiree: subsidiary will have a
to be eliminated against cost of
investment when computing goodwill
Acquirer: adjusting entries made during
consolidation to record assets (including
goodwill) and liabilities
18
Illustration 4: Asset Revaluation

31 December 20X9 for total consideration of 200,000. The
balance sheets of P Ltd and S Ltd as at 31 December 20X9
are as follows:
P Ltd
S Ltd
000
000
Building
300
150
Investment in S Ltd
200
Inventory
150
40
50
30
Bank
700
220
Share capital
400
120
Retained earnings
200
50
Accounts payable
100
50
700
220
Illustration 4: Asset Revaluation

The fair value of building and inventory for S Ltd as at the
date of acquisition were 180,000 and 20,000
respectively.
Required:
Prepare a consolidated balance sheet of P Ltd and is
subsidiary as at 31 December 20X9.
19
Non-Controlling Interest
Equity in a subsidiary not attributable, directly
or indirectly, to a parent [IFRS 10]
Non-controlling shareholders proportionate
share in net assets of subsidiary
Represented by shareholders capital
contribution and their share of reserves
NCI should be measured at:
a) Fair value (e.g. market value of shares), or
b) Proportionate share in net assets of
subsidiary
[IFRS 3]
References: Tan, L.T (2013); Ng, E.J et al. (2013)
Non-Controlling Interest
Entity concept/full consolidation method:
100% of subsidiarys assets and liabilities are
added to those of parent
Presented in the consolidated statement of
financial position within equity, separately from
the equity of the owners of the parent
An entity shall attribute the profit or loss and

each component of other comprehensive
income to the owners of the parent and to the
non-controlling interests
References: Tan, L.T (2013); Ng, E.J et al. (2013)
20
Illustration 5: Non-Controlling Interests

P Ltd acquired 80% of the issued share capital of S Ltd on 31
December 20X9 for total consideration of 200,000.
P Ltd
S Ltd
000
000
300
150
Investment in S Ltd
200
150
Bank
50
70
700
220
Share capital
400
100
Retained earnings
200
50
Accounts payable
100
70
700
220
Required:
Pre & Post Acquisition Reserves

Pre & Post Acquisition Reserves
Reserve
Description
Pre-acquisition
reserves
Reserves of subsidiary as at
To be eliminated against
in consolidation process
Included in calculation of goodwill
Post-acquisition
reserves
Profits of subsidiary earned

Groups share of post-acquisition
reserves are included in
21
Illustration 6: Pre/Post Acq. Reserves

The balance sheets of P Ltd and S Ltd as at 31 Dec 20X9 are
as follows:
P Ltd
S Ltd
000
000
300
150
Investment in S Ltd
200
150
50
70
Bank
700
220
Share capital (1 each)
400
100
Retained earnings
200
50
Accounts payable
100
70
700
220
Illustration 6: Pre/Post Acq. Reserves

P Ltd acquired 80,000 shares in S Ltd on 1 January 20X8 for
total consideration of 200,000. The share capital and
retained earnings for S Ltd on the acquisition date were
100,000 and 30,000 respectively.
Required:
22
Intragroup Trading
Intragroup trading may involve one group
entity selling to another at a profit
If goods remain in the inventory, any
unrealised profit is eliminated on consolidation
Cancel out any profit made by the seller as
gain only achieved when goods or service sold
to
Closing inventory to be valued at cost to the
group, i.e. any
held by the purchaser
Intragroup Trading
If parent sell to subsidiary,
remove unrealised profit from parents books
Dr
Group retained earnings

Cr
Group inventory [closing]
If subsidiary sell to parent,

remove unrealised profit from subsidiarys
books and shared between NCI (if any) and
parent company
Dr
Group retained earnings (parents share)

Non-controlling interest (NCIs share)
Cr
Group inventory [closing]
23
Illustration 7: Intragroup - Inventory

as follows:
P Ltd
S Ltd
000
000
Building
300
150
Investment in S Ltd
200
Inventory
150
60
Bank
50
10
700
220
400
120
Retained earnings
200
50
Accounts payable
100
50
700
220

January 20X8 for total consideration of 200,000. The share
capital and retained earnings for S Ltd on the acquisition date
were 120,000 and 30,000 respectively.
P Ltd had sold goods worth 100,000 to S Ltd at a mark-up of
25%. A quarter of these goods are still unsold and remains in
the inventory of S Ltd as at 31 December 20X9.
Required:
24

as follows:
P Ltd
S Ltd
000
000
Building
300
100
Investment in S Ltd
200
Inventory
110
60
Trade receivables
40
50
Bank
50
10
700
220
400
120
Retained earnings
200
50
Trade payables
100
50
700
220

S Ltd had sold goods worth 100,000 to P Ltd at a mark-up of
25%. Half of these goods are still unsold and remains in the
inventory of P Ltd. P Ltd owes S Ltd 20,000 for goods
purchased and this is included in the trade payables of P Ltd
and trade receivables of S Ltd.
Required:
25
Intragroup Asset Sale

Intragroup sales of depreciable assets (or
transfers of such assets not made at their
book values) may cause the following:
Disposing entity recording a
Purchasing entity provides depreciation based
on the
Intragroup profit or loss on asset

sale/transfer is eliminated and depreciation
corrected for over- or under-provision
References: Tan, L.T (2013)
Illustration 9: Intragroup Asset Sale

The balance sheets of P Ltd and S Ltd as at 31 Dec
20X9 are as follows:
P Ltd
S Ltd
000
000
300
150
less: accumulated depreciation
(50)
(30)
Investment in S Ltd
200
Trade receivables
150
30
Bank
100
70
700
220
400
120
Retained earnings (31 Dec 20X8)
150
30
50
20
Profit for the year 20X9

Trade payables
100
50
700
220
26
Illustration 9: Intragroup Asset Sale

P Ltd acquired 100% of the issued share capital of S Ltd
on 31 December 20X8 for total consideration of
200,000. The share capital and retained earnings for S
Ltd on that day were 120,000 and 30,000 respectively
P Ltd had sold an equipment costing 30,000 to S Ltd
for 35,000, with the profit of 5,000 included in P Ltds
profit for 20X9. The accumulated depreciation balance of
S Ltd includes 8,000 for the abovementioned
equipment. It is the groups policy to depreciate
equipment at 20% on cost per annum.
Required:
Intragroup Dividends
Parent recognises dividend income from its
investment in subsidiaries when the
shareholders right to receive dividend is
established
in parents accounts
should be eliminated on consolidation with the
in subsidiarys accounts
If subsidiary is partially owned, portion of

dividends is payable to NCI and included in
of consolidated
balance sheet
27
Intragroup Dividends
Dividends paid from pre-acquisition profits
Dividends paid by a subsidiary are to be recorded
as dividend revenue in the parent entitys accounts
Reduces the net assets of the subsidiary and may
cause Investment in Subsidiary to fall below
original cost of investment (i.e. impairment loss)
Impairment loss to be reversed as a consolidation
adjustment before eliminating the parents
Investment in a Subsidiary against the share
capital and reserves of the subsidiary as at the date
of acquisition
Illustration 10: Dividends / Goodwill

as follows:
P Ltd
S Ltd
000
000
300
150
Investment in S Ltd
200
Trade receivables
130
30
Dividend receivable
20
Bank
50
60
700
240
400
120
Retained earnings
200
50
Trade payables
100
45
25
700
240
Dividend payable
28
Illustration 10: Dividends / Goodwill

Goodwill is to be impaired by 50% after a review conducted
on 31 October 20X9. S Ltd declared a dividend payable of
25,000 during 20X9. P Ltd has recognised a dividend
receivable of 20,000 in its statement of financial position.
Required:
Thank You
Q&A
58
29

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Session 3 & 4: Consolidated SFP

Accounting for Groups:

Session 3 & 4: Consolidated SFP

Relevant Accounting Standards

Accounting for Groups

Session 3 & 4: Consolidated SFP

Accounting for Groups

Accounting for Groups

Session 3 & 4: Consolidated SFP

Test of Control : Power

Test of Control : Power

Session 3 & 4: Consolidated SFP

Test of Control : Power

Test of Control : Power

Session 3 & 4: Consolidated SFP

Test of Control : Power

a) selling and purchasing of goods or services;

Test of Control : Variable Returns

Exposure/ assessed based on substance of

Session 3 & 4: Consolidated SFP

Test of Control : Variable Returns

Test of Control : Power & Returns

Session 3 & 4: Consolidated SFP

Session 3 & 4: Consolidated SFP

Session 3 & 4: Consolidated SFP

Stresses on ownership interest rather

Session 3 & 4: Consolidated SFP

All assets and liabilities of the parent

Used to account for holding company

Formerly used in accounting for

Session 3 & 4: Consolidated SFP

Typically used in group accounting for

Typically used in group accounting for

Acquisition vs. Merger Methods

Merger (pooling of interest)

Shares issued accounted for

Assets & liabilities of

Assets & liabilities of

No goodwill, either positive

Session 3 & 4: Consolidated SFP

Acquisition vs. Merger Methods

Merger (pooling of interest)

Reserves and profits of

Merger method has been disallowed. Except for

Accounting for Subsidiaries:

Session 3 & 4: Consolidated SFP

Should NOT show

Session 3 & 4: Consolidated SFP

Illustration 1: Basic Consolidation

Property, plant & equipment

Session 3 & 4: Consolidated SFP

under IAS 36 Impairment

Property, plant & equipment

Session 3 & 4: Consolidated SFP

Possibly a result of bargain purchase

Session 3 & 4: Consolidated SFP

Illustration 3: Negative Goodwill

Property, plant & equipment

Session 3 & 4: Consolidated SFP

Illustration 4: Asset Revaluation

Illustration 4: Asset Revaluation

Session 3 & 4: Consolidated SFP

An entity shall attribute the profit or loss and