P2 Gp2 #9lsbf.aimsapp.com/aimsweb/LearnResource/GID14906182-P2... · 2016-09-18 · Presentation of Separate Financial Statements When an entity prepares separate financial statements,

8

Questio

n

June 2013

Dec 2013

June 2014

Dec 2014

June 2015

Sep 2015

Dec 2015

March 2016

June 2016

Sep 2016

1

Group

Consol /

Cashflo

w

Trailer

D-Shaped Grp

CSOFP with

precemeal

acquisitio

n,

FRS 39, 1

6,

37, 1

9,

Proportio

nate

Goodwill a

nd

Ethics

Angel

CSOCF

Definitio

n of

C&CE and

Ethics

Marchant

Fello

w Subsi

CSOPL & OCI

with

disposal

to Subsi &

Assc

FRS 19, 1

6,

102, 3

9

Fair V

alue and

Ethics

Joey

Fello

w Subsi

CSOFP with

piecemeal

acquisitio

n

FRS 16, 1

05,

102, 2

4

Ethics

Kutchen

Fello

w Subsi

CSOFP with

acquisitio

n and

disposal in

S1’s Book and

Proportio

nate

Goodwill b

y S1

FRS 108, 1

7, 3

6,

12, 3

7, 1

03 and

Ethics

Fello

w Subsi

CSOPL & OCI

Piecemeal

acquisitio

n and

disposal to

Assc

FRS 36, 1

6, 4

0,

102, 2

8, 1

09

and Ethics

Bubble

Fello

w Subsi

CSOFP with

Foreign Subsi

FRS 109, 1

6, 4

0,

19, 2

1 and

Ethics

D-Shaped Grp

CSOFP with

Piecemeal A

cq

and Partia

l Goodwill a

nd

Impairment

FRS 2, 3

7, 1

6,

40, 2

7, 1

09

Weston

CSOCF

No SOCE given

Discontin

ued

operatio

ns,

Integrated

Report,

Ethics

Fello

w Subsi

CSOFP

cal FV of N

CI,

FRS 36, F

RS 17

sale &

leaseback, F

RS

108, 3

7, 1

10.

Dire

ctor’s ethics.

2

Focused

/ Mixed

Verge

FRS 108

FRS 18

FRS 37

FRS 16

FRS 20

Havanna

FRS 18

FRS 105

FRS 17

Aspire

FRS 21

FRS 12

FRS 103

FRS 39

Coatm

in

FRS 24

FRS 109

FRS 39

Yanong

FRS 113

FRS 41

FRS 102

FRS 16

FRS 16

FRS 37

Chemclean

FRS 38

FRS 110

FRS 103

FRS 2

FRS 12

Mehran

FRS 113

FRS 38

FRS 109

FRS 12

FRS 37 re

org

FRS 108

FRS 12

FRS 21

FRS 12

FRS 115

3

Mixed

Janne

FRS 40

FRS 17

FRS 105

Bental

FRS 110

FRS 39

Minco

FRS 18

FRS 38

FRS 37

FRS 36

Kayte

FRS 103

FRS 110

FRS 16

Klancet

FRS 108

FRS 38

FRS 102

FRS 38

FRS 103

FRS 1

Gasnature

FRS 111

FRS 16

FRS 109

FRS 10

FRS 17

FRS 105

FRS 37

FRS 16

Emcee

FRS 23

FRS 38

FRS 24

FRS 8

FRS 10

FRS 105

FRS 109

4

Current

Issues /

Focused

Lizzer

Disclosure in

Annual R

eports

FRS 107

Zack

FRS 8

Avco

FRS 32

Estoil

FRS 36

Cloud

FRS 1

FRS 109

Tang

FRS 115

Pod

Move to

new

IFRS,

Impairm

ent o

f

NCA and DTA,

FRS 38

Indefin

ite life

FRS 17

Flaws of curre

nt

FRS 17

Materia

lity,

Integrated

Reportin

g,

Cashflow

CHAPTER 7 – CONSOLIDATION

330

CHAPTER CONTENTS DIAGRAM

FRS 27 Separate Financial Statements

If Control Exist (>50% votes)

If Jointly Control (50% votes)

If Significant Influence

(20%-49% votes)

If Simple Investment Exist (1%-19% votes)

FRS 110 Consolidated

Financial Statements

FRS 111 Joint Arrangements

FRS 109 Financial Instruments

(See Chapter 3)

If Joint Ventures

FRS 103 Business Combinations

FRS 28 Investments in Associates and

Joint Ventures

FRS 112 Disclosure of Interests in Other Entities


331

CHAPTER CONTENTS

FRS 27 SEPARATE FINANCIAL STATEMENTS ------------------------ 332

FRS 110 CONSOLIDATED FINANCIAL STATEMENTS ---------------- 333

FRS 111 JOINT ARRANGEMENTS -------------------------------------- 340

FRS 28 INVESTMENT IN ASSOCIATES AND JOINT VENTURES ----- 342

FRS 112 DISCLOSURE OF INTERESTS IN OTHER ENTITIES -------- 344

FRS 103 BUSINESS COMBINATIONS --------------------------------- 346

1. COMPLEX GROUPS 360

2. PIECEMEAL ACQUISITIONS 364

3. DISPOSALS 381

4. FOREIGN SUBSIDIARIES 395


332

FRS 27 SEPARATE FINANCIAL STATEMENTS

This Standard was issued on 31 August 2012 (superseded 20 September 2011) and

is effective for annual periods beginning on or after 1 January 2014. Earlier

application is permitted. If an entity applies this Standard earlier, it shall disclose

that fact and apply FRS 110, FRS 111, FRS 112 Disclosure of Interests in Other

Entities and FRS 28 (as amended in 2011) at the same time.

This Standard is issued concurrently with FRS 110. Together, the two FRSs

supersede FRS 27 Consolidated and Separate Financial Statements (June 2009).

Scope

This Standard shall be applied in accounting for investments in subsidiaries, joint

ventures and associates when an entity elects, or is required by local regulations, to

present separate financial statements.

Definition

Consolidated Financial Statements are the financial statements of a group in

which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

Separate Financial Statements are those presented by a parent (ie an investor

with control of a subsidiary) or an investor with joint control of, or significant

influence over, an investee, in which the investments are accounted for at cost or in

accordance with FRS 109 Financial Instruments.

Presentation of Separate Financial Statements

When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either:

(a) at cost, or (b) in accordance with FRS 109.

The entity shall apply the same accounting for each category of investments.

Investments accounted for at cost shall be accounted for in accordance with FRS

105 Non-current Assets Held for Sale and Discontinued Operations when they are

classified as held for sale (or included in a disposal group that is classified as held

for sale). The measurement of investments accounted for in accordance with FRS

109 is not changed in such circumstances.

An entity shall recognise a dividend from a subsidiary, a joint venture or an

associate in profit or loss in its separate financial statements when its right to

receive the dividend is established.


333

FRS 110 CONSOLIDATED FINANCIAL STATEMENTS



application is permitted. If an entity applies this FRS earlier, it shall disclose that

fact and apply FRS 111, FRS 112, FRS 27 Separate Financial Statements and FRS

28 (as amended in 2011) at the same time.

This FRS does not deal with the accounting requirements for business combinations

and their effect on consolidation, including goodwill arising on a business

combination (see FRS 103 Business Combinations).

Scope

A parent need not present consolidated financial statements if it meets all the following conditions:

(i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;

(ii) its debt or equity instruments are not traded in a public market (a domestic or

foreign stock exchange or an over-the-counter market, including local and

regional markets);

(iii) it did not file, nor is it in the process of filing, its financial statements with a

securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and

(iv) its ultimate or any intermediate parent produces consolidated financial

statements that are available for public use.


334

Investment Entities: exception to consolidation An investment entity shall not consolidate its subsidiaries or apply FRS 103 when it obtains control of another entity. Instead, an investment entity shall measure an

investment in a subsidiary at fair value through profit or loss in accordance with FRS 109.

However, if an investment entity has a subsidiary that provides services that relate to the investment entity’s investment activities, it shall consolidate that subsidiary and apply the requirements of FRS 103 to the acquisition of any such subsidiary.

A parent of an investment entity shall consolidate all entities that it controls,

including those controlled through an investment entity subsidiary, unless the

parent itself is an investment entity.

Determining whether an entity is an Investment Entity A parent shall determine whether it is an investment entity. An investment entity is an entity that:

(a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;

(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and

(c) measures and evaluates the performance of substantially all of its

investments on a fair value basis.

An investment entity has the following typical characteristics:

(a) it has more than one investment;

(b) it has more than one investor; (c) it has investors that are not related parties of the entity and

(d) it has ownership interests in the form of equity or similar interests

Control

An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those

returns through its power over the investee. Thus, the principle of control sets out the following three elements of control:

(a) power over the investee; (b) exposure, or rights, to variable returns from involvement with the investee;

and

(c) the ability to use power over the investee to affect the amount of the

investor’s returns.


338

Kayte (Dec 2014 Q3)

(a) Kayte operates in the shipping industry and owns vessels for transportation.

Additionally, Kayte had borrowed heavily to purchase some vessels and was struggling to meet its debt obligations. Kayte had sold some of these vessels but in

some cases, the bank did not wish Kayte to sell the vessel. In these cases, the vessel was transferred to a new entity, in which the bank retained a variable interest based upon the level of the indebtedness. Kayte’s directors felt that the entity was a subsidiary of the bank and are uncertain as to whether they have

complied with the requirements of FRS 103 Business Combinations and FRS 110 Consolidated Financial Statements as regards the above transactions. (4 marks)

Required: Discuss the accounting treatment of the above transactions in the financial

statements of Kayte. Note: The mark allocation is shown against each of the elements above.


340

FRS 111 JOINT ARRANGEMENTS



application is permitted. If an entity applies this FRS earlier, it shall disclose that

fact and apply FRS 110, FRS 112, FRS 27 Separate Financial Statements and FRS

28 (as amended in 2011) at the same time.

The FRS supersedes FRS 31 Interests in Joint Ventures and INT FRS 13 Jointly

Controlled Entities—Non-Monetary Contributions by Venturers.

Scope

This FRS shall be applied by all entities that are a party to a joint arrangement.

The FRS is to be applied by all entities that are a party to a joint arrangement. A

joint arrangement is an arrangement of which two or more parties have joint control. The FRS defines joint control as the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities

(ie activities that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control.

The FRS classifies joint arrangements into two types—joint operations and joint

ventures.

Joint Arrangement

A Joint Arrangement is an arrangement of which two or more parties have joint control where require the unanimous consent of the parties sharing control.

A joint arrangement has the following characteristics: (a) The parties are bound by a contractual arrangement.

(b) The contractual arrangement gives two or more of those parties joint control

of the arrangement.

A joint arrangement is either a Joint Operation or a Joint Venture.

The classification of a joint arrangement as a joint operation or a joint venture

depends upon the rights and obligations of the parties to the arrangement.


342

FRS 28 INVESTMENT IN ASSOCIATES AND JOINT

VENTURES

This standard was issued on 31 August 2012 (superseded 20 September 2011) and

applies for annual periods beginning on or after 1 January 2014. Earlier application

is permitted. If an entity applies this Standard earlier, it shall disclose that fact and

apply FRS 110, FRS 111 Joint Arrangements, FRS 112 Disclosure of Interests in

Other Entities and FRS 27 (as amended in 2011) at the same time.

This Standard supersedes FRS 28 Investments in Associates (as revised in 2004).

Scope

This Standard shall be applied by all entities that are investors with joint control of,

or significant influence over, an investee.

Significant Influence

If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or

more (but less than 50 per cent) of the voting power of the investee, it is presumed

that the entity has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not

control or joint control of those policies.

Equity Method

The equity method is a method of accounting whereby the investment is initially

recognised at cost and adjusted thereafter for the post- acquisition change in the

investor’s share of the investee’s net assets. The investor’s profit or loss includes its

share of the investee’s profit or loss and the investor’s other comprehensive income

includes its share of the investee’s other comprehensive income.

An entity uses the equity method to account for its investments in associates or

joint ventures in its consolidated financial statements. An entity that does not have

any subsidiaries also uses the equity method to account for its investments in

associates or joint ventures in its financial statements even though those are not

described as consolidated financial statements. The only financial statements to

which an entity does not apply the equity method are separate financial statements

it presents in accordance with FRS 27 Separate Financial Statements.


344

FRS 112 DISCLOSURE OF INTERESTS IN OTHER ENTITIES

This standard was issued on 31 August 2012 (superseded 20 September 2011) and applies for annual periods beginning on or after 1 January 2014. Earlier application

is permitted.

An entity is encouraged to provide information required by this FRS earlier than

annual periods beginning on or after 1 January 2013. Providing some of the

disclosures required by this FRS does not compel the entity to comply with all the

requirements of this FRS or to apply FRS 110, FRS 111, FRS 27 (as amended in

2011) and FRS 28 (as amended in 2011) early.

Objective

The objective of this FRS is to require an entity to disclose information that enables users of its financial statements to evaluate:

(a) the nature of, and risks associated with, its interests in other entities; and

(b) the effects of those interests on its financial position, financial performance

and cash flows.

Scope

This FRS shall be applied by an entity that has an interest in any of the following:

(a) subsidiaries

(b) joint arrangements (ie joint operations or joint ventures)

(c) associates

(d) unconsolidated structured entities.

Interest in Subsidiaries

An entity shall disclose information that enables users of its consolidated financial statements

(a) to understand: (i) the composition of the group; and

(ii) the interest that non-controlling interests have in the group’s activities

and cash flows; and

(b) to evaluate: (i) the nature and extent of significant restrictions on its ability to access or

use assets, and settle liabilities, of the group; (ii) the nature of, and changes in, the risks associated with its interests in


346

FRS 103 BUSINESS COMBINATIONS

The FRS replaces FRS 103 (as issued in 2004) and comes into effect for business

combinations for which the acquisition date is on or after the beginning of the first

annual reporting period beginning on or after 1 July 2009. Earlier application is

permitted, provided that FRS 27 (as amended in 2008) is applied at the same time.

Scope

This FRS applies to a transaction or other event that meets the definition of a business combination. This FRS does not apply to:

(a) the formation of a joint venture.

(b) the acquisition of an asset or a group of assets that does not constitute a

business. In such cases the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in FRS 38 Intangible Assets) and liabilities assumed. The cost of the group shall be

allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.

(c) a combination between entities or businesses under common control.

Single Entity Concept

When the Parent has control over the Subsidiary either through a majority holding

of its voting shares or controlling its board of directors, it is considered a single

entity along with its subsidiary. Thus inter-company transactions (often held in

‘current accounts’) must be cancelled, and only transactions with the outside

world must be reported in the Consolidated Accounts.


347

Acquisition Method A business combination must be accounted for by applying the Acquisition Method, unless it is a combination between entities or businesses under common

control or the acquiree is a subsidiary of an investment entity, as defined in FRS 110 Consolidated Financial Statements, which is required to be measured at fair value through profit or loss.

One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that

does not constitute a business are not business combinations. The FRS establishes principles for recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.

Any classifications or designations made in recognising these items must be made in accordance with the contractual terms, economic conditions, acquirer’s operating or accounting policies and other factors that exist at the acquisition date.

Each identifiable asset and liability is measured at its acquisition-date fair value. Any non-controlling interest in an acquiree is measured at fair value or as the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.

As of the acquisition date, the acquirer shall recognise, separately from goodwill,

the identifiable assets acquired, the liabilities assumed and any non-controlling

interest in the acquiree at their acquisition-date fair values.


348

Acquisition-related Costs

Acquisition-related costs are costs the acquirer incurs to effect a business

combination. Those costs include finder’s fees; advisory, legal, accounting,

valuation and other professional or consulting fees; general administrative costs,

including the costs of maintaining an internal acquisitions department; and costs of

registering and issuing debt and equity securities. The acquirer shall account for

acquisition-related costs as expenses in the periods in which the costs are incurred

and the services are received, with one exception. The costs to issue debt or equity

securities shall be recognised in accordance with FRS 32 and FRS 109.

Contingent Considerations

Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date. However, changes resulting from events after the

acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments. The acquirer shall account for changes in the

fair value of contingent consideration as follows: (a) Contingent consideration classified as equity shall not be remeasured and its

subsequent settlement shall be accounted for within equity.

(b) Contingent consideration classified as an asset or a liability that:

(i) is a financial instrument and is within the scope of FRS 109 shall be

measured at fair value, with any resulting gain or loss recognised either in profit or loss or in other comprehensive income in accordance with that FRS.

(ii) is not within the scope of FRS 109 shall be accounted for in

accordance with FRS 37 or other FRSs as appropriate.


349

Consolidation Adjustments

1. Cost of Investment

FRS 103 requires Acquisition Cost of a subsidiary to be expensed of to the profit

and loss and not to be added as Cost Of Investment (COI).

FRS 103 requires Contingent Considerations (i.e. future settlements) to be

recognised as part of the parent’s COI (or purchase considerations) and FRS 103 do

not require it to be probable.

COI less Fair Value of Net Assets (FVNA) acquired = Goodwill

2. Goodwill

FRS 103 measures goodwill at the acquisition (Acq) date in terms of Full Goodwill

and Proportionate Goodwill.

a. Full Goodwill: given FV of NCI

Full Goodwill at Acq

= (P’s COI at Acq + FV of NCI at Acq) - 100% S’s FVNA at Acq

NCI at YE

= FV of NCI at Acq + S’s Post Acq RE movement – NCI% of Goodwill impairment

b. Full Goodwill: given NCI’s Goodwill

Full Goodwill at Acq

= (P’s COI at Acq – P’s % of S’s FVNA at Acq) + NCI’s Goodwill at Acq

NCI at YE

= NCI’s Goodwill at Acq + S’s FVNA at YE – NCI% of Goodwil impairment

c. Partial (Proportionate) Goodwill with no goodwill allocated to NCI

Proportionate Goodwill at Acq

= P’s COI – P’s share of S’s FVNA = P’s Goodwill only

NCI at YE = NCI’s % of S’s FVNA at YE

In partial goodwill, there is no goodwill allocated to the NCI so there will not be any

share of goodwill impairment to the NCI.

FRS 103 prohibits the amortisation of goodwill. Instead, goodwill is tested for

impairment under FRS 36 and any reversal of impairment loss on goodwill is

prohibited.

Any gain from a bargain purchase (negative goodwill) is recognised as revenue

immediately in the statement of profit or loss.


350

3. Pre/Post Retained Earnings in Mid-Year Acquisitions and Disposals

During mid-year acquisitions, it is important to split the Subsidiary’s Retained

Earnings (RE) into Pre-Acq RE and Post-Acq RE in order to calculate Goodwill and

NCI at YE. This is because before the acquisition, the Parent is not entitled to any

Pre-Acq RE but is entitled it’s share (% acquired) in the Subsidiary’s Post-Acq RE.

The same is true for mid-year disposals where the Parent would be entitled a share

of the Subsidiary’s profits before disposal.

Thus, in the case of mid-year acquisitions and disposals, it is important to

determine the pre and post retained earnings by Time Apportionment

4. Inter-Company Balances

Inter-Company Balances within a Group (i.e. Parent and Subsidiary)

The application of the Single Entity Concept requires inter-company balances

arising from trade and loan resulting in amounts due to and due by the Parent and

Subsidiary must be eliminated. It makes no sense for a company to owe money to

itself.

Often, the amount due to and due by the Parent and Subsidiary will not agree, this

is due to in-transit items at the year end. Therefore, such items must be treated

as received and then inter-company balances be eliminated.

a. Treat as if received in-transit items:

Dr Bank or Dr Inventory or Expenses

Cr Receivables Cr Payables

b. Eliminate inter-company balances:

Dr Payables

Cr Receivables

Inter-Company Balances with an Associate

Remember that Associates are not part of the group of companies, thus, the

amounts due to and due by the Parent and Associate are left unadjusted on the

CSOFP and is not eliminated.


351

5. Unrealised Profit in Inventory

a. Unrealised Profit within a Group

Individual companies within the group, namely Parent and Subsidiary) may buy and

sell inventories to each other at a profit. However, if such inventories, inflated with

profits, are still kept in stock at the year end, unrealised profit (URP) must be

eliminated. There is no problem of URP if the inventories have been sold to external

parties outside the group.

i. Downstream Sales of inventories

This is when Parent sells inventories to Subsidiary. The Parent had made the

PURP and the Subsidiary have the inflated inventories in stock at year end.

To eliminate PURP: Dr Parent’s RE $PURP

Cr Inventories on CSOFP $PURP

ii. Upstream Sales of inventories

This is when Subsidiary sells inventories to Parent. Here, the Subsidiary made the

SURP while the Parent have the inflated inventories in stock at year end.

To eliminate SURP: Dr Subsidiary’s RE $SURP

Cr Inventories on CSOFP $SURP

The PAT attributable to the NCI will be adjusted with SURP.

b. Unrealised Profit with an Associate

Regardless of Downstream or Upstream sales with the Parent and the Associate,

Equity Method in FRS 28 requires one adjustment. Often, we adjust the URP in the

Associate’s RE. This is because the Equity Method is a single line disclosure on the

CSOFP and CSOPL, thus, no double entry is required for such adjustment.

To eliminate URP in both Downstream and Upstream Sales:

Dr Associate’s RE $URP Only single entry in Equity Method

Cr Inventories on CSOFP $URP


352

6. Unrealised Profit in Non-Current Assets

Like inventories, the group may buy and sell Non-Current Assets (NCA) among the

Parent and Subsidiary. As a result, unrealised profit exists in the seller and extra

depreciation has been charged in the buyer (user) due to the inflated cost price of

the non-current asset.

Upon consolidation, it is important to eliminate:

- unrealised profit in the seller, and

- extra depreciation in the buyer,

so that the group is presented as if there were no such sale in the first place.

a. Downstream sales of NCA

Parent sells NCA to Subsidiary.

- eliminate URP in Parent: Dr Parent’s RE $URP

Cr NCA in CSOFP $URP

- eliminate extra Dep in Subsidiary: Dr NCA in CSOFP $extra Dep

Cr Subsidiary’s RE $extra Dep

b. Upstream sales of NCA

Subsidiary sells NCA to Parent.

- eliminate URP in Subsidiary: Dr Subsidiary’s RE $URP

Cr NCA in CSOFP $URP

- eliminate extra Dep in Parent: Dr NCA in CSOFP $extra Dep

Cr Parent’s RE $extra Dep

7. Fair Value Adjustments

The cost of the investment is established at fair value (FV) and must therefore be compared to the Parent’s share of the Subsidiary’s net assets taken over, also at fair value. This ensures the difference between the two figures, goodwill, is realistic.

At the acquisition date, there are fair value adjustments on the Subsidiary’s non-current assets, thus, resulting in depreciation adjustments in the post-acquisition period.

Increase FV: Dr NCA Charge Additional Dep: Dr S’s RE Cr S’s RE (time apportion if needed) Cr NCA


353

8. Parent’s Accounting Policy

Upon consolidation, the Subsidiary must follow the Parent’s accounting policy.

9. Proposed Dividends

When Parent Company becomes a shareholder and controls the Subsidiary

Company, the Parent is also entitled to receive dividend income from Subsidiary.

Upon consolidation, any inter-company dividends from Subsidiary due to Parent

must be eliminated in the CSOFP.

In the CSOPL, inter-company dividends from Subsidiary is also eliminated because

such dividends are already included in Sales Revenue under the Acquisition Method.


354

Kayte (Dec 2014 Q3)

(a) Kayte operates in the shipping industry and owns vessels for transportation.

In June 2014, Kayte acquired Ceemone whose assets were entirely investments in small companies. The small companies each owned and operated one or two

shipping vessels. There were no employees in Ceemone or the small companies. At the acquisition date, there were only limited activities related to managing the small companies as most activities were outsourced. All the personnel in Ceemone were employed by a separate management company. The companies owning the

vessels had an agreement with the management company concerning assistance with chartering, purchase and sale of vessels and any technical management. The management company used a shipbroker to assist with some of these tasks.

Kayte accounted for the investment in Ceemone as an asset acquisition. The consideration paid and related transaction costs were recognised as the acquisition price of the vessels. Kayte argued that the vessels were only passive investments

and that Ceemone did not own a business consisting of processes, since all activities regarding commercial and technical management were outsourced to the management company. As a result, the acquisition was accounted for as if the vessels were acquired on a stand-alone basis. (8 marks)

Required:

Discuss the accounting treatment of the above transactions in the financial statements of Kayte.

Note: The mark allocation is shown against each of the elements above.


358

Marrgrett (Dec 2008 Q2) Marrgrett, a public limited company, is currently planning to acquire and sell interests in other entities and has asked for advice on the impact of FRS103

‘Business Combinations’ and FRS110 ‘Consolidated Financial Statements’. The company is particularly concerned about the impact on earnings, net assets and goodwill at the acquisition date and any ongoing earnings impact that the new

standards may have. The company is considering purchasing additional shares in an associate, Josey, a public limited company. The holding will increase from 30% stake to 70% stake by

offering the shareholders of Josey, cash and shares in Marrgrett. Marrgrett anticipates that it will pay $5 million in transaction costs to lawyers and bankers. Josey had previously been the subject of a management buyout. In order that the current management shareholders may remain in the business, Marrgrett is going

to offer them share options in Josey subject to them remaining in employment for two years after the acquisition. Additionally, Marrgrett will offer the same shareholders, shares in the holding company which are contingent upon a certain

level of profitability being achieved by Josey. Each shareholder will receive shares of the holding company up to a value of $50,000, if Josey achieves a pre-determined rate of return on capital employed for the next two years.

Josey has several marketing-related intangible assets that are used primarily in marketing or promotion of its products. These include trade names, internet domain names and non-competition agreements. These are not currently recognised in

Josey’s financial statements. Marrgrett does not wish to measure the non-controlling interest in subsidiaries on the basis of the proportionate interest in the identifiable net assets, but wishes to

use the ‘full goodwill’ method on the transaction. Marrgrett is unsure as to whether this method is mandatory, or what the effects are of recognising ‘full goodwill’. Additionally the company is unsure as to whether the nature of the consideration would affect the calculation of goodwill.

To finance the acquisition of Josey, Marrgrett intends to dispose of a partial interest in two subsidiaries. Marrgrett will retain control of the first subsidiary but will sell

the controlling interest in the second subsidiary which will become an associate. Because of its plans to change the overall structure of the business, Marrgrett wishes to recognise a re-organisation provision at the date of the business combination.

Required:

Discuss the principles and the nature of the accounting treatment of the above plans under Financial Reporting Standards setting out any impact that FRS103 ‘Business Combinations’ and FRS110 ‘Consolidated Financial Statements’ might have on the earnings and net assets of the group.

Note: this requirement includes 2 professional marks for the quality of the discussion.

(25 marks)


359

Consolidation in P2 involves the following: 1. Complex Groups 2. Piecemeal Acquisitions 3. Disposals 4. Foreign Subsidiaries All other exams on CSOFP are Fellow Subsidiaries unless stated otherwise below.

1. Comlpex Grp:

Vertical Group

D-Shaped Group

J’10

Ashanti

D’12

Minny

J’13

Trailer

M’16

Q1

2. Piecemeal Acq

D’07

Beth

J’09

Bravado

D’11

Traveler

J’12

Robby

D’12

Minny

J’13

Trailer

D’14

Joey

J’15

Kutchen

S’15

Q1

M’16

Q1

3. Disposal

D’09

Grange

J’10

Ashanti

J’14

Marchant

J’15

Kutchen

S’15

Q1

4. Foreign Subsi

J’08

Ribby

J’11

Rose

D’15

Bubble


360

1. Complex Groups

Complex groups exists when the Parent Company controls two or more Subsidiaries and / or Associates.

1. Fellow Subsidiaries P

70% __90%

S1 S2 There are 2 Cost of Investments (COI) in P (each S1 and S2).

During exam, we do not need to calculate Effective Control.

SOFP P S1 S2

NCA

COI in S1

COI in S2

$x

$x


361

2. Vertical Group

P

70%

S1’s NCI 30%

90%

S2

There are 2 COIs, each in the books of P and S1. During exam, we need to calculate Effective Control as follows:

First, apply FRS 110 to decide if control exist in order to cosolidate. FRS 110: P would control S1 and S1 would control S2. P would also control S2 via

S1. Thus, P need to consolidate both S1 and S2. Next, we calculate Parent’s Effective Control in Sub-Subsidiary, S2.

P’s indirect control in S2 = 70% x 90% = 63% NCI in S2 = 100% - 63% = 37%

Adjusting Entries: Dr NCI Cr COI

Effecive control DO NOT apply to inter-group dividends.

SOFP P S1 S2

NCA

COI in S1

COI in S2

$x

$x


362

3. D-Shaped Group P

___80%

30% S1’s NCI 20% __40%

S2

There are three COIs in total, two in the books of P and one in the book of S1.

During exam, we would need to calculate P’s Effective Control in S2. Under FRS 110, P contols both S1 and S2.

Under FRS 103, P’s effective control in S2 would be:

P’s control in S2 = Direct + Indirect = 30% + (80% x 40%) = 30% + 32% = 62%

NCI in S2 = 100% - 62% = 38% Adjusting Entries: Dr NCI

Cr COI

SOFP P S1 S2

NCA

COI in S1

COI in S2

$x

$x

$x


363

EXAMPLE 1

J purchased its shareholding in B on 1 January 2007, and B purchased its shareholding in D on 31 December 2007. Control was achieved on these acquisition dates.

EXAMPLE 2

Using the information in Example 1, assume that J purchased its shareholding in B on 31 December 2007, and B purchased its shareholding in D on 1 January 2007. All other facts within the scenario are unchanged.

Documents

P2 Gp2 #9lsbf.aimsapp.com/aimsweb/LearnResource/GID14906182-P2... · 2016-09-18 · Presentation of Separate Financial Statements When an entity prepares separate financial statements,