Consolidated and Separate Financial Statements (IAS 27)
EXAMPLES: CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES
EXAMPLE 7.1
The following amounts of profit after tax relate to the Alpha group of entities:
$
Alpha Inc. 150,000
Beta Inc. 40,000
Charlie Inc. 25,000
Delta Inc. 60,000
Echo Inc. 80,000
Alpha Inc. owns 75 percent of the voting power in Beta Inc. and 30 percent of the voting power in Charlie Inc.
Beta Inc. also owns 30 percent of the voting power in Charlie Inc. and 25 percent of the voting power in Echo Inc.
Charlie Inc. owns 40 percent of the voting power in Delta Inc.
What is the status of each entity in the group, and how is the non-controlling interest in the group after-tax profit calculated?
EXPLANATION
Beta Inc. and Charlie Inc. are both subsidiaries of Alpha Inc., which owns, directly or indi-rectly through a subsidiary, more than 50 percent of the voting power in the entities.
Charlie Inc. and Echo Inc. are deemed to be associates of Beta Inc., whereas Delta Inc. is deemed to be an associate of Charlie Inc. unless it can be demonstrated that significant influ-ence does not exist.
The non-controlling interest in the group after-tax profit is calculated as follows:
$ $
Profi t after tax of Charlie Inc.
Own 25,000 Equity accounted
Delta Inc. (40% ⫻ 60,000) 24,000
49,000
Non-controlling interest of 40% 19,600
Profi t after tax of Beta Inc.
Own 40,000 Equity accounted:
Charlie Inc. (30% ⫻ 49,000) 14,700
Echo Inc. (25% ⫻ 8,000) 20,000
74,700
Non-controlling interest of 25% 18,675
38,275
Chapter 7 Consolidated and Separate Financial Statements (IAS 27) 87
EXAMPLE 7.2
A European parent company, with subsidiaries in various countries, follows the accounting policy of FIFO costing for all inventories in the group. It has recently acquired a controlling interest in a foreign subsidiary that uses LIFO because of the tax benefits.
How is this aspect dealt with on consolidation?
EXPLANATION
IAS 27 requires consolidated financial statements to be prepared using uniform accounting policies However, it does not demand that an entity in the group change its method of accounting in its separate financial statements to that method which is adopted for the group.
Therefore, on consolidation appropriate adjustments must be made to the financial state-ments of the foreign subsidiary to convert the carrying amount of inventories to a FIFO-based amount.
EXAMPLE 7.3
Below are the statements of financial position and income statements of a parent company and an 80 percent owned subsidiary. The table depicts the method and adjustments required to construct the consolidated financial statements.
Parent only ($) Subsidiary only ($) Adjustments ($) Consolidated ($)
Cash 50 120 170
Receivables
From Others 320 20 340
From Subsidiary 30 (30)(a) —
Goodwill —(b) —
Inventories 600 100 700
Plant and Equipment 1,000 500 1,500
Investments
In Others 800 40 840
In Subsidiary 360 (360)(c) —
Total Assets 3,160 780 (390) 3,550
Accounts Payable
To Others 250 100 350
To Parent 30 (30)(a) —
Long-Term Debt 1,350 200 1,550
Non-controlling Interest 90(c)(d) 90(e)
Common Stock 100 40 (40)(c) 100(f)
Share Capital 300 160 (160)(c) 300(f)
Retained Earnings 1,160 250 (250)(c) 1,160(f)
Total Liabilities and Equity 3,160 780 (390) 3,550
Notes to the Statement of Financial Position:
(a) The intercompany receivables or payables are eliminated against each other so that they do not affect the consolidated group’s assets and liabilities.
88 Chapter 7 Consolidated and Separate Financial Statements (IAS 27)
(b) There is no goodwill on consolidation as the parent paid consideration equal to its interest in the subsidiary.
Consideration $360 Add: non-controlling interest $90(d) Less: net asset value of subsidiary ($450) Goodwill from consolidation $0
(c) The investment in the subsidiary is eliminated at consolidated level against any goodwill, non-controlling interest and the recognition of the net assets of the subsidiary by the parent.
(d) The parent has elected to measure non-controlling interest as the pro rata share of the net asset value of the subsidiary:
20% of $450 = $90. IFRS 3 also allows a measurement choice where this initial amount may be recognized at fair value.
(e) Note that the non-controlling interest is an explicit item only on the consolidated statement of financial position.
(f) Note that the equity of the consolidated group is the same as the equity of the parent, which is the public entity.
Parent only ($) Subsidiary only ($) Adjustments ($) Consolidated ($)
Sales to Outside Entities 2,800 1,000 3,800
Receipts from Subsidiary 500 (500)(a) —
Total Revenues 3,300 1,000 (500) 3,800
Costs of Goods Sold (1,800) (400) (2,200)
Other Expenses (200) (50) (250)
Payments to Parent — (500) 500(a) —
Profit before Tax 1,300 50 — 1,350
Tax Expense (30%) (390) (15) (405)
Net Profit 910 35 — 945
Non-controlling Interest 189(b)
Notes to the income statement:
(a) The receipts from or payable by the subsidiary ($500) are eliminated against each other and do not appear on the consoli-dated income statement.
(b) The non-controlling interest’s share of profits after tax is calculated as its proportionate share of interest held in the sub-sidiary, that is, $945 ⫻ 20% = $189 attributable to non-controlling interest.
EXAMPLE 7.4
Investor Inc. holds a 25 percent interest in the issued share capital of Associate Inc. Investor Inc. acquires an additional 30 percent interest in Associate Inc. for $200. The fair value of 100 percent of the issued share capital of Associate Inc. at that date is $700. The equity accounted carrying amount of the investment at this date is $100. The net asset value of Associate Inc.
at that date is $400.
EXPLANATION
IAS 27 requires that when an entity acquires an additional interest in another entity that results in the change of nature of the investment (a step up acquisition), the existing interest held is deemed to be disposed of at fair value at that date. A gain or loss on the remeasurement of the existing interest to fair value should be recognized. For IFRS 3, the fair value of the existing interest should be included as part of the consideration for the additional interest.
In this example, Investor Inc. has acquired a controlling interest in an associate, that is, the interest in Associate Inc. has increased from 25 to 55 percent. The investment has therefore changed in nature from an associate (accounted for under the equity method) to a subsidiary (consolidated). The previous interest of 25 percent is therefore deemed to be disposed of at
Chapter 7 Consolidated and Separate Financial Statements (IAS 27) 89
fair value at the date of acquisition of the additional 30 percent. The steps to recognize the transaction at acquisition are detailed below.
Deemed disposal of the existing interest:
Dr Investment in Associate Inc. $75(a) Cr Fair value gains $75(a)
Determine amounts for IFRS 3 accounting:
Existing interest $175 Add: Cash paid $200 Total consideration $375
Add: non-controlling interest $315(b) Less: net asset value acquired ($400) Goodwill $290
(a) The existing interest is remeasured to fair value; that is, 25 percent of the 100 percent fair value of Associate Inc. = $700 ⫻ 25% – $100 equity accounted carrying amount of investment at that date.
(b) Non-controlling interest has been initially measured at fair value = $700 ⫻ 45% = $315.
EXAMPLE 7.5
Parent Inc. holds an 80 percent interest in the issued share capital of Subsidiary Inc. Parent Inc. disposes of 50 percent of its interest in Subsidiary Inc. for $300. The fair value of the 30 percent retained interest in the share capital of Subsidiary Inc. at that date is $180. The carry-ing amount of the net assets of Subsidiary Inc. at this date is $500 includcarry-ing goodwill of $60.
The carrying amount of the non-controlling interest (20 percent) at this date is $88.
EXPLANATION
IAS 27 requires that when an entity partially disposes of its interest in another entity and this results in the change of nature of the investment, the retained interest held is deemed to be acquired at fair value at that date.
In this example, Parent Inc. has lost control of a subsidiary, that is, the interest in Subsidiary Inc. has decreased from 80 to 30 percent. The investment has therefore changed in nature from subsidiary (consolidated) to an associate (equity accounted). The retained interest of 30 percent in Subsidiary Inc. is therefore deemed to be acquired at fair value at the date of dis-posal of the controlling interest. Parent Inc. will account for this partial disdis-posal as follows:
Dr Bank/cash $300(a)
Dr Investment in Subsidiary Inc. $180(b) Dr Non-controlling interest $88(c) Cr Net assets $440(c)
Cr Goodwill $60(c)
Cr Gain on disposal of subsidiary $68(d)
(a) Consideration received for the disposal of 50 percent interest.
(b) The fair value of the retained interest of 30 percent in Subsidiary Inc., deemed to be acquired.
(c) Subsidiary Inc. is no longer a subsidiary of Parent Inc. and should no longer be consolidated.
Its net assets and non-controlling interest should therefore be derecognized from the financial statements of Parent Inc.
(d) Any resulting difference from the derecognition of net assets, goodwill, and non-controlling interest and the recognition of the consideration and retained interest, should be accounted for as a gain or loss on the partial disposal of the subsidiary.
90 Chapter 7 Consolidated and Separate Financial Statements (IAS 27)
EXAMPLE 7.6
Parent Inc. acquired 60 percent interest in the issued share capital of Subsidiary Inc. for $300 when the non-controlling interest had a fair value of $200. Two years later, Parent Inc.
acquires the remaining 40 percent of its interest in Subsidiary Inc. for $300, effectively acquir-ing a 100 percent holdacquir-ing. Duracquir-ing the two years the net asset value of Subsidiary Inc. has increased by $100.
EXPLANATION
IAS 27 requires that when an entity acquires an additional interest or disposes of a portion of its interest in a subsidiary without a change in control over the entity, such transactions are considered to be transactions with non-controlling interest and should be recognized in equity. No gains or losses are recognized in profit or loss.
In this example, Parent Inc. has acquired the remaining 40 percent in Subsidiary Inc., which is already a subsidiary. Therefore there has been no change in the nature of the investment as control is held by Parent Inc. both before and after the transaction. This is therefore a transac-tion with the non-controlling interest and should be accounted for through equity. Parent Inc.
will account for this partial disposal as follows:
Dr Non-controlling interest $240(a) Dr Equity (e.g., retained earnings) $60(b) Cr Bank/cash $300(c)
(a) Derecognize total non-controlling interest as the entity becomes a wholly owned subsidiary.
At acquisition date the carrying amount of non-controlling interest = $200 fair value at initial acquisition + R100 increase in net asset value ⫻ 40% = $240.
(b) The resulting gain or loss on acquisition, that is, the difference between the adjustment to non-controlling interest and the amount paid. This should go through equity and not profit or loss as it is considered to be an equity transaction.
(c) The consideration paid for the acquisition of the additional interest in Subsidiary Inc.
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