ACCG 907 Financial Reporting

Module Five

Business Combinations and Group Accounting

1
 Methods for growing or diversifying operations
SG p 364

•Investments through direct acquisition or by establishing relationships with other

entities by acquiring shares or setting up joint arrangements.

•Acquisition of multiple businesses by a company

Source: CPA Australia 2016.

2
 Types of relationships with other entities
SG p 365

Three types of close Types of relationships established by a

relationships established by company with other entities
the investor with other
entities:
• parent–subsidiary;
• investor–associate; and
• joint arrangements.

Source: CPA Australia 2016.

3
 Focus of the module
• Part A - the acquisition method (under IFRS 3) as it applies to different forms
of business combination
• Part B - accounting consolidation requirements (under IFRS 10) when the
investor has control of other entities—parent‒subsidiary relationships
• Part C - investments where the investor obtains significant influence over
the investee (associate) under IAS 28
• Part D - a brief overview of situations where the investor has joint control
over a joint arrangement (IFRS 11)

• Disclosure requirements (under IFRS 12) for entities that have an investment
in subsidiaries, associates and joint arrangements (Parts B, C and D)

4
 Part A
Business Combinations

5
 Business combinations
SG p 369

A business combination is ‘a transaction or other event in which an acquirer

obtains control of one or more businesses’ (IFRS 3, Appendix A)

This module focuses on the two most common business combination scenarios:
direct and indirect acquisition.

Source: CPA Australia 2016.

6
 The acquisition method
SG p 373

Business combinations are accounted for using a method called the

‘acquisition method’. This method has four steps as follows:

a) Identifying the acquirer

b) Determining the acquisition date
c) Recognising and measuring the identifiable assets acquired’ liabilities
assumed and any NCI (if relevant)
d) Recognising and measuring goodwill or gain from bargain purchase

7
 The acquisition method
SG p 373-376

a) Identifying the acquirer

Direct acquisition: The entity that receives the assets and liabilities
acquired
Indirect acquisition: The entity that obtains control of another entity

b) Determining the acquisition date

Direct acquisition: Normally the date when the contract for sale of the
business is signed
Indirect acquisition: Normally the date when the acquirer holds enough
shares to give them majority voting power over the investee

8
 The acquisition method
SG p 377

c) Recognise and measure the identifiable assets acquired, liabilities assumed

and NCI in the acquire
This includes:
Item How measured?
Recorded assets and liabilities in acquiree’s records FV
Unrecorded assets FV
(eg internally generated intangible assets)
Unrecorded liabilities FV
(eg contingent liabilities)
NCI according to
(Only applicable in an indirect acquisition where the acquirer guidelines on slide 10
has an interest of < 100%)

Fair value of identifiable net assets (FVINA) = Assets acquired – liabilities assumed

9
 The acquisition method
SG p 381-383

d) Recognise and measure goodwill or gain from bargain purchase

Consideration transferred – FVINA = Goodwill/(Gain)

• Consideration may comprise cash, non cash assets and shares issued in the
acquirer
• In an indirect acquisition where there is an NCI IFRS 3 provides two options for
calculating goodwill
– Full goodwill method
– Partial goodwill method
• The choice of methods will affect the following balances in the consolidated SFP:
– Goodwill and NCI
– Both will be higher under the full goodwill method (see ex 5.5 in SG)

10
 Full vs partial goodwill method
SG p 384

Full goodwill method Partial goodwill method

Consideration transferred Consideration transferred
+ NCI measured at FV + NCI measured at
proportionate share of net
assets of acquiree
-FVINA -FVINA
= Goodwill/(Gain) = Goodwill/(Gain)

• Under the full goodwill method goodwill is attributed to the NCI,

whereas under the partial method only the acquirer’s portion of
goodwill is recorded. See Example 5.5

11
 Calculating goodwill on indirect acquisition
- partial goodwill method
SG p 384-385

• Lambert bought 90% of the shares in Regal for $980 000 on 31 March X1
• At this date the book value of Regal’s net assets was $903 000.
• All assets and liabilities were recorded at fair value, except of an item of plant
that was undervalued by $10,000.
• The tax rate is 30%.

What goodwill arises on the business combination, assuming the NCI is measured
as a proportion of Regal’s net assets?

12
 Calculating goodwill on indirect acquisition –
partial goodwill method
SG p 384-385

Consideration transferred 980 000

Book value of net assets 903 000 Book value of S/Cap + R/E
FV adjustment for plant 7 000 $10,000 x (1-30%)
FVINA 910 000
Share of FVINA 819 000 $910,000 x 90%
Goodwill 161 000 $980 000 - $819 000

Note that this format is different to that used on page 350 of SG. You can reformat in your own time
to the same format used in the SG to satisfy yourself that both methods will give the same
answer. Many students find this method quicker and easier.

13
 Calculating goodwill on indirect acquisition -
full goodwill method
SG p 384-385

• P acquired 60% of the shares of S for $136,000 on 1 January 20X8.

• Share capital of S comprised 100,000 shares, issued at $1 each. Retained
earnings was $30,000.
• Share price of S’s shares at date of acquisition was $2.10.
• All S’s assets were recorded at fair value except for an unrecorded patent with
a fair value of $30,000.
• The tax rate is 30%.
Calculate the goodwill on acquisition under the full goodwill method.

14
 Calculating goodwill on indirect acquisition –
full goodwill method
SG p 384-385

Consideration transferred 136 000

FV of NCI 84 000 100 000 x 40% x $2.10

220 000
Book value of net assets 130 000 Book value of S/Cap + R/E
FV adjustment for patent 21 000 $30,000 x (1-30%)
FVINA 151 000
Goodwill 69 000 $220 000 - $151 000

For more examples of acquisition analyses refer to the

learning task under the Module 5 folder on MYOL

15
 Deferred tax arising on direct acquisitions
SG p 388-392

Note that the following relates to direct acquisitions only. In an indirect acquisition
deferred tax effects are always required to be considered.

General rule (where TB = FV)

•When acquiring assets and liabilities directly the acquiree will record all items at
their fair values.
•For many items these fair values establish their tax bases for the acquiring entity
•For example TB = FV for:
– Receivables, inventory, PPE
– Loans, payables
•Therefore the acquirer will not need to record a DTA/DTL from the business
combination in relation to these items.
•Refer Ex 5.8 in SG

16
 Deferred tax arising on direct acquisitions
SG p 388-392

Exception (where TB = FV)

•In some cases the FV of items acquired will be different to their fair values.
•Examples:
– Contingent liabilities have a TB of zero
– Warranty provisions have a TB of zero
•Therefore the acquirer will need to record a DTA from the business combination
when recognising these items
•Refer Example 5.9

17
 IFRS 3 disclosures
SG p 393

• IFRS 3 includes extensive disclosure requirements to enable financial

statement users to evaluate the financial effects.
• Requires disclosures to enable users to evaluate the financial effects of
adjustments.

• Include the following in your critical file to assist you in answering disclosure
based questions:
• Note 33 Acquisition of a Subsidiary – from KPMG sample financial
statements
• IFRS 3 paras 59-63 and B64-7 from Red Book

18
 Part B
Consolidated financial
statements

19
 Intro to consolidated financial statements
SG p 395 - 398

• IFRS 10 is primarily concerned with establishing the principles for

the preparation of consolidated financial statements.

• ‘Economic entity’ and ‘group’ have the same meaning.

• Broadly, IFRS 10 is concerned with two issues:

• defining the group; and
• preparing consolidated financial statements.

See assumed knowledge page 396.

20
 The group
SG p 398

• Where one entity controls another entity, this gives rise to a parent–subsidiary
relationship and establishes a group for financial reporting purposes.

Source: CPA Australia 2015.

• Specifying control as the criterion for the need to prepare consolidated financial
statements has several important consequences, including:
• the legal form of the members of the economic entity is irrelevant;
• equal applicability in both the public sector and the private sectors; and
• a broad concept of group (the nature of the entity or lack of ownership rights
is not a limiting factor).

21
 Concept of control
SG p 399 - 403

• IFRS 10 requires that consolidated financial statements should be prepared

where a parent entity controls an investee
(i.e. a subsidiary entity)
• Three essential attributes of control

Source: CPA Australia 2016.

1. Power over an investee

2. Exposure, or rights, to variable returns from an investee
3. Link between power and variable returns

• Exception to consolidation of subsidiaries—investment entities

22
 Concept of control
SG p 399 - 403

Determine whether ABC has control over Investee Ltd

23
 Concept of control
SG p 399 - 403

Element Discussion
1. Power • Given that ABC owns 60% of the shares, it is assumed the
ABC controls a majority of the voting rights.
• Voting rights are an indication of power therefore ABC has
power.
2. Exposure to • ABC has exposure to variable returns as it owns equity instruments.
variable • The returns (through dividends and capital gains) will vary with the
returns performance of Investee

3. Ability to • ABC has been directing the relevant activities of Investee and hence is
use power to able to effect returns.
affect returns
Conclusion: ABC has control over investee

Note: As the potential ordinary shares held by DEF are

deeply out of the money they do not have the practical
ability to exercise them and therefore would not be 24
considered to be substantive.
 The consolidation process
SG p 404

• Consolidated financial statements are prepared by aggregating the financial

statements of each of the entities in the group, subject to a series of
adjustments required by IFRS 10.
• The initial stage involves adjusting the financial statements of individual
entities where they have not been prepared on a common basis.
• The second stage combines the financial statements of the individual entities
in order to present the information as it would have been prepared for a single
economic entity.
• Adjustments may be required at the second stage.

25
 Consolidations – Checklist

FV adjustments:
• Revalue inventory and depreciable assets through BCR
• Record depreciation adjustments on assets subject to FV adjustment

Pre-acquisition elimination:
• Eliminate the investment asset
• Eliminate pre-acquisition equity
• Record goodwill using partial goodwill method
• Account for transfers of pre-acquisition equity between general reserve and
retained earnings

26
 Consolidations – Checklist

Interentity eliminations:
• Intra group sale of inventory (in opening & closing inventory)
• Intragroup sale of depreciable asset (with consequential depreciation)
• Dividends paid by subsidiary
• Intragroup services
• Intragroup receivables and payables
• Intragroup interest

– Make sure you can complete a simple worksheet

27
 Revaluation of assets
SG p 408 - 414

• When the parent gains control of another entity, the identifiable assets and
liabilities of the subsidiary should be reflected in the consolidated financial
statements at fair value.
• If the identifiable assets and liabilities are not recorded in the subsidiary’s
financial statements at fair value at acquisition date, fair value adjustments
can be posted in either the subsidiary’s accounts or in the consolidation
worksheet.
• In accordance with IFRS 3 Business Combinations, a depreciable non-current
asset has to be revalued to fair value at the acquisition date and further
consolidation adjustments will have to be undertaken in subsequent reporting
periods to adjust depreciation charges.

28
 Revaluation of assets and FV adjustments
SG p 408 - 414

• On 1 July 20X4 P Ltd acquired a 70% interest in S Ltd

• At that date the PPE of S Ltd had a carrying amount of $250,000 (cost of $300,000
less accumulated depreciation of $50,000) and a fair value of $280,000

• The remaining useful life of S Ltd’s PPE at 1 July 20X4 was 6 years

• All fair value adjustments are made on consolidation

29
 Revaluation of assets and FV adjustments
SG p 408 - 414

Prepare the BCR consolidation journal(s) at 1 July 20X4 to account for

the revaluation of S Ltd’s PPE

Dr Accumulated depreciation 50,000 ($300,000-$250,000)

Cr PPE 20,000 ($300,000-$280,000)
Cr DTL 9,000 ($30,000 x 30%)
Cr BCR 21,000 ($30,000 x (1-30%))

Note that 100% of the revaluation has been recorded even though P only acquired a 70%
interest. This entry is NOT affected by the ownership interest

30
 Revaluation of assets and FV adjustments
SG p 408 - 414

Prepare the BCR consolidation journal(s) at 30 June 20X5 to account

for the revaluation of S Ltd’s PPE

Original entry on slide 30 will be repeated PLUS the following:

Dr Depreciation expense 5,000 ($30,000 revaluation/ 6 years)

Cr Accumulated depreciation 5,000

Dr DTL 1,500 ($5,000 x 30%)

Cr ITE 1,500

31
 Revaluation of assets and FV adjustments
SG p 408 - 414

Prepare the BCR consolidation journal(s) at 30 June 20X6 to account

for the revaluation of S Ltd’s PPE

Original entry on slide 30 will be repeated PLUS the following:

Dr Depreciation expense 5,000 (20X6 expense)
Dr Retained earnings 5,000 (20X5 expense)
Cr Accumulated depreciation 10,000
Dr DTL 3,000
Cr ITE 1,500 (20X6 expense)
Cr Retained earnings 1,500 (20X5 expense)

32
 Revaluation of assets and FV adjustments
SG p 408 - 414

CPA materials often combine multiple entries together. For example the entries on
slides 30 and 32 would be presented as:

Dr Accumulated depreciation 40,000

Dr Depreciation expense 5,000
Dr Retained earnings 3,500
Cr PPE 20,000
Cr DTL 6,000
Cr ITE 1,500
Cr BCR 21,000

Even more confusing is when they combine FV adjustments and pre-acquisition entry
into a single journal (eg in the solution to Q 5.13)!!
See Question 5.12
33
 Pre-acquisition elimination entry

• On 31 Dec 20X4 P Ltd acquired 100% of S Ltd for $120 000.

• At that time the share capital of S Ltd was $10 000 and retained earnings was
$65 000.
• All assets were recorded at FV, except for land, which had a carrying amount of
$70 000 and a FV of $90 000.

a) Prepare the consolidation journal to record the FV adjustment and the pre-
acquisition elimination entry
b) Complete the consolidation worksheet at 31 December 20X4 on slide 36. All
amounts are rounded to thousands.

For more examples of pre-acquisition elimination entries refer to the

learning task under the Module 5 folder on MYOL

34
 Pre-acquisition elimination entry

Dr Land 20 000
Cr DTL 6 000
Cr BCR 14 000

Dr Share capital 10 000

Dr Retained earnings 65 000
Dr BCR 14 000
Dr Goodwill 31 000
Cr Investment in S 120 000

35
 Pre-acquisition elimination entry

P Ltd S Ltd DR CR Group

Share capital 200 10 10 200
Retained earnings 110 65 65 110
BCR 14 14 -
Current liabilities 20 20 6 46
330 95 356
Current assets 30 25 55
Investment in S 120 120 -
PPE 180 70 20 270
Goodwill ....... ....... 31 31
330 95 356
36
 Pre-acquisition elimination entry

• What would happen in the previous example if P had acquired 75% of S (instead
of 100%)?

• BCR entry would be the same (still revalue the whole asset)
• Pre-acquisition entry would change – only eliminate 75% of equity
• Goodwill would change – it would be higher

37
 Pre-acquisition equity transfers

• Transfers of pre-acquisition equity will result in a change to the pre-acquisition

elimination entry.
• Commonly done from general reserve to retained earning (or vice versa).

• Take care – as if the transfer is from post-acquisition equity there is NO

consolidation adjustment required

38
 Pre-acquisition equity transfers

• Assume in the previous example that on 31 Dec X5 S Ltd transferred $20,000 of

pre acquisition retained earnings into a general reserve.
• What would the entry have been to record the transfer in S Ltd’s books?
Dr Transfer to G/R 20,000
Cr General reserve 20,000
• What is the consolidation adjustment required at 31 Dec X5?
Dr General reserve 20,000
Cr Transfer to G/R 20,000

• What if P acquired 75% (rather than 100%)?

The consolidation journal would be for $15,000 ($20,000 x 75%)

39
 Transactions within the group
SG p 414 - 421

• When assets are transferred between entities within a group and a

profit is recognised on that transfer any unrealised profit must be
eliminated.

Source: CPA Australia 2015.

For more examples of intragroup transaction entries refer to the

learning task under the Module 5 folder on MYOL

40
 Inventory transfers
SG p 418

• P Ltd owns a 100% interest in S Ltd. During the year ended 30 June 20X5 S Ltd sold
$100,000 worth of inventory to P Ltd at a profit of $20,000. At 30 June 20X5 P Ltd still held
25% of this inventory.
a) What is the consolidation journal required at 30 June 20X5?
Dr Sales 100,000 (entire revenue needs to be removed)
Cr COGS 95,000 (balancing item)
Cr Inventory 5,000 (inventory needs to be reduced by
amount of unrealised profit)

Dr DTA 1,500
Cr ITE 1,500 (profit has reduced, so ITE should fall
by 30% of the entry above)

b) What is the consolidation journal required at 30 June 20X6?

Dr Retained earnings 3,500 (100 000 – 95 000 – 1 500 from above)
Dr ITE 1,500 (profit has increased, so ITE needs to increase as well)
Cr COGS 5,000 (profit was unrealised last year, has
become realised in the current year)
41
 Inventory transfers
SG p 418

a) Explain (in words) the purpose of the first entry on slide 41

Do these in your own time – bring them to me to check if you like

b) Explain (in words) the purpose of the second entry on slide 41

See example 5.14

42
 Depreciable asset transfers
SG p 421

• Grape Co holds a 100% interest in Vine Co.

• Vine Co bought a non-current asset on 1 July X5 for $30,000. It has a useful life of
10 years.
• On 1 July X8 it was sold to Grape Co for $25,000.
• Grape depreciated the asset over its remaining useful life of 7 years.

a) What is the adjusted amount that the asset and the related depreciation
expense should be included at in the consolidated financial statements for the
year ended 30 June X9?
b) Prepare consolidation journals to eliminate the effects of the transaction in the
year ended 30 June 20X9

43
 Depreciable asset transfers
SG p 421

• Consolidation journals are required to remove the effects

of the transfer as though it never happened.
• The 20X9 consolidated SFP will show the following:
Cost 30 000
Accum depreciation (12 000) 4 years x $3 000 pa
Carrying amount 18 000
• The 20X9 consolidated SPLOCI will show:
Depreciation expense $3 000

44
 Depreciable asset transfers
SG p 421

Journal to eliminate gain on sale

Determine CA @ date of sale: 30 000 – 9 000 = 21 000 (transferred 3 years after
acquisition date)

Determine gain on sale: 25 000 – 21 000 = 4 000 gain

DR Gain on sale 4,000

CR Asset 4,000

DR DTA 1,200
CR ITE 1,200 (4 000 x 30%)
Profit has reduced so ITE also needs to reduce

45
 Depreciable asset transfers
SG p 421

Journal to adjust depreciation expense

Original annual depreciation expense prior to transfer was $3 000
New annual depreciation expense after transfer:25 000 /7 years = $3 571
Depreciation expense is overstated by $571pa

DR Accum dep’n 571

CR Dep’n expense 571

DR ITE 171
CR DTA 171 ($571 x 30)
Profit has increased so ITE also needs to increase

Shortcut to work amount for journal: 4 000 gain /7 years = $571

46
 Depreciable asset transfers
SG p 421

Review the worksheet below and note that the totals in the group column were
as identified on slide 44.
Grape Vine DR CR Group
B/S extract
Non-current asset (net) 21 429 571 4 000 18 000

P/L extract
Gain on sale 4 000 4 000 -
Depreciation expense 3 571 571 3 000

47
 Depreciable asset transfers
SG p 421

How would the entries on slides 45-46 change if P Ltd and

Grape Ltd owned an interest of less than 100%?
• No change required.
• IFRS 10 requires that unrealised profits be eliminated IN
FULL (100%) regardless of the ownership interest.

48
 Interentity dividends

• A Ltd holds an 80% interest in B Ltd. Details of dividends paid and declared by B
Ltd during the year are as follows:
– Paid $100,000 - Declared $60,000
• Prepare the consolidation journal in relation to the dividend paid
DR Dividend income 80 000
CR Dividend paid (R/E) 80 000

• Prepare the consolidation journals in relation to the dividend declared

DR Dividend income 48 000
CR Dividend declared (R/E) 48 000

DR Dividend payable 48 000

CR Dividend receivable 48 000

49
 Intragroup services, receivables and payables

• During the year ended 31 Dec 20X4, a parent entity provided management
services to a subsidiary for $80 000. At 31 Dec 20X4 the subsidiary still owed the
parent $30 000 for these services.

Prepare the consolidation entries required at 31 Dec 20X4.

DR Services revenue 80 000

CR Services expense 80 000

DR Payables 30 000
CR Receivables 30 000

This entry is unaffected by the ownership interest – 100% of the effects will always
be eliminated

50
 Calculating NCI
SG p 421 - 437

Components of equity
* Multiply by NCI %
• Issued capital *
to get NCI share
• General reserve *
• Retained earnings (comprises the following)
Profit for the year **
+ Op retained earnings **
- Dividends paid/declared *
+/- Transfer from/to G/R *
= Closing retained earnings

** Adjust for effect of interentity transactions before

multiplying by NCI % to get NCI share

51
 Calculating NCI
SG p 421 - 437
Adjusting for interentity transactions
•If there has been a transfer of inventory or non-current assets and a profit has
been made on the transfer an adjustment may be required to the NCI calculations.
•Whether or not an adjustment is required depends on “who sold to “who”.
•Consider the following:

Direction of transaction “Downstream” “Upstream”

P S

S P
Unrealised profit in: P’s books S’s books
NCI adjustment required? NO YES

52
 Calculating NCI
SG p 421 - 437

• P Ltd owns 80% of S Ltd.

• Extract from S Ltd financial statements at 31 Dec 20X5

$
Profit for the year 120 000
Opening retained earnings 25 000
Dividends paid (60 000)
Closing retained earnings 85 000

53
 Calculating NCI
SG p 421 - 437

• During the year ended 31 Dec 20X5 S Ltd sold goods to P

Ltd at a profit of $25 000. All inventory was still on hand
at 31 Dec 20X5 .
• The tax rate is 30%
Calculate the NCI share of:
a) Opening retained earnings
b) Profit
c) Closing retained earnings

54
 Calculating NCI
SG p 421 - 437

NCI share of opening retained earnings

$25 000 x 20% = $5 000
NCI share of profit
S Ltd profit 120 000
Less: profit on inventory (25 000)
Plus: Tax on above 7 500
Adjusted profit of S Ltd 102 500
NCI share of profit (x 20%) 20 500

55
 Calculating NCI
SG p 421 - 437

NCI share of closing retained earnings

Share of opening R/E 5 000
+ Share of profit 20 500
– Share of dividend (12 000) 60 000 x 20%

NCI share of closing R/E 13 500

For more examples of NCI calculations refer to the learning task under the
Module 5 folder on MYOL

See Examples 5.15 and 5.16

56
Disclosures in consolidated financial statements
SG p 437 - 439

IAS 1 Presentation of Financial Statements

• Requires preparation of consolidated financial statements,
separately showing parent and NCI share of profit, OCI and
equity
IFRS 12 Disclosure of Interests in Other Entities
• Requires entities to disclose information that allows users to
assess:
• the nature of, and risks involved with an entity’s interests in
other entities; and
• the effects of those interests on financial position,
performance and cashflows

57
Disclosures in consolidated financial statements
SG p 437 - 439

Review relevant
extracts from KPMG
Example financial
statements required
by IAS 1

58
Disclosures in consolidated financial statements
SG p 437 - 439

Review relevant
extracts from
KPMG Example
financial
statements
required by IFRS
12

59
Disclosures in consolidated financial statements
SG p 437 - 439

60
 Part C
Investments in Associates

61
 Identifying associates
SG p 442 - 443

• An associate is defined in IAS 28 as ‘an entity over which the

investor has significant influence’
• The power to participate, regardless of whether it is active
participation or a passive investment
• Significant influence includes:
− representation on the board of directors ;
− participation in policy making;
− material transactions between investor and investee;
− interchange of managerial personnel; and
− provision of essential technical information.
• IAS 28 provides a quantitative test (20% test)

62
 Use of equity method
SG p 443

• IAS 28 requires an investment in an associate to be accounted for

using the equity method.
• In this module, CPA Australia assume that the investor prepares
consolidated financial statements and applies the equity method
for associates in those financial statements.
• In addition, it is assumed that the investor accounts for the
investment in the associate in its own financial statements at cost.

63
 Basis of equity method
SG p 444-446

• The equity method involves recognising the investment in the

associate originally at cost and then adjusting its carrying amount
for the investor’s share of any changes post-acquisition in the
associate’s equity, including changes that result from the
associate’s profit or loss, dividends and OCI
• See example 5.18

64
 Application of equity method: basic features
SG p 446 - 447

Components of the equity CA of an associate:

Cost
+ Share of opening post acq retained earnings
+ share of post acq reserves (OCI)
+ share of current year profit
- Share of current year dividend
= Equity carrying amount

65
Calculating the share of associate profits and
equity CA of associate
SG p 451

Apple Ltd purchased 40% of Pear Ltd on 1 Jan X8 for $50,000. The net
assets at acquisition amounted to $125,000. During the year ended
31 Dec X8, Pear made profits after tax of $12,000.

What is the journal to record the share of associates profits?

DR Investment in Associate 4,800

CR Share of associate profits 4,800
($12,000 x 40%)

What is the equity carrying amount of the investment at 31 Dec X8?

Equity CA: $50,000 + $4,800 = $54,800

See Example 5.20

66
 Adjusting for interentity transactions
SG p 455

• As we saw earlier, if there has been a transfer of inventory or non-current assets

and a profit has been made on the transfer an adjustment may be required
CONSOLIDATION EQUITY
Direction of “Downstream” “Upstream” “Downstream” “Upstream”
transaction
P S I A

S P A I

Unrealised profit in: P’s books S’s books I’s books A’s books
Adjustment NO YES YES YES
required?

• Accounted for via a separate journal entry

67
 Adjusting for interentity transactions
SG p 455

Driscoll Ltd has a 40% interest in Moore Ltd. During the

year Driscoll Ltd sold $25,000 of inventory to Moore Ltd.
The goods originally cost $15,000 and all of the inventory
was still on hand at year end. Moore’s profit after tax for
the year was $100,000.
What are the equity journals in respect of the share of
Moore’s profit?

68
 Adjusting for interentity transactions
SG p 455

DR Investment in associate 40,000

CR Share of associate profit 40,000
($100 000 x 40%)
Unrealised profit before tax 10,000 ($25 000 - $15 000)

Net of tax 7,000

Investors share (40%) 2,800

DR Share of associate profit 2,800

CR Investment in associate 2,800

69
 Adjusting for associate dividends
SG p 452

Oak Ltd has a 35% investment in Ash Ltd. Ash paid a dividend of
$200,000 in the current year.
What is the general journal that would be recorded in Oak’s books?
DR Cash 70,000
CR Dividend revenue 70,000
$200 000 x 35%

What is the equity journal?

DR Dividend revenue 70,000
CR Investment in associate 70,000

70
 Disclosures for associates
SG p 458-459

IAS 1 Presentation of Financial Statements

• Requires disclosure of investment, share of profit and OCI
IFRS 12 Disclosure of Interests in Other Entities
• Requires entities to disclose information that allows users to
assess:
• the nature of, and risks involved with an entity’s interests in
other entities; and
• the effects of those interests on financial position,
performance and cashflows

71
 Disclosures for associates
SG p 458-459

Review relevant
extracts from KPMG
Example financial
statements required
by IAS 1

72
Disclosures for
associates
SG p 458-459

73
Disclosures for
associates
SG p 458-459

Review relevant
extracts from
KPMG Example
financial
statements
required by IFRS
12

74
 Part D
Joint arrangements

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 Joint arrangements
SG p 460-461

• A joint arrangement: an ‘arrangement of which two or more

parties have joint control’ (IFRS 11).
• IFRS 11 requires joint arrangements to be classified as either a
‘joint operation’ or a ‘joint venture’.
• As a joint operation involves an arrangement where the joint
operators have a right to the assets of, and obligation for the
liabilities of, the joint arrangement, IFRS 11 requires the joint
operator to recognise assets, liabilities, revenues and expenses
that arise from its interest in the joint operation (using the line-by-
line method)
• IFRS 11 requires the joint venturer to recognise their interest in the
arrangement as an investment (using the equity method)

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Module 5 learning checklist
I am able to… Yes
(tick)
Identify a business combination, discuss the forms that it may take and analyse
issues relating to different business combinations
Discuss and apply the acquisition method to a business combination, including
the IFRS 3 requirements for recognising and measuring goodwill

Apply the accounting for the deferred taxation impact of a business

combination
Explain the concept of control and analyse specific scenarios to outline how the
existence of control is determined
Explain and prepare consolidation worksheet entries, including the revaluation
of assets subject to depreciation and transactions within the group

77
Module 5 learning checklist
I am able to… Yes
(tick)
Explain the concept of ‘non-controlling interest’ and prepare a consolidation
worksheet that includes the appropriate adjustment entries and allows for non-
controlling interests
Explain and apply the disclosure requirements of both IAS 1 Presentation of
Financial Statements for consolidated financial statements and IFRS 12
Disclosure of Interests in Other Entities for interests in subsidiaries, associates
and joint arrangements
Determine whether significant influence exists in specific scenarios and evaluate
whether consolidation is required
Account for associates using the equity method
Define a joint arrangement and explain the accounting requirements of IFRS 11

78