chapter Change in a group structure Chapter learning objectives Upon completion of this chapter you will be able to: * prepare group financial statements where activities have been acquired, discontinued or have been disposed of in the period * discuss and apply the treatment of a subsidiary that has been acquired exclusively with a view to subsequent disposal. 109SUBSIDIARIES ACQUISITION pisposaL | | ACQUIRED WITH A ‘OFA OFA view TO. SUBSIDIARY SUBSIDIARY ‘suaSeQuENT DISPOSAL "TRANSACTIONS: wirein equity — CONTROL NEITHER LOST OR GAINED CONTROLS LOST 4 Acquisition of a subsidiary Remember that a parent entity acquires control of a subsidiary from the date that it obtains a majority shareholding. If this happens mid-year, then it will be necessary to pro-rata the results of the subsidiary for the year to identify the net assets at the date of acquisition. Illustration 1 - Tudor - mid-year acquisition of a subsidiary _ © | On 1 July 2004 Tudor purchased 1,600,000 of 2,000,000 equity shares ‘of $1 each in Windsor for $10,280,000. On the same date it also acquired 1,000,000 of Windsor's 10% loan notes. At the date of acquisition the retained earnings of Windsor were $6,150,000. The summarised draft statement of comprehensive income for each company for the year ended 31 March 2005 was as follows: 110 KAPLAN PUBLISHINGchapter 3 yo Tudor Windsor ; $000 $000 Revenue 60,000 24,000 Cost of sales (42,000) (20,000) a ; Gross profit 18,000 4,000 Distribution costs (2,500) (60) ‘ Administration expenses (3,500) (150) Profit from operations 12,000 3,800 ; Interest received/(paid) 75 (200) ; Profit before tax 12,075 3,600 Tax (3,000) (600) Profit for the year 9,075, 3,000 Retained earnings b'fwd 16,525 5,400 The following information is relevant: (1) The fair values of Windsor's assets at the date of acquisition were mostly equal to their book values with the exception of plant, which was stated in the books at $2,000,000 but had a fair value of $5,200,000. The remaining useful life of the plant in question was four years at the date of acquisition. Depreciation is charged to cost of sales and is time apportioned on a monthly basis (2 During the post-acquisition period Tudor sold Windsor some goods for $12 million. The goods had originally cost $9 million. During the remaining months of the year Windsor sold $10 million (at cost to Windsor) of these goods to third parties for $13 million. (3) Revenues and expenses should be deemed to accrue evenly throughout the year. (4) Tudor has a policy of valuing non-controlling interests using the full goodwill method, The fair value of non-controlling interest at the date of acquisition was $2,520,000. (5) The fair value of goodwill was impaired by $300,000 at the reporting date. Required: Prepare a consolidated income statement for Tudor group for the year to 31 March 2005. ABUAN PUBLISHING anChange in a group structure Expandable text - Solution Answer ‘Tudor group statement of comprehensive income for the year ended 31 March 2005: Tudor Windsor Adjusts Group (9/12) soci $000 $000 $000 Revenue 60,000 18,000(12,000) 66,000 Cost of sales (42,000) (15,000) 12,000 URPS (W4) (600) (46,100) FVA adjust dep'n (W2) (600) Gross profit 19.900 Distribution costs (2,500) (38) (2,538) Administration expenses (3,500) (112) Goodwill impairment (W3) (300) (3,912) Profit from operations 13,450 Interest received 75 (75) = Interest paid (150) 75 (75) Profit before tax 13,375 Tax (3,000) (450) (3,450) Profit after tax for the year 1,650 9,925 NCI- take 20% of 1,650 330 Less: NCI goodwill (60) impairment (300x20%) — 270 Group share of profit after tax 9,655 —bal fig 9,925 (W1) Group structure - Tudor owns 80% of Windsor — the acquisition took place three months into the year = nine months is post-acquisition ww 2 KAPLAN PUBLISHINGchapter 3 po WE (W2) Net assets Acq'n date Rep date $000 $000 Equity capital 2,000 2,000 Retained earnings 6,150 8,400 8,150 10,400 FVA—PPE 3,200 3,200 FVA - dep'n adjust 3,200/48 x 9 (600) 11,350 13,000 (W3) Goodwill Windsor $000 © Cost of investment 10,280 FV of NCI at acquisition 2,520 12,800 FV of net assets at acquisition (W2) (11,350) Total goodwill at acquisition 1,450 Impaired during year (300) Unimpaired goodwill 1,150 (W4) URPS of parent company $2,000 x (33.33/133.33 = $500) 2 Disposal scenarios During the year, one entity may sell some or all of its shares in another entity. Possible situations include: (1) the disposal of all the shares held in the subsidiary 2 the disposal of part of the shareholding, leaving a controlling interest after the sale (3) the disposal of part of the shareholding, leaving a residual holding after the sale, which is regarded as an associate (4) the disposal of part of the shareholding, leaving a residual holding after the sale, which is regarded as a trade investment. KAPLAN PUBLISHING 3Change in a group structure 114 When a group disposes of all or part of its interest in a subsidiary undertaking, this must be reflected both in the investing entity's individual accounts and in the group accounts. 3 Investing entity’s accounts Gain to investing entity In all of the above scenarios, the gain on disposal in the investing entity's accounts is calculated as follows: $ Sales proceeds x Carrying amount (usually cost) of shares sold ~ x ‘Tax — amount or rate given in question (%) Net gain to parent x The gain would often be reported as an exceptional item; if so, it must be disclosed separately on the face of the parent's statement of comprehensive income/income statement after operating profit. ‘Tax on gain on disposal The tax arising as a result of the disposal is always calculated based on the gain in the investing entity's accounts, as identified above. The tax calculated forms part of the investing (parent) entity's total tax charge. As such this additional tax forms part of the group tax charge. 4 Group accounts In the group accounts the accounting for the sale of shares in a subsidiary will depend on whether or not the transaction causes control to be lost, or whether after the sale control is still maintained. Where control is lost, there will be a gain or loss to the group which must be included in the group income statement for the year. Additionally, there will be derecognition of the assets and liabilities of the subsidiary disposed of, together with elimination of goodwill and non-controlling interest from the group accounts. The income statement of the subsidiary will be consolidated upto the date of disposal. KAPLAN PUBLISHINGchapter 3 Where control is of the subsidiary is retained, there is no gain or loss to be recorded in the group accounts. Instead, the transaction is regarded as one between equity holders, with the end result being an increase in non- controlling interest. The group continues to recognise the goodwill, assets and liabilities of the subsidiary at the year end, and consolidates the income statement of the subsidiary for the year. Accounting for a disposal where control is lost + Where control is lost (i.e. the subsidiary is completely disposed of or becomes an associate or investment), the parent: — Recognises — the consideration received — any investment retained in the former subsidiary at fair value on the date of disposal - Derecognises = the assets and liabilities of the subsidiary at the date of disposal = unimpaired goodwill in the subsidiary = the non-controlling interest at the date of disposal (including any components of other comprehensive income attributable to them) = Any difference between these amounts is recognised as an exceptional gain or loss on disposal in the group accounts. — Inthe group income statement, it will also be necessary to pro-rata the results of the subsidiary for the year into pre-disposal for consolidation, and post-disposal for accounting as an associate or simple investment as appropriate. Proceeds x FV of retained interest x x Less interest in subsidiary disposed of: Net assets of subsidiary at disposal date x Unimpaired goodwill at disposal date x Less: carrying value of NCI x) Pre-tax gain/loss to the group KAPLAN PUBLISHING a5Change ina group structure ce Presentation in the group income statement when control is lost: Exceptional Gain The gain to the group would often be reported as an exceptional item, i.e. presented as an exceptional item on the face of the income statement after operating profit. There are two ways of presenting the results of the disposed subsidiary: (i) Time-apportionment line-by-line In the group income statement, where the sale of the subsidiary has occurred during the year, basic consolidation principles will only allow the income and expenses of the subsidiary to be consolidated up to the date of disposal. The traditional way is to time apportion each [ine of the disposed subsidiary's results in the same way that a subsidiary's results that had been acquired part way through the year would be consolidated. (ji) Time-apportioned and a discontinued operation If however the subsidiary that has been disposed qualifies as a discontinued operation in accordance with “IFRS 5 Accounting for Non- current Assets held for sale and discontinued operations’, then the pre- disposal results of the subsidiary are aggregated and presented in a single line on the face of the income staternent immediately after profit after tax from continuing operations. Adiscontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and: * represents a separate major line of business or geographical area of operations, * is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or * isa subsidiary acquired exclusively with a view to resale and the disposal involves loss of control. 16 XAPLAN PUBLISHINGCS ae ee ee re ee ee aa en ee ee ee ee a Associate time-apportioned Further if the disposal means control is lost but it leaves a residual interest that gives that the parent significant influence, this will mean that in the group income statement there will be an associate to account for, for example if a parent sells half of its 80% holding to leave it owning a 40% associate. Associates are accounted for using equity accounting and as the associate relationship will only be relevant from the date of disposal it will be time apportioned in the group income statement. 5 Group accounts — entire disposal Entire disposal Illustration 2 - Rock - entire disposal 7 Rock has held a 70% investment in Dog for two years. Rock is disposing of this investment. Goodwill has been calculated using the full goodwill method. No goodwill has been impaired. Details are: $ Cost of investment 2,000 Dog - Fair value of net assets at acquisition 1,900 Dog ~ Fair value of the non-controlling interest at acquisition 800 Sales proceeds 3,000 Dog — Net assets at disposal 2,400 Required: Calculate the profit/loss on disposal. (a) In Rock's individual accounts (b) In the consolidated accounts Rock is subject to tax at the rate of 25%, KAPLAN PUBLISHING chapter 3 uzChange in a group structure uB [ Expandable text - Solution Rock (a) Gain to Rock ple Sales proceeds Cost of shares sold Gain on disposal Tax charge against Rock at 25% (b) Consolidated accounts Sales proceeds Net assets at disposal Unimpaired goodwill (W1) Less: carrying value of NCI (2,400x30%) Gain to group before tax Tax charge on gain made by Rock (as above) (W1) Goodwill Cost of investment FV of NCI at acquisition FV of net assets at acquisition Total Goodwill 3,000 (2,000) 1,000 250 3000 2,400 900 (950) (2,350) 650 250 $ 2,000 800 2,800 (4,900) 900 KAPLAN PUBLISHINGchapter 3 Test your understanding 1 — Snooker ‘Snooker purchased 80% of the shares in Billiards for $100,000 when the net assets of Billiards had a fair value of $50,000. Goodwill was calculated using the proportion of net assets method amounting to $60,000 and has not suffered any impairment to date. Snooker has just disposed of its entire shareholding in Billiards for $300,000, when the net assets were stated at $110,000. Tax is payable by Snooker at 30% on any gain on disposal of shares. + Calculate the gain or loss arising to the parent entity on disposal of shares in Billiards. * Calculate the g: Test your understanding 2 - Bridge The following information relates to the acquisition by Bridge of a 60% subsidiary, Pontoon, where goodwill and non-controlling interests are measured on a {ull fair value basis. At disposal, no goodwill had been impaired and tax is payable at 30% Net assets at Net assets Fair value of Cost of Sale acquisition at disposal NClat investment proceeds date acquisition sm $m $m $m $m 500 750 300 900 3,000 Required: + Calculate the gain arising to the parent entity on disposal. + Calculate the gain arising to the group on disposal. { Test your understanding 3 - Padstow Padstow purchased 80% of the shares in St Merryn four years ago for $100,000. On 30 June it sold all of these shares for $250,000. The net assets of St Merryn at acquisition were $69,000 and at disposal, $88,000. Fifty per cent of the goodwill arising on acquisition had been written off in an earlier year. The fair value of the non-controlling interest in St Merryn at the date of acquisition was $15,000. It is group policy to value the non-controlling interest using the full goodwill method. ie > APLAN PUBLISHING ugChange in a group structure _ Tax is charged at 30%. Required: What profits/losses on disposal are reported in Padstow’s income statement and in the consolidated income statement? Expandable Text - IFRS 5 Discontinued operations Where an entity has disposed of its entire holding in a subsidiary that represents a separate major line of business or geographical area of operations, that subsidiary will meet the IFRS 5 definition of a discontinued operation. The examiner may therefore require you to present the group accounts in accordance with this standard. IFRS 5 is dealt with within chapter 13 of this workbook. 6 Group accounts disposal - subsidiary to associate This situation is where the disposal results in the subsidiary becoming an associate, e.g. 90% holding is reduced to a 40% holding. Aiter the disposal the income, expenses, assets and liabilities of the ex- subsidiary can no longer be consolidated on a line by line basis; instead they must be accounted for under the equily method, with a single amount in the statement of comprehensive income/income statement for the share of the post tax profits for the period after disposal and a single amount in the statement of financial position for the fair value of the investment retained plus the share of post-acquisition retained profits. Consolidated statement of comprehensive income/income statement + Pro rate the subsidiary's results up to the date of disposal and : — consolidate the results up to the date of disposal — equity account for the results after the date of disposal. * Include the group gain on part disposal. Consolidated statement of financial position * Equity account by reference to the yearend holding, based on the fair value of the associate holding at disposal date. KAPLAN PUBLISHINGchapter 3 Mustration 3 - ary to associate Thomas disposed of a 25% holding in Perey on 30 June 20X6 for $125,000. A 70% holding in Percy had been acquired five years prior to this. Thomas uses the full goodwill method in accordance with IFRS 3 revised. Goodwill was impaired and written off in full prior to the year of disposal. Details of Percy are as follows: $ Net assets at 31 December 20X5 290,000 Profit for year ended 31 December 20X6 100,000 (assumed to accrue evenly) Fair value of a 45% holding at 30 June 20X6 245,000 If the carrying value of NCI is $80,000 at the date of the share disposal, what gain on disposal is reported in the Thomas Group accounts for the year ended 31 December 20X6? Ignore tax. Expandable text — Solution Thomas Group - answer (W4) Group Structure Thomas 70% Thomas (25%) 75% 45% 45% Percy Percy Subsidiary Associate x6/12 x 6/12 KAPLAN PUBLISHING aaaChange in a group structure a (W2) Net assets Date of disposal 30 June X6 $ Per question at 31 Dec X5 290,000 In yr 100,000 x 6/12 50,000 340,000 Gain or loss to the group on disposal $ Proceeds 125,000 FV of retained int 245,000 370,000 Net assets recognised at disposal 340,000 NCI (80,000) (260,000) Gain on disposal 110,000 OR $ Proceeds - 25% interest disposed 125,000 45% retained interest at fair value 245,000 30% NCI 80,000 450,000 100% Net assets at date of disposal (340,000) GAIN ON DISPOSAL 110,000 122 KAPLAN PUBLISHINGchapter 3 Test your understanding 4 - Hague Hague has held a 60% investment in Maude for several years, using the full goodwill method to value the non-controlling interest. Half of the goodwill has been impaired prior to the date of disposal of shares by Hague. Details are as follows: $000 Cost of investment 6,000 Maude — Fair value of net assets at acquisition 2,000 Maude — Fair value of a 40% investment at acquisition date 1,000 Maude — Net assets at disposal 3,000 Maude — FV of a 30% investment at disposal date 3,500 Required: (2) Assuming a full disposal of the holding and proceeds of $10 million, calculate the profit/loss arising: (i) in Hague's individual accounts (ii) in the consolidated accounts. Tax is 25%. (0) Assuming a disposal of half the holding and proceeds of $5 million: (i) calculate the profitiloss arising in the consolidated accounts (ii) explain how the residual holding be accounted for. Ignore tax. IERPLAN PUBLISHING 123Change in a group structure Test your understanding 5 - Kathmandu aad The income statements for the year ended 31 December 20X9 are as follows: Kathmandu group Nepal $ $ Revenue 553,000 450,000 Operating costs (450,000) (400,000) Operating profits 103,000 50,000 Dividends receivable 8,000 - Profit before tax 411,000 50,000 Tax (40,000) (14,000) Profit after tax 71,000 36,000 Retained eamings b/f 100,000 80,000 Profit after tax 71,000 36,000 Dividend paid (25,000) (10,000) Retained eamings o/f 146,000 106,000 Additional information * The accounts of the Kathmandu group do not include the results of Nepal. * On‘ January 20X5 Kathmandu acquired 70% of the shares of Nepal for $100,000 when the fair value of Nepal's net assets were $120,000. Nepal has equity capital of $50,000. At that date, the fair value of the the non-controlling interest was $38,000. * Nepal paid its 20X89 dividend in cash on 31 March 20x9. * Goodwill is to be accounted for based upon the fair value of non- controlling interest. No goodwill has been impaired. * Kathmandu has other subsidiaries participating in the same activities as Nepal, and therefore the disposal of Nepal shares does not represent a discontinued operation per IFRS 5. > 124, KAPLAN PUBUSHINGchapter 3 a Required: (a) (i) Prepare the consolidated income statement for the year ended 31 December 20X9 for the Kathmandu group on the basis that Kathmandu pic sold its holding in Nepal on 1 July 20X9 for $200,000. This disposal is not yet recognised in any way in Kathmandu group's income statement. (ii), Compute the group retained eamings at 31 December 20X9 (iii) Explain and illustrate how the results of Nepal are presented in the group income statement in the event that Nepal represented a discontinued activity per IFRS 5. Ignore tax on the disposal. (b) (i) Prepare the consolidated income statement for the year ended 31 December 20X9 for the Kathmandu group on the basis that Kathmandu sold half of its holding in Nepal on 1 July 20X9 for $100,000 This disposal is not yet recognised in any way in Kathmandu group's income statement. The residual holding of 35% has a fair value of $100,000 and leaves the Kathmandu group with significant influence (ii), Compute the group retained earnings at 31 December 20X9. Ignore tax on the disposal. 7 Group accounts — Disposal with trade investment retained This situation is where the subsidiary becomes a trade investment, e.g. 90% holding is reduced to a 10% holding. Consolidated statement of comprehensive income/income statement * Pro rate the subsidiary’s results up to the date of disposal and then: - consolidate the results up to the date of disposal — only include dividend income after the date of disposal. * Include the group gain on part disposal. Consolidated statement of financial position + Recognise the holding retained as an investment, measured at fair value at the date of disposal PUBLISHING 125126 8 Accounting for a disposal where control is not lost From the perspective of the group accounts, where there is a sale of shares but the parent still retains control then, in essence, this is an increase in the non-controlling interest. For example if the parent holds 80% of the shares in a subsidiary and sells 5%, the relationship remains one of a parent and subsidiary and as such will remain consolidated in the group accounts in the normal way, but the NCI has risen from 20% to 25%. Where there is such an increase in the non-controlling interest: — No gain or loss on disposal is calculated — No adjustment is made to the carrying value of goodwill ~The difference between the proceeds received and change in the non-controlling interest is accounted for in shareholders’ equity as follows: $ Cash proceeds received x NCI in subsidiary pre-disposal x NCI in subsidiary post-disposal x Increase in NCI x Difference to equity x Illustration 4 ~ No loss of control | Until 30 September 20X7, Juno held 90% of Hera. On that date it sold | 15% For $100,000. Prior to the disposal, the non-controlling interest | was valued (using the full goodwill method) at $65,000. After the disposal, the non-controlling interest is valued at $180,000. How should the disposal transaction be accounted for in the Juno Group accounts? Expandable text - Solution Dr Cash $100,000 Dr Shareholders’ equity $15,000 Cr Non-controlling interest (180,000 - 65,000) $115,000 KAPLAN PUBLISHINGchapter 3 Expandable text - Disposal with no loss of control In this situation, the subsidiary remains a subsidiary, albeit the shareholding is reduced, e.g. 90% holding is reduced to a 60% holding. Consolidated statement of comprehensive income / income statement * — Consolidate the subsidiary’s results for the whole year. + Calculate the non-controlling interest relating to the periods before and after the disposal separately and then add together: * eg. (X/12 x profit x 10%) + (¥ / 12 x profit x 40%) Consolidated statement of finan Position * Consolidate as normal, with the non-controlling interest valued by reference to the year-end holding * take the difference between proceeds and the change in the NCI to shareholders’ equity as previously discussed. Test your understanding 6 - David and Goliath David has owned 90% of Goliath for many years. David is considering selling part of its holding, whilst retaining control of Goliath. At the date of considering disposal of part of the shareholding in Goliath, the NCI has a fair value of $50,000, and the net assets and goodwill have a carrying value of $70,000 and $20,000 respectively. (i) David could sell 5% of the Goliath shares for $10,000 leaving it holding 85% and increasing the NCI to 15%, or (ii) David could sell 25% of the Goliath shares for $20,000 leaving it holding 65% and increasing the NCI to 35%. Required: Calculate the difference arising that will be taken to equity for each situation APLAN PUBLISHING 327Change in a group structure 128 Test your understanding 7 - Cagney & Lacey The draft financial statements of two entities at 31 March 20X1 were as follows. Statements of Financial Position Cagney Lacey Group $000 $000 Investment in Lacey at cost 3,440 _ Sundry assets 41,950 9,500 45,390 9,500 Equity capital ($1 shares) 20,000 3,000 Retained earnings 41,000 3,500 Sundry liabilities 5,500 3,000 Sales proceeds of disposal (Suspense account) 8,890 - 45,390 9,500 Statements of Comprehensive Income Gagney Lacey Group $000 $000 Revenue 31,590 11,870 Cost of sales (15,290) (6,820) Gross profit 16,300 6,050 Distribution costs (3,000) (2,000) Administrative expenses (350) (250) Profit before tax 12,950 3,800 Tax (5,400) (2,150) Profit after tax for the year 7,550 1,650 The entities had retained earnings on 1 April 20X0 as follows $ $ Retained earnings 3,450 1,850 ADLAN PUBLISHINGchapter 3 ‘Cagney had acquired 90 per cent of Lacey when the retained earings of Lacey were $700,000. Goodwill of $110,000 calculated on a proportionate basis, has been fully impaired. The Cagney group includes other 100 per cent owned subsidiaries. On 31 December 20X0, Cagney disposed of a 15% interest in the equity capital of Lacey. Required: Prepare extracts from the Cagney Group statement of financial position and statement of comprehensive income on the basis that Cagney sold 15% holding in Lacey. Include a statement of changes in equity within your answer. 9 Subsi disposal IFRS 5: non-current assets held for sale and discontinued operations aries acquired exclusively with a view to subsequent * Asubsidiary acquired exclusively with a view to resale is not exempt from consolidation. * — Butifit meets the criteria in IFRS 5: — itis presented in the financial statements as a disposal group classified as held for sale. This is achieved by amalgamating all its assets into one line item and all its liabilities into another — itis measured, both on acquisition and at subsequent reporting dates, at fair value less costs to sell. (IFRS 5 sets down a special tule for such subsidiaries, requiring the deduction of costs to sell. Normally, it requires acquired assets and liabilities to be measured at fair value). * The criteria include the requirements that: = the subsidiary is available for immediate sale — itis likely to be disposed of within one year of the date of its acquisition. — the sale is highly probable. * Anewly acquired subsidiary which meets these held for sale criteria automatically meets the criteria for being presented as a discontinued operation. KAPLAN PUBUSHING 129Change in a group structure Expandable Text - Illustration: IFRS 5 David acquires Rose on 1 March 20X7. Rose is a holding entity with two wholly-owned subsidiaries, Mickey and Jackie. Jackie is acquired exclusively with a view to resale and meets the criteria for classification as held for sale. David's year-end is 30 September. On 1 March 20X7 the following information is relevant: * the identifiable liabilities of Jackie have a fair value of $40m * — the acquired assets of Jackie have a fair value of $180m + the expected costs of selling Jackie are $5m. On 30 September 20X7, the assets of Jackie have a fair value of $170. The liabilities have a fair value of $35m and the selling costs remain at $5m. Discuss how Jackie will be treated in the David Group financial statements on acquisition and at 30 September 20X7. Expandable Text - Solution On acquisition the assets and liabilities of Jackie are measured at fair value less costs to sell in accordance with IFRS 5's special rule. 130 $m Assets 180 Less selling costs (6) 175 Liabilities (40) Fair value less costs to sell 135 YUAN PUBLISHINGchapter 3 At the reporting date, the assets and liabilities of Jackie are remeasured to update the fair value less costs to sell $m Assets 170 Less selling costs (6) 165 Liabilities (35) Fair value less costs to sell 130 The fair value less costs to sell has decreased from $135m on 1 March to $130m on 30 September. This $5m reduction in fair value must be presented in the consolidated income statement as part of the single line item entitled ‘discontinued operations’. Also included in this line items is the post-tax profit or loss earned/incurred by Jackie in the March — September 20X7 period. The assets and liabilities of Jackie must be disclosed separately on the face of the statement of financial position. Below the subtotal for the David group's current assets Jackie's assets will be presented as follows: $m Non-current assets Classified as held for sale 165 Below the subtotal for the David group's current liabilities Jackie’s liabilities will be presented as follows: $m Liabilities directly associated with non-current assets classified as held for sale 35 No other disclosure is required.Change in a group structure 132 10 Increase in group holding where control already obtained From the perspective of the group accounts where there is a purchase of more shares in a subsidiary then, in essence, this is not an acquisition rather a decrease in the non-controlling interest. For example if the parent holds 80% of the shares in a subsidiary and buys 5% more the relationship remains one of a parent and subsidiary and as such will be remain consolidated in the group accounts in the normal way, but the NCI has decreased from 20% to 15%: Where there is such a decrease in the NCI: * There is no change in the goodwill asset * No gain or loss arises as this is a transaction within equity i.e. with the Nel + Adifference will arise that will be taken to equity and is determined in the following proforma $ Cash paid x NCI in subsidiary pre-purchase of shares x NCl in subsidiary post-purchase of shares re Decrease in NCI x Difference to equity x Test your understanding 8 - Gordon and Mandy Gordon has owned 80% of Mandy for many years. Gordon is considering acquiring more shares in Mandy, which will decrease the NCI. The NCI of Mandy currently has a carrying value of $20,000, with the net assets and goodwill having a value of $125,000 and $25,000 respectively. Gordon is considering the following two scenarios: (i) Gordon could buy 20% of the Mandy shares leaving no NCI for $25,000, or (ii) Gordon could buy 5% of the Mandy shares for $9,000 leaving a 15% NCI. a YAPLAN PUBLISHINGchapter 3 a Required: Calculate the difference arising that will be taken to equity for each situation Expandable text - UK syllabus focus The ACCA UK syllabus contains a requirement that UK variant candidates should be able to discuss and apply the key differences between UK GAAP and IFRS GAAP. As with other areas of group accounts, the accounting requirements of UK GAAP and IFRS GAAP are very similar in this area, but there are one or two differences. You should approach questions using the approach of completing the five standard workings identified within chapter 1 as far as they are required. Normally a net assets working is required at the date of any disposal, together with identification of any unamortised goodwill at that date. This information helps to calculate the gain or loss on disposal for inclusion in the financial statements. Expandable text - UK GAAP question 4 Parker purchased 80% of the shares in Tramp four years ago for £100,000. On 30 June it sold all of these shares for £250,000. The net assets of Tramp at acquisition were £69,000 and at disposal, £88,000. Half of the goodwill arising on acquisition had been amortised by the date of the share disposal. Tax is charged at 30%. Required: What profits/losses on disposal are reported in Parker's profit and loss account and in the group profit and loss account? KAPLAN PUBLISHING 133Change ina group structure Be 134 Expandable text - UK GAAP answer 1 (a) Gain to Parker Sales proceeds Cost of shares sold Gain on disposal Tax at 30% Net gain on disposal (b) Consolidated accounts Sales proceeds Share of net assets sold (88,000 x 80%) Goodwill disposed of (W1) Gain on disposal Tax (per parent) Net gain on disposal (W1) Goodwill Cost of investment Group share of FV of net assets at acquisition (80% x 69) Impaired to extent of 50% Unamortised goodwill at disposal date £000 250 (100) 150 (45) 105 £000 250.0 (70.4) (22.4) 157.2 (45.0) 112.2 £000 100.0 (55.2) 44.8 (22.4) 22.4 Normally the parent entity profit is greater than the group profit, by the share of the post-acquisition retained earings now disposed of. In this case the reverse is true, because the $22,400 amortisation of goodwill already recognised exceeds the $15,200 ((88,000 — 69,000) = 80%) share of post acquisition profits. KAPLAN PUBLISHINGchapter 3 Expandable text - UK GAAP question 2 The income statements for the year ended 31 December 20X9 are as follows: Kathmandu group Doha £ £ Turnover 553,000 450,000 Operating costs (450,000) (400,000) Operating profits 103,000 50,000 Dividends receivable 8,000 - Profit before tax 411,000 50,000 Tax (40,000) (14,000) Profit after tax 71,000 36,000 P&L reserve bif 100,000 80,000 Profit after tax 71,000 36,000 Dividend paid (25,000) (10,000) P&L reserve cif 146,000 106,000 Additional information * The accounts of the Kathmandu group do not include the results of Doha. * On 1 January 20X5 Kathmandu acquired 70% of the shares of Doha for £100,000 when the fair value of Nepal's net assets were £120,000. Doha has ordinary share capital of $50,000. * Doha paid its 20X9 dividend in cash on 31 March 20X9. * — Goodwill has an indefinite life, and has suffered no impairment to date. + Kathmandu has other subsidiaries participating in the same activities as Nepal, and therefore the disposal of Nepal shares does not represent a discontinued operation per FRED 32. ww KAPLAN PUBLISHING 135Change in a group structure _ Required: (a) (i) Prepare the consolidated profit and loss account for the year ended 31 December 20X89 for the Kathmandu group on the basis that Kathmandu plc sold its holding in Doha on 4 July 20X9 for £200,000. This disposal is not yet recognised in any way in Kathmandu group's profit and loss acount. (ji) Compute the group profit and loss reserve at 31 December 20X9. (iii) Explain and illustrate how the results of Nepal are presented in the group income statement in the event that Nepal represented a discontinued activity per FRED 32 (equivalent of IFRS 5). Ignore tax on the disposal. (b) (i) Prepare the consolidated profit and loss account for the year ended 31 December 20X9 for the Kathmandu group on the basis that Kathmandu sold half of its holding in Doha on 1 July 20X9 for £200,000 This disposal is not yet recognised in any way in Kathmandu group's profit and loss account. The residual holding of 35% leaves the Kathmandu group with significant influence. (ii), Compute the group profit and loss reserve at 31 December 20x9. Ignore tax on the disposal. 136 KAPLAN PUBLISHINGchapter 3 Expandable text - UK GAAP answer 2 (2) ()) Consolidated income statement - full disposal Kathmandu Doha Group group £ £ Turmover 553,000 (6/12x 450,000) 778,000 Operating costs 450,000 (6/12 x 400,000) (650,000) Operating profit 128,000 Dividend 8,000 less inter-co (70% x 10,000) 1,000 Profit on disposal (W3) 87,400 Profit before tax 216,400 Tax 40,000 (6/12 x 14,000) (47,000) Profit after tax 169,400 Altributable to: Equity holders of 164,000 Kathmandu (8) Minority interest (30% = 36,000* 5,400 6/12) 169,400 > KAPLAN PUBLISHING 137Change in a group structure (ji) Group P&L reserve at 31 December 20X9 - full disposal Brought forward: £ Kathmandu 100,000 Group % of Doha’s post acquisition retained profits bif (70% * (130,000 (W4) - 120,000) (per Q)) 7,000 407,000 Profit for year per consolidated income statement 164,000 Less Dividend paid (25,000) Retained profits carried forward 246,000 Notice that the post-tax results of the subsidiary upto the date of disposal are presented as a one-line entry in the group income statement. There is no line-by-line consolidation of results when this method of presentation is adopted. (b) (i) group profit and loss account - part disposal with residual interest Kathmandu Nepal Group group £ £ Revenue 553,000 (6/12 450,000) 778,000 Operating costs 450,000 (6/12 x 400,000) (650,000) Operating profit 128,000 Dividend 8,000 less inter-co (70% x 10,000) 1,000 Income from associate (35% x 50,000 8,750 6/12) Profit on disposal 143,700 (w3) Profit before tax 281,450 Tax 40,000 (6/12 * 14,000) (47,000) -1e associate (35% x 14,000 x (2,450) 6/12) Profit after tax 232,000 ——_ or 138 KAPLAN PUBLISHINGchapter 3 Brought forward Kathmandu Group % of Nepal's post acquisition retained profits bit (70% (130,000 (W4) — 120,000) (per Q)) Group income per consolidated income statement Less Dividend paid Workings (W4) Net assets - Doha Net assets at disposal & Share capital 50,000 P&L reserve bif 80,000 P&L for year: 6/12 x 36,000 18,000 Less Dividend (10,000) 138,000 (W2) Goodwill Cost to parent 100,000 Group share of FV of net assets at date of |—-—(84,000) acquisition (70% x 120,000) Unimpaired goodwill 16,000 > Attributable to: Kathmandu (8) 226,600 Minority interest (30% x 36,000 * 6/12) 5,400 232,000 (ii) Group P&L reserve at 31 December 20X9 — part disposal £ 100,000 7,000 107,000 226,600 (25,000) 308,600 Net assets bit £ 50,000 80,000 130,000 KAPLAN PUBLISHING 139Change in a group structure i La 140 (W3) Profit on disposal Full disposal (a)(i) Proceeds Less: Net assets at disposal (W1) Less: goodwill disposed of (70/70 x 16,000) (W1) Profit on disposal Part disposal (b)(i) Proceeds Less: net assets disposed of: ~ (35% x 138,000) (W1) Less: goodwill disposed of: (35/70 x 16,000) (W2) £ 200,000 138,000 16,000 87,400 £ 200,000 ((48,300) (8,000) 143,700 KAPLAN PUBLISHINGchapter 3 44 Chapter summary DISPOSALS Parent entity accounts Gain: Proceeds x Cost 00. Tax 00, x Group accounts gain = No gain or loss where no loss of control If control is lost, calculate gain as: proceeds FV of any interest retained. Net assets of sub at disposal Goodwill NCi at disposal lFRSs Disclosure discontinued operations Whole shareholding disposal of SCI/IS: consolidate to disposal and show group gain B/S: subsidiary’s net assets not included No loss of controt ‘SCI/IS: consolidate for full year, calculate NCI pre and post disposal ‘SFP: consolidate as narmal with NCI based on year end holding, ‘account for gain or loss to NCI in equity Associate shareholding retained SCI/S: consolidate to date of disposal, then equity account, show gain SFP: equity account at year end based on FV of associate shareholding at disposal Trade investment shareholding retained SCI/IS: consolidate to date of disposal, then inctude dividend income, show gain SFP: Record retained investment at fairvalue at disposal date Subsidiaries acquired with a view to subsequent disposal must consolidate present as disposal graup; measure at lower of CV and FV selling costs KAPLAN PUBLISHING 1aChange ina group structure Test your understanding answers Test your understanding 1 - Snooker _ (a) Gain to Snooker $000 Sales proceeds 300 Cost of shares sold (100) Gain on disposal 200 Tax at 30% (60) Net gain on disposal 140 (b) Consolidated accounts $000 Proceeds 300 FV of retained interest NIL 300 Less interest in subsidiary disposed of: Net assets of subsidiary at disposal date 110 Unimpaired goodwill at disposal date 60 Less: NCI share of net assets at disposal (20% (22) 110) Less: NCI share of goodwill at disposal (if (NIL) applicable) ~~ (148) 162 Tax on gain as per Snooker (part (a)) (60) Post-tax gain to group “92. 142 KAPLAN PUBLISHINGchapter 3 [ ‘Test your understanding 2 - Bridge me? (a) Gain to parent entity $000 Sales proceeds 3,000 Cost of shares sold (900) Gain on disposal 2,100 Tax at 30% (630) Net gain on disposal 1,470 (b) Consolidated accounts ! $ Proceeds 3,000 FV of retained interest NIL 3,000 Less interest in subsidiary disposed of: Net assets of subsidiary at disposal date 750 Unimpaired goodwill at disposal date (W1) 700 Less: NCI at disposal date (W2) (400) —— (1,050) 1,950 Tax on gain as per parent entity (630) Post-tax gain to group 1,320 KAPLAN PUBLISHING 143,Change in a group structure 8 dm (W1) Goodwill calculation $m Cost of investment 900 FV of NCI at acquisition (given) 300 1,200 FV of net assets acquisition (500) Fair value of goodwill at acquisition — 700 (W2) NCI at disposal date $m FV of NCI at acquisition (given) 300 NCI share of post-acquisition retained earings (40% x (750 - 100 500)) 400 144 KAPLAN PUBLISHINGTest your understanding 3 - Padstow | (a) Gain to Padstow Sales proceeds Cost of shares sold Gain on disposal Tax at 30% Net gain on disposal (b) Consolidated accounts Sales proceeds Carrying value of subsidiary at disposal date: Net assets at disposal date - given Unimpaired goodwill at disposal date (W1) Less: CV of NCI at disposal (W2) Tax (per parent) Net gain on disposal Tax (per parent in part (a) $000 88.0 23.0 111.0 (18.8) $000 250 (100) 150 (45) 105 $000 250.0 (22.2) 157.8 (45.0) 112.8 chapter 3 145Change in a group structure a (W1) Goodwill $000 Cost of investment 100.0 FV of NCI at acquisition 15.0 115.0 FV of net assets at acquisition (69.0 46.0 Impaired to extent of 50% (23.0) Unimpaired goodwill at disposal date 23.0 (W2) NCI at disposal date $000 FV at date of acquisition 15.0 NCI share of post-acquisition retained eamings (20% x (88.0 - 38 69.0)) Goodwill 18.8 Normally the parent entity profit is greater than the group profit, by the share of the post-acquisition retained earings now disposed of. In this case the reverse is true, because the $23,000 impairment loss already recognised exceeds the $15,200 ((88,000 — 69,000) x 80%) share of post acquisition retained earnings. 146 KAPLAN PUBLISHINGSe ee ee ee ee a a Test your understanding 4 - Hague HAPLAN PUBLISHING. (W1) Goodwill $000 Cost of investment 6,000 FV of the NCI at date of acquisition 1,000 7,000 FV of net assets at the date of acquisition (2000) (given) Total goodwill 5,000 Impaired (50%) (2,500) Unimpaired goodwill 2,500 (W2) NCI at disposal date $000 FV at date of acquisition 4,000 NCI share of post-acquisition retained 400 earnings (40% x (3,000 - 2,000) Less: NCI share of goodwill impairment (40% x (1,000) 2500) 400 Full disposal of shares Gain in Hague’s individual accounts $000 (a) (i) Sale proceeds 10,000 Less Cost of shares sold (6,000) Gain to parent 4,000 Tax at 25% x 4,000 (1,000) 3,000 ee chapter 3Change in a group structure us 148, Full disposal of shares - gain in Hague Group accounts Sale proceeds FV of retained interest CV of subsidiary at disposal: Net Assets Unimpaired goodwill (W1) Less: NCI at disposal date (W2) Gain before tax Tax per part (ai) 3,000 2,500 5,500 (400) (b) (i) Disposal of half of the holding to leave a residual shareholding: Disposal proceeds FV of retained interest CV of subsidiary at disposal date: Net assets Unimpaired goodwill (W1) Less: FV of NCI at disposal date (W2) $000 3,000 2,500 5,500 (400) (i) After the date of disposal, the residual holding will be equity accounted, with a single amount in the income statement for the share of the post-tax retained earings for the period after disposal and a single amount in the statement of financial position for the fair value at disposal date of the investment retained plus the group share of post-acquisition retained earnings. $000 10,000 nil (5,100) 4,900 (1,000) 3,900 (,100 3,400 KAPLAN PUBLISHINGchapter 3 Test your understanding 5 - Kathmandu = (a) (i) Consolidated income statement - full disposal Kathmandu Nepal Group group $ $ Revenue 553,000 (6/12x 450,000) 778,000 Operating costs 450,000 (6/12 x 400,000) (650,000) Operating profit 128,000 Dividend 8,000 less inter-co (70% x 10,000) 1,000 Profit on disposal (W4) 87,400 Profit before tax 216,400 Tax 40,000 (6/ 12x 14,000) (47,000) Profit after tax 169,400 Attributable to: Equity holders of 464,000 Kathmandu (B) Non-controlling interest (30% * 36,000 = 5,400 6/12) 169,400 wy KAPLAN PUBLISHING 149Change in a group structure 150 (ii) Group retained earnings at 31 December 20X9 — full disposal Brought forward Kathmandu Group % of Nepal's post acquisition retained eamings bit (70% = (130,000 (W4) - 120,000) (per Q)) Profit for year per consolidated income statement Less Dividend paid Retained earnings carried forward 100,000 7,000 107,000 164,000 (25,000) 246,000 (iii) Group income statement - discontinued operations presentation Revenue Operating costs Operating profit Dividend Profit on disposal (W4) Profit before tax Tax Profit after tax — continuing operations Kathmandu group $ 553,000 450,000 8,000 less inter-co (70% x 10,000) Discontinued operations —_ ($36,000 * 6/12) Group $ 553,000 (450,000) 103,000 1,000 87,400 191,400 (40,000) 151,400 18,000 169,400 APU PUBLISHINGchapter 3, a Attributable to: Equity holders of 164,000 Kathmandu (8) Non-controlling interest (30% 5,400 36,000 x 6/12) 169,400 Notice that the post-tax results of the subsidiary upto the date of disposal are presented as a one-line entry in the group income statement. There | ig no line-by-line consolidation of results when this method of presentation is adopted. (0) (i) Consolidated income statement — part disposal with residual interest Kathmandu Nepal Group group $ $ Revenue 553,000 (6/12 % 450,000) 778,000 Operating costs 450,000 (6/12 x 400,000) (650,000) Operating profit 128,000 Dividend 8,000 less inter-co (70% x 10,000) 1,000 Income from associate (35% * 36,000 6,300 x6/12) \ Profit on disposal (W4) 87,400 Profit before tax 222,700 Tax 40,000 (6/12 14,000) (47,000) Profit after tax 175,700 wy KAPLAN PUBLISHING 151Change in a group structure Attributable to: Equity holders of Kathmandu (f) 170,300 Non-controlling interest (30% x 36,000 x6/ 12) 5,400 175,700 (ii) Group retained earnings at 31 December 20X9 - part disposal Brought forward $ Kathmandu 100,000 Group % of Nepal's post acquisition retained earnings b/f (70% x (130,000 (W4) — 120,000) (per Q)) 7,000 107,000 Group income per consolidated income statement 170,300 Less Dividend paid (25,000) 252,300 Workings (W1) Net assets - Nepal Netassets Net assets at disposal bif $ $ Share capital 50,000 50,000 Retained earnings Bit 80,000 80,000 6/12 x 36,000. 18,000 Less Dividend (10,000) = 138,000 130,000 wa 152 KAPLAN PUBLISHINGa ae: a he Te a on Pe en ee ee ee (W2) Goodwill Cost to parent FV of NCI at date of acquisition FV of net assets at date of acquisition (per question) Unimpaired goodwill (W3) NCI at disposal date FV of NCI at date of acquisition NCI share of post-acquisition retained eamings (30% x (138,000 - 120,000) (W4) Profit on disposal Full disposal (a)(i) Proceeds Net assets recorded prior to disposal Net assets Full goodwill - unimpaired NCI at date of disposal (W3) Profit on disposal KAPLAN PUBLISHING 100,000 38,000 138,000 120,000 18,000 38,000 5,400 43,400 138,000 18,000 156,000 (43,400) $ 200,000 (112,600) 87,400 chapter 3 153Change in a group str 154 ucture le Part disposal (b)(i) Proceeds FV of retained interest (per question) Net assets recorded prior to disposal Net assets Unimpaired goodwill at disposal date NCI at date of disposal (W3) 138,000 18,000 156,000 (43,400) 87,400 100,000 100,000 200,000 (112,600) KAPLAN PUBLISHINGTest your understanding 6 - David and Goliath (i) Sale of 5% of Goliath shares Cash proceeds Increase in NCI (5% x (70,000 + 20,000) Difference to equity (1. increase in equity) (ii) Sale of 25% of Goliath shares Cash proceeds Increase in NCI (25% x (70,000 + 20,000) Difference to equity (i.e. decrease in equity) during the year. APLAN PUBLISHING 10,000 4,500 5,500 20,000 22,500 2,500 Note that in both situations, Goliath remains a subsidiary of David after the sale of shares. There is no gain or loss to the group - the difference arising is taken to equity. Goliath would continue to be consolidated within the David Group like any other subsidiary; there is no change to the carrying value of goodwill. The only impact will be the calculation of NCI share of retained earnings for the year - this would need to be time- apportioned based upon the NCI percentage pre- and post-disposal chapter 3 155Change in a group structure 156 | Test your understanding 7 - Cagney & Lacey (W1) Group structure Cagney Cagney 90% 75% Lacey Lacey Subsidiary 9/12 Subsidiary 3/12 (W2) Net assets at disposal 31 December 19X0 Equity capital Retained earnings bought forward Earnings for the year (pro rata - $1,650 x 9/12) Proportion disposed of (15%) (W3) Disposal transaction Dr Cash Proceeds Cr Non Controlling Interest | Net assets disposed of W2 Cr Shareholder Equity Disposal adjustment (W4) Non - Controlling Interest Lacey's profit after tax ($1,650 x 9/12 x 10%) ($1,650 x 3/12 x 25%) $000 3,000 1,850 1,238 6,088 913 $000 8,890 913 7,977 $000 124 103 227 [EAPLAN PURLISHINGPe eS” Ue ee ee ee ee eee oe ee! Le ee ae eee a Ue ee a Statement of Comprehensive Income for the year ended 31 March xI $000 Revenue (31,590 + 11,870) 43,460 Cost of sales (15,290 + 5,820) (21,110) Gross profit 22,350 Distribution costs (3,000 + 2,000) (6,000) ‘Admin expenses (350 + 250) (600) Profit before tax (12,950 + 3,800) 16,750 Tax (5,400 + 2,150) (7,550) Profit after tax for the year 9,200 Attributable to Non — controlling interest (W4) (227) Profit for the year 8,973 You can now reconcile the reserves Retained earnings reconciliation $000 Bal b/fwd (W1) 4,375 Profit for the year 8,973 Disposal adj [8,890 ~ 913] 7.977 Bal c/fwd (W2) 21,325 NCI bifwd: working $000 Equity capital 3,000 Retained earnings 1,850 4,850 Take NCI % (10% x 4,850) 485 a KAPLAN PUBLISHING chapter 3 157Change in a group structure 158 Workings (W4) Retained earnings bal bifwd 100% Cagney Lacey (1,850 — 700) x 90% Less goodwill fully impaired (W2) Retained earnings bal c/fwd 100% Cagey Profit on disposal [8,890 ~ 3,440 x 15/90] Less goodwill (110 — 110 x 15/90] Lacey (3,500 — 700) x 75% Now prepare the Statement of Financial Position Sundry assets [41,950 + 9,500] Equity Capital Relained earnings (W2) Non-controlling interest [6,500 x 25%] ‘Sundry liabilities (5,500 + 3,000) $000 3,450 4,035 (110) 4,375, 11,000 8,317 (92) 2,100 21,325 $000 51,450 51,450 $000 20,000 21,325 1,625 42,950 8,500 51,450 KAPLAN PUBLISHINGchapter 3 ee Statement of Changes in Equity Equity Retained Non-controlling Total capital earnings interest $000 $000 $000 $000 31 March 20X0 20,000 4,375 485 24,860 Profit for the 8,973 227 «9,200 year Disposal 7,977 913 8,890 adjustment 31 March 20X1 20,000 21,325 1,625 42,950 Test your understanding 8 - Gordon and Mandy (i) Purchase of 20% of Mandy shares $ Cash paid 25,000 Decrease in NCI (20% x (125,000 + 25,000)) 30,000 Difference to equity (i. increase in equity) 5.000 (ii) Purchase of 5% of Mandy shares $ Cash paid 9,000 Decrease in NCI (5% x (125,000 + 25,000)) 7,500 Difference to equity (.e. decrease in equity) 1,500 KAPLAN PUBLISHING 159