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FINANCIAL ACCOUNTING 300

IAS 28: Investments in associates and joint
DEPARTMENT OF
ventures ACCOUNTING
Prescribed work, notes and class examples
C Wright
UP

TABLE OF CONTENTS

PRESCRIBED WORK .................................................................................................. 2

NOTES AND CLASS EXAMPLES ............................................................................... 5
1. Background ..................................................................................................... 5
2. Overview of IAS 28 ......................................................................................... 5
3. Accounting treatment required by IAS 28 ....................................................... 6
4. The equity method .......................................................................................... 6
5. Other requirements of the equity method ....................................................... 7
6. Goodwill / gain on bargain purchase .............................................................. 8
Class example 1 – investment in associate acquired for an amount in excess
of net asset value ............................................................................................ 8
Class example 2 – investment in associate acquired at a bargain purchase
price …………………… ................................................................................. 15
7. Value adjustments and equity accounting .................................................... 21
Class example 3 – fair value adjustments at acquisition date ....................... 21
8. Preference shares ......................................................................................... 26
9. Losses of associates..................................................................................... 26
Class example 4 – losses of associates / joint ventures ............................... 27
10. Unrealised gains and losses ......................................................................... 30
Class example 5 – sale of inventories by investor to associate = downstream
transaction …….. ........................................................................................... 31
Class example 6 – sale of inventories by associate to investor = upstream
transaction ..................................................................................................... 40
Class example 7 – sale of depreciable asset by investor to associate =
downstream transaction ................................................................................ 46
Class example 8 – sale of depreciable asset by associate to investor =
upstream transaction ……............................................................................. 55
11. Equity accounting and complex groups ........................................................ 64
Class example 9 – associate and joint venture in a horizontal group ........... 64
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PRESCRIBED WORK

1. IAS 28, Investments in associates and joint ventures

Read and study IAS 28 but ignore the following paragraphs:

 Par 7 – 9 Ignore completely

 Par 12 – 14 Ignore completely
 Par 18 – 21 Ignore completely
 Par 22 Only take note of the introductory sentence which
indicates that the equity method is discontinued from the
date that the investment ceases to be an associate or joint
venture. The rest of the paragraph [i.e. subparagraphs (a)
to (c)] should be ignored.
 Par 23 Ignore completely
 Par 25 Ignore completely
 Par 30 – 31B Ignore completely
 Par 36A Ignore completely
 Par 40 – 43 Ignore completely
 Par 45 – 47 Ignore completely

2. IFRS 11, Joint Arrangements

Revise this IFRS so that you are fully aware of when a joint arrangement is
classified as a joint venture, since IAS 28 is also applicable to joint ventures.

3. IAS 27, Separate Financial Statements

Revise IAS 27 that deals with the accounting for investments in associates and
joint ventures in the separate financial statements of the investor and related
disclosure requirements.

4. Notes and class examples

Read and work through this handout and make sure that you understand the
content of the handout.

5. Homework questions

Work through all the homework questions handed out in class as follows:

 Lecture 1 Question 3
 Lecture 2 Questions 1, 2, 5 and 6
 Lecture 3 Questions 8 and 9
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Homework questions 4 and 7 should be completed after the IFRS 5 lectures.

One of the following homework questions may be taken in via clickUP on

Sunday, 20 October 2024:
 Question 1or 6

If the question is to be taken in, you will be notified in an announcement on

ClickUP on Saturday, October 19, 2024, and you will have until 19:00 Sunday
to hand in the solution.

You must hand in the solution in PDF format, which must be a scanned PDF of
a handwritten solution.

6. SPECIFIC OUTCOME

IAS 28: Investments in Associates and Joint Ventures

IFRS 11: Joint Arrangements

IAS 27: Separate Financial Statements

You should be able to account for all aspects relating to accounting for
associates and joint ventures in both the equity accounted and separate
financial statements of the investor. However, the deferred tax implications of
equity accounting the investment (adjusting the carrying amount) in an associate
and/or joint venture are outside the scope of FRK 300. In addition, the
impairment of an investment in an associate and/or joint venture is outside the
scope of FRK 300.

6.1 Assessment criteria

In order to reach the specific outcome, you should:

1. be able to explain the technical terms pertaining to investments in

associates and joint ventures contained in IAS 28;

2. be able to critically evaluate when equity accounting is applicable and

when not;

3. be able to communicate equity accounting by preparing financial

statements (limited to the statement of profit or loss and other
comprehensive income, statement of financial position and statement of
changes in equity for FRK 300) in an ethically responsible manner;

4. be able to critically evaluate and effectively communicate the

requirements of equity accounting through the preparation of pro-forma
journal entries and other means for the following aspects:
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- intra-group transactions relating to sales of inventories, non-

depreciable assets and depreciable assets between the investor
and investee (including tax implications);

- losses of an associate and joint venture and their recognition;

5. be able to apply the rules relating to the accounting for the investments in
the investee (associate and joint venture) in the books of the investor and
the disclosure requirements in the separate financial statements of the
investor per IAS 27.

7. SOURCES

1. IAS 28 Investments in Associates and Joint Ventures

2. IFRS 11 Joint Arrangements

3. IAS 27 Separate Financial Statements

4. IAS 28 Notes and class examples

5. IAS 28 Homework questions and suggested solutions

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NOTES AND CLASS EXAMPLES

1. Background

Companies (investors) can invest in other companies (investees). The size and nature
(or both) of the investment determines how much influence the investor has over the
investee.

At the one extreme, the investor may have no influence over the investee whatsoever.
The accounting treatment of such investments has been discussed in the IFRS 9,
Financial Instruments, material.

At the other extreme, the investor controls the investee. Control is defined in IFRS 10,
Consolidated Financial Statements, and the accounting of control is consolidation of the
investee (the subsidiary). The requirements for consolidation are set out in your class
notes.

However, between the extremes discussed above, other possibilities exist. The
accounting treatment of such possibilities is the subject of this document.

2. Overview of IAS 28

Refer to the following definitions in IAS 28, par 3:

 Associate
 Joint arrangement
 Joint venture
 Significant influence

Note the following:

 The accounting treatment in IAS 28 only applies to investments in joint ventures and
associates (IAS 28, par 1).
 A joint venture is a type of joint arrangement. Refer to IFRS 11, Joint Arrangements,
for the details on what a joint arrangement is and when a joint arrangement is
classified as a joint venture.
 The key characteristic of an associate is significant influence. In addition to the
definition, IAS 28, par 5 – 6, provides more guidance on when an investor has
significant influence over an investee.
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3. Accounting treatment required by IAS 28

Note that associates and joint ventures will always be separate entities. Therefore, as
with subsidiaries, the investor can have separate financial statements and consolidated
(group) financial statements. The accounting treatment for investments in associates
and joint ventures for each set of financial statements is:

 Separate financial statements

In the separate financial statements, investments in associates and joint ventures

are accounted for in accordance with IAS 27, par 10 (refer to IAS 28, par 44).

IAS 27, par 10, is the same paragraph that applies to investments in subsidiaries in
the separate financial statements and lists three accounting policy choices.

Note that, for FRK 300, we only consider the first accounting policy choice, namely
accounting for the investment at cost in the separate financial statements.

 Consolidated (group) financial statements

In the consolidated (group) financial statements, investments in associates and joint

ventures are accounted for in accordance with the equity method (IAS 28, par 16).

IAS 28, par 17, lists criteria whereby an entity can be exempted from applying the
equity method. Note the similarity to the exemptions from consolidation which are
set out in IFRS 10.

4. The equity method

Refer to the definition of the equity method in IAS 28, par 3. Note the following:
 The equity method is only applied in the consolidated (group) financial statements. It
therefore requires consolidation journal entries.
 The starting point for the equity method will be the separate financial statements.
 The equity method includes the investor’s share of changes in the investee’s net
assets (equity). IAS 28, par 27, provides guidance how to determine the investor’s
share.

From the definition of the equity method, you should note that there are different
reasons that the investee’s net assets change over time. IAS 28, par 10, sets out the
requirements for consolidation journals to account for each of these changes.

The requirement around distributions received is to avoid double-counting. The share of

profit would be before dividends paid. Therefore, the investor should not include both
the share of profit as well as dividend income in its consolidated (group) profit.

Note the differences and similarities between consolidation and the equity method:
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Consolidation – IFRS 10 Equity method – IAS 28

(subsidiaries) (associates and joint ventures)
Differences
Start by adding trial balances of the parent Start with the trial balance of the investor
and subsidiary only
Combined SFP per line item One line item in the SFP
(also refer to IAS 28, par 15):
“Investment in associate”
“Investment in joint venture”
Combined profit or loss per line item Only one line item in profit or loss:
“Share of profit of associate”
“Share of profit of joint venture”
Combined other comprehensive income Only one line item in other comprehensive
per line item income:
“Share of other comprehensive income of
associate”
“Share of other comprehensive income of
joint venture”
Non-controlling interest NO non-controlling interest
Similarities
In the statement of changes in equity, In the statement of changes in equity,
each reserve (i.e. column) is the parent’s each reserve (i.e. column) is the investor’s
equity plus its share of the since equity plus its share of the since
acquisition equity of the subsidiary acquisition equity of the investee

5. Other requirements of the equity method

 When should an investor start applying the equity method?

Refer to IAS 28, par 32. Equity accounting starts on the day that an investment
meets the definition of an associate / joint venture.

 When should an investor stop applying the equity method?

Refer to IAS 28, par 22. However, note that the accounting requirements when
equity accounting stops [par (a) – (c) of par 22] are outside the scope of FRK 300.

 What if an associate becomes a joint venture or vice versa?

Refer to IAS 28, par 24.

 Which financial statements do we use?

IAS 28, par 27, and IAS 28, par 33 – 34, provide guidance in this regard.
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 What if the accounting policies of the investor and investee differ?

IAS 28, par 35 – 36, provide guidance in this regard.

6. Goodwill / gain on bargain purchase

Refer to IAS 28, par 32.

At acquisition, the investor will compare what it paid (cost of the investment) to what it is
getting in return (its share of the fair value of equity). The difference will be either:
 Goodwill [IAS 28, par 32(a)] Illustrated in class example 1
 A gain on bargain purchase [IAS 28, par 32(b)] Illustrated in class example 2

Class example 1 – investment in associate acquired for an amount in excess of

net asset value

Mistry Limited acquired a 40% interest in the ordinary shares of Meggie Limited on
1 January 20X4 for R420 000. Mistry Limited has exercised significant influence over
Meggie Limited since this date. On 1 January 20X4 the equity of Meggie Limited,
fairly valued, was as follows:
R
Ordinary share capital (550 000 shares) 550 000
Retained earnings 300 000
Revaluation surplus on land 150 000
1 000 000

The following is an extract from the financial records of Meggie Limited:

Retained earnings: 31/12/20X6 31/12/20X5 31/12/20X4

R R R
Balance at the beginning of the year 545 000 410 000 300 000
Profit for the year 180 000 150 000 120 000
Ordinary dividend (20 000) (15 000) (10 000)
Balance at the end of the year 705 000 545 000 410 000

Both Mistry Limited and Meggie Limited have a 31 December reporting date.

Mistry Limited accounts for its investment in Meggie Limited at cost in its separate
financial statements.

Since 1 January 20X4 there have been no changes in the equity of Meggie Limited
other than that related to retained earnings and a pre-tax increase in the revaluation
surplus on land on 1 January 20X5 of R64 433.

The tax rate is 28% and 80% of capital gains are included in taxable income.
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REQUIRED:

1. Prepare the general journal entries (cash transactions included) in the separate
accounting records of Mistry Limited to account for the above information for the
years ended 31 December 20X4, 20X5 and 20X6.

2. Prepare the pro-forma consolidation journal entries to equity account the

investment in Meggie Limited for the years ended 31 December 20X4, 20X5 and
20X6.

3. Calculate the carrying amount of the “Investment in associate” that will be

presented in the consolidated statement of financial position of the Mistry Limited
Group as at 31 December 20X4, 20X5 and 20X6.

4. Explain why there is no journal entry for goodwill.

5. Prepare the analysis of equity of Meggie Limited for the years ended
31 December 20X4, 20X5 and 20X6. Use this analysis to calculate the carrying
amount of the “Investment in associate” for presentation in the consolidated
statement of financial position as well as the amount of “Share of profit of
associate” to be presented in the consolidated statement of profit or loss and
other comprehensive income (profit or loss section).

SUGGESTED SOLUTION:

1. Journal entries in the books of Mistry Limited

(Used to prepare the separate financial statements of Mistry Limited)
Dr Cr
R R
31/12/20X4

Investment in associate (SFP) 420 000

Bank 420 000

Bank 4 000
Dividend income (P/L) 4 000
(R10 000 x 40%)

31/12/20X5

Bank 6 000
Dividend income (P/L) 6 000
(R15 000 x 40%)

31/12/20X6

Bank 8 000
Dividend income (P/L) 8 000
(R20 000 x 40%)
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2. Pro-forma consolidation journal entries to equity account the investment in

associate

(Used to prepare the consolidated financial statements of the Mistry

Limited Group, consisting of the investor, Mistry Limited, and its associate,
Meggie Limited)

Dr Cr
R R
31/12/20X4

J1 Investment in associate (SFP) 48 000

Share of profit of associate (P/L) 48 000
(R120 000 x 40%)
(Share of profit of associate for current year)

J2 Dividend income (P/L) 4 000

Investment in associate (SFP) 4 000
(R10 000 x 40%)
(Re-allocate dividend income to equity account
investment)

31/12/20X5

J3 Investment in associate (SFP) 44 000

Retained earnings (SCE) 44 000
(R48 000 J1 – R4 000 J2)
(Correct opening balances)

J4 Investment in associate (SFP) 60 000

Share of profit of associate (P/L) 60 000
(R150 000 x 40%)
(Share of profit of associate for current year)

J5 Dividend income (P/L) 6 000

Investment in associate (SFP) 6 000
(R15 000 x 40%)
(Re-allocate dividend income to equity account
investment)

J6 Investment in associate (SFP) 20 000

Share of other comprehensive income of 20 000
associate (OCI)
{[R64 433 – (R64 433 x 28% x 80%)] x 40%}
(Share of since acquisition revaluation surplus of
associate)
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Dr Cr
R R
31/12/20X6

J7 Investment in associate (SFP) 118 000

Retained earnings (SCE) 98 000
Revaluation surplus (SCE) 20 000
(RE: R44 000 J3 + R60 000 J4 – R6 000 J5)
(Correct opening balances)

J8 Investment in associate (SFP) 72 000

Share of profit of associate (P/L) 72 000
(R180 000 x 40%)
(Share of profit of associate for current year)

J9 Dividend income (P/L) 8 000

Investment in associate (SFP) 8 000
(R20 000 x 40%)
(Re-allocate dividend income to equity account
investment)

3. Carrying amount of “Investment in associate” for presentation in the

consolidated statement of financial position

31/12/20X4 R

Initial cost of investment 01/01/20X4 420 000

Share of profit current year (J1) 48 000
Dividend income (J2) (4 000)
464 000

31/12/20X5 R

Initial cost of investment 01/01/20X4 420 000

Increase in equity since acquisition (J3) 44 000
Balance at beginning of year (31/12/20X4 above) 464 000
Share of profit current year (J4) 60 000
Dividend income (J5) (6 000)
Share of revaluation surplus (J6) 20 000
538 000

31/12/20X6 R

Initial cost of investment 01/01/20X4 420 000

Increase in equity since acquisition (J7) 118 000
Balance at beginning of year (31/12/20X5 above) 538 000
Share of profit current year (J8) 72 000
Dividend income (J9) (8 000)
602 000
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4. There is no journal entry for the goodwill that arose on acquisition since the
starting point for equity accounting is the initial cost of the investment in the
associate. This amount already includes the goodwill amount, thus no pro-forma
consolidation journal entry is required to account for the goodwill.

5. Preparation of analysis of equity of Meggie Limited

(NB: This is only a calculation)

5.1 For the year ended 31/12/20X4

Analysis of equity of Meggie Limited

Total Mistry Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital 550 000
Retained earnings 300 000
Revaluation surplus 150 000
Total equity 1 000 000 400 000
Consideration paid 420 000
Goodwill 20 000

Since acquisition to
beginning of current year N/A

Current year
Profit for the year 120 000 B 48 000
Ordinary dividends (10 000) (4 000)
1 110 000 A 44 000 -

Investment in associate
R420 000 initial cost + R44 000A share of since acquisition increase in net asset
value = R464 000
NB: The starting point is always the initial cost of the investment in associate!

Share of profit of associate: R48 000B

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5.2 For the year ended 31/12/20X5

Analysis of equity of Meggie Limited

Total Mistry Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital 550 000
Retained earnings 300 000
Revaluation surplus 150 000
Total equity 1 000 000 400 000
Consideration paid 420 000
Goodwill 20 000

Since acquisition to
beginning of current year
Retained earnings
(410 000 – 300 000) 110 000 44 000

Current year
Profit for the year 150 000 C 60 000
Ordinary dividends (15 000) (6 000)
Revaluation surplus 50 000 20 000
[R64 433 – (R64 433 x 28%
x 80%)]
1 295 000 A 98 000 B 20 000

Investment in associate
R420 000 initial cost + (R98 000A + R20 000B) share of since acquisition
increase in net asset value = R538 000
NB: The starting point is always the initial cost of the investment in associate!

Share of profit of associate: R60 000C

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5.3 For the year ended 31/12/20X6

Analysis of equity of Meggie Limited

Total Mistry Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital 550 000
Retained earnings 300 000
Revaluation surplus 150 000
Total equity 1 000 000 400 000
Consideration paid 420 000
Goodwill 20 000

Since acquisition to
beginning of current year
Retained earnings
(545 000 – 300 000) 245 000 98 000
Revaluation surplus 50 000 20 000
[R64 433 – (R64 433 x 28%
x 80%)]

Current year
Profit for the year 180 000 C 72 000
Ordinary dividends (20 000) (8 000)
1 455 000 A 162 000 B 20 000

Investment in associate
R420 000 initial cost + (R162 000A + R20 000B) share of since acquisition
increase in net asset value = R602 000
NB: The starting point is always the initial cost of the investment in associate!

Share of profit of associate: R72 000C

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Class example 2 – investment in associate acquired at a bargain purchase

price

Ginger Limited acquired a 40% interest in the ordinary shares of Lucky Limited on
1 January 20X4 for R370 000. Ginger Limited has exercised significant influence
over Lucky Limited since this date. On 1 January 20X4 the equity of Lucky Limited,
fairly valued, was as follows:
R
Ordinary share capital (550 000 shares) 550 000
Retained earnings 300 000
Revaluation surplus 150 000
1 000 000

The following is an extract from the financial records of Lucky Limited:

Retained earnings: 31/12/20X6 31/12/20X5 31/12/20X4

R R R
Balance at the beginning of the year 545 000 410 000 300 000
Profit for the year 180 000 150 000 120 000
Ordinary dividend (20 000) (15 000) (10 000)
Balance at the end of the year 705 000 545 000 410 000

Both Ginger Limited and Lucky Limited have a 31 December reporting date.

Ginger Limited accounts for its investment in Lucky Limited at cost in its separate
financial statements.

Since 1 January 20X4 there have been no changes in the equity of Lucky Limited
other than that related to retained earnings and a post-tax increase in the revaluation
surplus on 1 January 20X5 of R50 000.

REQUIRED:

1. Prepare the general journal entries (cash transactions included) in the separate
accounting records of Ginger Limited to account for the above information for the
years ended 31 December 20X4, 20X5 and 20X6.

2. Prepare the pro-forma consolidation journal entries to equity account the

investment in Lucky Limited for the years ended 31 December 20X4, 20X5 and
20X6.

3. Calculate the carrying amount of the “Investment in associate” that will be

presented in the consolidated statement of financial position of the Ginger
Limited Group as at 31 December 20X4, 20X5 and 20X6.

4. Prepare the analysis of equity of Lucky Limited for the years ended
31 December 20X4, 20X5 and 20X6. Use this analysis to calculate the carrying
amount of the “Investment in associate” for presentation in the consolidated
statement of financial position as well as the amount of “Share of profit of
 16

associate” to be presented in the consolidated statement of profit or loss and

other comprehensive income (profit or loss section).

SUGGESTED SOLUTION:

1. Journal entries in the books of Ginger Limited

(Used to prepare the separate financial statements of Ginger Limited)

Dr Cr
R R

2. Pro-forma consolidation journal entries to equity account the investment in

associate

(Used to prepare the consolidated financial statements of the Ginger

Limited Group, consisting of the investor, Ginger Limited, and its
associate, Lucky Limited)

Dr Cr
R R
17

Dr Cr
R R
 18

3. Carrying amount of “Investment in associate” for presentation in the

consolidated statement of financial position

3.1 31/12/20X4

3.2 31/12/20X5

3.3 31/12/20X6

R
 19

4. Preparation of analysis of equity of Lucky Limited

(NB: This is only a calculation)

4.1 For the year ended 31/12/20X4

Total Ginger Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital
Retained earnings
Revaluation surplus
Total equity
Consideration paid
Gain on bargain purchase

Since acquisition to
beginning of current year

Current year
Profit for the year
Ordinary dividends

4.2 For the year ended 31/12/20X5

Total Ginger Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital
Retained earnings
Revaluation surplus
Total equity
Consideration paid
Gain on bargain purchase

Since acquisition to
beginning of current year
Retained earnings

Current year
Profit for the year
Ordinary dividends
Revaluation surplus
 20

4.3 For the year ended 31/12/20X6

Total Ginger Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital
Retained earnings
Revaluation surplus
Total equity
Consideration paid
Gain on bargain purchase

Since acquisition to
beginning of current year
Retained earnings
Revaluation surplus

Current year
Profit for the year
Ordinary dividends
 21

7. Value adjustments and equity accounting

Note that the goodwill or gain on bargain purchase is calculated using the fair value of
the investee’s identifiable assets and liabilities (IAS 28, par 32). The implications for the
equity method are the following:

 The fair values could differ from the carrying amounts on acquisition date
No consolidation journal entries are necessary for the value adjustments at
acquisition date, as the equity method does not use individual line items of the
investee. In other words, the value adjustments are part of the calculation of the
goodwill / gain on bargain purchase and are not recognised separately.

 Value adjustments could affect future periods

When there was a value adjustment at acquisition, although it was not recognised
separately, adjustments are made for depreciation, impairment losses or gains /
losses upon disposal (IAS 28, par 32). These adjustments are necessary because
the cost of the asset (or liability) will be different from the perspective of the group
and the investee.

 Value adjustments in future periods are recorded net of deferred tax

As the equity method does not use individual line items, the impact of value
adjustments in future periods are recorded net of deferred tax. There are therefore
no separate consolidation journal entries for the deferred tax consequences of value
adjustments under the equity method.

These implications of value adjustments are illustrated in class example 3.

Class example 3 – fair value adjustments at acquisition date

Use the same information as in example 2, but assume that Ginger Limited
determined at acquisition date (1 January 20X4) that the fair value of a patent of
Lucky Limited (with a carrying amount of R500 000) was R380 000. The remaining
useful life of the patent on this date was 20 years. Both the group and Lucky Limited
account for intangible assets using the cost model in IAS 38 and amortise using the
straight-line method. A tax rate of 28% applies.

REQUIRED:

Prepare the pro-forma consolidation journal entries to equity account the investment
in Ginger Limited for the years ended 31 December 20X4, 20X5 and 20X6.
 22

SUGGESTED SOLUTION:

1. Pro-forma consolidation journal entries to equity account the investment in

associate

(Used to prepare the consolidated financial statements of the Ginger

Limited Group, consisting of the investor, Ginger Limited, and its
associate, Lucky Limited)

Dr Cr
R R
31/12/20X4

J1 Investment in associate (SFP) 49 728

Share of profit of associate (P/L) 49 728
(Analysis 20X4: B)
(Share of profit of associate for current year)

J2 Dividend income (P/L) 4 000

Investment in associate (SFP) 4 000
(R10 000 x 40%)
(Re-allocate dividend income to equity account
investment)

31/12/20X5

J3 Investment in associate (SFP) 45 728

Retained earnings (SCE) 45 728
(R49 728 J1 – R4 000 J2)
(Correct opening balances)

J4 Investment in associate (SFP) 61 728

Share of profit of associate (P/L) 61 728
(Analysis 20X5: C)
(Share of profit of associate for current year)

J5 Dividend income (P/L) 6 000

Investment in associate (SFP) 6 000
(R15 000 x 40%)
(Re-allocate dividend income to equity account
investment)

J6 Investment in associate (SFP) 20 000

Share of other comprehensive income of
associate (OCI) 20 000
(R50 000 x 40%)
(Share of since acquisition revaluation surplus of
associate)
 23

Dr Cr
R R
31/12/20X6

J7 Investment in associate (SFP) 121 456

Retained earnings (SCE) 101 456
Revaluation surplus (SCE) 20 000
(RE: R45 728 J3 + R61 728 J4 – R6 000 J5)
(Correct opening balances)

J8 Investment in associate (SFP) 73 728

Share of profit of associate (P/L) 73 728
(Analysis 20X6: C)
(Share of profit of associate for current year)

J9 Dividend income (P/L) 8 000

Investment in associate (SFP) 8 000
(R20 000 x 40%)
(Re-allocate dividend income to equity account
investment)

2. Preparation of analysis of equity of Lucky Limited

(NB: This is only a calculation)

2.1 For the year ended 31/12/20X4

Analysis of equity of Lucky Limited
Total Ginger Limited (40%)
At Since
RE RS
R R R R
At acquisition
Ordinary share capital 550 000
Retained earnings 213 600
[300 000 – (120 000 x 72%)]
Revaluation surplus 150 000
Total equity 913 600 365 440
Consideration paid 370 000
Goodwill C 4 560

Since acquisition to
beginning of current year N/A

Current year
Profit for the year 124 320 B 49 728
- given 120 000
- amortisation adjustment (i) 4 320
Ordinary dividends (10 000) (4 000)
1 027 920 A 45 728 -
 24

(i) Amortisation adjustment

R
Adjustment to carrying amount of patent (380 000 – 500 000) 120 000

Amortisation per year (120 000 / 20 years) 6 000

Impact after tax (6 000 x 72%) 4 320

Carrying amount of the investment at 31/12/20X4:

R370 000 (cost) + R45 728 A = R415 728

2.2 For the year ended 31/12/20X5

Analysis of equity of Lucky Limited

Total Ginger Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital 550 000
Retained earnings 213 600
[300 000 – (120 000 x 72%)]
Revaluation surplus 150 000
Total equity 913 600 365 440
Consideration paid 370 000
Goodwill D 4 560

Since acquisition to
beginning of current year
Retained earnings 114 320 45 728
- given (410 000 – 300 000) 110 000
- amortisation adjustment 4 320
(4 320 x 1 yr)

Current year
Profit for the year 154 320 C 61 728
- given 150 000
- amortisation adjustment 4 320
Ordinary dividends (15 000) (6 000)
Revaluation surplus 50 000 20 000
1 217 240 A 101 456 B 20 000

Carrying amount of the investment at 31/12/20X5:

R370 000 (cost) + R101 456 A + R20 000 B = R491 456
 25

2.3 For the year ended 31/12/20X6

Analysis of equity of Lucky Limited

Total Ginger Limited (40%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital 550 000
Retained earnings 213 600
[300 000 – (120 000 x 72%)]
Revaluation surplus 150 000
Total equity 913 600 365 440
Consideration paid 370 000
Goodwill D 4 560

Since acquisition to
beginning of current year
Retained earnings 253 640 101 456
- given (545 000 – 300 000) 245 000
- amortisation adjustment 8 640
(4 320 x 2 yrs)
Revaluation surplus 50 000 20 000

Current year
Profit for the year 184 320 C 73 728
- given 180 000
- amortisation adjustment 4 320
Ordinary dividends (20 000) (8 000)
1 381 560 A 167 184 B 20 000

Carrying amount of the investment at 31/12/20X6:

R370 000 (cost) + R167 184 A + R20 000 B = R557 184
 26

8. Preference shares

If an associate / joint venture has preference shares in issue, it will have the following
implications:

 For the equity method (i.e. the investment in ordinary shares)

When an equity accounted investee has preference shares in issue, the
implications for the equity method are similar to those for consolidation.
If the preference shares are cumulative, the share of profit of the investee is after
preference dividends irrespective of whether they have been declared or not
(IAS 28, par 37).

 For an investment in preference shares

The starting point for equity accounting is the separate financial statements. In
the separate financial statements, investments in preference shares and loans to
investees will be accounted for in accordance with IFRS 9.
IAS 28, par 14A, determines that the IFRS 9 accounting is completed and
carried forward to the consolidated (group) financial statements for these
financial assets.

9. Losses of associates

Equity accounting requires the recognition of the investor’s share of both profits and
losses (IAS 28, par 10).

What if the share of losses to be recognised is more than the carrying amount of
the investment?

 The interest in an associate / joint venture is limited to zero (IAS 28, par 38).
 Note that the interest in an associate / joint venture is more than just the
equity accounted carrying amount.
 Note the order in which the interest in an associate / joint venture is reduced
by losses.

 This limit means that there could be unrecognised losses (IAS 28, par 38).
 The unrecognised losses form part of disclosure requirements in IFRS 12
(not in the scope of FRK 300).
 If there are unrecognised losses, profits in subsequent years must first clear
the previously unrecognised losses before an investor can start recognising
its interest in an associate / joint venture again (IAS 28, par 39).

Recognition of losses of equity accounted investees is illustrated in class example 4.

 27

Class example 4 – losses of associates / joint ventures

Trial balances at 31 December 20X10

P Limited A Limited
R R

Ordinary share capital 50 000 20 000

Retained earnings 18 000 -
Profit before tax 13 900 66 700
Interest bearing liabilities 30 000 25 000
Trade and other payables 8 000 10 000
119 900 121 700

Investment in A Limited 15 000 -

Accumulated loss - 31 000
Income tax expense 3 900 18 700
Property, plant and equipment 63 000 37 000
Inventories 38 000 35 000
119 900 121 700

P Limited acquired a 30% interest in A Limited on 1 January 20X7 when A Limited’s

retained earnings had a credit balance of R28 000. P Limited has exercised significant
influence over A Limited since this date.

P Limited accounts for investments in associates at cost in its separate financial

statements.

REQUIRED:

Prepare the pro-forma consolidation journal entries and the consolidated financial
statements of the P Limited Group for the year ended 31 December 20X10. Your
answer must as far as possible comply with International Financial Reporting Standards
(IFRS). Notes, comparative amounts are not required. A consolidated statement of
cash flows is not required.
 28

SUGGESTED SOLUTION:

Analysis of equity of A Limited at 31 December 20X10

Total P Limited (30%)

At Since
R R R
At acquisition (01/01/20X7)
Ordinary share capital 20 000
Retained earnings 28 000
Total equity 48 000 14 400
Consideration paid 15 000
Goodwill 600

Since acquisition to beginning

of current year
Accumulated loss B (15 000)
- balance (- 31 000 - 28 000) (59 000) (17 700)
- unrecognised loss 2 700

Current year (31/12/20X10)

Profit for the year C 11 700
- given (66 700 – 18 700) 48 000 14 400
- unrecognised loss of prior years (2 700)
37 000 D (3 300)

Pro-forma consolidation journal entries to equity account the investment in

associate

31/12/20X10 Dr Cr
R R

J1 Retained earnings (SCE) 15 000

Investment in associate (SFP) 15 000
(Correct opening balances) (Analysis: B)

J2 Investment in associate (SFP) 11 700

Share of profit of associate (P/L) 11 700
(Analysis: C)
(Share of profit of associate for current year)
 29

P LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X10
R

Profit 13 900
Share of profit of associate (C per analysis) 11 700
Profit before tax 25 600
Income tax expense (3 900)
Profit for the year 21 700
Other comprehensive income -
Total comprehensive income for the year 21 700

P LIMITED GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 31 DECEMBER 20X10
Ordinary Retained Total
share earnings
capital
R R R
1
Balance at the beginning of the year 50 000 3 000 53 000
Total comprehensive income for the year - 21 700 21 700
2
- Profit for the year - 21 700 21 700
- Other comprehensive income for the year - - -
Balance at the end of the year 50 000 24 700 74 700

(1) 18 000P – 15 000B = 3 000

(2) (13 900 – 3 900)P + 11 700C = 21 700

 30

P LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20X10
R
ASSETS

Non-current assets 74 700

Property, plant and equipment (63 000P) 63 000
Investment in associate (15 000 cost – 3 300D) 11 700

Current assets
Inventories (38 000P) 38 000

Total assets 112 700

EQUITY AND LIABILITIES

Total equity 74 700

Issued ordinary share capital 50 000
Retained earnings [(18 000 + 13 900 – 3 900)P – 3 300D] 24 700

Non-current liabilities
Interest bearing borrowings (30 000P) 30 000

Current liabilities
Trade and other payables (8 000P) 8 000

Total equity and liabilities 112 700

10. Unrealised gains and losses

It is possible that transactions can take place between investors and their equity
accounted associates / joint ventures. These transactions are intragroup.

If an unrealised gain or loss arises from such a transaction, the investor must
eliminate its share of such a gain or loss when equity accounting (IAS 28, par 28).

This requirement is similar to that of consolidating a subsidiary. However, because

the equity method is not identical to consolidation, there are some important
differences which are summarised in the comparison below:
 31

Consolidation – IFRS 10 Equity method – IAS 28

(subsidiaries) (associates and joint ventures)
Transactions between the entity and its Transactions between the entity and its
subsidiaries are intragroup associate / joint venture are intragroup
IFRS 10 requirements (IFRS 10, par B86): IAS 28 requirements (IAS 28, par 28):
 Eliminate intragroup assets, liabilities,  Eliminate only unrealised gains and
equity, income, expenses and cash losses!
flows
 Eliminate transactions and balances
 Eliminate in full (100%)  Eliminate share of unrealised gains
and losses!
Direction of the sale determines whether No non-controlling interest to account
non-controlling interest is affected for
Rest of the consolidation journals are the Direction of the sale has a big impact
same, regardless of who sold on the consolidation journals

Note: Unrealised gains are always eliminated. However, this is not true for
unrealised losses. When an intragroup loss provides evidence of a decrease in net
realisable value or of an impairment loss, it is not eliminated (IAS 28, par 29).

The elimination of unrealised gains and losses are illustrated in the examples that
follow. As the direction of the sale has a big impact on the consolidation journals, the
elimination of unrealised gains or losses are illustrated for both directions (i.e. where
the investor sold and where the investee sold).

Class example 5 – sale of inventories by investor to associate = downstream

transaction

Cuddles Limited acquired a 35% interest in Scampy Limited on 1 July 20X4 for
R650 000 when the equity of Scampy Limited consisted of ordinary share capital of
R950 000 (950 000 ordinary shares) and retained earnings of R850 000. Cuddles
Limited has exercised significant influence over Scampy Limited since this date. The
net asset value of Scampy Limited was considered to be fairly valued on the date of
acquisition.

The following financial statements on 30 June 20X8, prepared for management

purposes, are presented to you:
 32

Statements of financial position as at 30 June 20X8

Cuddles Scampy
Limited Limited
R R
Assets
Property, plant and equipment 1 800 000 1 680 000
Investment in associate – at cost 650 000 -
Inventories 150 000 450 000
Cash and cash equivalents 300 000 590 000
2 900 000 2 720 000

Equity and liabilities

Ordinary share capital 600 000 950 000
Retained earnings 1 950 000 1 550 000
Revaluation surplus 150 000 70 000
Trade and other payables 200 000 150 000
2 900 000 2 720 000

Statements of profit or loss and other comprehensive income for the year
ended 30 June 20X8
Cuddles Scampy
Limited Limited
R R

Revenue 1 200 000 900 000

Cost of sales (500 000) (400 000)
Gross profit 700 000 500 000
Other expenses (264 000) (100 000)
Dividend income 14 000 -
Profit before tax 450 000 400 000
Income tax expense (126 000) (112 000)
Profit for the year 324 000 288 000
Other comprehensive income:
Items that will not be reclassified to profit or loss:
- Revaluation surplus on property, plant and equipment 150 000 70 000
Gain on revaluation of land 193 299 90 206
Income tax effect of revaluation of land (43 299) (20 206)
Total comprehensive income for the year 474 000 358 000

During the year ended 30 June 20X8 Scampy Limited declared and paid an ordinary
dividend of R40 000. No dividends were declared or paid by Scampy Limited during
the year ended 30 June 20X7. Cuddles Limited has neither paid nor declared any
ordinary dividends for the last two years.

Since the acquisition of its interest in Scampy Limited, Cuddles Limited has sold
inventories to Scampy Limited at a mark-up of 50% on cost. Total sales during the
years ended 30 June 20X7 and 20X8 amounted to R500 000 and R650 000
respectively. Of these amounts the unsold inventories on hand in Scampy Limited’s
 33

warehouse on 30 June 20X7 and 20X8 amounted to R45 000 and R52 500
respectively. Scampy Limited had no unsold inventories on hand on 30 June 20X6.

The tax rate is 28% and 80% of capital gains is included in taxable income.

There have been no changes in the issued share capital of either of the companies.

REQUIRED:

1. Prepare the pro-forma consolidation journal entries to equity account the

investment in Scampy Limited for the years ended 30 June 20X7 and 20X8 for
only the inventory transactions in accordance with International Financial
Reporting Standards (IFRS).

2. Prepare the pro-forma consolidation journal entries to equity account the

investment in Scampy Limited for the year ended 30 June 20X8 in accordance
with International Financial Reporting Standards (IFRS).

3. Prepare the consolidated financial statements of the Cuddles Limited Group for
the year ended 30 June 20X8, in accordance with International Financial
Reporting Standards (IFRS).

Note:  Notes and comparative amounts are not required.

 A consolidated statement of cash flows is not required.
 Cuddles Limited Group presents each item in other comprehensive
income together with its tax effect on the face of the statement of
profit or loss and other comprehensive income.

Calculations:

1. Inventories (Investor sells to associate = downstream transaction)

30/06/20X8 30/06/20X7
R R
100% 35% 100% 35%

Cost 100 35 000 12 250 30 000 10 500

Gross profit 50 17 500 6 125 15 000 5 250
Selling price 150 52 500 18 375 45 000 15 750

Revenue / Cost of sales 650 000 227 500 500 000 175 000
 34

2. Analysis of equity of Scampy Limited – 30/06/20X8

Total Cuddles Limited (35%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital 950 000
Retained earnings 850 000
Total equity 1 800 000 630 000
Consideration paid 650 000
Goodwill 20 000

Since acquisition to
beginning of current year
Retained earnings 452 000 A 158 200
Opening balance 1 302 000
(1 550 000 – 288 000 + 40 000)
At acquisition (850 000)

Current year
Profit for the year 288 000 B 100 800
Ordinary dividends (40 000) D (14 000)
Revaluation surplus 70 000 E 24 500
2 570 000 F 245 000 G 24 500

Part 1: Pro-forma consolidation journal entries i.r.o. inventories (investor

sells to associate)

Dr Cr
R R
30/06/20X7

J1 Revenue (P/L) (45 000 x 35%) 15 750

Cost of sales (P/L) (45 000 x 100 / 150 x 35%) 10 500
Investment in associate (SFP) 5 250
(45 000 x 50 / 150 x 35%)
(Eliminate unrealised profit)

J2 Deferred tax (SFP) 1 470

Income tax expense (P/L) 1 470
(R5 250 x 28%)
(Tax effect of unrealised profit)
 35

Dr Cr
R R
30/06/20X8

J3 Retained earnings – opening (SCE) (R5 250 x 72%) 3 780

Deferred tax (SFP) (R5 250 x 28%) 1 470
Investment in associate (SFP) 5 250
(Correct consolidated opening balances for unrealised
profit of 20X7)

J4 Investment in associate (SFP) 5 250

Cost of sales (P/L) 10 500
Revenue (P/L) 15 750
(Unrealised profit of 20X7 realising during 20X8)

J5 Income tax expense (P/L) 1 470

Deferred tax (SFP) 1 470
(Tax effect of J4)

Or alternative for J3 – J5

Retained earnings (SCE) 3 780

Cost of sales (P/L) 10 500
Income tax expense (P/L) 1 470
Revenue (P/L) 15 750

J6 Revenue (P/L) (52 500 x 35%) 18 375

Cost of sales (P/L) (52 500 x 100 / 150 x 35%) 12 250
Investment in associate (SFP) 6 125
(52 500 x 50 / 150 x 35%)
(Eliminate unrealised profit for 20X8)

J7 Deferred tax (SFP) (R6 125 x 28%) 1 715

Income tax expense (P/L) 1 715
(Tax effect of J6)

Part 2: Pro-forma consolidation journal entries to equity account investment in

Scampy Limited for the year ended 30 June 20X8

Dr Cr
R R

J1 Investment in associate (SFP) 158 200

Retained earnings (SCE) 158 200
(Share of increase in net asset value since acquisition
to beginning of current year)
 36

Dr Cr
R R
J2 Retained earnings – opening (SCE) 3 780
Deferred tax (SFP) 1 470
Investment in associate (SFP) 5 250
(Correct consolidated opening balances for unrealised
profit of 20X7)

J3 Investment in associate (SFP) 5 250

Cost of sales (P/L) 10 500
Revenue (P/L) 15 750
(Unrealised profit of 20X7 realising during 20X8)

J4 Income tax expense (P/L) 1 470

Deferred tax (SFP) 1 470
(Tax effect of J3)

Or alternative for J2 – J4

Retained earnings (SCE) 3 780

Cost of sales (P/L) 10 500
Income tax expense (P/L) 1 470
Revenue (P/L) 15 750

J5 Revenue (P/L) 18 375

Cost of sales (P/L) 12 250
Investment in associate (SFP) 6 125
(Eliminate unrealised profit for 20X8)

J6 Deferred tax (SFP) 1 715

Income tax expense (P/L) 1 715
(Tax effect of J5)

J7 Dividend income (P/L) 14 000

Investment in associate (SFP) 14 000
(Eliminate intragroup dividend)

J8 Investment in associate (SFP) 100 800

Share of profit of associate (P/L) 100 800
(Share of profit of associate for current year)

J9 Investment in associate (SFP) 24 500

Share of other comprehensive income of 24 500
associate (OCI)
(Share of associate’s revaluation surplus current year)
 37

Part 3: Consolidated financial statements (equity accounting applied)

CUDDLES LIMITED GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20X8
R

Revenue [1 200 000C + 15 750(J3) – 18 375(J5)] 1 197 375

Cost of sales [500 000C + 10 500(J3) – 12 250(J5)] (498 250)
Gross profit 699 125
Other income [14 000C – 14 000(J7)] -
Other expenses (264 000C) (264 000)
Share of profit of associate (B per analysis) 100 800
Profit before tax 535 925
Income tax expense [126 000C + 1 470(J4) – 1 715(J6)] (125 755)
Profit for the year 410 170

Other comprehensive income:

Items that will not subsequently be reclassified to profit or loss:
- Revaluation of property, plant and equipment (only C) 150 000
Gain on revaluation of land 193 299
Income tax effect of revaluation of land (43 299)
- Share of other comprehensive income of associate (E per analysis) 24 500
Total comprehensive income for the year 584 670

Note: Although the entity’s share of the other comprehensive income of its associate
is presented as a single line item, IAS 1 requirements must still be met. This means
that the items in other comprehensive income must be distinguished between those
items that will subsequently be reclassified to profit or loss and those that will not. In
this respect it would be helpful to use clear narrations in pro-forma journal entries to
distinguish between these items when preparing the consolidated financial
statements.

Assume that Cuddles Limited had a R10 000 increase in its foreign currency
translation reserve for the year ended 30 June 20X8, while its share of the increase
in the foreign currency translation reserve of Scampy Limited amounted to R7 000.
Assume further that the tax effect on foreign currency translation reserves is zero. In
such a scenario the other comprehensive income section of the consolidated
statement of profit or loss and other comprehensive income would reflect as follows:
 38

R
Other comprehensive income:
Items that will not subsequently be reclassified to profit or loss:
- Revaluation of property, plant and equipment (only C) 150 000
Gain on revaluation of land 193 299
Income tax effect of revaluation of land (43 299)
- Share of other comprehensive income of associate (E per analysis) 24 500
Items that will subsequently be reclassified to profit or loss:
- Foreign currency translation reserve (only C) 10 000
Increase in foreign currency translation reserve 10 000
Income tax effect of foreign currency translation reserve -
- Share of other comprehensive income of associate (given) 7 000

CUDDLES LIMITED GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 30 JUNE 20X8
Ordinary Retained Revaluation Total
share earnings surplus equity
capital
R R R R
1
Balance beginning of the year 600 000 1 780 420 - 2 380 420
Total comprehensive income
for the year - 410 170 174 500 584 670
2
- Profit for the year - 410 170 - 410 170
3
- Other comprehensive income - - 174 500 174 500
Balance end of the year 600 000 2 190 590 174 500 2 965 090

(1) Retained earnings – opening balance R

Cuddles Limited 1 622 220
- balance [1 950 000 (end of year) – 324 000 (current year p/l)] 1 626 000
- unrealised profit in opening inventories (3 780)
[15 750 (J3) – 10 500 (J3) – 1 470 (J4)]
Cuddles Ltd’s interest in Scampy Ltd (A per analysis) 158 200
1 780 420
 39

(2) Profit for the year R

Cuddles Limited 309 370
- given 324 000
- intragroup dividend from Scampy Ltd (D per analysis) (14 000)
- unrealised profit in opening inventories 3 780
[15 750 (J3) – 10 500 (J3) – 1 470 (J4)]
- unrealised profit in closing inventories [6 125 (J5) – 1 715 (J6)] (4 410)
Cuddles Ltd’s interest in Scampy Ltd (B per analysis) 100 800
410 170

(3) 150 000C + 24 500E = 174 500

CUDDLES LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 JUNE 20X8

R
ASSETS
Non-current assets 2 715 090
Property, plant and equipment (1 800 000C) 1 800 000
Investment in associate (a) 913 375
Deferred tax [1 470(J2) – 1 470(J4) + 1 715(J6)] 1 715
Current assets 450 000
Inventories (150 000C) 150 000
Cash and cash equivalents (300 000C) 300 000
Total assets 3 165 090

EQUITY AND LIABILITIES

Equity attributable to owners of the investor 2 965 090
Ordinary share capital (600 000C) 600 000
Retained earnings (b) 2 190 590
Other components of equity (150 000C + 24 500G) 174 500
Current liabilities
Trade and other payables (200 000C) 200 000
Total equity and liabilities 3 165 090

(a) 650 000(cost) + 245 000F + 24 500G – 6 125(J5) = 913 375

(b) Retained earnings R

Cuddles Limited 1 945 590
- given 1 950 000
- unrealised profit in closing inventories [6 125(J5) – 1 715(J6)] (4 410)
Cuddles Ltd’s interest in Scampy Ltd (F per analysis) 245 000
2 190 590
 40

Class example 6 – sale of inventories by associate to investor = upstream

transaction

Cuddles Limited acquired a 35% interest in Scampy Limited on 1 July 20X4 for
R650 000 when the equity of Scampy Limited consisted of ordinary share capital of
R950 000 (950 000 ordinary shares) and retained earnings of R850 000. Cuddles
Limited has exercised significant influence over Scampy Limited since this date. The
net asset value of Scampy Limited was considered to be fairly valued on the date of
acquisition.

The following financial statements on 30 June 20X8, prepared for management

purposes, are presented to you:

Statements of financial position at 30 June 20X8

Cuddles Scampy
Limited Limited
R R
Assets
Property, plant and equipment 1 800 000 1 680 000
Investment in associate – at cost 650 000 -
Inventories 150 000 450 000
Cash and cash equivalents 300 000 590 000
2 900 000 2 720 000
Equity and liabilities
Ordinary share capital 600 000 950 000
Retained earnings 1 950 000 1 550 000
Revaluation surplus 150 000 70 000
Trade and other payables 200 000 150 000
2 900 000 2 720 000

Statements of profit or loss and other comprehensive income for the year
ended 30 June 20X8
Cuddles Scampy
Limited Limited
R R
Revenue 1 200 000 900 000
Cost of sales (500 000) (400 000)
Gross profit 700 000 500 000
Other expenses (264 000) (100 000)
Dividend income 14 000 -
Profit before tax 450 000 400 000
Income tax expense (126 000) (112 000)
Profit for the year 324 000 288 000
Other comprehensive income:
Items that will not be reclassified to profit or loss:
- Revaluation surplus on property, plant and equipment 150 000 70 000
Gain on revaluation of land 193 299 90 206
Income tax effect of revaluation of land (43 299) (20 206)
Total comprehensive income for the year 474 000 358 000
 41

During the year ended 30 June 20X8 Scampy Limited declared and paid an ordinary
dividend of R40 000. No dividends were declared or paid by Scampy Limited during
the year ended 30 June 20X7. Cuddles Limited has neither paid nor declared any
ordinary dividends for the last two years.

Since the acquisition of its interest in Scampy Limited, Cuddles Limited has
purchased inventories from Scampy Limited at a mark-up of 50% on cost. Total sales
during the years ended 30 June 20X7 and 20X8 amounted to R500 000 and
R650 000 respectively. Of these amounts the unsold inventories on hand in Cuddles
Limited’s warehouse on 30 June 20X7 and 20X8 amounted to R45 000 and R52 500
respectively. Cuddles Limited had no unsold inventories on hand on 30 June 20X6.

The tax rate is 28% and 80% of capital gains is included in taxable income.

There have been no changes in the issued share capital of either of the companies.

REQUIRED:

1. Prepare the pro-forma consolidation journal entries to equity account the

investment in Scampy Limited for the years ended 30 June 20X7 and 20X8 for
only the inventory transactions in accordance with International Financial
Reporting Standards (IFRS).

2. Prepare the pro-forma consolidation journal entries to equity account the

investment in Scampy Limited for the year ended 30 June 20X8, in accordance
with International Financial Reporting Standards (IFRS).

3. Prepare the consolidated financial statements of the Cuddles Limited Group for
the year ended 30 June 20X8, in accordance with International Financial
Reporting Standards (IFRS).

Note:  Notes and comparative amounts are not required.

 A consolidated statement of cash flows is not required.
 Cuddles Limited Group presents each item in other comprehensive
income together with its tax effect on the face of the statement of
profit or loss and other comprehensive income.

Part 1: Pro-forma consolidation journal entries i.r.o. inventories (associate

sells to investor)

Dr Cr
R R
 42

Dr Cr
R R

Part 2: Pro-forma consolidation journal entries to equity account investment in

Scampy Limited for the year ended 30 June 20X8

Dr Cr
R R
 43

Dr Cr
R R

Part 3: Consolidated financial statements (equity accounting applied)

CUDDLES LIMITED GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20X8

R
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Share of profit of associate
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income
Items that will not subsequently be reclassified to profit or loss:
- Revaluation of property, plant and equipment
Gain on revaluation of land
Income tax effect of revaluation of land
- Share of other comprehensive income of associate
Total comprehensive income for the year
 44

CUDDLES LIMITED GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 30 JUNE 20X8
Ordinary Retained Revaluation Total
share earnings surplus equity
capital
R R R R
Balance beginning of the year
Total comprehensive income
for the year:
- Profit for the year
- Other comprehensive income
Balance end of the year

CUDDLES LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X8

R
ASSETS
Non-current assets
Property, plant and equipment
Investment in associate
Deferred tax

Current assets
Inventories
Cash and cash equivalents

Total assets

EQUITY AND LIABILITIES

Equity attributable to owners of the investor
Ordinary share capital
Retained earnings
Other components of equity

Current liabilities
Trade and other payables

Total equity and liabilities

 45

Calculations:

1. Inventories

30/06/20X8 30/06/20X7
R R
100% 35% 100% 35%
Cost price
Gross profit
Selling price
Revenue / Cost of sales

2. Analysis of equity of Scampy Limited – 30/06/20X8

Total Cuddles Limited (35%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital
Retained earnings
Total equity
Consideration paid
Goodwill

Since acquisition to
beginning of current year
Retained earnings

Current year
Profit for the year
Ordinary dividends
Revaluation surplus

3. Other
 46

Class example 7 - sale of depreciable asset by investor to associate =

downstream transaction

Shelley Limited acquired a 20% interest in Marmite Limited on 1 January 20X4 for
R140 000 when the equity of Marmite Limited consisted of ordinary share capital of
R300 000 and retained earnings of R450 000. Shelley Limited has exercised
significant influence over Marmite Limited since this date. The net asset value of
Marmite Limited was considered to be fairly valued on the date of acquisition.
The following financial statements on 31 December 20X6, prepared for management
purposes, are presented to you:
Statements of profit or loss and other comprehensive income for the year
ended 31 December 20X6
Shelley Ltd Marmite
Group Ltd
R R

Revenue 2 100 000 600 000

Cost of sales (1 200 000) (250 000)
Gross profit 900 000 350 000
Other income 85 000 50 000
Other expenses (245 000) (150 000)
Dividend income 10 000 -
Profit before tax 750 000 250 000
Income tax expense (210 000) (70 000)
Profit for the year 540 000 180 000
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Mark-to-market reserve on equity instruments - 15 000
Total comprehensive income for the year 540 000 195 000

Profit and total comprehensive income for the year

attributable to:
Owners of the parent 480 000
Non-controlling interest 60 000
540 000

Statements of financial position at 31 December 20X6

Shelley Ltd Marmite
Group Ltd
R R
Assets
Property, plant and equipment 1 500 000 1 000 000
Investment in associate – at cost 140 000 -
Inventories 150 000 250 000
Other investments in equity instruments - 200 000
Cash and cash equivalents 80 000 90 000
1 870 000 1 540 000
 47

Shelley Ltd Marmite

Group Ltd
R R
Equity and liabilities
Ordinary share capital 420 000 300 000
Retained earnings 1 090 000 1 050 000
Mark-to-market reserve on equity instruments - 40 000
Non-controlling interest 260 000 -
Trade and other payables 100 000 150 000
1 870 000 1 540 000

During the year ended 31 December 20X6 Marmite Limited declared and paid an
ordinary dividend of R50 000. No dividends were declared or paid by Marmite
Limited during the year ended 31 December 20X5. Shelley Limited paid ordinary
dividends for the last two years of R60 000 each year.

On 30 June 20X5 Shelley Limited sold office equipment to Marmite Limited for
R450 000. The original cost of this office equipment was R620 000 and the carrying
amount on the date of sale was R400 000.

Office equipment is depreciated on a straight-line basis over the estimated useful life
thereof. The remaining useful life of the office equipment was 10 years on
30 June 20X5.

The tax rate is 28% and 80% of capital gains is included in taxable income. Ignore
tax consequences on financial instruments.

There have been no changes in the issued share capital of either of the companies.

REQUIRED:

1. Prepare the pro-forma consolidation journal entries to equity account the

investment in Marmite Limited for the years ended 31 December 20X5 and 20X6,
only for the sale of the office equipment in accordance with International
Financial Reporting Standards (IFRS).

2. Prepare the pro-forma consolidation journal entries to equity account the

investment in Marmite Limited for the year ended 31 December 20X6, in
accordance with International Financial Reporting Standards (IFRS).

3. Prepare the consolidated financial statements of the Shelley Limited Group for
the year ended 31 December 20X6, in accordance with International Financial
Reporting Standards (IFRS). Notes and comparative amounts are not required. A
consolidated statement of cash flows is not required.
 48

SUGGESTED SOLUTION:

Calculations:

1. Office equipment (investor sells to associate = downstream transaction)

Alternative 1:
(Catch: remember to multiply by the interest owned when using an amount from
the table)

Group Associate Difference

(Marmite Ltd)
R R R
Cost 620 000 450 000 170 000
Accumulated depreciation (220 000) - (220 000)
Carrying amount 400 000 450 000 (50 000)
a b
Depreciation (20 000) (22 500) 2 500
Balance: 31/12/20X5 380 000 427 500 (47 500)
c d
Depreciation (40 000) (45 000) 5 000
Balance: 31/12/20X6 340 000 377 500 (42 500)

(a) 400 000 / 10 x 6 / 12 = 20 000

(b) 450 000 / 10 x 6 / 12 = 22 500
(c) 400 000 / 10 or 380 000 / 9,5 = 40 000
(d) 450 000 / 10 or 427 500 / 9,5 = 45 000

Alternative 2:
(Catch: think about what a table at 100% would look like to get the direction of
the adjustment correct)

Profit on sale made by investor R

Proceeds on sale (given) 450 000
Carrying amount on date of sale (given) 400 000
Profit on sale 50 000

20% of
unrealised
profit
R
Cost [(R620 000 – R450 000) x 20%] 34 000
Accumulated depreciation (R220 000 x 20%) (44 000)
Unrealised profit: 30/06/20X5 10 000
Depreciation (R10 000 x 10% x 6/12) (500)
Balance: 31/12/20X5 9 500
Depreciation (R10 000 x 10%) (1 000)
Balance: 31/12/20X6 8 500
 49

2. Analysis of equity of Marmite Limited – 31/12/20X6

Total Shelley Limited (20%)

At Since
RE MTME
At acquisition R R R R
Ordinary share capital 300 000
Retained earnings 450 000
Total equity 750 000 150 000
Consideration paid 140 000
Gain on bargain purchase A 10 000

Since acquisition to
beginning of current year
Retained earnings 470 000 B 94 000
Opening balance 920 000
(1 050 000 – 180 000 + 50 000)
At acquisition (450 000)
Mark-to-market reserve on
equity instruments 25 000 C 5 000
Closing balance 40 000
Movement for the year (15 000)

Current year
Profit for the year 180 000 D 36 000
Ordinary dividends (50 000) E (10 000)
Mark-to-market reserve on
equity instruments 15 000 F 3 000
1 390 000 G 120 000 H 8 000

Part 1: Pro-forma consolidation journal entries i.r.o. office equipment (Investor

sells to associate)
Dr Cr
R R
31/12/20X5

J1 Profit on sale of equipment (other income) (P/L) 10 000

Investment in associate (SFP) 10 000
[Alt 1: 50 000 x 20%; Alt 2: 10 000 from table]
(Eliminate unrealised profit)

J2 Deferred tax (SFP) [10 000 (J1) x 28%] 2 800

Income tax expense (P/L) 2 800
(Tax effect of J1)

J3 Investment in associate (SFP) 500

Profit on sale of equipment (other income) (P/L) 500
[Alt 1: 2 500 x 20%; Alt 2: 500 from table]
(Unrealised profit realises)
 50

Dr Cr
R R
J4 Income tax expense (P/L) [500 (J3) x 28%] 140
Deferred tax (SFP) 140
(Tax effect of J3)

31/12/20X6

J5 Retained earnings (SCE) 6 840

(9 500 x 72%)
Deferred tax (SFP) (9 500 x 28%) 2 660
Investment in associate (SFP) 9 500
[Alt 1: 47 500 x 20%; Alt 2: 9 500 from table]
(Adjust opening balances for 20X5 entries)

J6 Investment in associate (SFP) 1 000

Profit on sale of equipment (other income) (P/L) 1 000
[Alt 1: 5 000 x 20%; Alt 2: 1 000 from table]
(Unrealised profit realises)

J7 Income tax expense (P/L) [1 000 (J3) x 28%] 280

Deferred tax (SFP) 280
(Tax effect of J6)

Part 2: Pro-forma consolidation journal entries to equity account investment in

Marmite Limited for the year ended 31 December 20X6

Dr Cr
R R

J1 Investment in associate (SFP) 99 000

Retained earnings (SCE) 94 000
Mark-to-market reserve on equity instruments
(SCE) 5 000
(Share of increase in net asset value since acquisition
to beginning of current year)

J2 Investment in associate (SFP) 10 000

Retained earnings (SCE) 10 000
(Gain on bargain purchase on acquisition of associate)

J3 Retained earnings (SCE) 6 840

Deferred tax (SFP) 2 660
Investment in associate (SFP) 9 500
(Adjust opening balances for 20X5 entries)

J4 Investment in associate (SFP) 1 000

Profit on sale of equipment (other income) (P/L) 1 000
(Unrealised profit realises)
 51

Dr Cr
R R
J5 Income tax expense (P/L) 280
Deferred tax (SFP) 280
(Tax effect of J4)

J6 Dividend income (P/L) 10 000

Investment in associate (SFP) 10 000
(Eliminate intragroup dividends)

J7 Investment in associate (SFP) 36 000

Share of profit of associate (P/L) 36 000
(Share of profit of associate for current year)

J8 Investment in associate (SFP) 3 000

Share of other comprehensive income of
associate (OCI) 3 000
(Share of associate’s mark-to-market reserve on equity
instruments for current year)
 52

Part 3: Consolidated financial statements (equity accounting applied)

SHELLEY LIMITED GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X6
R

Revenue (2 100 000S) 2 100 000

Cost of sales (1 200 000S) (1 200 000)
Gross profit 900 000
Other income 86 000
[85 000S + 10 000S – 10 000 (jnl 6) + 5 000 (calc 1) x 20%]
Other expenses (245 000S) (245 000)
Share of profit of associate (D per analysis) 36 000
Profit before tax 777 000
Income tax expense [210 000S + 5 000 (calc 1) x 20% x 28%] (210 280)
Profit for the year 566 720
Other comprehensive income:
Items that will not subsequently be reclassified to profit or loss
- Share of other comprehensive income of associate (F per analysis) 3 000
Total comprehensive income for the year 569 720

Profit for the year attributable to:

Owners of the parent (balancing) 506 720
Non-controlling interest (given) 60 000
566 720
Total comprehensive income for the year attributable to:
Owners of the parent (balancing) 509 720
Non-controlling interest (given) 60 000
569 720
 53

SHELLEY LIMITED GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20X6

Attributable to owners of the parent

Ordinary Retained Mark-to- Total Non- Total
share earnings market controlling equity
capital reserve on interest
equity
instruments
R R R R R R
1 4 6
Balance beginning of the year 420 000 767 160 5 000 1 192 160 200 000 1 392 160
Total comprehensive income for the year - 506 720 3 000 509 720 60 000 569 720
2 7
- Profit for the year - 506 720 - 506 720 60 000 566 720
5
- Other comprehensive income for the year - - 3 000 3 000 - 3 000
3
Ordinary dividends - (60 000) - (60 000) - (60 000)
Balance at the end of the year 420 000 1 213 880 8 000 1 641 880 260 000 1 901 880

(1) Retained earnings – opening balance R

Shelley Limited 663 160
- opening balance [1 090 000 (end of year) – 480 000 (current yr p/l) + 60 000(div)] 670 000
- unrealised profit in office equipment [47 500 (calc 1) x 20% x 72%] (6 840)
Shelley Ltd’s interest in Marmite Ltd (B per analysis) 94 000
Gain on bargain purchase (A per analysis) 10 000
767 160
 54

(2) Profit for the year R

Shelley Limited 470 720
- given 480 000
- intragroup dividend from Marmite Ltd (E per analysis) (10 000)
- unrealised profit in office equipment realising 720
[5 000 (calc 1) x 20% x 72%]
Shelley Ltd’s interest in Marmite Ltd (D per analysis) 36 000
506 720

(3) Only Shelley Ltd

(4) 0S + 5 000C = 5 000

(5) 0S + 3 000F = 3 000

(6) 260 000(end of year) – 60 000(current year) = 200 000

(7) Given

SHELLEY LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X6

R
ASSETS
Non-current assets 1 771 880
Property, plant and equipment (1 500 000S) 1 500 000
Investment in associate 269 500
[140 000(cost) + 10 000A + 120 000G + 8 000H – 42 500 x 20% (calc 1)]
Deferred tax [42 500 (calc 1) x 20% x 28%] 2 380
Current assets 230 000
Inventories (150 000S) 150 000
Cash and cash equivalents (80 000S) 80 000
Total assets 2 001 880

EQUITY AND LIABILITIES

Total equity 1 901 880
Equity attributable to owners of the parent 1 641 880
Ordinary share capital (420 000S) 420 000
Retained earnings 1 213 880
[(1 090 000 – 42 500 x 20% x 72% (calc 1))S + 120 000G + 10 000A]
Other components of equity (0S + 8 000H) 8 000
Non-controlling interest (given) 260 000
Current liabilities
Trade and other payables (100 000S) 100 000
Total equity and liabilities 2 001 880
 55

Class example 8 - sale of depreciable asset by associate to investor =

upstream transaction

Shelley Limited acquired a 20% interest in Marmite Limited on 1 January 20X4 for
R140 000 when the equity of Marmite Limited consisted of ordinary share capital of
R300 000 and retained earnings of R450 000. Shelley Limited has exercised
significant influence over Marmite Limited since this date. The net asset value of
Marmite Limited was considered to be fairly valued on the date of acquisition.
The following financial statements on 31 December 20X6, prepared for management
purposes, are presented to you:
Statements of profit or loss and other comprehensive income for the year
ended 31 December 20X6
Shelley Ltd Marmite
Group Ltd
R R

Revenue 2 100 000 600 000

Cost of sales (1 200 000) (250 000)
Gross profit 900 000 350 000
Other income 85 000 50 000
Other expenses (245 000) (150 000)
Dividend income 10 000 -
Profit before tax 750 000 250 000
Income tax expense (210 000) (70 000)
Profit for the year 540 000 180 000
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Mark-to-market reserve on equity instruments - 15 000
Total comprehensive income for the year 540 000 195 000

Profit and total comprehensive income for the year

attributable to:
Owners of the parent 480 000
Non-controlling interest 60 000
540 000

Statements of financial position as at 31 December 20X6

Shelley Ltd Marmite
Group Ltd
R R
Assets
Property, plant and equipment 1 500 000 1 000 000
Investment in associate – at cost 140 000 -
Inventories 150 000 250 000
Other investments in equity instruments - 200 000
Cash and cash equivalents 80 000 90 000
1 870 000 1 540 000
 56

Shelley Ltd Marmite

Group Ltd
R R
Equity and liabilities
Ordinary share capital 420 000 300 000
Retained earnings 1 090 000 1 050 000
Mark-to-market reserve on equity instruments - 40 000
Non-controlling interest 260 000 -
Trade and other payables 100 000 150 000
1 870 000 1 540 000

During the year ended 31 December 20X6 Marmite Limited declared and paid an
ordinary dividend of R50 000. No dividends were declared or paid by Marmite
Limited during the year ended 31 December 20X5. Shelley Limited paid ordinary
dividends for the last two years of R60 000 each year.

On 30 June 20X5 Marmite Limited sold office equipment to Shelley Limited for
R450 000. The original cost of this office equipment was R620 000 and the carrying
amount on the date of sale was R400 000.

Office equipment is depreciated on a straight-line basis over the estimated useful life
thereof. The remaining useful life of the office equipment was 10 years on
30 June 20X5.

The tax rate is 28% and 80% of capital gains is included in taxable income. Ignore
tax consequences on financial instruments.

There have been no changes in the issued share capital of either of the companies.

REQUIRED:

1. Prepare the pro-forma consolidation journal entries to equity account the

investment in Marmite Limited for the years ended 31 December 20X5 and 20X6,
only for the sale of the office equipment in accordance with International
Financial Reporting Standards (IFRS).

2. Prepare the pro-forma consolidation journal entries to equity account the

investment in Marmite Limited for the year ended 31 December 20X6 in
accordance with International Financial Reporting Standards (IFRS).

3. Prepare the consolidated financial statements of the Shelley Limited Group for
the year ended 31 December 20X6 in accordance with International Financial
Reporting Standards (IFRS). Notes and comparative amounts are not required. A
consolidated statement of cash flows is not required.
 57

SUGGESTED SOLUTION:

Calculations:

1. Office equipment (associate sells to investor = upstream transaction)

Alternative 1:
(Catch: remember to multiply by the interest owned when using an amount from
the table)

Group Investor Difference

(Shelley Ltd)
R R R
Cost 620 000 450 000 170 000
Accumulated depreciation (220 000) - (220 000)
Carrying amount 400 000 450 000 (50 000)
a b
Depreciation (20 000) (22 500) 2 500
Balance: 31/12/20X5 380 000 427 500 (47 500)
c d
Depreciation (40 000) (45 000) 5 000
Balance: 31/12/20X6 340 000 377 500 (42 500)

(a) 400 000 / 10 x 6 / 12 = 20 000

(b) 450 000 / 10 x 6 / 12 = 22 500
(c) 400 000 / 10 or 380 000 / 9,5 = 40 000
(d) 450 000 / 10 or 427 500 / 9,5 = 45 000

Alternative 2:
(Catch: think about what a table at 100% would look like to get the direction of
the adjustment correct)

Profit on sale made by associate R

Proceeds on sale (given) 450 000
Carrying amount on date of sale (given) 400 000
Profit on sale 50 000

20% of
unrealised
profit
R
Cost [(R620 000 – R450 000) x 20%] 34 000
Accumulated depreciation (R220 000 x 20%) (44 000)
Unrealised profit: 30/06/20X5 10 000
Depreciation (R10 000 x 10% x 6/12) (500)
Balance: 31/12/20X5 9 500
Depreciation (R10 000 x 10%) (1 000)
Balance: 31/12/20X6 8 500
 58

2. Analysis of equity of Marmite Limited – 31/12/20X6

Total Shelley Limited (20%)
At Since
RE MTME
At acquisition R R R R
Ordinary share capital 300 000
Retained earnings 450 000
Total equity 750 000 150 000
Consideration paid 140 000
Gain on bargain purchase A 10 000

Since acquisition to
beginning of current year
Retained earnings 470 000 B 94 000
Opening balance 920 000
(1 050 000 – 180 000 + 50 000)
At acquisition (450 000)
Mark-to-market reserve on
equity instruments 25 000 C 5 000
Closing balance 40 000
Movement for the year (15 000)
Current year
Profit for the year 180 000 D 36 000
Ordinary dividends (50 000) E (10 000)
Mark-to-market reserve on
equity instruments 15 000 F 3 000
1 390 000 G 120 000 H 8 000

NB: Even though the associate sold the office equipment to the investor and the
unrealised profit lies in the associate, the analysis is not adjusted (this
therefore differs from the case of a parent and a subsidiary!).

Part 1: Pro-forma consolidation journal entries i.r.o. office equipment (associate

sells to investor)

Dr Cr
R R
31/12/20X5

J1 Share of profit of associate (P/L) 7 200

Deferred tax (SFP) 2 800
[Alt 1: 50 000 x 20% x 28%; Alt 2: 10 000 x 28%]
Equipment – cost (SFP) 34 000
[Alt 1: 170 000 x 20%; Alt 2: 34 000 from table]
Accumulated depreciation – equipment (SFP) 44 000
[Alt 1: 220 000 x 20%; Alt 2: 44 000 from table]
(Eliminate unrealised profit)
 59

Dr Cr
R R
J2 Accumulated depreciation – equipment (SFP) 500
[Alt 1: 2 500 x 20%; Alt 2: 500 from table]
Deferred tax (SFP) (500 x 28%) 140
Share of profit of associate (P/L) 360
(Unrealised profit realises through reversal of excess
depreciation)

31/12/20X6

J3 Retained earnings (SCE) 6 840

Deferred tax (SFP) 2 660
[Alt 1: 47 500 x 20% x 28%; Alt 2: 9 500 x 28%]
Equipment – cost (SFP) 34 000
[Alt 1: 170 000 x 20%; Alt 2: 34 000 from table]
Accumulated depreciation – equipment (SFP) 43 500
Alt 1: 47 500 x 20% + 34 000
or (220 000 – 2 500) x 20%
Alt 2: 9 500 + 34 000
or 44 000 – 500
(Adjust opening balances for 20X5 entries)

J4 Accumulated depreciation – equipment (SFP) 1 000

[Alt 1: 5 000 x 20%; Alt 2: 1 000 from table]
Deferred tax (SFP) (1 000 x 28%) 280
Share of profit of associate (P/L) 720
(Unrealised profit realises through reversal of excess
depreciation)

Part 2: Pro-forma consolidation journal entries to equity account investment in

Marmite Limited for the year ended 31 December 20X6

Dr Cr
R R

J1 Investment in associate (SFP) 99 000

Retained earnings (SCE) 94 000
Mark-to-market reserve on equity instruments 5 000
(SCE)
(Share of increase in net asset value since acquisition
to beginning of current year)

J2 Investment in associate (SFP) 10 000

Retained earnings (SCE) 10 000
(Gain on bargain purchase on acquisition of associate)
 60

Dr Cr
R R
J3 Retained earnings (SCE) 6 840
Deferred tax (SFP) 2 660
Equipment – cost (SFP) 34 000
Accumulated depreciation – equipment (SFP) 43 500
(Adjust opening balances for 20X5 entries)

J4 Accumulated depreciation – equipment (SFP) 1 000

Deferred tax (SFP) 280
Share of profit of associate (P/L) 720
(Unrealised profit realises through reversal of excess
depreciation)

J5 Dividend income (P/L) 10 000

Investment in associate (SFP) 10 000
(Eliminate intragroup dividends)

J6 Investment in associate (SFP) 36 000

Share of profit of associate (P/L) 36 000
(Share of profit of associate for current year)

J7 Investment in associate (SFP) 3 000

Share of other comprehensive income of 3 000
associate (OCI)
(Share of associate’s mark-to-market reserve on equity
instruments for current year)
 61

Part 3: Consolidated financial statements (equity accounting applied)

SHELLEY LIMITED GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X6
R

Revenue (2 100 000S) 2 100 000

Cost of sales (1 200 000S) (1 200 000)
Gross profit 900 000
Other income [85 000S + 10 000S – 10 000(J5)] 85 000
Other expenses (245 000S) (245 000)
Share of profit of associate [36 000D + 5 000 (calc 1) x 20% x 72%] 36 720
Profit before tax 776 720
Income tax expense (210 000S) (210 000)
Profit for the year 566 720
Other comprehensive income:
Items that will not subsequently be reclassified to profit or loss
- Share of other comprehensive income of associate (F per analysis) 3 000
Total comprehensive income for the year 569 720

Profit for the year attributable to:

Owners of the parent (balancing) 506 720
Non-controlling interest (given) 60 000
566 720
Total comprehensive income for the year attributable to:
Owners of the parent (balancing) 509 720
Non-controlling interest (given) 60 000
569 720
 62

SHELLEY LIMITED GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20X6

Attributable to owners of the parent

Ordinary Retained Mark-to- Total Non- Total
share earnings market controlling equity
capital reserve on interest
equity
instruments
R R R R R R
1 4 6
Balance beginning of the year 420 000 767 160 5 000 1 192 160 200 000 1 392 160
Total comprehensive income for the year - 506 720 3 000 509 720 60 000 569 720
2 7
- Profit for the year - 506 720 - 506 720 60 000 566 720
5
- Other comprehensive income for the year - - 3 000 3 000 - 3 000
3
Ordinary dividends - (60 000) - (60 000) - (60 000)
Balance at the end of the year 420 000 1 213 880 8 000 1 641 880 260 000 1 901 880

(1) Retained earnings – opening balance R

Shelley Limited [1 090 000 (end of year) – 480 000 (current yr p/l) + 60 000(div)] 670 000
Shelley Ltd’s interest in Marmite Ltd 87 160
- per analysis (B) 94 000
- unrealised profit in office equipment [47 500 (calc 1) x 20% x 72%] (6 840)
Gain on bargain purchase (A per analysis) 10 000
767 160
 63

(2) Profit for the year R

Shelley Limited 470 000
- given 480 000
- intragroup dividend from Marmite Ltd (E per analysis) (10 000)
Shelley Ltd’s interest in Marmite Ltd 36 720
- per analysis (D) 36 000
- unrealised profit in office equipment 720
[5 000 (calc 1) x 20% x 72%]
506 720

(3) Only Shelley Ltd

(4) 0S + 5 000C = 5 000

(5) 0S + 3 000F = 3 000

(6) 260 000(end of year) – 60 000(current year) = 200 000

(7) Given

SHELLEY LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X6
R
ASSETS
Non-current assets 1 771 880
Property, plant and equipment
[1 500 000S – 42 500 (calc 1) x 20%)] 1 491 500
Investment in associate
[140 000(cost) + 10 000A + 120 000G + 8 000H] 278 000
Deferred tax [42 500 (calc 1) x 20% x 28%] 2 380
Current assets 230 000
Inventories (150 000S) 150 000
Cash and cash equivalents (80 000S) 80 000
Total assets 2 001 880

EQUITY AND LIABILITIES

Total equity 1 901 880
Equity attributable to owners of the parent 1 641 880
Ordinary share capital (420 000S) 420 000
Retained earnings 1 213 880
[(1 090 000 – 42 500 x 20% x 72% (calc 1))S + 120 000G + 10 000A]
Other components of equity (0S + 8 000H) 8 000
Non-controlling interest (given) 260 000
Current liabilities
Trade and other payables (100 000S) 100 000
Total equity and liabilities 2 001 880
 64

11. Equity accounting and complex groups

A single investor can hold investments in many other entities. The appropriate
accounting requirements will be applied to each investment.

A complex group structure can be horizontal, vertical or mixed (and can include both
subsidiaries and equity accounted investees (i.e. associates and joint ventures).

For FRK 300, subsidiaries that hold investments in associates / joint ventures are
excluded from the scope. In practical terms this means that for FRK 300 purposes a
complex group structure can be:
 An investor with interests in multiple associates and/or joint ventures
 An investor with interests in subsidiaries and/or associates / joint ventures
 An investor with:
 Interests in subsidiaries that have subsidiaries of their own
 Interests in associates and/or joint ventures.

Class example 9 - associate and joint venture in a horizontal group

Mittee Limited has investments in the following companies on 30 September 20X9:

- 25 000 ordinary shares in Sixpence Limited that it purchased for R50 000 on
1 October 20X7. On this date Sixpence Limited had 100 000 ordinary shares in
issue that had been issued at R1 each and its retained earnings was R35 000.
Mittee Limited has exercised joint control over Sixpence Limited since
1 October 20X7 and classified the joint arrangement as a joint venture.

- 40 000 ordinary shares in Frisky (Proprietary) Limited that it purchased on

30 April 20X9. On this date Frisky (Proprietary) Limited had 200 000 ordinary
shares in issue that had been issued at R2,05 each. Mittee Limited paid
R110 000 for this investment. Mittee Limited has exercised significant influence
over Frisky (Pty) Limited since 30 April 20X9.

Additional information:

1. Assume that the profit for the year of Frisky (Pty) Limited accrued evenly during
the year ended 30 September 20X9, unless it is otherwise obvious from the
information provided.

2. The 10% loan advanced to Frisky (Pty) Limited by Mittee Limited was made on
30 June 20X9. No capital repayments have been made as at
30 September 20X9 and all interest due and payable for the year ended
30 September 20X9 have been accounted for by all parties concerned. The 10%
coupon rate on the loan is market-related for similar types of loans.
 65

3. The profit for the year ended 30 September 20X9 (see trial balances under point
4) comprises the following:

Mittee Sixpence Frisky

Limited Limited (Pty)
Limited
R R R
Sales 1 440 000 1 210 000 760 000
Cost of sales (860 000) (665 500) (530 000)
Gross profit 580 000 544 500 230 000
Other income 12 000 5 000 -
Other expenses (58 000) (332 500) (109 500)
Finance costs - - (8 000)
Profit before tax 534 000 217 000 112 500
Income tax expense (84 000) (37 000) (22 500)
Profit for the year 450 000 180 000 90 000

4. The following trial balances have been extracted from the financial records of
each company as at 30 September 20X9:

Mittee Sixpence Frisky

Limited Limited (Pty)
Limited
R R R
Vacant land at carrying amount 1 240 000 310 000 -
Office equipment at carrying amount 400 000 180 000 390 000
Patents and trade-marks at carrying
amount 120 000 - 180 000
Inventories 70 000 15 000 20 000
Trade debtors and accrued income 55 000 10 000 30 000
Bank 135 000 35 000 60 000
Investments:
- Sixpence Limited 50 000 - -
- Frisky (Pty) Limited 110 000 - -
- 10% Loan to Frisky (Pty) Limited 20 000 - -
Dividends:
- interim paid on 01/04/20X9 - - 10 000
- final declared on 25/09/20X9 40 000 20 000 15 000
2 240 000 570 000 705 000

Ordinary share capital 425 000 100 000 410 000

Revaluation surplus 165 000 30 000 -
Retained earnings 950 000 175 000 120 000
Profit for year 450 000 180 000 90 000
Deferred tax 45 000 15 000 5 000
10% Loan from Mittee Limited - - 20 000
Current tax owing 100 000 50 000 35 000
Trade creditors 65 000 - 10 000
Owners for dividends 40 000 20 000 15 000
2 240 000 570 000 705 000
 66

5. The revaluation surpluses arose on 30 September 20X8 when all the companies
revalued their vacant stands to current market value.

6. There have been no changes in the issued share capital of any of the companies
since their incorporation.

REQUIRED:

1. Prepare the pro-forma consolidation journal entries to equity account the

investments in Sixpence Limited and Frisky (Pty) Limited for the year ended
30 September 20X9 in accordance with International Financial Reporting
Standards (IFRS).

2. Prepare the consolidated financial statements of the Mitttee Limited Group for
the year ended 30 September 20X9 in accordance with International Financial
Reporting Standards (IFRS). Notes and comparative amounts are not required. A
consolidated statement of cash flows is not required.

SUGGESTED SOLUTION:

Calculations:

1. Analysis of equity of Sixpence Limited – 30/09/20X9

Total Mittee Ltd (25’/100’ = 25%)

At Since
RE RS
R R R R
At acquisition
Ordinary share capital 100 000
Retained earnings 35 000
Total equity 135 000 33 750
Consideration paid 50 000
Goodwill A 16 250

Since acquisition to
beginning of the current year
Retained earnings
(175 000 – 35 000) 140 000 B 35 000
Revaluation surplus 30 000 C 7 500

Current year
Profit for the year 180 000 D 45 000
Ordinary dividends (20 000) E (5 000)
465 000 G 75 000 H 7 500

Therefore carrying amount of investment in joint venture on 30/09/20X9:

R50 000(cost) + R75 000G + R7 500H = R132 500
 67

2. Allocation of profit for the current year of Frisky (Pty) Limited between pre-
and post acquisition with 30/04/20X9 as date of acquisition

Pre acquisition Post acquisition

1/10/20X8 – 30/4/20X9 1/5/20X9 – 30/9/20X9
(7 months) (5 months)
R R
Profit before tax and interest on
intragroup loan (1) 65 917 47 083
Interest expense (3) - (500)
Profit before tax (2) 65 917 46 583
Income tax expense (4) (13 183) (9 317)
Profit after tax (5) 52 734 37 266

(1) R112 500 + (R20 000 x 10% x 3/12) = R113 000

R113 000 x 7/12 = R65 917
R113 000 x 5/12 = R47 083

(2) R65 917 + R46 583 = R112 500 profit before tax (given)

(3) All interest on loan post acquisition since loan only made on 30/06/20X9

(4) R22 500 x R65 917/(R(65 917 + 46 583) = R13 183

R22 500 x R46 583/R(65 917 + 46 583) = R9 317

(5) R52 734 + R37 266 = R90 000 profit for the year (given)

3. Analysis of equity of Frisky (Pty) Limited – 30/09/20X9

Total Mittee Limited

(40’/200’ = 20%)
At Since
R R R
At acquisition
Ordinary share capital 410 000
Retained earnings (1) 162 734
Total equity 572 734 114 547
Consideration paid 110 000
Gain on bargain purchase I 4 547
Current year
Profit for the year (calc 2) 37 266 J 7 453
Ordinary dividends (15 000) K (3 000)
595 000 L 4 453

(1) R120 000(given) + R52 734(calc 2) – R10 000(interim dividend) = R162 734

Therefore carrying amount of investment in associate on 30/09/20X9:

R110 000(cost) + R4 547I + R4 453L = R119 000
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Part 1: Pro-forma consolidation journal entries

To equity account the investment in Sixpence Ltd for the year ended
30/09/20X9:

Dr Cr
R R

J1 Investment in joint venture (SFP) 42 500

Retained earnings (SCE) 35 000
Revaluation surplus (SCE) 7 500
(Share of increase in net asset value since acquisition to
beginning of current year)

J2 Dividend income (P/L) 5 000

Investment in joint venture (SFP) 5 000
(Eliminate intragroup dividends)

J3 Investment in joint venture (SFP) 45 000

Share of profit of joint venture (P/L) 45 000
(Share of joint venture’s profit for the year)

To equity account the investment in Frisky (Pty) Ltd for the year ended
30/09/20X9:

Dr Cr
R R

J4 Investment in associate (SFP) 4 547

Share of profit of associate (P/L) 4 547
(Gain on bargain purchase on acquisition of associate)

J5 Dividend income (P/L) 3 000

Investment in associate (SFP) 3 000
(Eliminate intragroup dividends)

J6 Investment in associate (SFP) 7 453

Share of profit of associate (P/L) 7 453
(Share of associate’s profit for the year)
 69

Part 2: Consolidated financial statements (equity accounting applied)

MITTEE LIMITED GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X9
R
Revenue (1 440 000M) 1 440 000
Cost of sales (860 000M) (860 000)
Gross profit 580 000
Other income [12 000M – 5 000(J2) – 3 000(J5)] 4 000
Other expenses (58 000M) (58 000)
Share of profit of joint venture [45 000(J3)] 45 000
Share of profit of associate [4 547(J4) + 7 453(J6)] 12 000
Profit before tax 583 000
Income tax expense (84 000M) (84 000)
Profit for the year 499 000
Other comprehensive income -
Total comprehensive income for the year 499 000

MITTEE LIMITED GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 30 SEPTEMBER 20X9
Ordinary Retained Revaluation Total
share earnings surplus equity
capital
R R R R
1 4
Balance beginning of the year 425 000 985 000 172 500 1 582 500
Total comprehensive income
for the year - 499 000 - 499 000
2
- Profit for the year - 499 000 - 499 000
- Other comprehensive income - - - -
3
Ordinary dividends - (40 000) - (40 000)
Balance end of the year 425 000 1 444 000 172 500 2 041 500

(1) 950 000M + 35 000B = 985 000

(2) Profit for the year R

Mittee Limited 442 000
- given 450 000
- intragroup dividend from Sixpence Ltd (E per analysis) (5 000)
- intragroup dividend from Frisky (Pty) Ltd (K per analysis) (3 000)
Mittee Ltd’s interest in Sixpence Ltd (D per analysis) 45 000
Mittee Ltd’s interest in Frisky (Pty) Ltd (J per analysis) 7 453
Gain on bargain purchase in Frisky (Pty) Ltd (I per analysis) 4 547
499 000

(3) Only Mittee Limited

(4) 165 000M + 7 500H = 172 500

 70

MITTEE LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 20X9
R
ASSETS
Non-current assets 2 031 500
Property, plant and equipment (1 240 000M + 400 000M) 1 640 000
Intangible assets (120 000M) 120 000
Investment in joint venture (1) 132 500
Investment in associate (2) 139 000
Current assets 260 000
Inventories (70 000M) 70 000
Trade and other receivables (55 000M) 55 000
Cash and cash equivalents (135 000M) 135 000
Total assets 2 291 500

EQUITY AND LIABILITIES

Total equity 2 041 500
Ordinary share capital (425 000M) 425 000
Retained earnings
[(950 000 + 450 000 – 40 000)M + 75 000G + (4 547I + 4 453L)] 1 444 000
Other components of equity (165 000M + 7 500H) 172 500
Non-current liabilities
Deferred tax (45 000M) 45 000
Current liabilities 205 000
Trade and other payables (65 000M) 65 000
Current tax payable (100 000M) 100 000
Owners for dividends (40 000M) 40 000
Total equity and liabilities 2 291 500

(1) Sixpence Ltd [50 000(cost) + 75 000G + 7 500H] = R132 500

(2) Frisky (Pty) Ltd [110 000(cost) + 4 547I + 4 453L + 20 000(loan)#] = R139 000

# This loan can also be presented as a separate line item: “Loan to associate”