Advanced Financial

Accounting
An IFRS® Standards Approach, 3e

Pearl Tan, Chu Yeong Lim and Ee Wen Kuah

Solutions Manual

Chapter 2
Group Reporting I: Concepts and Context

Copyright © 2016 by McGraw-Hill Education (Asia)

Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

CHAPTER 2

CONCEPT QUESTIONS

Concept Question 2.1

(a) Neither Co A nor Co B has control over Co C. Using the voting rights criterion, each
has only significant influence over Co C.

(b) Co A acquired the net assets rather than the equity of Co B. There is no parent-
subsidiary relationship between Co A and Co B.

(c) In this situation, Co B has ownership of the shares of Co A but the directors of Co A
have majority votes on the board of directors of Co B. Who is the real acquirer? In
view of the mixed evidence of control, other factors such as those indicated in IFRS 3
Appendix B: B14-B18 need to be identified to determine if a parent-subsidiary
relationship exists:

a. Who initiated the acquisition?

b. Does the management of Co A dominate the management of the combined entity?
c. Do the owners of Co A have the ability to appoint or remove a majority of the
board of directors?
d. Are the owners of Co A the largest shareholders of Co B after the acquisition?
e. Is Co A the larger of the two?
f. Is the business combination beneficial to Co A?

If the answer is yes to each of the above question, it is likely that this arrangement is a
reverse acquisition, with Co A being the effective acquirer and Co B being the takeover
target.

(d) When a loan is converted to issued share capital, the lenders assume the full rights of
equity owners. Hence, Co A has control through the ownership of more than 50% of
the voting rights of Co B, assuming that voting rights are the main source of power
over Co B.

2
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan, Lim and Kuah)
Chapter 2 Solutions

Concept Question 2.2

A
100% 60%

B C
40%
60%

B, C and D are subsidiaries of A. D is a subsidiary of A because of indirect control through

B and C.

Concept Question 2.3

A
50%
60%

B C

40%
60%
D

Only C is a subsidiary of A. Although the effective interest in D by A is 54% (30%+24%), A

does not have control in D because it does not have control over B.

Concept Question 2.4

False, it has to acquire the equity of the other entity to achieve the power over the voting
rights of the entity. If it acquires the net assets directly, there is no control of another entity.

Concept Question 2.5

True, an acquired subsidiary continues to exist as a separate legal entity. However, the
control exercised by the parent over the subsidiary results in both entities being units of the
same economic entity.

Concept Question 2.6

No, the power to govern is vested by the beneficial owner of Co X. Co A is acting in a

fiduciary capacity to govern Co X on behalf of the beneficial owner. Co X is effectively an
agent for Ms Gates, the principal who is exposed to the variability in returns of Co X.
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
3
Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

Concept Question 2.7

In considering all facts and circumstances under IFRS 10, there is strong basis to suggest that
Co Y is a subsidiary of Co A. Aside from voting rights, Co A has power arising from the
contractual agreement. Co A also has the ability to use its power to affect the variable returns
of Co Y. Co A has the power to appoint or remove the majority of the members of the Board
of Directors on the basis of the contractual agreement with other shareholders. It also has a
40% beneficial interest in Co Y that bolsters its contractual right to determine the majority
composition on the Board of Directors. Relative voting rights is an important consideration in
IFRS 10.

Concept Question 2.8

Co A Total

Ordinary shares 40,000,000 100,000,000

Potential
ordinary
shares from
convertible debt 40,000,000 (Note 1) 48,000,000

Total 80,000,000 148,000,000

Note 1:
Convertible debt 10,000,000 12,000,000
Each $ 1 of debt is convertible into 4 ordinary shares

With potential voting rights included, percentage held by Co A = 80m/148m = 54.0 percent.

All things being equal,

(a) Co A is deemed to have control over Co B, even if Co A chooses to hold the debt to
maturity. The intention to convert the debt is not relevant to determining the existence
of control.

(b) Co A is deemed to have control over Co B, even if Co A has a concurrent right to sell
the debt instrument to other existing shareholders at fair value. The intention to
dispose or retain the instrument is not relevant to determining the existence of control.

(c) Co A is assessed for control by using only the present ownership interests of 40%. Co
A has an obligation to sell its convertible debt instruments to a third party. Hence, the
potential ordinary shares vest with the third party rather than Co A. In this scenario,
Co A has no control over Co B.

4
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan, Lim and Kuah)
Chapter 2 Solutions

Concept Question 2.9

1. The competing concepts of consolidation discussed in the two articles 1 are:

(a) the economic unit concept (or the entity theory)

 Under the economic unit concept, the reporting unit is the combined economic
unit
 The assets (including goodwill) and liabilities of the combined entity must be
reflected on the balance sheet and not simply the parent’s share of the assets
and liabilities.
 Consolidated equity is the controlling interests’ share (parent’s shareholders)
and the non-controlling interests
 Consolidated net income is the income earned on all assets controlled by the
management of the parent company.
 Non-controlling interests are equity holders.

(b) the parent company concept

 The primary users of the financial statements are the parent’s shareholders.
 The financial statements are a modification of the parent’s financial statements
(Pacter, p. 39).
 Equity comprises purely the parent’s shareholders’ interests in the combined
entity.
 Consolidated net income comprises earnings attributable to parent’s
shareholders.
 Non-controlling interests are classified between liabilities and equity
(Beckman, p. 3) and is outside the proprietary interests in the consolidated
entity.

(c) proportionate consolidation

 Reports line items “net” of non-controlling interests (Pacter, p. 40)

 Non-controlling interests is excluded from the balance sheet altogether.
 Consolidated net income is the same as that of the parent’s theory.
 May be seen as a conceptually purer application of the parent’s theory (Pacter,
p. 40)

1
(a)“Revising GAAP for Consolidations: Join the Debate” by Paul Pacter (The CPA Journal, July 1992) and
(b)“The Economic Unit Approach to Consolidated Financial Statements: Support from the Financial Economics
Literature” by Judy K Beckman (Journal of Accounting Literature, 1995, Vol 14).

2016 © All rights reserved, McGraw-Hill Education (Asia)

Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
5
Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

2. Beckman uses the research findings from financial economics to support the
economic unit (or entity) concept of consolidation. Note that her observations are
based on inferences of the findings of tests which are not specifically designed to test
the economic unit concept. These findings include the following:

 Minority interests benefit from the synergies and value-increasing efforts of the
acquirer (for example, Grossman and Hart, 1980). Minority interests are the
shareholders who refrain from tendering their shares to the acquirer because they wish
to “free-ride” on the gains provided by the acquisition and the new management. The
“free-riders” see greater value in holding the shares than in tender offer price (even
the price includes the control premium). Beckman concludes that minority interests
should be classified as equity as they enjoy the benefits of ownership in the enlarged
entity.

 Partial acquisitions by tender offer transfers control over 100% of the subsidiary’s
assets, even though less than 100% controlling interests are obtained. Hence, this
finding supports the economic unit concept that requires the consolidation of all assets
and liabilities, regardless of the ownership interest held by the parent. Empirical
support is provided by studies such as Bradley (1980) that showed that acquiring
firms obtain value from control rather than capital gains of shares held. Another study
by Roy (1988) shows that optimal share-value maximization can be achieved through
partial, rather than total, acquisition of a subsidiary.

 In equity carve-outs (whereby the parent sells part of its existing holdings), the market
reacted favorably to these carve-outs (Schipper and Smith, 1986) through positive
reactions for the parent company stock price. Beckman concludes that if the market
does not penalize the parent for the carve-outs, there is no perception of “loss of
control” even when the holding is less than 100%. Hence, in Beckman’s view, there
should not be any change in consolidation when a subsidiary is wholly-owned to
when it is partially-owned. “The economic unit approach represents this fact most
faithfully both before and after the carve-out transactions”. The fact referred to by
Beckman is that the parent relinquishes no control through these transactions.

Concept Question 2.10

The manager has limited discretion over decision making, given narrowly defined parameters.
The manager has only 5% interests in the fund, with remuneration determined by the fund’s
net asset value. The manager is more akin to an agent with little control over the fund.

Concept Question 2.11

The manager has a significant 20% interest in the fund, and has wide decision-making
discretion although his/her remuneration is market-based. While the manager can be removed
by a simple majority vote of investors, that is only for breach of contract. The removal rights
appear to be more protective than substantive in nature and is exercisable in rare conditions.
Assume the remaining 80% interest in the fund is widely dispersed, the manager is deemed to
have control over the fund.

6
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan, Lim and Kuah)
Chapter 2 Solutions

Concept Question 2.12

Although the manager has a significant 20% interest in the fund, and has wide decision-
making authority, the manager appointment is decided annually by a board determined by
investors. The manager can also be easily replaced, in addition to remuneration being market-
based. The manager has little control over the fund.

Concept Question 2.13

The manager holds a significant 30% equity interest in the fund, with the remaining interest
widely held by equity and debt investors. The fact that the manager can be removed easily,
without cause by a simple majority vote shows that the manager does not have control over
the fund.

Concept Question 2.14

Example 1: the investor holds 40% equity share in the investee, with the remaining 60%
widely dispersed among investors. The investor has power and ability to have control over
the returns. The investor needs to consolidate investee under IFRS 10, but not under IAS 27.

Example 2: the investor holds 45% equity share in the investee, with the remaining 55% held
among ten investors. The investor has power to control the operating and financing activities
of the investee. The investor needs to consolidate investee under IFRS 10, but not under IAS
27.

Concept Question 2.15

More qualitative factors such as power and ability to exercise that power over the key
operating activities of the investee to affect its returns are taken into consideration in IFRS 10,
versus IAS 27.

The reason in making the changes is largely due to the shortcomings of the old bright-lines
rule, which can be circumvented easily. The new qualitative considerations require overall
assessment to determine if consolidation is required.

Concept Question 2.16

Risks and rewards is not a primary determinant in establishing if control exists. Control exists
when there is ability to use power to direct relevant activities which would affect returns.
However, risks and rewards are implicit in the notion of variable returns. The exposures of
the investor to risks and rewards from the investee are taken into consideration to determine
control under IFRS 10. The risks and rewards could arise from only negative returns, only
positive returns or both negative and positive returns of the investee.

Concept Question 2.17

Power in itself is not a sufficient basis to determine control because control requires all three
variables to exist: power, ability to use the power to affect returns and the right or exposure to
variable returns. Hence, the existence of power may not give rise to control in the following
situations:
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
7
Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

(1) Absence of ability to use the power. There may be significant barriers to the use of the
power. Barriers may take different forms but they potentially obstruct the ability of
the investor to exercise the power. For example, an investor with options to acquire
shares in an investee may face financial barriers if the options are deeply out of the
money. Another example relates to legal or regulatory barriers to ownership rights.
For example, the rights to repatriate earnings from a foreign subsidiary may be
blocked by governmental intervention or regulation.

(2) Absence of right or exposure to variable returns. Decision makers of an entity have
power and ability to use the power but they may not be exposed to variable returns. I
that situation, they are acting as agents and managers rather than residual risk takers.
For example, managers have power and ability to manage significant activities but
their compensation may be fixed in nature or the extent of their exposure to variable
earnings may be small. If a decision maker is minimally exposed to variable returns,
that decision maker is acting as an agent for another principal.

Question 2.18

Returns in IFRS 10 must be variable in nature. Variable returns, by definition are not fixed
and may be only positive, only negative or may be both positive and negative. Returns would
vary in response to an underlying measure such as profit or fair value. Asymmetric returns
(one-sided, either positive or negative) may arise from the pricing of underlying option
instruments. In most cases, returns in the normal course of business would be symmetrical
(both positive and negative returns are likely) and would fluctuate in accordance with the
underlying measure (often the profit measure).

Returns may assume different forms. Returns may not be simply financial in nature.
Examples of financial returns are dividends and other profit distributions that are essentially
passive income for investment holdings. An investor with control would apply power to
actively manage the relevant activities of the investee to maximize the investor’s returns.
These returns may take the form of strategic advantage through synergies. Returns for active
management may also take the form of remuneration for managing an investee or an
investee’s assets (e.g. management fees). Returns may also arise from entering into
transactions with the investee (for example, trading, borrowing and lending transactions). If
the investment in the subsidiaries are carried at fair value, the investor is also exposed to
returns in the form of fair value changes of the investments.

8
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan, Lee & Lim)
Chapter 2 solutions

EXERCISES
Phi Alpha Combined Combined
Exercise 2.1 Parent Entity
Theory Theory
Income Statement <------------------------------------->
Parent NCI Total

80% 20% 100%

Net profit after tax (1) 800 280 1,080 1,024 56 1,080
Non-controlling interests (1) (56)
Net profit after Non-controlling interests 1,024
Retained earnings, 1 Jan 1,300 200 1,300 1,300 40 1,340
Retained earnings, 31 Dec 2,100 480 2,324 2,324 96 2,420

Balance sheet Phi Alpha Combined Combined

Parent Entity
Theory Theory
<-------------------------------------->
Parent NCI Total
Property, plant and equipment 2,300 1,200 3,500 3,500
Inventory (3) 300 200 580 600
Cash 100 50 150 150
Goodwill on consolidation (3) 360 450
Investment in Subsidiary (3) 1,000
Liabilities (600) (470) (1,070) (1,070)
Net assets 3,100 980 3,520 3,630

2016 © All rights reserved, McGraw-Hill Education (Asia)

Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
9
Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

Balance sheet (continued) Phi Alpha Combined Combined

Parent Entity
Theory Theory
<-------------------------------------->
Parent NCI Total

Share capital 1,000 500 1,000 1,000 100 1,100

Retained earnings 2,100 480 2,324 2,324 96 2,420
Non-controlling interests share of
fair value increment and goodwill (3) 110 110
Equity 3,100 980 3,324 3,324 306 3,630
Non-controlling interests 196
Equity and Non-controlling interests 3,100 980 3,520 3,630

Workings on the next page

10
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan, Lee & Lim)
Chapter 2 solutions

(1) Net profit after tax and Non-controlling interests

Parent theory

Non-controlling interest's share of net profit after tax =20% x Alpha's net profit after tax
=20% x 280
56
Entity theory
Non-controlling interest is not shown as a deduction but is presented as a sub-total of net profit after tax.

Parent's share of net profit after tax

=(100% x Phi's net profit after tax) + (80% x Alpha's net profit after tax)
=(100% x 800) + (80% x 280)
1024

(2) Elimination of investment in Alpha and recognition of goodwill and fair value increment

Parent theory
Goodwill is an asset of the parent and NCI has no share of goodwill.
Goodwill = Investment in Alpha – Phi’s ownership % * (Fair value of Alpha's net asset at date of
acquisition)
Fair value of Alpha’s net assets = Book value of equity + Fair value increment
Goodwill =1000 -{ 80%*(700+100)} = 360

Tax on fair value adjustment is ignored in this exercise and is introduced in a later chapter.

Fair value increment of inventory is recognized only with respect to P's share.
Historical cost of Alpha's inventory
Phi's share of fair value increase in Alpha’s 200
inventory at date of acquisition
Phi's inventory 80 (80% x 100)
300
Consolidated inventory 580

Entity theory
Goodwill is an asset of the entity and NCI has a share of the goodwill.
Parent's share of goodwill 360
Entity goodwill =360/0.8
450
NCI's share of goodwill =20%*450
90
Fair value increment of inventory is recognized in total
Historical cost of Alpha's inventory 200
Fair value increment for entity 100
Phi's inventory 300
Consolidated inventory 600

2016 © All rights reserved, McGraw-Hill Education (Asia)

Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
11
 Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

(3) Equity

Parent theory
Non-controlling interest is shown as a separate line from equity.
Non-controlling interest = NCI % x Book value of Alpha's equity
=20% x 980
= 196

Entity Theory
Non-controlling interest is shown as a component of equity.
Non-controlling interest share of goodwill and fair value increment =90+20=110

Non-controlling interest
=NCI% x (Bk value of Alpha's equity + Fair value increment + goodwill)
=20% x (980+100+450)=306

12
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan and Lee)
Chapter 2 solutions

Exercise 2.2

Balance sheet Parent Subsidiary Combined Combined

Parent Entity
Theory Theory
<-----------------------------
--------->
Parent NCI Total
Other assets 350,000 320,000 670,000 670,000
Goodwill on consolidation 90,000 150,000
Investment in Subsidiary 240,000 0 0
Liabilities (40,000) (34,000) (74,000) (74,000)

Net assets 550,000 286,000 686,000 746,000

Share capital 300,000 100,000 300,000 300,000 40,000 340,000

Retained earnings 250,000 186,000 271,600 271,600 74,400 346,000
Non-controlling interests share of
goodwill 60,000 60,000
Equity 550,000 286,000 571,600 571,600 174,400 746,000
Non-controlling interests 114,400
Total Equity 550,000 286,000 686,000 746,000

2016 © All rights reserved, McGraw-Hill Education (Asia)

Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
13
 Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

Workings for Exercise 2.2

Shareholders' equity at date of acquisition:

Share capital 100,000

Retained earnings 150,000

250,000

Goodwill on consolidation
Parent's share =240000-60%*(250000)

90,000
Entity goodwill =(240000+160000)-250000

150,000

Non-controlling interests as at year-end

Equity of S as at year-end 286,000

NCI's share at 40% 114,400

Parent's share of RE
RE of S at year end 186,000

RE of S at acquisition date 150,000

Change in RE 36,000

P's share 21,600

P's RE 250,000
Parent's RE 271,600

NCI's share of RE 74,400 40%*186000

14
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan and Lee)
Chapter 2 solutions

Case 2.1

In analyzing the situations of whether control or risks reside with the sponsoring
entity (Enron), consideration can be made of the guidance in IFRIC INT 12
Consolidation – Special Purpose Entities and IAS 182 Revenue.

IFRIC INT 12 has the following guidance to determine if control exists over an SPE:

The sponsoring entity should consolidate an SPE if in substance:

(a) the SPE operates on behalf of the entity who benefits from the SPE’s operation;

(b) the entity has the powers to make decisions to obtain the majority of the benefits
of the activities of the SPE or, by setting up an “autopilot” mechanism, the entity has
delegated these decision-making powers;

(c) the entity has rights to obtain the majority of the benefits of the SPE and hence
may be exposed to risks incident to the activities of the SPE; or

(d) the entity retains the majority of the residual or ownership risks related to the SPE
or its assets in order to obtain benefits from its activities.

IAS 18 Revenue has the following criteria for revenue recognition:

(a) Transfer of significant risks and rewards of ownership of the goods to the buyer;
(b) No retention by seller of effective control over the goods sold;
(c) Amount of revenue can be measured reliably;
(d) Probable inflow of economic benefits; and
(e) Reliable measurement of revenue.

RADR

Enron divested the windmill farms to an SPE (“RADR”) that is set up by Enron’s
CFO, Andrew Fastow. However, the intention is for Enron to retain control of the
windmill farms

Applying the principle of substance over form of IFRIC INT 12:

 RADR was set up by a related party of Enron for the purpose of allowing
Enron to “divest” itself of windmill farms without losing control of the
windmill farms. Effectively, Enron had control over the farms and did not
meet the revenue recognition criterion in IAS 18.

 Enron appears to undertake the majority of the residual risks of the windmill
farms through its repurchase of the farms, which may have been the implicit
intention at the point of divestment.

2
IAS 18 will be replaced by IFRS 15 in 2018. 2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
15
 Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

 The intention of the “divestment” was to park the windmill farms temporarily
in the SPE and to repurchase it at a future date to preserve control over the
farms. The residual risks in the net assets of RADR rest with Enron.

Chewco

Purchased JEDI from CalPERS

Enron Chewco Pays cash CalPERS

(SPE)

Obtains
joint interest in Jedi

JEDI (SPE)

Applying the principle of substance over form,

 Chewco is an SPE that was set up by Enron’s related party. It was set up
for the sole purpose of helping Enron to avoid consolidating JEDI. By
virtue of the fact that it served Enron’s purpose, the SPE operates for the
benefit of Enron and should in principle be consolidated into Enron’s
balance sheet.

 Although Fastow benefited from the kickbacks and siphoning of funds, the
primary intention of setting up Chewco was to allow Enron to carry on the
off-balance sheet accounting of JEDI.

The Cuiaba Project

Applying the principle in IAS 18 Revenue, there is no transfer of risks and rewards of
ownership of the power-plant project. At the time when the sale was made, an
unwritten side agreement required Enron to repurchase the interest it sold to LJM1 at
a guaranteed profit, regardless of the risks associated with the project.

 Residual risks in the net assets of LJM1 still remained with Enron; hence, in
substance, LJM1 is an extension of Enron.

 The sale was a loan in substance and the guaranteed profit was the interest
element.

16
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
 Advanced Financial Accounting (Tan and Lee)
Chapter 2 solutions

C2.2

1. IFRS 10 requires consideration of all facts and circumstances to determine the

existence of control. In the case of business trusts or real estate investment
trusts, the sponsor or the original owners are responsible for the design of the
trusts and their involvement in the design phase gives them a strategic
advantage in setting up a trust that continues to benefit the owners through
new sources of power and exposing them to variable returns in other forms.

 The owner is in a position to set in place arrangements that would give it the
power and ability to use its power to affect the returns of the trust. In most
cases, the property owner engages itself as the manager of the trusts’ assets.

 The property owner often continues to own some interests in the trust.
Although the ownership interest may be less than majority interest, the owner
continues to have power through other sources. One of the primary source of
power is the management contract that permits the owner to manage the assets
of the trust and make decisions on the most relevant activities of the trust.

 In the capacity as managers, the property owner continues to have power to

make decisions about the most relevant or significant activities of the trust.
The power is delegated power; however, one must evaluate whether the power
is exercised for own interests (acting as a principal) or for the interests of
others (acting as an agent). One consideration is to compare the remuneration
terms with industry benchmarks. If the manager is being awarded for its
services on an arms-length basis, the manager is more likely to be operating as
an agent.

 The property owner-manager is often well-entrenched and difficult to remove

by other investors. The property owner designs the set-up of the trust and is in
a position to set terms in the management contract that would make it difficult
for other investors to remove the manager. If this is the situation, the power of
the owner-manager is bolstered by the onerous removal clauses in the
management contract. If it is harder for the manager to be removed, it is more
likely that the property owner has control over the trust.

 The management contract often has a variable component that aligns the
interests of the manager with those of the owners (including unrelated owners).
The owner-manager is now exposed to variable returns from its existing
ownership interests and management contracts. It is necessary to consider the
magnitude and variability of total returns and not simply returns from
shareholdings to assess if control exists.

2016 © All rights reserved, McGraw-Hill Education (Asia)

Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
17
 Advanced Financial Accounting (Tan Lim and Kuah)
Chapter 2 Solutions

2. Analysis of ratios before and after the implementation of the local equivalent
of IFRS 10 – the case of IHH Healthcare Berhad (www.ihhhealthcare.com).

All figures in RM'000 31-Dec-12 31-Dec-12

Previously Restated
reported

Revenue Note 1 6,981,942 6,962,466

Finance costs (200,632) (222,209)

Profit before tax 997,355 1,057,959
Profit for the year 818,048 859,626

Total assets Note 2 17,283,998 19,663,171

Total liabilities Note 2 7,246,647 8,637,880
Total equity Note 3 10,037,351 11,025,291

(a) Net profit margin

(Profit for the year/Revenue) 11.72% 12.35%

(b) Return on total assets 4.73% 4.37%

(Profit for the year/Total Assets)

(c) Return on total equity 8.15% 7.80%

(Profit for the year/Total Equity)

(d) Leverage ratio 0.72 0.78

(Total Liabilities/Total Equity)

(e) Interest coverage ratio 0.2012 0.21

(Finance costs/Profit before tax)

Profit before interest and tax/ 5.97 5.76

Finance costs
Note 1: Although the restatement causes an increase in revenue by RM67,989,000
revenue was adjusted downwards by RM87,465,000 arising from a reclassification
to conform with current year disclosures. Hence, restated revenues fell contrary to expectations that
consolidation would increase total revenues
Note 2: Assets and liabilities increase because the one-line effect of equity accounting is replaced by
line-by-line consolidation of assets and liabilities
Note 3: Equity increases because of the inclusion of non-controlling interests which is substantial
(RM 1,048,285,000).

Conclusion: Most of the ratios look worse off after the implementation of the equivalent of IFRS 10.
Consolidation results in higher asset, equity and higher liability bases which affect return ratios and
leverage ratios.

18
2016 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted