Group Statements – Volume 2

Seventeenth edition

Group Statements – Volume 2

Seventeenth edition

CS Binnekade

MCom(Taxation)(Pret) CA(SA)

Associate Professor of Accounting

University of South Africa

ZR Koppeschaar

DCom(Acc)(Pret) CA(SA)

Associate Professor of Accounting

University of South Africa

N Stegmann

DCom(RAU)

Associate Professor of Accounting

University of Johannesburg

J Rossouw

MAcc(UFS) CA(SA)

Associate Professor of Accounting

University of the Free State

C Wright

MCom(Forensic Acc) (Potchefstroom) CA(SA)

Senior Lecturer of Accounting

University of South Africa

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ISBN 978 0 409 12849 9

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Preface
The purpose of this book is to set out the principles and conceptual issues of
consolidated financial statements as based on International Financial
Reporting Standards (IFRSs). It focuses on the principles of control and
consolidation techniques in preparing consolidated financial statements for a
group of entities. Furthermore, the accounting treatment of an investor’s
interests in associates and joint arrangements is covered in Volume 2 of this
work.

Group Statements focuses on providing detailed explanatory application

examples of the following IFRSs:

• IAS

27

Separate Financial Statements;

• IFRS

Business Combinations;

• IFRS

10

Consolidated Financial Statements;

• IAS

28

Investments in Associates and Joint Ventures; and

• IFRS 12 Disclosure of Interests in Other Entities (by providing limited

disclosure examples of some core aspects).
The text includes numerous illustrative and practical examples which expand
on the principles and conceptual issues of the standards above and related
aspects of other IFRSs. The approach of the book is to primarily make use of
the analysis of owners’

equity in table format, but extensive use is also made of consolidation

journal entries. In addition, the worksheet approach is applied up to the end
of chapter 4. The text makes use of commentary to explain important
concepts. Disclosure requirements for the consolidated financial statements
are illustrated and taxation issues are also addressed to the extent that
deferred tax is applicable to certain accounting areas.

The book is aimed at:

• undergraduate and postgraduate university students registered for financial

accounting modules;

• members and students of professional bodies such as the South African

Institute of Chartered Accountants (SAICA), the South African Institute of
Professional Accountants (SAIPA), the Institute of Certified Professional
Accountants (CPA), etc.; and

• practicing accountants and preparers of consolidated financial statements.

LexisNexis Passplus is still included for Volume 1 of this work. PassPlus is

an electronic assessment tool which allows students to continuously assess
their own understanding of, and progress through the textbook. All PassPlus
questions are automatically and immediately graded by the system, which
allows students to receive their feedback instantly. PassPlus also affords
lecturers the opportunity to use the system for continuous assessment
purposes, without adding any additional marking to their own workload. The
most beneficial way for students to use PassPlus is to work v

Preface

through each chapter in the textbook and then complete the accompanying
questions to test their progress.
During the latter part of 2017, the SAICA finalised its “syllabus overload”
review and some aspects were excluded or moved to an “awareness level”
for the sake of SAICA’s professional assessment (the Initial Test of
Competence (ITC)). The major aspects thus affected relating to Group
Statements are as follows:

• investment

entities;

• some aspects relating to the identification of a business combination and

the acquirer;

• pre-existing relationships and reacquired rights in a business combination;

• some aspects relating to determining control (such as delegated power,

principal/

agent consideration; control of specified assets);

• vertical groups (less detailed emphasis);

• subsidiaries classified as held for sale and subsidiaries acquired with a

view to resale;

• share buy-backs and rights issues of subsidiaries leading to loss of control

or step acquisition;

• joint operation accounting;

• parent recognising its investment in investees at fair value/under the equity

method in its separate financial statements (the update of this work focused
on the parent carrying the investment at cost);

• group

reorganisations;

• changes in interests in associate (but still an associate); and

• associates held for sale.

This work was updated to still include a brief discussion of some of these
aspects (where relevant), but without very detailed explanatory examples
thereof. Volume 2 was mostly affected by these changes.

We trust that users of this publication will find it beneficial.

THE AUTHORS

November 2017

vi

Contents

Page

9 IFRS 3 Business combinations – Advanced aspects

......................................

10 IFRS 10 Consolidated financial statements – Control

.....................................

41

11 Investments in associates and joint ventures

..................................................

59

12 Interests in joint arrangements

........................................................................

149

13 Changes in ownership of subsidiaries through buying or selling shares

.........
167

14 Changes resulting from the issue of additional shares by investees

and other changes in ownership .....................................................................

283

15 Foreign operations
..........................................................................................

373

16 Consolidated statement of cash flows

.............................................................

433

vii

IFRS 3

Business combinations

– Advanced aspects

Introduction

9.1

Overview of the topic ..............................................................................

The acquisition method ..............................................................................

4
Recognising and measuring the identifiable assets acquired,

the liabilities assumed and any non-controlling interests

in the acquiree

9.2 Recognition

principle

................................................................................

Example

9.1:

Recognition

of

identifiable liabilities ..................................

Example 9.2:

Classification of identifiable assets acquired ....................

Example 9.3:

Recognition of intangible assets .......................................

9.3 Measurement
principle

.............................................................................

10

Example 9.4:

Remeasurement of liability to fair value ............................

11

Example 9.5:

Fair value of operating lease – Lessor ............................

12

Example 9.6:

Fair value of items used differently ...................................

13

Example 9.7:

Measurement of non-controlling interests.........................

15

9.4

Exceptions to the recognition and measurement principles .....................

15

Example

9.8:
Contingent

liabilities .........................................................

17

Example

9.9:

Deferred

tax .....................................................................

17

Example

9.10:

Indemnification asset ........................................................

18

Example 9.11:

Recognition and measurement of a favourable

operating lease .................................................................

20

Example 9.12:

Non-current assets held for sale .......................................

22

Consideration transferred
9.5

Measurement of consideration transferred ..............................................

23

Example 9.13:

Measurement of consideration transferred .......................

23

Example 9.14:

Measurement of consideration transferred – Asset ..........

24

Chapter 9

9.6

Measurement of contingent consideration transferred .............................

25

Example 9.15:

Contingent consideration – Financial liability ....................

26

Example

9.16:

Contingent
consideration – Asset .....................................

29

Example 9.17:

Compensation for reduction in equity instruments ............

29

Measurement period

9.7

Measurement period adjustments ............................................................

30

Example 9.18:

Measurement period and adjustment to goodwill .............

31

Example 9.19:

Measurement period adjustment – Non-controlling

interest measured at proportionate share .........................

32

Example 9.20:

Measurement-period adjustment – Non-controlling

interest measured at fair value .........................................

34
Self-assessment question

Question 9.1

.....................................................................................

36

IFRS 3 Business combinations – Advanced aspects IFRS 3: BUSINESS

COMBINATIONS – SUMMARY

Acquisition method

Identify the acquirer and account for

l Entity that obtains control is acquirer

business combination transaction

l Separate related transactions and apply other IFRS

separately from related transactions

standards

l Date on which control of net assets and operations is

Date of acquisition

transferred to the acquirer

l Use fair value at acquisition date, also for business

combination achieved in stages

Consideration related to business

l Costs directly attributable not part of business

combination

combination

l Contingent

consideration

l Assets/liabilities recognised separately

l Basic recognition: Meet definitions in Conceptual

Recognition of identifiable assets

Framework

and liabilities

l Classifying or designating

l Exceptions

l Fair value as at acquisition date

Initial measurement at fair value

l Market values or valuation techniques

of identifiable assets and liabilities

l Exceptions

l At proportionate share of net assets, or

Non-controlling interests

l At fair value

l Consideration transferred + non-controlling interests +

FV of previously-held interest at date of acquisition (only step acquisition) –
Net assets acquired and measured in

accordance with IFRS 3 = Goodwill/(bargain purchase

Goodwill/bargain purchase gain

gain)

l Goodwill: Recognise as asset, subsequent impairment

test

l Bargain gain: Reassess all items; if still gain, recognise at acquisition date
in profit or loss

l Limited to one year

l Provisional values recognised if accounting incomplete

l Provisional fair values adjusted retrospectively

l Also recognise assets and liabilities that previously were Measurement

period

not recognised even though they existed

l Facts and circumstances existing at acquisition date

should be considered

l Correction of error if it becomes known after

measurement period

Disclosure

Chapter 9
Introduction

9.1 Overview of the topic

The basic principles and the disclosure requirements of IFRS 3 Business

Combinations are discussed in chapter 2 of Volume 1.

IFRS 3 establishes very important principles on how the acquirer recognises

and measures the following in its records:

l the assets acquired and liabilities assumed;

l the non-controlling interests in the acquiree;

l the goodwill acquired in a business combination or the gain from a bargain

purchase; and

l adequate disclosure of information relating to the business combination, in

order to provide useful information for decision making to the user of the
financial statements.

In this chapter more advanced aspects are discussed relating to the

recognition and measurement of the identifiable assets acquired, the
liabilities assumed and any non-controlling interests in the acquiree, as well
as the consideration transferred and measurement period. It is also important
to remember that business combinations refer to the acquisition of a business
(a subsidiary or the acquisition of assets and liabilities that constitute a
business as defined in IFRS 3). This chapter focuses on the acquisition of a
subsidiary. For guidance on the acquisition of assets and liabilities that
constitute a business, refer to chapter 2 of Volume 1.

Comment

Also refer to chapter 8 of Volume 1 which addresses the accounting of a

business combination achieved during instead of at the beginning of the
financial reporting period.

The acquisition method

In terms of the acquisition method the goodwill or a gain from a bargain
purchase is calculated as follows:

Identifying the acquirer

Chapter 2.4 of Volume 1

Determining the acquisition date

Chapter 2.5 of Volume 1

Consideration transferred

Chapter 9.5 and 9.6 of Volume 2

Plus

Non-controlling interests

Chapter 9.3 of Volume 2

Less

Total net assets (identifiable assets

Chapter 9.2–9.4 of Volume 2

acquired less liabilities assumed)

Equals

Goodwill/gain from a bargain purchase

IFRS 3 Business combinations – Advanced aspects

Recognising and measuring the identifiable assets acquired, the

liabilities assumed and any non-controlling interests in the acquiree

9.2 Recognition

principle

IFRS 3 determines that the acquirer shall recognise, separately from

goodwill, the identifiable assets acquired, the liabilities assumed and any
non-controlling interests in the acquiree at the acquisition date.

1 Recognition

conditions

Firstly, to be recognised, the identifiable assets and liabilities acquired and

assumed must meet the definition of an asset or liability as defined in the
Conceptual Framework. For this reason, future planned costs to be
incurred by the acquirer will not meet the definition of a liability as at the
date of acquisition, as there is no present obligation to incur these costs at
this date. These costs will therefore only be recognised after the date of
acquisition, when an obligation to pay arises.

Secondly, to be recognised, the identifiable assets and liabilities acquired

and assumed must be part of what the acquirer and acquiree exchanged in
the business combination transaction and not the result of separate
transactions. Guidance is provided in IFRS 3 as to what forms part of a
business combination transaction – this guidance is addressed in chapter
2.10.

Thirdly, the acquirer’s application of the recognition principle and

conditions may result in some assets and liabilities being recognised in the
business combination that the acquiree had previously not recognised as
assets and liabilities in its pre-acquisition financial statements. This would
be the case especially where the acquirer recognises, for example, certain
intangible assets (e.g. brand names, customer relationships, etc.) at the
acquisition date where these items were not recognised as intangible assets
by the acquiree as they were internally generated by the acquiree. IFRS 3 has
introduced some new principles, especially in respect of intangible assets in
accordance with IAS 38. These are dealt with below.

Example 9.1
Recognition of identifiable liabilities

On 1 April 20.18 P Ltd acquired 90% of the shares of S Ltd. From that date
P Ltd had control over S Ltd as per the definition of control in accordance
with IFRS 10. On 1 April 20.18, S Ltd had correctly recognised a liability of
R350 000 in respect of a breach of contract that was previously filed against
the entity. Furthermore, on 1

April

20.18 P

Ltd was planning to restructure the operations of S

Ltd. The

restructuring costs were estimated at R240 000. Ignore any tax

consequences.

As part of the business combination on 1 April 20.18, P Ltd shall recognise

the identifiable liability for the breach of contract amounting to R350 000.
However, on 1

April

20.18 there is no present obligation for the restructuring provision. The

restructuring is rather a result of the business combination. P Ltd will only
recognise the provision for the restructuring of R240 000 in the period after
the business combination.

Chapter 9

This will give rise to the following pro forma consolidation journal entry (*):
Dr

Cr
R

1 April 20.18

Equity at acquisition (SCE)

350 000

Liability (SFP)

350 000

Remeasurement of plant to fair value

Comment

When remeasuring assets and liabilities of the acquiree to fair value on the
acquisition date in terms of IFRS 3, the pro forma remeasurement can be
recorded in any equity account of the acquiree. For ease of reference, the
authors refer to “equity at acquisition”. The specific equity account used is
not important, as at acquisition date the entire equity balance of the acquiree
(including any remeasurements) will be eliminated in the main elimination
journal, against the “investment in subsidiary”

recorded in the separate accounting records of the acquirer.

(*) A pro forma journal entry is a journal entry that is not processed in the
separate financial statements of the acquirer or the individual financial
statements of the acquiree, but processed for the purposes of drawing up
consolidated financial statements. Pro forma journal entries therefore only
adjusts the consolidated financial statements and are processed to give effect
to IFRS 3 requirements and to eliminate intragroup transactions and balances
in accordance with IFRS 10.

2 Classifying or designating identifiable assets acquired and liabilities

assumed in a business combination
The acquirer shall classify or designate the identifiable assets at the
acquisition date acquired and liabilities assumed to facilitate the subsequent
application of other IFRSs.

These designations or classifications shall be made on the basis of

contractual terms, economic conditions, the acquirer’s operating or
accounting policies and other pertinent conditions as they exist at the
acquisition date.

Two exceptions to this rule exist:

l the classification of a lease contract in which the acquiree is the lessor as

either an operating lease or a finance lease in accordance with IFRS 16
Leases; and l the classification of a contract as an insurance contract in
accordance with IFRS 4

Insurance Contracts.

The above contracts will be classified on the basis of the contractual terms
and other factors at the inception of the contract (or, if the terms of the
contract have been modified in a manner that would change the
classification of the contract, at the date of the modification, which may be
the acquisition date).

Example 9.2

Classification of identifiable assets acquired

On 1 January 20.19 P Ltd acquired a 75% interest in S Ltd. From that date P
Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. On this date S Ltd also had, amongst others, the following assets
and contracts: l For the past few years, S Ltd has been leasing a building to P
Ltd. S Ltd classified the building as investment property as the building was
held for rental income.

IFRS 3 Business combinations – Advanced aspects l On 1 January 20.13 (six

years before the business combination) S Ltd entered into a lease agreement
to lease equipment to X Ltd. The lease term was seven years and the
economic life of the equipment was estimated to be eight years. S Ltd
correctly classified the lease as a finance lease at the inception of the lease,
as substantially all the risks and rewards incidental to ownership passed to S
Ltd (this may be evident from the fact that the lease term (seven years) was
for a major part of the economic life (eight years) of the asset (7/8 = 88%)).

In accounting for the business combination of S

Ltd, P

Ltd may classify the

above-mentioned assets and contract as follows:

l P Ltd is occupying the building of S Ltd. Therefore, from the date of the
business combination, the building will be owner-occupied. For the
combined entity, the building shall be classified as property, plant and
equipment in accordance with IAS 16 Property, Plant and Equipment
instead of investment property.

l The lease will still be classified as a finance lease (based on the contractual
terms at the inception of the contract) even though the remaining lease term
(one year) may not be a major part of the remaining economic life (which is
two years).

3 Guidance with respect to recognition of intangible assets IAS 38

Intangible Assets provides extensive guidance about the acquisition of an
intangible asset as part of a business combination (refer to IAS 38.33 to .43).
The main principles are summarised below.

The fair value of an intangible asset at initial recognition is its acquisition

date fair value. This fair value reflects market expectations about the
probability that the future economic benefits embodied in the asset will flow
to the entity. In other words, the entity expects there to be an inflow of
economic benefits, even if there is uncertainty about the timing or amount of
the inflow. Therefore, the probability-recognition criterion per IAS 38.21(a)
is always considered to be satisfied for intangible assets in a business
combination.
Intangible assets shall therefore be recognised separately from goodwill, if
they are identifiable. IAS 38 defines the concept of identifiability, and these
principles must therefore also be applied to the recognition of intangible
assets at the acquisition date in a business combination.

In accordance with IAS 38, an intangible asset is identifiable if it meets

either the separability criterion or the contractual-legal criterion. An
intangible asset that meets the contractual-legal criterion is identifiable even
if the asset is not transferable or separable from the acquiree or from other
rights and obligations.

An intangible asset that is not individually separable from the acquiree or

combined entity, and does not meet the contractual-legal criterion meets the
separability criterion if it is separable in combination with a related contract,
identifiable asset or liability.

The separability criterion means that an acquired intangible asset is

capable of being separated or divided from the acquiree and sold,
transferred, licensed, rented or exchanged (individually or together with a
related contract, identifiable asset or liability).

An acquired intangible asset meets the separability criterion if there is

evidence of exchange transactions for that type of asset or an asset of a
similar type, even if those transactions are infrequent and regardless of
whether the acquirer is involved in them.

The contractual-legal criterion is met when the intangible asset arises from
contractual or other legal rights.

Chapter 9

The acquirer will subsume (absorb) into goodwill the value of all intangible
assets that are not identifiable and all other assets that do not qualify as
assets at the acquisition date. This is consistent with the principle in IAS
38.68(b).
The recognition of intangible assets in accordance with IFRS 3 can be
summarised as follows:

Intangible assets

Identifiable

Not identifiable

Separable

Contract/Legal

Do not recognise

Recognise separately

Recognise separately

Included in

from goodwill

from goodwill

goodwill

The following intangible assets, that could be acquired in a business

combination, are usually considered identifiable:

Identifiable intangible assets

Separable

Contractual or other legal rights

Marketing-related intangible assets

Trademarks, trade names, etc.

Customer-related intangible assets

Customer lists and non-contractual

Order or production backlog, customer

customer relationships

contracts and related customer relationships

Artistic-related intangible assets (if protected by copyright)

Plays, operas, etc.

Books, magazines, newspapers and other

literary works

Musical works such as compositions, etc.

Pictures and photographs

Video and audio visual material

continued

IFRS 3 Business combinations – Advanced aspects Separable

Contractual or other legal rights

Contract-based intangible assets

Licensing, royalty, etc.

Advertising, construction, etc.

Lease agreements (whether the acquiree is

the lessee or the lessor)

Construction permits

Franchise agreements

Broadcast rights

Service contracts

Beneficial employee contracts

(from the perspective of the employer)

Use rights, for example water, air, etc.

Technology-based intangible assets

Unpatented technology

Patented technology

Databases (if not protected by copyright)

Databases (if protected by copyright)

Trade secrets, such as secret formulas,

Trade secrets, such as secret formulas,

processes and recipes

processes and recipes (if legally protected)

(if not legally protected)

Computer software and mask works

(if protected by patent or copyright)

Comment

Refer to IFRS 3.IE18–.IE44 for a detail discussion of the above mentioned

identifiable intangible assets.

Example 9.3

Recognition of intangible assets

On 1 January 20.19 P Ltd acquired a 100% interest in S Ltd. From that date
P Ltd had control over S Ltd as per the definition of control in accordance
with IFRS 10. On 1 January 20.19 S Ltd had, amongst others, the following
assets: Carrying

Fair

amount

value

Licences and registered patent

R50 000

R62 000

Internally generated trademark

R34

000

Internally generated customer lists (subject to

confidentiality agreements and cannot be disposed of)

–
R18 000

Assembled workforce

R13 000

Goodwill R60

000

In-process research

R29 000

Chapter 9

The licences, patent and trademark are identifiable as they arise from
contractual or other legal rights. These items are recognised as intangible
assets at fair value (R62 000 and R34 000 respectively) as part of the
business combination.

As the confidentiality agreements prohibit the disposal/exchange of

information contained in the customer lists, the lists do not meet the
separability criterion and are not recognised separately from goodwill.
These intangible assets also do not arise from contractual/legal rights.

The assembled workforce does not meet the definition of an asset as it is not
controlled (S Ltd does not have a contract with the collection of employees
as a whole). The assembled workforce cannot be sold separately and does
not meet the separability criterion. Therefore, the assembled workforce is
not separately recognised as an intangible asset. The value placed on the
assembled workforce is therefore subsumed into goodwill.

The goodwill of R60 000 arose due to a previous business combination. The
goodwill is not an identifiable intangible asset as it is not separable nor
contract/legal. The value placed on the goodwill is therefore also subsumed
into the goodwill that will be accounted for by P Ltd.

The in-process research is separately identifiable as it can be sold

separately and is therefore recognised as an intangible asset, separately from
goodwill, at its fair value of R29 000.

Research and development expenditure

It was indicated above that it is possible for an acquirer to recognise some

assets and liabilities that the acquiree had not previously recognised as assets
and liabilities in its pre-acquisition financial statements. The in-process
research in the example above is an illustration thereof. Furthermore, IAS 38
provides specific guidance on the treatment of research and development
expenditure. Research or development expenditure that: l relates to an in-
process research or development project acquired separately or in a business
combination and recognised as an intangible asset; and l is incurred after the
acquisition of that project;

shall be recognised as an expense when incurred if it is research expenditure

or development expenditure that does not satisfy the criteria for recognition
as an intangible asset, and included in the carrying amount of the acquired
in-process research or development project if it is development expenditure
that satisfies the criteria for recognition as an intangible asset per IAS 38.57.

9.3 Measurement

principle

The acquirer shall measure the identifiable assets acquired and liabilities
assumed at their acquisition date fair values. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, i.e.
acquisition date.
10

IFRS 3 Business combinations – Advanced aspects

Example 9.4

Remeasurement of liability to fair value

On 1 January 20.17 P Ltd acquired a 100% controlling interest in S Ltd. On

acquisition date, S Ltd’s liabilities included 10 000 7% debentures of R100
each, issued on 1 January 20.16 to Z Ltd. The debentures are redeemable at
nominal value on 31 December 20.20 and interest is payable annually in
arrears. On 1 January 20.16 the applicable discount rate was 10% and on 1
January 20.18 the applicable discount rate reduced to 9%. Ignore any tax
consequences.

On 1 January 20.17 the assets acquired and liabilities assumed of S Ltd

should be measured at fair value.

S Ltd already accounted for the debentures in its individual accounting

records according to IFRS 9. Therefore, the pro forma consolidation journal
entries will account for the difference between the carrying amount of the
debentures in S Ltd’s individual financial statements and the fair value as
calculated in accordance with IFRS 3.

S Ltd

Group

Difference

Fair value 1 January 20.16

(1)886 276

Finance costs

(2)88 628
Debenture payment

(70 000)

Amortised cost 31 December 20.16

R904 904

Carrying value/Fair value 1 January 20.17

904 904

(3)935 206

30 302

Finance costs

(5)90 490

(4)84 169

(6 321)

Debenture payment

(70 000)

(70 000)

Amortised cost 31 December 20.16

R925 394

R949 375

R23 981
(1)

Pmt = 70 000; i = 10%; n = 5; FV = 1 000 000

(2)

886 276 × 10%

(3)

Pmt = 70 000; i = 9%; n = 4; FV = 1 000 000

(4)

935 206 × 9%

(5)

904 904 × 10%

The pro forma consolidation journal entry at the date of acquisition will be
as follows: Dr

Cr

1 January 20.17

Equity at acquisition (SCE)

30 302

Lease liability (SFP)

30 302

Remeasurement of debentures
The following consolidation journal entry will be required at the reporting
date (31 December 20.17):

Dr

Cr

Debentures (SFP)

6 321

Finance costs (P/L)

6 321

Adjustment of finance costs for 20.17

11

Chapter 9

Comment

Income and expenses of the subsidiary are based on the amounts of the
assets and liabilities recognised in the consolidated financial statements at
the acquisition date. For example, depreciation expense recognised in profit
or loss after the acquisition date is based on the fair values of the related
depreciable assets recognised in the consolidated financial statements at the
acquisition date.

1 Guidance with respect to measurement of assets with uncertain cash

flows The effects of uncertainties about future cash flows should be reflected
in the acquisition date fair value of assets and liabilities, on the acquisition
date. All acquired assets and assumed liabilities are measured on acquisition
date at fair values, and thus shall not be subject to a separate valuation
allowance in respect of cash flows that are deemed uncollectible at the
acquisition date. For example, the fair value of receivables acquired as part
of a business combination will be determined based on the expected cash
flows, timing thereof and the appropriate discount rate. A separate valuation
allowance (allowance for credit losses) will not be recognised because the
discount rate already accounts for any uncertainties.

2 Guidance with respect to measurement of assets subject to operating

leases in which the acquiree is a lessor

The acquisition date fair value of an asset, which is subject to an operating

lease in which the acquiree is a lessor, should take into account the terms of
the operating lease. This means that the lessor shall not recognise a separate
asset or liability if the terms of the operating lease in which the acquiree is
the lessor are either favourable or unfavourable when compared to market
terms.

Example 9.5

Fair value of operating lease – Lessor

P Ltd acquires a 100% interest in S Ltd on 1 January 20.15. From that date P
Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. S Ltd owns a plant, with a carrying amount of R3 750 000, that is
leased to Z Ltd in terms of an operating lease, at an annual rental of R550
000 (a market-related rental is R450 000 per annum). The remaining period
of the lease is 10 years, while the remaining useful life of the plant is 25
years. The estimated fair value of the plant, based on a market-related rental
for 25 years, is equal to R5 million. Assume that the present value of the
favourable component of the lease contract with Z Ltd amounts to R560 000.
Ignore any tax consequences.

When accounting for the business combination, the plant should be

recognised at its total fair value of R5 560 000 (R5 000 000 + R560 000).

This will give rise to the following pro forma consolidation journal entry: Dr

Cr
R

1 January 20.15

Plant (SFP) (5 560 000 – 3 750 000)

1 810 000

Equity at acquisition (SCE)

1 810 000

Remeasurement of plant to fair value

12

IFRS 3 Business combinations – Advanced aspects For group purposes, the

subsequent depreciation of the plant should be based on R5 560 000. As the
favourable component of R560 000 of the plant will realise over the
remaining lease period of 10 years (refer to IAS 16.44), it would be
appropriate to depreciate this component over 10 years, while the remainder
of the asset should be depreciated over 25 years. The annual depreciation
will therefore amount to R256 000

[(5 000 000/25) + (560 000/10)] from a group perspective. In its individual
financial statements S Ltd will account for depreciation of R150 000 (3 750
000/25).

On 31 December 20.15 (reporting date) the following consolidation journal

is required: Dr

Cr

R
31 December 20.15

Depreciation (P/L) (256 000 – 150 000) 106

000

Accumulated depreciation (SFP)

106 000

Additional depreciation for 20.15

3 Guidance with respect to measurement of assets that the acquirer

intends not to use or use in a way that is different from the way other
market participants would use them

To protect its competitive position, or for other reasons, the acquirer may
intend not to use an acquired non-financial asset, or it may not intend to use
the asset according to its highest and best use. However, the acquirer shall
measure the fair value of the non-financial asset assuming its highest and
best use by market participants in accordance with the appropriate valuation
technique in accordance with IFRS 13 Fair Value Measurement.

Example 9.6

Fair value of items used differently

P Ltd acquires a 100% interest in S Ltd and has control over S Ltd as per the
definition of control in accordance with IFRS 10. S Ltd owns export licences
to export goods globally. The fair value of the global export licenses is
determined to be R900 000.

However, P Ltd intends to export only to Africa and determines the fair
value of the license to export to Africa only, at R390 000. Ignore any tax
consequences.

At the acquisition date, S Ltd also had an in-process research project with a
fair value of R140 000. P Ltd does not intend to continue with the research.
P Ltd does not intend to use the export license or in-process research
according to its highest and best use. Nevertheless for the business
combination, the export licences will be measured at R900 000 and the in-
process research project at R140 000. An impairment loss may probably be
recognised in the period after the business combination.

4 Guidance with respect to measurement of intangible assets If an asset

acquired in a business combination is separable or arises from contractual or
other legal rights (i.e. is identifiable as discussed above), sufficient
information exists to reliably measure the fair value of the asset. Thus, the
reliable-measurement criterion per IAS 38.21(b) is always considered to be
satisfied for intangible assets acquired in a business combination. It is
therefore clear that the emphasis lies on the satisfaction of 13

Chapter 9

the definition of an intangible asset (incorporating identifiability), rather

than on the recognition criteria, as the latter are considered to be satisfied in
a business combination as explained.

The fair value of an intangible asset would be the price that would be
received to sell an asset in an orderly transaction between market
participants at the acquisition date.

Quoted market prices provide the most reliable estimate of the fair value of
an intangible asset. If such market prices are not available, the price of the
most recent similar transaction may provide a basis from which to measure
the fair value of the intangible asset, provided no significant changes have
occurred from the date of the most recent similar transaction to the
acquisition date.

If no active market exists for an intangible asset, valuation techniques may

be used to determine the fair value of intangible assets.

5 Guidance with respect to measurement of non-controlling interests

The non-controlling interests, if any, shall be measured by the acquirer in
one of two ways, i.e. either:

l at fair value; or
l at the non-controlling interests’ proportionate share of the acquiree’s
identifiable net assets (i.e. not taking into account the fair value of the non-
controlling interests but basing the non-controlling interests on the net asset
value of the entity instead).

The measurement choice is only available for present ownership interests

(e.g. ordinary shares) which entitle their holders to a proportionate share of
the entity’s net assets in the event of liquidation. All other components of
non-controlling interests must be measured at fair value. If non-controlling
interests include preference shares the preference shares shall be measured
at fair value unless the preference shareholders are entitle to a proportionate
share of the entity’s net assets in the event of liquidation.

The choice between the two methods of measuring non-controlling interests

is not part of the accounting policy of the acquirer and can be exercised for
each separate business combination.

If the acquirer measures non-controlling interests at fair value at the

acquisition date, this value can sometimes be based on the market prices for
the equity shares not held by the acquirer. Where market prices are not
available for these equity shares, the fair value shall be determined by the
acquirer using other valuation techniques. It is very possible that the fair
value of the acquirer’s interest in the acquiree and the fair value of the non-
controlling interests in the acquiree on a per-share basis will differ due to the
inclusion of a control premium in the per-share fair value of the acquirer’s
interest in the acquiree, or a discount, for the lack of control, included in the
per-share fair value of the non-controlling interests in the acquiree.

The amount assigned to the non-controlling interests is included in the

calculation of goodwill or the gain from a bargain purchase arising from the
business combination.

The acquirer’s choice of the measurement basis of non-controlling interests

for ordinary shares will therefore influence the resultant goodwill or the gain
from a bargain purchase.

14
IFRS 3 Business combinations – Advanced aspects

Example 9.7

Measurement of non-controlling interests

The equity of N Ltd consists of 100 000 ordinary shares and 10 000
preference shares.

The preference shares give their holders the right to a preferential dividend
before the payment of any dividend to the ordinary shareholders. On
liquidation of N Ltd, the preference shareholders are entitled to receive their
initial investment back before the remainder of the net assets are distributed
to the ordinary shareholders. The preference shareholders do not have any
further rights on liquidation. On 1 January 20.19 the ordinary and preference
shares were trading at R34 and R15 each respectively. On 1 January 20.19 P
Ltd acquired a 60% interest in N Ltd at a cost of R2,2 million. From that
date P Ltd had control over N Ltd as per the definition of control in
accordance with IFRS 10. P Ltd was willing to pay more than R34 per share
in order to gain control (60 000 shares × R34 = R2,04 million). The fair
value of the identifiable net assets of N Ltd amounts to R3,3 million at the
acquisition date.

P Ltd can elect to measure the 40% present ownership interest at its fair
value. Non-controlling interests will then amount to R1,51 million (40 000
shares × R34 plus 10 000

shares × R15); OR,

P Ltd can elect to measure the 40% present ownership interest at its share of
N Ltd’s identifiable net assets. Non-controlling interests will then amount to
R1,47 million (40%

× R3,3 million plus 10 000 shares × R15).

9.4 Exceptions to the recognition and measurement principles

IFRS 3 provides the following exceptions to the recognition and

measurement principles:
Exceptions

Exceptions to the

Exceptions to both the

Exceptions to the

recognition

recognition and

measurement

principle

measurement principles

principle

Contingent liabilities

l Deferred tax assets

l Reacquired right

and liabilities

l Share-based

l Employee benefits

payment awards

l Indemnification

l Non-current assets

assets
held for sale

l Leases in which the

acquiree is the

lessee

15

Chapter 9

1 Exceptions to the recognition principle

Contingent liabilities

A contingent liability is defined in accordance with IAS 37 Provisions,

Contingent Liabilities and Contingent Assets as:

la

possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or l a

present obligation that arises from past events but is not recognised because
it is either not probable that future economic benefits will be required to
settle the obligation or the amount of the obligation cannot be measured with
sufficient reliability (i.e. the definition of a liability is satisfied, but one or
both of the recognition criteria is not satisfied).

However, a contingent liability assumed in a business combination shall be

recognised by the acquirer at the acquisition date if:

l it is a present obligation that arises from past events; and l its fair value
can be reliably measured.

The contingent liability is therefore recognised by the acquirer, even if it is

not probable that an outflow of economic benefits will be required to settle
the obligation.

Contingent liability IAS 37

No present obligation exists

Present obligation exists

Definition of liability not met

However, one or more

(possible obligation)

recognition criteria not met

Do not recognise

If fair value can be reliably

met, recognise contingent

liability i.t.o IFRS 3

16

IFRS 3 Business combinations – Advanced aspects

Example 9.8

Contingent liabilities

On 1 January 20.19 P Ltd acquired a 75% interest in S Ltd. From that date P
Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. At this stage a claim for damages was filed against S Ltd for
damages caused by the company. S Ltd was defending the claim and its
lawyers were of the opinion that there was only a remote possibility that the
claim would succeed. Although the claim represents a present obligation (i.e.
S Ltd was responsible for damages caused), S Ltd did not recognise the
liability in its individual financial statements as the possibility of the outflow
of economic benefits was remote (i.e. not probable). The fair value of the
contingent liability was estimated at R45 000 at the acquisition date. Ignore
any tax consequences.

P Ltd would have taken this contingent liability into account in considering
the fair value of the identifiable net assets of S

Ltd and in determining the amount of the

consideration for the business combination. In accounting for the business

combination, P Ltd will therefore recognise the contingent liability at R45
000 in the combined entity at the acquisition date.

2 Exceptions to both the recognition and measurement principles

Deferred tax

A deferred tax asset or liability arising from the acquisition of the assets and
assumption of the liabilities in the business combination shall be recognised
and measured by the acquirer in accordance with IAS 12 Income Taxes. It is
important to note that the initial recognition exemption in respect of deferred
tax does not apply to temporary difference that arose from a business
combination. A deferred tax liability or asset is therefore recognised on all
temporary differences. The potential tax effects of temporary differences and
carry-forwards of an acquiree that exist at the acquisition date or arise as a
result of the acquisition shall also be recognised and measured in accordance
with IAS 12.

Example 9.9

Deferred tax

Deferred tax on fair value remeasurements of an asset

The date of the business combination of P Ltd and S Ltd is 1 March 20.19.
On this date the carrying amount of the plant of S Ltd was R700 000 and the
tax base was R600 000. The tax rate is 28%. S Ltd recognised a deferred tax
liability of R28 000 in respect of this plant. On 1 March 20.19 the fair value
of the plant was R730 000.
For the purpose of the business combination, the plant will be recognised at
its fair value of R730 000. The remeasurement of R30 000 (R730 000 –
R700 000) is recognised as equity at acquisition. An adjustment of R8 400
(R30 000 × 28%) is also recognised for the deferred tax liability.

Details of the deferred tax calculation are as follows:

Carrying

Tax

Temporary Deferred

Adjust-

amount

base

difference tax liability

ment

Balance on

1 January 20.19

R700 000

R600 000 R100 000

R28 000

Business combination

R730 000

R600 000

R130 000
R36 400

R8 400

17

Chapter 9

Subsequent recognition of deferred tax asset

P Ltd acquired a 100% interest in S Ltd on 1 December 20.18. On this date S

Ltd had an assessed loss of R500 000. S Ltd did not recognise a deferred tax
asset, as there was no certainty regarding future taxable income and thus no
tax asset was recognised in the consolidated financial statements.

On 31 December 20.19 (reporting date) S Ltd assessed that future taxable

profit should be sufficient to recover the total benefit of the assessed loss of
R500 000. Assume a tax rate of 28%.

On 31 December 20.19 S Ltd will recognise a deferred tax asset of R140 000

(R500 000 × 28%) in S Ltd’s individual financial statements. No

consolidation journals are required in respect of this deferred tax asset. S Ltd
recognised the deferred tax asset (SFP) and the benefit thereof (P/L), which
is also the correct treatment in the consolidated financial statements.

Employee benefits

The acquirer shall recognise and measure a liability or asset related to the
acquiree’s employee benefit arrangements in accordance with IAS 19
Employee Benefits.

Indemnification assets

The seller in the business combination (i.e. the acquiree) may contractually
indemnify the acquirer for the outcome of a contingency or uncertainty
related to all or part of a specific asset or liability. For example, a seller may
guarantee that an acquirer’s liability will not exceed a specified amount. As
a result, the acquirer obtains an indemnification asset. The acquirer shall
recognise the indemnification asset at the same time it recognises the
indemnified item, and measures the indemnification asset on the same basis
as the indemnified item, subject to the need for a valuation allowance for
uncollectible amounts. If the indemnified asset or liability is therefore
recognised at fair value on the acquisition date, the indemnification asset
will also be recognised at fair value on the acquisition date. If the
indemnification asset is measured at fair value, the uncertainty about future
cash flows because of collectability is included in the fair value and a
separate valuation allowance for uncollectible amounts is not necessary.

If an indemnification asset relates to an item that is an exception to the

recognition or measurement principles, for example a contingent liability
that is not recognised at the acquisition date as its fair value cannot be
reliably measured, or an item that is not measured at the acquisition date fair
value, e.g. an employee benefit liability, the indemnification asset shall be
recognised and measured using assumptions consistent with those used to
recognise and measure the indemnified item.

Example 9.10

Indemnification asset

P Ltd acquires a 60% interest in S Ltd on 1 July 20.15 from Q Ltd. From that
date P Ltd had control over S Ltd as per the definition of control in
accordance with IFRS 10. On this date S Ltd is also involved in a court case
in terms of which S Ltd may be liable to pay damages amounting to R2,5
million for violating Z Ltd's patent rights. Although S Ltd's lawyers are of
the opinion that the patent rights were indeed violated, there is a possibility
that the court's ruling may be in S Ltd's favour. It is therefore not possible to
predict the outcome of the court case on 1 July 20.15. Should the ruling not
be in S Ltd's favour, Q Ltd agrees contractually to reimburse S Ltd for 60%
of the damages 18

IFRS 3 Business combinations – Advanced aspects payable to Z Ltd. The

fair value of the potential liability to pay damages to Z Ltd amounts to R500
000 at 1 July 20.15. Ignore any tax consequences.
From S Ltd's perspective, the court case represents a contingent liability, as
there is a present obligation to pay damages (patent rights were violated), but
the outflow of future economic benefits is not probable (court's ruling
uncertain). Although S Ltd does not recognise this contingent liability in its
individual financial statements, it should be recognised in the consolidated
financial statements at acquisition date at fair value when accounting for the
business combination. As the indemnified liability is recognised at
acquisition date at fair value, the indemnification asset should also be
recognised at acquisition date at fair value (note that S Ltd will not recognise
this indemnification asset in its individual financial statements at acquisition
date, as it represents a contingent asset at that date).

The following consolidation journal will be required at acquisition date: Dr

Cr

1 July 20.15

Equity at acquisition (SCE)

200 000

Indemnification asset (SFP) (500 000 × 60%) 300

000

Recognised contingent liability (SFP)

500 000

Recognition of contingent liability and indemnification asset

If there are indications at the end of the reporting period (31 December
20.15) that the claim will succeed and the amount of the claim is estimated
at R2 million, S Ltd will raise a provision of R2 million in its individual
financial statements, as the outflow of economic benefits are now probable.
S Ltd will then also recognise a reimbursement asset of R1,2 million (2
million × 60%). For consolidation purposes the liability should be measured
at the higher of R500 000 (amount initially recognised) and R2 million
(amount recognised in accordance with IAS 37) – therefore R2 million,
while an indemnification asset of R1,2 million should also be recognised. As
the individual financial statements of S Ltd already include the provision and
the reimbursement asset, it will be necessary to reverse the liability of R500
000 and indemnification asset of R300 000 recognised at acquisition date.

The following additional consolidation journal is required: Dr

Cr

31 December 20.15

Recognised contingent liability (SFP)

500 000

Indemnification asset (SFP)

300 000

Other expenses (law suit) (P/L)

200 000

Reversal of contingent liability and indemnification asset 19

Chapter 9

Comment
The effect of the above two consolidation journals is that the P Ltd Group
recognises a liability of R500 000 and an asset of R300 000 on 1 July 20.15,
which are then adjusted to R2 million and R1,2 million respectively at 31
December 20.15. The adjustment of R600 000 is included in profit or loss
and consists of the net expense of R800 000

(2 million – 1,2 million) recognised by S Ltd when the provision and

reimbursement asset was raised, less the above adjustment of R200 000 on
31 December 20.15.

Leases in which the acquiree is the lessee

The acquirer shall recognise right-of-use assets and lease liabilities for leases
identified in accordance with IFRS 16 in which the acquiree is the lessee,
except for: l leases for which the lease term ends within 12 months of the
acquisition date; or l leases for which the underlying asset is of low value (as
described in IFRS 16).

The acquirer shall measure the lease liability at the present value of the
remaining lease payments (as defined in IFRS 16) as if the acquired lease
were a new lease at the acquisition date. The acquirer shall measure the
right-of-use asset at the same amount as the lease liability, adjusted to reflect
favourable or unfavourable terms of the lease when compared with market
terms.

Example 9.11

Recognition and measurement of a favourable operating lease

On 1 January 20.19 P Ltd acquired a 75% interest in S Ltd. From that date P
Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. On 1 January 20.18, S Ltd signed a lease agreement as lessee in
respect of a specific building situated in a prime business area with Z Ltd.
The lease agreement stated that the lease payment of R50 000 per annum
was payable in arrears and, at the inception of the lease, S Ltd's incremental
borrowing rate was 16%. On 1 January 20.19 the remaining lease term was
five years, a market-related lease payment for similar buildings was R58 000
per annum and S Ltd's incremental borrowing rate reduced to 15%. Ignore
any tax consequences.

At acquisition date (1 January 20.19) P Ltd shall firstly measure the lease
liability and right-of-use asset at R167 608, calculated as Pmt = 50 000; i =
15%; n = 5; FV = 0 (the present value of the remaining lease payments as if
the acquired lease were a new lease at the acquisition date).

Comment

A favourable component to the lease agreement arises from the favourable

terms of the lease agreement. The annual instalment payable by S Ltd is only
R50 000, while a market-related instalment amounts to R58 000.

Secondly, P Ltd will adjust the value of the right-of-use asset to reflect the
favourable terms of the lease when compared with market terms. The
favourable component of the lease equals R26 817 (Pmt = (58 000 – 50
000); i = 15%; n = 5; FV = 0). Therefore, the fair value of the right-of-use
asset will be R194 425 (R167 608 + R26 817).

20

IFRS 3 Business combinations – Advanced aspects

Comment

The fair value of the right-of-use asset can also be calculated as the present
value of the market-related instalments of R58 000 discounted at 15% (Pmt
= 58 000; i = 15%; i = 5; FV = 0).

S Ltd already accounted for the lease agreement in its individual accounting
records according to IFRS 16. Therefore, the pro forma consolidation journal
entries will account for the difference between the carrying amount of the
lease liability and right-of-use asset in S Ltd’s accounting records and the
fair value as calculated in accordance with IFRS 3.

S Ltd

Group
Difference

Lease liability 1 January 20.19

(1)163 715

(5)167 608

3 893

Finance costs

(2)26 194

(6)25 141

(1 053)

Lease instalment

(50 000)

(50 000)

Lease liability 31 December 20.19

R139 909

R142 749

R2 840

Right-of-use asset 1 January 20.19

(3)153 531

(7)194 425
40 894

Depreciation

(4)(30 706)

(8)(38 558)

(8 179)

Right-of-use asset 31 December 20.19

R122 825

R155 867

R32 715

(1) Pmt = 50 000; i = 16%; n = 5; FV = 0

(5) Pmt = 50 000; i = 15%; n = 5; FV = 0

(2) 163 715 × 16%

(6) 167 608 × 15%

(3) (Pmt = 50 000; i = 16%; n = 6; FV = 0) × 5/6

(7) Pmt = 58 000; i = 15%; i = 5; FV = 0

(4) 184 237/6

(8) 194 425/5

The pro forma consolidation journal entry at the date of acquisition will be
as follows: Dr

Cr

R
R

1 January 20.19

Right-of-use asset (SFP) (194 425 – 153 531) 40

894

Lease liability (SFP) (167 608 – 163 715)

3 893

Equity at acquisition (SCE)

37 001

Remeasurement of lease

The following consolidation journal entry will be required at the reporting

date (31 December 20.19):

Dr

Cr

Depreciation (P/L)

8 179

Right-of-use asset (SFP)

8 179

Financial liability (SFP)

1 053
Finance costs (P/L)

1 053

Adjustment of depreciation and finance costs for 20.19

21

Chapter 9

3 Exceptions to the measurement principle

Reacquired rights

The acquirer can reacquire a right that it had previously granted to the
acquiree, such as the right to use one or more of the acquirer’s recognised or
unrecognised assets. This right is recognised separately from goodwill. An
example is the acquisition of the right to use its trade name under a franchise
agreement that the acquirer had previously granted to the acquiree.

Share-based payment awards

The acquirer shall measure a liability or an equity instrument related to the

replacement of an acquiree’s share-based payment awards with share-based
payment awards of the acquirer in accordance with the method in IFRS 2
Share-based Payment. This method is called the “market-based measure”
of the award. Refer to IFRS 3.B56–.B62 and

.IE61–.IE71 for detailed guidance and illustrations.

Assets held for sale

The acquirer shall measure an acquired non-current asset held for sale (or
disposal group held for sale) at the acquisition date in accordance with IFRS
5 Non-current Assets Held for Sale and Discontinued Operations at fair
value less costs to sell (refer to IFRS 5.15–.18).

Example 9.12
Non-current assets held for sale

S Ltd classified a machine as held for sale on 31 March 20.15, when the
carrying amount of the machine amounted to R250 000 and the fair value
less costs to sell amounted to R275 000. P Ltd acquired an 80% interest in S
Ltd on 31 May 20.15, when the machine’s fair value less costs to sell
amounted to R287 500. From this date P Ltd had control over S Ltd as per
the definition of control in accordance with IFRS 10. At the reporting date
(30 June 20.15), the machine’s fair value less costs to sell decreased to R280
000. Ignore any tax consequences.

In the individual financial statements of S Ltd the machine should be

measured on 31 March 20.15 at the lower of its carrying amount (R250 000)
and its fair value less costs to sell (R275 000), i.e R250 000. When
accounting for the business combination on 31 May 20.15, the machine
should be measured in the consolidated financial statements at its fair value
less costs to sell of R287 500.

The following consolidation journal is required:

Dr

Cr

31 May 20.15

Non-current assets held for sale (SFP) (287 500 – 250 000) 37

500

Equity at acquisition (SCE)

37 500

Remeasurement of non-current asset held for sale

At the end of the reporting period the machine should be remeasured to the
lower of its carrying amount and fair value less costs to sell. In the
individual financial statements of S Ltd no adjustment is required –
measured at the lower of the carrying amount (R250 000) and fair value less
costs to sell (R280 000). In the consolidated financial 22

IFRS 3 Business combinations – Advanced aspects statements the machine

should be measured at the lower of R287 500 (carrying amount) and R280
000 (fair value less costs to sell). An impairment loss of R7 500

should thus be recognised in the consolidated financial statements.

The following consolidation journal is required:

Dr

Cr

30 June 20.15

Impairment loss (P/L)

7 500

Non-current asset held for sale (SFP) (287 500 – 280 000)

7 500

Remeasurement of non-current asset held for sale

Consideration transferred

9.5 Measurement of consideration transferred

The consideration transferred in a business combination should be measured

at fair value determined at acquisition date. The consideration is calculated
as the sum of the fair values of:

l the assets transferred by the acquirer (cash, property, plant and equipment,
investments, businesses or subsidiaries of the acquirer);

l the liabilities incurred by the acquirer (settlement of the purchase price at a

future date); and

l the equity interests issued by the acquirer (ordinary shares, preference

shares and options).

The carrying amount of assets and liabilities transferred as part of

consideration may be different from their fair values at acquisition date. If
so, the acquirer should remeasure the transferred assets or liabilities to their
fair values as at the acquisition date and should then recognise the resulting
gains or losses, if any, in profit or loss.

Example 9.13

Measurement of consideration transferred

On 1 January 20.15 P Ltd acquired a 55% interest in S Ltd. From that date P
Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. The purchase price was settled as follows:

l A cash payment of R1 750 000 on 1 January 20.15.

l The issue of 10 000 shares on 15 January 20.15. The fair value of these
shares amounted to R350 000 on 1 January 20.15 and R385 000 on 15
January 20.15.

l The transfer of land, with a carrying amount of R525 000. The fair value of
the land amounted to R700 000 on 1 January 20.15 and R787 500 on 31
January 20.15, when the transfer of the land was formally registered.

l As P Ltd did not have sufficient cash reserves, it was agreed that the
outstanding amount of R1 225 000 will be paid on 31 December 20.16. The
fair value of this liability amounted to R1 050 000 on 1 January 20.15.
Ignore any tax consequences.

23

Chapter 9

The fair value of the consideration transferred will amount to R3 850 000 (1
750 000

(cash) + 700 000 (land) + 350 000 (shares) + 1 050 000 (liability)). The fair
value of the land and shares should be determined at the acquisition date (1
January 20.15). The requirement to measure liabilities at fair value
necessitates the calculation of the present value whenever settlement of the
purchase consideration is deferred (the difference between the present value
(R1 050

000) and the amount payable

(R1 225 000) should be accounted for as interest paid over two years, using
the effective interest method). The transfer of land will result in a gain of
R175 000

(700 000 – 525 000) being recognised in profit or loss.

The journal entry to account for the acquisition of S Ltd in the separate
financial statements of P Ltd as well as in the consolidated financial
statements will be as follows:

Dr

Cr

Investment in S Ltd (SFP)

3 850 000
Bank (SFP)

1 750 000

Share capital (SCE)

350 000

Financial liability (SFP)

1 050 000

Property, plant and equipment (Land) (SFP)

525 000

Gain on transfer of land (P/L)

175 000

Recognising the acquisition of S Ltd

Comment

In the above example the land was transferred to the former owners of the
acquiree. If, however, the transferred assets or liabilities remain within the
combined entity after the business combination, for example, because the
assets or liabilities were transferred to the acquiree, and, therefore, the
acquirer retains control of them, the assets and liabilities should be measured
at their carrying amounts immediately before the acquisition date and no
gain or loss should be recognised. This will happen, for example, if the
acquirer obtains its interest in the acquiree directly from the acquiree instead
of its shareholders (the acquiree issues shares to the acquirer in exchange for
the transfer of an asset).

Example 9.14

Measurement of consideration transferred – Asset

S Ltd was incorporated on 1 January 20.15, on which date it issued all of its
authorised share capital to P Ltd in exchange for land owned by P Ltd. From
that date P Ltd had control over S Ltd as per the definition of control in
accordance with IFRS 10. The land had a carrying amount of R1 125 000 in
the accounting records of P Ltd and a fair value of R1 575 000 at that date.
Ignore any tax consequences.

The journal entry to account for the acquisition of S Ltd in the separate
financial statements of P Ltd is as follows:

Dr

Cr

Investment in S Ltd (SFP)

1 125 000

Property, plant and equipment (Land) (SFP)

1 125 000

Recognising the acquisition of S Ltd

24

IFRS 3 Business combinations – Advanced aspects As P Ltd retained control

of the land transferred to S Ltd, a gain on the transfer of the land may not be
recognised in P Ltd's separate financial statements.

The journal entry to account for the issue of the shares in the individual
financial statements of S Ltd is as follows:

Dr
Cr

Property, plant and equipment (Land) (SFP)

1 575 000

Share capital (SCE)

1 575 000

Issuing of shares

S Ltd has issued shares worth R1 575 000 in exchange for land worth R1
575 000. In accordance with IAS 16.16 the land should be measured at its
purchase price, which is R1 575 000.

In the consolidated financial statements, it would not be appropriate to

recognise a gain on the transfer of the land, as P Ltd retained control of the
land. In addition, the land should be recognised in the consolidated financial
statements at its previous carrying amount of R1 125 000 and not at the fair
value of R1 575 000.

The following consolidation journal entry should be processed:

Dr

Cr

Share capital of S Ltd (SCE)

450 000
Property, plant and equipment (Land) (SFP)

450 000

Reversal of intragroup profit

An acquirer sometimes obtains control of an acquiree without transferring

consideration. Examples can include:

l The acquiree repurchases a sufficient number of its own shares, for an

existing investor (the acquirer) to obtain control.

l Minority veto rights lapse that previously kept the acquirer from
controlling an acquiree in which the acquirer held the majority voting rights.

l The acquirer and acquiree agree to combine their businesses by contract

alone.

If the business combination is achieved by contract alone, the acquirer shall

account for the equity interests held by other parties as non-controlling
interests in the consolidated financial statements. Refer to example 14.13 for
an example on the accounting treatment of obtaining control through an
agreement.

9.6 Measurement of contingent consideration transferred

The acquirer may agree to transfer additional equity interests, cash, or other
assets to the former owners of the acquiree after the acquisition date,
provided that specified events occur, for example if certain profit levels are
reached – this is referred to as contingent consideration. Contingent
consideration is defined as an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree as part of the
exchange for control of the acquiree if specified future events occur or
conditions are met. The fair value of this contingent consideration as at
acquisition date should be included in the fair value of the total consideration
that the acquirer transfers in exchange for the acquiree (the fair value of the
contingent consideration reflects the probability that it will be paid).

25
Chapter 9

The obligation to pay contingent consideration should be classified as a

financial liability or as equity, based on the definitions of an equity
instrument and financial liability contained in IAS 32. If the obligation is not
classified as equity or a financial liability, it should be classified as a liability
in terms of other standards. When measuring the fair value of contingent
payments, the acquirer's agreement to make contingent payments is the
obligating event that requires the recognition of a liability at acquisition date.

Contingent consideration may also give the acquirer the right to the return of
previously transferred considerations if specified future events occur or
conditions are met, for example where a portion of the purchase price will be
repaid if profits fall below a certain level. Contingent considerations
receivable should be taken into account when measuring the total
consideration relating to the business combination. This will be accounted
for as a reduction in the total consideration transferred and the fair value
thereof will reflect the probability that it will be received. The right to
receive this contingent consideration should be classified as an asset.

Subsequent changes may occur in the fair value of the assets and liabilities
recognised for consideration receivable or payable. If these changes result
from additional information obtained after the acquisition date regarding
circumstances that already existed at acquisition date, the financial
statements should be corrected retrospectively, provided the adjustment is
made within one year from acquisition date. This is referred to as a
measurement period adjustment. Changes in fair value, resulting from events
that occurred only after the acquisition date, such as share price and profit
targets being met, are not regarded as measurement period adjustments and
are not accounted for retrospectively. Instead, these changes in fair value are
accounted for as follows:

l Contingent consideration classified as equity is not remeasured. When the

amount is settled, the settlement is accounted for within equity.

l Contingent consideration classified as a financial asset or liability within

the scope of IFRS 9 should be measured to fair value at each reporting date.
Any gains or losses will be recognised in profit or loss in the period after the
business combination.

l Contingent consideration classified as an asset or liability not within the

scope of IFRS 9 should also be measured to fair value at each reporting date.
Any gains or losses will be recognised in profit or loss in the period after the
business combination.

Comment

It should be noted that most contingent consideration obligations are

financial instruments, and many are derivatives, as the value of the
obligation changes, no initial net investment is required and settlement is at a
future date.

Example 9.15

Contingent consideration – Financial liability

On 1 January 20.15 P Ltd acquired a 60% interest in S Ltd. From that date P
Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. At 1 January 20.15 the fair value of the identifiable net assets of S
Ltd amounted to R375 000, while the fair value of the 40% non-controlling
interests amounted to 26

IFRS 3 Business combinations – Advanced aspects R125 000 (the non-

controlling interests in the acquiree is measured at fair value). The purchase
price was settled as follows:

l R500 000 in cash;

l P Ltd also agreed to pay the previous owners of S Ltd an additional amount
of R75 000 in cash if the earnings of S Ltd increases by more than 10% per
year for two consecutive years. On 1 January 20.15 the fair value of this
obligation is estimated at R57 500 (taking into account the probability of
meeting the earnings target, as well as the time value of money).

On 31 December 20.15 (reporting date), the earnings of S Ltd have increased

by 11%.
As the probability of payment increases, and as a result of the payment being
one period closer, the fair value of the liability is R65 000 on 31 December
20.15.

On 31 December 20.16 the earnings of S Ltd has increased by 12% and P

Ltd is obligated to pay the additional consideration of R75 000.

P Ltd recognised the equity investment in S Ltd in its separate records using
the cost price method.

Ignore any tax consequences.

In its separate financial statements, P Ltd will process the following journal
entry on 1 January 20.15:

Dr

Cr

Investment in S Ltd (SFP)

557 500

Bank (SFP)

500 000

Financial liability at fair value through profit or loss (SFP) 57 500

Recognising contingent consideration as part of the

consideration transferred for the business combination

On 31 December 20.15, the financial liability is remeasured to fair value: Dr

Cr
R

Fair value adjustment (P/L)

7 500

Financial liability at fair value through profit or loss (SFP) (65 000 – 57 500)

7 500

Fair value adjustment of the financial liability for

contingent consideration

On 31 December 20.16 the following journal entries will be required:

Dr

Cr

J1

Fair value adjustment (P/L)

10 000

Financial liability at fair value through profit or loss

(SFP) (75 000 – 65 000)

10 000

Fair value adjustment of the financial liability for

contingent consideration

J2

Financial liability at fair value through profit or loss (SFP) 75 000

Bank (SFP)

75 000

Settlement of the contingent consideration

27

Chapter 9

The following pro forma consolidation journal entry will be required to

eliminate the at acquisition equity of S Ltd:

Dr

Cr

At acquisition equity (SCE)

375 000

Goodwill (SFP) [(557 500 + 125 000) – 375 000]

307 500

Investment in S Ltd (SFP)

557 500

Non-controlling interests (SCE/SFP)

125 000

Elimination of at acquisition equity

If the contingent consideration will be settled by the issuing of P Ltd’s shares

(equal to R75 000), the amount will still be classified as a financial liability.
This is so because IAS 32 requires contracts that will be settled in a variable
number of the entity's own shares to be classified as a financial liability.
Assuming that P Ltd’s share price is R12,50 on this date, all the journal
entries will remain the same, except for the entry to be processed on 31
December 20.16 by P Ltd, which will be as follows:

Dr

Cr

J1

Fair value adjustment (P/L)

10 000

Financial liability at fair value through profit or loss

(SFP) (75 000 – 65 000)

10 000

Fair value adjustment of the financial liability for

contingent consideration

J2

Financial liability at fair value through profit or loss (SFP) 75 000

Share capital (SCE)

75 000

Settlement of the contingent consideration

If the parties agreed that P Ltd will settle the contingent consideration by
issuing 6 000

shares, the amount will be classified as equity. This is because IAS 32

requires contracts that will be settled in a fixed number of the entity's own
shares to be classified as equity. Equity instruments are not remeasured in
accordance with IAS 32. In such a case, P Ltd will process the following
journal entry on 1 January 20.15: Dr

Cr

Investment in S Ltd (SFP)

557 500

Bank (SFP)

500 000

Equity (SCE) (contract to issue shares)

57 500

Recognising contingent consideration as part of the

consideration transferred for the business combination

On 31 December 20.16, the following journal entry will be required: Dr

Cr
R

Equity (SCE) (contract to issue shares)

57 500

Share capital (SCE)

57 500

Settlement of the contingent consideration

28

IFRS 3 Business combinations – Advanced aspects

Example 9.16

Contingent consideration – Asset

On 31 December 20.15 (reporting date) P Ltd acquires an 80% interest in S

Ltd at a cost of R2,5 million. From that date P Ltd had control over S Ltd as
per the definition of control in accordance with IFRS 10. In terms of the
purchase agreement, 6% of the selling price amount will be repaid by the
sellers to P Ltd if the profits of S Ltd fall below R500 000 per annum in any
of the next two years. Ignore any tax consequences.

At the acquisition date, an estimate should be made of the fair value of the
contingent consideration (the amount that may be received from the sellers).
The fair value should take into account the time value of money, as well as
the probability that the amount will be received. If it is assumed that the fair
value of this receivable is R25 000 (low fair value as it is expected that
profits will exceed R500 000 per annum), the fair value of the total
consideration will amount to R2,475 million (2,5 million – 25 000).

On 31 December 20.15, the following journal entry will be required: Dr

Cr

Investment in S Ltd (SFP)

2 475 000

Financial asset (SFP)

25 000

Bank (SFP)

2 500 000

Recognising the consideration transferred to acquire

an 80% interest in S Ltd

If expectations at acquisition date are that the profit targets will be reached
but, due to an increase in interest rates subsequent to acquisition date there is
a downward trend in the economy, resulting in the targets not being met, the
fair value of the consideration should not be adjusted retrospectively.
Instead, the difference between the initial fair value of R25 000 and the
amount received of R150 000 (6% × R2,5 million) should be recognised in
profit or loss.

Comment

If, after the acquisition date, information is obtained which confirms that the
sellers of the interest in S Ltd supplied fraudulent profit forecasts to P Ltd
during negotiations and that, based on the correct information as at
acquisition date, the profits of S Ltd will definitely not exceed R500 000 per
annum, the fair value of the consideration transferred should be adjusted
retrospectively, by restating comparatives as the fraudulent information
meets the definition of a prior period error in accordance with IAS 8.
Example 9.17

Compensation for reduction in equity instruments

On 1 January 20.15 P Ltd acquires a 60% interest in S Ltd by issuing 10 000

shares with a fair value of R25 each as settlement of the purchase price.
From that date P Ltd had control over S Ltd as per the definition of control
in accordance with IFRS 10. P Ltd undertakes to issue additional shares if
the fair value of its shares decreases within the first year after acquisition of
S Ltd. On 1 January 20.15 expectations are that the share price of P Ltd will
increase in future and therefore the fair value of the potential obligation to
issue additional shares amounts to R15 000. However, the share price of 29

Chapter 9

P Ltd dropped during December and on 31 December 20.15 (reporting date)

the fair value of P Ltd's shares amounted to R15 each. Ignore any tax
consequences.

The fair value of the consideration transferred is R265 000 and consists of
the fair value of the 10 000 shares issued on 1 January 20.15, amounting to
R250 000 (10 000 × 25) as well as the fair value of the contingent
consideration of R15 000. The obligation to issue additional shares if the
share price decreases represents a financial liability, as the number of shares
issued depends on the extent of the reduction in the share price.

When the value of the shares decreases on 31 December 20.15, additional

shares need to be issued.

The following journal entries will appear in the separate financial accounts
of P Ltd:

Dr

Cr

R
J1

1 January 20.15

Investment in S Ltd (SFP)

265 000

Share capital (SCE) (25 × 10 000)

250 000

Financial liability (SFP)

15 000

Fair value of consideration transferred

J2

31 December 20.15

Fair value adjustment (P/L) (((25 – 15) × 10 000) – 15 000) 85

000

Financial liability (SFP)

85 000

Remeasurement of financial liability to fair value

J3

Financial liability (SFP)

100 000

Share capital (SCE)

100 000

Settlement of liability

Measurement period

9.7 Measurement period adjustments

In the sections above, it was indicated that the acquirer needs to identify and
recognise all the assets and liabilities of the acquiree. Furthermore, the fair
value of the various assets, liabilities, non-controlling interests,
consideration, etc., needs to be obtained.

From a practical point of view, one should bear in mind that all these
requirements are very time-consuming. The measurement period in IFRS 3
therefore allows the acquirer some leeway to finalise all the required
procedures to complete the accounting of the business combination properly.

If the initial accounting for the business combination is incomplete at the

end of the reporting period in which the combination transaction occurs, the
acquirer shall report provisional amounts in its financial statements for the
items for which the accounting is incomplete.

During the measurement period, the acquirer shall retrospectively adjust the
provisional amounts recognised at the acquisition date to reflect new
information obtained about facts and circumstances that existed at the
acquisition date that, if known, would have affected the measurement of the
amounts recognised at the acquisition date.

During the measurement period, the acquirer shall also recognise additional
assets and liabilities if new information is obtained about facts and
circumstances that existed at the acquisition date that, if known, would have
resulted in the recognition of those assets and liabilities at the acquisition
date.

30

IFRS 3 Business combinations – Advanced aspects The measurement period

ends as soon as the acquirer receives the information it was seeking about
facts and circumstances that existed at the acquisition date or learns that
more information is not obtainable. However, the measurement period shall
not exceed more than one year from the acquisition date.

The effect of the above principle is that goodwill is subsequently adjusted

for such changes due to the fact that the changes resulting from new
information are processed retrospectively, as if the information had existed
at the acquisition date. This results in a fairer presentation of the goodwill
(or gain from a bargain purchase) at the acquisition date.

It is very important to note that not all information obtained in the

measurement period will result in changes to the provisional amounts at the
acquisition date. The acquirer should apply professional judgement to ensure
that the new information reflects the circumstances that existed at the
acquisition date and not those that arose thereafter.

The shorter the time period between the estimate of the provisional amount
at the acquisition date and the receipt of additional information about the
provisional amount in the measurement period, the more likely the new
information will relate to a circumstance that existed at the acquisition date.
The opposite is also true.

After the measurement period ends, the acquirer shall revise the accounting
for a business combination only to correct an error in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.

Example 9.18

Measurement period and adjustment to goodwill

The date of the business combination of P Ltd and S Ltd is 1 December

20.18. P Ltd acquired a 55% interest in S Ltd. By the end of the reporting
period of the group (31 December 20.18), P Ltd determined the fair value of
the identifiable net assets (excluding plant) to be R2,4 million. The plant was
provisionally valued at R600 000.

The business combination was effected through the transfer of R1,5 million
in cash and through the transfer of another investment to the seller. The other
investment was provisionally valued at R300 000.
The non-controlling interests are measured at its proportionate share of the
acquiree’s identifiable net assets at the acquisition date.

P Ltd recognised the equity investment in S Ltd in its separate records using
the cost price method.

Ignore any tax consequences.

By 31

December

20.18 the goodwill arising from the business combination at 1 December

20.18 was provisionally calculated as follows:

Consideration transferred (R1,5 million + R300 000)

1 800 000

Non-controlling interests [45% × (R2,4 million + R600 000)]

1 350 000

3 150 000

Less: Net identifiable assets acquired (R2,4 million + R600 000) (3 000 000)

Goodwill (provisional)

R150 000

During March 20.19 P Ltd obtained the final valuation reports from an
expert. The fair value of plant on 1 December 20.18 was R650 000, while
the fair value of the investment transferred was R290 000. Furthermore, P
Ltd did not identify any additional assets acquired or liabilities assumed as at
1 December 20.18.

31

Chapter 9
The final goodwill from the business combinations at 1 December 20.18 will
be calculated as follows:

Consideration transferred (R1,5 million + R290 000)

1 790 000

Non-controlling interests [45% × (R2,4 million + R650 000)]

1 372 500

3 162 500

Less: Net identifiable assets acquired (R2,4 million + R650 000) (3 050 000)

Goodwill (final)

R112 500

The amount for goodwill, as presented in the consolidated statement of

financial position as at 31 December 20.18, will therefore be retrospectively
adjusted by R37 500

(i.e. R150 000 – R112 500) to reflect the true goodwill of R112 500 as at the
date of the acquisition (1 December 20.18).

The consolidation journal will be as follows:

Dr

Cr

1 December 20.18

Equity at acquisition (SCE)

3 000 000

Goodwill (SFP) (balancing)

150 000

Non-controlling interests (SCE/SFP)

1 350 000

Investment in S Ltd (SFP)

1 800 000

At acquisition elimination journal of S Ltd

The provisional amounts used for the valuation of the plant and the
investment transferred will be retrospectively adjusted to the final valuation
amounts in the subsequent financial period. Consolidation journals are
repeated every year and therefore the final valuation amounts will be used
in the 20.19 elimination journal.

Dr

Cr

31 December 20.19

Equity at acquisition (SCE)

3 050 000

Goodwill (SFP) (balancing)

112 500
Non-controlling interests (SCE/SFP)

1 372 500

Investment in S Ltd (SFP)

1 790 000

At acquisition elimination journal of S Ltd

Measurement period adjustment – Non-controlling interests

Example 9.19

measured at proportionate share

P Ltd acquired an 80% interest in S Ltd on 1 December 20.15 for R1 750

000. From that date P Ltd had control over S Ltd as per the definition of
control in accordance with IFRS 10. The net assets (excluding machinery) of
S Ltd had a fair value of R1,5 million.

At that date the machinery of S Ltd had a remaining useful life of five years
and carrying amount of R500 000. P Ltd sought an independent appraisal for
the machinery owned by S Ltd, which was only finalised during March
20.16. Initially the value of the 32

IFRS 3 Business combinations – Advanced aspects machinery was estimated

at R600 000, but the appraisal indicated a fair value of R675 000 (the
difference in fair value related to circumstances that existed at acquisition
date). The financial statements of P Ltd for the reporting period ended 31
December 20.15 were issued on 28 February 20.16.

The non-controlling interests are measured at their proportionate share of S

Ltd’s identifiable net assets.

P Ltd recognised the equity investment in S Ltd in its separate records using
the cost price method.

Ignore any tax consequences.

When preparing the consolidated financial statements for the reporting
period ended 31 December 20.15, a value of R600 000 will be assigned to
the machinery.

The consolidation journals for 20.15 will be as follows:

Dr

Cr

J1 Machinery

(SFP)

(600 000 – 500 000) 100

000

Equity at acquisition (SCE)

100 000

Remeasurement of machinery to provisional fair

value

J2

Equity at acquisition (SCE) (1 500 000 + 600 000)

2 100 000

Goodwill (SFP) (balancing)

70 000
Non-controlling interests (SCE/SFP)

(2 100 000 × 20%) 420

000

Investment in S Ltd (SFP)

1 750 000

Elimination of investment against equity at

acquisition

J3 Depreciation

(P/L)

(100 000/5 × 1/12) 1

667

Accumulated depreciation (SFP)

1 667

Additional depreciation for 20.15 due to fair value

remeasurement

J4

Non-controlling interests (SCE/SFP) (1 667 × 20%)

333

Non-controlling interests (P/L)

333
Non-controlling interests in additional depreciation

for 20.15

The provisional amount used for the machinery will be corrected in the
20.16 financial statements by means of a retrospective adjustment, as the
amount is finalised within 12 months from the acquisition date.

The consolidation journal entries for 20.16 will therefore be as follows: Dr

Cr

J1 Machinery

(SFP) (675 000 – 500 000) 175

000

Equity at acquisition (SCE)

175 000

Remeasurement of machinery to final fair value

continued

33

Chapter 9

Dr

Cr

R
R

J2

Equity at acquisition (SCE) (1 500 000 + 675 000)

2 175 000

Goodwill (SFP) (balancing)

10 000

Non-controlling interests (SCE/SFP) (2 175 000 × 20%)

435 000

Investment in S Ltd (SFP)

1 750 000

Elimination of investment against equity at

acquisition

J3

Retained earnings (SCE) (175 000/5 × 1/12) 2

917

Accumulated depreciation (SFP)

2 917

Additional depreciation for 20.15 due to fair value

remeasurement

J4
Non-controlling interests (SCE/SFP) (2 917 × 20%) 583

Retained earnings (SCE)

583

Non-controlling interests in additional depreciation

for 20.15

J5

Depreciation for 20.16 (P/L) (175 000/5) 35

000

Accumulated depreciation (SFP)

35 000

Additional depreciation for 20.16 due to fair value

remeasurement

J6

Non-controlling interests (SCE/SFP) (35 000 × 20%) 7

000

Non-controlling interests for 20.16 (P/L)

7 000

Non-controlling interests in additional depreciation

for 20.16

Measurement-period adjustment – Non-controlling interests

Example 9.20

measured at fair value

P Ltd acquired an 80% interest in S Ltd on 1 December 20.15 for R1 750

000. From that date P Ltd had control over S Ltd as per the definition of
control in accordance with IFRS 10. The net assets (excluding machinery) of
S Ltd had a fair value of R1 500 000.

At that date the machinery of S Ltd had a remaining useful life of five years
and carrying amount of R500 000. P Ltd sought an independent appraisal for
the machinery owned by S Ltd, which was only finalised during March
20.16. Initially the value of the plant was estimated at R600 000, but the
appraisal indicated a fair value of R675 000 (the difference in fair value
related to circumstances that existed at acquisition date).

The financial statements of P Ltd for the reporting period ended 31

December 20.15

were issued on 28 February 20.16.

The non-controlling interests at acquisition date are measured at a fair value

of R440 000.

P Ltd recognised the equity investment in S Ltd in its separate records using
the cost price method.

Ignore any tax consequences.

When preparing the consolidated financial statements for the year ended 31
December 20.15, a value of R600 000 will be allocated to the plant.

34

IFRS 3 Business combinations – Advanced aspects The consolidation

journals for 20.15 will be as follows:

Dr
Cr

J1 Machinery

(SFP)

(600 000 – 500 000) 100

000

Equity at acquisition (SCE)

100 000

Remeasurement of machinery to provisional fair

value

J2

Equity at acquisition (SCE) (1 500 000 + 600 000)

2 100 000

Goodwill (SFP) (balancing)

90 000

Non-controlling interests (SCE/SFP)

440 000

Investment in S Ltd (SFP)

1 750 000
Elimination of investment against equity at

acquisition

J3 Depreciation

(P/L)

(100 000/5 × 1/12) 1

667

Accumulated depreciation (SFP)

1 667

Additional depreciation for 20.15 due to fair value

remeasurement

J4

Non-controlling interests (SCE/SFP) (1 667 × 20%)

333

Non-controlling interests (P/L)

333

Non-controlling interests in additional depreciation

for 20.15

The provisional amount used for the machinery will be corrected in the
20.16 financial statements by means of a retrospective adjustment, as the
amount is finalised within 12 months from the acquisition date.

The consolidation journal entries for 20.16 will therefore be as follows: Dr

Cr

J1 Machinery

(SFP) (675 000 – 500 000) 175

000

Equity at acquisition (SCE)

175 000

Remeasurement of machinery to final fair value

J2

Equity at acquisition (SCE) (1 500 000 + 675 000)

2 175 000

Goodwill (SFP) (balancing)

15 000

Non-controlling interests (SCE/SFP)

440 000

Investment in S Ltd (SFP)

1 750 000

Elimination of investment against equity at

acquisition
J3

Retained earnings (SCE) (175 000/5 × 1/12) 2

917

Accumulated depreciation (SFP)

2 917

Additional depreciation for 20.15 due to fair value

remeasurement

continued

35

Chapter 9

Dr

Cr

J4

Non-controlling interests (SCE/SFP) (2 917 × 20%) 583

Retained earnings (SCE)

583

Non-controlling interests in additional depreciation

for 20.15
J5

Depreciation for 20.16 (P/L) (175 000/5) 35

000

Accumulated depreciation (SFP)

35 000

Additional depreciation for 20.16 due to fair value

remeasurement

J6

Non-controlling interests (SCE/SFP) (35 000 × 20%) 7

000

Non-controlling interests for 20.16 (P/L)

7 000

Non-controlling

interests

in additional depreciation

for 20.16

Comment

The pro forma fair value remeasurement and elimination journal entries
(Journal 1 and 2) could also have been combined into one journal:

Dr

Cr
R

1 December 20.15

Machinery (SFP)

175 000

Equity at acquisition (SCE) (1 500 000 + 500 000)

2 000 000

Goodwill (SFP) (balancing)

15 000

Investment in S Ltd (SFP)

1 750 000

Non-controlling interests (SFP/SCE)

440 000

Elimination journal entry at acquisition

Self-assessment question

Question 9.1

P Ltd is a new company listed on the JSE Limited. The company primarily
invests in a number of diversified subsidiaries. All the companies in the
group have a 30 September reporting period. P Ltd acquired an 87% holding
in S Ltd on 1 October 20.19 from X Ltd. From that date P Ltd had control
over S Ltd as per the definition of control in accordance with IFRS 10. The
purchase agreement stipulated that the 87% interest in S Ltd must be settled
as follows:
l A cash payment of R12 million was made to X Ltd on 1 October 20.19.

l An amount of R30 million will be paid to X Ltd on 30 September 20.25.

l P Ltd transferred land to X Ltd. The land has a fair value of R50 million
and a carrying amount of R42 million on 1 October 20.19. The fair value
increased to R55 million on 15 October 20.19 when transfer was formally
registered with the Deeds Office.

36

IFRS 3 Business combinations – Advanced aspects l An additional amount

of R10 million will be paid in cash to X Ltd on 31 March 20.23

if the profits generated by S

Ltd during the period 1 October

20.19 to

31 March 20.23, increase by 150% above the current level. The probability
of this at 1 October 20.19 is 45%. The fair value of this obligation, taking
into account the probability and time value of money, is R3 198 066.

l P Ltd issued 200 000 call options on its own shares to X Ltd on 1 October
20.19.

The options entitle X Ltd to take up 200 000 ordinary shares in P Ltd on 30
September 20.20 at an exercise price of R7 per share. If the share price of P
Ltd drops before or on 31 March 20.20, additional options will be issued to
X Ltd in order to maintain the original value of the options issued.

l An amount of R100 000 was paid to an attorney for the valuation of S Ltd’s
assets.

These costs were included in the cash amount of R12 million paid by P Ltd.

The abridged statement of financial position of S Ltd as at 1 October 20.19

was as follows:
Equity

Share capital (10 000 000 shares)

5 000 000

Reserves

55 957 000

Total equity

R60 957 000

The net asset value of S Ltd is considered to be fairly valued with the
exception of the following:

l S Ltd has owner-occupied property, consisting of land and buildings, with

the following relevant information on the 1 October 20.19:

Carrying

Fair

Residual

Cost

amount

value

value

Land

R19 million

R19 million
R25 million

Buildings

R32 million

R28 million

R44 million

R36 million

It is the accounting policy of both P Ltd and S Ltd to account for property,
plant and equipment using the cost price model in accordance with IAS 16
Property, Plant and Equipment.

l At acquisition S Ltd is facing legal action from Y Ltd due to a deal that
went sour.

The amount of the claim is R5 million. The legal advisors of S Ltd are of the
opinion that there is a 30% chance that the claimant will be successful with
its case. After talks with their legal team S Ltd is contemplating taking out
insurance to cover the claim. An independent insurer has quoted a once-off
premium of R750 000. The SARS will not allow any deductions relating to
the claim or the once-off premium.

l The success of S Ltd is largely due to its workforce. Their staff has been
trained by the best to be the best. P Ltd has taken note of this, and it is as a
crucial reason for acquiring S Ltd. S Ltd has determined that to replace their
current workforce would cost R6 million (P Ltd accept this as the fair value).

l Another reason why P Ltd was interested in S Ltd is their huge customer
data base. The attorney determined the fair value of the customer data base
at R5 million. It can be assumed that customer data bases are frequently
exchanged.
S Ltd has signed confidentiality agreements with all its customers preventing
them from exchanging information with third parties.

37

Chapter 9

Additional information

l Unless stated otherwise, assume a fair pre-tax market-related rate of 10%

per annum, compounded annually.

l P Ltd elected to measure non-controlling interests at fair value on

acquisition date.

l P Ltd recognised the equity investment in S Ltd in its separate records

using the cost price method.

l Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.

l The following information relates to P Ltd:

Fair value of P Ltd shares (per share)

1 October 20.19

R15

31 March 20.20

R14,20

Fair value of call options to X Ltd (per option)

1 October 20.19

R6

31 March 20.20
R5,30

l The following information relates to S Ltd:

Fair value of S Ltd shares (per share)

1 October 20.19

R9

Required

(a) Prepare the journal entry to account for the acquisition of S Ltd, as
required in the separate financial statements of P Ltd on 1 October 20.19, in
accordance with IFRS 3 Business Combinations.

(b) Prepare the at acquisition consolidation journal entry that is required on 1

October 20.19, in order to include S Ltd in the consolidated financial
statements of the P Ltd Group. Journals should also include applicable items
which have no value and deferred tax calculation for applicable items.

Round off to the nearest rand.

Suggested solution 9.1

(a) Journal entry in the separate financial statements of P Ltd Dr

Cr

1 October 20.19

Investment in S Ltd (SFP) (balancing) 83 232

284

Valuation expenses (P/L)

100 000

Bank (SFP)

12 000 000

Liability (SFP) (C1)

16 934 218

Land (SFP)

42 000 000

Gain on land transferred (P/L)

8 000 000

Contingent consideration liability (SFP)

3 198 066

Options (SCE) (C2)

1 200 000

Recognise the acquisition of S Ltd

38

IFRS 3 Business combinations – Advanced aspects

Comment

The consideration transferred may include assets of the acquirer that have
carrying amounts that differ from their fair values at the acquisition date. If
so, the acquirer shall remeasure the transferred assets or liabilities to their
fair values and recognise the resulting gains or losses in profit or loss.
However, sometimes the transferred assets remain within the combined
entity after the business combination and the acquirer therefore retains
control of them. In this situation, the acquirer shall measure those assets at
their carrying amounts immediately before the acquisition date and shall not
recognise a gain or loss.

(b) Consolidation journal entry in the consolidated financial statements

of the P Ltd Group

Dr

Cr

1 October 20.19

Share capital (SCE)

5 000 000

Retained earnings (SCE)

55 957 000

Land (SFP) (C3.1)

6 000 000

Buildings (SFP) (C3.2)

16 000 000

Contingent liability (SFP)

750 000

Intangible asset (SFP) – Workforce

–

Intangible asset (SFP) – Customer data base

Deferred tax (SFP) (C4)

5 600 000

Goodwill (SFP) (balancing)

18 325 284

Investment in S Ltd (SFP) (Part (a))

83 232 284

Non-controlling interests (SCE/SFP) (C5)

11 700 000

At acquisition elimination journal of S Ltd

Calculations

C1 Liability – Deferred settlement

FV=30 000 000; i=10%; n=6; Pmt=0; PV=16 934 218

C2 Equity instrument – Share options

200 000 × 6 = 1 200 000

C3 Owner-occupied property

Land Building

Fair value 1 October 20.19

25 000 000

44 000 000

Carrying amount 1 October 20.19

19 000 000

28 000 000

Fair value remeasurement

6 000 000

16 000 000

(C3.1)

(C3.2)

39

Chapter 9

C4 Deferred tax

Carrying

Tax

Temporary Deferred tax

amount

base

difference

Land – Fair value

remeasurement

6 000 000

6 000 000

(*)1 344 000

Building – Fair value

remeasurement

Carrying amount to cost

4 000 000

4 000 000

1 120 000

Cost to residual

4 000 000

4 000 000

(*)896 000

Above residual

8 000 000

–
8 000 000

2 240 000

16 000 000

16 000 000

4 256 000

Contingent liability

750 000

750 000

5 600 000

(*) Will be realised at the capital gains tax rate

C5 Non-controlling interests

10 000 000 × 13% × 9 = 11 700 000

40

10

IFRS 10

Consolidated financial statements

– Control

Introduction

10.1
Overview of the topic ...............................................................................

43

10.2 Investment

entities

...................................................................................

43

Example

10.1:

Investment entities ..........................................................

45

Control
...............................................................................................................

45

10.3

Purpose and design of the investee .........................................................

46

Example 10.2:

Purpose and design of the investee ................................

47

10.4

Power of an investee ...............................................................................

47

Example

10.3:

Substantive rights ............................................................ 49

Example

10.4:

Protective rights ..............................................................

50

Example 10.5:

Majority of voting rights without power ............................

51

Example 10.6:

Power without a majority of voting rights .........................

52

Example

10.7;

Potential

voting rights ......................................................

53

10.5
Exposure to variable returns from an investee ........................................

54

10.6

Link between power and variable returns ................................................

54

Example 10.8:

Investor acting as agent or principal ................................

55

10.7

Unconsolidated structured entities ...........................................................

56

10.8

Summary of control assessment ..............................................................

56

Self-assessment question

Question 10.1
........................................................................................................

57

41

IFRS 10 Consolidated financial statements – Control

Introduction
10.1 Overview of the topic

The objective of IFRS 10 Consolidated Financial Statements is to

establish principles for the presentation and preparation of consolidated
financial statements.

To meet the above objective, the standard:

l requires a parent entity to present consolidated financial statements; l

defines the principle of control, and establishes control as the basis for
consolidation;

l set out how to apply the principle of control to identify whether an investor
controls an investee and therefore must consolidate the investee;

l sets out the accounting requirements for the preparation of consolidated

financial statements; and

l defines an investment entity and sets out an exception to consolidating

particular subsidiaries of an investment entity.

The presentation and preparation of consolidated financial statements are

dealt with in Volume 1, chapter 1 and chapter 3 to 8, respectively.
Investment entities will be briefly dealt with under chapter 10.2 below and
the principles of control will be summarised and illustrated in the remainder
of this chapter. IFRS 10 contains detailed guidance for the application of the
principles of control and should also be consulted.

The definition and principle of control is also important when applying

IFRS 3 Business Combinations as a business combination is defined in
IFRS 3 as a transaction or other event in which an acquirer obtains control of
one or more businesses. The business combination definition thus comprises
mainly two core aspects, namely “control” and

“business”. Although “business” is defined in IFRS 3, control is only

addressed in IFRS 10.

10.2 Investment
entities

IFRS 10 specifically states that investment entities are excluded from the
requirement to prepare consolidated financial statements. Investment entities
are defined as an entity that:

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

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

l measures and evaluates the performance of substantially all of its

investments on a fair value basis.

Investment entities also have the following typical characteristics that should
be considered when assessing if an entity is an investment entity: l the entity
has more than one investment;

l the entity has more than one investor;

l the entity has investors that are not related parties of the entity; and l the
entity has ownership interests in the form of equity or similar interests.

43

Chapter 10

If an entity is classified based on the above definition and typical

characteristics as an investment entity:

l the entity is not required to assess control in terms of IFRS 10; l the entity
is not required to apply IFRS 3 Business Combinations; and l the entity is
not required to consolidate its subsidiaries.

Instead the entity will measure their investments in subsidiaries at fair value
through profit or loss in accordance with IFRS 9 Financial Instruments.
If the circumstances and facts indicate that there were changes to one or
more of the elements that make up the definition of an investment entity, or
to the typical characteristics of an investment entity, the investor should
reconsider the investment entity classification. Any change in the status of
the investment entity classification shall be accounted for prospectively from
the date at which the change in status occurred.

IFRS 12 requires an investment entity to disclosure the following: l the fact

that the entity is classified as an investment entity; l significant judgements
and assumptions the entity has made in determining that it is an investment
entity;

l if the investment entity does not have one or more of the typical
characteristics of an investment entity, it shall disclose its reasons for
concluding that it is nevertheless an investment entity;

l for each unconsolidated subsidiary:

• the subsidiary’s name;

• the principal place of business (and country of incorporation if different

from the principal place of business) of the subsidiary; and

• the proportion of ownership interest held by the investment entity and, if

different, the proportion of voting rights held;

l the nature and extent of any significant restrictions on the ability of an

unconsolidated subsidiary to transfer funds to the investment; l any current
commitments or intentions to provide financial or other support to an
unconsolidated subsidiary;

l if, during the reporting period, an investment entity or any of its

subsidiaries has, without having a contractual obligation to do so, provided
financial or other support to an unconsolidated subsidiary the entity shall
disclose:

• the type and amount of support provided to each unconsolidated

subsidiary; and
• the reasons for providing the support;

l the terms of any contractual arrangements that could require the entity or
its unconsolidated subsidiaries to provide financial support to an
unconsolidated, controlled, structured entity, including events or
circumstances that could expose the reporting entity to a loss;

l if during the reporting period an investment entity or any of its

unconsolidated subsidiaries has, without having a contractual obligation to
do so, provided financial or other support to an unconsolidated, structured
entity that the investment entity did not control, and if that provision of
support resulted in the investment entity controlling the structured entity, the
investment entity shall disclose an explanation of the relevant factors in
reaching the decision to provide that support.

44
IFRS 10 Consolidated financial statements – Control

Example 10.1

Investment entities

P Ltd was established to manage retirement funds of various public and

private sector pension funds. The company has two main investors being the
Government Pension Fund and Invest Pension Fund. P Ltd prepares
quarterly reports which are sent to investors and used internally to measure
performance. These reports typically include information about the return on
investment and fair value movements of the investments made by P Ltd. The
commission earned by P Ltd is also based on the quarterly reports. P Ltd’s
investments consist mainly of equity investments of various local companies
listed on the JSE Ltd. For one of these equity investments, S Ltd, P Ltd
holds a 62% controlling interest.

P Ltd was established to manage retirement funds. P Ltd also uses fair value
measurement to gauge their performance and invests in various local
companies. P Ltd has more than one investment, more than one investor, it
does not appear if the parties are related and P Ltd invests in equity. P Ltd
therefore meets the definition of an investment entity.

P Ltd shall thus not consolidate S Ltd, but will instead measure the
investment in a subsidiary at fair value through profit or loss in accordance
with IFRS 9 Financial Instruments.

Comment
IFRS 10.B85A–.B85W provides detail guidance on the assessment of an
investment entity.

Control

In terms of IFRS 10 Consolidated Financial Statements an entity that is a

parent shall present consolidated financial statements. A parent is defined as
an entity that controls one or more entities. Therefore, an investor, regardless
of the nature of its involvement with the investee, shall determine whether it
is a parent by assessing whether it controls the investee. An investor
controls an investee when the investor 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 (IFRS 10

Appendix A). The definition can be illustrated as follows: Link

between

Exposure to

Power

power and

Control

variable returns

(chapter 10.4)

returns

(chapter 10.5)

(chapter 10.6)

Taking into account the purpose and design of the investee (chapter 10.3)

45
Chapter 10

Comment

It is important to note that all three elements of control must be present in a

scenario before control over an investee can be achieved. If any one of the
elements are not satisfied, the control assessment can be ceased because
control is not present.

An investor should continuously assess if it still controls an investee. If the

circumstances and facts indicate that there were changes to one or more of
the three elements of control, as indicated above, the investor should
consider if control over an investee was perhaps obtained or lost.

Comment

It may even happen that an investor gains or loses power over an investee
without any action taken by the investor. For example, an investor can gain
power over an investee because decision-making rights held by another party
or parties that previously prevented the investor from controlling an investee
have lapsed.

Two or more investors cannot jointly be regarded as the parent of an

investee. If two or more investors collectively control (act together to direct
the relevant activities) an investee, none of the investors individually
controls the investee. Each investor would account for its interest in the
investee in accordance with other relevant IFRSs, such as IFRS 11 Joint
Arrangements, IAS 28 Investments in Associates and Joint Ventures or
IFRS 9 Financial Instruments.

10.3 Purpose and design of the investee

The purpose and design of the investee impacts the determination of control.
Although the purpose and design of the investee is not an element of the
control definition, it is the primary consideration when accessing control. An
investor shall consider the purpose and design of the investee in order to
identify:

l the
relevant

activities;

l how decisions about the relevant activities are made;

l who has the current ability to direct those activities; and l who receives
returns from those activities.

Comment

The assessment may be straightforward, for example if an investee, in the

absence of additional arrangements that alter decision-making, is controlled
by means of equity instruments for instance shares. The equity instruments
give the holder proportionate voting rights. The party who is able to exercise
voting rights sufficient to determine the investee’s operating and financing
policies will control the investee and should therefore prepare consolidated
financial statements. In other cases the assessment may be more complex
and the other elements of control should also be considered in assessing
control.

46

IFRS 10 Consolidated financial statements – Control

Example 10.2

Purpose and design of the investee

S Ltd was incorporated exclusively to manage the debtors of a commercial

bank, P Ltd.

The only assets of S Ltd are the debtors. When the purpose and design of S
Ltd are considered, it is determined that the only relevant activity is
managing the debtors upon default. The party that has the ability to manage
the defaulting debtors has power over S Ltd, irrespective of whether any of
the debtors are currently recoverable or not.

10.4 Power of an investee

The assessment of power can be explained by the following decision tree:
The investor has power

over the investee

Identify the

relevant

Yes

activities of the

investee.

Does the

Are the voting

The investor

How are the

investor hold

Through voting

Yes rights substantive No

does not

more than ½

relevant

rights

and not merely

control the
activities of the

of the voting

protective?

investee

investee

rights?

directed?

No

Yes

Is there a contractual arrangement with other

investors? Or

Through a

Is there a contractual arrangement to direct

contractual

relevant activities? Or

agreeement

Does voting rights provide the investor the

practical ability to direct the relevant activites

unilaterally? Or

Are there potential voting rights to consider?

An investor has power over an investee when the investor has existing
rights that give it the current ability to direct the relevant activities
(activities that significantly affect the investee’s returns) of the investee.

1 Existing

rights

Power arises from rights. The rights that may give an investor power can
differ between investees. Rights that, either individually or in combination,
can give an investor power include:

l voting rights or potential voting rights of an investee; l rights to appoint,

reassign or remove members of an investee’s key management personnel
who have the ability to direct the relevant activities; l rights to appoint or
remove another entity that directs the relevant activities; l rights to direct the
investee to enter into, or veto any changes to transactions for the benefit of
the investor; and

l other rights for instance decision-making rights specified in a management

contract that give the holder the ability to direct the relevant activities.

In the absence of additional arrangements that alter decision-making, control

is simply determined by voting rights. The party that is able to exercise
voting rights (power) sufficient to determine the investee’s operating and
financial policies (relevant activities), controls the investee.

47

Chapter 10

Comment

Refer to chapter 1 (Volume 1) for examples of different group structures.

For the purpose of assessing power, an investor shall only consider

substantive rights and rights that are not protective (refer to point 3 and 4
respectively, below).
2 Relevant

activities

It is important to note that the investor should have control over the relevant
activities of the investee. IFRS 10 defines relevant activities, as activities of
the investee that significantly affect the investee’s returns. This implies that
the investor, who ultimately can direct the relevant activities, would control
the investee. Activities that, depending on the circumstances, can be relevant
activities include:

l selling and purchasing of goods or services;

l managing financial assets during their life;

l selecting, acquiring or disposing of assets;

l researching and developing new products or processes; and l determining a

funding structure or obtaining funding.

Comment

Refer to example 10.4 and 10.5 for examples of relevant activities.

3 Substantive

rights

An investor’s rights over an investee’s relevant activities should be

considered when assessing control. Only substantive rights may lead to
control. A right is substantive when the holder of the right has the practical
ability to exercise that right relating to an investee. The investor should also
consider the nature of the investee’s relationship with other parties when
determining if the rights are substantive. Factors that could impact if a right
is substantive or not include:

l Whether there are any barriers that prevent the holder from exercising the
rights, for example, financial penalties that would prevent or deter the holder
from exercising its rights.
l When the exercise of rights requires the agreement of more than one party,
or when the rights are held by more than one party, whether a mechanism is
in place that provides those parties with the practical ability to exercise their
rights collectively if they choose to do so. The lack of such a mechanism is
an indicator that the rights may not be substantive. The more parties that are
required to agree to exercise the rights, the less likely it is that those rights
are substantive.

l Whether the party or parties that hold the rights would benefit from the
exercise of those rights, for example, the holder of potential voting rights in
an investee shall consider the exercise or conversion price of the instrument.

To be substantive, rights also need to be exercisable when decisions about

the direction of the relevant activities need to be made. Usually, to be
substantive, the rights need to be currently exercisable, However, sometimes
rights can be substantive, even though the rights are not currently
exercisable.

48

IFRS 10 Consolidated financial statements – Control

Comment

Potential voting rights (refer below) are also only considered when those
rights are substantive.

Example 10.3

Substantive rights

On 1 April 20.18 P Ltd acquired an option to acquire the majority of shares

in S Ltd. The option will be settled on 25 April 20.18. In terms of S Ltd’s
memorandum of incorporation, policies over the relevant activities can be
changed only at special or scheduled shareholders’ meetings. This includes
the approval of material sales of assets as well as the making or disposing of
significant investments. The next scheduled shareholders’ meeting is in three
months. Shareholders that individually or collectively hold at least 5% of the
voting rights can call a special meeting to change the existing policies over
the relevant activities, but a requirement to give notice to the other
shareholders means that such a meeting cannot be held for at least 30 days.

P Ltd is considered to have the practical ability to settle the option. The
option will only be settled in 25 days. However, the existing shareholders are
unable to change the existing policies over the relevant activities because a
special meeting cannot be held for at least 30 days, at which point the option
will have been settled. There are also no barriers preventing P Ltd from
settling the option.

On 1 April 20.18 P Ltd’s option is a substantive right that gives P Ltd the
current ability to direct the relevant activities even before the option is
settled. Therefore, P Ltd has rights that are essentially equivalent to the
majority shareholder in S Ltd.

Comment

If however the exercise price of the option is substantively more than the
current share price of S Ltd, the option would not be a substantive right as P
Ltd would not benefit from exercising the right.

4 Protective

rights

Substantive rights exercisable by other parties can prevent an investor from

controlling the investee to which those rights relate. As long as the rights are
not merely protective, substantive rights held by other parties may prevent
the investor from controlling the investee even if the rights give the holders
only the current ability to approve or block decisions that relate to the
relevant activities.

IFRS 10 defines protective rights as rights designed to protect the interest of

the party holding those rights without giving that party power over the entity
to which those rights relate. Examples of protective rights include:

l a lender’s right to restrict a borrower from undertaking activities that could

significantly change the credit risk of the borrower to the detriment of the
lender; l the right of a party holding a non-controlling interest in an investee
to approve capital expenditure greater than that required in the ordinary
course of business, or to approve the issue of equity or debt instruments;

l the right of a lender to seize the assets of a borrower if the borrower fails to
meet specified loan repayment conditions.

49
Chapter 10

Example 10.4

Protective rights
P Ltd holds a 55% interest in S Ltd and another shareholder B Ltd holds the
remaining 45%. The shareholders agreement between P Ltd and B Ltd states
that B Ltd is responsible for the day to day running of S Ltd and approval
from P Ltd will only be required if S Ltd required additional funding. The
terms of the shareholders agreement can only be changed with the approval
of both parties.

P Ltd holds more than half of the voting rights of S Ltd. P Ltd has the right
to restrict S Ltd from undertaking activities that could significantly change
the credit risk (through additional funding) of S Ltd to the detriment of P
Ltd. Another entity, B Ltd, has existing rights that provide them with the
right to direct the relevant activities of S Ltd. P Ltd can also not change the
shareholders agreement without the approval of B Ltd. Thus although P Ltd
holds the majority of the voting rights of S Ltd, it only holds protective
rights and does not have power over S Ltd.

Comment

Because protective rights are designed to protect the interests of their holder
without giving that party power over the investee to whom those rights
relate, an investor that holds only protective rights cannot have power or
prevent another party from having power over an investee.

The difference between substantive rights and protective rights is important

and often confused. The difference can be summarised as follows:

5 Franchises

A franchise agreement for which the investee is the franchisee often gives
the franchisor rights that are designed to protect the franchise brand.
Franchise agreements typically also give franchisors some decision-making
rights with respect to the operations of the franchisee.

However, it is necessary to distinguish between having the current ability to

make decisions that significantly affect the franchisee’s returns and having
the ability to make 50

IFRS 10 Consolidated financial statements – Control decisions that protect

the franchise brand. The franchisor does not have power over the franchisee
if other parties have existing rights that give them the current ability to direct
the relevant activities of the franchisee. For example, the shareholders of an
investee will have power over the business (relevant activities) of the
franchisee and run the business to maximise profits. In doing so, the
franchisee will have to follow some rules meant to protect the franchise
brand in terms of the franchise agreement.

6 Power through majority of voting rights

An investor has power over an investee if the following requirements are

met: l the

investor

holds

more than half of the voting rights of an investee; l the voting rights are
substantive; and

l voting

rights

direct the relevant activities (refer to chapter 10.4, point 2) of the investee
or the voting right may appoint the majority of the executive management of
the investee.

Example 10.5

Majority of voting rights without power

S Ltd was incorporated by the local municipality to install prepaid water and
electricity meters at residential properties. P Ltd, a manufacturer of prepaid
water and electricity meters acquired a 60% interest in S Ltd from the
municipality. The shareholders agreement between the municipality and P
Ltd stipulates the following terms: l Each share entitles the holder to one
vote.
l The board of directors will comprise of two nominees of P Ltd and the
municipality each.

l S Ltd will purchase all the meters from P Ltd at a fixed price. The fixed
price can only be changed with the approval of the municipality.

l The municipality will determine the selling and installation price of the
meters.

In general P Ltd will be regarded as having power over S Ltd, as P Ltd own
60% (each share entitle the holder to one vote) of the total voting rights,
which constitutes the majority of the voting rights. However, although P Ltd
owns the majority of the voting rights, the shareholders agreement stipulate
the municipality will determine the selling and installation price of the
prepaid meters and will have to approve any change into the input cost of S
Ltd’s inventory. These activities are deemed to be the relevant activities, as
they significantly affect the returns of S Ltd; therefore, the relevant activities
are directed by the municipality through the shareholders agreement. P Ltd
does not have the power of S Ltd as it does not have the power to direct the
relevant activities that significantly affects the returns of S Ltd.

Comment

Power over the investee can therefore not be automatically assumed if the
investor merely owns more than 50% of the shares in an investee. Other
factors should also be considered to determine control over an investee.

51

Chapter 10

7 Power without a majority of voting rights ( de facto power) An investor

can have power with less than a majority of the voting rights of an investee,
for example, through:

l a contractual arrangement between the investor and other vote holders, for
example a contractual arrangement might ensure that the investor can direct
enough other vote holders on how to vote to enable the investor to make
decisions about the relevant activities;
l rights arising from other contractual arrangements, for example a
contractual arrangement in combination with voting rights may be sufficient
to give an investor the current ability to direct the relevant activities of the
investees; l voting rights, if the voting rights provides the investor the
practical ability to direct the relevant activities unilaterally; or

l potential voting rights (refer to point 8 below); or

l a combination of the above.

When assessing whether an investor’s voting rights are sufficient to give it

power, all facts and circumstances should be considered. The size of the
investor’s holding of voting rights relative to the size and dispersion of
holdings of the other vote holders is important, as the more voting rights an
investor holds, the more likely the investor is to have existing rights enabling
it to direct relevant activities. An investor is also more likely to have the
current ability to direct relevant activities, where a lot of parties are needed
to act together to outvote the investor.

Example 10.6

Power without a majority of voting rights

S Ltd has 1 million shares in issue and each ordinary share entitles the holder
to one vote at shareholders’ meetings. S Ltd’s operating and financial
policies are determined by the company’s Board of Directors. All the
directors of S Ltd are appointed by the shareholders at annual general
meetings by simple majority vote.

Details of voting rights represented at the annual general meetings of S Ltd’s

shareholders are as follows:

Annual general meeting held on

31 May 20.14

31 May 20.13 31

May
20.12

Voting rights represented,

in person or by proxy

90%

92%

87%

On 1 January 20.15 P Ltd acquired 49% of the shares of S Ltd in the open
market. The remaining shares were widely held by shareholders holding less
than 1% each of the share capital.

The relevant activities of S Ltd are the operational and financial activities of
the company. Changes through the operational and financial policies will
affect the investee’s returns. From the information provided it is evident that
the board of directors make the operating and financial decisions and in turn
they direct the relevant activities of S Ltd. Directors are appointed by the
shareholders by a simple majority vote on shareholder meetings. Therefore,
a majority shareholder vote (>50%) at meetings would enable the
appointment of the directors and implicitly gain power over the relevant
activities of S Ltd. However, no single investor holds the majority of the
voting rights.

52

IFRS 10 Consolidated financial statements – Control Nonetheless, P Ltd’s

shareholding of 49% is significant in relation to the other shareholders and
based on past attendance of the shareholders meetings, P Ltd has
significantly more voting rights than any other vote holder.

Attendance at shareholders’ meetings reveals that during the last three years,
on average no more that 90% of shareholders were present at the shareholder
meetings.
Therefore, any shareholder who holds more than 45% (50% of the 90%
voting rights at a shareholders’ meeting) of the voting rights would be
considered to have the majority vote. As P Ltd acquired 49% of the shares of
S Ltd, P Ltd will be deemed to have power over S Ltd even without holding
the majority of the voting rights.

Comment

IFRS 10.B39–.B46 provides detail guidance on assessing power when the

investor does not own a majority of voting rights.

8 Potential voting rights

Potential voting rights should also be considered in assessing power, if the

rights are substantive (see point 3 above). This will include potential voting
rights of the investee held by the investor or other parties. Potential voting
rights are rights to obtain voting rights of an investee, such as those arising
from convertible instruments, options, or forward contracts.

When considering potential voting rights, an investor shall consider the

purpose and design of the instrument, as well as the purpose and design of
any other involvement with the investee. This includes an assessment of the
various terms and conditions of the instrument as well as the investor’s
apparent expectations, motives and reasons for agreeing to those terms and
conditions.

Example 10.7

Potential voting rights

P Ltd owns 42% of the issued share capital of S Ltd. S Ltd issued share
capital consist of 1 000 shares and each share qualifies for one vote. P Ltd
also holds 400 convertible debentures in S Ltd. The convertible debentures
are convertible at any time at the discretion of the holder. Two debentures
are convertible into one share and the debentures are currently convertible.

If the debentures are converted S Ltd’s issued share capital will increase to 1
200
shares and P Ltd’s investment in S Ltd will increase to 620 shares (420
previously owned shares and 200 converted shares). P Ltd will therefore
own 52% (620/1200) of S Ltd.

For that reason, P Ltd has power over S Ltd even though the convertible
debentures have not yet been converted as P Ltd’s potential voting power of
52% constitutes more than half of the total voting power (assuming there are
no other contractual agreements or rights that dictate otherwise).

Comment

When consolidating S Ltd, the present ownership interest should be used to

allocate the equity of S Ltd between the controlling and non-controlling
interests, thus 42% to P Ltd and 58% to the non-controlling shareholders.

53

Chapter 10

10.5 Exposure to variable returns from an investee

The second component of the definition of control is that an investor should

be exposed, or have rights to variable returns from its involvement with the
investee. An investor is exposed to variable (not fixed) returns from its
involvement with the investee when the investor’s returns from its
involvement have the potential to vary as a result of the investee’s
performance. Variable returns can be only positive, only negative or both
positive and negative.

Examples of returns include:

l dividends, other distributions of economic benefits from an investee and

changes in the value of the investor’s investment in that investee; l
remuneration for servicing an investee’s assets or liabilities, fees and
exposure to loss from providing credit or liquidity support, residual interests
in the investee’s assets and liabilities on liquidation of that investee, tax
benefits, and access to future liquidity that an investor has from its
involvement with an investee; l returns that are not available to other interest
holders, for example, an investor might use its assets in combination with the
assets of the investee, such as combining operating functions to achieve cost
savings, sourcing scarce products, limiting some operations or assets, or to
enhance the value of the investor’s other assets.

Comment

Although only one investor can control an investee, more than one party can
share in the returns of an investee, for example, holders of non-controlling
interests can share in the profits or distributions of an investee. The investor
who controls the investee has the power to influence the performance of the
investee (through its decisions regarding the relevant activities) which will
result in variable returns to the controlling investor and other investors.

10.6 Link between power and variable returns

An investor controls an investee if the investor not only has power over the
investee, and exposure to variable returns from its involvement with the
investee, but also has the ability to use its power to use its power to affect
the investor’s returns from its involvement with the investee. There must be
a connection between the power and variable returns.

Agent classification

An investor may use its power over the investee itself, or it may appoint an
agent to exercise its power on its behalf. When an investor with decision-
making rights assesses whether it controls an investee, it shall determine
whether it is a principal or an agent.

An agent is a party that acts on behalf of and for the benefit of another party
namely 54
IFRS 10 Consolidated financial statements – Control

the principal. The difference between an agent and a principal can be

illustrated as follows:

Power:

Exposure to

Variable returns

Principal

decision-making

variable returns

for own benefit

rights

Variable

Power:

Exposure to
returns for

Agent

decision-making

variable returns

other party's

rights

benefit

Important to note is that a decision-maker is not regarded as an agent simply

because other parties can benefit from the decisions that it makes. An agent
does not control the investee when it exercises its decision-making authority
and therefore will not have to present consolidated financial statements.
Control still lies with the principal on whose behalf the agent is acting.

The agent/principal assessment is crucial for investment managers who

make investment decisions on behalf of investors in exchange for a fee. A
decision-maker should consider their relationship with the investee and other
parties involved with the investee in determining whether the decision-
maker is acting in the capacity of an agent. The following factors should all
be considered in the assessment: l the scope of the decision-maker’s
authority over the investee; l the rights held by other parties;

l the remuneration to which the decision-maker is entitled; and l the

decision-maker’s exposure to variability of returns from other interests that it
holds in the investee.

Comment

IFRS 10 provides detail additional guidance on the factors that should be

considered in accessing agent/principal relationship (IFRS 10.B60–.B72).

Example 10.8
Investor acting as agent or principal

P Ltd, a fund manager markets and manages an investment fund that

provides investment opportunities to a number of investors. P Ltd (decision-
maker) must make decisions in the best interests of all investors and in
accordance with the fund’s governing agreements. Nonetheless, P Ltd has
wide decision-making discretion. P Ltd also receives a market-based fee for
its services equal to 1% of the assets under its management and 20% of all
the fund’s profits if a specified profit level is achieved. The fees are
proportionate to the services provided. P Ltd can also be dismissed by
investors with a majority vote.

P Ltd must make decisions in the best interests of all investors. P Ltd is paid
fixed and performance-related fees that are proportionate to the services
provided. In addition, the remuneration aligns the interests of the fund
manager with those of the other investors (the fund manager’s fee is based
on the fund’s performance). Although P Ltd does have decision-making
powers over the fund, it does so under the governing agreement as set up by
the investors. P Ltd can also be removed as decision-maker by 55
Chapter 10

the investors if they are not satisfied with the fund’s performance. P Ltd is
acting as an agent and therefore does not control the fund.

If P Ltd also has a significant investment in the fund, it can be argued that P
Ltd is exposed to variable returns that may arise from the activities of the
fund. Together with P Ltd’s decision-making authority it may be concluded
that P Ltd does control the fund.

10.7 Unconsolidated structured entities

A structured entity is an entity that has been designed so that voting or

similar rights are not the dominant factor in deciding who controls the entity,
for example when the voting rights relate to administrative tasks only and
the relevant activities are directed by means of contractual arrangements
(IFRS12.B21). An unconsolidated structured entity would therefore be a
structured entity that is not controlled (nor consolidated) by the investor.
Examples of structured entities include securitisation vehicles, asset-backed
financings and some investment funds.

Entities that have an interest in an unconsolidated structured entity shall

disclose information that enables the users of the financial statements to: l
understand the nature and extent of its interest in the unconsolidated
structured entity; and

l evaluate the nature of, and changes, in the risks associated with its interest
in the inconsolidated structured entity.

Comment

Refer to IFRS 12.B21–.B26 for a detailed explanation of unconsolidated

structured entities as well as the disclosure requirements.
10.8 Summary

of

control

assessment

The control assessment can be illustrated as a follows:

56

IFRS 10 Consolidated financial statements – Control

Self-assessment question

Question 10.1

Beta Ltd grows coffee beans and supplies coffee beans exclusively to Alpha
Ltd.

Alpha Ltd acquired a 50% shareholding (each share entitles a shareholder to

one vote) in Beta Ltd from Mr B, the sole shareholder.

Mr B and Alpha Ltd signed the purchase agreement on 1 January 20.15. In

terms of the purchase agreement, Alpha Ltd will have the right to appoint
staff and key management personnel of Beta Ltd.

On the date of acquisition, Beta Ltd’s equity consisted of the following:

Ordinary share capital

R150 000

Convertible non-cumulative preference shares

R30 000

Retained earnings

R340 000
The unlisted convertible preference shares were issued on 1 August 20.10
and are mandatorily convertible into 50 000 Beta Ltd ordinary shares on 31
July 20.16. The preference shares are not convertible prior to that date. The
holders of the preference shares do not have voting rights except on matters
that directly affect their rights. The preference shares had a fair value of R1,2
million on 30 September 20.15. The company’s founder, Mr B, has held the
preference shares since 1 August 20.10.

Required

Discuss, with reasons, whether Beta

Ltd is a subsidiary of Alpha

Ltd as at

30 September 20.15.

Suggested solution 10.1

A subsidiary is an entity that is controlled by another entity (IFRS [Link]

A).

Alpha Ltd, as the investor, has to determine whether it is a parent by

assessing whether it controls the investee, Beta Ltd (IFRS 10.5).

An investor controls an investee when the investor 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.

Power

An investor has power over an investee when the investor has existing rights
that give it the current ability to direct the relevant activities (IFRS 10.10).

Examples of rights that, either individually or in combination, can give an

investor power include but are not limited to:
(a) rights in the form of voting rights (or potential voting rights of an
investee); and (b) rights to appoint, reassign or remove members of an
investee’s key management personnel who have the ability to direct the
relevant activities (IFRS 10.B15).

Potential voting rights:

When assessing whether Alpha Ltd’s voting rights are sufficient to give it
power over Beta Ltd, all facts and circumstances should be considered,
including potential voting 57

Chapter 10

rights held by others. For a potential voting right to be substantive, the

holder must have the practical ability to exercise that right.

At 30 September 20.15 Mr B held potential voting rights in the form of the

convertible preference shares. However, these were not substantive on 30
September 20.15 as it is not currently exercisable and therefore the
convertible preference shares can be ignored.

Protective voting rights:

In evaluating whether rights give an investor power over an investee, the

investor shall also assess whether its rights, and rights held by others, are
protective rights (IFRS 10.B26).

Because protective rights are designed to protect the interests of their holder
without giving that party power over the investee, an investor that holds only
protective rights cannot have power or prevent another party from having
power over an investee.

Mr B’s preference shares are protective rights as he can only vote on matters
that directly affect his rights as a preference shareholder and are therefore
the preference shares are not included in the assessment of control over Beta
Ltd.

Rights in the form of voting rights:

Alpha Ltd owns 50% of the voting rights of Beta Ltd, which does not
constitute the majority voting rights. Therefore, Alpha Ltd does not have
power over Beta Ltd based on its voting rights alone.

Rights to appoint members of an investee’s key management personnel: An

investor can have power even if it holds less than a majority of the voting
rights of an investee through rights arising from other contractual
arrangements (IFRS 10.B38).

Based on the purchase agreement, Alpha Ltd has a contractual right to

appoint key management personnel.

In light of all of the above, Alpha Ltd does have power over Beta Ltd.

Exposure to variable returns

Alpha Ltd has exposure to variable returns by means of the dividends

received from the shares owned in Beta Ltd.

Link between power and returns

Alpha Ltd has existing rights (voting rights and rights to appoint key
management personnel) through which it is exposed to variable returns
(dividends).

Conclusion

The voting rights and contractual agreement, together with the exposure to
variable returns and the ability to affect the amount of the returns, results in
Alpha Ltd having control over Beta Ltd. Beta Ltd is a subsidiary of Alpha
Ltd.

58

11

Investments in associates

and joint ventures

Introduction

11.1 Background

..............................................................................................

62

11.2 Significant

influence

.................................................................................

62

Accounting for investments in associates in the separate

financial statements of the investor ......................................................

63

Accounting for investments in associates

in the consolidated financial statements of the investor

11.3 Equity

method

..........................................................................................

63

Application of the equity method

11.4

Equity method procedures .......................................................................

65

Example 11.1a: Application of the equity method ......................................

67

Example 11.1b: Fair value adjustment at acquisition date .........................

69

Example

11.2:

Revaluation surplus of an associate ..................................

71

Example 11.3:

Attributable loss of an associate .......................................

76

Example 11.4:

Elimination of unrealised profit in inventories

(investor company sells to associate) ...............................

80

Example 11.5:

Elimination of unrealised profit in inventories

(associate sold to investor company) ...............................

86
Example 11.6:

Elimination of unrealised profit in equipment

(investor sells to associate) ..............................................

92

Example 11.7:

Elimination of unrealised profit in equipment

(associate sells to investor company) ...............................

98

Example 11.8:

Associates in a horizontal group .......................................

104

Example 11.9:

Investment in an associate which itself is a parent ...........

109

Example 11.10: Investment in associate by a partially-owned subsidiary ..

113

11.5

Classification as held for sale ..................................................................

116

11.6 Impairment
losses

....................................................................................

117

11.7

Discontinuing the use of the equity method .............................................

119

11.8 Disclosure

................................................................................................

119

59

Chapter 11

Piecemeal acquisition of interests in investees

11.9

Changes in ownership interest .................................................................

121

Example 11.11: Piecemeal acquisition whereby the status

of an investment changes to that of an associate

(significant influence is obtained) .....................................

121

Example
11.12:

Acquisition

of

additional interest .......................................

126

Disposal of interests in an investee

Example 11.13: Disposal of the entire interest in an associate

(significant influence is lost)..............................................

130

Example 11.14: Partial disposal of an interest in an associate –

Loss of significant influence (associate becomes

IFRS 9 investment ............................................................

136

Self-assessment questions

Question 11.1 Basic equity accounting/interest received

...................................

140

Question 11.2 Basic equity accounting/reporting dates differ

.............................

145

60
Investments in associates and joint ventures INVESTMENTS IN
ASSOCIATES (IAS 28)

Definitions

Accounting

treatment

Associate

Equity method = Cost + Changes in equity

An entity over which the investor has

since acquisition

significant influence and that is neither a

Cost

subsidiary nor an interest in a joint venture.

l Recognised initially at cost.

Equity method

l Goodwill part of cost of investment.

Investment initially recognised at cost and

l Consider effect of revaluations or fair

adjusted thereafter for the since acquisition

value adjustments.

change in the investor’s share of net assets

l Recognise excess in profit or loss.

of the investee. The profit or loss of the

Changes in equity

investor includes the investor’s share of the

l Recognise share of profit of associate,

profit or loss of the investee. The other

adjust:

comprehensive income of the investor

• depreciation or amortisation;

includes the investor’s share of the other

• cumulative preference dividends;

comprehensive income of the investee.

• intragroup profits and losses.

Significant influence

l Recognise share of other comprehensive

The power to participate in the financial and

income of associate.

operating policy decisions of the investee but

l Consider recognition of impairment loss.

is not control or joint control over those

l Share of losses of associate:

policies.

• carrying amount of the investment

Presume significant influence if investor

limited to Rnil;

holds 20% or more of the voting power.

• include other long-term interests that

Evidenced in the following ways:

will not be settled in foreseeable

l Representation on board of directors;

future;

l Participation in policy-making processes;

• recognise subsequent profits only after

l Material transactions between parties;

they exceed unrecognised losses.

l Interchange of managerial personnel;

l Provision of essential technical

information.

Consider potential voting rights, held by

investor and by other entities, that are

currently exercisable or convertible.

Other issues

Separate financial statements

l Accounting policies – use uniform

An investment in an associate should be

policies.

accounted for as follows:

l Reporting dates – if different:

l Account for investment at cost; or

• associate prepares financial

l In terms of IFRS 9.

statements at investor’s reporting date

or

• if impracticable, use available financial

statements, adjusted for significant

transactions (not more than 3 months’

difference).

l Discontinue equity method – if no longer

significant influence:

• measure retained investment at fair

value; recognise profit or loss;

• account for investment in terms of

IFRS 9.

61

Chapter 11

Introduction

11.1 Background

IAS 28 Investments in associates and joint ventures (issued May 2011)

prescribes the accounting treatment for associates as well as joiint ventures.

Comment

The examples in this chapter refer only to associates, but they would be
equally applicable if the investee was a joint venture, since the equity
method is applied

identically to associates and joint ventures.

An associate is an entity in which the investor has siignificant influence.

From the above definition of an associate, it is clear that significant

influence is an important concept for the identification of an associate. IAS
28.4 defines significant influence as the power to participate in the financial
and operating policy decisions of the investee, but is not control or joint
control of those policies.

11.2 Siignificant influence

If an investor holds, directly or indirectly, through subsidiaries or joint

ventures, 20% or more of the voting power of the investee, it is presumed
that the investor does have significant influence unless it can be clearly
demonstrated that this is not the case.

Conversely, if the investor holds, directly or indirectly, throu ugh

subsidiaries or joint

ventures, less than 20% of the voting power of the investee, it is presumed
that the investor does not have significant influence, unless such influence
can be clearly demonstrated. A substantial or majority ownership by another
investor does not necessarily preclude an investor from having significant
influence.

The existence of significant influence is usually evidenced in one or more

of the following ways:

l representation on the board of directors or equivalent governing body of the

investee; l participation in policy-making processes, includiing participation
in decisions about dividends or other distributions;

l material transactions between the investor and the investee; l interchange of

managerial personnel;

l provision of essential technical information.

Potential voting rights

An entity may own share warrants, share call options, debt or equity
instruments that are convertible into ordinary shares that h

have the pottential, if exercised or converted, to

give the entity additional voting power or reduce another party’s voting
power over the financial and operating policies of another entity, and should
thus be considered in establishing whether an investor has control or
significant influence over an investee (this is called potential voting rights).

All presently exercisable or presently convertible instruments held by the

investor or other shareholders are taken into account when assessing whether
significant influence exists. The combined interests of the parent and the
subsidiaries are considered in assessing significant influence. However, the
interests that joint ventures and 62

Investments in associates and joint ventures

associates in the group hold are not taken into account. Potential voting
rights that are exercisable or convertible only at a future date or only upon
the occurrence of a future event are also not brought into the assessment.
The facts and circumstances surrounding the potential voting rights
instruments should be considered in the assessment. However, the intention
of management and the financial capability to exercise or convert are not
taken into consideration (IAS 28.7–8).

Comment

P Ltd holds 15% of the issued ordinary share capital of A Ltd, but also has
an option to acquire a further 10% of A Ltd’s ordinary share capital. As P
Ltd potentially owns 25% of

the voting rights, it is assumed thatt P Ltd has significant influence over A
Ltd, provided that the option is presently exercisable, resulting in A Ltd
being an associate of P Ltd.

However, when A Ltd’s results, assets and liabilities are equity accounted
for, only the 15% existing interest will be taken into account and not the
potential interest of 25%.

Instruments containing potential voting rights are accounted for as financial

instruments in terms of IFRS 9 Financial Instruments.

Accounting for investments in associates in the separate financial

statements of the investor

An investment in an associate that is included in the separate financial
statements of an investor should be accounted for in accordance with IAS
27.10: l carried at cost; or

l accounted for in accordance with IFRS 9 Financial Instruments.

When an investment in an associate, or a portion thereof, meets the criteria

to be classified as held for sale, it will be accounted for in accordance with
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations .
Any retained portion that has not been classified as held for sale, will be
equity accounted for. After disposal any retained portion will be accounted
for in accordance with IFRS 9 Financial Instruments , unless the retained
interest continues to be an associate, in which case it will still be equity
accounted for.

An investor that has investments in associates ma

ay not issue consolidated financial

statements because it does not have subsidiaries. It is appropriate that such

an investor provide the same information about its investments in associates
as those enterprises that issue consolidated financial statements.

Accounting for investments in associates in the consolidated

financial statements of the investor

11.3 Equity method

An investment in an associate must be accounted for in accordance with the

equity method in the consolidated financial statements, except when (IAS
28.17): l The

exception in IFRS 10 allowing a parent that also has an investment in an

associate not to prepare consolidated financial statements, applies; or 63

Chapter 11

l All four conditions apply, namely:

• the investor is a wholly-owned subsidiary of another entity, or the investor
is a partially-owned subsidiary of another entity and the non-controlling
shareholders have no objection against not applying the equity method; and

• the debt and equity instruments of the investor are not traded in a public
market; and

• the investor is not in the process of filing its financial statements with a
securities commission in order to issue the instruments in a public market;
and

• the ultimate or any intermediate parent of the investor prepares

consolidated financial statements.

l If the investment in an associate is held directly or indirectly by a venture

capital organisation, a mutual fund, a unit trust or similar entity, the entity
may elect to measure the investment at fair value through profit or loss in
accodance with IFRS

9 Financial Instruments . When the entity has an investment in an

associate, a portion of which is held by a venture capital organisation,
mutual fund, unit trust or similar entity, this treatment still applies, regardless
of whether this entity excercises significant influence over that portion of the
investment. If the entity makes this election, the equity method must still be
applied by the entity to the remaining portion of the investment not held by a
venture capital organisation or similar entity.

According to the equity method the investment is initially recorded at cost

and after the date of acquisition, increases or decreases are recorded by
including the following: l the proportionate share of the profit or loss of the
investor in the investee after the date of acquisition;

l distributions received from the investee;

l the portion of prior year adjustments in the investee since the date of
acquisition; and

l adjustments to the carrying amount due to changes to the proportionate

interest of the entity in the investee, flowing from changes to the equity
interest of the investee not included in profit or loss – such as the revaluation
of property, plant and equipment after the acquisition date, which is
recognised in other comprehensive income (IAS 28.10).

The equity method therefore involves the inclusion of only the investment in
the associate in the consolidated statement of financial position and only the
investor’s share of profit and other comprehensive income in the
consolidated statement of profit or loss and other comprehensive income.
The associate’s individual assets, liabilities, income and expenses are not
separately included in the consolidated financial statements.

64

Investments in associates and joint ventures

Application of the equity method

OVERVIEW – APPLICATION OF THE EQUITY METHOD

Equity method procedures

l Goodwill/Gain from a bargain

purchase

l Other comprehensive income

Classification as held for sale

l Contribution of non-monetary asset

l Treatment of reserves

l Cumulative preference shares

Impairment losses

l Reporting dates/Accounting policies

l Losses of an associate
l Intragroup transactions

Discontinuing the equity method

l Deferred tax implications

l Associates in horizontal/vertical

groups

Disclosure

Changes in ownership interest

l Piecemeal acquisition

l Disposal of interest

11.4 Equity method procedures

An investment in an associate is accounted for under the equity method from

the date on which it falls within the definition of an associate. The basic
principles and procedures that apply in the preparation of consolidated
financial statements also apply in the application of the equity method. In
particular, in the application of the equity method:

l an owners’ equity analysis is used as basic calculation; l where necessary,

individual assets and liabilities of the associate are revalued on the
acquisition date;

l the excess of the cost of the investment over the investor’s share in the fair
value of the net assets of the associate on the acquisition date is recognised
as goodwill.

It is however not recognised as a separate asset, but is rather reflected in the

cost of the investment. Goodwill is therefore effectively included in the
carrying amount of the investment;
l the excess of the investor’s share in the fair value of the net assets of the
associate over the cost of the investment on the acquisition date is
recognised as a gain from a bargain purchase. This is done by taking this
gain from a bargain purchase into 65

Chapter 11

account in calculating the share of profit of associate in the period in which

the investment is acquired; and

l unrealised profits or losses on intragroup transactions are eliminated.

1 Goodwill and gain from a bargain purchase on acquisition Where the

purchase price of the shares in an associate exceeds the portion of the
identifiable net assets acquired at fair value, and this is not attributable to a
particular asset(s), it is recorded as goodwill in accordance with IFRS 3
Business Combinations. Conversely, if the portion of identifiable net assets
at fair value exceeds the purchase price of shares in the associate, a gain
from a bargain purchase at acquisition will be recognised.

Goodwill that relates to an associate is included in the carrying amount of

the investment, and is not amortised. As the goodwill is an integral part of
the investment, it cannot be recognised separately, nor assessed separately
for the purposes of recognising impairment. Instead, the entire carrying
amount of the investment should be tested, if there are indications of
impairment.

A gain from a bargain purchase on acquisition is recognised in the profit

or loss section of the statement of profit or loss and other comprehensive
income as part of the share of profit from the associate. The initial
investment is increased by the gain from a bargain purchase at acquisition to
equal the entity’s share of the investee’s net asset value on the date of
acquisition.

Fair value adjustments at acquisition

All the identifiable assets and liabilities of an associate should be measured

at fair value at the date of acquisition (similar to the acquisition of a
subsidiary). If the fair values differ from the carrying amounts, fair value
adjustments will have to be made. These fair value adjustments affect the
carrying amount of assets and liabilities at the acquisition date and
consequentially the amount of goodwill (or gain from a bargain purchase)
recognised.

When fair value adjustments are recognised at acquisition date, the

investee’s profits after acquisition date may need to be adjusted, for
example, additional depreciation may need to be recognised or a profit on
the sale of an asset may need to be adjusted.

2 Other comprehensive income

Not all changes in equity of an associate or joint venture are recognised in

profit or loss.

Some changes, for example revaluations of property, plant and equipment, as

well as fair value adjustments on financial assets subsequently measured at
fair value through other comprehensive income, are recognised in other
comprehensive income. The entity must recognise its share of these changes
in other comprehensive income in its own statement of profit or loss and
other comprehensive income (to the extent that it has not been recognised at
date of acquisition). They must be presented in the line-item share of other
comprehensive income of associate in the consolidated statement of profit
or loss and other comprehensive income (IAS 28.27).

3 Contribution of a non-monetary asset

When an investor contributes a non-monetary asset to an associate in

exchange for an equity interest in that entity, the profit or loss from this
contribution is recognised in the investor’s financial statements only to the
extent of the other investors’ interests in the 66

Investments in associates and joint ventures associate. However, if the

contribution lacks commercial substance and no other assets have been
received, no profit or loss is recognised (IAS 28.30).

When an investor receives, in exchange for its own non-monetary asset, a

monetary or dissimilar non-monetary asset over and above the equity interest
in the associate, the entity will recognise in full in profit or loss the portion
of the gain or loss on the non-monetary contribution relating to those assets
(IAS 28.31).

Example 11.1a

Application of the equity method

STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd

A Ltd

Group

Profit

188 000

100 000

Dividends received from A Ltd

12 000

Profit before tax

200 000

100 000

Income tax expense

(94 000)

(50 000)

PROFIT FOR THE YEAR

106 000

50 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R106 000

R50 000

Total comprehensive income attributable to:

Owners of the parent

91 000

50 000

Non-controlling interests

15 000

R106 000

R50 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained
earnings

P Ltd

A Ltd

Group

Balance at 1 January 20.17

79 000

70 000

Changes in equity for 20.17

Dividends

(50 000)

(30 000)

Total comprehensive income for the year:

Profit for the year

91 000

50 000

Balance at 31 December 20.17

R120 000

R90 000

67

Chapter 11
Additional information

1 On 1 January 20.12, P Ltd acquired a 40% equity interest in A Ltd for R84
000.

Since the acquisition date, P Ltd has exercised significant influence over the
financial and operating decisions of A Ltd. At the date of the acquisition of
the 40%

equity interest in A Ltd, A Ltd had share capital of R195 000. At that stage,
the reserves of A Ltd consisted of retained earnings of R15 000.

2 In the above draft consolidated statement of profit or loss and other

comprehensive income and draft consolidated statements of changes in
equity, the results of A Ltd are accounted for according to the cost method.

Solution 11.1a

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Profit

188 000

Share of profit of associate

20 000

Profit before tax

208 000

Income tax expense (P)

(94 000)

PROFIT FOR THE YEAR

114 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R114 000

Total comprehensive income attributable to:

Owners of the parent

99 000

Non-controlling interests

15 000

R114 000

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Balance at 1 January 20.17 (79 000(P) + 22 000(A))

101 000

Changes in equity for 20.17

Dividends (50
000)

Total comprehensive income for the year:

Profit for the year

99 000

Balance at 31 December 20.17 (Test: 120 000(P) + 30 000(A)) R150 000

68

Investments in associates and joint ventures

Comment

The investment in the associate will appear in the consolidated statement of

financial position at an amount of R114 000 (84 000 + 30 000) at 31
December 20.17.

Calculations

C1 Analysis of owners’ equitty of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition (01/01/20.12)

Share
capital

195 000

78 000

Retained earnings

15 000

6 000

210 000

84 000

Investment in A Ltd

(84 000)

ii Since acquisition

• To beginning of current year (20.12 – 20.16)

Retained earnings (70 000 – 15 000)

55 000

22 000

• Current year (20.17)

Profit

for the year

50 000
20 000

Dividends

(30 000)

(12 000)

R285 000

R30 000

C2 Pro forma consolidation journal entries

Dr

Cr

J1 Investment in A Ltd (SFP)

42 000

Share of profit of associate (P/L)

20 000

Retained earnings – Beginning of year (SCE)

22 000

J2 Dividend income (P/L)

12 000

Investment in A Ltd (SFP)

12 000

Example 11.1b

Fair value adjustment at acquisition date

Assume the same information as in example 11.1a. All the assets and
liabilities of A Ltd were fairly valued on 1 January 20.12, except for
machinery that was undervalued with R25 000 (after taking into account
28% tax). The machinery had a remaining useful life of eight years.

69

Chapter 11

Solution 11.1b

Calculations

C1 Analysis of owners’ equitty of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition (01/01/20.12)

Share

capital
195 000

78 000

Retained earnings

15 000

6 000

Revaluation surplus (machinery)

25 000

10 000

235 000

94 000

Investment in A Ltd

(84 000)

Gain

from a bargain purchase

10 000

ii Since acquisition

• To beginning of current year (20.12–20.16)

Retained earnings

(70 000 – 15 000 – (25 000/8 × 5)(depreciation))

39 375

15 750

• Current year (20.17)

Profit

for the year (50 000 – (25 000/8))

46 875

18 750

Dividends

(30 000)

(12 000)

R291 250

R22 500

C2 Pro forma consolidation journal entries

Dr

Cr

J1 Investment in A Ltd (SFP)

10 000

Retained earnings – Beginning of year (SCE)

10 000

J2 Investment in A Ltd (SFP)

34 500

Share of profit of associate (P/L)

18 750

Retained earnings – Beginning of year (SCE)

15 750

J3 Dividend income (P/L)

12 000

Investment in A Ltd (SFP)

12 000

Comment

The gain from a bargain purchase was recognised in profit or loss in 20.12
and would therefor impact on the opening balance of retained earnings in
20.17.

The investment in the associate will appear in

n the consolidated statement of financial

position at an amount of R116 500 (84 000 + 10 000 + 22 500) at 31

December 20.17.

70

Investments in associates and joint ventures 4 Treatment of the reserves of

an associate
l Transfers to and from reserves via the statement of changes in equity
of the associate

If a subsidiary makes a transfer to a reserve in the statement of changes in

equity during the current year, it is customary to transfer the portion of the
transfer attributable to the shareholding of the investor to the specific reserve
in the consolidated statement of changes in equity. If an associate makes a
transfer to a reserve, the transfer is treated in a manner similar to transfers
made by subsidiaries. This transfer reflects the fact that the investor
influences the policy and operating decisions of the associate.

l Revaluation of the assets of an associate since acquisition If the assets of

an associate are revalued after the acquisition of the investment, the
attributable portion of the revaluation surplus that is created must be
recognised within other comprehensive income in the consolidated
statements of the investor, and the carrying amount of the investment must
be increased by the amount of the investor’s share in the revaluation surplus
of the associate. The portion of the revaluation that has already been taken
into account in the investor’s original cost of the investment is not taken into
consideration.

Any surplus that was paid on the acquisition date must, as far as possible, be
allocated to the assets of the associate on the date of acquisition. If a
depreciable asset was revalued in this manner, the accompanying adjustment
to the depreciation expense must be set off in the calculation of the share of
profit of the associate. The above treatment is in accordance with the basic
viewpoint that the consolidation process and the equity method are based on
the same procedures and principles.

Example 11.2

Revaluation surplus of an associate

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

P Ltd

A Ltd
Group

ASSETS

Property, plant and equipment

250 000

150 000

Investment in A Ltd (40 000 shares at cost)

50 000

Inventories

350 000

140 000

Total assets

R650 000

R290 000

EQUITY AND LIABILITIES

Share capital (250 000/100 000 shares)

250 000

100 000

Retained earnings

300 000
120 000

Other components of equity (revaluation surplus)

– 30

000

Non-controlling interests

50 000

Deferred tax liability

– 20

000

Long-term loans

50 000

20 000

Total equity and liabilities

R650 000

R290 000

71

Chapter 11

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd

A Ltd

Group

Profit

378 000

150 000

Dividends received

4 000

Profit before tax

382 000

150 000

Income tax expense

(152 000)

(60 000)

PROFIT FOR THE YEAR

230 000

90 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation of land

30 000

Other comprehensive income for the year, net of tax

30 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R230 000

R120 000

Profit attributable to:

Owners of the parent

215 000

90 000

Non-controlling interests

15 000

R230 000

R90 000

Total comprehensive income attributable to:

Owners of the parent

215 000

120 000

Non-controlling interests

15 000

R230 000

R120 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

P Ltd

A Ltd

Group

Balance at 1 January 20.17

100 000

40 000

Changes in equity for 20.17

Dividends

(15 000)
(10 000)

Total comprehensive income for the year:

Profit for the year

215 000

90 000

Balance at 31 December 20.17

R300 000

R120 000

Additional information

1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd when the retained earnings of A Ltd amounted to R10 000. Since that
date, P Ltd exercises significant influence over the financial and operating
policy decisions of A Ltd.

2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the

land was revalued.

72

Investments in associates and joint ventures Solution 11.2

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT

31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P)

250 000

Investment in associate (50 000 + 56 000) 106

000

356 000

Current assets

Inventories (P)

350 000

Total assets R706

000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

250 000

Retained earnings 344

000

Other components of equity (revaluation surplus)

12 000

606 000

Non-controlling interests

50 000
Total equity

656 000

Non-current liabilities

Long-term loans

50 000

Total equity and liabilities R706

000

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31

DECEMBER 20.17

Profit (P)

378 000

Share of profit of associate

36 000

Profit before tax

414 000

Income tax expense (P)

(152 000)

PROFIT FOR THE YEAR

262 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Share of other comprehensive income of associate

12 000

Other comprehensive income for the year, net of tax

12 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R274 000

Profit attributable to:

Owners of the parent

247 000

Non-controlling interests

15 000

R262 000

Total comprehensive income attributable to:

Owners of the parent

259 000

Non-controlling interests

15 000
R274 000

73

Chapter 11

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revalu-

Non-

Share

Retained

Total

tion

Total

controlling

capital

earnings

equity

surplus

interests

Balance at
1 Jan 20.17

250 000

* 112 000

362 000

35 000

397 000

Changes in

equity for

20.17

Dividends

– (15

000)

– (15

000)

– (15

000)

Total

comprehensive

income for the

year

Profit for the year

– 247

000

247 000

15 000

262 000

Other

comprehensive

income

12 000

12 000

12 000

Balance at

31 Dec 20.17

R250 000 @ R344 000

R12 000 R606 000

R50 000 R656 000

100 000(P) + 12 000 = 112 000

@ Test: 300 000(P) + 44 000(A) = 344 000

Calculations

C1 Analysis of owners’ equity of A Ltd

Total

P Ltd 40%

At

Since

i At acquisition

Share capital

100 000

40 000

Retained earnings

10 000

4 000

110 000

44 000
Investment in A Ltd

(50 000)

Goodwill

(6

000)

ii Since acquisition

• To beginning of current year

Retained

earnings

(40 000 – 10 000)

30 000

12 000

• Current year

Profit for the year

90 000

36 000

Dividends

(10 000)
(4 000)

Revaluation surplus

30 000

12 000

R250 000

R12 000 RS

R44 000 RE

74

Investments in associates and joint ventures C2 Pro forma consolidation

journal entry

Dr

Cr

J1

Investment in A Ltd (SFP)(12 000 + 44 000) 56

000

Share of profit of associate (P/L)

36 000

Share of other comprehensive income of associate

(OCI)
12 000

Retained

earnings

– Beginning of year (SCE)

12 000

Dividend income (P/L)

4 000

5 Cumulative preference shares

When applying the equity method, only the income attributable to equity or
ordinary shares is included. Preference shares can be classified either as
equity or as a financial liability. If an associate has issued cumulative
preference shares which are classified as equity, the current dividend payable
on these shares should be deducted when determining the income or loss
attributable to the ordinary shareholders, irrespective of whether such
dividends have been declared. If the preference shares are classified as a
financial liability, the dividends are regarded as interest and would therefore
have already been recognised as an expense in the calculation of the
associate’s profit for the year (IAS 28.37).

6 Reporting dates/Accounting policies

l Non-coterminous year ends

The investor uses the most recent available financial statements of the
associate in applying the equity method; they are usually drawn up to the
same date as the financial statements of the investor.

When financial statements with a different reporting date are used,

adjustments are made for the effects of any significant events or transactions
that occur between the date of the associate’s financial statements and the
date of the investor’s financial statements. The difference may not be more
than three months. When the difference is more than three months, the
associate prepares, for the use of the investor, statements as at the same date
as the financial statements of the investor (IAS 28.33–34).

l Different accounting policies

The investor’s financial statements are usually prepared using uniform

accounting policies for like transactions and events in similar circumstances.
In cases where an associate uses accounting policies other than those
adopted by the investor for like transactions and events in similar
circumstances, appropriate adjustments have to be made to the associate’s
financial statements when they are used by the investor in applying the
equity method (IAS 28.35).

7 Losses of an associate

If an associate suffers a loss during a financial year, the carrying amount of

the investment is reduced according to the equity method by the investor’s
attributable portion of the loss. If the attributable portion of the loss exceeds
the carrying amount of the investment, the write-off must be limited to the
investor’s net investment in the associate.

75

Chapter 11

The investor’s net investment in the associate includes the carrying amount
of the investment in equity and other long-term interests of the associate
such as loans to the associate. However, items for which settlement has been
planned and will take place in the foreseeable future, for instance long-term
loans for which security has been provided and trade payables, are not
included.

If the associate consequently makes a profit, the equity method should only
be resumed as soon as the investor’s attributable portion of the profit
exceeds the losses that were not previously recognised.

If the investor has guaranteed certain of the company’s debts, the possibility
exists that a greater loss may be suffered. In this case, an additional
provision should be created for the amount of the loss. (IAS 28.38–39).

Example 11.3

Attributable loss of an associate

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

Ltd

A Ltd

Group

ASSETS

Property, plant and equipment

440 000

35 000

Investment in A Ltd – 40 000 ordinary shares at cost

50 000

– 10 000 preference shares at cost

10 000

Inventories

300 000
150 000

Total assets

R800 000

R185 000

EQUITY AND LIABILITIES

Share capital (400 000/100 000 shares)

400 000

100 000

6% non-redeemable preference shares (20 000 shares)

– 20

000

Retained earnings

300 000

65 000

Non-controlling interests

100 000

Total equity and liabilites

R800 000

R185 000
STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd

A Ltd

Group

PROFIT FOR THE YEAR

300 000

200 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R300 000

R200 000

Total comprehensive income attributable to:

Owners of the parent

260 000

200 000

Non-controlling interests

40 000

R300 000
R200 000

76

Investments in associates and joint ventures EXTRACT FROM

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Ltd

A Ltd

Group

Balance at 1 January 20.17

140 000

(135 000)

Changes in equity for 20.17

Dividends (100

000)

Total comprehensive income for the year:

Profit for the year

260 000
200 000

Balance at 31 December 20.17

R300 000

R65 000

Additional information

On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A Ltd
when the retained earnings of A Ltd amounted to R25 000. On the same
date, P Ltd also acquired a 50% interest in the 6% non-redeemable non-
cumulative preference share capital at R10 000. Since that date, P Ltd has
exercised significant influence over the financial and operating policy
decisions of A Ltd.

Solution 11.3

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P)

440 000

Investment in associate (50 000 + 16 000 + 10 000) 76

000

516 000

Current assets
Inventories (P)

300 000

Total assets R816

000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

400 000

Retained earnings

316 000

716 000

Non-controlling interests 100

000

Total equity

816 000

Total equity and liabilities R816

000

77
Chapter 11

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Profit (P)

300 000

Share of profit of associate

76 000

PROFIT FOR THE YEAR

376 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R376 000

Total comprehensive income attributable to:

Owners of the parent

336 000

Non-controlling interests

40 000

R376 000

P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Balance at 1 January 20.17 (140 000(P) – 60 000(A)) 80 000

Changes in equity for 20.17

Dividends

(100 000)

Total comprehensive income for the year:

Profit for the year

336 000

Balance at 31 December 20.17 (Test: 300 000(P) + 16 0

000(A))

R316 000

Comment

The carrying amount of the investment is compiled as follows:

l Cost

50 000

l Cumulative since acquisition equity

16 000
• Retained earnings up to beginning of the current year

(60 000)

• Profit for the current year

76 000

l Investment in preference shares

10 000

R76 000

78

Investments in associates and joint ventures

Calculations

C1 Analysis of owners’ equitty of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition

Share

capital
100 000

40 000

Retained earnings

25 000

10 000

125 000

50 000

Investment in A Ltd

(50 000)

ii Since acquisition

• To beginning of current year:

Retained earnings (135 000 + 25 000)

(160 000)

(64 000)

Correction

(4 000)

4 000

• Current year

Profit
for the year

200 000

80 000

Correction

4 000

(4 000)

R165 000

R16 000

Comment

Take note that P Ltd’s attributable losses up to the beginning of the current
year are

limited to the net investment in A Ltd, namely the cost of R50 000 plus the
investment in preference shares of R10 000. The surplus of R4 000 is
analysed in the “At” column for control purposes.

In the current year, the first R4 000 of the profit is employed against the R4
000

attributable losses that were not recognised in previous years.

C2 Pro forma consolidation journal entries

Dr

Cr

R
J1 Retained earnings – Beginning of the year (SCE)

60 000

Investment (ordinary shares) (SFP

P)

50 000

Investment (preference shares) (SFP)

10 000

J2 Investment (ordinary shares) (SFP)

66 000

Investment (preference shares) (SFP)

10 000

Share of profit of associate (P/L)

76 000

8 Intragroup transactions

Unrealised intragroup profits may arise as a result of:

l sales by the investor to the associate, or

l sales by the associate to the investor.

IAS 28.28 requires the elimination of unrealised profits and losses on

intragroup transactions where an associate is one of the parties (similar
manner to that of the elimination of unrealised profits on intragrroup
transactions where a subsidiary is one of 79

Chapter 11
the parties). The difference is however that only the percentage of interest in
the associate must be eliminated. Where an associate is accounted for by use
of the equity method, unrealised profits and losses arising from transactions
between an investor (or its consolidated subsidiaries) and associates should
be eliminated to the extent of the investor’s interest in the associate.

Balances such as receivables, payables, loans to and loans from associates

are not eliminated as the individual line items of the associate are not
reflected in the equity accounted financial statements. Income and expense
items such as interest received, interest paid and management fees items are
also not eliminated.

Where an associate is accounted for by using the equity method, unrealised

profits and losses resulting from upstream and downstream transactions
between an entity (or its consolidated subsidiaries) and associates should be
eliminated to the extent of the entity’s interest in the associate (IAS 28.28).
However, when downstream transactions provide evidence of an impairment
of the transferred asset, the unrealised losses

should be recognised in full by the investor. When upstream transactions

provide evidence of a reduction of an impairment of the transferred asset, the
investor shall recognise its share in the losses (IAS 28.29).

Elimination of unrealised profit in inventories

Example 11.4

(investor company sells to associate)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

Ltd

A Ltd

Group
ASSETS

Property, plant and equipment

250 000

150 000

Investment in A Ltd (40 000 shares at cost)

54 000

Inventories

346 000

140 000

Total assets

R650 000

R290 000

EQUITY AND LIABILITIES

Share capital (250 000/100 000 shares)

250 000

100 000

Retained earnings

300 000

140 000
Other components of equity (revaluation surplus)

– 50

000

Non-controlling interests

50 000

Long-term loans

50 000

Total equity and liabilities

R650 000

R290 000

80

Investments in associates and joint ventures STATEMENTS OF PROFIT

OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd

A Ltd

Group

Revenue
800 000

320 000

Cost of sales

(400 000)

(160 000)

Gross profit

400 000

160 000

Other income (dividend received)

4 000

Other expenses

(22 000)

(10 000)

Profit before tax

382 000

150 000

Income tax expense

(152 000)

(60 000)
PROFIT FOR THE YEAR

230 000

90 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation of land

50 000

Other comprehensive income for the year, net of tax

50 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R230 000

R140 000

Profit attributable to:

Owners of the parent

215 000

90 000

Non-controlling interests

15 000
–

R230 000

R90 000

Total comprehensive income attributable to:

Owners of the parent

215 000

140 000

Non-controlling interests

15 000

R230 000

R140 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Ltd

A Ltd

Group
Balance at 1 January 20.17

100 000

60 000

Changes in equity for 20.17

Dividends

(15 000)

(10 000)

Total comprehensive income for the year:

Profit for the year

215 000

90 000

Balance at 31 December 20.17

R300 000

R140 000

Additional information

1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd when the retained earnings of A Ltd amounted to R10 000. At that stage,
all the assets and liabilities of A Ltd were deemed to be fairly valued. Since
1 January 20.13, P Ltd has been exercising significant influence over the
financial and operating policy decisions of A Ltd.

81

Chapter 11
2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the
land was revalued.

3 Since 1 January 20.16, P Ltd has been selling inventories to A Ltd at a

profit of 50%

on cost. Included in the inventories of A Ltd on 31 December 20.16 is R15

000 in respect of such inventories at the cost for A Ltd. Included in the
inventories of A Ltd on 31 December 20.17 is R30 000 in respect of such
inventories at the cost for A Ltd. Total sales of P Ltd to A Ltd amounted to
R100 000.

4 Assume a tax rate of 28%.

Solution 11.4

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P)

250 000

Investment in associate (54 000 + 72 000 – 2 000(J2) + 2 000(J3) – 4

000(J5)) 122

000

Deferred tax (560(J2) – 560(J4) + 1 120(J6)) 1

120

373 120
Current assets

Inventories (P)

346 000

Total assets R719

120

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

250 000

Retained earnings

349 120

Other components of equity (revaluation surplus)

20 000

619 120

Non-controlling interests (P)

50 000

Total equity

669 120

Non-current liabilities

Long-term loans
50 000

Total equity and liabilities R719

120

82

Investments in associates and joint ventures P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (800 000(P) + 6 000(J3) – 12 000(J5))

794 000

Cost of sales (400 000(P) + 4 000(J3) – 8 000(J5)) (396

000)

Gross profit

398 000

Other expenses (P)

(22 000)

Share of profit of associate

36 000

Profit before tax

412 000
Income tax expense (152 000(P) + 560(J4) – 1 120(J6)) (151

440)

PROFIT FOR THE YEAR

260 560

Other comprehensive income

Items that will not be reclassified to profit or loss

Share of other comprehensive income of associate

20 000

Other comprehensive income for the year, net of tax

20 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R280 560

Profit attributable to:

Owners of the parent

245 560

Non-controlling interests

15 000

R260 560

Total comprehensive income attributable to:

Owners of the parent

265 560

Non-controlling interests

15 000

R280 560

83

Chapter 11

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-

Revalu-

Share

Retained

control-

Total

ation

Total

capital
earnings

ling

equity

surplus

interests

Balance at

1 Jan 20.17

250 000

* 118 560

368 560

35 000

403 560

Changes in

equity for

20.17

Total

comprehensive

income for the

year:
Profit for the year

245 560

245 560

15 000

260 560

Other

comprehensive

income

– 20

000 20 000

20 000

Dividends

(15 000)

(15 000)
–

(15 000)

Balance at

31 Dec 20.17

R250 000

@R349 120 R20 000 R619 120

R50 000 R669 120

* 100

000 + 20 000 – 1 440(J2) = 118 560

@ Test: 300 000(P) + 52 000(A) – 1 440(J2) + 6 000(J3)

– 4 000(J3) – 560(J4) – 12 000(J5) +

8 000(J5) +1 120(J6) = 349 120

Comment

The carrying amount of the investment in the associate is compiled as

follows:

l Cost

54 000

l Cumulative since acquisition equity

72 000

• Retained earnings up to beginning of the current year

20 000
• Profit for the current year

32 000

• Revaluation surplus

20 000

l Unrealised profit eliminated in closing inventories

(4 000)

R122 000

84

Investments in associates and joint ventures Calculations

C1 Analysis of owners’ equity of A Ltd

Total

P Ltd 40%

At

Since

i At acquisition

Share capital

100 000

40 000

Retained earnings

10 000
4 000

110 000

44 000

Investment in A Ltd

(54 000)

Goodwill

(R10

000)

ii Since acquisition

• To beginning of current year

Retained

earnings (60 000 – 10 000)

50 000

20 000

• Current year

Profit for the year

90 000

36 000
Dividends

(10 000)

(4 000)

Revaluation surplus

50 000

20 000

R290 000

R52 000 RE

R20 000 RS

C2 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in A Ltd (SFP)

72 000

Revaluation surplus (OCI)

20 000

Share of profit of associate (P/L)

36 000

Retained

earnings

– Beginning of the year (SCE)

20 000

Dividend income (P/L)

4 000

Bringing to book of associate

J2

Retained earnings – Beginning of year (SCE)

1 440

Deferred tax (SFP) (2 000 × 28%)

560

Investment in associate (SFP)(15 000 × 50/150 × 40%) 2

000

Correction of retained earnings at the beginning

of the year

J3

Cost of sales (P/L)(15 000 × 100/150 × 40%)) 4

000
Investment in associate (SFP)(15 000 × 50/150 × 40%)

2 000

Revenue

(P/L)(15 000 × 40%)

6 000

Realisation of unrealised profit in opening

inventories of A Ltd

J4

Income tax expense (P/L)(2 000 × 28%) 560

Deferred tax

(SFP)

560

Tax implication of realisation of unrealised profit

in opening inventories of A Ltd

continued

85

Chapter 11

Dr

Cr

R
R

J5 Revenue

(P/L)(30 000 × 40%) 12

000

Cost of sales (P/L)(30 000 × 100/150 × 40%)

8 000

Investment in associate (SFP) [(30 000 – 20 000) × 40%] 4

000

Elimination of unrealised profit in closing

inventories of A Ltd

J6

Deferred tax (SFP)

1 120

Income tax expense (P/L)(4 000 × 28%)

1 120

Tax implication of unrealised profit in closing

inventories of A Ltd

Elimination of unrealised profit in inventories

Example 11.5

(associate sold to investor company)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
20.17

Ltd

A Ltd

Group

ASSETS

Property, plant and equipment

250 000

150 000

Investment in A Ltd (40 000 shares at cost)

54 000

Inventories

346 000

140 000

Total assets

R650 000

R290 000

EQUITY AND LIABILITIES

Share capital (250 000/100 000 shares)

250 000

100 000

Retained earnings

300 000

140 000

Other components of equity (revaluation surplus)

– 50

000

Non-controlling interests

50 000

Long-term loan

50 000

Total equity and liabilities

R650 000

R290 000

86

Investments in associates and joint ventures STATEMENTS OF PROFIT

OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P

Ltd

A Ltd

Group

Revenue

800 000

320 000

Cost of sales

(400 000)

(160 000)

Gross profit

400 000

160 000

Other income (dividends received)

4 000

Other expenses

(22 000)

(10 000)

Profit before tax

382 000

150 000

Income tax expense

(152 000)

(60 000)

PROFIT FOR THE YEAR

230 000

90 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation of land

50 000

Other comprehensive income for the year, net of tax

50 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R230 000

R140 000

Profit attributable to:

Owners of the parent

215 000

90 000

Non-controlling interests

15 000

R230 000

R90 000

Total comprehensive income attributable to:

Owners of the parent

215 000

140 000

Non-controlling interests

15 000

R230 000

R140 000

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained
earnings

P Ltd

A Ltd

Group

Balance at 1 January 20.17

100 000

60 000

Changes in equity for 20.17

Dividends

(15 000)

(10 000)

Total comprehensive income for the year:

Profit for the year

215 000

90 000

Balance at 31 December 20.17

R300 000

R140 000

87

Chapter 11
Additional information

1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd when the retained earnings of A Ltd amounted to R10 000. At that stage,
all the assets and liabilities of A Ltd were deemed to be fairly valued. Since
1 January 20.13, P Ltd has been exercising significant influence over the
financial and operating policy decisions of A Ltd.

2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the

land was revalued.

3 Since 1 January 20.16, A Ltd has been selling inventories to P Ltd at a

profit of 50%

on cost. Included in P Ltd’s inventories on 31 December 20.16 is R15 000 in

respect of such inventories at the cost for P Ltd. Included in the inventories
of P Ltd on 31/12/20.17 is R30 000 in respect of such inventories at the cost
for P Ltd. Total sales of A Ltd to P Ltd amounted to R100 000.

4 Assume a tax rate of 28%.

Solution 11.5

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P)

250 000

Investment in associate (54 000 + 72 000) 126

000

Deferred tax (J5)

1 120

377 120

Current assets

Inventories (346 000(H – 4 000(J4))

342 000

Total assets R719

120

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

250 000

Retained earnings

349 120

Other components of equity (revaluation surplus)

20 000

619 120

Non-controlling interests 50

000
Total equity

669 120

Non-current liabilities

Long-term loans

50 000

Total equity and liabilities R719

120

88

Investments in associates and joint ventures P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (P)

800 000

Cost of sales (P)

(400 000)

Gross profit

400 000

Other expenses (P)

(22 000)
Share of profit of associate

(36 000(J1) + 2 000(J2) – 560(J3) – 4 000(J4) + 1 120(J5)) 34 560

Profit before tax

412 560

Income tax expense (P)

(152 000)

PROFIT FOR THE YEAR

260 560

Other comprehensive income

Items that will not be reclassified to profit or loss

Share of other comprehensive income of associate

20 000

Other comprehensive income for the year, net of tax

20 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R280 560

Profit attributable to:

Owners of the parent

245 560

Non-controlling interests
15 000

R260 560

Total comprehensive income attributable to:

Owners of the parent

265 560

Non-controlling interests

15 000

R280 560

89

Chapter 11

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Reval-

Non-

Share

Retained

Total
uation

Total

controlling

capital

earnings

equity

surplus

interests

Balance at

1 Jan 20.17

250 000

* 118 560

368 560

35 000

403 560

Changes in

equity for

20.17

Dividends
–

(15 000)

(15 000)

(15 000)

Total

comprehen-

sive income for

the year:

Profit for the year

245 560

245 560

15 000

260 560

Other

comprehen-

sive income
–

– 20

000 20 000

20 000

Balance at

31 Dec 20.17

R250 000

@R349 120 R20 000 R619 120

R50 000 R669 120

* 100

000 + 20 000 – 2 000(J2) + 560(J3) = 118 560

@ 300 000(P) + 52 000(A) – 4 000(J4) + 1 120(J5) = 349 120

Comment

The carrying amount of the investment in the associate is compiled as

follows: l Cost

54 000

l Cumulative since acquisition equity

72 000

• Retained earnings up to beginning of the current year

20 000
• Profit for the current year

32 000

• Revaluation surplus

20 000

R126 000

90

Investments in associates and joint ventures Calculations

C1 Analysis of owners’ equity of A Ltd

Total

P Ltd 40%

At

Since

i At acquisition

Share capital

100 000

40 000

Retained earnings

10 000

4 000

110 000
44 000

Investment in A Ltd

(54 000)

Goodwill

(R10 000)

ii Since acquisition

• To beginning of current year

Retained earnings (60 000 – 10 000)

50 000

20 000

• Current year

Profit for the year

90 000

36 000

Dividends

(10 000)

(4 000)

Revaluation surplus
50 000

20 000

R290 000

R52 000 RE

R20 000 RS

C2 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in A Ltd (SFP)

72 000

Retained

earnings – Beginning of the year (SCE)

20 000

Revaluation surplus (OCI)

20 000

Share of profit of associate (P/L)

36 000
Dividend income (P/L)

4 000

Bringing to book of associate

J2

Retained earnings – Beginning of year (SCE)

2 000

Share of profit of associate (P/L)

2 000

Elimination of unrealised profit in opening

inventories of P Ltd (15 000 × 50/150 × 40%)

J3

Share of profit of associate (P/L)

560

Retained

earnings

– Beginning of year (SCE)

560

Tax implication of unrealised profit in opening

inventories of P Ltd (2 000 × 28%)

J4
Share of profit of associate (P/L)

4 000

Inventories (SFP)

4 000

Elimination of unrealised profit in closing

inventories of P Ltd (30 000 × 50/150 × 40%)

J5

Deferred tax (SFP)

1 120

Share of profit of associate (P/L)

1 120

Tax implication of unrealised profit in closing

inventories of P Ltd (4 000 × 28%)

91

Chapter 11

Elimination of unrealised profit in equipment

Example 11.6

(investor sells to associate)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

P
Ltd

A Ltd

Group

ASSETS

Property, plant and equipment

250 000

150 000

Investment in A Ltd (40 000 shares at cost)

54 000

Inventories

346 000

140 000

Total assets

R650 000

R290 000

EQUITY AND LIABILITIES

Share capital (250 000/100 000 shares)

250 000

100 000
Retained earnings

300 000

140 000

Other components of equity (revaluation surplus)

– 50

000

Non-controlling interests

50 000

Long-term loans

50 000

Total equity and liabilities

R650 000

R290 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd

A Ltd
Group

Revenue

800 000

320 000

Cost of sales

(400 000)

(160 000)

Gross profit

400 000

160 000

Other income (dividend received)

4 000

Other expenses

(22 000)

(10 000)

Profit before tax

382 000

150 000

Income tax expense

(152 000)

(60 000)

PROFIT FOR THE YEAR

230 000

90 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation of land

50 000

Other comprehensive income for the year, net of tax

50 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R230 000

R140 000

Profit attributable to:

Owners of the parent

215 000

90 000
Non-controlling interests

15 000

R230 000

R90 000

Total comprehensive income attributable to:

Owners of the parent

215 000

140 000

Non-controlling interests

15 000

R230 000

R140 000

92

Investments in associates and joint ventures EXTRACT FROM

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

P
Ltd

A Ltd

Group

Balance at 1 January 20.17

100 000

60 000

Changes in equity for 20.17

Dividends

(15 000)

(10 000)

Total comprehensive income for the year:

Profit for the year

215 000

90 000

Balance at 31 December 20.17

R300 000

R140 000

Additional information

1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd when the retained earnings of A Ltd amounted to R10 000. At that stage,
all the assets and liabilities of A Ltd were deemed to be fairly valued. Since
1 January 20.13, P Ltd has been exercising significant influence over the
financial and operating policy decisions of A Ltd.

2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the

land was revalued.

3 On 1 January 20.15, P Ltd sold equipment to A Ltd at a profit of 50% on

cost (for

Ltd). The equipment is still included in the equipment of A Ltd on

31 December 20.17. Depreciation is provided at 20% per annum on the cost

of the equipment. The cost of the equipment in the books of A Ltd was R15
000.

4 Assume a tax rate of 28%.

93

Chapter 11

Solution 11.6

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P)

250 000

Investment in associate (54 000 + 72 000 – 1 200(J2) + 400(J3)) 125 200

Deferred tax (336(J2) – 112(J4)) 224

375 424

Current assets

Inventories (P)

346 000

Total assets R721

424

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

250 000

Retained earnings

351 424

Other components of equity (revaluation surplus)

20 000

621 424

Non-controlling interests 50

000

Total equity

671 424
Non-current liabilities

Long-term loans

50 000

Total equity and liabilities R721

424

94

Investments in associates and joint ventures P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (P)

800 000

Cost of sales (P)

(400 000)

Gross profit

400 000

Other expenses (22 000(P) – 400(J3)) (21

600)

Share of profit of associate

36 000
Profit before tax

414 400

Income tax expense (152 000(P) + 112(J4))

(152 112)

PROFIT FOR THE YEAR

262 288

Other comprehensive income

Items that will not be reclassified to profit or loss

Share of other comprehensive income of associate

20 000

Other comprehensive income for the year, net of tax

20 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R282 288

Profit attributable to:

Owners of the parent

247 288

Non-controlling interests

15 000

R262 288
Total comprehensive income attributable to:

Owners of the parent

267 288

Non-controlling interests

15 000

R282 288

95

Chapter 11

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-

Reval-

Share

Retained

control-

Total
uation

Total

capital

earnings

ling

equity

surplus

interests

Balance at

1 Jan 20.17

250 000

* 119 136

– 369

136

35 000 404

136

Changes in

equity for 20.17

Dividends

–
(15 000)

– (15

000)

– (15

000)

Total

comprehensive

income for the

year:

Profit for the year

247 288

– 247

288

15 000 262

288

Other

comprehensive

income

–
– 20

000 20

000

– 20

000

Balance at

31 Dec 20.17

R250 000 @ R351 424 R20

000 R621

424 R50 000 R671 424

* 100

000 + 20 000 – 864(J2) = 119 136

@ 300

000(P) + 52 000(A) – 684(J2) + 400(J3) – 112(J4) = 3

351 424

Comment

The carrying amount of the investment in associate is compiled as follows:

l Cost

54 000

l Cumulative since acquisition equity

72 000

• Retained earnings up to beginning of the current year

20 000

• Profit for the current year

32 000

• Revaluation surplus

20 000

l Unrealised profit included in the closing balance of equipment (800)

R125 200

96

Investments in associates and joint ventures Calculations

C1 Analysis of owners’ equity of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition

Share capital

100 000

40 000
Retained earnings

10 000

4 000

110 000

44 000

Investment in A Ltd

(54 000)

Goodwill

(R10 000)

ii Since acquisition

• To beginning of current year

Retained earnings (60 000 – 10 000)

50 000

20 000

• Current year

Profit for the year

90 000

36 000
Dividends

(10 000)

(4 000)

Revaluation surplus

50 000

20 000

R290 000

R52 000 RE

R20 000 RS

C2 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in A Ltd (SFP)

72 000

Retained

earnings – Beginning of the year (SCE)

20 000
Revaluation surplus (OCI)

20 000

Share of profit of associate (P/L)

36 000

Dividend income (P/L)

4 000

Bringing to book of associate

J2

Retained earnings – Beginning of year (SCE)

(1 200 – 336) 864

Deferred

tax

(SFP)

(1 200 × 28%) 336

Investment in associate (SFP) ((15 000 × 50/150 × 40%

= 2 000) – (2 000 × 20% = 400) – 400)

1 200

Correction of retained earnings at the beginning

of the year in respect of unrealised profit included

in the equipment of A Ltd

J3

Investment in associate (SFP)

400

Depreciation (P/L)

400

Realisation of unrealised profit in the current year

through depreciation

J4

Income tax expense (P/L) (400 × 28%) 112

Deferred tax

(SFP)

112

Tax implication of realisation of unrealised profit

in the current year

97

Chapter 11

Elimination of unrealised profit in equipment

Example 11.7

(associate sells to investor company)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17
P

Ltd

A Ltd

Group

ASSETS

Property, plant and equipment

250 000

150 000

Investment in A Ltd (40 000 shares at cost)

54 000

Inventories

346 000

140 000

Total assets

R650 000

R290 000

EQUITY AND LIABILITIES

Share capital (250 000/100 000 shares)

250 000
100 000

Retained earnings

300 000

140 000

Other components of equity (revaluation surplus)

– 50

000

Non-controlling interests

50 000

Long-term loan

50 000

Total liabilities

R650 000

R290 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd
A Ltd

Group

Revenue

800 000

320 000

Cost of sales

(400 000)

(160 000)

Gross profit

400 000

160 000

Other income (dividend received)

4 000

Other expenses

(22 000)

(10 000)

Profit before tax

382 000

150 000
Income tax expense

(152 000)

(60 000)

PROFIT FOR THE YEAR

230 000

90 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation of land

50 000

Other comprehensive income for the year, net of tax

50 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R230 000

R140 000

Profit attributable to:

Owners of the parent

215 000
90 000

Non-controlling interests

15 000

R230 000

R90 000

Total comprehensive income attributable to:

Owners of the parent

215 000

140 000

Non-controlling interests

15 000

R230 000

R140 000

98

Investments in associates and joint ventures EXTRACT FROM

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings
P

Ltd

A Ltd

Group

Balance at 1 January 20.17

100 000

60 000

Changes in equity for 20.17

Dividends

(15 000)

(10 000)

Total comprehensive income for the year:

Profit for the year

215 000

90 000

Balance at 31 December 20.17

R300 000

R140 000

Additional information

1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd when the retained earnings of A Ltd amounted to R10 000. At that stage,
all the assets and liabilities of A Ltd were deemed to be fairly valued. Since
1 January 20.13, P Ltd has been exercising significant influence over the
financial and operating policy decisions of A Ltd.

2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the

land was revalued.

3 On 1 January 20.15, A Ltd sold equipment to P Ltd at a profit of 50% on

cost (for A

Ltd). The equipment is still included in the equipment of P

Ltd on

31 December 20.17. Depreciation is provided at 20% per annum on the cost

of the equipment. The cost of the equipment to P Ltd was R15 000.

4 Assume a tax rate of 28%.

99

Chapter 11

Solution 11.7

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (250 000 – 1 200(J2) + 400(J3)) 249

200

Investment in associate (54 000 + 72 000) 126

000

Deferred tax (336(J2) – 112(J4)) 224

375 424

Current assets

Inventories (P)

346 000

Total assets R721

424

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

250 000

Retained earnings

351 424

Other components of equity (revaluation surplus)

20 000

621 424

Non-controlling interests 50

000

Total equity
671 424

Non-current liabilities

Long-term loan

50 000

Total equity and liabilities R721

424

100

Investments in associates and joint ventures P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31

DECEMBER 20.17

Revenue

800 000

Cost of sales

(400 000)

Gross profit

400 000

Other expenses

(22 000)

Share of profit of associate (36 000(J1) + 400(J3) – 112(J4)) 36 288

Profit before tax

414 288

Income tax expense

(152 000)

PROFIT FOR THE YEAR

262 288

Other comprehensive income

Items that will not be reclassified to profit or loss

Share of other comprehensive income of associate

20 000

Other comprehensive income for the year, net of tax

20 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R282 288

Profit attributable to:

Owners of the parent

247 288

Non-controlling interests

15 000

R262 288
Total comprehensive income attributable to:

Owners of the parent

267 288

Non-controlling interests

15 000

R282 288

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-

Reval-

Share

Retained

control-

Total

uation

Total

capital

earnings

ling
equity

surplus

interests

Balance at

1 Jan 20.17

250 000

* 119 136

369 136

35 000

404 136

Changes in

equity for 20.17

Dividends

(15 000)

(15 000)

(15 000)
Total

comprehensive

income for the

year:

Profit for the year

247 288

247 288

15 000

262 288

Other

comprehensive

income –

20 000

20 000

20 000

Balance at
31 Dec 20.17

R250 000 # R351 424 R20 000

R621 424

R50 000 R671 424

100 000 + 20 000 – 864(J2) = 119 280

# 300 000(P) + 52 000(A) – 864(J2) + 400(J3) – 112(J4) = 351 424

101

Chapter 11

Comment

The carrying amount of the investment in associate is compiled as follows:

l Cost

54 000

l Cumulative since acquisition equity

72 000

• Retained earnings up to beginning of the current year

20 000

• Profit for the current year

32 000

• Revaluation surplus

20 000

R126 000

Calculations

C1 Analysis of owners’ equitty of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition

Share

capital

100 000

40 000

Retained earnings

10 000

4 000

110 000

44 000
Investment in A Ltd

(54 000)

Goodwill

(R10 000)

ii Since acquisition

• To beginning of current year

Retained earnings

s (60 000 – 10 000)

50 000

20 000

• Current year

Profit

for the year

90 000

36 000

Dividends

(10 000)

(4 000)
Revaluation surplus

50 000

20 000

R290 000

R52 000 RE

R20 000 RR

102

Investments in associates and joint ventures C2 Pro forma consolidation

journal entries

Dr

Cr

J1

Investment in A Ltd (SFP)

72 000

Retained

earnings – Beginning of the year (SCE)

20 000

Revaluation surplus (OCI)

20 000
Share of profit of associate (P/L)

36 000

Dividend income (P/L)

4 000

Bringing to book of associate

J2

Retained earnings – Beginning of year (SCE)(1 200 – 336) 864

Deferred tax (SFP) ((2 000 - 800) × 28%)

336

Equipment – Cost (SFP)(15 000 × 50/150 × 40%)

2 000

Accumulated depreciation on equipment (SFP)

(2 000 × 20% × 2 years)

800

Correction of retained earnings at the beginning

of the year in respect of unrealised profit included

in the equipment of P Ltd

J3

Accumulated depreciation on equipment (SFP)

400
Share of profit of associate (P/L)

400

Realisation of unrealised profit in the current year

through depreciation

J4

Share of profit of associate (P/L) (400 × 28%) 112

Deferred

tax

(SFP)

112

Tax implication of realisation of unrealised profit

in the current year

9 Deferred tax implications as a result of the application of the equity

method Income tax arising from investments in associates is accounted for
in accordance with IAS 12 Income Taxes.

Temporary differences arise when the carrying amount of the investment in

the associate (namely the investor’s portion of the net assets of the investee,
including goodwill) is no longer the same as the tax base (which is often the
cost) thereof. Such differences may arise in various circumstances, for
example: l the existence of undistributed profits of the associate; and l a
reduction in the carrying amount of an investment in an associate to its
recoverable amount (i.e. an impairment loss).

In consolidated financial statements, there may be a difference between the

investment in the associate compared to the amount of the investment in the
separate financial statements of the investor, if the investor carries the
investment in its separate financial statements at cost or a revalued amount.

An entity should recognise a deferred tax liability for all taxable temporary
differences that relate to investments in associates, except to the extent that
both the following conditions have been met:

l the investor can control the timing of the write-back of the temporary
difference; and

l it is probable that the temporary difference will not be written back in the
foreseeable future.

103

Chapter 11

An investment in an associate can be recovered in one of two ways: l the

receipt of dividends from the associate; or

l the sale of the investment in the associate.

Section 10(1)( k) of the Income Tax Act 58 of 1962 stipulates that any
dividend received by or accrued to any person is exempt. The receipt of
dividends from the associate can therefore not lead to taxable temporary
differences.

The sale of an investment in an associate will lead to a capital profit which

will be taxed at the capital gains tax rate. A deferred tax liability will have to
be created and the deferred tax liability must be calculated as the difference
between the carrying amount of the investment in the associate and the tax
base thereof (usually the cost of the investment) multiplied by the capital
gains tax rate. The deferred tax liability should not be created at the normal
tax rate.

An entity should recognise a deferred tax asset for all deductible temporary
differences arising from investments in associates to the extent that, and only
to the extent that, it is probable that:
l the temporary difference will be written back in the foreseeable future; and
l taxable income will be available against which the temporary difference
may be utilised.

In deciding whether a deferred tax asset should be recognised for deductible

temporary differences that bear relation to investments in associates, an
entity considers the guidance set out in IAS 12.

10 Associates in horizontal/vertical groups

Associates in horizontal groups

Where an investor has more than one associate, the results of the associates
are grouped together in the consolidated financial statements.

Example 11.8

Associates in a horizontal group

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

Ltd

A Ltd

Z Ltd

Group

ASSETS

Property, plant and equipment

315 000

150 000
250 000

Investment in A Ltd (40 000 shares at cost)

50 000

Investment in Z Ltd (50 000 shares at cost)

85 200

Inventories

349 800

250 000

200 000

Total assets

R800 000

R400 000

R450 000

EQUITY AND LIABILITIES

Share capital (200 000/100 000/250 000 shares)

200 000
100 000

250 000

Retained earnings

500 000

300 000

200 000

Non-controlling interests

100 000

Total equity and liabilities

R800 000

R400 000

R450 000

104

Investments in associates and joint ventures STATEMENTS OF PROFIT

OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd

A Ltd
Z Ltd

Group

Profit

315 000

255 000

170 000

Other income (dividend received)

16 000

Profit before tax

331 000

255 000

170 000

Income tax expense

(131 000)

(105 000)

(70 000)

PROFIT FOR THE YEAR

200 000
150 000

100 000

TOTAL COMPREHENSIVE INCOME

FOR THE YEAR

R200 000

R150 000

R100 000

Total comprehensive income attributable to:

Owners of the parent

150 000

150 000

100 000

Non-controlling interests

50 000

R200 000

R150 000

R100 000

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

P Ltd

A Ltd

Z Ltd

Group

Balance at 31 December 20.16

400 000

180 000

120 000

Changes in equity for 20.17

Dividends paid: 31 December 20.17

(50 000)

(30 000)

(20 000)

Total comprehensive income for the year:

Profit for the year

150 000

150 000
100 000

Balance at 31 December 20.17

R500 000

R300 000

R200 000

Additional information

1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd, when the retained earnings of A Ltd amounted to R20 000. Since the
acquisition date, P Ltd has been exercising significant influence over the
financial and operating decisions of A Ltd.

2 On 30 June 20.17, P Ltd acquired 20% of the issued share capital of Z Ltd
for R85 200. Since the acquisition date, P Ltd has been exercising significant
influence on the financial and operating decisions of Z Ltd.

3 Z Ltd’s profit for 20.17 accrued evenly, with the exception of R2 000
included in income tax expense, which arose during the second half of the
year.

105

Chapter 11

Solution 11.8

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets
Property, plant and equipment (P)

315 000

Investment in associates (50 000 + 85 200 + 112 000 + 5 800) 253 000

568 000

Current assets

Inventories (P)

349 800

Total assets

R917 800

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

200 000

Retained earnings

617 800

817 800

Non-controlling interests

100 000

Total equity

917 800
Total equity and liabilities

R917 800

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Profit

315 000

Share of profit of associate (60 000 + 9 800)

69 800

Profit before tax

384 800

Income tax expense

(131 000)

PROFIT FOR THE YEAR

253 800

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R253 800

Total comprehensive income attributable to:

Owners of the parent

203 800

Non-controlling interests

50 000

R253 800

106

Investments in associates and joint ventures P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Balance at 1 January 20.17 (400 000(P) + 64 000(A)) 464 000

Changes in equity for 20.17

Dividends (50

000)

Total comprehensive income for the year:

Profit for the year

203 800

Balance at 31 December 20.17 (Test: 500 000(P) + 112 000(A) + 5 800(Z))

R617 800

Calculations
C1 Analysis of owners’ equity of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition

Share capital

100 000

40 000

Retained earnings

20 000

8 000

120 000

48 000

Investment in A Ltd

(50 000)

Goodwill

(R2

000)

ii Since acquisition
• To beginning of current year

Retained

earnings

(180 000 – 20 000)

160 000

64 000

• Current year

Profit for the year

150 000

60 000

Dividends

(30 000)

(12 000)

R400 000

R112 000

107

Chapter 11

C2 Analysis of owners’ equity of Z Ltd

P Ltd 20%

Total

At

Since

i At acquisition

Share capital

250 000

50 000

Retained

earnings

(120 000 + 51 000*)

171 000

34 200

421 000

84 200

Investment in Z Ltd

(85 200)

Goodwill

(R1

000)
ii Since acquisition

• Current year

Profit up to 31/12/20.17

49 000*

9 800

Dividends

(20 000)

(4 000)

R450 000

R5 800

* Profit

split:

Before acquisition date = (100 000 + 2 000) × 6/12 = 51 000

After acquisition date = [(100 000 + 2 000) × 6/12] – 2 000 = 49 000

Associates in vertical groups

Basically, three cases may occur:

l the associate is itself a parent; or

l the investment in the associate is held by a partially-owned subsidiary, or l

the investment in the associate is held by another associate of the parent.

1 The associate itself is a parent

Where the associate itself is a parent, the consolidated statements of the
associate should be used to account for the results of the associate according
to the equity method in the consolidated financial statements of the investor.
Consider the following group: P Ltd, which also has various subsidiaries,
owns 40% of the issued ordinary shares of A Ltd, which in turn owns 80%
of the issued ordinary shares of S Ltd. The interest of A Ltd in the owners’
equity of S Ltd must be analysed. The analysis is then used to calculate the
consolidated owners’ equity of A Ltd and to analyse P Ltd’s interest therein.

108

Investments in associates and joint ventures

Example 11.9

Investment in an associate which itself is a parent

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

Ltd

A Ltd

S Ltd

Group

ASSETS

Property, plant and equipment

250 000

92 000

250 000
Investment in A Ltd (40 000 shares at cost)

50 000

Investment in S Ltd (80 000 shares at cost)

208 400

Inventories

400 000

99 600

50 000

Total assets

R700 000

R400 000

R300 000

EQUITY AND LIABILITIES

Share capital (100 000 shares)

100 000

100 000
100 000

Retained earnings

400 000

300 000

200 000

Non-controlling interests

200 000

Total equity and liabilities

R700 000

R400 000

R300 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd

A Ltd

S Ltd

Group
Profit

660 000

322 000

168 000

Other income (dividend received)

8 000

8 000

Profit before tax

668 000

330 000

168 000

Income tax expense

(268 000)

(130 000)

(68 000)

PROFIT FOR THE YEAR

400 000

200 000

100 000
TOTAL COMPREHENSIVE INCOME

FOR THE YEAR

R400 000

R200 000

R100 000

Total comprehensive income attributable to:

Owners of the parent

300 000

200 000

100 000

Non-controlling interests

100 000

R400 000

R200 000

R100 000

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

P
Ltd

A Ltd

S Ltd

Group

Balance at 1 January 20.17

150 000

120 000

110 000

Changes in equity for 20.17

Dividends paid: 31 December 20.17

(50 000)

(20 000)

(10 000)

Total comprehensive income for the year:

Profit for the year

300 000

200 000

100 000

Balance at 31 December 20.17

R400 000
R300 000

R200 000

109

Chapter 11

Additional information

1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd for R50 000, when the retained earnings of A Ltd amounted to R20 000.
Since the acquisition date, P Ltd has been exercising significant influence
over the financial and operating decisions of A Ltd.

2 On 30 June 20.17, A Ltd acquired 80% of the issued share capital of S Ltd
for R208 400.

3 S Ltd’s profit for 20.17 accrued evenly, with the exception of R1 000
included in income tax expense, which arose during the second half of the
year.

Solution 11.9

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P)

250 000

Investment in associate (50 000 + 124 640) 174

640

424 640

Current assets

Inventories (P)

400 000

Total assets R824

640

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

100 000

Retained earnings

524 640

624 640

Non-controlling interests 200

000

Total equity

824 640

Total equity and liabilities R824

640
110

Investments in associates and joint ventures

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Profit (P)

660 000

Share of profit of associate (15 840 + 76 800)

92 640

Profit before tax

752 640

Income tax expense (P)

(268 000)

PROFIT FOR THE YEAR

484 640

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R484 640
Total comprehensive income attributable to:

Owners of the parent

384 640

Non-controlling interests

100 000

R484 640

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Balance at 1 Janaury 20.17 (150 000(P) + 40 000(A)) 190 000

Changes in equity for 20.17

Dividends

(50 000)

Total comprehensive income for the year:

Profit for the year

384 640

Balance at 31 December 20.17 (Test: 400 000(P) + 124 640(A)) R524 640

Comment
Take note that the equity method is applied to the consolidated statement of
profit or loss and other comprehensive income of A Ltd. In most cases, the
consolidated

financial statements of A Ltd will be available and can consequently be

employed directly in the equity accounting of A Ltd.

111

Chapter 11

Calculations

C1 Analysis of owners’ equity of S Ltd

A Ltd 80%

Non-

Total

controlling

At Since

interests

i At acquisition (30/6/20.17)

Share capital

100 000

80 000

20 000

Retained

earnings
(110 000 + 50 500)

160 500

128 400

32 100

260 500

208 400

52 100

Investment in S Ltd

(208 400)

ii Since acquisition

Current

year:

Profit up to 31/12/20.17

49 500

39 600

9 900

Dividends

(10 000)
(8 000)

(2 000)

R300 000

R31 600

R60 000

C2 Analysis of owners’ equity of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition (1/1/20.13)

Share capital

100 000

40 000

Retained earnings

20 000

8 000

120 000

48 000

Investment in A Ltd
(50 000)

Goodwill

(R2

000)

ii Since acquisition

• To beginning of current year

Retained

earnings

(120 000 – 20 000)

100 000

40 000

• Current year:

Profit for the year

S Ltd

39 600

15 840

Ltd

(200 000 – 8 000)

192 000
76 800

Dividends

(20 000)

(8 000)

R431 600

R124 640

112

Investments in associates and joint ventures 2 The investment in the

associate is held by a partially-owned subsidiary Consider the following
group: P Ltd owns 80% of the issued shares of S Ltd, which in turn owns
40% of the issued shares of A Ltd. For the purposes of the preparation of the
consolidated statements of P Ltd, S Ltd’s interest in A Ltd’s owners’ equity
will be analysed. The analysis is then used to calculate the consolidated
owners’ equity of S Ltd and to analyse P Ltd’s interest therein.

Example 11.10

Investment in associate by a partially-owned subsidiary

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

Ltd

S Ltd

A Ltd

Group

ASSETS
Property, plant and equipment

220 000

235 000

80 000

Investment in S Ltd (80 000 shares at cost)

80 000

Investment in A Ltd (40 000 shares at cost)

– 65

000

Inventories

200 000

300 000

120 000

Total assets

R500 000

R600 000

R200 000
EQUITY AND LIABILITIES

Share capital (200 000/100 000/100 000 shares)

200 000

100 000

100 000

Retained earnings

200 000

500 000

100 000

Non-controlling interests

100 000

Total equity and liabilities

R500 000

R600 000

R200 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P
Ltd

S Ltd

A Ltd

Group

Profit

100 000

330 000

85 000

Other income (dividend received)

40 000

4 000

Profit before tax

140 000

334 000

85 000

Income tax expense

(40 000)

(134 000)

(35 000)
PROFIT FOR THE YEAR

100 000

200 000

50 000

TOTAL COMPREHENSIVE INCOME

FOR THE YEAR

R100 000

R200 000

R50 000

Total comprehensive income attributable to:

Owners of the parent

80 000

200 000

50 000

Non-controlling interests

20 000

R100 000

R200 000
R50 000

113

Chapter 11

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Ltd

S Ltd

A Ltd

Group

Balance at 1 January 20.17

150 000

350 000

60 000

Changes in equity for 20.17

Dividends paid: 31 December 20.17

(30 000)

(50 000)
(10 000)

Total comprehensive income for the year:

Profit for the year

80 000

200 000

50 000

Balance at 31 December 20.17

R200 000

R500 000

R100 000

Additional information

1 P Ltd acquired 80% of the issued share capital of S Ltd at incorporation of

S Ltd.

2 S Ltd acquired 40% of the issued share capital of A Ltd on 1 January

20.17. Since the acquisition date, S Ltd has been exercising significant
influence over the financial and operating decisions of A Ltd.

Solution 11.10

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets
Property, plant and equipment (220 000 + 235 000) 455

000

Investment in associate (65 000 + 16 000) 81

000

536 000

Current assets

Inventories (200 000 + 300 000) 500

000

Total assets

R1 036 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital: R1 ordinary shares

200 000

Retained earnings

612 800

812 800

Non-controlling interests (100 000(given) + 123 200(S)) 223 200

Total equity

1 036 000
Total equity and liabilities

R1 036 000

114

Investments in associates and joint ventures P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31

DECEMBER 20.17

Profit (100 000 + 330 000)

430 000

Share of profit of associate

20 000

Profit before tax

450 000

Income tax expense (40 000 + 134 000) (174

000)

PROFIT FOR THE YEAR

276 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R276 000

Total comprehensive income attributable to:

Owners of the parent

212 800

Non-controlling interests (20 000(given) + 43 200(S))

63 200

R276 000

P LTD GROUP

EXTRACT FROM THE CONSOLIDATED STATEMENT OF

CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Balance at 1 January 20.17 (150 000(P) + 280 000(S)) 430 000

Changes in equity for 20.17

Dividends (30

000)

Total comprehensive income for the year:

Profit for the year

212 800

Balance at 31 December 20.17 (Test: 200 000(P) + 412 800(S)) R612 800

Calculations

C1 Analysis of owners’ equity of A Ltd

S Ltd 40%

Total

At

Since

i At acquisition

Share capital

100 000

40 000

Retained earnings

60 000

24 000

160 000

64 000

Investment in A Ltd

(65 000)

Goodwill

(R1

000)

ii Since acquisition

• Current year:
Profit for the year

50 000

20 000

Dividends

(10 000)

(4 000)

R200 000

R16 000

115

Chapter 11

C2 Analysis of owners’ equity of S Ltd

P Ltd 80%

Non-

Total

controlling

At

Since

interest

i At acquisition

Share capital
100 000

80 000

20 000

Investment in A Ltd

(80 000)

ii Since acquisition

• To beginning of current year

Retained earnings

350 000

280 000

70 000

• Current year

Profit

– S Ltd (200 000 – 4 000)

196 000

156 800

39 200
Equity

profit

– A Ltd

20 000

16 000

4 000

Dividends

(50 000)

(40 000)

(10 000)

R616 000

R412 800

R123 200

3 The investment in the associate is held by an associate of the parent A

parent may own shares in an associate which itself also owns shares in
another associate. Consider the following group: P Ltd owns 80% of the
issued ordinary shares of S Ltd, and also owns 40% of the issued ordinary
shares of A Ltd, which in turn owns 30% of the issued ordinary shares of
AA Ltd. A mechanical application of the 20%

criterion allows P Ltd to use the equity financial statements of A Ltd (i.e.
that already includes the investment in AA Ltd in accordance with the equity
method) for the purposes of the preparation of consolidated statements. The
equity accounting of associates in which the parent owns indirect interests
through other associates must be approached with caution, since the
influence by the parent over the financial and operating decisions of the
eventual associate may be so diluted that equity accounting of the associate
is inappropriate.

11.5 Classification as held for sale

If an entity decides to sell an investment in an associate, or a portion of an

investment, and it meets the criteria contained in IFRS 5, the investment
becomes a non-current asset held for sale, and is accounted for in accordance
with IFRS 5 Non-current Assets Held For Sale and Discontinued
Operations (IAS 28.20).

Refer to chapter 14.10 for associates classified as held for sale.

116

Investments in associates and joint ventures

11.6 Impairment

losses

After equity accounting for the investment, the entity applies the
requirements of IAS 39

Financial Instruments , to determine whether there is any indication of

impairment of the net investment in the associate. The entity also uses IAS
39 to determine whether an additional impairment loss should be recognised
for the entity’s interest in the associate that does not constitute part of the net
investment.

Since goodwill forms part of the carrying amount of the investment in the
associate and is not recognised separately, it is not tested separately for
impairment in accordance with IAS 36. If, by applying the requirements of
IAS 39, there is an indication of possible impairment of the investment in the
associate, the entire carrying amount of the investment will be tested for
impairment in accordance with IAS 36, by comparing the recoverable
amount (greater of value in use and fair value less costs of disposal) to the
carrying amount of the investment. The impairment loss is not allocated to
any asset, including goodwill, that forms part of the carrying amount of the
investment.

In determining the value in use of the investment, an entity estimates: l its

share of the present value of the estimated future cash flows expected to be
generated by the investee as a whole, including the cash flows from the
operations of the investee and the proceeds on the ultimate disposal of the
investment; or l the present value of the estimated future cash flows expected
to arise from dividends to be received from the investment and from the
ultimate disposal of the investment.

The recoverable amount of an investment in an associate is assessed for each

individual associate, unless an individual associate does not generate cash
inflows from continuing use that are largely independent of those from other
assets of the reporting entity (IAS 28.40–42).

117

Chapter 11

Comment

P Ltd acquired a 25% interest in A Ltd on 1 January 20.18 at a cost of R250

000. P Ltd

has significant influence over A Ltd.

The carrying amount of the investment was as ffollows on 31 December

20.19:

Cost of investment

250 000

Share in retained earnings – to 31 December 20.18 (200 000 × 25%) 50 000

Share of profit of associate for the year ended 31 December 20.19

(100 000 × 25%)

25 000

Carrying amount of the investment

R325 000

The significant decrease in profit for the year ended 31 December 20.19
occurred as a result of a declining market (there are indications of
impairment present in respect of the investment). P Ltd’s financial advisor
estimated that A Ltd will pay an annual dividend of R90 000 to its
shareholders in future. A fair dividend return rate for an entity with a similar
risk and growth profile is 10%.

The recoverable amount of the investment (25% interest) on 31 December

20.19 is as follows:

Expected annual dividend (90 000 × 25%)

R22 500

Fair dividend return rate

10%

Recoverable amount – capitalised dividend (22 500/0,10)

R225 000

The impairment loss on the investment is as follows:

Carrying amount of investment

325 000

Recoverable amount
(225 000)

Impairment loss (recognised in proffit or loss)

R100 000

Journal entry

31 December 20.19

Dr

Cr

Impairment loss (P/L)

R100 000

Investment in associate (SFP)

R100 000

The impairment loss of R100 000 on the investment in the associate is

reversed against the investment in the associate in subsequent periods to the
extent that the recoverable amount of the investment increases. Assume the
recoverable amount increases to R275 000 on 31 Dece

ember 20.20:

Recoverable amount 20.19

225 000

Recoverable amount 20.20

275 000

Reversal of impairment loss

R50 000
Journal entry

31 December 20.20

Dr

Cr

Investment in associate (SFP)

R50 000

Reversal of impairment loss (P/L)

R50 000

118

Investments in associates and joint ventures

11.7 Discontinuing the use of the equity method

An investor should discontinue the use of the equity method from the date
that it ceases to be an associate as follows (IAS 28.22):

l If the investment becomes a subsidiary, the investment must be accounted

for in accordance with IFRS 3 Business Combinations, or IFRS 10
Consolidated Financial Statements .

l If the retained interest in the former associate is a financial asset, it must be

measured at fait value in accordance with IFRS 9 Financial Instruments ,
which will be deemed its fair value on initial recognition of the financial
asset. On the date that an investment ceases to be an associate, the investor
will measure the retained investment at fair value. The difference between
the following must be recognised in profit or loss:

• the fair value of the retained interest plus any proceeds from the disposal of
the equity accounted investment; and
• the carrying amount of the equity accounted investment on the date that
significant influence was lost.

l If the equity method is discontinued or if the current interest in the

associate is reduced and the entity continues to apply the equity method, all
amounts, or a proportionate part thereof, previously recognised in other
comprehensive income relating to the investment, will be accounted for on
the same basis as would have been required if the related assets or liabilities
were disposed of. This means that if an amount that was recognised in other
comprehensive income would be reclassified to profit or loss on disposal of
the related assets or liabilities, the entity would reclassify the gain or loss
from equity via other comprehensive income to profit or loss when the
equity method is discontinued.

l If an investment in an associate becomes an investment in a joint venture or

vice versa, the entity will continue to apply the equity method and retained
earnings will not be remeasured.

11.8 Disclosure

The disclosure requirements for joint arrangements and associates are set out
in IFRS 12 Disclosure of Interests in Other Entities (IFRS 12.20–23)
(refer to chapter 12 for joint arrangements).

An entity is required to disclose information that will enable users of

financial statements to evaluate the nature, extent and financial effects of its
interests in associates, including the nature and effect of its contractual
relationship with other investors with significant influence, as well as the
nature of and changes in the risks associated with its interests in associates.

An entity must disclose information about significant adjustments and

assumptions made in determining if the entity has significant influence over
another entity (this may also include disclosure of assumptions and
judgements made to determine that no significant influence is excercised,
although the entity holds more than 20% of the voting rights of the investee,
or vice versa, where an investor does excercise significant influence,
although it holds less than 20% of the voting rights).
119

Chapter 11

The following information must be disclosed separately for each associate

that is material to the reporting entity:

l the name of the associate;

l the nature of the entity’s relationship with the associate; l the principal
place of business (and country of incorporation, if applicable or different);
and

l the proportion of ownership interest or participating share and if different,

the proportion of voting rights held.

The following information must be disclosed for every associate that is

material to the reporting entity:

l whether the investment in the associate is measured using the equity

method or at fair value;

l summarised financial information of the associate (obtained from the

financial statements, the total amount and not only the investor’s share
thereof), including dividends received, non-current and current assets, non-
current and current liabilities, revenue, profit or loss from continuing and
discontinued operations, other comprehensive income and total
comprehensive income;

l if the equity method is applied, the fair value of investments in associates

for which there are published price quotations;

l if the equity method is applied, the amounts in the financial statements of

the associate must be adjusted by fair value adjustments at acquisition and
adjustments for differences in accounting policy;

l if the equity method is applied, a reconciliation must be provided between

the summarised financial information and the carrying amount of the interest
in the associate; and
l if the interest is measured at fair value or if the associate does not prepare
IFRS

financial statements, the summarised financial information may be prepared

on the basis of the associate’s financial statements.

The following information must be disclosed for associates which are

individually immaterial to the reporting entity (it must be disclosed in total
for all associates which are individually immaterial):

l the carrying amount in total of all individually immaterial associates that

were equity accounted for; and

l summarised financial information of the associate, including profit or loss

from continuing and discontinued operations, other comprehensive income
and total comprehensive income.

The following must also be disclosed:

l the nature and extent of any significant restrictions on the associate’s ability
to transfer funds to the entity;

l if the reporting periods of the entity and the associate differ, the reporting
period of the associate should be mentioned, as well as the reason for the use
of different reporting periods;

120

Investments in associates and joint ventures l the unrecognised share of

losses of an associate, both for the current period and cumulatively;

l any contingent liabilities incurred relating to interests in associates in

accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets , which must be seperately disclosed.

Piecemeal acquisition of interest in investees

11.9 Changes in ownership interest

1 Acquisition of additional shares whereby the investee becomes an
associate

Where the equity method is applied for the first time, since significant
influence has now been secured, for instance because of the acquisition of
additional shares or the conclusion of a shareholders’ agreement, the
investor’s share of since acquisition equity (i.e. profit or loss) is accounted
for as follows:

l The investor’s share of the retained earnings (i.e. profit or loss) of the
associated company, from the date on which the investee becomes an
associate, is included in the current period’s profit or loss in the investor’s
financial statements as share of profit of associate.

Piecemeal acquisition whereby the status of an investment

Example 11.11

changes to that of an associate

(significant influence is obtained)

On 31 December 20.13, the following information relating to P Ltd and A

Ltd is available:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.13

Ltd

and sub-

sidiaries

A Ltd

(consoli-
dated)

ASSETS

Property, plant and equipment

250 000

150 000

Investment in A Ltd

(40 000 shares at fair value; consideration R162 500)

240 000

Inventory

487 500

450 000

Total assets

R977 500

R600 000

EQUITY AND LIABILITIES

Share capital (250 000/100 000 shares)

250 000

100 000

Mark-to-market reserve
60 140

Retained earnings

600 000

500 000

Non-controlling interests

50 000

Deferred tax

17360

Total equity and liabilities

R977 500

R600 000

121

Chapter 11

EXTRACT FROM STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.13

P Ltd
and

subsidiaries

A Ltd

(consoli-

dated)

Revenue

800 000

300 000

Cost of sales

(300 000)

(150 000)

Income tax expense

(50 000)

(30 000)

PROFIT FOR THE YEAR

450 000

120 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Fair value adjustment on investment

9 312

Other comprehensive income for the year, net of tax

9 312

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R459 312

R120 000

Profit attributable to:

Owners of the parent

400 000

120 000

Non-controlling interests

50 000

R450 000

R120 000

Total comprehensive income attributable to:

Owners of the parent

409 312
120 000

Non-controlling interests

50 000

R459 312

R120 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.13

Retained

earnings

Ltd

and

subsidiaries

A Ltd

(consoli-

dated)

Balance at 1 January 20.13

300 000

380 000
Changes in equity for 20.13

Total comprehensive income for the year:

Profit for the year

400 000

120 000

Dividends (100

000)

Balance at 31 December 20.13

R600 000

R500 000

122

Investments in associates and joint ventures Additional information

1 P Ltd acquired 15% of A Ltd’s issued share capital on 31 December 20.12

for R15 000. This interest did not enable P Ltd to exercise significant
influence over A Ltd.

2 P Ltd acquired a further 25% of A Ltd’s issued share capital for R147 500
on 30 November 20.13, from which date P Ltd exercised significant
influence over the financial and operating decisions of A Ltd. The fair value
of the previously held 15% interest on this date was R88 000.

3 A Ltd’s profit was earned evenly throughout the period.

4 P Ltd recognised all fair value adjustments on the investment in A Ltd

through other comprehensive income using a mark-to-market reserve in its
separate financial statements. The cumulative fair value gain on 1 January
20.13 amounted to R65 500.

5 On each date of purchase, the identifiable assets and liabilities of A Ltd

were regarded to be fairly valued.

6 Assume a company tax rate of 28% and that capital gains tax is recognised
at 80%

thereof.

Solution 11.11

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.13

ASSETS

Non-current assets

Property, plant and equipment (P)

250 000

Investment in associate (88 000 + 147 500 + 500 + 4 000) 240

000

490 000

Current assets

Inventory (P)

487 500

Total assets R977

500

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

250 000

Retained earnings

661 148

911 148

Non-controlling interests (P)

50 000

Total equity

961 148

Liabilities

Deferred tax (17 360 – 1 008(J1))

16 352

Total liabilities

16 352

Total equity and liabilities R977

500

123
Chapter 11

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31

DECEMBER 20.13

Revenue

800 000

Cost of sales

(300 000)

Gross profit

500 000

Share of profit of associate (4 000 + 500)

4 500

Profit before tax

504 500

Income tax expense

(50 000)

PROFIT FOR THE YEAR

454 500

Other comprehensive income

Items that will not be reclassified to profit or loss

Fair value adjustment on investment

(88 000 – (15 000 + 65 500) = 7 500 – (7 500 × 28% × 80%))

5 820

Other comprehensive income for the year, net of tax

5 820

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R460 320

Profit attributable to:

Owners of the parent

404 500

Non-controlling interests (other subsidiaries)

50 000

454 500

Total comprehensive income attributable to:

Owners of the parent

410320

Non-controlling interests (other subsidiaries)

50 000

R460 320
P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.13

Mark-

Non-

Share

Retained

to-

con-

Total

Total

capital

earnings

market

trolling

equity

reserve

interests

Balance at

1 January 20.13
250 000

300 000

*50 828

600 828

# – 600

828

Changes in equity

for 20.13

Dividends

– (100 000)

(100 000)

– (100

000)

Total

comprehensive

income for the

year:

Profit for the year

404 500
5 820

410 320

50 000

460 320

Transfers

56 648

(56 648)

Balance at

31 Dec 20.13

R250 000 R661 148

– R911 148

R50 000 R961 148

50 000 – 50 000 (current year) = Nil

65 500(given) – (65 500 × 28% × 80%) = 50 828

124

Investments in associates and joint ventures Calculations

C1 Analysis of owners’ equity in A Ltd

P Ltd 40%
Total

At

Since

i At acquisition of additional interest

Share capital

100 000

40 000

Retained

earnings

((500 000 – (120 000/12))

490 000

196 000

590 000

236 000

Gain from a bargain purchase

(500)

Consideration

(88 000 + 147 500)

R235 500

ii Since acquisition
Current year:

Profit: 1/12/20.13–31/12/20.13 (1)

10 000

4 000

R600 000

R4 000

(1) 120 000 × 1/12 = 10 000 (accrued evenly)

C2 Pro forma consolidation journal entries

Dr

Cr

J1

Mark-to-market reserve (OCI)

3 492

Deferred

tax

(SFP)

(4 500 × 28% × 80%)

1 008
Investment in A Ltd (SFP) (240 000 – 88 000 – 147 500)

500

Pro forma reversal of fair value adjustments

in respect of investment in A Ltd at group level

J2

Mark-to-market reserve (SCE)

56 648

Retained earnings (SCE)

56 648

Fair value gain realised at deemed disposal of

investment when obtain significant influence

J3

Investment in A Ltd (SFP)

500

Share of profit of associate (P/L)

500

Recognise gain from a bargain purchase

J4

Investment in A Ltd (SFP)

4 000

Share of profit of associate (P/L)

4 000

Equity accounting of the investment in A Ltd

at group level

125

Chapter 11

Example 11.12

Acquisition of additional interest

A Ltd acquired a 15% equity interest in B Ltd on 1 March 20.14 for R150
000. The consideration was paid in cash. In terms of the acquisition contract
A Ltd have the unconditional right to exercise options that will allow A Ltd
to obtain a further 10%

equity stake. The options however must be exercised before 28 February

20.16.

B Ltd had the following financial information:

1/03/20.14 28/02/20.15 28/02/20.16

Share capital (100 000 shares)

500 000

500 000

500 000

Retained earnings
200 000

300 000

250 000

Mark-to-market reserve

100 000

120 000

120 000

Total equity

R800 000

R920 000

R870 000

Fair value B Ltd *

R1 100 000

R1 000 000

* This fair value represents the fair value of the shares of B Ltd.

On 31 August 20.14 B Ltd sold machinery, with a carrying amount of R50

000, to A Ltd for R60 000. A Ltd paid the R60 000 amount in cash. The
remaining useful life of the machinery at the date of sale was 5 years with a
residual value of Rnil. A Ltd’s accounting policy is to depreciate machinery
over the remaining useful life. A Ltd recognised the asset and depreciation
for the year based on R60 000 (purchased amount). No other entries were
processed by A Ltd in respect of this transaction.

Additional information
1 Ignore any tax implications for the purpose of this question.

2 Assume that the identifiable assets and assumed liabilities on 1 March

20.14 and 28 February 20.15 were carried at fair value.

3 A Ltd Group’s accounting policy for investments in associates is to

account for the investments in terms of the equity method in accordance with
IAS 28.

4 It is the policy of A Ltd to classify investments in associates in its own

financial statements at “Fair value through profit or loss”.

5 A Ltd has classified the option in B Ltd as financial instruments at “Fair

value through profit or loss”. The fair value gain on the options amounted to
R30 000 on 28 February 20.15. The options represent derivatives in terms of
IFRS 9.

6 Both A Ltd’s and B Ltd’s reporting dates are 28 February.

126

Investments in associates and joint ventures Solution 11.12

Assume that A Ltd has exercised their options on 1 March 20.15 at a cost of
R50 000

and consequently obtained the additional 10% equity interest. The R50 000
was paid in cash.

Pro forma consolidation journal entries

Dr

Cr

R
28 February 20.16

At acquisition

J1 Retained

earnings

– Opening balance (SCE)

15 000

Investment in associate (SFP)

((1 100 000 × 15%) – 150 000 (initial cost))

15 000

Elimination of fair value adjustment

Since acquistion

J2

Investment in associate (SFP)

18 000

Retained earnings (SCE) ((300 000 – 200 000) × 15%) 15

000

Mark-to-market reserve (SCE)

((120 000 – 100 000) × 15%)

3 000

Intragroup transaction
J3

Retained earnings (SCE) (C3)

1 350

Accumulated depreciation (SFP) (C3)

150

Machinery (SFP) (C3)

1 500

Adjustment to ensure that the consolidated retained

earnings at the beginning of 20.16 agree with the

end of 20.15.

J4 Accumulated

depreciation

(SFP)

300

Share of profit of associate (P/L) (C3)

300

Realisation of intragroup profit

Current year

J5

Fair value adjustment (P/L)

5 000

Investment in associate (SFP) (C4)

5 000

Elimination of fair value adjustment

J6

Investment in associate (SFP) (C1)

12 000

Share of profit of associate (P/L)

12 000

Gain on option

J7

Share of loss of associate (P/L)

12 500

Investment in associate (SFP)

((250 000 – 300 000) × 25%)

12 500

A Ltd’s share of the loss of the current year

127

Chapter 11

Control check for the journals

Total equity – B Ltd on 28/02/20.16 (500 000 + 250 000 + 120 000)

870 000

Equity interest at 25% held by A Ltd (870 000 × 25%)

217 500

Goodwill at initial acquisition of 15%

((500 000 + 200 000 + 100 000) ×15%) – 150 000 (Cost price) 30 000

Unrealised profit (intragroup profit) made on sale of machinery (C2) (1 500)

Realised profit in 20.15 (C3)

150

Realised profit in 20.16 (C3)

300

Total value of investment in B Ltd

R246 450

Reconciliation with group statement

Cost price of initial acquisition

150 000

Cost price of options

80 000

Bargain purchase gain recognised in profit or loss on options (C1) 12 000

Since acquisition reserves

18 000

Loss of associate for 20.16

(12 500)

Remaining unrealised profit at end of 20.16 (1 500 – 450)

(1 050)

Total value of investment in B Ltd as per journals

R246 450

Assume that A Ltd sold the right to the options for the additional 10% equity
on the 1 March 20.15 at its fair value of R30 000. A Ltd therefor loses
significant influence over B Ltd and should discontinue the equity method.
The investment is then accounted for under IFRS 9 (See IAS 28.22b).

Pro forma consolidation journal entries

Dr

Cr

1 March 20.15: Same journal as J1 to J3 above

28 February 20.16

J4

Investment in B Ltd (SFP)

168 000

Investment in associate (SFP)

(carrying amount = cost of R150 000 and since

acquisition equity of R18 000 (J2)

168 000

Investment in associate becomes an ordinary

investment as a result of the sale of options

J5

Fair value adjustment (P/L)

3 000

Investment in B Ltd (SFP)

((1 100 000 ×15%) – 168 000)

3 000

Fair value adjustment

J6

Mark-to-market reserve (SCE)

3 000

Retained earnings (SCE)

3 000

Mark-to-market reserve realised transferred to

retained earnings

128
Investments in associates and joint ventures Calculations

C1 Gain on bargain purchase price as a result of the exercise of the

option Total equity for B Ltd on 01/03/20.15 (500 000 + 300 000 + 120 000)
920 000

10% Equity interest gained on execution of option by A Ltd (920 000 ×

10%) 92 000

Amount paid for options (C5)

80 000

Gains from a bargain purchase (92 000 – 80 000)

R12 000

OR the “Gain from a bargain purchase” can be calculated as follows: Interest

after option exercise

260 000

l Net

asset

value

(920 000 × 25%)

230 000

l Goodwill on 15% acquisition

[(500 000 + 200 000 + 100 000) × 15%] – 150 000(cost price) 30 000

Interest before option exercise

(168 000)
l Net

asset

value

(920 000 × 15%)

138 000

l Goodwill on 15% acquisition

30 000

Additional cash outflow (cost of options) (C5)

80 000

Gain from a bargain purchase

R12 000

C2 Sale of machinery

Consideration received by B Ltd

60 000

Carrying amount of machinery for B Ltd

(50 000)

Profit made on the sale of machinery

10 000

15% of the profit pertains to intragroup (15% × 10 000)

1 500
C3 Realisation of unrealised profit through depreciation Unrealised
profit (intragroup profit) (C2)

1 500

Realised over 5 years (useful life) (1 500/5) 300

Thus realised for 20.15 (6 months) (300 × 6/12) 150

Thus realised for 20.16 (1 year)

300

C4 Investment in the books of A Ltd

Carrying amount of investment at 28 February 20.15

(fair value of R1 100 000 × 15%)

165 000

Cost of addition purchase

80 000

Fair value gain for the year (balancing)

5 000

Carrying amount of investment at 28 February 20.16

(fair value of R1 000 000 × 25%)

R250 000

129
Chapter 11

Comment

When an investor acquires an additional interest in an existing associate, it is

dealt with as follows:

l The cost price of the additional shares acquired is added to the carrying
amount of the investment.

The

additional equity obtained (at carrying amount) is compared to the purchase

price thereof to determine whether goodwill or a bargain gain arose with the
additional purchase.

l The increased equity interest (after the acquisition of the additional shares)
is used to calculate the investor’s interest in the equity profit or loss accrued
after the acquisition of the additional interrest.

Disposal of interests in an investee

2 Disposal of the entire interest in an associate

The same principles apply when significant influence over an associate, or

joint control over a jointly controlled entity, is relinquished. The example
hereafter deals with an associate where IAS 28.18 is applicable. The total
interest in the associate is disposed of and the retained investment in the
former associate is therefore carried at Rnil.

Disposal of the entire interest in an associate

Example 11.13

(significant influence is lost)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
20.17

P Ltd

and sub-

sidiaries

A Ltd

(consoli-

dated)

ASSETS

Property, plant and equipment

400 000

100 000

Inventory

100 000

150 000

Total assets

R500 000

R250 000

EQUITY AND LIABILITIES

Share capital (200 000/100 000 shares)

200 000
100 000

Retained earnings

200 000

150 000

Non-controlling interests

100 000

Total equity and liabilities

R500 000

R250 000

130

Investments in associates and joint ventures STATEMENT OF PROFIT

OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd

and sub-

sidiaries

A Ltd

(consoli-

dated)

Revenue
300 000

200 000

Cost of sales

(112 000)

(100 000)

Gross profit

188 000

100 000

Other income (gain on disposal of shares)

16 000

Profit before tax

204 000

100 000

Income tax expense

(94 000)

(50 000)

PROFIT FOR THE YEAR

110 000

50 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R110 000

R50 000

Total comprehensive income attributable to:

Owners of the parent

80 000

50 000

Non-controlling interests

30 000

R110 000

R50 000

EXTRACT FROM STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Ltd

and sub-

sidiaries
A Ltd

(consoli-

dated)

Balance at 1 January 20.17

150 000

125 000

Changes in equity for 20.17

Total comprehensive income for the year:

Profit for the year

80 000

50 000

Dividends (31 December 20.17)

(30 000)

(25 000)

Balance at 31 December 20.17

R200 000

R150 000

Additional information

1 P Ltd acquired 40% of the issued share capital of A Ltd on 1 January 20.13
for R50 000, when the retained earnings of A Ltd amounted to R10 000. P
Ltd exercised significant influence over the financial and operating policies
of A Ltd from that date.
2 On 30 June 20.17, P Ltd disposed of its entire interest in A Ltd for R66
000.

3 A Ltd’s profit after tax for the six months ended 30 June 20.17 amounted
to R25 000.

131

Chapter 11

4 The disposal of the interest in the associate did not comply with the
requirements of IFRS 5 Non-current Assets Held for Sale and
discontinued operations up to the date of disposal of the interest.

5P

Ltd measures investments in associates at cost in its separate financial

statements.

6 Ignore

taxation.

Solution 11.13

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment

400 000

400 000
Current assets

Inventory

100 000

Total assets

R500 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

200 000

Retained earnings

200 000

400 000

Non-controlling interests (other subsidiaries)

100 000

Total equity

500 000

Total equity and liabilities

R500 000

132

Investments in associates and joint ventures P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue

300 000

Cost of sales

(112 000)

Gross profit

188 000

Other expenses (loss on disposal of interest (J1))

(40 000)

Share of profit of associate (J1)

10 000

Profit before tax

158 000

Income tax expense

(94 000)

PROFIT FOR THE YEAR

64 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R64 000

Profit attributable to:

Owners of the parent

34 000

Non-controlling interests (given)

30 000

R64 000

Total comprehensive income attributable to:

Owners of the parent

34 000

Non-controlling interests (given)

30 000

R64 000

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-

Share

Retained

Total
Total

controlling

capital

earnings

equity

interests

Balance at

1 January 20.17

200 000 * 196 000

396 000

! 70 000

466 000

Changes in equity

for 20.17

Dividends

(30 000)

(30 000)

– (30

000)
Total comprehensive

income for the year:

Profit for the year

34 000

34 000

30 000

64 000

Balance at

31 December 20.17

R200 000 R200 000 R400 000

R100 000 R500 000

= 150 000(P) + 46 000(A) = 196 000

= balancing figure, as the comparative information was not given to

calculate opening balance 133

Chapter 11

Calculations

C1 Analysis of owners’ equity in A Ltd

P Ltd 40%–0%
Total

At

Since

i At acquisition

Share capital

100 000

40 000

Retained earnings

10 000

4 000

110 000

44 000

Investment in A Ltd

(50 000)

ii Since acquisition

• To beginning of current year:

Retained

earnings (125 000 – 10 000)

115 000

46 000
• Current year:

Profit:

1/1/20.17–30/6/20.17 (given)

25 000

10 000

250 000

56 000

Disposal of entire interest

(44 000)

(56 000)

R250 000

C2 Calculation of gain/(loss) on disposal of interest in associate Proceeds

on disposal of interest

66 000

Historic cost of interest disposed of

(50 000)

Gain on disposal in P Ltd’s separate records (66 000 – 50 000) 16 000

Since acquisition reserves disposed of

Retained earnings (46 000 + 10 000)

(56 000)
Loss on disposal of interest in group context

(R40 000)

The calculation can also be done as follows (IAS 28.18):

Proceeds on disposal of interest

66 000

Fair value

N/A

Carrying amount on date of disposal (50 000 + 56 000(*))

(106 000)

Loss on disposal of interest in group context

(R40 000)

(*) The R56 000 represents P Ltd’s interest in the since acquisition reserves
of A Ltd by which the investment in A Ltd has been adjusted upwards in
terms of the equity method.

C3 Pro forma consolidation journal entry

Dr

Cr

J1

Gain on disposal of interest (P/L)

(Reverse P Ltd’s gain on disposal)

16 000

Loss on disposal of interest (P/L)

(establish loss in group context)

40 000

Share of profit of associate (P/L)

10 000

Retained earnings – Beginning of period (SCE)

46 000

Gain correction at group level and equity accounting

of associate

134

Investments in associates and joint ventures

Comments

The gain from the disposal of interest of R16 000 according to the separate
records of P Ltd is therefore effectively replaced, on applying the equity
method, by a loss on disposal of interest of R40 000 (i.e. R16 000 – R56
000).

3 Partial disposal of an interest in an associate

l If the retained interest in the former associate is a financial asset, it must be
measured at fair value, which will be deemed its fair value on initial
recognition of the financial asset, in accordance with IFRS 9 Financial
Instruments.

l On the date that an investment ceases to be an associate, the investor will

measure the retained investment at fair value. The difference between:

• the fair value of the retained interest plus any proceeds from the disposal of
the equity accounted investment; and

• the carrying amount of the equity accounted investment on the date that
significant influence was lost, must be recognised in profit or loss.

l If

the equity method is discontinued or if the current interest in the associate is

reduced and the entity continues to apply the equity method, all amounts, or
a proportionate part thereof relating to the investment previously recogn
nised in other

comprehensive income will be accounted for on the same basis as would

have been required if the investee had directly disposed of the related assets
or liabilities (IAS 28.22(c)). This means that if an amount that was
recognised in other comprehensive income would be reclassified to profit or
loss on disposal of the related assets or liabilities, the entity would reclassify
the gain or loss from equity via other comprehensive income to profit or loss
when the equitty method is discontinued.

135

Chapter 11

Partial disposal of an interest in an associate – Loss of

Example 11.14

significant influence (associate becomes IFRS 9

investment)

EXTRACT OF STATEMENTS OF FINANCIAL POSITION OF A

LTD

01/01/20.14 31/12/20.15 30/06/20.16 31/12/20.16

EQUITY AND LIABILITIES

Share capital

600 000

600 000

600 000

600 000

Retained earnings

180 000

270 000

315 000

360 000

Revaluation surplus

225 000

276 600

276 600

276 600

Mark-to-market reserve
258 000

296 700

309 600

335 400

Total equity and liabilities

R1 263 000

R1 443 300

R1 501 200

R1 572 000

Additional information

1 P Ltd acquired 40% of the issued share capital of A Ltd on 1 January 20.14
for R525 000. P Ltd exercised significant influence over the financial and
operating policies of A Ltd from that date.

2 On 30 June 20.16, P Ltd disposed of a 35% interest in A Ltd for R615 000.
The remaining 5% interest had a fair value of R112 500 on 30 June 20.16
and R165 000

on 31 December 20.16. A Ltd classified the investment as a financial asset at

fair value through other comprehensive income.

3 A Ltd’s profit after tax for the six months ended 30 June 20.16 amounted
to R45 000

(earned evenly during the year).

4P

Ltd measures investments in associates at cost in its separate financial

statements.
5 The revaluation surplus relates to land. It is the policy of P Ltd to realise
the revaluation surplus on the disposal of the land. The mark-to-market
reserve relates to fair value gains on financial assets at fair value through
other comprehensive income. It is the policy of P Ltd to transfer these gains
to retained earnings on the disposal of the financial assets.

6 P Ltd included the following items in its separate financial statements for
20.16: l Financial asset at fair value through other comprehensive income
R165 000; l Gain on disposal of investment in associate R155 625 (615 000
– (525 000 ×

35/40));

l Mark-to-market reserve R52 500 (165 000 – 112 500);

l Day one gain (P/L) R46 875 ((112 500 – (525 000 x 5/40)).

7 Ignore

taxation.

136

Investments in associates and joint ventures Solution 11.14

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF FINANCIAL

POSITION

AS AT 31 DECEMBER 20.16

20.16 20.15

ASSETS

Non-current assets

Investment in associate
– 597

120

Financial asset

165 000

20.15: 525 000 + 20 640 + 15 480 = 597 120

20.16: Fair value (given)

The following items relating to only A Ltd will be included in the

consolidated statement of changes in equity:

P LTD GROUP

EXTRACT FROM THE CONSOLIDATED STATEMENT OF

CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.16

Reval-

Mark-to-

Retained

uation

market

earnings

surplus

reserve
Balance at 1 January 20.16

36 000

20 640

15 480

Changes in equity for 20.16

Total comprehensive income for the year:

Profit for the year

125 220

Other comprehensive income

*57 660

Transfers from revaluation surplus

20 640

(20 640)

Transfer from mark-to-market reserve

20 640

(20 640)

Balance at 31 December 20.16

R202 500

R52 500
* 5 160(J2) + 52 500(J7) = 57 660

137

Chapter 11

Calculations

C1 Analysis of owners’ equity in A Ltd

P Ltd 40%–35%

Total

At

Since (RE)

(MtM;RS)

i At acquisition (01/01/20.14)

Share capital

600 000

240 000

Retained earnings

180 000

72 000

Revaluation surplus

225 000

90 000
Mark-to-market reserve

258 000

103 200

1 263 000

505 200

Goodwill

19

800

Consideration

525 000

ii Since acquisition

• To beginning of current year

Retained

earnings (1)

90 000

36 000

Revaluation surplus (2)

51 600

20 640 RS

Mark-to-market reserve (3)

38 700

15 480 MtM

• Current year (20.16)

Profit:

1/1/20.16–30/6/20.16 (4)

45 000

18 000

Mark-to-market reserve (5)

12 900

5 160 MtM

1 501 200

525 000

54 000

20 640 RS

20 640 MtM

Disposal of 35% (8);(C2)

(459 375)

(83 370)

Transfer to retained earnings

20 640 (20 640) RS

Transfer to retained earnings

20 640 (20 640) MtM

R1 501 200 *R65 625

*R11 910

(1) (270 000 – 180 000);

(2) (276 600 – 225 000)

(3) (296 700 – 258 000);

(4) (315 000 – 270 000)

(5) (309 600 – 296 700);

(6) (360 000 – 315 000)

(7) (335 400 – 309 600);

(8) (525 000 × 35/40)

* Carrying amount of remaining interest: 65 625 + 11 910 = 77 535

Fair value adjustment: Fair value – Carrying amount = 112 500 – 77 535 =
34 965

C2 Calculation of gain/(loss) on disposal of interest in associate Proceeds

on disposal of interest

615 000

Cost of interest disposed of (525 000 × 35/40) (459

375)
Gain on disposal in P Ltd’s separate records

155 625

Less: Since acquisition reserves disposed of ((1 501 200 – 1 263 000) ×
35%) 83 370

Gain on disposal of interest (group context)

R72 255

The calculation can also be done as follows:

Proceeds on disposal of interest

615 000

Consolidated net asset value (1 501 200 × 35%)

(525 420)

Goodwill (19 800 × 35/40)

(17 325)

Gain on disposal of interest (group context)

R72 255

138

Investments in associates and joint ventures C3 Pro forma consolidation

journal entries

Dr

Cr

R
R

J1

Investment in A Ltd (SFP)

72 120

Retained earnings (SCE)

36 000

Revaluation surplus (SCE)

20 640

Mark-to-market reserve (SCE)

15 480

Recognition of opening equity

J2

Investment in A Ltd (SFP)

23 160

Share of profit of associate (P/L)

18 000

Share of other comprehensive income of associate

(OCI)

5160

Recognition of profit and other comprehensive

income (01/01/20.16–30/06/20.16)

J3

Gain on sale of shares (separate) (P/L)

155 625

Gain on sale of shares (consolidated) (P/L)

72 255

Investment in A Ltd (SFP)

83 370

Recognition of consolidated gain on disposal of 35%

interest in associate

J4

Revaluation surplus (SCE)

20 640

Mark-to-market reserve (SCE)

20 640

Retained earnings (SCE)

41 280

Transfer to retained earnings on date of disposal

J5

Gain on mark-to-market reserve (OCI) (given)

52 500

Day one gain (P/L)

46 875

Investment in A Ltd (SFP)

99 375

Elimination of mark-to-market adjustment

in separate financial statements

J6

Investment in A Ltd (SFP) (C1)

34 965

Fair value adjustment (P/L)

34 965

Fair value adjustment for the group on 30 June 20.16

J7

Investment in A Ltd (SFP) (165 000 – 112 500) 52

500

Gain on mark-to-market reserve (OCI)

52 500

Fair value adjustment for the group on

31 December 20.16
139

Chapter 11

Self-assessment questions

Question 11.1

Basic equity accounting/interest received

The profit-or-loss section of the draft consolidated statements of profit or

loss and other comprehensive income and an extract from the consolidated
statements of changes in equity of P Ltd and its subsidiaries and A Ltd and
subsidiaries for the 20.17 financial year are as follows:

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Ltd

A Ltd

Group

Group

Revenue

5 873 000

1 857 000

Cost of sales

(4 600 000) (1 539 000)

Gross profit

1 273 000

318 000

Interest received

15 000

Gain from sale of land

100 000

Dividends received

14 000

Interest paid

(30 000)

Profit before tax

1 302 000

388 000

Income tax expense

Current

(390 000)
(106 000)

Deferred

(90 000)

(34 000)

PROFIT FOR THE YEAR

822 000

248 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R822 000

R248 000

Total comprehensive income attributable to:

Owners of the parent

798 000

218 000

Non-controlling interests

24 000

30 000

R822 000

R248 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Ltd

A Ltd

Group

Group

Balance at 1 January 20.17

1 149 000

242 000

Changes in equity for 20.17

Dividends paid

(235 000)

(56 000)

Total comprehensive income for the year:

Profit for the year

798 000

218 000

Balance at 31 December 20.17

R1 712 000

R404 000

140

Investments in associates and joint ventures Additional information

1 A Ltd’s issued share capital consists of 150 000 shares of R1 each. The
company is situated in Cape Town.

2 A Ltd revalues its buildings annually on 31 August. The revaluation

surplus (after tax at 28%) had arisen as follows:

31 August 20.15

20 000

31

August 20.16

20 000

31

August 20.17

10 000

Revaluation surplus on 31 August 20.17

R50 000

3 On 1 September 20.15, P Ltd acquired 22 500 shares in A Ltd, a

manufacturer of musical instruments, for R50 000, when A Ltd’s
consolidated retained earnings amounted to R100 000. Since 1 September
20.15, P Ltd also has an option to take up another 10 000 shares in A Ltd.
The option has been exercisable at any time since 1 September 20.15, but P
Ltd has not exercised it as of yet. On 31 December 20.17, the shares in A
Ltd traded at R4,10.

4 On 1 September 20.15, A Ltd issued R100 debentures to the amount of

R150 000.

At this date, half of the debentures were taken up by P Ltd; the other half
was taken up by other shareholders. The interest received and paid by P Ltd
and A Ltd respectively relates to these debentures. The debentures bear a
market-related interest rate.

5 The profit from sale of land relates to a farm sold by A Ltd to P Ltd. It was
a transaction negotiated under extreme conditions and the profit is of a
capital nature.

6 Included in P Ltd’s profit before tax are the following items: Secretarial
services rendered by an external person

R20 000

Directors’

remuneration

– for services as directors

R100 000

7 The carrying amounts of A Ltd’s assets and liabilities as at 31 December

20.17 are the following:

Non-current assets

R1 561 100

Current assets

R438 900
Non-current liabilities

R1 300 000

Current liabilities

R96 000

8 Assume a normal tax rate of 28% and that 80% of capital gains are taxable.

9 The balance of non-controlling interests in the P Ltd Group’s consolidated

statement of financial position as at 31 December 20.16 amounted to R110
000.

Required

(a) Prepare the consolidated statement of profit or loss and other

comprehensive income and consolidated statements of changes in equity of
the P Ltd Group for the year ended 31 December 20.17;

(b) Indicate the components that the carrying amount of the investment in
associate on 31 December 20.17 are compiled of; and

(c) Prepare the following notes in the consolidated financial statements of

the P Ltd Group for the year ended 31 December 20.17 (ignore comparative
amounts): l Profit before tax;

l Investment in associate.

141

Chapter 11

Suggested solution 11.1

Part (a)

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (P)

5 873 000

Cost of sales (P)

(4 600 000)

Gross profit

1 273 000

Other income (14 000 + 15 000 – 8 400)

20 600

Share of profit of associate (32 700(C1) – 15 000 + 3 360(C2)) 21 060

Profit before tax

1 314 660

Income tax expense

Current (P)

(390 000)

Deferred (P)

(90 000)

PROFIT FOR THE YEAR

834 660
Other comprehensive income

Items that will not be reclassified to profit or loss

Share of other comprehensive income of associate

1 500

Other comprehensive income for the year, net of tax

1 500

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R836 160

Profit attributable to:

Owners of the parent

810 660

Non-controlling interests

24 000

R834 660

Total comprehensive income attributable to:

Owners of the parent

812 160

Non-controlling interests

24 000

R836 160
142

Investments in associates and joint ventures P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revalu-

Non-

Retained

ation

controlling

Total

earnings

surplus

interests

Balance at 1 January 20.17

# 1 170 300

3 000

110 000 1 283 300

Changes in equity for 20.17

Dividends (P)

(235 000)
–

(235 000)

Total comprehensive income

for the year:

Profit for the year

810 660

24 000

834660

Other comprehensive income

–1

500

1 500

Balance at 31 December 20.17

* R1 745 960

@ R4 500

R134 000 1 882 960

# 1 149 000(P) + 21 300(C1) = 1 170 300

*

Test: 1 712 000(P) + 45 600(C1) – 15 000 + 3 360(C2) = 1 745 960

@ Test: 0(P) + 4 500(C1) = 4 500

Part (b)

Investment in associate

The carrying amount of the investment is compiled as follows: l Cost

50

000

l Cumulative since acquisition equity 50

100

• Retained earnings to beginning of the current year

21 300

• Profit for the current year (32 700 – 8 400)

24 300

• Revaluation

surplus

500

# R100 100

# Test: 50 000(cost) + 45 600(retained earnings C1) + 4 500(revaluation

surplus C1) = 100 100
Part (c)

1 Profit before tax

Profit before tax is stated after taking into account the following expenses: l
Secretarial services

R20 000

l Directors’ remuneration – for services as director

R100 000

143

Chapter 11

2 Investment in associate

P Ltd owns a 15% interest in the manufacturing company, A Ltd. A Ltd is

incorporated in South Africa and its principal place of business is Cape
Town. The interest is equity accounted for.

Summarised financial information of associate

Non-current assets

1 561 100

Current assets

438 900

Non-current liabilities

1 300 000

Current liabilities
96 000

Revenue

1 857 000

Profit for the year

248 000

Total comprehensive income

248 000

Reconciliation to the carrying amount of the investment Net assets of

associate

604 000

15% interest in net assets of associate

90 600

Plus: Goodwill at acquisition

9 500

Carrying amount of investment in associate

100 100

Fair value of investment in associate

The fair value of the investment in the associate is R92 250

(R4,10 × 22 500 shares)

Calculations

C1 Analysis of owners’ equity of A Ltd

P Ltd 15%

Total

At

Since

i At acquisition (1/9/20.15)

Share capital

150 000

22 500

Retained earnings

100 000

15 000

Revaluation surplus

20 000

3 000

270 000

40 500

Investment in A Ltd

(50 000)

Goodwill

(R9
500)

ii Since acquisition

• To beginning of current year:

Revaluation surplus

20 000

3 000

Retained earnings (242 000 – 100 000)

142 000

21 300

• Current year:

Revaluation surplus

10 000

1 500

Profit for the year

218 000

32 700

Dividends

(56 000)

(8 400)

R604 000
45 600 RE

4 500 RS

144

Investments in associates and joint ventures C2 Journals in respect of

unrealised profit

Dr

Cr

J1

Share of profit of associate (P/L)

15 000

Land (SFP) (100 000 × 15% = 15 000)

15 000

J2

Deferred tax (SFP) (15 000 × 28% × 80%)

3 360

Share of profit of associate (P/L)

3 360

Question 11.2

Basic equity accounting/reporting dates differ

On 1 January 20.13, P Ltd purchased 40% of the issued share capital of A
Ltd for R65 000. On this date, the retained earnings of R70 000 were the
only reserve of A Ltd.

Except for land, which was undervalued by R5 000, all the assets of A Ltd
were fairly valued. A Ltd’s share capital consisted of 100 000 shares of R1
each. P Ltd exercises significant influence over the financial and operating
decisions of A Ltd.

The following represents the statements of profit or loss and other

comprehensive income and an extract from the statements of changes in
equity of the two companies for the relevant periods:

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

Ltd

A Ltd

Group

30/9/20.17

31/12/20.17

Revenue

1 000 000

850 000

Cost of sales

(880 000)

(710 000)
Gross profit

120 000

140 000

Other income (dividend received)

8 000

Profit before tax

128 000

140 000

Income tax expense

(60 000)

(70 000)

PROFIT FOR THE YEAR

68 000

70 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation of land

10 000
Income tax relating to other comprehensive income

(1 500)

Other comprehensive income for the year, net of tax

8 500

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R68 000

R78 500

Profit attributable to:

Owners of the parent

63 000

70 000

Non-controlling interests

5 000

R68 000

R70 000

Total comprehensive income attributable to:

Owners of the parent

63 000

78 500

Non-controlling interests

5 000

R68 000

R78 500

145

Chapter 11

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

Retained

earnings

Ltd

A Ltd

Group

30/9/20.17

31/12/20.17

Balance at 1 January 20.17

260 000
150 000

Changes in equity for 20.17

Dividends paid (30 June 20.17)

(15 000)

(20 000)

Total comprehensive income for the year:

Profit for the year

63 000

70 000

Balance at 31 December 20.17

R308 000

R200 000

Additional information

1 The reporting date of P Ltd is 31 December and that of A Ltd is 30

September.

2 Since the acquisition date, the investment in A Ltd has been accounted for
according to the equity method in the consolidated financial statements.

3 The revaluation surplus arose during June 20.17 when A Ltd revalued its
land.

Deferred tax on revaluations of land is recognised at the capital gains tax

rate of 15% (namely half of the normal tax rate of 30%).

4 During November 20.17, A Ltd suffered a loss of R30 000 when a

warehouse burned down. This is regarded as a significant event.
5 The balance of non-controlling interests in the P Ltd Group’s consolidated
statement of financial position as at 31 December 20.16 amounted to R75
000.

6 Assume a normal tax rate of 28% and that 80% of capital gains are taxable.

Required

(a) Prepare the consolidated statement of profit or loss and other

comprehensive income and consolidated statement of changes in equity of
the P Ltd Group which account for the results of A Ltd according to the
equity method; and (b) Calculate the investment in the associate as it will
appear in the consolidated statement of financial position at 31 December
20.17. Also show the compilation thereof.

146

Investments in associates and joint ventures Suggested solution 11.2

Part (a)

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (P)

1 000 000

Cost of sales (P)

(880 000)

Gross profit

120 000
Share of profit of associate (C1)

16 000

Profit before tax

136 000

Income tax expense (P)

(60 000)

PROFIT FOR THE YEAR

76 000

Other comprehensive income

Items that will not be reclassified to profit or loss

Share of other comprehensive income of associate

1 552

Other comprehensive income for the year, net of tax

1 552

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R77 552

Profit attributable to:

Owners of the parent

71 000

Non-controlling interests
5 000

R76 000

Total comprehensive income attributable to:

Owners of the parent

72 552

Non-controlling interests

5 000

R77 552

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-

Retained

Revaluation controlling

Total

earnings

surplus

interests

Balance at 1 January 20.17

# 296 552
–

75 000

371 552

Changes in equity for 20.17

Dividends (P)

(15 000)

(15 000)

Total comprehensive income

for the year:

Profit for the year

71 000

5 000

76 000

Other comprehensive income

–1

552

–
1 552

Balance at 31 December 20.17

* R352 552

R1 552

R80 000

R434 104

# 260 000(P) + 32 000 + 4 552(C1) = 296 552

308 000(P) + 40 000 + 4 552(C1) = 352 552

147

Chapter 11

Part (b)

Investment in associate

The carrying amount of the investment in associate is compiled as follows: l

Cost

65

000

l Cumulative since acquisition equity 46

104

• Retained earnings to beginning of the current year (32 000 + 4 627) 36

552
• Profit for the current year (16 000 – 8 000)

8 000

• Revaluation

surplus

552

# R111 104

# Test: 65 000(cost) + 40 000(retained earnings C1) + 1 552(revaluation

surplus C1) + 4 627 (bargain purchase C1) = 111 104

Calculation

C1 Analysis of owners’ equity of A Ltd

P Ltd 40%

Total

At

Since

i At acquisition (1/1/20.13)

Share capital

100 000

40 000

Retained earnings

70 000
28 000

Revaluation surplus (2)

3 880

1 552

173 880

69 552

Investment in A Ltd

(65 000)

Gain from a bargain purchase

R4 552

ii Since acquisition

• To beginning of current year:

Retained earnings (1)

80 000

32 000

• Current year:

Profit for the year (70 000 – 30 000)

40 000

16 000

Revaluation surplus (3)#

3 880

1 552

Dividends

(20 000)

(8 000)

R277 760

R40 000 RE

R1

552 RS

(1) 150 000 – 70 000 = 80 000

(2) 5 000 – (5 000 × 28% × 80%) = 3 880

(3) (10 000 – 5 000 #) = 5 000 – (5 000 × 28% × 80%) = 3 880

A Ltd revalued its land by R10 000 in its own financial statements, but P Ltd
had already revalued the land of A Ltd by R5 000 at date of acquisition of
the interest in A Ltd.

148

12

Interests in joint arrangements

Basic concepts

12.1
Description of basic concepts ..................................................................

151

12.2

Types of joint arrangements ....................................................................

151

Classification of joint arrangements .....................................................

152

12.3

Structure of the joint arrangement ...........................................................

153

12.4

Legal form of the separate vehicle ...........................................................

153

12.5

Terms of the contractual arrangement .....................................................

154

12.6

Other facts and circumstances ................................................................

154

Accounting for joint arrangements

12.7 Joint

operations

........................................................................................

156

12.8 Joint

ventures

...........................................................................................

156

Disclosure ........................................................................................................

157

Examples

Example 12.1:

Basic approach – Joint arrangement in a separate entity ........

158

Example 12.2:

Joint operation not structured in a separate entity ....................

164

149

Interests in joint arrangements

Basic concepts
12.1 Description of basic concepts

IFRS 11 Joint Arrangements focuses on investments where an investor can

exercise

joint control, in contrast to control that is established between a parent and a

subsidiary in terms of IFRS 10 Consolidated Financial Statements.

A joint arrangement is an arrangement where two or more parties exercise

joint control that is the contractually agreed sharing of control. This means
that the unanimous consent of the parties sharing control is required for all
decisions about the relevant activities.

A joint arrangement is classified as follows:

l assess if collective control of an arrangement exists; and l then assess if the

contractual arrangement gives two or more parties joint control.

Collective control of an arrangement exists when all the parties must act
together to direct the activities that significantly affect the returns of the
arrangement. If collective control exists, it must be assessed whether joint
control exists.

Joint control is the contractually agreed sharing of control over an

arrangement, which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control. An entity must
assess whether all the parties have joint control of the arrangement. No
single party can control the arrangement individually.

Control is not defined in IFRS

11. In accordance with IFRS 10 Consolidated

Financial Statements an investor controls an investee when it is exposed or

has rights to variable returns from its involvement with that investee and has
the ability to affect those returns through its power of the investee.

An arrangement can be a joint arrangement even though not all of its parties
have joint control of the arrangement. Therefore, there are parties exercising
joint control of an arrangement and other parties participating in the
arrangement. An entity must apply its judgement to assess whether all of the
parties jointly control an arrangement.

12.2 Types of joint arrangements

A joint arrangement is an arrangement of which two or more parties have

joint control.

IFRS 11 identifies two types of joint arrangements: a joint operation and a

joint venture. The following characteristics are present in both: l two or
more parties are bound by a contractual arrangement; and l the contractual
arrangement establishes joint control.

A contractual arrangement is often in writing in the form of a formal

contract or minutes of discussions between parties. When the joint
arrangement is structured through a separate vehicle, the contractual
arrangement or some aspects thereof will be incorporated in the articles,
charter or by-laws of this entity. A separate vehicle is a separately
identifiable financial structure, including separate legal entities or entities
151

Chapter 12

recognised by statute, regardless of whether those entities have a legal

personality.

The contractual arrangement deals with the following:

l the purpose, activities and duration of the joint arrangement; l the

appointment of the board of directors or similar governing body of the joint
arrangement;

l the decision-making process: the matters requiring decisions from the

parties, the voting rights of the parties and the required level of support for
those matters. This process establishes joint control of the arrangement;

l capital or other contributions required of the parties; and l the sharing of

production, revenues, expenses or profit or loss of the joint arrangement.
A joint operation is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the assets and obligations for the
liabilities relating to the arrangement. Those parties are called joint
operators.

A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement.
Those parties are called joint venturers.

Is it a joint arrangement?

Does the contractual arrangement give the parties

(or a group of parties) all control of the arrangement

collectively?

No

Ļ Yes

Outside the

scope of

Do the decisions about the relevant activities

IFRS 11

require the unanimous consent of all the parties

(not a joint

that collectively control the arrangement?

No
arrangement)

Ļ Yes

Joint arrangement

Classification of joint arrangements

The classification of a joint arrangement depends upon the rights and

obligations of the parties to the arrangement. An entity must consider the
following in order to classify a joint arrangement:

l the structure of the joint arrangement;

l when a joint arrangement is structured through a separate vehicle:

• the legal form of the separate entity;

• the terms of the contractual arrangement; and

• other facts and circumstances, if applicable.

152

Interests in joint arrangements

Sometimes a framework agreement exists that contains the general terms for
one or more activities, which sets out that the parties establish different joint
arrangements for specific activities that form part of the same agreement.
Even though those joint arrangements are governed under the same
framework agreement, they may be classified as different types of
arrangements if the rights and obligations differ.

Therefore, joint operations and joint ventures can co-exist when different
activities are undertaken by the parties that form part of the same framework
agreement.

12.3 Structure of the joint arrangement

Joint arrangements can either be structured through a separate vehicle, or
not.

A joint arrangement which is not structured through a separate vehicle can

only be classified as a joint operation. In such cases the contractual
arrangement establishes the rights and obligations of the parties, for
example, where the parties agree to manufacture a product together, with
each party being responsible for a specific task by using its own resources
and incurring its own liabilities. The contractual arrangement can also
specify how the revenues and expenses are to be shared. Another example is
where the parties to a joint arrangement might agree to share and operate an
asset together. The contractual arrangement establishes the parties’ rights to
the jointly operated asset and how the output or revenue earned from the
asset and the operating costs are shared between the parties. In such a case,
each joint operator accounts for its assets and liabilities used for the specific
task or its share of the jointly operated asset in its financial statements, as
well as its share of the revenues and expenses according to the contractual
arrangement.

A joint arrangement in which the assets and liabilities are held in a separate
vehicle can be classified either as a joint operation or a joint venture,
depending on the rights and obligations of the parties. The legal form of the
separate vehicle, the terms of the contractual arrangement and other facts
and circumstances must be considered to assess whether the parties either
have rights to the assets and obligations for the liabilities of the arrangement
(i.e. a joint operation), or they have rights to the net assets of the
arrangement (i.e. a joint venture).

12.4 Legal form of the separate vehicle

The legal form of the separate vehicle is considered in the initial assessment
of the parties’ rights to the assets and obligations for the liabilities held in the
separate vehicle.

When the joint arrangement is structured through a separate vehicle, the

legal form causes the separate vehicle to be considered in its own right, that
is the assets and liabilities held in the separate vehicle, are the assets and
liabilities of the separate vehicle and not those of the parties. In such a case
the assessment of the rights and obligations indicates that the arrangement is
a joint venture.

However, the terms agreed by the parties in the contractual arrangement, as

well as other facts and circumstances, can override the initial assessment of
the rights and obligations as was determined by the legal form.

An arrangement can only be classified as a joint operation when the

assessment of the rights and obligations as determined by the legal form,
indicate no separation between the parties and the separate vehicle. Thus the
assets and liabilities of the separate vehicle are the assets and liabilities of
the parties.

153

Chapter 12

12.5 Terms of the contractual arrangement

In many cases the rights and obligations agreed to by the parties in the
contractual arrangement are consistent, or do not conflict, with the rights and
obligations that determined the legal form of the separate vehicle in which
the arrangement has been structured.

In other cases, the parties use the contractual arrangement to reverse or

modify the rights and obligations as determined by the legal form of the
separate vehicle.

When the contractual arrangement specifies that the parties have rights to the
assets and obligations for the liabilities of the arrangement, the arrangement
is classified as a joint operation and other facts and circumstances do not
need to be considered for classification purposes.

12.6 Other facts and circumstances

Even though the fact that the legal form and the contractual arrangement
may indicate that it is a joint operation, other facts and circumstances may: l
give the parties rights to substantially all the economic benefits relating to
the arrangement; and
l cause the arrangement to depend on a continuous basis on the parties for
settling its liabilities.

In such a case the arrangement is classified as a joint operation.

When the activities of the arrangement are designed to provide output to the
parties, it is an indication that the parties have rights to substantially all the
economic benefits of the assets of the arrangement. Parties to such
arrangements often ensure their access to the output of the arrangement by
preventing sales to third parties. The effect of such an arrangement is that the
liabilities incurred by the arrangement, is settled only by the cash flow
received from the parties through their purchases of the output. When the
parties are the only source of cash flow contributing to the continuity of the
operations, this indicates that the parties have an obligation for the liabilities
of the arrangement and thus such an arrangement is classified as a joint
operation.

154

Interests in joint arrangements

Classification of a joint arrangement structured through a separate

vehicle Does the legal form of the

separate vehicle give the

Legal form of

parties rights to the assets,

the separate

Yes

and obligations for the

vehicle
liabilities, relating to the

arrangement?

No

Do the terms of the

contractual arrangement

Terms of the

specify that the parties

Yes

contractual

have rights to the assets,

arrangement

and obligations for the

liabilities, relating to the

arrangement?

No

Joint

operation
Have the parties designed

the arrangement so that:

Yes

Its activities primarily

aim to provide the

parties with an output

(i.e. the parties have

rights to substantially all

of the economic benefits

Other facts and

of the assets held in the

circumstances

separate vehicle); and

l It depends on the

parties on a continuous

basis for settling the

liabilities relating to the

activity conducted
through the

arrangement?

No

Joint venture

155

Chapter 12

Accounting for joint arrangements

12.7 Joint

operations

A joint operator includes its interest in a joint operation in its own

accounting records and accounts for its interest in its separate financial
statements and, if applicable, in its consolidated financial statements
according to its share in the joint operation. This includes:

l its assets, including its share of any assets held jointly; l its liabilities,
including its share of any liabilities incurred jointly; l its share of the revenue
from the sale of its share of the output from the joint operation, as well as its
share of the revenue from the sale of the output by the joint operation; and

l its expenses, including its share of any expenses incurred jointly.

A party participating in a joint operation but who does not have joint control,
shall account for its interest in the arrangement in the same way as described
above, if the party has rights to the assets and obligations for the liabilities of
the arrangement.

If such a party does not have rights to the assets and obligations form the
liabilities of the arrangement, the interest will be accounted for in
accordance with IFRS 9 Financial Instruments .

12.8 Joint

ventures

A joint venturer shall account for its interest in a joint venture by applying
the equity method in accordance with IAS 28 Investments in Associates
and Joint Ventures.

The equity method is an accounting method in terms of which the interest in

a joint venture is initially recorded at cost and is subsequently adjusted for
the venturer’s share of the post-acquisition share of net assets of the joint
venture (refer to chapter 11, Investments in associates, for a detailed
discussion and explanation of the equity method).

If a party only participates in a joint arrangement and does not have joint
control, the interest in the arrangement must be accounted for in accordance
with IFRS 9 Financial Instruments .

Joint arrangement

Accounting treatment

Joint operation

Joint venture

Separate

Recognise own assets,

l Cost or

financial statements

liabilities and transactions,

l Financial asset
including its share of those

(IFRS 9)

incurred jointly

Consolidated

Recognise own assets,

Equity method (IAS 28)

financial statements

liabilities and transactions,

including its share of those

incurred jointly

156

Interests in joint arrangements

Comment

The interest in a joint operation is recognised in an entity’s separate

financial statements. Consequently there is no difference in what is
recognised in the entity’s

separate financial statements and the entity’s consolidated financial

statements.

Disclosure

The disclosure requirements for joint arrangements and associates are set out
in IFRS 12 Disclosure of Interests in Other Entities (IFRS12.20–23).

An entity must disclose information to enable users of the financial

statements to evaluate the nature, extent and financial effects of interests in
joint arrangements, including the nature and effects of contractual
relationships with other investors with joint control, as well as the nature of
and changes in the risks associated with these investments.

An entity must disclose information about significant adjustments and

assumptions made in determining:

l if the entity has joint control of an arrangement or significant influence

over another entity; and

l the type of joint arrangement (i.e. a joint operation or joint venture) if the
arrangement was structured through a separate vehicle.

The following disclosure requirements are applicable specifically to joint

arrangements that are both joint operations and joint ventures The
following information must be disclosed separately for each joint
arrangement (which includes joint operations and joint ventures) that is
material to the reporting entity:

l the name of the joint arrangement;

l the nature of the entity’s relationship with the joint arrangement; l the
principal place of business (and country of incorporation, if applicable or
different); and

l the proportion of ownership interest or participating share and if different,

the proportion of voting rights held.

The following disclosure requirements are applicable specifically to joint

ventures

The following information must be disclosed for every joint venture that is
material to the reporting entity:

l whether the investment in the joint venture is measured using the equity
method or at fair value;

l summarised financial information of the joint venture (obtained from the

financial statements, the total amount and not only the investor’s share
thereof), including dividends received, non-current and current assets, non-
current and current liabilities, revenue, profit or loss from continuing and
discontinued operations, other comprehensive income and total
comprehensive income;

157

Chapter 12

l in addition, for every material joint venture, cash and cash equivalents,
financial current and non-current liabilities (excluding trade and other
creditors and provisions), depreciation and amortisation, interest income,
interest expense and income tax expense;

l if the equity method is applied, the fair value of investments in joint

ventures for which there are published price quotations;

l if the equity method is applied, the amounts in the financial statements of

the joint venture must be adjusted by fair value adjustments at acquisition
and adjustments for differences in accounting policy;

l if the equity method is applied, a reconciliation must be provided between

the summarised financial information and the carrying amount of the interest
in the joint venture; and

l if the interest is measured at fair value or if the joint venture does not
prepare IFRS

financial statements, the summarised financial information may be prepared

on the basis of the joint venture’s financial statements.

The following information must be disclosed for joint ventures which are
individually immaterial to the reporting entity. It must be disclosed in total
and separately for all joint ventures which are individually immaterial:

l the carrying amount in total of all individually immaterial joint ventures

that were equity accounted for; and
l summarised financial information of the joint venture, including profit or
loss from continuing and discontinued operations, other comprehensive
income and total comprehensive income.

The following must also be disclosed:

l the nature and extent of any significant restrictions on the joint venture’s
ability to transfer funds to the entity;

l if the reporting periods of the entity and the joint venture differ, the
reporting period of the joint venture should be mentioned, as well as the
reason for the use of different reporting periods;

l the unrecognised share of losses of a joint venture, both for the current
period and cumulatively;

l commitments that the entity has relating to its joint ventures, which must be
separately disclosed from any commitments mentioned above; and l any
contingent liabilities incurred relating to interests in joint ventures in
accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets which must be separately disclosed.

Examples

Example 12.1

Basic approach – Joint arrangement in a separate entity

On 2 January 20.15, P Ltd acquired 40% of the issued shares of J (Pty) Ltd
for R100 000. On this date, the shareholders’ equity of J (Pty) Ltd consisted
of the following:

Share capital (200 000 shares)

200 000

Retained earnings 50

000
R250 000

158

Interests in joint arrangements

P Ltd exercises joint control over the financial and operating policy
decisions of J (Pty) Ltd in terms of a joint arrangement.

Assume a normal tax rate of 28% and that 80% of capital gains are taxable.

The abridged consolidated financial statements of P Ltd and its subsidiaries,

as well as the abridged financial statements of J (Pty) Ltd for the year ended
31 December 20.17, are shown below.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

P Ltd

J (Pty)

Group

Ltd

ASSETS

Property, plant and equipment

750 000

300 000

Investment in J (Pty) Ltd: (80 000 shares at cost)

100 000

–
Inventories

750 000

200 000

Total assets

R1 600 000

R500 000

EQUITY AND LIABILITIES

Share capital

500 000

200 000

Retained earnings

700 000

200 000

Non-controlling interests

150 000

Long-term loans

250 000

100 000

Total equity and liabilities

R1 600 000

R500 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd

J (Pty)

Group

Ltd

Profit

800 000

600 000

Dividends received from J (Pty) Ltd

120 000

Profit before tax

920 000

600 000

Income tax expense

(320 000)

(240 000)
PROFIT FOR THE YEAR

600 000

360 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R600 000

R360 000

Total comprehensive income attributable to:

Owners of the parent

550 000

360 000

Non-controlling interests

50 000

R600

000

R360 000

159

Chapter 12

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained earnings

P Ltd Group J (Pty) Ltd

Balance at 1 January 20.17 400

000

140 000

Changes in equity for 20.17

Dividends paid

(250 000)

(300 000)

Total comprehensive income for the year:

Profit for the year

550 000

360 000

Balance at 31 December 20.17

R700 000

R200 000

The joint arrangement will be accounted for as follows:

(i) Assume that, after considering all the requirements, the joint arrangement
is classified as a joint operation. The contractual arrangement specifies that
all revenues, expenses, assets and liabilities are allocated according to the
respective interests held by the operators.

(ii) The joint arrangement is classified as a joint venture.

Solution 12.1

(i) Joint operation

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (750 000(P) + 120 000(J))

870 000

Current assets

Inventories (750 000(P) + 80 000(J))

830 000

Total assets

R1 700 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

500 000

Retained earnings

760 000
1 260 000

Non-controlling interests

150 000

Total equity

1 410 000

Non-current liabilities

Long-term loans (250 000(P) + 40 000(J))

290 000

Total equity and liabilities

R1 700 000

160

Interests in joint arrangements

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Profit before tax (800 000(P) + 240 000(J))

1 040 000

Income tax expense (320 000(P) + 96 000(J)) (416

000)
PROFIT FOR THE YEAR

624 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R624 000

Total comprehensive income attributable to:

Owners of the parent

574 000

Non-controlling interests (P)

50 000

R624 000

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Balance at 1 January 20.17 (400 000(P) + 36 000(J)) 436

000

Changes in equity for 20.17

Ordinary dividends (P)

(250 000)
Total comprehensive income for the year:

Profit for the year

574 000

Balance at 31 December 20.17 (Test: 700 000(P) + 60 000(J))

R760 000

Comment

There is no difference in recognising the joint operation in the entity’s

separate financial

statements and the entity’s consolidated financial statements. In the above

example the joint operation is shown in the consolidated financial statements
as a result of other interests held by the parent (the given information
included non-controlling interests).

161

Chapter 12

(ii) Joint venture

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P)

750 000
Investment in joint venture (100 000 + 60 000)

160 000

910 000

Current assets

Inventories (P)

750 000

Total assets

R1 660 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

500 000

Retained earnings

760 000

1 260 000

Non-controlling interests

150 000

Total equity

1 410 000

Non-current liabilities
Long-term loans (P)

250 000

Total equity and liabilities

R1 660 000

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Profit (P)

800 000

Share of profit of joint venture

144 000

Profit before tax

944 000

Income tax expense (P)

(320 000)

PROFIT FOR THE YEAR

624 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R624 000
Total comprehensive income attributable to:

Owners of the parent

574 000

Non-controlling interests (P)

50 000

R624 000

162

Interests in joint arrangements

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

Balance at 1 January 20.17 (400 000(P) + 36 000(J)) 436

000

Changes in equity for 20.17

Dividends (P)

(250 000)

Total comprehensive income for the year:

Profit for the year (550 000 + 24 000)

574 000

Balance at 31 December 20.17 (Test: 700 000(P) + 60 000(J))

R760 000

Calculations

C1 Analysis of owners’ equity of J (Pty) Ltd

P Ltd 40%

Total

At

Since

i At acquisition

Share

capital

200 000

80 000

Retained

earnings

50 000

20 000

250 000

100 000
Investment in J (Pty) Ltd (cost)

(100 000)

ii Since acquisition

• To beginning of current year

Retained

earnings

(140 000 – 50 000)

90 000

36 000

• Current year

Profit for the year

360 000

144 000

Dividends

paid

(300 000)

(120 000)
R400 000

R60 000

C2 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in joint venture (SFP)

60 000

Dividends received (P/L) (given)

120 000

Retained

earnings

– Beginning of year (SCE)

((140 000 – 50 000) × 40%)

36 000

Share of profit of joint venture (P/L)

144

000
Accounting for the joint venture according to the

equity method

163

Chapter 12

Example 12.2

Joint operation not structured in a separate entity

P Ltd has various farming activities. On 1 January 20.16, P Ltd entered into
the following contractual agreement with Z Ltd:

l Z Ltd will be the only supplier of P Ltd’s wheat to customers for the
following two years. Z Ltd will market and distribute the wheat. Z Ltd will
acquire the necessary equipment to distribute the wheat at its own cost and
also make use of its own assets.

l P Ltd will continue to use its own equipment and existing employees to
produce the wheat. These employees and equipment are also used in P Ltd’s
other farming activities. P Ltd is responsible for all expenses relating to the
production of the wheat.

l Z Ltd incurs all expenses on the retail side. All income from the sale of
wheat will be collected by Z Ltd and then shared in the ratio 50:50 between
Z Ltd and P Ltd (the profit of the joint operation is also shared in this ratio).

l Once the wheat inventory has been transferred to Z Ltd, the inventory (and
any accounts receivable resulting from the sales) belongs to the operators
jointly.

This arrangement is not structured through a separate entity.

The information for the joint operation for the year ended 31 December
20.16 is as follows (no settlement between the joint operators had occurred):
R
Revenue from sales

2 250 000

Gross production cost

1 275 000

Retail and distribution costs

600 000

Closing inventory (P Ltd)

165 000

Closing inventory (Z Ltd)

172 500

Accounts receivable (31 December 20.16)

322 500

Solution 12.2

Journal entries (P Ltd)

Dr

Cr

J1

Inventory (SFP)
1 275 000

Bank (SFP)

1 275 000

Cost of production

J2

Joint operation receivable (SFP) (1 275 000 – 165 000)

1 110 000

Inventory (SFP)

1 110 000

Inventory transferred to joint operation

continued

164

Interests in joint arrangements

Dr

Cr

J3

Cost of sales (P/L) ((1 110 000 – 172 500 + 600 000) × 50%) 768

750
Joint operation receivable (SFP)

356 250

Revenue

(P/L)

(2 250 000 × 50%)

1 125 000

Share of profit from joint operation

J4

Inventory (SFP) (joint operation) (172 500 × 50%) 86

250

Accounts receivable (SFP) (joint operation) (322 500 ×

161 250

50%)

Joint operation receivable (SFP)

247 500

Recognise joint operation inventory and receivable

Journal entries (Z Ltd)

Dr

Cr

R
R

J1

Joint operation payable (SFP)

600 000

Bank (SFP)

600 000

Cost of distribution

J2 Bank

(SFP)

(2 250 000 – 322 500)

1 927 500

Joint operation payable (SFP)

1 927 500

Revenue received in cash

J3

Cost of sales (P/L) ((1 110 000 – 172 500 + 600 000) × 50%) 768

750

Joint operation payable (SFP)

356 250

Revenue
(P/L) (2 250 000 × 50%)

1 125 000

Share of profit from joint operation

J4

Inventory (SFP) (joint operation) (172 500 × 50%) 86

250

Accounts receivable (SFP) (joint operation) (322 500 ×

161 250

50%)

Joint operation payable (SFP)

247 500

Recognise joint operation inventory and receivable

165

13

Changes in ownership of subsidiaries

through buying or selling shares

Introduction

13.1

Methods of change in ownership .............................................................

170
Acquisition of interests in subsidiaries

13.2

Methods of step-acquisition .....................................................................

171

13.3

Acquisition of an additional interest in an existing subsidiary ..................

171

Example 13.1a: Acquisition of a further interest in an existing subsidiary

where the subsidiary remains a subsidiary

(there is no change in status) (NCI is measured

at its proportionate share of the acquiree’s identifiable

net assets at the acquisition date) ..................................

172

Example 13.1b: Acquisition of a further interest in an existing subsidiary

where the subsidiary remains a subsidiary

(there is no change in status) (NCI is measured

at fair value at the date of acquisition). ............................

181

13.4

Acquisition of an additional interest whereby the investee

(investment) becomes a subsidiary .........................................................

187

Example 13.2:

Acquisition of a further interest where the investment

becomes a subsidiary (NCI is measured at fair value

at the date of acquisition). ..............................................

189

13.5

Acquisition of an additional interest whereby an associate becomes

a subsidiary ..............................................................................................

196

Example 13.3:

Acquisition of a further interest where an associate

becomes a subsidiary (control is obtained)

(NCI is measured at its proportionate share

of the acquiree’s identifiable net assets

at the acquisition date). ..................................................

198

Disposal of interests in a subsidiary

13.6
Basic approach on disposal of an interest ...............................................

205

167

Chapter 13

13.7

Partial disposal of an interest in a subsidiary where control is not lost ....

207

Example 13.4a: Partial disposal of an interest in a subsidiary with no

change in the status as the subsidiary remains a

subsidiary (control is not lost) (NCI is measured at its

proportionate share of the acquiree’s identifiable net

assets at the acquisition date) ........................................

208

Example 13.4b: Partial disposal of an interest in a subsidiary with no

change in the status as the subsidiary remains a

subsidiary (control is not lost) (NCI is measured at fair

value at the date of acquisition). .....................................

219

13.8

Loss of control with partial disposal of a subsidiary, with a simple

investment retained ..................................................................................

224

Example 13.5:

Partial disposal of a subsidiary (loss of control) and an

investment retained (NCI is measured at their

proportionate share of the acquiree’s identifiable net

assets at the acquisition date). .......................................

228

13.9

Partial disposal of an interest in a subsidiary, whereby it becomes

an associate .............................................................................................

237

Example 13.6:

Partial disposal of an interest in a subsidiary resulting

in a change in status as the subsidiary becomes an

associate (a loss of control by the parent occurs) (NCI is

measured at its proportionate share of the acquiree’s

identifiable net assets at the acquisition date) .................

237

13.10
Loss of control and intragroup sale of assets ..........................................

249

Example 13.7:

Loss of control over a subsidiary with previous

intragroup profits on the sale of depreciable assets .........

250

13.11

Changes of interest in complex groups ...................................................

261

Self-assessment questions

Question 13.1
........................................................................................................

262

Question 13.2
........................................................................................................

270

Question 13.3
........................................................................................................

275

168

Changes in ownership of subsidiaries through buying or selling shares

Changes in ownership of subsidiaries through buying or selling shares
Acquisitions
Disposals

Increased interest in existing

Partial disposal of interest in existing

subsidiary

subsidiary

l Transaction with owners

l Transaction with owners

l Change in the relative interests of the

l Change in the relative interests of the

owners recognised directly in equity

owners recognised directly in equity

NCI at

NCI

at

NCI at

NCI at

proportionate

proportionate

fair value

fair value
share

share

Investment becomes subsidiary

Disposal of subsidiary

l Constitutes a business combination

l Loss of control

l Remeasure previously held equity

l Derecognise net assets, goodwill and

interest to fair value and recognise

NCI of subsidiary and recognise gain

remeasurement in profit or loss or

or loss

other comprehensive income as

l Treat any amounts in OCI of subsidiary

appropriate

as if underlying assets were sold

l Treat cumulative fair value

l Remeasure retained interest to fair

adjustments on investment as if

value and recognise gain or loss

investment was sold

Associate becomes subsidiary

Subsidiary becomes associate

l Equity-accounting for associate

l Loss of control

l Constitutes a business combination

l Derecognise net assets, goodwill and

l Remeasure previously held equity

NCI of subsidiary and recognise gain

interest from carrying amount to fair

or loss

value and recognise remeasurement

l Treat any amounts in OCI of subsidiary

in profit or loss

as if underlying assets were sold

l Treat any amounts in OCI of

l Remeasure retained equity interest to

associate as if underlying assets

fair value and recognise gain or loss

were sold
l Equity-accounting for associate

Changes of interest in complex

Subsidiary held for sale

groups

l (End of chapter 14)

l Integrated revision example

169

Chapter 13

Introduction

13.1 Methods of change in ownership

Changes in ownership in an investee can occur in the following

circumstances: l piecemeal acquisition of interests in an investee from other
owners; l disposal of interests in an investee to other owners;

l as a result of the issue of additional shares by an investee; l as a result of a

buy-back of shares by an investee; and l as a result of other events such as
obtaining or losing control through a contract with other owners.

In previous chapters, it was accepted that:

l the parent acquired control over the subsidiary as a result of a single

purchase of shares or as a result of the issue of shares to the parent upon
incorporation of the subsidiary; and

l the parent’s interest in the subsidiary remained unchanged throughout the

entire period covered by the financial report.

This assumption was adopted in order not to obscure the basic aspects
involved in the preparation of consolidated financial statements.
It may nevertheless happen that control is obtained not in a single purchase,
but by means of successive share purchases, or that various changes in the
nature and extent of ownership of the parent in, or influence of the parent
over, the investee could have taken place.

It is important to note that any acquisition of control over a business would

constitute a business combination in terms of IFRS 3. Disclosure of the
business combination should be made in terms of IFRS 3.59–63 and B64–
B67. In this chapter the business combination would be achieved in stages
and the following information should, in particular, be disclosed (IFRS
3.B64(p)):

l the acquisition-date fair value of the equity interest in the acquiree held by
the acquirer immediately before the acquisition date;

l the amount of any gain or loss recognised as a result of re-measuring to fair

value the equity interest in the acquiree held by the acquirer before the
business combination; and

l the line item in the statement of profit or loss and other comprehensive
income in which that gain or loss is recognised.

The issues arising in the preparation of consolidated financial statements of a

group when changes occur in the nature and extent of ownership of the
parent in a subsidiary are discussed in this chapter. This chapter only deals
with: l changes in ownership of subsidiaries; where

l the

parent

buys or sells shares of the subsidiary.

Changes in the ownership of associates and joint ventures through buying or

selling shares of the associate and joint ventures were addressed in the
chapter on investments in associates and joint ventures (see chapter 11). The
next chapter of this work deals with other changes (e.g. rights issues,
buyback, etc.) in the ownership of investees (see chapter 14).
170

Changes in ownership of subsidiaries through buying or selling shares

Acquisition of interests in subsidiaries

13.2 Methods

of

step-acquisition

There are various ways in which interests can be acquired on a piecemeal

basis: l acquisition of an additional interest in an existing
subsidiary/associate/joint venture (i.e. there is no change in status of the
investee); and l acquisition of an additional interest in an entity, with the
result that the entity becomes a subsidiary/associate/joint venture (i.e. a
change in status).

It was mentioned that this chapter only deals with subsidiaries and that
changes in associates and joint ventures through share purchases are
addressed in the chapter on associates and joint ventures (chapter 11).

13.3 Acquisition of an additional interest in an existing subsidiary

1 IFRS

10.23

states

that

changes in a parent’s ownership interest in a subsidiary that do not result

in a loss of control are accounted for as equity transactions (i.e. transactions
with owners in their capacity as owners). It should be borne in mind that
non-controlling interests are also classified as equity (IFRS 10.22).
Furthermore, the consolidated carrying amounts of the parent’s and non-
controlling interests must be adjusted to reflect the change in their relative
interests in the subsidiary. This change shall be recognised directly in
equity and is attributable to the owners of the parent. This means that no
gain or loss should be recognised in the consolidated profit or loss.

The acquisition by the parent of additional shares in an existing subsidiary

which it already controls, is not a business combination (obtaining
control). This transaction does not result in additional goodwill being
recognised and does not affect the measurement of the subsidiary’s assets
and liabilities, as would be the case for a business combination. This means
that no change in the carrying amount of the subsidiary’s assets (including
goodwill) or liabilities are recognised. The transaction only changes the
parent’s and non-controlling relative interests in the subsidiary.

2 IFRS 10.B96 states that the amount to be recognised in equity would be

the difference between the amount by which the non-controlling interests
are adjusted and the fair value of the consideration paid or received. This
adjustment in the amount of the non-controlling interests will be affected by
the initial measurement of the non-controlling interests at the date of the
business combination (at its proportionate share of the acquiree’s identifiable
net assets or at fair value), which is illustrated in the examples below.

There may arguably be various approaches to calculate the adjustment to the

non-controlling interests. It is important to note the IFRIC has considered the
issue of the reallocation of the equity represented by goodwill between the
non-controlling and controlling interests after a change in a parent’s
ownership interest where control is not lost. The IFRIC has recommended
that the IASB should address this issue (and other related issues) as part of
their IFRS 3 post-implementation review. Refer to the IFRIC Update
September 2010 and the IASB Update May 2011 for more detail.

171

Chapter 13

During the IASB’s post-implementation review of IFRS

3 they regarded the

measurement of the non-controlling interests as a “low” significance for

future steps to be taken. Until a final conclusion has been reached, this work
follows the approach that the equity represented by goodwill is only re-
attributed between the parent and the non-controlling interests if any
goodwill was initially recognised in respect of the non-controlling interests
(i.e. NCI measured at fair value) (also see comment (b) to the analysis in
example 13.1b). Under this approach the subsidiary basically consists of two
separate asset pools: one asset pool in respect of all the other net assets
(excluding goodwill); and goodwill (which may be recognised only in
respect of the parent’s interest or for both the parent’s and the non-
controlling interests’). Also refer to chapter 3.7 for an additional discussion
in this regard.

3 Disclosure of the change in a parent’s ownership interest in a subsidiary

that did not result in a loss of control should be made in terms of IFRS 12
Disclosure of Interests in Other Entities. The parent shall disclose
information that enables users of the consolidated financial statements to
evaluate the consequences of such changes (IFRS 12.10(b)(iii)). In meeting
this requirement the parent shall present a schedule that shows the effect on
the equity attributable to owners of the parent of any changes in its
ownership interest in a subsidiary that did not result in a loss of control
(IFRS 12.18).

Acquisition of a further interest in an existing subsidiary

where the subsidiary remains a subsidiary (there is no change

Example 13.1a

in status) (NCI is measured at its proportionate share of the

acquiree’s identifiable net assets at the acquisition date)

The following are the draft condensed financial statements of P Ltd and
subsidiary S Ltd at 30 June 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.19

P Ltd

S Ltd

ASSETS

Investment in S Ltd at cost:

90 000 shares purchased on 1/7/20.17

97 000

30 000 shares purchased on 31/12/20.18

40 000

Inventory

106 000

182 500

Total assets

R243 000

R182 500

EQUITY AND LIABILITIES

Share capital (200 000/150 000 shares)

200 000

150 000
Retained earnings

43 000

32 500

Total equity and liabilities

R243 000

R182 500

172

Changes in ownership of subsidiaries through buying or selling shares

STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 20.19

P Ltd

S Ltd

Revenue

200 000

100 000

Cost of sales

(157 000)

(58 000)

Gross profit

43 000
42 000

Dividend received

6 000

Profit before tax

49 000

42 000

Income tax expense

(14 000)

(11 500)

PROFIT FOR THE YEAR

35 000

30 500

Other comprehensive income

––

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R35 000

R30 500

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 20.19

Retained earnings

P Ltd

S Ltd

Balance at 1 July 20.18

18 000

12 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

35 000

30 500

Other comprehensive income

Dividends: 30/9/20.18

(10 000)

(10 000)

Balance at 30 June 20.19

R43 000

R32 500
Additional information

1 S Ltd became a subsidiary of P Ltd on 1 July 20.17, on which date the

credit balance on its retained earnings amounted to R9 000. On this date, P
Ltd acquired 90 000 shares in S Ltd at a cost of R97 000.

2P

Ltd elected to measure the non-controlling interests at the non-controlling

interests’ proportionate share of the acquiree’s identifiable net assets at the
acquisition date.

3 On the date of the business combination, the assets and liabilities of S Ltd
were regarded to be a fair reflection in terms of the requirements of IFRS 3.

4 P Ltd classified the investment in S Ltd at cost in its separate financial

statements.

5 On 31/12/20.18, P Ltd acquired another 30 000 shares in S Ltd from the

other shareholders at a cost of R40 000.

6 The profit of S Ltd was earned evenly during the current year ended 30
June 20.19.

7 The company tax rate is 28% and CGT (capital gains tax) is calculated at
80%

thereof.

173

Chapter 13

Comments
a The date of the business combination is 1 J

July 20.17. At that date the assets and

liabilities of S Ltd were regarded to be fairly measured in terms of IFRS 3.

Therefore, no remeasurements of any item were needed. However, if the
assets and liabilities were not fairly valued, remeasurements may have been
needed as were explained in chapter 9.

b The acquisition of the 30 000 shares at 31/12

2/20.18 does not constitute a business

combination as P Ltd already had control over S Ltd. The transaction was
between

equity participants and the effec

ct of the transaction should be recognised within

equity in the consolidated financial statements.

Solution 13.1a

The consolidated financial statements of P Ltd and itts subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 20.19

ASSETS

Non-current assets

Goodwill

1 600
Current assets

Inventory (106 000(P) + 182 500(S))

288 500

Total assets

R290 100

EQUITY AND LIABILITIES

Share capital

200 000

Retained earnings

60 150

Other components of equity (changes in ownership)

(6 550)

253 600

Non-controlling interests

36 500

Total equity

290 100

Total equity and liabilities

R290 100

174
Changes in ownership of subsidiaries through buying or selling shares P
LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 20.19

Revenue (200 000(P) + 100 000(S))

300 000

Cost of sales (157 000(P) + 58 000(S))

(215 000)

Gross profit (43 000(P) + 42 000(S))

85 000

Income tax expense (14 000(P) + 11 500(S))

(25 500)

PROFIT FOR THE YEAR

59 500

Other comprehensive income for the year

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R59 500

Profit attributable to:

Owners of the parent(#)

50 350

Non-controlling interests (6 100 + 3 050)(#)

9 150

R59 500

Total comprehensive income attributable to:

Owners of the parent(#)

50 350

Non-controlling interests (6 100 + 3 050)(#)

9 150

R59 500

(#) The same as profit for the year, as there is no other comprehensive
income in the example.

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 20.19

Non-

Changes

Share

Retained

con-

Total
in

Total

capital

earnings

trolling

equity

ownership

interests

Balance at

1 July 20.18

200 000 * 19 800

219 800

! 64 800

284 600

Changes in

equity for

20.19

Total

comprehensive
income

for the year:

Profit for the

year

– 50

350

50 350

9 150

59 500

Dividends

– (10

000)

(10 000)

(4 000)

(14 000)

Purchase of

interest

––
(6 550)

(6 550)

(33 450)

(40 000)

Balance at

30 June 20.19 R200 000 R60 150

(R6 550)

R253 600

R36 500

R290 100

18 000 + 1 800(S) = 19 800

63 600 + 1 200 = 64 800

175

Chapter 13

P LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Changes in ownership in subsidiary:

During the current year, P Ltd acquired an additional 20% interest in S Ltd,
an existing subsidiary. This resulted in an amount of R6

550 being

recognised in equity as presented in the consolidated statement of changes in

equity. Details of the transaction between the equity participants are as
follows:

Fair value of the consideration paid

40 000

Decrease in the non-controlling interests

(33 450)

Adjustment to equity attributable to owners of the parent

R6 550

Comments

IFRS 12.18 requires that an entity shall present a schedule that shows the
effects on the

equity attributable to owners of the parent of any changes in its ownership

interest in a subsidiary that do not result in a loss of control. Other
disclosures relating to the group and the subsidiary are also required in terms
of IFRS 12, but are not illustrated in chapter 13 and 14 in detail.

Calculations

The basic consolidation procedures comprise:

l elimination of common items;

l elimination of intragroup items; and

l the

consolidation of the remaining items.

In this chapter, the shorter method is used to perform the basic consolidation
procedures (i.e. no worksheet is drawn up). The pro forma consolidation
journal entries are also shown to provide a complete picture.

176

Changes in ownership of subsidiaries through buying or selling shares C1

Analysis of the owners’ equity of S Ltd

P Ltd 60%–80%

Total

NCI

At

Since

i At acquisition (1/7/20.17)

Share capital

150 000

90 000

60 000

Retained earnings

9 000

5 400

3 600
159 000

95 400

63 600

Equity represented by

goodwill –– Parent

1 600

1 600

Consideration and NCI

160 600

97 000

63 600

ii Since acquisition

• To beginning of current year:

Retained earnings

(12 000 – 9 000) 3

000

1 800

1 200

• Current year:
Profit:

1/7/20.18–31/12/20.18

(30 500 × 6/12) 15

250

9 150

6 100

Dividend: 30/9/20.18

(10 000)

(6 000)

(4 000)

168 850

4 950

66 900

Further

acquisition

(66 900 (NCI) × 20/40 = 33 450)

33 450

(33 450)

Changes in ownership (equity)

(per IFRS 10.23)

6 550

Consideration and NCI

40 000

33 450

Profit:

1/1/20.19–30/6/20.19

(30 500 × 6/12) 15

250

12 200

3 050

R184 100

R17 150

R36 500 (*)

(*) Note that, due to the inclusion of the goodwill of R1 600 (relating to the
parent only) in the total equity column, this amount will no longer equate to
exactly 20% of the total equity column.

177

Chapter 13

Comments
a The analysis represents a chronological exposition of the events that affect
the

owners’ equity in the subsidiary.

b The profit of the current period is allocated to two periods, namely the
periods before and after the change in owners’ equity. Special attention must
be paid to the treatment of the subsidiary’s dividend declared/paid, which
relates to a specific date and must therefore be allocated to the correct period
– in this example to the period before the acquisition of additional shares by
the parent.

c The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspective of the NCI): Fair value of
the consideration received by NCI

40 000

Amount by which the non-controlling interests are adjusted (reserves

acquired by parent from NCI) (66 900 × 20/40 = 33 450) (33 450)

NCI after transaction ((168 850 – 1 600GW) × 20%)

33 450

NCI before transaction ((168 850 – 1 600GW) × 40%)

(66 900)

Amount to be recognised directly in equity

R6 550

The

approach in terms of IFRS 10.B96 that the difference between the change in
the non-controlling interests and the amount paid o
or received is to be recognised in equity

is also clear from journal 5 below.

It

is

important to understand the ra

ational of the calculation of the change in ownership.

The non-controlling shareholders sold 50% of their interest in the subsidiary

to the parent. The carrying amount of the NCI is therefore reduced by 50%,
being R33 450.

The parent paid R40 000 for this equity and, as such, the difference of R6
550 is recognised within equity as a transaction between the equity
participants.

d The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspective of the parent): Fair value
of the consideration paid by the parent

(40 000)

Increase in parent’s interest/amount by which the non-controlling interests

are adjusted (reserves acquired from NCI)

33 450

Parent’s interest after transaction

((168 850 – 1 600GW) × 80%) + 1 600GW)

135 400

Parent’s interest before transaction

((168 850 – 1 600GW) × 60%) + 1 600GW)

(101 950)

Amount to be recognised directly in equity

(R6 550)

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3

3.32(a)(i)

97 000

Amount of non-controlling interests: IFRS 3.32(a)(ii) (159 000 × 40%) 63

600

160 600

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(159 000)

Goodwill (parent)

R1 600

178

Changes in ownership of subsidiaries through buying or selling shares C3

Pro forma consolidation journal entries

Dr

Cr

R
R

J1

Share capital (SCE)

150 000

Retained earnings (SCE)

9 000

Investment in S Ltd (SFP)

97 000

Non-controlling interests (SFP/SCE) 63

600

Goodwill (SFP) (parent only)

1 600

Main elimination journal entry at acquisition date

J2

Retained earnings (SCE)

1 200

Non-controlling interests (SFP/SCE) 1

200

Non-controlling interests’ portion of retained

earnings since acquisition to beginning of current

year

J3

Non-controlling interests (P/L)

6 100

Non-controlling interests (SFP/SCE) 6

100

Non-controlling interest’s portion of current year’s

profit (1/7/20.18–31/12/20.18, i.e. before additional

acquisition)

J4

Dividend received (P/L)

6 000

Non-controlling interests (SFP/SCE) 4

000

Dividend paid (SCE)

10 000

Elimination of intragroup dividend

J5

Non-controlling interests (SFP/SCE)

33 450
Changes in ownership (equity) (SCE) (IFRS 10.23)

6 550

Investment in S Ltd (SFP)

40 000

Acquisition of a further 20% interest in S Ltd

eliminated

J6

Non-controlling interests (P/L)

3 050

Non-controlling interests (SFP/SCE) 3

050

Non-controlling interests’ portion of current year’s

profit (1/1/20.19–30/6/20.19, i.e. after additional

acquisition)

C4 Test of consolidated equity

P Ltd (200 000 + 43 000)

243 000

S Ltd (Retained earnings per analysis) 17

150

R260 150
Consolidation adjustments (refer to pro forma consolidation journal entries) l
Recognise change in ownership (in terms of IFRS 10.23)

(6 550)

l Recognise non-controlling interests

36 500

Consolidated equity

R290 100

179

Chapter 13

C5 Detailed calculation of allocation of equity

Attributable

Attributable

Total

to parent

to NCI

Equity of subsidiary before change

represented by:

168 850
101 950

66 900

Other net assets

167 250

100 350

66 900

Goodwill

1 600

1 600

Change in ownership represented by:

33 450

(33 450)

Other net assets reallocated

33 450

(33 450)

Goodwill relinquished

N/A

N/A

Equity of subsidiary after change

represented by:

168 850

135 400

33 450

Other net assets

167 250

133 800

33 450

Goodwill

1 600

1 600

Comments

a No

fair

value adjustment was made to the non-controlling interests at the acquisition

date as P Ltd elected to measure the non-controlling interests at their

proportionate share of the acquiree’s identifiable net assets at the acquisition
date. Refer to IFRS 3.19.

b This example is not a business combination achieved in stages (i.e. a step-

acquisition) as defined in IFRS 3.41 and .42, as P Ltd obtained control at the
date of the first share purchase (i.e. the acquisition of the 60% interest).
Since S Ltd immediately became a subsidiary, no remeasurement of
previously held equity interest in S Ltd is required as per IFRS 3.42.

c IFRS

10.23 requires that changes in a parentt’s owners’ equity in a subsidiary that

do not result in a loss of control (which is the case in this example) are
accounted for as equity transactions (i.e. transactions with owners in their
capacity as owners). In this chapter, these equity transactions will be
referred to as “changes in ownership”

as can be seen in the journal entries and the statement of changes in equity.
IFRS 10

is not specific about the exact equity category to be used for this transaction.
The authors are of the opinion that a separate equity category should be
used, because the transaction is regarded as equity by IFRS 10 and
specifically transactions with owners in their capacity as owners. Some are
of the opinion that the transaction should be accounted for within retained
earnings, which is also an acceptable alternative.

d In volume 1 of this work (chapter 3.3), it was indicated that the investment
in the subsidiary (in the parent’s record

ds) represents a claim against the net assets of the

subsidiary as represented by its equity. As a result it should be eliminated in

the consolidated financial statements (i.e. an elimination of common items in
terms of IFRS 10.B86(b)). As a result of the journals entries above, the
investment is indeed eliminated: Investment of R137 000 (given) – R97 000
(J1) – R40 000 (J5) = Rnil.

e The two separate asset pools and the allocation of these asset pools
between the

parent and the non-controlling interests are clearly evident from Calculation
5 above.
180

Changes in ownership of subsidiaries through buying or selling shares The

following example is used to contrast the measurement of the non-
controlling interests at fair value at the acquisition date, to the
measurement thereof at their proportionate share of the acquiree’s
identifiable net assets (as the example above).

Acquisition of a further interest in an existing subsidiary

where the subsidiary remains a subsidiary (there is no

Example 13.1b

change in status) (NCI is measured at fair value at the date of

acquisition)

Assume the same information as in example 13.1a, except that P Ltd elected
to measure non-controlling interests at fair value at the date of acquisition.
The fair value of the non-controlling interests was R64 200 at the acquisition
date (when P Ltd obtained control over S Ltd).

Solution 13.1b

The consolidated statement of profit or loss and other comprehensive income

is the same as in part (a) of this example. The rest of the consolidated
financial statements are prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 20.19

ASSETS

Non-current assets
Goodwill (parent and NCI)

2 200

Current assets

Inventory (106 000(P) + 182 500(S))

288 500

Total assets

R290 700

EQUITY AND LIABILITIES

Share capital

200 000

Retained earnings

60 150

Other components of equity (changes in ownership)

(6 250)

253 900

Non-controlling interests

36 800

Total equity

290 700

Total equity and liabilities

R290 700

181

Chapter 13

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 20.19

Changes

Non-

Share

Retained

in

con-

Total

Total

capital

earnings

owner-

trolling

equity

ship
interests

Balance at

1 July 20.18

200 000

* 19 800

219 800

! 65 400

285 200

Changes in

equity for

20.19

Total

comprehensive

income for

the year:

Profit for the year

50 350

–
50 350

9 150

59 500

Dividends

(10 000)

(10 000)

(4 000)

(14 000)

Purchase of

interest –

(6 250)

(6 250)

(33 750)

(40 000)

Balance at

30 June

20.19
R200 000

R60 150

(R6 250) R253 900

R36 800

R290 700

18 000 + 1 800(S) = 19 800

63 600 + 600 (represented by goodwill) + 1 200 (interest in RE) = 65 400

P LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Changes in ownership in subsidiary:

During the current year, P Ltd acquired an additional 20% interest in S Ltd,
an existing subsidiary. This resulted in an amount of R6

250 being

recognised in equity as presented in the consolidated statement of changes in

equity. Details of the transaction between the equity participants are as
follows:

Fair value of the consideration paid

40 000

Decrease in the non-controlling interests

(33 750)
Adjustment to equity attributable to owners of the parent

R6 250

182

Changes in ownership of subsidiaries through buying or selling shares

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 60%–80%

Total

NCI

At

Since

i At acquisition (1/7/20.17)

Share capital

150 000

90 000

60 000

Retained earnings

9 000

5 400

3 600

159 000
95 400

63 600

Equity represented by

goodwill – Parent and NCI

(comment (a))

2 200

1 600

600

Consideration and NCI

161 200

97 000

64 200

ii Since acquisition

• To beginning of current year:

Retained earnings

(12 000 – 9 000)

3 000

1 800

1 200

• Current year:
Profit:

1/7/20.18–31/12/20.18

15 250

9 150

6 100

Dividend: 30/9/20.18

(10 000)

(6 000)

(4 000)

169 450

4 950

67 500

Further

acquisition

(67 500 (NCI) × 20/40 = 33 750)

33 750

(33 750)

Changes in ownership (equity)

(per IFRS 10.23)

6 250
Consideration and NCI

40 000

33 750

Profit: 1/1/20.19–30/6/20.19

15 250

12 200

3 050

R184 700

R17 150

R36 800 (*)

(*) This amount will not be 20% of the total equity of S Ltd as the goodwill
(at the acquisition date) that was included in the equity at acquisition date is
not in the same proportion to owners’ equity at the acquisition date.

183

Chapter 13

Comments

a Since NCI is now measured at fair value, th

he goodwill arising at acquisition date is

treated as an asset of the subsidiary, i.e. equity also increases by that same
amount (R2 200) at acquisition in order for the accounting equation to stay
in balance, as follows:

EQUITY =

ASSETS LESS LIABILITIES

+ 2 200 =

+2

200 (goodwill)

This

amount is seen in the total equity column. The net equity therefore
represents the goodwill contributed of R2 200.

b The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspective of the NCI): Fair value of
the consideration received by NCI

40 000

Amount by which the non-controlling interests are adjusted (reserves

acquired by parent from NCI and goodwill re-attributed)

(67 500 × 20/40 = 33 750)

(33 750)

NCI after transaction ((169 450 – 2 200GW) × 20% + (600GW × 20/40)) 33

750

NCI before transaction ((169 450 – 2 200GW) × 40% + (600GW × 40/40))

(67 500)
Amount recognised directly in equity

R6 250

Through the parent’s acquisition of another 20% interest in the subsidiary,

20% of the net asset value (excluding goodwill) ((169 450 – 2 200) × 20% =
33 450) was transferred from the non-controlling interests to the parent’s
interest. Furthermore, the non-controlling owners relinquished some of the
goodwill (600 × 20/40 = 300) that was attributable to them to the parent.
This resulted in a decrease of the non-controlling interests of R33 750 (33
450 + 300).

Take

note that the amount for goodwill in the consolidated financial statements is
not adjusted. It is the equity, represented by the goodwill that is re-attributed
between the equity participants (parent and NCI).

As

was explained in chapter 13.3 above, this work follows the approach that the
non-controlling owners relinquished some of the goodwill that was
attributable to them to the parent.

c The

amount for the change in ownership recognised in equity can be calculated

as

follows (see IFRS 10.B96) (from the perspective of the parent): Fair value
of the consideration paid by the parent

(40 000)

Increase in parent’s interest / amount by which the non-controlling interests

are adjusted (reserves acquired from NCI)

33 750
Parent’s interest after transaction ((169 450 – 2 200GW) × 80%) + 1 600

135 700

own GW + 300GW from NCI)

Parent’s interest before transaction

((169 450 – 2 200GW) × 60%) + 1 600 own GW)

(101 950)

Amount to be recognised directly in equity

(R6 250)

C2 Proof of calculation of go

oodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3

3.32(a)(i)

97 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

64 200

161 200

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(159 000)

Goodwill (parent and NCI)

R2 200
184

Changes in ownership of subsidiaries through buying or selling shares C3

Pro forma consolidation journal entries

The pro forma consolidation journal entries are the same as in example
13.1a, except for those indicated below.

Dr

Cr

J1

Share capital (SCE)

150 000

Retained earnings (SCE)

9 000

Goodwill (parent and NCI) (SFP)

2 200

Investment in S Ltd (SFP)

97 000

Non-controlling interests (SFP/SCE)

64 200

Main elimination journal entry at acquisition date

J5

Non-controlling interests (SFP/SCE)

33 750

Changes in ownership (equity) (SCE) (IFRS 10.23)

6 250

Investment in S Ltd (SFP)

40 000

Acquisition of a further 20% interest in S Ltd

eliminated

C4 Test of consolidated equity

P Ltd (200 000 + 43 000)

243 000

S Ltd (RE per analysis)

17 150

R260 150

Consolidation adjustments

(refer to pro forma consolidation journal entries)

l Recognise gain from a bargain purchase in retained earnings –

l Recognise change in ownership (in terms of IFRS 10.23)

(6 250)
l Recognise non-controlling interests

36 800

Consolidated equity

R290 700

C5 Detailed calculation of allocation of equity

Attributable

Attributable

Total

to parent

to NCI

Equity of subsidiary before change

represented by:

169 450

101 950

67 500

Other net assets

167 250

100 350

66 900

Goodwill
2 200

1 600

600

Change in ownership represented by:

33 750

(33 750)

Other net assets reallocated

33 450

(33 450)

Goodwill relinquished

300

(300)

Equity of subsidiary after change

represented by:

169 450

135 700

33 750

Other net assets

167 250

133 800
33 450

Goodwill 2 200

1 900

300

185

Chapter 13

Comments

a In this example (compared to example 13.1a), the non-controlling interests

at the

acquisition date are measured at the acquisition-date fair value, as P Ltd

elected to measure the non-controlling interests at fair value. Refer to IFRS
3.19.

b The goodwill recognised from the perspective of the non-controlling

interests, as a result of the measurement of the non-controlling interests at
fair value, should be

taken into account in adjusting the carrying amount of the non-controlling

interests to reflect the change in their relative interest in the subsidiary.

4 If an increase in the parent’s interest has taken place, the analysis of the
subsidiary’s owners’ equity also separately reflects this increase in interest
in every consolidation thereafter. This is done to

o ensure that changes in ownership

(which are regarded as transactions with owners) are determined separately,
and transfers to and from the non-controllin

ng interests are correctly taken into account at

the relevant dates. With reference to example 13.1a, the appropriate sections
of S Ltd’s analysis of owners’ equity with a view to the consolidation on 30
June 20.20

(end of the next reporting period) will be as follows:

Analysis of the owners’ equitty of S Ltd

P Ltd 60%–80%

Total

NCI

At

Since

i At acquisition (1/7/20.17)

Share capital

150 000 90

000

60

000

Retained earnings

9 000 5

400
3

600

159 000 95

400

63

600

Equity represented by

goodwill – Parent

1 600

1 600

Consideration and NCI

160 600 97

000

63

600

ii Since acquisition

• To beginning of current year:

The

period: 1/7/20.17–31/12/20.18
Retained earnings (aggregated)

8 250

950 3

300

168 850

66

900

Purchase of shares (20%)

33 450

(33

450)

Changes in ownership (equity)

6 550

Consideration and NCI

40 000

33

450

The

period: 1/1/20.19–30/6/20.19
Retained earnings

15 250

12

200 3

050

• Current year: detail for that year

5A

change in the degree of control usually means that the profit and items of
other comprehensive income of the subsidiary involved must, for the current
period, be allocated between two periods, i.e. the periods

s before and since the change in

degree of control. As indicated earlier, the retained earnings of a subsidiary

are dealt with in the analysis of owners’ equity by accounting for the
constituent elements thereof, namely profit and dividends.

186

Changes in ownership of subsidiaries through buying or selling shares l

Profit

The allocation is generally done evenly on the assumption that profit is

earned evenly during the period, except where the operations of the
subsidiary clearly reflect fluctuations or unique items. Certain items arising
from the consolidation process must also first be accounted for before such
allocation can be made, for example, the allocation of the preference
dividend of the subsidiary or the increased depreciation of the subsidiary
resulting from a pro forma remeasurement of a depreciable asset of the
subsidiary at acquisition date.
Unrealised profit resulting from regular sales of inventories by the subsidiary
to the parent, should, in general, be treated as follows:

• Unrealised profit at the beginning of the period realises in the period

before the change in degree of control.

• Unrealised profit at the date of the change in degree of control realises in

the period since (after) the change in interest.

l Dividends

Dividends are allocated to the relevant period (before or after the change in
interest), based on the date on which the dividend was declared by the
subsidiary (and no longer at the discretion of the entity – refer to IFRIC 17).

l Items of other comprehensive income

Items of other comprehensive income are usually the result of fair value
movements or the remeasurement of asset or liabilities. These items are
allocated to the relevant period (before or after the change in interest), based
on when the fair value movements occurred or when the assets or liabilities
were remeasured.

13.4 Acquisition of an additional interest whereby the investee

(investment) becomes a subsidiary

1 In the previous chapters, it was repeatedly emphasised that: l the

acquisition date is an important point in time; and l the periods before and
after the acquisition date are important time phases in the preparation of
consolidated financial statements.

IFRS 3 Business Combinations defines the acquisition date as the date on

which the acquirer effectively obtains control over the acquiree. An
investor may have had a simple investment in an entity (say 15%, without
significant influence or control), and later obtained an additional interest in
the entity, resulting in obtaining control. In accounting for such a business
combination, the investor would effectively derecognise the previously held
investment at its fair value, and then account for the business combination
in terms of IFRS 3 (refer to chapters 2 and 9 for more detail).The accounting
for a business combination achieved in stages is prescribed in IFRS 3.41 and
.42, and paragraphs BC384–BC389 in the basis for conclusions supporting
IFRS 3.

2 IFRS 3 establishes the acquisition date as the single measurement date for
all assets acquired, liabilities assumed and any non-controlling interests in
the acquiree (refer to chapters 2 and 9 for detail). The obtaining of control
therefore triggers remeasurement of all the identifiable net assets of the
subsidiary and the 187

Chapter 13

recognition of goodwill (if any). In a business combination achieved in

stages, the acquirer furthermore remeasures its previously held equity
interest in the acquiree at its acquisition-date fair value, and recognises the
resulting gain or loss, if any, in profit or loss or other comprehensive income,
as appropriate (refer to IFRS 3.42).

In prior reporting periods, the acquirer may have recognised changes in the
fair value of its equity interest in the acquiree in other comprehensive
income (e.g.

because the parent elected to do so in accordance with IFRS 9 Financial

Instruments). If so, the amount that was previously recognised in other
comprehensive income shall be recognised as if the acquirer had disposed
directly of the previously held equity interest. This may require the acquirer
(in the consolidated financial statements) to transfer the amount in the mark-
to-market reserve to retained earnings (IFRS 9.B5.7.1) on the date that
control is obtained over the acquiree. This would, for example, occur when
a simple investment that was previously measured at “fair value through
other comprehensive income” now becomes a subsidiary over which control
is exercised in the current year. Thus, all the fair value adjustments on the
equity investment that were previously recognised in a mark-to-market
reserve (i.e. other comprehensive income) before control was obtained, will
be transferred within equity (in the consolidated financial statements) when
control over the subsidiary is obtained.
The IASB motivated the approach above by concluding that a change from
holding a non-controlling investment in an entity to obtaining control of that
entity, is a significant change in the nature of and economic circumstances
surrounding that investment. That change warrants a change in the
classification and measurement of that investment. Once it obtains control,
the acquirer is no longer the owner of a non-controlling investment (asset) in
the acquiree. The acquirer, therefore, ceases its accounting for an investment
(asset) and begins reporting in its consolidated financial statements the
underlying assets, liabilities and results of the operations of the acquiree. In
a business combination achieved in stages, the acquirer basically
derecognises its investment asset in an entity in its consolidated financial
statements when it achieves control (refer to IFRS 3.BC384–389). The
above approach is therefore similar to disposing an equity investment and
then buying a controlling interest in a subsidiary through a business
combination.

3 Full

disclosure of the business combination is made in terms of IFRS 3. For a

business combination achieved in stages, the following information should
in particular be disclosed:

l the acquisition-date fair value of the equity interest previously held; l the
amount of any gain or loss recognised as a result of remeasuring the
abovementioned interest to fair value; and

l the line item in which the gain or loss was recognised.

188

Changes in ownership of subsidiaries through buying or selling shares

Acquisition of a further interest where the investment becomes

Example 13.2

a subsidiary (NCI is measured at fair value at the date of

acquisition)
The following are the draft condensed financial statements of P Ltd and
subsidiary S Ltd at 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Property, plant and equipment

400 000

505 500

Investment in S Ltd (fair value of previously held interest of R54 000 plus
additional consideration of R216 000)

270 000

Total assets

R670 000

R505 500

EQUITY AND LIABILITIES

Share capital (150 000/100 000 shares)

150 000

100 000

Mark-to-market reserve
10 864

Retained earnings

506 000

405 500

Deferred tax

3 136

Total equity and liabilities

R670 000

R505 500

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

700 000

600 000

Cost of sales

(280 000)
(240 000)

Gross profit

420 000

360 000

Other expenses

– (90

000)

Profit before tax

420 000

270 000

Income tax expense

(120 000)

(81 000)

PROFIT FOR THE YEAR

300 000

189 000

Other comprehensive income:

Items that will not be reclassified to profit or loss:

Mark-to-market reserve (fair value adjustment to investment) 4 000

–
Income tax relating to items that will not be reclassified (896)

Other comprehensive income for the year, net of tax

3 104

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R303 104

R189 000

189

Chapter 13

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Mark-to-

Retained earnings

market

reserve

P Ltd

S Ltd

P Ltd

Balance at 1 January 20.19

7 760

206 000

216 500

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

300 000

189 000

Other comprehensive income

3 104

Dividends: None

Balance at 31 December 20.19

R10 864

R506 000
R405 500

Additional information

1 P Ltd bought 15 000 shares in S Ltd on 1 January 20.17 for R40 000.

2 S Ltd became a subsidiary of P Ltd on 1 March 20.19, when P Ltd bought

another 60 000 shares in S Ltd for R216 000.

3 P Ltd elected to measure non-controlling interests at fair value at the date

of acquisition. The fair value of the non-controlling interests was R90 000 at
the acquisition date (when P Ltd obtained control over S Ltd).

4 On the date of the business combination, the assets and liabilities of S Ltd
were regarded to be a fair reflection in terms of the requirements of IFRS 3.

5 P Ltd classified the investment in S Ltd at cost after it became a subsidiary.

Before S Ltd became a subsidiary, P Ltd classified the investment under
IFRS 9 in its separate financial statements and recognised fair value
adjustments in the mark-to-market reserve (other comprehensive income).
Details of the 15% investment are as follows:

Number

Fair value

Fair value

Fair value

of shares

on 1/1/20.17

on 1/1/20.19

on 1/3/20.19

15 000
R40 000

R50 000

R54 000

6 The profit of S

Ltd was earned evenly during the current year ended

31 December 20.19.

7 The company tax rate is 28% and CGT (capital gains tax) is calculated at
80%

thereof.

190

Changes in ownership of subsidiaries through buying or selling shares

Solution 13.2

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Non-current assets

Property, plant and equipment (400 000(P) + 505 500(S)) 905

500

Goodwill
12 000

Total assets R917

500

EQUITY AND LIABILITIES

Share capital

150 000

Retained earnings

634 989

784 989

Non-controlling interests

129 375

Total equity

914 364

Liabilities

Deferred tax

3 136

Total equity and liabilities R917

500

191

Chapter 13
P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (700 000(P) + 600 000(S) – 100 000 (J2)) or (700 000(P) + 600
000 × 10/12 (S))

1 200 000

Cost of sales (280 000(P) + 240 000(S) – 40 000 (J2))

or (280 000(P) + 240 000 × 10/12 (S))

(480 000)

Gross profit (420 000(P) + 360 000(S) × 10/12)

720 000

Other expenses (90 000(S) – 15 000 (J2)) or (90 000 × 10/12 (S)) (75

000)

Profit before tax

645 000

Income tax expense

(120 000(P) + 81 000(S) – 13 500 (J2)) or (120 000(P) + 81 000 × 10/12 (S))
(187 500)

PROFIT FOR THE YEAR

457 500
Other comprehensive income:

Items that will not be reclassified to profit or loss:

Mark-to-market reserve (fair value adjustment to investment) (before the

business combination)

4 000

Income tax relating to items that will not be reclassified (896)

Other comprehensive income for the year, net of tax

3 104

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R460 604

Profit attributable to:

Owners of the parent

418 125

Non-controlling interests (#)

39 375

R457 500

Total comprehensive income attributable to:

Owners of the parent (418 125 (profit) + 3 104 (OCI))

421 229

Non-controlling interests (#)

39 375
R460 604

(#) The same as profit for the year, as the non-controlling interests do not
share in the other comprehensive income in this example.

192

Changes in ownership of subsidiaries through buying or selling shares P

LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Mark-to-

Non-

Share

Retained

Total

market

Total

controlling

capital

earnings

equity
reserve

interests

Balance at

1 Jan 20.19

150 000

206 000

* 7 760

363 760

– 363

760

Changes in

equity for

20.19

Acquisition of

subsidiary

! 90 000 90
000

Total

comprehensive

income for the

year:

Profit for the year

418 125

418 125

39 375 457

500

Other

comprehensive

income

3 104

3 104

3 104
Transfer (J1)

10 864

(10 864)

Balance at

31 Dec 20.19

R150 000

R634 989

– R784 989

R129 375 R914

364

* (50

000 – 40 000) × 77.6% = 7 760

! 87

000

+ 3 000(represented by goodwill) = 90 000

Comments
The amounts in the marrk-to-market reserve can be explained as follows:

Opening balance after tax (50 000 – 40 000) × 77,6%

7 760

Recognised in other comprehensive income for the year:

3 104

Movement for the period 1/1/20.19 – 28/2/20.19, after tax

(54 000 – 50 000) × 77,6%

3 104

Movement for the period 1/3/20.19 – 31/12/20.19 – investment in subsidiary

was now held at “cost” and there were no subsequent

remeasurements

Transferred to retained earnings on the date of acquisition, after tax (54 000
– 40 000) × 77,6% as if the investment was disposed of (10 864)

(IFRS 3.42)

Closing balance

Rnil

193

Chapter 13
Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 15%–75%

Total

NCI

At

Since

i At acquisition (1/3/20.19)

Share

capital

100 000

75 000

25

000

Retained earnings at acquisition

248 000

186 000

62

000

As
at

beginning of year

216 500

Profit

for the period 1/1/20.19–

28/2/20.19 (189 000 × 2/12)

31 500

348 000

261 000

87

000

Equity represented by goodwill

– Parent and NCI

12 000

9 000

3 000

Consideration and NCI

360 000

270 000

90
000

Consideration paid for additional

shares purchased

216 000

Fair

value of equity interest

previously held

54 000

ii Since acquisition

• Current year:

Profit:

1/3/20.19–31/12/20.19

(189 000 × 10/12)

157 500

118 125 39

375

Dividend: None

–
R517 500

R118

125 R129 375

Comments

a The retained earnings at acquisition of S Ltd comprises of the balance at

the beginning of the year and the net profit for first two months up to the
date of the business combination. Refer to chapter 8 dealing with interim
acquisition of a

subsidiary (i.e. acquisition of control during the current year) for more detail
in this regard.

b The consideration for the business combination (gaining of control over S

Ltd) comprises of the amount paid for the additional shares and the fair
value of the equity

interest previously held. In terms of IFRS 3.4

42, P Ltd should remeasure its previous

investment of 15 000 shares to the fair value of R54 000 at the date of
acquisition.

C2 Proof of calculation of go

oodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3

3.32(a)(i)

216 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

90 000
Acquisition-date fair value of acquirer’s previously held equity interest in
the acquiree: IFRS 3.32(a)(iii)

54 000

360 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(348 000)

Goodwill (parent and NCI)

R12 000

194

Changes in ownership of subsidiaries through buying or selling shares C3

Pro forma consolidation journal entries

Dr

Cr

J1

Mark-to-market reserve (SCE)

((54 000 – 40 000) × 77,6%) (comment (b)) 10

864

Retained earnings (SCE)

10 864
Transfer of fair value adjustments previously

recognised in mark-to-market reserve (OCI) to

retained earnings with remeasurement of equity

interest previously held, at group level

J2

Share capital (SCE)

100 000

Retained

earnings – Opening balance (SCE)

(comment (c)) 216

500

Goodwill (SFP) (parent and NCI)

12 000

Revenue

(P/L)

(comment (c)) (600 000 × 2/12) 100

000

Cost of sales (P/L) (comment (c)) (240 000 × 2/12) 40

000

Other expenses (P/L) (comment (c)) (90 000 × 2/12)

15 000

Income tax expense (P/L) (comment (c)) (81 000 × 2/12)

13 500

Investment in S Ltd (SFP) (54 000 + 216 000)

270 000

Non-controlling interests (SFP/SCE) 90

000

Main elimination journal entry at acquisition date

J3

Non-controlling interests (P/L)

39 375

Non-controlling interests (SFP/SCE) 39

375

Non-controlling interests’ portion of current year’s

profit (1/3/20.19–31/12/20.19 i.e. after additional

acquisition)

195

Chapter 13
Comments

aS

Ltd only became a subsidiary on 1 March 20.19. Thereafter, P Ltd elected to

measure its investment in the subsidiary at cost in its separate financial

statements and there were no further remeasurements to fair value after this
date.

b In terms of IFRS 3.42, P Ltd should first reme

easure its previous investment of 15 000

shares to the fair value of R54 000 at the date of acquisition as is indicated in
the analysis above. Furthermore, P Ltd already recognised the resulting fair
value adjustments with the remeasurement in other comprehensive income
under IFRS 9 in its separate financial statements. Then, for the group, the
cumulative fair value gains previously recognised in the marrk-to-market
reserve (OCI) is transferred to retained earnings on the date of acquisition.
IFRS 3 basically treats the previously held

investment as being disposed of at fair value and a new subsidiary acquired

at fair value. Note that there are no tax consequences as there is no actual
sale (only deemed disposal for the sake of the group’s consolidated financial
statements).

The

cost of the original investment was R40 000. The fair value of this
investment on 1 March 20.19 was R54 000, which resulted in a cumulative
gain of R14 000 before tax. The after tax amount of R10 864 is transferred
within equity, similar to the accounting treatment as if the investment would
have been derecognised (IFRS 9.B5.7.1).

c To

prepare the consolidated financial statements, the financial statements of S

Ltd are combined (consolidated) with the financial statements of P Ltd (i.e.
adding every line item in the financial statements of S Ltd to that of P Ltd).
This implies that the whole amount (i.e. for the full year) of all items of
profit or loss is added to that of P Ltd. S Ltd was not a subsidiary of P Ltd
for the first two months and the profit earned during

these two months should not form part of the profit or loss for the group and
should be eliminated from the group’s profit or loss. The profits for the first
two months are actually part of the reserves at the acquisition date and
should be eliminated as such in accounting for the business combination.
Refer to chapter 8 dealing with interim acquisition of a subsidiary (i.e.
acquisition of control during the current year) for more detail in this regard.

d Full

disclosure of the business combination should be made in terms of IFRS

3.59–63

and B64–B67. Of particular interest to this example is the disclosure of the

acquisition-date fair value of the equity interest in the acquiree held by the
acquirer immediately

before the acquisition date (being

g R54 000) and the amount of the gain recognised as

a result of remeasuring to fair value the equity interest in the acquiree held
before the business combination (being the transfer of the cumulative gain of
R10 864 within equity – see journal 1).

13.5 Acquisition of an additional interest whereby an associate becomes

a subsidiarry

1 The

section above dealt with a business combination achieved in stages where

the acquirer obtains an additional interest in an existing investee. The status
of the investment changed from a simple investment to an investment in a
subsidiary. The same principles and disclosure requirements will also be
applicable where an associate or joint venture becomes a subsidiary.

2 An investor may have obtained an interest in an investee whereb by

significant

influence is exerted. Where the acquirer then obtains an additional interest in

an associate, whereby control is obtained, the business combination should
be accounted for in terms of IFRS 3.41 and .42. With regards to an associate
or joint venture that becomes a subsidiary durin

ng the current period, the following consolidation

procedures will be relevant:

196

Changes in ownership of subsidiaries through buying or selling shares l up to

the acquisition date, the investment in the associate or joint venture should
be accounted for in terms of the equity method (note that all investments in
associates and joint ventures must be accounted for in terms of the equity
method, unless one of the exceptions in IAS 28.17 applies, in which case the
investment will be measured in terms of IFRS 9 Financial Instruments); l
where the investor/parent accounted for the investment in the associate, joint
venture and subsidiary in accordance with IFRS 9 at fair value in its
separate financial statements, any fair value adjustments must be reversed
upon consolidation (an investment in an associate, joint venture or
subsidiary may be accounted for at cost (which is arguably the most
common approach in South Africa) or in accordance with IFRS

9 in the investor’s separate financial

statements – refer to IAS 28.44 and IAS 27.10);

l the previously held equity interest in the acquiree should be remeasured at

its acquisition-date fair value and the resulting gain or loss, if any,
recognised in profit or loss directly (as if the interest in the associate or joint
venture was disposed of and a controlling interest purchased (IFRS 3.42) –
then follow IAS 28.22 for the deemed disposal of the associate or joint
venture); l in terms of the equity method, the investor may have recognised
its share of items recognised in other comprehensive income of the
associate or joint venture. If so, these amounts that were previously
recognised in other comprehensive income shall be recognised as if the
acquirer had disposed directly of the previously held equity interest (as any
asset). Depending on the nature of underlying assets remeasured or revalued
in other comprehensive income, some of these items will be reclassified
from other comprehensive income to profit or loss (e.g., the foreign currency
translation reserve – refer to chapter 16), and some items will only be
transferred within equity (e.g., the revaluation surplus on property, plant and
equipment and the mark-to-market reserve on equity investments (if so
elected) transferred to retained earnings); l remeasurement of identifiable
net assets in terms of IFRS 3 (see chapters 2

and 9), where applicable;

l elimination of common items at the acquisition date and the recognition

and measurement of any goodwill or bargain gain and non-controlling
interests (it should be noted that the retained earnings that will be eliminated
at the acquisition date, would comprise of the opening balance at the
beginning of the year and the net profit for the period of the current year
(various line items in the statement of profit or loss and other comprehensive
income before the acquisition date – similar to the interim acquisition of a
subsidiary that was addressed in chapter 8); and

l applying basic consolidation principles after the acquisition date.

197

Chapter 13

Acquisition of a further interest where an associate

becomes a subsidiary (control is obtained) (NCI is

Example 13.3

measured at its proportionate share of the acquiree’s

identifiable net assets at the acquisition date)

On 31 December 20.12 the following summarised financial information

relating to P Ltd and other wholly-owned subsidiaries (consolidated) and S
Ltd is supplied: SUMMARISED FINANCIAL INFORMATION

AS AT 31 DECEMBER 20.12

Ltd

and sub-

sidiaries

S Ltd

(consoli-

dated)

DEBITS

Property, plant and equipment

50 000

9 000

Investment in S Ltd at cost:

8 000 shares purchased on 1/1/20.11 (consideration)

8 000

5 000 shares purchased on 30/4/20.12 (consideration)

7 500

Inventory

144 500

31 000

Cost of sales (*)

8 000

3 000

Income tax expense (*)

2 000

1 000

R220 000

R44 000

CREDITS

Share capital (150 000/20 000 shares)

150 000

20 000

Retained earnings: 1/1/20.12

50 000

4 000
Revaluation surplus

1 000

Sundry liabilities (including deferred tax)

9 000

Revenue (*)

20 000

10 000

R220 000

R44 000

(*) Accrued/incurred

evenly

Additional information

1P

Ltd acquired 8

000 shares in S

Ltd at the incorporation of S

Ltd on

1 January 20.11. On 30 April 20.12, P Ltd purchased a further 5 000 shares

in S Ltd from the non-controlling owner, thereby obtaining control over the
voting rights of S Ltd.

2 At the acquisition date (i.e. the date on which P Ltd obtained control of S
Ltd), the assets and liabilities of S Ltd were regarded as a fair reflection in
terms of the requirements of IFRS 3. The acquisition-date fair value of P
Ltd’s previously held equity interest was R11 100.

3 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.

4 P Ltd accounts for all investments in associates in accordance with the

equity method in its consolidated financial statements, as none of the
exceptions in IAS 28.17 apply.

198

Changes in ownership of subsidiaries through buying or selling shares 5 On

31 December 20.11 S Ltd revalued its land and recognised a surplus of R1
000

(after tax) in the revaluation surplus (OCI) in its individual financial

statements. It is the policy of the group to realise the revaluation surplus
when the asset is sold.

6 P Ltd measures the investment in S Ltd at cost in terms of IAS 27.10(a) in

its separate financial statements.

7 The company tax rate is 28% and CGT (capital gains tax) is calculated at
80%

thereof.

Solution 13.3

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.12

ASSETS

Non-current assets

Property, plant and equipment (50 000(P) + 9 000(S))

59 000

Goodwill (parent)

1 050

60 050

Current assets

Inventory (144 500(P) + 31 000(S)) 175

500

Total assets R235

550

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

150 000

Retained earnings

65 700
215 700

Non-controlling interests (10 850(S))

10 850

Total equity

226 550

Liabilities (9 000(S))

9 000

Total equity and liabilities R235

550

199

Chapter 13

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.12

Revenue (20 000(P) + 10 000(S) – 3 333(J5))

26 667

Cost of sales (8 000(P) + 3 000(S) – 1 000(J5))

(10 000)

Gross profit
16 667

Other income (remeasurement gain) (J3)

300

Share of profit of associate (J2)

800

Profit before tax

17 767

Income tax expense (2 000(P) + 1 000(S) – 333(J5)) (2

667)

PROFIT FOR THE YEAR

15 100

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R15 100

Profit attributable to:

Owners of the parent

13 700

Non-controlling interests (last eight months of current period) (J6) 1 400

R15 100
Total comprehensive income attributable to:

Owners of the parent

13 700

Non-controlling interests (last eight months of current period) (J6) 1 400

R15 100

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.12

Revaluati

Non-

Share

Retained

Total

on

Total

controlling

capital

earnings

equity

surplus
interests

Balance at

1 Jan 20.12

150 000

* 51 600

# 400

202 000

– 202

000

Changes in

equity for

20.12

Acquisition of

subsidiary –

–––

9 450

9 450

Transfers

400 (400)
–

Total

comprehensive

income for

the year:

Profit for the year

13 700

13 700

1 400

15 100

Balance at

31 Dec 20.12

R150 000

R65 700

– R215 700

R10 850
R226 550

50 000(P) + 1 600(S) = 51 600

# 400(S)

200

Changes in ownership of subsidiaries through buying or selling shares

Calculations

C1 Analysis of the owners’ equity of S Ltd – as associate

P Ltd 40%

Total

NCI

At

Since

i Date of first purchase

Share capital

20 000

8 000

12 000 *

Retained

earnings

–
–

20 000

8 000

12 000 *

Consideration

000

ii Since date of first purchase

• To beginning of current year:

Retained

earnings (4 000 – 0)

4 000

1 600 RE

2 400 *

Revaluation surplus

1 000

400 RS

600 *

• Current year:
Profit: 1/1/20.12–30/4/20.12

(6 000 × 4/12 = 2 000 (accrued evenly))

2 000

800 RE

1 200 *

27 000

2 800

16 200 *

Associate becomes a subsidiary

Derecognise associate

(IFRS 3.BC384)

(27 000)

(8 000) (2 800)

Transfer between reserves

400 RE

(400 RE – 400 RS) (comment (d))

(400)RS

–
–

See comment (c)

RE = retained earnings; RS = revaluation surplus

201

Chapter 13

C1 Analysis of the owners’ equity of S Ltd – as subsidiary

P Ltd 65%

Total

NCI

At

Since

i At acquisition (30 April 20.12)

Share capital

20 000

13 000

7 000

Retained earnings at beginning of year

4 000

2 600

1 400

Profit for the current year before

acquisition 2

000

1 300

700

Revaluation surplus

1 000

650

350

Total equity acquired

27 000

17 550

9 450

Equity represented by goodwill – Parent

1 050

1 050

–
Consideration and NCI

28 050

18 600

9 450

Consideration paid for additional shares

purchased (25%)

7 500

Fair value of equity interest previously

held (40%) (comment (b)

11 100

ii Since acquisition

Profit: 1/5/20.12–31/12/20.12

(6 000 × 8/12 = 4 000 (accrued evenly))

4 000

2 600 RE

1 400

R32 050

R2 600 RE R10 850

RE = retained earnings

202
Changes in ownership of subsidiaries through buying or selling shares
Comments

a The retained earnings at acquisition of S Ltd comprises of the balance at

the

beginning of the year and the net profit for the first four months up to the
date of the business combination. Refer to J5 and comment (c) to the journal
entries.

b The consideration for the business combination (gaining of control over S

Ltd) comprises of the amount paid for the additional shares and the fair
value of the equity interest previously held. In terms of IFRS 3.42, P Ltd
should re-measure its equity interest previously held (i.e. investment in
associate) to the fair value of R11 100 at the date of acquisition. Note that
the carrying amount of the investment in S Ltd (previously held equity
interest) at the acquisition date (in the consolidated financial statements) is
R10 800 (i.e. R8 000 (cost) + R1 600 (share in retained earnings) + R400
(share in revaluation surplus) + R800 (current-period share of profit

of associate)). The investment is remeasured to R11 100 and a

remeasurement gain of R300 (11 100 – 10 800) is recognised in the
consolidated financial statements – refer to J3 below. This is the same
treatment as if the associate (with carrying amount of R10 800) was sold at
its fair value of R11 100.

In

this

example, all the assets and liabilities of S Ltd were regarded as fairly valued
at the date of the business combination and no adjustment to the individual
assets and liabilities in terms of IFRS 3 was needed. Refer to self-assessment
question 1 where this was indeed the case.
c Before

30 April 20.12 (the acquisition date), S Ltd is only an associate of P Ltd and
the non-controlling interests are not recognised as such. These amounts (*)
are given for information purposes only as S Ltd only became a subsidiary at
the

acquisition date and the non-controlling interests are then recognised. In this
example, the non-controlling interests are measured at their proportionate
share of the acquiree’s identifiable net assets at the

e acquisition date as R9 450 (27 000 ×

35%). IFRS 3.B64(o)(i) only requires disclosure of the amount of the non-
controlling interests in the acquiree recognised at the acquisition date (i.e.
R9 450).

d In terms of IFRS 3.42 and IAS 28.22(c), any amount previously

recognised in other comprehensive income (i.e. the revaluation su

urplus) shall be recognised on the same

basis as would be required if the acquirer had disposed directly of the

previously held equity interest. In terms of IAS 16.41, a revaluation surplus
may be transferred directly to retained earnings when the asset is
derecognised. Also see J4 below.

C2 Proof of calculation of go

oodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 7 500

Amount of non-controlling interests:

IFRS 3.32(a)(ii) (27 000 × 35%) or (16 200 × 35/60)

9 450
Acquisition-date fair value of acquirer’s previously held equity interest in
the acquiree: IFRS 3.32(a)(iii) (given)

11 100

28 050

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(27 000)

Goodwill (parent)

R1 050

203

Chapter 13

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in S Ltd (associate) (SFP) (comment (a))

2 000

Retained earnings (SCE)

1 600
Revaluation surplus (SCE)

400

Accounting for investor’s interest in reserves

of associate at the beginning of the year

J2

Investment in S Ltd (associate) (SFP) (comment (a))

800

Share of profits of associate (P/L)

800

Accounting for investor’s share of current year’s

profit (1/1/20.12–30/4/20.12 i.e. before additional

acquisition) of associate

J3

Investment in S Ltd (associate) (SFP) (comment (b))

300

Other income (remeasurement gain) (P/L)

300

Accounting for remeasurement gain on equity

interest previously held

J4
Revaluation surplus (SCE) (comment (d) above)

400

Retained earnings (SCE)

400

Transfer of revaluation surplus to retained earnings

with business combination

J5

Share capital (SCE)

20 000

Retained

earnings – Opening balance (SCE)

(comment (c))

4 000

Revaluation surplus (SCE)

1 000

Goodwill (SFP) (parent)

1 050

Revenue (P/L) (comment (c)) (10 000 × 4/12)

3 333

Cost of sales (P/L) (comment (c)) (3 000 × 4/12)

1 000

Income tax expense (P/L) (comment (c)) (1 000 × 4/12) 333

Investment in S Ltd (SFP) (now subsidiary)

(8 000 + 2 000 + 800 + 300 + 7 500) or (11 100 + 7 500)

18 600

Non-controlling interests (SFP/SCE) 9

450

Main elimination journal entry at acquisition date

J6

Non-controlling interests (P/L)

1 400

Non-controlling interests (SFP/SCE) 1

400

Non-controlling interests’ portion of current year’s

profit (1/5/20.12–31/12/20.12 i.e. after additional

acquisition)

204
Changes in ownership of subsidiaries through buying or selling shares
Comments

a Journal

1 and 2 are typical journal entries for the accounting of associates in terms of

the equity method (see chapter 11 for detail).

b Journal 3 represent the adjustme

ent of the equity interest previously held to fair value,

with the recognition of the remeasurement gain in the consolidated financial

statements in terms of IFRS 3.42.

c To

prepare the consolidated financial statements, the financial statements of S

Ltd are combined (consolidated) to the financial statement of P Ltd (i.e.
adding every line item in the financial statement of S Ltd to those of P Ltd).
This implies that the whole amount (i.e. for the full year) of all items of
profit or loss is added to that of P Ltd. S Ltd was not a subsidiary of P Ltd
for the first four months and the profit earned during

these four months should not form part of the profit or loss for the group and
should be eliminated from the group’s profit or loss. The profits for the first
four months are actually part of the reserves at the acquisition date and
should be eliminated as such in accounting for the business combination.
Refer to chapter 8 dealing with interim acquisition of a subsidiary (i.e.
acquisition of control during the current year) for more detail in this regard.

d Full

disclosure of the business combination should be made in terms of IFRS

3.59–63

and B64–B67. Of particular intterest to this example, is the disclosure of the

acquisition-date fair value of the equity interest in the acquiree held by the
acquirer

immediately before the acquisition date (being R11 100) and amount of the
gain recognised as a result of remeas

suring to fair value the equity interest in the acquiree

held before the business combination (being the gain of R300 included in the
line item for “other income”).

Disposal of interests in a subsidiary

13.6 Basic approach on disposal of an interest

1 The

disposal of interests in a subsidiary (whether entirely or partially) b by a

parent is

materially similar to the disposal of an

ny other asset by the parent. The transaction

consists of the following components:

l the recognition of the asset received for the dissposal (e.g. cash proceeds); l
derecognition of the carrying amount of the asset disposed of from the asset
account (e.g. the investment held in another entity is derecognised); and l
recognition of any gain or loss on disposal (either in profit or loss or directly
in equity, depending on whether control has been lost).

2 In

the separate financial statements of the parent, the gain or loss on the
disposal of the shares is calculated in accordance with the cost method or
fair value method (depending on the accounting policy applied by the
parent for the measurement of investments in subsiidiaries in its separate
financial statements –
IAS 27.10). This policy decision will affect the accounting for the disposal
of a parent’s interest in a subsidiary:

l If the parent has accounted for the investmennt in the subsidiary in its
separate financial statements at cost, the gain or loss on the disposal of its
interest is calculated purely as the difference between the proceeds from the
disposal of the shares and the historic cost price of the shares disposed of.
The gain or loss is

recognised in profit or loss.

205

Chapter 13

Comments

This work focusses on the investment in a subsidiary, associate or joint

venture carried at cost in the parent’s/investor’s separate financial
statements, as it is arguably the

most common approach applied by companies in South Africa.

l If the parent has accounted for the investmennt in the subsidiary in its
separate financial statements in accordance with IFRS 9 the investment
would be measured at fair value at any given time. The parent ma ay choose
to remeasure

the investment to fair value through other comprehensive income (refer to

IFRS [Link]). If the parent elected this alternative, it can furthermore choose
to transfer the cumulative fair value adjustments recognised in other
comprehensive income, to retained earnin

ngs when the investment is sold

(IFRS 9.B5.7.1).

3 However, for the group (consolidated), the disposal of the parent’s

interest will be dealt with differently. In the group context, the disposal of
the shares comprises a disposal of:

l an attributable interest in the net assets (i.e. equity) of the subsidiary as at

the date of the transaction; as well as

l a proportionate portion of the goodwill or gain from a bargain purchase

(the latter will form part of the equitty recognised since the acquisition date).

It is apparent that, with reference to the “at-acquisition section” of the

analysis of owners’ equity of a subsidiary, the cost price of the shares is
equal to the fair value of the attributable net assets (equity) as at the
acquisition date plus (or minus) the goodwill (or gain from a bargain
purchase). Consequently, the following applies: l gaain/loss on disposal of
shares in a subsidiary per the separate financial statements of the parent
(calculated in accorda

ance with the cost method)

less

l attributable reserves earned since acquisition (which evidences an

increase/

decrease in the net asset value since acquisition date) now given up due to
the disposal of the shares

equals

l gaain/loss on disposal of interest in group context (refer to comment (g) to

the analysis in example 13.4a).
Comments

Net asset value as at the acquisition date plus reserves to date of disposal
equal the

net asset value as at the date of the disposal.

4 The

accounting treatment of the parent’s disposal of an interest in the subsidiary

depends on whether control over the subsidiarry is lost or not. IFRS 10
contains detailed requirements for both cases and these requirements are
discussed and illustrated in the sections below. IFRS

S 10.23 would be applicable in the case where

control is not lost, and IFRS 10.25 where control iis lost.

206

Changes in ownership of subsidiaries through buying or selling shares

13.7 Partial disposal of an interest in a subsidiary where control

is not lost

1 IFRS 10.23 states that changes in a parent’s owners’ equity in a

subsidiary that do not result in a loss of control are accounted for as
equity transactions (i.e.

transactions with owners in their capacity as owners). It should be borne in

mind that non-controlling interests are also classified as equity (IFRS 10.22).

Furthermore, the consolidated carrying amounts of the parent’s and non-

controlling interests must be adjusted to reflect the change in their relative
interests in the subsidiary. This change in the relative interests of the owners
shall be recognised directly in equity and is attributable to the owners of the
parent. This means that no gain or loss should be recognised in profit or loss
where a parent disposes some of its interest in a subsidiary without losing
control (i.e. the subsidiary remains a subsidiary of the parent, but the
parent’s interest in the subsidiary declined).

This transaction only changes the parent’s and non-controlling shareholders’

relative interests in the subsidiary and is therefore recognised only within

equity.

This means that no change in the carrying amount of the subsidiary’s assets
(including goodwill) or liabilities is recognised.

2 When a parent sells a portion of its investment in a subsidiary (but retains

control), the parent would recognise a gain or loss on the disposal in its
separate statement of profit or loss and other comprehensive income (if
the investment was carried at cost) or as a transfer within equity in its
separate statement of changes in equity (if the investment was accounted
for in accordance with IFRS 9). This gain or loss or the transfer within
equity will be reversed upon consolidation.

The amount for the consolidated gain or loss for the group may be different
from that of the parent and must be recognised directly in equity. In
preparing the consolidated financial statements, the adjustment to the non-
controlling interests (reflecting the change in their relative interest in the
equity of the subsidiary) will also need to be reflected in the consolidated
statement of changes in equity. This approach will also be evident from the
pro forma consolidation journal entries in the example below (see journal 4).

3 IFRS 10.B96 states that the amount to be recognised in equity would be

the difference between the amount by which the non-controlling interests is
adjusted and the fair value of the consideration paid or received. This
adjustment in the amount of the non-controlling interests will be affected by
the initial measurement of the non-controlling interests at the date of the
business combination (at their proportionate share of the acquiree’s
identifiable net assets or at fair value – see comment (f) to the analysis in
example 13.4a for more detail), which is illustrated in the examples below.

It was mentioned in chapter 13.3 above that the approach for calculating the
adjustment to the non-controlling interests is based on the view that the
subsidiary basically consists of two separate asset pools: one asset pool in
respect of all the other net assets (excluding goodwill); and goodwill. With a
partial sale of an interest in a subsidiary by the parent (without losing
control), the equity represented by the other net assets will always be re-
attributed between the parent and the non-controlling interests based on their
new ownership’ interests. The equity 207

Chapter 13

represented by goodwill will only be re-attributed between the parent and the
non-controlling interests if goodwill was initially measured in respect of the
non-controlling interests (i.e. the non-controlling interests were initially
measured at fair value). This approach is illustrated in calculation 4 of the
following two examples.

4 Disclosure of a schedule that shows the effect on the equity, attributable

to owners of the parent of any changes in its ownership interest in a
subsidiary that did not result in a loss of control, should be made in terms of
IFRS 12.18. Refer to paragraph 13.3 of this chapter for more detail.

Partial disposal of an interest in a subsidiary with no change

in the status as the subsidiary remains a subsidiary (control

Example 13.4a

is not lost) (NCI is measured at its proportionate share of the

acquiree’s identifiable net assets at the acquisition date)

The following represents the condensed financial statements of P Ltd and its
subsidiary at 31 December 20.15:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.15

P Ltd

S Ltd
ASSETS

Inventory

70 000

100 000

Bank

63 150

60 000

Investment in S Ltd: 6 000 shares at cost (R40 000 – R10 000) 30 000

Total assets

R163 150

R160 000

EQUITY AND LIABILITIES

Share capital (90 000/10 000 shares)

90 000

10 000

Replacement reserve (comment (a))

120 000

Retained earnings
73 150

30 000

Total equity and liabilities

R163 150

R160 000

208

Changes in ownership of subsidiaries through buying or selling shares

STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.15

P Ltd

S Ltd

Revenue

100 000

80 000

Cost of sales

(67 000)

(56 000)

Gross profit

33 000

24 000
Other income (profit on sale of shares)

25 000

Profit for the year before tax

58 000

24 000

Income tax expense

(14 850)

(9 000)

PROFIT FOR THE YEAR

43 150

15 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R43 150

R15 000

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.15

Retained earnings

P Ltd

S Ltd

Balance at 1 January 20.15

30 000

15 000

Changes in equity for 20.15

Total comprehensive income for the year:

Profit for the year

43 150

15 000

Other comprehensive income

Balance at 31 December 20.15

R73 150

R30 000

Additional information

1 P Ltd acquired its 80% interest (8 000 shares) in S Ltd on 1 January 20.11
for R40 000. On that date S Ltd’s equity consisted of the following: Share
capital
R10 000

Replacement reserve

R30 000

Retained earnings

R5 000

2 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date. On the
date of the business combination, the assets and liabilities of S Ltd were
regarded to be a fair reflection in terms of the requirements of IFRS 3.

3 P Ltd classified the investment in S Ltd at cost in its separate financial

statements.

209

Chapter 13

4 On

30 June 20.15 P Ltd disposed of 2 000 of the shares in S Ltd for R35 000
(fair value). P Ltd accounted for the cash proceeds from the disposal of the
interest as follows in its separate financial statements:

Dr

Cr

R
J1

Bank (SFP)

35 000

Investment in S Ltd (SFP)

10

000

(2 000/8 000 shares × R40 000 cost)

Profit on sale of shares (P/L)

25

000

Recording proceeds and profit on partial disposal

of investment

J2 Income tax expense (P/L)

5 600

SARS tax payable/Bank (SFP)

600

(25 000 × 80% × 28%)

Capital gains tax (current tax) payable on disposal

of shares
5 The

disposal of the interest in the subsidiary did not comply with the criteria of
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
until the date of disposal.

6 The

profit of S Ltd was earned evenly during 20.15.

7S

Ltd

made no transfer to/from the replacement reserve during the current year.

8 The

company tax rate is 28% and CGT is calculated at 80% thereof.

Comments

a Although the Companies Act does not require specific reserves to be

created, it is

assumed that a company may well create any reserve by choice (as a transfer
within equity, i.e. from retained earnings to a reserve). In this example, it
was assumed that S Ltd created a replacement reserve in the past to replace
assets that were fully depreciated during the current period, in the next year.
The reserve is merely used to illustrate the effect of a partial sale of an
interest in a subsidiary on other reserves (other than retained earnings).

b There are various ways in which the partiial disposal of the investment
can be recognised in the investor’s separate financial statements. When share
disposals take place, the separate financial statements of the parent may
contain an item such as a

“suspense account” to which the p

proceeds on disposal have been provisionally credit-

ed (and not as was done in note 4 of this example). If this is the case, the
separate financial statements of the parent (P Ltd) must first be corrected by
some actual correcting journal entries (i.e. not pro forma consolidation
journal entries) to achieve the entries indicated in note 4 above.

210

Changes in ownership of subsidiaries through buying or selling shares

Solution 13.4a

In this example, P Ltd retained control over S Ltd, even though it sold some
of its interest in S Ltd to the non-controlling interests. P Ltd therefore
combines its financial statements and those of S Ltd (as a subsidiary) line by
line by adding together like items of assets, liabilities, equity, income and
expenses (IFRS 10.B86(a)). Thereafter, the normal consolidation principles
will be followed to eliminate common items and to recognise any non-
controlling interests and goodwill.

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.15

ASSETS

Non-current assets

Goodwill (parent only)

4 000

Current assets
Inventory (70 000(P) + 100 000(S)) 170

000

Bank (63 150(P) + 60 000(S))

123 150

293 150

Total assets R297

150

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

90 000

Retained earnings

84 650

Other components of equity (54 000 + 4 500)

58 500

233 150

Non-controlling interests

64 000

Total equity

297 150
Total equity and liabilities R297

150

211

Chapter 13

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.15

Revenue (100 000(P) + 80 000(S)) 180

000

Cost of sales (67 000(P) + 56 000(S))

(123 000)

Gross profit

57 000

Other income (no gain on disposal of interest is recognised here) (25

000(P) – 25 000(J4)) –

Profit before tax

57 000

Income tax expense (14 850(P) + 9 000(S))

(23 850)

PROFIT FOR THE YEAR

33 150

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R33 150

Profit attributable to:

Owners of the parent

28 650

Non-controlling interests (1 500 + 3 000) (#)

4 500

R33 150

Total comprehensive income attributable to:

Owners of the parent

28 650

Non-controlling interests (1 500 + 3 000) (#)

4 500

R33 150

(#) The same as profit for the year, as there is no other comprehensive
income in the example.

212
Changes in ownership of subsidiaries through buying or selling shares P
LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.15

Changes

Re-

Re-

Non-

Share

in

tained

place-

con-

Total

Total

capital

owner-

earn-

ment

trolling

equity
ship

ings

reserve

interests

Balance at

1 Jan 20.15

90 000

– * 38 000

72 000

200 000 ! 29 000

229 000

Changes in

equity for

20.15

Total

compre-

hensive

income for

the year:

Profit for the

year

28 650

28 650

4 500

33 150

Transfer from

replacement

reserve

18 000 (18 000)

Disposal of

interest

–
4 500

4 500

30 500

35 000

Balance at

31 Dec 20.15 R90 000

R4 500 R84 650 R54 000 R233 150 R64 000 R297 150

30 000(P) + 8 000(S) = 38 000

9 000(at) + 2 000(RE) + 18 000(RR) = 29 000

P LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Changes in ownership in subsidiary:

During the current year, P Ltd sold a 20% interest in S Ltd, an existing
subsidiary, without losing control over S Ltd. This resulted in an amount of
R4 500 being recognised in equity as presented in the consolidated statement
of changes in equity. Details of the transaction between the equity
participants are as follows:

Fair value of the consideration received

35 000

Increase in the non-controlling interests

(30 500)

Adjustment to equity attributable to owners of the parent

R4 500

213

Chapter 13

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–60%

Total

NCI

At

Since

i At acquisition (1/1/20.11)

Share capital

10 000

8 000

2 000

Replacement reserve
30 000

24 000

6 000

Retained earnings

5 000

4 000

1 000

45 000

36 000

9 000

Equity represented by goodwill

– Parent

4 000

4 000

Consideration and NCI

49 000

40 000

9 000

ii Since acquisition
• To beginning of current year:

Retained

earnings

(15 000 – 5 000) 10

000

8 000 RE 2

000

Replacement

reserve

(120 000 – 30 000) 90

000

72 000 RR 18

000

• Current year:

Profit: 1/1/20.15–30/6/20.15

(15 000 × 6/12) 7

500

6 000 RE 1

500

156 500
14 000 RE

30 500

72

000 RR

Disposal of 2 000 shares (1)

(3 500) RE

(comment (b)) (9

000)

(18 000) RR 30

500

156 500

61 000

Profit: 1/7/20.15–31/12/20.15

(15 000 × 6/12) 7

500

4 500 RE 3

000

R164 000

R15 000 RE

R64 000
R54 000 RR

RE = Retained earnings

RR = Replacement reserve

(1) 36 000 × 20/80 = 9 000 AT

(8 000 + 6 000) × 20/80 = 3 500 RE

72 000 × 20/80 = 18 000 RR

30 500(NCI) × 40/20 = 61 000 – 30 500(existing) = 30 500(equity acquired

from parent) 214

Changes in ownership of subsidiaries through buying or selling shares

Comments

a The parent’s interest in S Ltd changed from 80% (8 000/10 000 shares) up
to

30 June 20.15 to 60% (6 000/10 000 shares) thereafter.

b Note that as control is not lost in this example, there is no need to

remeasure the retained investment in the subsidiary to fair value at the date
the interest is disposed of. IFRS 10.25(b) therefore does not apply. It should
also be borne in mind that IFRS 10.23 states that changes in a parent’s
owners’ equity in a subsidiary that do not result in a loss of control are
accounted for as equity transactions (i.e.

transactions with owners in their capacity as owners).

c The amount for the change in ownership recognised in equity can be

calculated as
follows (see IFRS 10.B96) (from the perspec

ctive of the NCI):

Fair value of the consideration paid by NCI

(35 000)

Amount by which the non-controlling interests are adjusted (reserves

acquired from parent – see below))

30 500

NCI after transaction ((156 500 – 4 000GW) × 40%)

61 000

NCI before transaction ((156 500 – 4 000GW) × 20%)

(30 500)

Amount to be recognised directly in equity

(R4 500)

The

approach in terms of IFRS 10.B96 that the difference between the change in
the non-controlling interests and the amount paid or received is to be
recognised in equity

is also clear from J4 below. The entries made by the parent against the
investment (R10 000) and the profit on the sale of the shares (R25 000) are
reversed and the principles of IFRS 10.B96 are applied.

d The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspec

ctive of the parent):

Fair value of the consideration received by the parent

35 000

Decrease in parent’s interest/amount by which the non-controlling interests

are adjusted (reserves sold to NCI)

(30 500)

Parent’s interest after transaction

((156 500 – 4 000GW) × 60%) + 4 000GW)

95 500

Parent’s interest before transaction

((156 500 – 4 000GW × 80%) + 4 000GW)

(126 000)

Amount to be recognised directly in equity

R4 500

The

amount for the change in ownership recognised in equity can also be

calculated

as follows (from the perspective of the parent):

Fair value of the consideration received by the parent

35 000

Equity relinquished to NCI

(30 500)

Historic fair value of shares disposed of (excluding goodwill) (comment (f))

((40 000 cost – 4 000 goodwill) × 20/80)

(9 000)

Attributable post-acquisition equity disposed of:

Retained earnings ((8 000 + 6 000) × 20/80)

(3 500)

Replacement reserve (72 000 × 20/80)

(18 000)

Amount to be recognised directly in equity (in group context) R4 500

continued

215

Chapter 13

e Alternatively, the amount can also be calculated as follows: Proceeds on

disposal of interest

35 000

Attributable net assets disposed (excluding goodwill)

((156 500 – 4 000) × 20%)

(30 500)

Goodwill relinquished (not realised as control not lost and not transferred as
NCI did not share in any goodwill at acquisition) (comment (f))

–
Amount to be recognised directly in equity (in group context) R4 500

f In this example, goodwill was only recognised in respect of the parent as

the non-controlling interests were not measured at fair value on the
acquisition date.

Therefore, the non-controlling interests did not share in any of the goodwill
recognised. Furthermore, IFRS 10.BCZ168 indicates that no changes should
be made to goodwill in respect of a disposal of interest where control is
maintained (i.e.

not lost). As this applies to this particular example, goodwill of R4 000

should be maintained in the consolidated financial statements of the parent
company until such time that control is relinquished and the full amount
remains attributable to the parent.

The calculation of the gain on disposal (at group level) should therefore
incorporate

the fact that goodwill is not transferred to the non-controlling interests. This
is done by using the historic fair value of the assets and liabilities obtained
with the original business combination (acquisition) and not the purchase
price which includes the goodwill amount.

As was explained in chapter 13.3 above, this work follows the approach that
the parent only relinquishes some of the goodwill that was attributable to it,
to the non-controlling owners if goodwill was initially also recognised in
respect of the non-controlling interests (NCI was measured at fair value at
the date of the business combination).

g The group’s gain on the partial disposal of the interest can also be
calculated from (or

reconciled to) the parent’s entries as recognised in its separate financial

statements, as follows:

Parent’s profit on sale of shares

25 000
Adjustments to be made at group level:

Add back goodwill included in cost of investment above, not to be

transferred within the group (IFRS 10.BCZ168) (comment (f))

(4 000 × 20/80)

1 000

Deduct parent’s interest in since-acquisition reserves disposed of (3 500 RE

+ 18 000 RR)

(21 500)

Amount to be recognised directly in equity (in group context) R4 500

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 40 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

9 000

49 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(45 000)

Goodwill (parent)

R4 000

216

Changes in ownership of subsidiaries through buying or selling shares C3

Pro forma consolidation journal entries
Dr

Cr

J1

Share capital (SCE)

10 000

Replacement reserve (SCE)

30 000

Retained earnings (SCE)

5 000

Goodwill (SFP) (parent only)

4 000

Investment in S Ltd (SFP)

40 000

Non-controlling interests (SFP/SCE)

9 000

Main elimination journal entry at acquisition date

J2

Retained earnings (SCE)

2 000

Replacement reserve (SCE)

18 000

Non-controlling interests (SFP/SCE)

20 000

Allocation of non-controlling interests’ portion

of retained earnings and replacement reserve

J3

Non-controlling interests (P/L)

1 500

Non-controlling interests (SFP/SCE)

1 500

Allocation of non-controlling interests’ portion

of current year’s profit

J4

Investment in S Ltd (SFP) (comment (b)) 10

000

Profit on sale of shares (P/L)

25 000

Changes in ownership (equity) (SCE)

4 500

Non-controlling interests (SFP/SCE)

30 500

Pro forma correction of group gain on disposal

to separate equity category to give effect to the

requirements of IFRS 10.23

J5

Replacement reserve (SCE) (72 000 × 20/80)

18 000

Retained earnings: Transfer from replacement

reserve (SCE)

18 000

Transfer of replacement reserve due to disposal

of owners’ equity (comment (c))

J6 Non-controlling interests (P/L)

3 000

Non-controlling interests (SFP/SCE)

3 000

Allocation of non-controlling interests’ portion

of current year’s profit

217

Chapter 13

Comments

a The parent accounted for its investment in the subsidiary at cost and there
were no

fair value adjustments in the separate financial statements of P Ltd.

b J4 firstly reverses the entries made by the parent with the sale of some
shares (the parent credited the investment with the partial cost of R10 000
and recognised the profit of R25 000). Then the group’s adju

ustments in respect of the change in

ownership are recognised in accordance with IFRS 10.23 and B96. The
parent’s balance for the investment in the subsidiary is effectively cancelled
(balance is Rnil) after all the pro forma consolidation journal entries
(Investment of R30 000(given) –

R40 000(J1) + R10 000(J4) = Rnil).

c From the analysis and comment (g) above, it is clear that the parent
effectively disposed of a portion of its interest in the replacement reserve of
S Ltd (20/80 ×

72 000 = R18 000) (i.e. loss of reserves attached to the shares disposed of).
J5 is needed to reflect this loss of a portion of the reserve. It is also clear
from the analysis

that the closing balance for the replacement reserve should be R54 000 and
not R72 000. This transfer to retained earnings will also be made from any
other reserve (e.g. revaluation surplus, or mark-to-market reserve) that the
subsidiary may have had.

d J4

reverses the entries made by the parent with the sale of the shares, but note
that the actual current tax (capital gains tax) pa

aid by the parent, is not reversed. This

payment has indeed been made to the South African Revenue Services,
irrespective of the group’s adjustments and cannot be reversed. Some experts
are of the opinion that this tax expense should, however, be moved to equity
as the group’s adjustment

is made to equity. The journal entry would be to debit the “change in

ownership (equity)” and to credit the “income tax expense (P/L)”. However,
this has not been done in this work as the authors are of the opinion that the
tax expense rather relates to the parent’s sale of the shares, than to the
group’s adjustment of its owners’ equity interests (between the parent and
the non-con

ntrolling interests).

C4 Detailed calculation of allocation of equity

Attributable Attributable

Total

to parent

to NCI

Equity of subsidiary before change repre-

sented by:

156 500
126 000

30 500

Other net assets

152 500

122 000

30 500

Goodwill

4 000

4 000

Change in ownership represented by:

(30 500)

30 500

Other net assets reallocated

(30 500)

30 500

Goodwill relinquished

N/A

N/A

Equity of subsidiary after change

represented by:

156 500

95 500

61 000

Other net assets

152 500

91 500

61 000

Goodwill

4 000

4 000

218

Changes in ownership of subsidiaries through buying or selling shares The

following example is used to contrast the measurement of the non-
controlling interests at fair value at the acquisition date, to the
measurement thereof at their proportionate share of the acquiree’s
identifiable net assets (as the example above).

Partial disposal of an interest in a subsidiary with no change

in the status as the subsidiary remains a subsidiary (control

Example 13.4b

is not lost) (NCI is measured at fair value at the date of ac-

quisition)

Assume the same information as in example 13.4a, except that P Ltd elected
to measure non-controlling interests at fair value at the date of acquisition.
The fair value of the non-controlling interests was R9 900 at the acquisition
date (when P Ltd obtained control over S Ltd).

Solution 13.4b

The consolidated statement of profit or loss and other comprehensive income

is the same as in part (a) of example. The rest of the consolidated financial
statements are prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.15

ASSETS

Non-current assets

Goodwill (parent and NCI)

4 900

Current assets

Inventory (70 000(P) + 100 000(S)) 170

000

Bank (63 150(P) + 60 000(S))

123 150

293 150

Total assets R298

050

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

90 000

Retained earnings

84 650

Other components of equity (54 000 + 3 500)

57 500

232 150

Non-controlling interests

65 900

Total equity

298 050

Total equity and liabilities R298

050

219

Chapter 13

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.15

Changes

Re-

Non-

Re-

Share

in

place-

con-

Total

tained

Total

capital

owner-

ment

trolling

equity

earnings

ship

reserve
interests

Balance at

1 Jan 20.15

90 000

– * 38 000

72 000

200 000 ! 29 900

229 900

Changes in

equity for

20.15

Total

compre-

hensive

income for

the year:

Profit for the

year

– 28
650

28 650

4 500

33 150

Transfer from

replacement

reserve

18 000 (18 000)

Disposal of

interest

3 500

–
3 500

31 500

35 000

Balance at

31 Dec 20.15 R90 000

R3 500 R84 650 R54 000 R232 150 R65 900 R298 050

30 000(P) + 8 000(S) = 38 000

9 900(at) + 2 000(RE) + 18 000(RR) = 29 900

P LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Changes in ownership in subsidiary:

During the current year, P Ltd sold a 20% interest in S Ltd, an existing
subsidiary, without losing control over S Ltd. This resulted in an amount of
R3

500 being recognised in equity as presented in the consolidated statement of

changes in equity. Details of the transaction between the equity participants
are as follows:

Fair value of the consideration received

35 000

Increase in the non-controlling interests

(31 500)

Adjustment to equity attributable to owners of the parent

R3 500

220

Changes in ownership of subsidiaries through buying or selling shares

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–60%

Total

NCI

At

Since

i At acquisition (1/1/20.11)

Share capital

10 000

8 000

2 000

Replacement reserve

30 000

24 000

6 000
Retained earnings

5 000

4 000

1 000

45 000

36 000

9 000

Equity represented by goodwill

– Parent and NCI

4 900

4 000

900

Consideration and NCI

49 900

40 000

9 900

ii Since acquisition

• To beginning of current year:

Retained

earnings
(15 000 – 5 000)

10 000

8 000 RE

2 000

Replacement

reserve

(120 000 – 30 000) 90

000

72 000 RR 18

000

• Current year:

Profit: 1/1/20.15–30/6/20.15

(15 000 × 6/12) 7

500

6 000 RE 1

500

157 400

14 000 RE

31 400

72
000 RR

Disposal of 2 000 shares (1)

(9 000)

(3 500) RE

31 500

(comment (b))

(1 000)

(18 000) RR

157

400

62 900

Profit: 1/7/20.15–31/12/20.15

(15 000 × 6/12) 7

500

4 500 RE

3 000

R164 900

R15 000 RE

R65 900

R54 000 RR
RE = Retained earnings

RR = Replacement reserve

(1) 36 000 × 20/80 = 9 000 AT

4 000 × 20/80 = 1 000 Goodwill (comment (d))

(8 000 + 6 000) × 20/80 = 3 500 RE

72 000 × 20/80 = 18 000 RR

NCI: 9 000 + 1 000 + 3 500 + 18 000 = 31 500(equity acquired from parent)

221

Chapter 13

Comments

a The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspective of the NCI): Fair value of
the consideration paid by NCI

(35 000)

Amount by which the non-controlling interests are adjusted (reserves

acquired from parent – see below)

31 500

NCI after transaction ((157 400 – 4 900GW) × 40%) + (900 initial GW of

NCI) + (4 000 GW of parent × 20/80) relinquished to NCI)

62 900

NCI before transaction ((157 400 – 4 900GW) × 20%) +

(900 initial GW of NCI))

(31 400)

Amount to be recognised directly in equity

(R3 500)

Through the parent’s disposal of 20% of the interest in the subsidiary (being
20/80 =

25% of the parent’s interest), 20% of the net asset value (excluding
goodwill) ((157 400 – 4 900) × 20% = 30 500) was transferred from the
parent’s interest to the

non-controlling interests. Furthermore, the parent relinquished some of its

own goodwill (4 000 × 20/80 = 1 000) to the non-controlling owners. This
resulted in an increase of the non-controlling interests of R31 500 (30 500 +
1 000).

b The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspective of the parent): Fair value
of the consideration received by the parent

35 000

Decrease in parent’s interest / amount by which the non-controlling interests

are adjusted (reserves sold to NCI)

(31 500)
Parent’s interest after transaction ((157 400 – 4 900GW) × 60%) +

4 000GW – (4 000 GW of parent × 20/80))

94 500

Parent’s interest before transaction

((156 500 – 4 000GW × 80%) + 4 000GW)

(126 000)

Amount to be recognised directly in equity

R3 500

The

amount for the change in ownership recognised in equity can also be

calculated

as follows (from the perspective of the parent):

Fair value of the consideration received by the parent

35 000

Equity relinquished to NCI

(31 500)

Historic fair value of shares disposed of (including goodwill) (comment (d))

(40 000 cost × 20/80)

(10 000)

Attributable post-acquisition equity disposed of:

Retained earnings ((8 000 + 6 000) × 20/80)

(3 500)

Replacement reserve (72 000 × 20/80)

(18 000)

Amount to be recognised directly in equity (in group context) R3 500

c Alternatively, the amount can also be calculated as follows: Proceeds on

disposal of interest

35 000

Attributable net assets disposed (excluding goodwill)

((157 400 – 4 900) × 20%)

(30 500)

Goodwill relinquished (as NCI also shared in the goodwill) (comment (d)) (4
000 × 20/80)

(1 000)

Amount to be recognised directly in equity (in group context) R3 500

continued

222

Changes in ownership of subsidiaries through buying or selling shares d In

this example, goodwill was recognised in respect of the parent and the non-
controlling interests (by being measured at fair value on the acquisition
date).

Therefore, the non-controlling did share in the goodwill recognised.

Furthermore, IFRS 10.BCZ168 indicates that no changes should be made to
goodwill in respect of a disposal of interest where control is maintained (i.e.
not lost). As this is the case in this particular example, goodwill of R4 900
should be maintained in the consolidated financial statements of the parent
company until such time that control is relinquished.

However, R3 000 (4 000 – 1 000 relinquished) of the goodwill is now

attributable to the parent and R1 900 (900 initial + 1 000 from parent) is now
attributable to the non-

controlling interests. The calculation of the gain on disposal (at group level)
should therefore incorporate the fact that goodwill is indeed transferred to
the non-controlling interests. This is done by using the purchase price of the
investment, which includes the goodwill number.

As was explained in chapter 13.3 above, this work follows the approach that
the parent does relinquish some of the goodwill that was attributable to it, to
the non-controlling owners if goodwill was initially also recognised in
respect of the non-controlling interests (NCI was measured at fair value at
the date of the business combination).

e The group’s gain on the partial disposal of the interest can also be
calculated from (or

reconciled to) the parent’s entries as recognised in its separate financial

statements, as follows:

Parent’s profit on sale of shares

25 000

Adjustments to be made at group level:

Deduct parent’s interest in since-acquisition reserves disposed

of (3 500 RE + 18 000 RR)

(21 500)

Amount to be recognised directly in equity (in group context) R3 500

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 40 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

9 900

49 900

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(45 000)

Goodwill (parent and NCI)

R4 900

223

Chapter 13

C3 Pro forma consolidation journal entries

The pro forma consolidation journal entries are the same as in example
13.4a, except for those indicated below.

Dr

Cr

J1

Share capital (SCE)

10 000
Replacement reserve (SCE)

30 000

Retained earnings (SCE)

5 000

Goodwill (SFP) (parent and NCI)

4 900

Investment in S Ltd (SFP)

40 000

Non-controlling interests (SFP/SCE)

9 900

Main elimination journal entry at acquisition date

J4

Investment in S Ltd (SFP) (comment (b)) 10

000

Profit on sale of shares (P/L)

25 000

Changes in ownership (equity) (SCE)

3 500

Non-controlling interests (SFP/SCE)

31 500
Pro forma correction of group gain on disposal to

separate equity category to give effect to the

requirements of IFRS 10.23

C4 Detailed calculation of allocation of equity

Attributable Attributable

Total

to parent

to NCI

Equity of subsidiary before change repre-

sented by:

157 400

126 000

31 400

Other net assets

152 500

122 000

30 500

Goodwill

4 900

4 000
900

Change in ownership represented by:

(31 500)

31 500

Other net assets reallocated

(30 500)

30 500

Goodwill relinquished (4 000 × 20/80)

(1 000)

1 000

Equity of subsidiary after change represent-

ed by:

157 400

94 500

62 900

Other net assets

152 500

91 500

61 000

Goodwill
4 900

3 000

1 900

13.8 Loss of control with partial disposal of a subsidiary, with a simple

investment retained

This section of the work deals with a loss of control and IFRS 10.25–26 and
B97–B99

should be consulted in this regard.

1 IFRS 10.25 and B98 states that if a parent loses control of a subsidiary, it
(in the consolidated financial statements):

l derecognises the assets (including any goodwill) and liabilities of the

subsidiary at their carrying amounts on the date when control is lost; 224

Changes in ownership of subsidiaries through buying or selling shares l

derecognises the carryinng amount of any non-controlling interests in the
former subsidiary on the date when control is lost (including any
components of other comprehensive income attributable to them);

l recognises:

• the fair value of the consideration received, if any, from the transaction,
event or circumstances that resulted in the loss of control; and

• if the transaction that resulted in the loss of control involves a distribution

of shares of the subsidiary to owners in their capacity as owners, that
distribution;
l recognises anny investment retained in the former subsidiary at its fair
value on the date when control is lost;

l reclassifies to profit or loss, or transfers directlly to retained earningss if

required in accordance with other IFRSs, the amounts from other
comprehensive income as if the parent had directly disposed of that
subsidiary (refer to IFRS 10.B99); and l recognises anny resulting difference
as a gain or loss in profit or loss attributable to the parent.

Comments

a As indicated above, the carrying amounts of goodwill and non-controlling

interests

are derecognised. This applies irrespective of whether the non-controlling

interests (which effects the measurement of goodwill) were measured at fair
value or at their proportionate share of the acquiree’s identifiable net assets
at the date of acquisition, in terms of IFRS 3.19.

b The process listed above (in terrms of IFRS 10.B98) can easily be used to
calculate

the group’s profit or loss on the loss of control of the subsidiary.

2 This

treatment reflects that a loss of control is a significant economic event that

changes the nature of the investment (refer to IFRS 10.BCZ180–183). It
also indicates that the loss of control over a subsidiarry represents a loss of
control over the assets and liabilities of the subsidiary and that a new
investment (if any) in the former subsidiary is acquired.

Any investment that is retained in the former subsidiary (i.e. after the loss
of control) should be measured at its fair value on the date when control is
lost.

Any gain or loss arising from such remeasurement should be recognised

directly in profit or loss of the group. Note that this principle also applies to
the loss of significant influence or joint control where the retained interest is
a financial asset (IAS 28.22(b)) (refer to IAS 28.BC29 for more information
in this regard).

IFRS

10.25(b) further states that, on the loss of control of a subsidiary, any

investment retained in the former subsidiary shall be accounted for in
accordance with other IFRSs from the date when control is lost (e.g. IFRS 9
Financial Instruments or IAS 28 Investments in Associates and Joint
Ventures). The fair value of any investment retained in the former
subsidiary at the date when control is lost shall be regarded as the fair value
on initial recognition of a financial asset in accordance with IFRS 9
Financial Instruments or, when appropriate, the cost on initial recognition
of an investment in an associate or joint venture.

225

Chapter 13

3 In

its

separate financial statements the parent will recognise a gain or loss on the
disposal of the shares or will transfer an appropriate amount from the mark-
to-market reserve to retained earnings, depending on whether the investment
in the subsidiary was measured at cost or in accordance of IFRS 9 (at fair
value through other comprehensive income). Refer to paragraph 13.6 of this
chapter for more detail in this regard. The entries made in the parent’s
separate financial statements will be reversed upon consolidation and the
consolidated profit or loss will be accounted for, as indicated above.

IAS 27 and IFRS 10 are not clear on how any retained investment should
be accounted for after the partial sale in the separate financial statements of
the parent. If the retained investment only represents a simple investment
(with no control, joint control, or significant influence), it should be
accounted for as a financial asset under IFRS 9 and initially be measured at
fair value. If the parent had measured the investment in the former
subsidiary at cost, it is assumed that the remeasurement to fair value should
be recognised in profit or loss (similar to a

“day 1” gain – refer to IFRS 9.B5.1.2A(a)). If the parent had measured the
investment in the former subsidiary at fair value under IFRS 9, that fair
value would merely represent the initial measurement of the financial asset.

4 Should control over a subsidiary be lost during the course of the

financial reporting period, the following applies with respect to the
consolidated statement of financial position and statement of profit or loss
and other comprehensive income: l Consolidated statement of financial
position

The consolidated statement of financial position as at the financial reporting

date contains the assets and liabilities of the parent as well as the assets and
liabilities of companies which, at the financial reporting date, are in fact
subsidiaries of the parent. Consequently, a subsidiary disposed of in its
entirety during the current financial period is not included at all in the
consolidated statement of financial position at the consolidation date.

l Consolidated statement of profit or loss and other comprehensive

income The consolidated statement of profit or loss and other
comprehensive income contains the income and expenses and other
comprehensive income of:

• the parent;

• the subsidiaries that were subsidiaries for the whole term of the year under
consideration; and

• the appropriate portion of the income and expenses and other

comprehensive income of subsidiaries that were subsidiaries only for a part
of the year (for the period that the parent controlled the subsidiary) under
consideration.

The operating results of subsidiaries acquired during the reporting period are
consequently included in the consolidated statement of profit or loss and
other comprehensive income as from the date of acquisition, whilst the
results of a subsidiary disposed of are included up to the date of disposal.
226

Changes in ownership of subsidiaries through buying or selling shares

Comment

As a starting point to the consolidation, it is important to note that the

financial

statements of a subsidiary disposed of before the reporting date will not be

combined (i.e. added together) to those of the parent. The amounts in
respect of the post-acquisition reserves of the subsidiary need be journalised
into the consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity for the period while the
subsidiary was controlled by the parent. This approach is clearly evident in
journal 4 below. However, a different approach may be followed and this is
contrasted in the example below.

5 Disclosure of a loss of control should be made in terms of IFRS 12

Disclosure of Interests in Other Entities. The parent shall disclose
information that enables users of the consolidated financial statements to
evaluate the consequences of losing control of a subsidiary during the
reporting period (IFRS 12.10(b)(iv)). The following information should be
disclosed (IFRS 12.19):

l the total gain or loss with the loss of control;

l the portion of this gain or loss attributable to measuring any investment

retained in the former subsidiary at its fair value at the date of the loss; and l
the line item(s) in profit or loss inn which the gain or loss is recognised (if
not presented separately).

6 Given the requirements of IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations, it should be noted that in the period preceding
the disposal of a subsidiary, the latter will most probably meet the
requirements of IFRS 5 for classification as a non-current asset held for sale
in the consolidated financial statements of the parent company. This would
entail classifyin ng the assets

of the subsidiary as held for sale on the face of the statement of financial
position in a single line item, as well as separately classifyin

ng and disclosing the liabilities and

equity items of the subsidiary directly relating to non-current assets held for
sale.

The subsidiary held for sale will most probably also qualify as a component
of an entity which is a major line of business or a separate geo ographical
segment, and

may therefore qualify for separate presentation and disclosure as a

discontinued operation in terms of IFRS 5. This aspect is specifically dealt
with later at the end of chapter 14 and is, for the sake of simplicity, not taken
into account at this stage.

7 The

inclusion of the results of a subsidiary disposed of up to the date of disposal

ensures that the part of the results of the subsidiary for the current financial
period over which the parent exercised control, is reflected in the
consolidated statement of profit or loss and other comprehensive income. It
also ensures that the consolidated retained earnin

ngs at the beginning of the financial period correspond to the consolidated

retained earnings at the end of the previous year for consistency and
comparabilitty purposes. In the execution of the consolidation procedures,
the inclusion of the results of a subsidiary disposed of to the date of
disposal is achieved by dividing the ga

ain on disposal of shares in a subsidiary (under the cost model) as

reflected in the separa

ate financial statements of the parent, where

applicable, into the component elements thereof, and then incorporating
these elements in the consolidated statement of profit or loss and other
comprehensive income accordingly. The component elements are the
following: l the parent’s share in the retained eearnings since acquisition
and other reserves of the subsidiary disposed of to the beginning of the
current year plus

227

Chapter 13

l the parent’s share in the subsidiary’s profit for the current year to the date
of disposal

plus

l the gain (loss) on disposal of the interest in group context (as discussed
earlier)

equals

l the gain (loss) on disposal of shares as reflected in the separate records of

the parent under the cost model.

8 The following example illustrates the use of this approach on the

consolidation of the financial statements of a group where control over a
subsidiary was lost during the course of a year.

Partial disposal of a subsidiary (loss of control) and an

investment retained (NCI is measured at their proportionate

Example 13.5

share of the acquiree’s identifiable net assets at the

acquisition date)
The following are the abridged trial balances of P Ltd and S Ltd on 31
December 20.14:

P Ltd

S Ltd

CREDITS

Share capital (50 000/6 000 shares)

50 000

6 000

Retained earnings (at 1/1/20.14)

6 000

1 600

Mark-to-market reserve (at 31/12/20.14)

((1 230 – 1 200) × 77,6%) 23

Deferred tax

((1 230 – 693) × 80% × 28%) (R1 rounding adjustment) or (114 + 7) 121

Revenue (*)

8 000

2 000

Profit on the sale of shares (P/L)

3 293

Remeasurement gain on retained investment (after tax) (P/L) 507

R67 944

R9 600

DEBITS

Bank

60 447

8 000

Cost of sales (*)

4 800

1 400

Income tax expense (*)

1 467

200

Investment in S Ltd: 600 shares at fair value

1 230

R67 944
R9 600

(*) Accrued/incurred evenly (irrespective of the sale of the shares)

Additional information

1 P Ltd purchased 4 500 shares in S Ltd on 1 January 20.12 for R5 200,

when the retained earnings of the latter amounted to R400. P Ltd disposed of
3 900 of these shares on 30 June 20.14 for R7 800.

228

Changes in ownership of subsidiaries through buying or selling shares 2 P

Ltd elected to measure the non-controlling interests at their proportionate
share of the acquiree’s identifiable net assets at the acquisition date. On the
date of the business combination, the assets and liabilities of S Ltd were
regarded to be a fair reflection in terms of the requirements of IFRS 3.

3 P Ltd accounted for the investment in S Ltd (as a subsidiary) at cost in its
separate financial statements.

4 After the loss of control, P Ltd classified the investment in S Ltd as a

financial asset under IFRS 9 in its individual financial statements and P Ltd
recognised fair value adjustments in the mark-to-market reserve (other
comprehensive income). Fair value adjustments are recognised monthly. P
Ltd elected to present the other comprehensive income net after tax in the
statement of profit or loss and other comprehensive income (IAS 1.91(a)).
The fair value per share of S Ltd on the various dates was as follows:

On 30 June 20.14

R2,00

On 31 December 20.14

R2,05

5 The disposal of the subsidiary does not comply with the criteria of IFRS 5
Non-current Assets Held for Sale and Discontinued Operations until the
date of disposal.
6 The

subsidiary

does

not represent a separate major line of business or geographical area of the

group.

7 A company tax rate of 28% applies and CGT is calculated at 80% thereof.

The actual journal entries to recognise the partial sale of the share
investment in the separate financial statements of the parent will be: Dr

Cr

J1 Bank

(SFP)

(3 900 × R2,00 per share) 7

800

Investment in S Ltd (SFP) (3 900/4 500 × R5 200)

4 507

Profit on the sale of shares (P/L)

3 293

Recording proceeds and profit on partial disposal

of investment
J2

Income tax expense (P/L) (3 293 × 80% × 28%) 738

SARS

tax

payable/Bank (SFP)

738

Capital gains tax (current tax) payable on disposal

of shares

The remaining investment is still recognised at cost of R693 (600/4 500 ×

R5 200). This investment should now be classified as a financial asset and
must initially be measured at fair value (IFRS [Link]). It is assumed that the
initial remeasurement to fair value should be recognised in profit or loss.
The subsequent remeasurements to fair value (from R1 200 to R1 230) are
recognised in other comprehensive income (mark-to-market reserve) in
terms of the company’s accounting policy.

229

Chapter 13

The actual journal entries to recognise the initial remeasurement of the

share investment in the individual financial statements of the parent will
be: Dr

Cr

R
R

J3 Investment in S Ltd (SFP)

((600 shares × R2,00) – (600/4 500 × R5 200))

507

Remeasurement gain on retained investment (P/L)

507

(comment (b))

Remeasurement gain on retained investment

J4 Income tax expense (P/L) (507 × 80% × 28%)

114

Deferred tax (SFP)

114

Tax effect of remeasurement to fair value

Comment

a In this example the parent elected to account for the investment in the
subsidiary at cost in its separate financial statements. Refer to self-
assessment question 3 where the investment in the subsidiary is accounted
for under IFRS 9 in the parent’s separate financial statements.

b The

treatment of the remeasurement gain is not explicitly explained in IAS 27. In

this example, the initial remeasurement of the investment from the
remaining cost to fair value after control was lost, was recognised in profit or
loss in line with the general requirements of a financial assets in terms of
IFRS [Link] and IFRS 9.B5.1.2A.
Solution 13.5

The consolidated financial statements of P Ltd and its subsidiaries in respect

of the year ended 31 December 20.14, are prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.14

ASSETS

Non-current assets

Investment at fair value (1 230(P)) or (600 shares × R2,05) 1 230

Current assets

Bank (60 447(P))

60 447

Total assets

R61 667

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

50 000

Retained earnings

11 647

Mark-to-market reserve ((1 230 – 1 200) × 77,6%)

23

61 670

Non-controlling interests

Total equity

61 670

Liabilities

Deferred tax ((1 230 – 1 200) × 80% × 28%) or (121 – 114)

Total equity and liabilities

R61 667

230

Changes in ownership of subsidiaries through buying or selling shares P

LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.14

Revenue (8 000(P) + 1 000(J1))

9 000

Cost of sales (4 800(P) + 700(J1)) (5

500)
Gross profit

3 500

Other income (gain on disposal of interest)

2 750

Profit before tax

6 250

Income tax expense (1 467(P) – 114(J2) + 100(J1))

(1 453)

PROFIT FOR THE YEAR

4 797

Other comprehensive income, net of tax:

Items that will not be reclassified to profit or loss:

Mark-to-market reserve (fair value adjustment on investment) ((1 230 – 1

200) × 77,6%)

23

Other comprehensive income for the year, net of tax

23

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R4 820

Profit attributable to:

Owners of the parent

4 747

Non-controlling interests (50(J1)) 50

R4 797

Total comprehensive income attributable to:

Owners of the parent (4 747 + 23)

4 770

Non-controlling interests (50(J1)) 50

R4 820

231

Chapter 13

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.14

Mark-to-

Non-

Share

Retained

Total
market

Total

controlling

capital

earnings

equity

reserve

interests

Balance at

1 Jan 20.14

50 000

* 6 900

56 900

1 900

58 800

Changes in

equity for

20.14

Total
comprehensive

income for the

year:

Profit for the year

4 747

4 747

50

4 797

Other compre-

hensive

income

23

23

23

Loss of control
over subsidiary

(1 950) (1

950)

Balance at

31 Dec 20.14

R50 000

R11 647

R23

R61 670

R61 670

*6

000(P) + 900(S) = 6 900

P LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Loss of control over subsidiarry:

During the current year, P Ltd sold a 65% interest in S Ltd (parent’s
controlling 75%

interest reduced to a simple investment of 10% in S Ltd) and lost control

over S Ltd. This resulted in a total amount of R2 750 being included in the
line item of “Other income” in profit or loss. Included in this amount is
R367 that relates to the measuring of the retained investment to its fair value.
P Ltd now does not have control, joint control or significant influence over S
Ltd and accounts for its investment as a financial asset at fair value through
other comprehensive income.

Comment

a Due

to

the disposal of the interest held in S Ltd by P Ltd, the non-controlling

interests are derecognised. This is because S Ltd is no

o longer a subsidiary of P Ltd (control is

relinquished).

b IFRS 12.19 requires that an entity shall disclose the gain or loss (gain of
R2 750) with the loss of control over a subsidiary. Furthermore, the entity
should disclose the portion of that gain or loss attributable to measuring any
investment retained in the former subsidiary at its fair value at the date when
control is lost (being R367). The line item (being other income) in profit or
loss in which the gain or loss is recognised (if not presented separately)
should also be d

disclosed.

232
Changes in ownership of subsidiaries through buying or selling shares
Calculations

Although control over the subsidiary was relinquished durin ng the current
financial

period, it is essential to analyse the equity of this subsidiary up to the date

of disposal. The detail in the analysis of owners’ equitty makes it possible to
break down the gain on disposal of interest in S Ltd into the three
components contained therein, i.e.:

l the

gain in group context;

l profits attributable since acquisition of the subsidiary to the beginning of

the period in which the subsidiary was disposed of; and

l attributable profit of the subsidiary for the period in which it was disposed
of.

Comment

These three components (together with the reversal of the parent’s entries in
its separate financial statements) are also clearly evident in journal 1 below.

C1 Analysis of the owners’ equity of S Ltd

P Ltd 75%–10%

Total

NCI

At

Since

i At acquisition (1/1/20.12)
Share capital

6 000

4 500

500

Retained earnings

400

300

100

6 400

4 800

600

Equity represented by goodwill

– Parent

400

400

Consideration and NCI

6 800
5 200

600

ii Since acquisition

• To beginning of current year:

Retained earnings (1 600 – 400)

1 200

900

300

• Current year:

Profit: 1/1/20.14–30/6/20.14

((2 000 – 1 400 – 200) × 6/12)

200

150

50

Total

equity (represented by other net

assets of R7 800 and goodwill of R400)

8 200

1 050
1 950

Derecognise assets (including good-

(4 800)

will), liabilities and NCI (IFRS 10.B98)

(8 200)

(400)

(1 050) (1

950)

233

Chapter 13

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 5 200

Amount of non-controlling interests: IFRS 3.32(a)(ii)

1 600

6 800

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(6 400)
Goodwill (parent)

R400

C3 Pro forma consolidation journal entries – S Ltd

Dr

Cr

J1

Profit on the sale of shares (P/L)

3 293

Remeasurement gain on retained investment (P/L)

507

Non-controlling

interests (P/L)

50

Cost of sales (P/L) (comment (d)) (1 400 × 6/12) 700

Income tax expense (P/L) (comment (d)) (200 × 6/12) 100

Gain on disposal of interest (group context) (P/L)

(comment (b))

2 750
Retained

earnings

– Beginning of year (SCE)

900

Revenue

(P/L)

(comment (d)) (2 000 × 6/12)

000

Consolidation of subsidiary S Ltd and recognition

of disposal of interest at group level

J2 Deferred

tax

(SFP)

114

Income tax expense (P/L) (507 × 80% × 28%)

114

Reversal of tax effect on remeasurement gain as in

parent’s individual financial statements

J3
Non-controlling interests (SFP/SCE) (derecognised)

1 950

Non-controlling

interests (SFP/SCE)

(opening balance in equity)

1 900

Non-controlling interests (SFP/SCE)

(current year’s interest in profit)

50

Accounting for various line items of non-controlling

interests in equity for S Ltd

234

Changes in ownership of subsidiaries through buying or selling shares

Comments

a The

fair value adjustments to the investment iin S Ltd were as follows: Fair value
of remaining investment at 30 June 20.14 (600 × R2,00) 1 200

Fair value adjustment to end of current year

30
Fair value at end of current year (600 × R2,05)

R1 230

b If a parent loses control, as is the case with S Ltd here, the gain or loss on
disposal of the interest would be calculated as follows using IFRS 10.B98:
Derecognise assets (including goodwill) and liabilities on date control is lost
(7 800 other net assets + 400 goodwill)

(8 200)

Derecognise non-controlling interests

1 950

Carrying amount of P Ltd’s interest in S Ltd lost

(6 250)

Recognise consideration received

7 800

Fair value of investment retained (600 shares × R2,00)

1 200

Gain (consolidated) recognised in profit or loss

R2 750

The total gain should effectively be presented as a gain on the disposal of an

interest in the subsidiary and a remeasurement gain on remeasuring the
retained investment to fair value (IFRS 12.19). These items could be
calculated as follows: Carrying amount of interest sold (65/75 × R6 250
(above))

(5 417)

Recognise consideration received

7 800

Profit on disposal

R2 383

Carrying amount of interest retained (10/75 × R6 250 (above)) (833)

Fair value of investment retained (600 shares × R2,00)

1 200

Remeasurement gain

R367

c By means of the relevant amounts (as contained in the analysis of the

ownership interest of S Ltd), the gain on the disposal of the shares in S Ltd
can be analysed as follows:

Proceeds on disposal of interest

7 800

Historic cost of shares disposed of (5 200 × 3 900/4 500)

(4 507)

At-acquisition equity disposed off (4 800 × 65/75)

(4 160)

Goodwill realised (only for the parent company) (400 × 65/75) (347)

Gain on disposal of interest per separate records of P Ltd 3 293

Attributable post-acquisition retained earnings disposed of ((900 + 150)) ×

65/75)

(910)
Profit on disposal

2 383

Plus remeasurement of retained investment to fair value

(1 200 – ((4 800 × 10/75) + (1 050 × 10/75)) + (400 × 10/75)) or (1 200 –

((net asset value of 7 800 × 10%) + (400 × 10/75)) 367

Consolidated gain on disposal of the interest

R2 750

Or

Proceeds on disposal of interest

7 800

Attributable net assets disposed of (net asset value of R7 800 × 65%) (5 070)

Goodwill realised (only for the parent company) (400 × 65/75) (347)

Profit on disposal

2 383

Remeasurement of retained investment to fair value

367

Consolidated gain on disposal of the interest

R2 750

continued

235

Chapter 13
Care should be taken not to confuse the proceeds of R7 800 with the net
asset value of the subsidiary of R7 800 at the date of the loss of control. It is
purely coincidence that the amounts are the same.

d In the consolidation, the financial statements of S Ltd are not combined

(i.e. added together) with those of P Ltd as S Ltd is not a subsidiary of P Ltd
at the end of the reporting period. The amounts in respect of S Ltd are
accounted for by means of J1

(i.e. these amounts have to be journalised into the consolidated statement

of profit or loss and other comprehensive income and the consolidated
statement of changes in equity for the period while S Ltd was a
subsidiary).

e The investment in S Ltd is, after the loss of control, treated as a simple
investment (at fair value through other comprehensive income). The
investment account should therefore be equal to the fair value of R1 230 (see
comment (a)). The mark-to-market reserve should reflect the fair value gain
after the loss of control, being R23 ((1 230 –

1 200) × 77,6%), while the deferred tax balance should be R7 ((1 230 – 1
200) × 80%

× 28%) as is included in the consolidated statement of financial position.

Alternative pro forma consolidation journal entries for sale of interest

Dr

Cr

J1

Investment in S Ltd (SFP)

900

Retained

earnings

– Beginning of year (SCE)

900

Accounting for retained earnings at the beginning

of the year

J2

Investment in S Ltd (SFP)

150

Revenue

(P/L)

(2 000 × 6/12)

000

Cost of sales (P/L) (1 400 × 6/12)

700

Income tax expense (P/L) (200 × 6/12)

100

Non-controlling
interests (P/L)

50

Accounting for profit of subsidiary for the year

J3

Profit on the sale of shares (P/L)

3 293

Remeasurement gain on retained investment (P/L)

507

Investment in S Ltd (SFP)

3 800

Reversal of parent’s entries for profit on sale of

shares and remeasurement of retained investment

J4

Investment in S Ltd (SFP)

2 383

Gain on disposal of interest (group context) (P/L)

2 383

Recognition of gain at group level

J5

Investment in S Ltd (SFP)

367

Gain on disposal of interest (remeasurement

of retained investment to fair value) (P/L)

367

Recognition of gain at group level from

remeasurement of retained investment to fair value

236

Changes in ownership of subsidiaries through buying or selling shares

13.9 Partial disposal of an interest in a subsidiary, whereby it becomes

an associate

This section of the work is similar to the section above and also deals with a
loss of control over a subsidiary. The requirements of IFRS 10.25–26 and
B97–B99 are also applicable. The section above addressed the scenario
where the entire interest in a subsidiary was disposed of. This section deals
with the scenario where control over the subsidiary is lost, but an interest is
retained whereby significant influence is exercised.

Therefore, the subsidiary now becomes an associate (or joint venture). In

this scenario specific attention should be placed on the following
consolidation procedures: l in accounting for the loss of control over the
subsidiary, any investment retained in the former subsidiary should be
recognised at its fair value on the date when control is lost;

l this implies that a remeasurement gain or loss should be recognised as part

of the profit or loss with the disposal of the interest in the subsidiary; l after
control is lost the investment in the associate (or joint venture) should be
accounted for under the equity method in terms of IAS 28.

Partial disposal of an interest in a subsidiary resulting in a

change in status as the subsidiary becomes an associate (a

Example 13.6

loss of control by the parent occurs) (NCI is measured at its

proportionate share of the acquiree’s identifiable net assets

at the acquisition date)

The following represents the condensed financial statements of P Ltd (with

some subsidiaries already consolidated) and A Ltd (that should still be
accounted for in the consolidated financial statements) at 31 December
20.17:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

P Ltd and

subsidiaries

A Ltd

(consolidated)

ASSETS

Property, plant and equipment

500 000

70 000

Investment in A Ltd – 40 000 shares at cost

51 000

–
Equity investments at fair value through other

comprehensive income

25 477

Inventory

369 000

109 200

Total assets

R920 000

R204 677

EQUITY AND LIABILITIES

Share capital (400 000/100 000 shares)

400 000

100 000

Retained earnings

420 000

99 200

Mark-to-market reserve

–4

250
Non-controlling interests

(60 000 opening balance + 40 000 current year)

100 000

Deferred tax

–1

227

Total equity and liabilities

R920 000

R204 677

237

Chapter 13

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd and

sub-

sidiaries

A Ltd

(consoli-

dated)
Revenue

671 000

111 200

Cost of sales

(210 000)

(36 000)

Gross profit

461 000

75 200

Other income (gain on disposal of interest)

35 000

Other income (dividend received)

10 000

Profit before tax

506 000

75 200

Income tax expense

(146 000)
(24 000)

PROFIT FOR THE YEAR

360 000

51 200

Other comprehensive income:

Items that will not be reclassified to profit or loss:

Mark-to-market reserve (fair value adjustment on investment)

3 286

Income tax relating to items that will not be reclassified

(736)

Other comprehensive income for the year, net of tax

2 550

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R360 000

R53 750

Profit attributable to:

Owners of the parent

320 000

51 200

Non-controlling interests

40 000

R360 000

R51 200

Total comprehensive income attributable to:

Owners of the parent

320 000

53 750

Non-controlling interests

40 000

R360 000

R53 750

238

Changes in ownership of subsidiaries through buying or selling shares

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained earnings
P Ltd

Mark-to-

and

market

sub-

reserve

sidiaries

A Ltd

A Ltd

(consoli-

dated) –

parent

Balance at 1 January 20.17

1 700

150 000

73 000

Change in equity for 20.17

Total comprehensive income for the year:

Profit for the year

–
320 000

51 200

Other comprehensive income

2 550

Dividend paid: 31/12/20.17

(50 000)

(25 000)

Balance at 31 December 20.17

R4 250

R420 000

R99 200

Additional information

1 P Ltd acquired 80% of the issued share capital of A Ltd on 1 January 20.3
for R102 000, when the retained earnings of A Ltd amounted to R25 000.

2 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date. On the
date of the business combination, the assets and liabilities of S Ltd were
regarded to be a fair reflection in terms of the requirements of IFRS 3.

3 On 31 March 20.17 P Ltd disposed of 40 000 shares in A Ltd for R86 000.
P Ltd has exercised significant influence over the financial and operating
policy decisions of A Ltd since that date. The fair value of the remaining
investment by P Ltd in A Ltd was R80 000 at the date of disposal of the
interest.

4 P Ltd accounted for the investment in A Ltd at cost in its separate financial
statements (in terms of IAS 27.10 and IAS 28.44).

5 The disposal of the interest in the subsidiary did not comply with the
criteria of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations until the date of disposal thereof.

6 The subsidiary does not represent a separate major line of business or

geographical area of the group.

7 A Ltd’s profit and tax for 20.17 accrued evenly. The fair value gain on the
equity investments at fair value through other comprehensive income of A
Ltd only relates to the period after 1 April 20.17.

8 The company tax rate is 28% and CGT is calculated at 80% thereof.

239

Chapter 13

Comments

a The separate financial statements of P Ltd already include the gain on the
partial disposal of its investment in A Ltd

d. The gain was calculated as follows:

Proceeds

86 000
Cost price of portion sold (40 000/80 000 shares × R102 000) (51 000)

Gain on disposal

R35 000

b The separate financial statements of P Ltd also already include the tax
payable on this gain of R7 840 (35 000 × 80% × 28%).

Solution 13.6

The consolidated financial statements, incorporating the results of A Ltd (as

a subsidiary before the partial sale and in accordance with the equity method
thereafter), are prepared as follows.

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P and other subsidiaries)

500 000

Investment in associate

(51 000(remaining cost) + 29 000(J1) + 16 380(J4) – 10 000(J5)) or (80

000(fair 86 380

value of retained investment after loss of control) + 6 380(since))

586 380

Current assets
Inventory (P and other subsidiaries)

369 000

Total assets

R955 380

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

400 000

Retained earnings

454 360

Mark-to-market reserve

1 020

855 380

Non-controlling interests (in respect of other subsidiaries)

100 000

Total equity and liabilities

R955 380

240

Changes in ownership of subsidiaries through buying or selling shares P

LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (671 000(P) + 27 800(A)(J1))

698 800

Cost of sales (210 000(P) + 9 000(A)(J1)) (219

000)

Gross profit (461 000(P) + 18 800(A))

479 800

Other income (gain on disposal of interest)

14 000

Share of profit of associate (J4)

15 360

Profit before tax

509 160

Income tax expense (146 000(P) + 6 000(A)(J1))

(152 000)

PROFIT FOR THE YEAR

357 160

Other comprehensive income:

Items that will not be reclassified to profit or loss:

Share of other comprehensive income of associates (comment (a)) 1 020

Other comprehensive income for the year, net of tax

1 020

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R358 180

Profit attributable to:

Owners of the parent (balancing)

314 600

Non-controlling interests (40 000(other) + 2 560(A)(J1))

42 560

R357 160

Total comprehensive income attributable to:

Owners of the parent (314 600 profit + 1 020 OCI)

315 620

Non-controlling interests (40 000(other) + 2 560(A)(J1))

42 560

R358 180

241

Chapter 13

P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-

Mark-to-

Share

Retained

con-

Total

market

Total

capital

earnings

trolling

equity

reserve

interests

Balance at

1 Jan 20.17

400 000 * 188 400

1 360
589 760 ! 94 940

684 700

Changes in equity

for 20.17

Dividends

– (50

000)

– (50

000)

– (50

000)

Total

comprehensive

income for the

year:

Profit for the year

314 600

314 600
42 560

357 160

Other comprehen-

sive income

1 020

1 020

1 020

Transfer with dis-

posal of interest

in A Ltd

1 360

(1 360)

Disposal of interest

in A Ltd and

derecognition of

non-controlling

interests ((J3) and

comment (b))

(37 500)

(37 500)

Balance at

31 Dec 20.17

R400 000 R454 360

R1 020 R855 380 R100 000 R955 380

150 000(P) + 38 400(J1) = 188 400

Other: 100 000 end – 40 000 current year = 60 000 opening balance plus A
Ltd: 25 000 + 9 600 +

340 = 94 940

P LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Loss of control over subsidiary:

During the current year, P Ltd sold a 40% interest in S Ltd (half of its 80%
interest) and lost control over S Ltd. This resulted in a total amount of R14
000 being included in the line item of “other income” in profit or loss.
Included in this amount is R4 000 that relates to the measuring of the
retained investment to its fair value. P Ltd now has significant influence over
S Ltd and accounts for its interest in the associate by applying the equity
method.

242

Changes in ownership of subsidiaries through buying or selling shares

Comments

a In terms of the Guidance on implementing IAS 1 Presentation of

Financial Statements, the share of other comprehensive income of
associates is the amount attributable to the parent (i.e. the after tax and non-
controlling interests in the associate).

b Upon

the loss of control by P Ltd, A Ltd is no longer a subsidiary of the parent P

Ltd and non-controlling interests to the amount of R37 500 (113 500 – 76
000) are derecognised from the consolidated financial statements of P Ltd.
This results in a final amount of R100 000 in respect of the non-controlling
interests being recognised in the consolidated financial statements of P Ltd,
which relates to the other subsidiaries of P Ltd.

c IFRS

12.19 requires that an entity shall disclose the gain or loss (gain of R14 000)
with the loss of control over a subsidiary. Furthermore, the entity should
disclose the portion of that gain or loss attributable to measuring any
investment retained in the former subsidiary at its fair value (being R4 000)
at the date when control is lost. The line item (being other income) in profit
or loss in which the gain or loss is recognised (if not presented separately)
should also be d

disclosed.

Calculations

C1 Analysis of the owners’ equity of A Ltd – as subsidiary

P Ltd 80%

Total

NCI

At

Since

i At acquisition

Share capital

100 000

80 000

20 000

Retained earnings

25 000

20 000

5 000

125 000

100 000
25 000

Equity

represented by goodwill

– Parent

2 000

2 000

Consideration and NCI

127 000

102 000

25 000

ii Since acquisition

• To beginning of current year:

Retained earnings

s (73 000 – 25 000)

48 000

38 400 RE 9

600

Mark-to-market reserve

1 700
1 360 MtM 340

• Current year:

Profit: 1/1/20.17–31/3/20.17

(51 200 × 3/12)

12 800

10 240 RE 2

560

189 500

48 640 RE

37 500

1 360 MtM

Loss of control over subsidiary:

50 000

Derecognise assets (including

goodwill), liabilities and NCI (189 500) (102 000)

(50 000)

(37 500)

(IFRS 10.B98)

Transfer of mark-to-market

(1 360) MtM
reserve (IFRS 10.B99) (J2)

1 360 RE

RE = Retained earnings; MtM = Mark-to-market reserve

243

Chapter 13

C1 Analysis of the owners’ equity of A Ltd – as associate

P Ltd 40%

Total

NCI

At

Since

i At acquisition

Recognise remaining interest at fair

value

200 000

80 000
n/a

ii Since acquisition

• Current year:

Profit: 1/4/20.17–31/12/20.17

(51 200 × 9/12)

38 400

15 360 RE

n/a

Mark-to-market reserve

2 550

1 020 MtM

n/a

Dividend

(25 000)

(10 000) RE

n/a

R215 950

R5 360 RE

n/a

R1 020 MtM
RE = Retained earnings; MtM = Mark-to-market reserve

C2 Proof of calculation of goodwill of A Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 102 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

25 000

127 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(125 000)

Goodwill (parent)

R2 000

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in A Ltd (SFP) (80 000 fair value – cost of

R51 000 in separate financial statements of P Ltd)

29 000

Gain on disposal of interest (P) (P/L)

35 000

Cost of sales (P/L) (36 000 × 3/12) (comment (a))

9 000

Non-controlling interests (P/L) (first 3 months)

(comment (a))

2 560

Income tax expense (P/L) (24 000 × 3/12) (comment (a)) 6

000

Revenue (P/L) (111 200 × 3/12) (comment (a))

27

800

Retained earnings – Beginning of year (SCE)

38 400

Mark-to-market reserve – Beginning of year (SCE)

1 360

Gain on disposal of interest (group context) (P/L)

10 000

Gain on disposal of interest (group context) (P/L)

(Remeasurement gain) (IFRS 10.25)

4 000
Consolidation of subsidiary for first three months

and recognition of disposal of interest

continued

244

Changes in ownership of subsidiaries through buying or selling shares

Dr

Cr

J2 Mark-to-market

reserve

(SCE)

(comment (c)) 1

360

Retained earnings (SCE)

1 360

Transfer of mark-to-market reserve to retained

earnings on loss of control over subsidiary in terms

of IFRS 10.B99

J3
Non-controlling interests (SFP/SCE) (derecognised)

37 500

Non-controlling interests (SFP/SCE) (opening

balance in equity) (25 000 at + 9 600 RE + 340 MtM)

34 940

Non-controlling

interests (SFP/SCE)

(current year’s interests in profit)

2 560

Accounting for various line items of non-controlling

interests in equity for A Ltd (comment (j))

J4

Investment in A Ltd (as associate) (SFP)

16 380

Share of profit of associate (P/L)

15 360

Share of other comprehensive income of associate

(MtM) (OCI)

1 020

Accounting for P Ltd’s share of equity of associate

for current year (last nine months)

J5

Other income

(dividend received from A Ltd as in P Ltd) (P/L)

10 000

Investment in A Ltd (as associate) (SFP)

10 000

Elimination of dividend received from associate –

IAS 28.10

245

Chapter 13

Comments

a Note that A Ltd was only a subsidiary of P Ltd for the first three months
of the current year. Since A Ltd was not a subsidiary of P Ltd at the
reporting date, A Ltd’s individual financial statements will not be combined
with those of the parent (P Ltd) as a starting point for consolidation. This
means that the results for A Ltd (for the period that it was a subsidiary of P
Ltd) would have to be journalised into the consolidation, as is seen in the
pro forma consolidation journal entry above.

bP
Ltd disposed of 40 000 shares in A Ltd and lost control over A Ltd. The
gain or loss on the disposal of the interest would be calculated as follows
using IFRS 10.B98:

Derecognise assets (including goodwill) and liabilities on date control is lost

(187 500 other net assets + 2 000 goodwill) (IFRS 10.B98(a)) (189 500)

Derecognise non-controlling interests (IFRS 10.B98(a))

37 500

Net asset value (attributable to parent) derecognised

(152 000)

Fair value of consideration received recognised (i.e. cash received)

(IFRS 10.B98(b))

86 000

Recognise fair value of investment in former subsidiary retained (IFRS

10.B98(b))

80 000

Net gain on disposal of interest (group context)

(IFRS 10.B98(d)) attributable to the owners of the parent R14 000

The total gain should effectively be presented as a gain on the disposal of an

interest in the subsidiary and a remeasurement gain on remeasuring the
retained investment to fair value (IFRS 12.19). These items could be
calculated as follows: Carrying amount of interest sold (40/80 × R152 000
(above)) (76 000)

Recognise consideration received

86 000
Profit on disposal

R10 000

Carrying amount of interest retained (40/80 × R152 000 (above)) (76 000)

Fair value of investment retained (given)

80 000

Remeasurement gain

R4 000

The amount of R14 000 comprises R4

000 in respect of the fair value

remeasurement of the retained interest (refer to (d) below), plus R10 000
arising from the R86 000 received for equity of R76 000 that was disposed
of (refer to (e) below). These two amounts (R4 000 and R10 000) were
presented separately in J1

for illustration purposes. Note that both these amounts should be disclosed
separately in terms of IFRS 12.19.

c With

the loss of control over a subsidiary, any amount previously recognised in

other comprehensive income, should be reclassified to profit or loss, or
transferred directly to retained earnings if required in accordance with other
IFRSs (refer to IFRS 10.B98(c) and B99).

d Remeasurement of investment retained in terms of IFRS 10.25(b): Fair

value of retained 40% investment in former subsidiary (given) (IFRS
10.25(b))

80 000
Carrying amount of retained 40% investment in former subsidiary ((102 000
× 40/80) + (50 000 × 40/80)(analysis)) or

(152 000(comment (b)) × 40/80)

(76 000)

Remeasurement (gain) to be recognised in profit or loss (BCZ182) (refer to

J1)

R4 000

continued

246

Changes in ownership of subsidiaries through buying or selling shares e By

means of the relevant amounts (as contained in the analysis of the ownership
interest of A Ltd), the gain on disposal of shares in A Ltd can be analysed as
follows: Proceeds on disposal of interest

86 000

Historic cost of shares disposed of (102 000 × 40/80)

(51 000)

At-acquisition equity disposed of (100 000 × 40/80)

(50 000)

Goodwill realised (2 000 × 40/80)

(1 000)

Gain on disposal of interest per separate records of P Ltd 35 000

Attributable post-acquisition reserves disposed of

((48 640 RE × 40/80) + (1 360 MtM × 40/80)

(25 000)

Gain from equity relinquished

10 000

Remeasurement of investment retained (refer to (d) above)

4 000

Total consolidated gain on disposal of the interest

R14 000

The gain of R10 000 from the equity relinquished to NCI can also be
calculated as follows:

Proceeds on disposal of interest

86 000

Attributable net assets disposed of

(75 000)

(net asset value of R187 500 × 40%)

Goodwill realised (only for the parent company) (2 000 × 40/80) (1 000)

Consolidated gain on disposal of interest

R10 000

It is important to note that only the goodwill relating to the parent company
(i.e.

R2 000) is realised in respect of A Ltd. The goodwill relating to the non-

controlling interests, if any (none in this example) are not realised in the
consolidated financial statements of P Ltd, as this amount already relates to
the non-controlling interests and should therefore not be transferred to it
again.

f To obtain continuity between the amounts of the current and previous

periods’

consolidated statements of profit or loss and other comprehensive income,

the gain of R35 000 (per the separate financial statements of the parent) is
included in the current period’s consolidated statement of profit or loss and
other comprehensive income and the consolidated statement of changes in
equity, as follows: Included in opening consolidated retained earnings at the
beginning of the period

38 400

Included in opening consolidated mark-to-market reserve at the beginning of

the period

1 360

Included in profit for the current period (*) as various line items 10 240

50 000

Group’s net gain in the consolidated statement of profit or loss and other
comprehensive income (see comment (b) above)

14 000

Adjustment of carrying amount of the investment in associate to fair value

(see comment (h) below).

(29 000)

Gain on disposal of interest per separate records of P Ltd R35 000

This approach is also evident from J1 above where the investment in A Ltd
is increased with R29 000 (fair value of R80 000 less cost price of R51 000
still contained in the separate financial statements of P Ltd), the amount of
profit per P Ltd is reversed and replaced by the parent’s portion of the
retained earnings and mark-to-market reserve at the beginning of the period,
the various line items in profit or loss and the group’s profit on the loss of
control over the subsidiary.

continued

247

Chapter 13

g The R10 240(*) is taken up in the consolidated statement of profit or loss

and other comprehensive income by adding R12 800 to the profit of the
group, and by adding (thereafter) R2 560 to the non-controlling interests.

h The calculation of the group’s profit or loss on the loss of control over a
subsidiary includes the measurement of the investment in the former
subsidiary retained, at fair value (IFRS 10.25(b)). In this example, the
carrying amount of the investment in A Ltd, after the sale of the 40 000
shares, is reflected in P Ltd as R51 000 (remember that the financial
statements of P Ltd are the starting point for consolidation –

IFRS 10.B86(a)). The fair value of the investment retained is R80 000. An
adjustment of R29 000 (80 000 – 51 000) is therefore needed to correctly
account for the investment at fair value on the date of the disposal of the
interest. In contrast to example 13.5 above, this adjustment was not needed
as the parent had already remeasured the retained investment to its fair value
in its separate financial statements. A comparison table of the pro forma
consolidation journal entries for example 13.5 (investment retained is a
simple investment measured at fair value) and example 13.6 (investment
retained is an associate that is still measured at cost) is given below.

i The question arises whether any deferred tax adjustment is needed on the
abovementioned remeasurement gain. Note that P Ltd already accounted for
the actual tax expense from the sale of the shares in its separate financial
statements. Some are of the opinion that this remeasurement changes the
temporary differences on the investment and that deferred tax should then be
recognised (4 000 × 80% × 28% =
896). However, this remeasurement is in respect of P Ltd’s equity interest
retained in the net assets of A Ltd. Equity is by definition (in terms of the
Conceptual Framework) always an after-tax amount. The fair value of the
investment retained now becomes the initial investment in an associate. In
terms of the equity method, only the investor’s share of the net assets of the
investee is added to the investment (net assets would be the amount after
tax). Similar to the approach that no deferred tax is recognised for changes in
the investment in an associate for accounting for the investor’s share of the
profit (after tax) of the associate, no deferred tax is recognised in respect of
this remeasurement gain in this work.

j All entries in J3 are made against the same ledger account with no net
effect. Thus, it may be argued that J3 is not needed. J3 only assists in
preparing the various line items for the non-controlling interests in A Ltd in
the consolidated statement of changes in equity.

248

Changes in ownership of subsidiaries through buying or selling shares

Comparison table for loss of control:

LOSS OF CONTROL:

PARENT’S SEPARATE FINANCIAL STATEMENTS AND

CONSOLIDATION

Subsidiary becomes IFRS 9 investment

Subsidiary becomes associate

Parent’s separate financial statements:

Parent’s separate financial statements:

l Parent elected to measure investment in l Parent elected to measure

investment in subsidiary at cost (IAS 27).

subsidiary at cost (IAS 27).

l Parent sold part of its share investment l Parent elected to measure
investment in and remainder of investment (no control,

associate at cost (IAS 27) (i.e. what

significant influence or joint control)

remains of the initial cost after partial

must then be measured at fair value on

sale; no requirement to remeasure to

initial recognition (IFRS [Link]).

fair value).

Sale transaction (example 13.5):

Sale transaction (example 13.6):

Dr Bank

R7 800

Dr Bank

R86 000

Cr Investment

R4 507

Cr Investment

R51 000

Cr Profit on sale (P/L)

# R3 293
Cr Profit on sale (P/L)

# R35 000

Remeasurement of retained investment to No remeasurement of retained

investment fair value:

to fair value.

Dr Investment

R507

Cr Remeasurement (P/L)

# R507

Consolidated financial statements:

Consolidated financial statements:

l Retained investment to be remeasured l Retained investment to be

remeasured to fair value for purpose of the group

to fair value for purpose of the group

(IFRS

10.B98). The “investment” in

(IFRS

10.B98). The “investment” in

parent’s separate financial statements is

parent’s separate financial statements is

already at fair value of R1 200 coming

still at “remaining cost” coming into the

into the consolidation (parent plus

consolidation (parent plus subsidiary)

subsidiary) and no pro forma journal en-

and a pro forma journal is needed to

try is needed against the investment-

adjust the remaining cost of R51 000 to

account.

the fair value of R80 000.

l The parent’s “profit” and “remeasure- l The parent’s “profit” (as indicated
by #) ment” (as indicated by #) must be re-must be replaced by the group’s
profit

placed by the group’s profit (in terms of

(in terms of IFRS 10.B98) and as such

IFRS

10.B98) and as such are

are eliminated.

eliminated.

Pro forma journals:

Pro forma journals:

Dr Profit on sale (P/L) #

R3 293

Dr Profit on sale (P/L) #

R35 000

Dr Remeasurement (P/L) #

R507

Dr Remeasurement (P/L)

n/a

Dr Investment (SFP)

n/a

Dr Investment (SFP)

R29 000

Cr Group’s profit (P/L)

R2 750

Cr Group’s profit (P/L)

R14 000

And all the other line items...

And all the other line items...

13.10 Loss of control and intragroup sale of assets

The consolidation adjustments in respect of intragroup sale of assets were

discussed in chapter 5 of this work. It was emphasised that all unrealised
intragroup profits should be eliminated in full until the asset is sold to parties
outside the group. Furthermore, it was indicated that the unrealised
intragroup profit on depreciable assets also realises through the process of
depreciation/amortisation while the asset is being used. Should 249

Chapter 13

the partially-owned subsidiary sell assets to another entity in the group, the
relevant portion of the unrealised gain should be allocated to the non-
controlling interests in the subsidiary. When the unrealised gain is again
realised, the relevant portion is once again allocated to the non-controlling
interests in the subsidiary.

On the loss of control over a subsidiary, the parent-subsidiary relationship

ceases to exist. The parent no longer controls the subsidiary’s individual
assets and liabilities.

Therefore, the group derecognises all the individual assets, liabilities and
equity related to that subsidiary. It follows that the underlying assets and
liabilities of the subsidiary are effectively sold to parties outside the group.
When a parent loses control over a subsidiary, any unrealised intragroup
profit is regarded as being realised from the group’s perspective and it is
recognised in full (irrespective of whether the parent retains an investment in
the former subsidiary – this approach is similar to realising the amounts
previously recognised in other comprehensive income in full with the loss of
control over a subsidiary). All unrealised intragroup profits will thus be
realised with a loss of control over a subsidiary that is regarded as a business
(as defined) (IFRS 10.B99A).

Loss of control over a subsidiary with previous intragroup

Example 13.7

profits on the sale of depreciable assets

The following represents the condensed financial statements of P Ltd (with

some subsidiaries already consolidated) and S Ltd (that should still be
accounted for in the consolidated financial statements) at 31 December
20.17:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
20.17

P Ltd and

subsidiaries

S Ltd

(consolidated)

ASSETS

Property, plant and equipment

600 000

70 000

Patents

60 000

Investment in S Ltd at cost

Bank

413 488

109 200

Total assets

R1 013 488
R239 200

EQUITY AND LIABILITIES

Share capital (400 000/100 000 shares)

400 000

100 000

Retained earnings

483 488

119 200

Non-controlling interests

(60 000 opening balance + 40 000 current year)

100 000

Total liabilities

30 000

20 000

Total equity and liabilities

R1 013 488

R239 200

250

Changes in ownership of subsidiaries through buying or selling shares

STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd and

subsidiaries

S Ltd

(consoli-

dated)

Revenue

671 000

111 200

Cost of sales

(210 000)

(36 000)

Gross profit

461 000

75 200

Other income (gain on disposal of interest)

118 000

Profit before tax

579 000

75 200

Income tax expense

(155 512)

(24 000)

PROFIT FOR THE YEAR

423 488

51 200

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R423 488

R51 200

Profit and total comprehensive income attributable to:

Owners of the parent

383 488

51 200

Non-controlling interests

40 000
–

R423 488

R51 200

EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained earnings

P Ltd

and

subsidiaries

S Ltd

(consoli-

dated) –

parent

Balance at 1 January 20.17

150 000

93 000

Change in equity for 20.17

Total comprehensive income for the year:

Profit for the year

383 488
51 200

Other comprehensive income

Dividend paid: 31/12/20.17

(50 000)

(25 000)

Balance at 31 December 20.17

R483 488

R119 200

Additional information

1 P Ltd acquired 80% of the issued share capital of S Ltd on 1 January 20.13
for R102 000, when the retained earnings of S Ltd amounted to R25 000.

2 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date. On the
date of the business combination, the assets and liabilities of S Ltd were
regarded to be a fair reflection in terms of the requirements of IFRS 3.

251

Chapter 13

3 On
1

January 20.16 S Ltd sold an item of plant to P Ltd at a profit of R10 000.
The remaining useful life of the plant at that date was five years with no
residual value.

The plant is depreciated on the straigh

ht-line basis.

4 On

January 20.16 P Ltd sold a patent to S Ltd at a profit of R9 000. The patent
is amortised evenly over three years.

5 On

31 March 20.17 P Ltd disposed of all its shares in S Ltd for R220 000.

6P

Ltd accounted for the investment in S

Ltd at cost in its separate financial

statements.

7 The

disposal of the interest in the subsidiary did not comply with the criteria of
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
until the date of disposal thereof.

8 The

subsidiary does not represent a separate major line of business or

geographical area of the group.
9S

Ltd’s profit and tax for 20.17 accrued evenly.

10 The company tax rate is 28% and CGT is calculated at 80% thereof.

Comments

a The separate financial statements of P Ltd already include the gain on the
disposal of its investment in S Ltd. The gain was calculated as follows:

Proceeds

220 000

Cost price

(102 000)

Gain on disposal

R118 000

b The separate financial statements of P Ltd also already include the tax
payable on this gain of R26 432 (118 000 × 80% × 28%).

c This

examples assumes that adjustments made to the depreciation and

amortisation in respect of the intragroup profit from the plant and patent sold
between the two companies in the same group, will affect the cost of sales
line item as these costs form part of the production cost of inventory. Neither
company had inventory on hand at the reporting date, therefore the full
adjustment is made to cost of sale (nothing to inventory) as all the inventory
produced has already been sold.

252
Changes in ownership of subsidiaries through buying or selling shares
Solution 13.7

The consolidated financial statements, incorporating the results of S Ltd (as

a subsidiary before the sale), are prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (P and other subsidiaries)

600 000

600 000

Current assets

Bank (P and other subsidiaries)

413 488

Total assets

R1 013 488

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

400 000
Retained earnings

483 488

883 488

Non-controlling interests (in respect of other subsidiaries) 100 000

Total equity

983 488

Liabilities

Total liabilities

30 000

Total equity and liabilities

R1 013 488

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (671 000(P) + 27 800(S)(J1))

698 800

Cost of sales (210 000(P) + 8 500(S)(J1) - 750(P)(J3))

(217 750)

Gross profit
481 050

Other income (gain on disposal of interest) (60 860(J1) + 5 250(J3)) 66 110

Profit before tax

547 160

Income tax expense

(155 512(P) + 6 140(S)(J1) + 2 100(S)(J1) + 210(P)(J3) + 1 470(J3)) (165

432)

PROFIT FOR THE YEAR

381 728

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R381 728

Profit and total comprehensive income attributable to:

Owners of the parent (balancing)

338 016

Non-controlling interests (40 000(other) + 2 632(S)(J1) + 1 080(S)(J1)) 43

712

R381 728

253

Chapter 13
P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-con-

Share

Retained

Total

trolling Total equity

capital

earnings

interests

Balance at 1 Jan 20.17

400 000 * 195 472

595 472

! 97 448

692 920

Changes in equity for 20.17

Dividends

(50 000)
(50 000)

– (50

000)

Total comprehensive income

for the year:

Profit for the year

338 016

338 016

43 712

381 728

Disposal of interest in S Ltd

and derecognition of non-

controlling interests (J2)

(41 160)

(41 160)

Balance at 31 Dec 20.17

R400 000 R483 488 R883 488 R100 000

R983 488

150 000(P) + 49 792(J1) – 4 320(J3) = 195 472

Other: 60 000 opening balance plus S Ltd: 25 000 + 12 448 = 97 448

P LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Loss of control over subsidiary:

During the current year, P Ltd sold its entire 80% interest in S Ltd and lost
control over S Ltd. This resulted in a total amount of R66 110 being included
in the line item of “other income” in profit or loss. This amount does not
include any amount that relates to the measuring of the retained investment
to its fair value.

The loss of control over S Ltd resulted in previously unrealised gains on the
disposal of plant (by S Ltd to P Ltd) to an amount R4 320 and patent (by P
Ltd to S Ltd) to an amount of R3 780 being realised and attributable to the
parent.

254

Changes in ownership of subsidiaries through buying or selling shares

Calculations

C1 Analysis of the owners’ equity of S Ltd – as subsidiary

P Ltd 80%

Total
NCI

At

Since

i At acquisition

Share capital

100 000

80 000

20 000

Retained earnings

25 000

20 000

5 000

125 000

100 000

25 000

Equity represented by goodwill

– Parent

2 000

2 000

–
Consideration and NCI

127 000

102 000

25 000

ii Since acquisition

• To beginning of current year:

Retained earnings (93 000 – 25 000 –

((10 000 - 2 000) × 72%))

62 240

49 792 RE

12 448

(comment (d))

• Current year:

Profit: 1/1/20.17–31/3/20.17

((51 200 × 3/12) + 500 – 140

13 160

10 528 RE

2 632

((comment (b))

202 400
60 320 RE

40 080

Loss of control over subsidiary:

Derecognise assets (including

goodwill), liabilities and NCI

(202 400)

(102 000)

(60 320)

(40 080)

(IFRS 10.B98)

RE = Retained earnings

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 102 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

25 000

127 000
Net of the identifiable assets acquired and liabilities assumed at acquisition
date: IFRS 3.32(b)

(125 000)

Goodwill (parent)

R2 000

255

Chapter 13

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in S Ltd (SFP)

(no adjustment needed as P Ltd sold all its shares in S Ltd)

Gain on disposal of interest (P) (P/L) (comment (a) above) 118 000

Cost of sales (P/L) ((36 000 × 3/12) – 500) (comment (b)) 8

500

Non-controlling interests (P/L) (first 3 months)

(comment (a))
2 632

Income tax expense (P/L)

((24 000 × 3/12) + 140) (comment (b))

6 140

Revenue (P/L) (111 200 × 3/12) (comment (a))

27

800

Retained earnings – Beginning of year (SCE)

49 792

Gain on disposal of subsidiary (group context) (P/L)

(comment (f))

60 860

Income tax expense (P/L) (7 500 × 28%) (comment (f)) 2

100

Non-controlling interests (P/L) (5 400 × 20%) (comment (f)) 1 080

Consolidation of subsidiary for first three months

and recognition of disposal of interest

J2

Non-controlling interests (SFP/SCE) (derecognised)

(40 080 (analysis) + 1 080 realisation of intragroup profit (J1)) 41

160

Non-controlling interests (SFP/SCE) (opening

balance in equity) (25 000 at + 12 448)

37 448

Non-controlling interests (SFP/SCE) (current year’s

interests in profit)

3 712

(2 632 (analysis) + 1 080 realisation of intragroup profit (J1)) Accounting

for various line items of non-controlling

interests in equity for S Ltd

J3

Retained earnings (opening balance of parent) (SCE)

((9 000 – 3 000) × 72%) (comment (e))

4 320

Cost of sale (amortisation) (P/L)

(9 000/3 years × 3/12) (comment (e))

750

Income tax expense (P/L) (750 × 28%) (comment (e)) 210

Gain on disposal of subsidiary (group context) (P/L)

(comment (e))

5 250
Income tax expense (P/L) (5 250 × 28%) (comment (e)) 1

470

Elimination of unrealised intragroup gain and

realisation of remaining unrealised intragroup gain

with loss of control over subsidiary

256

Changes in ownership of subsidiaries through buying or selling shares C4

Alternative pro forma consolidation journal entries Alternative journal
entries for J1 and J2 could also be as follows (first without the unrealised
profit and the unrealised profit separately):

Dr

Cr

J1.1 Investment in S Ltd (SFP) (not adjustment needed as P Ltd sold all its
shares in S Ltd)

Gain on disposal of interest (P) (P/L) (comment (a) above) 118

000

Cost of sales (P/L) (36 000 × 3/12) (comment (a))

9 000

Non-controlling interests (P/L) (first 3 months)

(comment (a)) (51 200 × 3/12 × 20%)

2 560

Income tax expense (P/L) (24 000 × 3/12) (comment (a))

6 000

Revenue (P/L) (111 200 × 3/12) (comment (a))

27

800

Retained earnings – Beginning of year (SCE)

54

400

((93 000 – 25 000) × 80%)

Gain on disposal of subsidiary (group context) (P/L)

(comment (g))

53 360

Consolidation of subsidiary for first three months

and recognition of disposal of interest

J1.2 Retained earnings (opening balance of subsidiary

attributable to parent) (SCE)

4 608

((10 000 – 2 000) × 72%) × 80%) (comment (d))

Non-controlling interests (opening balance of subsidiary)

(SCE) (5 760 × 20%) (comment (d)) 1

152

Accumulated depreciation (SFP) (comment (d)) 2

000

Deferred tax (SFP)

((10 000 – 2 000) × 28%) (comment (d))

2 240

Plant (SFP) (P)

10 000

Elimination of unrealised intragroup gain included in

plant and recognition of portion realised to the

beginning of the current year through depreciation,

after tax

J1.3 Accumulated depreciation (SFP)

(10 000 / 5 years × 3/12) (comment (d))

500

Cost of sale (amortisation) (P/L)

500

Income tax expense (P/L) (500 × 28%) (comment (d)) 140

Deferred tax (SFP)

140

Non-controlling interests (P/L) ((500 – 140) × 20%)

72

Non-controlling interests (SFP/SCE) (current year’s

72

interests in profit)

Recognition of portion of unrealised intragroup gain

realised in first three months with related tax effect

and non-controlling interests

continued

257

Chapter 13

Dr

Cr

J1.4 Plant (SFP) (P)

10 000

Accumulated depreciation (SFP) (2 000(J1.2) + 500(J1.3))

2

500

Gain on disposal of subsidiary (group context) (P/L)

7 500

Income tax expense (P/L) (7 500 × 28%)) 2

100

Deferred tax (SFP) ((2 240(J1.2) – 140(J1.3))

100

Non-controlling interests (P/L) ((7 500 – 2 100) × 20%)

(comment (d)) 1

080

Non-controlling interests (SFP/SCE) (current year’s

interests in profit)

1 080

Realisation of remaining unrealised intragroup gain

with loss of control over subsidiary

J2

Non-controlling interests (SFP/SCE) (derecognised)

(40 080 (analysis) + 1 080 realisation of intragroup profit) 41 160

Non-controlling interests (SFP/SCE) (opening

balance in equity) (25 000 at + ((93 000 – 25 000) × 20%)) 38 600

Non-controlling interests (SFP/SCE) (current year’s

interests in profit) (51 200 × 3/12 × 20%)

2 560

Accounting for various line items of non-controlling

interests in equity for S Ltd

Alternative journal entries for J3 could also be as follows (first dealing with
the unrealised profit and then realising it with the loss of control):

Dr

Cr

J3

Retained earnings (opening balance of parent) (SCE)

((9 000 – 3 000) × 72%) (comment (e))

4 320

Accumulated

amortisation

(SFP)

(comment (e)) 3
000

Deferred

tax

(SFP)

((9 000 – 3 000) × 28%) (comment (e))

1 680

Patent (SFP) (S)

9 000

Elimination of unrealised intragroup gain included in

patent and recognition of portion realised to the

beginning of the current year through amortisation,

after tax

J4

Accumulated amortisation (SFP)

(9 000 / 3 years × 3/12) (comment (e))

750

Cost of sale (amortisation) (P/L)

750

Income tax expense (P/L) (750 × 28%) (comment (e)) 210

Deferred
tax

(SFP)

210

Recognition of portion of unrealised intragroup gain

realised in first three months with related tax effect

J5

Patent (SFP) (S)

9 000

Accumulated amortisation (SFP) (3 000(J3) + 750(J4))

750

Gain on disposal of subsidiary (group context) (P/L)

5 250

Income tax expense (P/L) (5 250 × 28%)) 1

470

Deferred tax (SFP) ((1 680(J3) – 210(J4))

470

Realisation of remaining unrealised intragroup gain

with loss of control over subsidiary

258

Changes in ownership of subsidiaries through buying or selling shares

Comments

a Note that S Ltd was only a subsidiary of P Ltd for the first three months
of the current year. Since S Ltd was not a subsidiary of P Ltd at the reporting
date, S Ltd’s individual financial statements will not be combined with
those of the parent (P Ltd) as a starting point for consolidation. This means
that the results for S Ltd (for the period that it was a subsidiary of P Ltd)
would have to be journalised into the consolidation, as is seen in the pro
forma consolidation journal entry (J1) above.

b The

adjustment to depreciation of R500 (R10 000/5 years = R2 000 × 3/12 =

R500) (comment (d)) and the tax effect thereof of R140 (R500 × 28%) that
relates to the intragroup sale of plant are already included in the analysis of S
Ltd. Separate pro forma consolidation journal entries to account for this is
not needed as the adjusted retained earnings and profit per the ana

alysis (as adjusted for the intragroup

transaction) is journalised into the consolidation. The line items of S Ltd are
not combined to those of the parent and, therefore, the unrealised gain
cannot be eliminated as it would normally be done (as in chapter 5 of this
work).

c With the loss of control over a subsidiary, any unrealised intragroup profits
are effectively realised as the subsidiary is effectively sold in full to parties
outside the group. The parent-subsidiary relationship ends and all individual
assets and liabilities of the subsidiary are effectively derecognised from the
group (i.e. not included in the consolidated statement of financial position).
The realisation of intragroup profits with the sale of the subsidiary should
therefore form part of the consolidated gain or loss with the loss of control.
See comment (g) where the realisation of this is added to the group’s profit
with the loss of control.

d The unrealised profit from the sale of the plant by S Ltd to P Ltd (note
that these adjustments are effectively included in the analysis of the equity of
S Ltd as S Ltd was the selling entity and the unrealised profit relates to the
subsidiary’s financial statements) is as follows:

Initial unrealised profit (given)

10 000

Realised through depreciation during 20.16 (10 000/5 years) (2 000)

Balance at beginning of current year

8 000

Realised through depreciation during 20.17 (10 000/5 years × 3/12) (500)

Balance realised with the loss of control

7 500

Tax effect (× 28%)

(2 100)

Amount after tax

5 400

Amount attributable to the non-controlling interests (× 20%) (1 080)

Amount attributable to the parent

R4 320

e The
unrealised profit from the sale of the patent by P Ltd to S Ltd (note that
these adjustments are not included in the analysis of the equity of S Ltd as P
Ltd was the selling entity and the unrealised profit relates to the parent’s
financial statements) is as follows:

Initial unrealised profit (given)

9 000

Realised through amortisation during 20.16 (9 000/3 years) (3 000)

Balance at beginning of current year

6 000

Realised through amortisation during 20.17 (9 000/3 years × 3/12) (750)

Balance realised with the loss of control

5 250

Tax effect (× 28%)

(1 470)

Amount after tax

3 780

Amount attributable to the non-controlling interests (N/A)

Amount attributable to the parent

R3 780

continued

259
Chapter 13

f P Ltd disposed of all its shares in S Ltd and lost control over S Ltd. The
gain or loss on the disposal of the interest can still be calculated using the
steps in IFRS 10.B98

(as was done in the preceding examples), but adjustments should also be
made for the realisation of intragroup profits. Furthermore, attention
should be given to the various line items that relate to the consolidated gain
or loss. The calculation in terms of IFRS 10.B98 results in the consolidated
gain or loss on the loss of the control over the subsidiary, attributable to the
owners of the parent (i.e. after tax and after the non-controlling interests).
However, the realisation of the intragroup profits would also have a tax
effect (separate line item) and it may affect the non-controlling interests in
profit or loss (separate line item) if the unrealised intragroup profit relates to
a partially-owned subsidiary.

The calculation of the consolidated gain or loss on the loss of the control
over the subsidiary, attributable to the owners of the parent, are as follows:

Derecognise assets (including goodwill) and liabilities on date control is lost

(200 400 other net assets + 2 000 goodwill) (IFRS 10.B98(a)) (202 400)

Derecognise non-controlling interests (IFRS 10.B98(a))

40 080

Net asset value (attributable to parent) derecognised

(162 320)

Fair value of consideration received recognised (i.e. cash received)

(IFRS 10.B98(b))

220 000

Recognise fair value of investment in former subsidiary retained (IFRS

10.B98(b))
0

Net gain on disposal of interest (group context)

(IFRS 10.B98(d)) attributable to the owners of the parent

R57 680

(In J1 above as: 60 860 – 2 100 – 1 080 (comment (d) = 57 680, with the
tax and non-controlling interests in respect of the realisation of the
intragroup profits as separate line items)

(The realisation of the unrealised gain from the sale of the plant by

S Ltd to P Ltd (see comment (d)) (after tax) is effectively included in this
amount.)

Plus the realisation of the unrealised gain from the sale of the patent by P
Ltd to S Ltd (see comment (e)) (after tax)

3 780

(In J3 above as: 5 250 – 1 470 = 3 780)

Total net gain on disposal of interest (group context)

(IFRS 10.B98(d)) attributable to the owners of the parent (after tax) R61 460

The total gain on the disposal of the subsidiary will be presented as

follows in the profit or loss:

Other income (gain on disposal of interest)

(60 860(J1)(S) + 5 250(J3)(P)

66 110

Income tax expense (2 100(J1)(S) + 1 470(J3)(P))

(3 570)

Profit after tax

62 540

Non-controlling interests (comment (d))

(1 080)

Total gain on disposal of interest (group context)

(IFRS 10.B98(d)) attributable to the owners of the parent (after tax) R61 460

continued

260

Changes in ownership of subsidiaries through buying or selling shares

Alternative calculation:

Gross

Tax

NCI

Parent

Gain on disposal (without unrealised

profit) (J1.1)

53 360

N/A
53 360

Realisation of profit on plant

(comment (d))

7 500

(2 100)

(1 080)

4 320

Amounts recognised in J1 above

60 860

(2 100)

(1 080)

57 680

Realisation of profit on patent (J3)

(comment (e))

5 250

(1 470)

N/A

3 780

Total gain on disposal of interest

attributable to the owners of the

parent

R66 110 (R3 570) (R1 080) R61 460

* = Refer to comment (i) to example 13.6 for the discussion on the tax effect
on the gain on the disposal of the subsidiary. Also keep in mind that the
actual tax paid by the parent on the disposal of the share investment has
already been recognised by the parent. Refer to comment (b) to the
information given in this example.

g The gain on the disposal of the subsidiary can also (as an alternative) be
calculated as follows:

Proceeds on disposal of interest

220 000

Carrying amount of parent’s interest in subsidiary lost

(166 640)

Consolidated carrying amount of subsidiary (without the elimination of the

unrealised profit)

(205 800)

(R100 000 share capital + R93 000 retained earnings at beginning of year +
R12 800 (R51 200 × 3/12) profit for first three months) Portion attributable
to non-controlling interests (205 800 × 20%) 41 160

Goodwill of parent derecognised

(2 000)

Gain on disposal of interest without unrealised profit

53 360
Unrealised profit from sale of the plant (comment (d) above) attributable to
the parent, after tax

4 320

57 680

Unrealised profit from sale of the patent (comment (e) above) attributable to
the parent, after tax

3 780

Total gain on disposal of interest attributable to the owners of the

parent, after tax

R61 460

h The other alternatives for the calculation of the group’s gain on the
disposal of the interest as outlined in the preceding examples may also be
applicable in this example, but were not repeated here. There are arguably
other alternatives to the journal entries as well.

13.11 Changes of interest in complex groups

In the case of changes of interest in complex groups, no new principles

apply. The complexity of the problems which may be encountered here
simply requires a very careful application of the principles that have been
dealt with in this chapter (as well as those in the next chapter).

261

Chapter 13

Self-assessment questions

Question 13.1

On 1 January 20.17, the first day of the financial year, P Ltd held a 35%
ownership interest in S Ltd. On 31 March 20.17, P Ltd acquired a further
ownership interest of 20% in S Ltd from other shareholders for R200 000. P
Ltd accounted for its initial investment in S Ltd in its consolidated financial
statements in terms of the equity method, as significant influence was
exercised over the financial and operating policies of S Ltd from the date of
purchase of the initial interest. From the date of acquisition of the second
interest in S Ltd, P Ltd had control S Ltd.

The following information applies to the year ended 31 December 20.17:

DRAFT STATEMENTS OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd and

other

subsidiaries

S Ltd

(consoli-

dated)

R’000

R’000

Revenue

11 825

1 200

Cost of sales

(6 450)
(700)

Gross profit

5 375

500

Other income (dividend received)

60

Other income (interest received)

30

Depreciation on non-manufacturing assets

(425)

Finance costs

(40)

Other expenses

(1 000)

(80)

Profit before tax

4 040

380

Income tax expense (1

470)

(150)

PROFIT FOR THE YEAR (*)

R2 570

R230

Profit attributable to:

Owners of the parent

1 750

230

Non-controlling interests

820

R2 570

R230

(*) There is no “other comprehensive income” relevant to this statement of

profit or loss and other comprehensive income.

262
Changes in ownership of subsidiaries through buying or selling shares
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

P Ltd and

other

subsidiaries

S Ltd

(consoli-

dated)

R’000

R’000

Balance at 1 January 20.17

3 420

420

Changes in equity for 20.17

Profit for the year

1 750

230

Dividend paid: 31 December 20.17

(700)

(100)

Balance at 31 December 20.17

R4 470

R550

Additional information

1 P Ltd acquired its 35% interest in S Ltd some time ago for R175 000
(equalling its proportion of the net asset value of S Ltd) when S Ltd’s
retained earnings amounted to R150 000. Since then, S Ltd has not issued
any new shares.

2 S Ltd’s major asset is land. S Ltd revalued this property in its individual
financial statements just before P Ltd acquired its 35% interest, and credited
the revaluation surplus by R100 000 (after tax). The land, presented in S
Ltd’s statement of financial position at R800 000, is not depreciated. It is the
policy of the group to realise the revaluation surplus when the asset is sold.

S Ltd revalued the land on 1 January 20.17 and credited the revaluation
surplus with R172 500 (after tax).

3 The fair value of P Ltd’s previously held equity interest in S Ltd was R350
000 at the date on which P Ltd obtained control over the financial and
operating policies of S Ltd (i.e. the acquisition date). No goodwill or gain
from bargain purchase arose with the business combination and S Ltd’s net
assets were regarded as fairly stated in terms of the requirements of IFRS 3
Business Combinations.

4 S Ltd’s net income was earned evenly throughout the current reporting
period.

5 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.
6 P Ltd measures the investment in S Ltd at cost in its separate financial
statements in terms of IAS 27.10(a) and IAS 28.44.

7 Assume that the opening balance of the non-controlling interests of P Ltd

and other subsidiaries at 1 January 20.17 was R1 million.

8 A company tax rate of 28% applies and CGT is calculated at 80% thereof.

263

Chapter 13

Required

Prepare the consolidated statement of profit or loss and other comprehensive

income and consolidated statement of changes in equity (column for share
capital is not required) of the P Ltd Group for the year ended 31 December
20.17. Notes are not required.

Suggested solution 13.1

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (11 825 000(P) + (1 200 000 × 9/12)(S))

12 725 000

Cost of sales (6 450 000(P) + (700 000 × 9/12)(S))

(6 975 000)

Gross profit

5 750 000
Other income

(60 000 (dividends) + 30 000 (interest)(P) – 55 000 (dividends of S)) 35

000

Other expenses (425 000(P) + 1 000 000 (P) + (80 000 × 9/12)(S)) (1 485
000)

Finance cost (40 000 × 9/12)(S) (30

000)

Share of profit of associate (57 500 × 35%)(S)

20 125

Profit before tax

4 290 125

Income tax expense (1 470 000(P) + (150 000 × 9/12)(S))

(1 582 500)

PROFIT FOR THE YEAR

2 707 625

Other comprehensive income:

Items that will not be reclassified to profit or loss:

Share of other comprehensive income of associate (C1) (comment (b)) 60

375

Income tax relating to other comprehensive income

–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R2 768 000

Profit attributable to:

Owners of the parent

1 810 000

Non-controlling interests (820 000(P) + 77 625(C1))

897 625

R2 707 625

Total comprehensive income attributable to:

Owners of the parent (1 810 000 + 60 375)

1 870 375

Non-controlling interests (897 625 (as above))

897 625

R2 768 000

264

Changes in ownership of subsidiaries through buying or selling shares P

LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revalu-

Non-
Retained

Total

ation

Total

controlling

earnings

equity

surplus

interests

Balance at

1 January 20.17

# 3 514 500

3 514 500 ^ 1 000 000

4 514 500

Changes in equity

for 20.17

Dividends

(700 000)

–
(700 000)

(45 000)

(745 000)

Total comprehensive

income for the year:

Profit for the year

1 810 000

1 810 000

897 625

2 707 625

Other comprehensive

income

– 60 375

60 375

60 375

Transfers

60 375 (60 375)

–
–

Acquisition of

subsidiary

450 000

450 000

Balance

31 December 20.17 $ R4 684 875

– R4 684 875 R2 302 625 R6 987 500

3 420 000(P) + 94 500(S) = 3 514 500

4 470 000(P) + 175 000 (since acquisition as associate) + 39 875 (since

acquisition as subsidiary)

= 4 684 875

Povided in question’s information

265
Chapter 13

Calculations

C1 Analysis of the owner’s equity of S Ltd – as associate

P Ltd 35%

Total

NCI

At

Since

i At date of first purchase

Share capital (comment (a))

250 000

87 500

Retained earnings

150 000

52 500

Revaluation surplus (given)

100 000

35 000

500 000

175 000
n/a

Consideration

(R175

000)

ii Since date of first

purchase

• To beginning of current year:

Retained

earnings

(420 000 – 150 000)

270 000

94 500 RE n/a

• Current year:

1/1/20.17–31/3/20.17

Profit

(230 000 × 3/12)

57 500

20 125 RE

n/a

Revaluation
surplus

(comment (b))

172 500

60 375 RS n/a

(350 000/35%)

1 000 000

175 000

n/a

Associate becomes a

subsidiary (comment (c))

Derecognise associate

(1 000 000)

(175 000)

(175 000)

Transfer between reserves

(60 375 RE – 60 375 RS)

60 375 RE

(comment (d)) –

(60 375) RS n/a

–
–

RE = Retained earnings (SCE); RS = Revaluation surplus (SCE) 266

Changes in ownership of subsidiaries through buying or selling shares C1

Analysis of the owner’s equity of S Ltd – as subsidiary

P Ltd 55%

Total

NCI

At

Since

i At acquisition

Share capital

250 000

137 500

112 500

Retained earnings at

beginning of year

420 000

231 000

189 000
Profit for current year before

acquisition (230 000 × 3/12)

57 500

31 625

25 875

Revaluation

surplus

(100 000 + 172 500)

272 500

149 875

122 625

Total equity acquired

1 000 000

550 000

450 000

Equity represented by

goodwill – Parent

–
Consideration

(comment (e))

and NCI

1 000 000

R550 000

450 000

ii Since acquisition

1/4/20.17–31/12/20.17:

Profit

(230 000 × 9/12)

172 500

94 875 RE

77 625

Dividend paid

(100 000)

(55 000) RE

(45 000)

NCI

(comment (f))

R1 072 500
R39 875 RE

R482 625

RE = Retained earnings (SCE); RS = Revaluation surplus (SCE)

267

Chapter 13

Comments

a Since the investment is acquired at R175 000, which represents 35% of the
net

assets on the date of first purchase (as given in the question), the R87 500
(i.e.

250 000 share capital × 35%) may be deduced as the balancing amount in
the “At”

column and 87 500/35% leaves R250 000 in the “Total” column.

b With this revaluation of the land at the beginning of the current year, S Ltd
is an

associate of P Ltd and P Ltd therefore shares in the other comprehensive

income of the associate amounting to R60 375 (refer to IAS 28.10).

cP

Ltd’s previously held ownership interest in S Ltd has a fair value of R350
000
(information given) at the date of the business combination. Therefore, no
fair value

adjustment has to be processed in this regarrd in terms of IFRS 3.42, as the

equity-accounted carrying amount of tthe investment at this date is also
R350 000 (i.e.

R175 000 (cost) + R175 000 (earnings and OCI since first purchase)).

d In terms of IFRS 3.42, any amount that was previously recognised in other
comprehensive income (i.e. the revaluation surplus) shall be recognised on
the same

basis as would be required if the acquirer had disposed directly of the

previously held equity interest. In terms of IAS 16.41, a revaluation surplus
may be transferred directly to retained earnings when the asset is
derecognised.

e The

consideration for the business combination effectively consists of R350 000

(fair

value of previously held interest (given)) + R200 000 (consideration for

additional 20%) = R550 000.

f The

NCI is equal to exactly 45% of the total equity of R1 072 500 in this
example, as there is no goodwill or gain from a bargain purchase that arose
at any stage, which

would have been included in the analysis of ownership interest; thereby

causing the NCI to not equal its ownership in

nterest in the total equity exactly.

C2 Proof of calculation of purchasing difference of S Ltd in terms of

IFRS 3.32
Consideration transferred at acquisition date: IFRS 3

3.32(a)(i)

200 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

450 000

Acquisition-date fair value of acquirer’s previously held equity interest in

the acquiree: IFRS 3.32(a)(iii) (given)

350 000

1 000 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(1 000 000)

Difference

268

Changes in ownership of subsidiaries through buying or selling shares C3

Pro forma consolidation journal entries

Dr

Cr

J1
Investment in S Ltd (associate) (SFP)

94 500

Retained earnings (SCE)

94 500

Accounting for investor’s interest in reserves

of associate at the beginning of the year

J2

Investment in S Ltd (associate) (SFP)

20 125

Share of profits of associate (P/L)

20 125

Accounting for investor’s share of current year’s

profit (before additional acquisition) of associate

J3

Investment in S Ltd (associate) (SFP)

60 375

Share of other comprehensive income of associate

(OCI) (172 500 × 35%)

60 375

Accounting for investor’s share of revaluation

of land of associate

J4

Revaluation reserves (SCE) (share of other

comprehensive income of associate

(OCI) accumulated in equity)

60 375

Retained earnings (SCE)

60

375

Transfer of revaluation surplus to retained earnings

with business combination

J5

Share capital (SCE)

250 000

Retained earnings: opening balance (SCE)

420 000

Revaluation

reserve

(SCE)

(100 000 + 172 500) 272

500

Revenue

(P/L)

(1 200 000 × 3/12)

300 000

Cost of sales (P/L) (700 000 × 3/12)

175

000

Other expense (P/L) (80 000 × 3/12)

20

000

Finance

cost

(P/L)

(40 000 × 3/12)

10

000

Income tax expense (P/L) (150 000 × 3/12)

37

500
Investment in S Ltd (SFP) (now subsidiary)

(350 000 + 200 000)

550 000

Non-controlling interests (SFP/SCE)

450 000

Main elimination journal entry at acquisition date

J6

Non-controlling interests (P/L)

77 625

Non-controlling interests (SFP)

77 625

Non-controlling interests’ portion of current year’s

profit after additional acquisition

J7

Dividend received (P/L)

55 000

Non-controlling interests (SFP/SCE)

45 000

Dividend paid (SCE)

100 000
Elimination of intragroup dividend and correction

of non-controlling interests

269

Chapter 13

Question 13.2

P Ltd is listed on the JSE Ltd. P Ltd's financial director approached you to
help him with the preparation of the consolidated financial statements of the
P Ltd group for the financial year ended 31 December 20.19.

The following abridged draft financial statements of P Ltd and S Ltd, in

which P Ltd has an interest, are presented to you:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Property, plant and equipment

110 000

42 000

Investment in S Ltd at cost:

19 800

1 200 shares purchased on 1 January 20.15 for R4 800

400 shares purchased on 30 June 20.19 for R15 000

Current assets

28 000

35 000

Total assets

R157 800

R77 000

EQUITY AND LIABILITIES

Share capital (6 000/2 000 shares)

6 000

2 000

Retained earnings

123 275

68 000

Total liabilities including deferred tax

28 525

7 000

Total equity and liabilities

R157 800
R77 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Gross profit

5 000

6 000

Dividend received

1 600

Profit before tax

6 600

6 000

Income tax expense

(1 400)

(1 680)

PROFIT FOR THE YEAR

5 200

4 320
Other comprehensive income

––

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R5 200

R4 320

270

Changes in ownership of subsidiaries through buying or selling shares

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

120 075

65 680

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

5 200

4 320
Other comprehensive income

Dividends: 31 December 20.19

(2 000)

(2 000)

Balance at 31 December 20.19

R123 275

R68 000

Additional information

1 P Ltd acquired 1 200 of the issued ordinary shares (60% interest) in S Ltd
on 1 January 20.15 for R4 800, on which date its retained earnings amounted
to R4 000. On this date the directors of P Ltd fair-valued all the identifiable
assets and liabilities as required by IFRS 3 Business Combination . The
following is relevant and the fair value adjustment is material:

The plant and machinery had a carrying amount of R20 000 and a fair value
of R22 500. All S Ltd’s plant and machinery was purchased on 1 January
20.9 and was depreciated on a straight-line basis over 10 years. On 1 January
20.15 there was no change in the remaining useful life of four years with no
residual value. The fair value adjustment was not recorded in the books of S
Ltd.

2 On 30 June 20.19, P Ltd purchased a further 400 ordinary shares (20%

interest) for R15 000 in S Ltd from other shareholders.

3 P Ltd elected to measure the non-controlling interests at fair value at the

date of acquisition. On 1 January 20.15 the fair value of the non-controlling
interests was R3 300 (when P Ltd obtained control over S Ltd).
4 P Ltd classified the investment in S Ltd at cost in its separate financial
statements.

5 The profit of S Ltd was earned evenly during the current year.

6 S Ltd purchases some of its inventories from P Ltd at cost plus 25%. S Ltd
had the following inventories, which were bought from P Ltd, on hand at: 31
December 20.18

R15 000

31 December 20.19

R10 000

Inventory usually realises within three months.

7 The company tax rate is 28% and CGT (capital gains tax) is calculated at
80%

thereof.

Required

Prepare the consolidated financial statements of the P Ltd Group for the year
ended 31 December 20.19. Notes are not required.

271

Chapter 13

Suggested solution 13.2

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS
Non-current assets

Goodwill (parent and NCI)

300

Property, plant and equipment (110 000(P) + 42 000(S))

152 000

Current assets (28 000(P) + 35 000(S) – 2 000 unrealised inventory) 61 000

Total assets

R213 300

EQUITY AND LIABILITIES

Share capital

6 000

Retained earnings

159 187

Other components of equity (changes in ownership)

(942)

164 245

Non-controlling interests

14 090

Total equity

178 335
Total liabilities (28 525 (P) – 560 (on inventory) + 7 000(S))

34 965

Total equity and liabilities

R213 300

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Gross profit

(5 000(P) + 6 000(S) + 3 000(opening inventory) – 2 000(closing inventory))

12 000

Income tax expense (1 400(P) + 1 680(S) + 840 – 560)

(3 360)

PROFIT FOR THE YEAR

8 640

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R8 640

Profit attributable to:

Owners of the parent

7 344

Non-controlling interests (864 + 432)

1 296

R8 640

Total comprehensive income attributable to:

Owners of the parent

7 344

Non-controlling interests (864 + 432)

1 296

R8 640

272

Changes in ownership of subsidiaries through buying or selling shares P

LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Non-

Changes

Share

Retained

con-

Total
in owner-

Total

capital earnings

trolling

equity

ship

interests

Balance at

1 January 20.19

6 000 * 153 843

159 843 ! 27 252

187 095

Changes in equity

for 20.19

Total comprehensive

income for the year:

Profit for the year

–7

344
–

7 344

1 296

8 640

Dividends

– (2

000)

(2 000)

(400)

(2 400)

Purchase of interest

(942)

(942) (14 058)

(15 000)

Balance at

31 December 20.19

R6 000 R159 187

(R942) R164 245 R14 090 R178 335

120 075(P) + 35 928(S) – 2 160(opening inventory, after tax) = 153 843

3 300 + 23 952 = 27 252

273

Chapter 13

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 60% – 80%

Total

NCI

At

Since

i At acquisition (1/1/20.15)

Share capital

2 000

1 200

800

Retained earnings
4 000

2 400

1 600

Revaluation

surplus

(2 500 × 72%)

1 800

1 080

720

7 800

4 680

3 120

Equity represented by goodwill

– Parent and NCI

300

120

180

Consideration and NCI

8 100

4 800
3 300

ii Since acquisition

• To beginning of current year:

Retained earnings

(65 680 – 4 000 – 1 800 extra depreciation

as a result of fair value adjustment of PPE

at acquisition for 4 years)

59 880

35 928

23 952

• Current year:

Profit:

1/1/20.19–30/6/20.19

(4 320 × 6/12)

2 160

1 296

864

70 140

37 224

28 116
Further

acquisition

(28 116(NCI) × 20/40)

14 058

(14 058)

Changes in ownership (equity)

(per IFRS 10.23)

942

Consideration and NCI

15 000

14 058

Profit:

1/7/20.19–31/12/20.19

2 160

1 728

432

Dividend: 31/12/20.19

(2 000)

(1 600)

(400)
R70 300

R37 352

R14 090

274

Changes in ownership of subsidiaries through buying or selling shares

Question 13.3

Comment

This question is similar to example

e 13.5, but the investment in the subsidiary is here

accounted for under IFRS 9 (and not at cost). The question therefore
facilitates comparison between the methods of accounting

g for the investment in the subsidiary in

the parent’s separate financial statements.

The following are the abridged trial balances of P Ltd and S Ltd on 31
December 20.14:

P Ltd

S Ltd

CREDITS

Share capital (50 000/6 000 shares)

50 000

6 000

Retained earnings (at 1/1/20.14)

6 000

1 600

Retained earnings: Transfer from mark-to-market reserve

2 555

Mark-to-market reserve (at 31/12/20.14) ((1 230 – 693) × 77,6%) 417

Deferred tax ((1 230 – 693) × 80% × 28%)

120

Revenue (*)

8 000

2 000

R67 092

R9 600

DEBITS

Bank
60 447

8 000

Cost of sales (*)

4 800

1 400

Income tax expense (*)

615

200

Investment in S Ltd: 600 shares at fair value

1 230

R67 092

R9 600

(*) Accrued/incurred evenly (irrespective of the sale of the shares)

Additional information

1P

Ltd

purchased 4 500 shares in S Ltd on 1 January 20.12 for R5 200, when the
retained earnings of the latter amounted to R400. P Ltd disposed of 3 900 of
these shares on 30 June 20.14 for R7 800.

2P

Ltd
elected to measure the non-controlling interests at their proportionate share
of the acquiree’s identifiable net assets at the acquisition date.

3P

Ltd

classified the investment in S Ltd under IFRS 9 in its separate financial

statements and recognised fair value adjustments in the mark-to-market
reserve (other comprehensive income). Fair value adjustments are
recognised monthly.

P Ltd chose to present the other comprehensive income net after tax in the
statement of profit or loss and other comprehensive income (IAS 1.91(a)).
The fair value per share of S Ltd on the various dates was as follows: On

January 20.14

R1,90

On

30 June 20.14

R2,00

On

31 December 20.14

R2,05

275

Chapter 13

4 The disposal of the subsidiary does not comply with the criteria of IFRS 5
Non-current Assets Held for Sale and Discontinued Operations until the
date of disposal.

5 The

subsidiary

does

not represent a separate major line of business or geographical area of the

group.

6 A company tax rate of 28% applies and CGT is calculated at 80% thereof.

Required

Prepare the pro forma consolidation journal entries to consolidate S Ltd into
the financial statements of the P Ltd group for the year ended 31 December
20.14. Notes are not required.

Suggested solution 13.3

Pro forma consolidation journal entries – S Ltd

Dr

Cr

J1

Mark-to-market reserve opening balance (SCE)

(3 350 × 77,6%) (comment (a))

2 600

Deferred
tax

(SFP)

(3 350 × 80% × 28%) 750

Investment in S Ltd (SFP)

3 350

Reversal of fair value adjustment on investment

in S Ltd at beginning of year at group level

J2 Mark-to-market

reserve

(OCI)

((450 + 30) × 77,6%)

(comment (e))

372

Deferred

tax

(SFP)

((450 + 30) × 80% × 28%) 108

Investment in S Ltd (SFP)

480

Reversal of fair value adjustment on investment

and tax effect in S Ltd for current year at group level J3

Retained earnings (SCE) (comment (c)) 2

555

Mark-to-market reserve (SCE)

((3 900 × R2) – 4 507 (cost of shares sold) × 77,6%)

2 555

Reversal of parent’s entry for transfer for transfer

within equity with sale of shares

J4

Income tax expense (P/L) (comment (c)) 738

Deferred

tax

(SFP)

(3 293 × 80% × 28%)

738

Reversal of parent’s entry for deferred tax with sale

of shares

continued

276

Changes in ownership of subsidiaries through buying or selling shares Dr

Cr

J5

Investment in S Ltd (SFP) (3 350(J1) + 450(J2)

(see comment (a) read with comment (e)) or

3 800

((600 x 2 fair value) – (1 230 given – 3 350(J1) – 480 (J2) (see comment (f))

Non-controlling

interests (P/L)

50

Cost of sales (P/L) (comment (d)) (1 400 × 6/12) 700

Income tax expense (P/L) (comment (d)) (200 × 6/12) 100

Gain on disposal of interest (group context) (P/L)

(comment (b))

2 750

Retained

earnings

– Beginning of year (SCE)

900
Revenue

(P/L)

(comment (d)) (2 000 × 6/12)

000

Consolidation of subsidiary S Ltd and recognition

of disposal of interest at group level

J6

Non-controlling interests (SFP/SCE) (derecognised)

1 950

Non-controlling

interests (SFP/SCE)

(opening balance in equity)

1 900

Non-controlling interests (SFP/SCE)

(current year’s interest in profit)

50

Accounting for various line items of non-controlling

interests in equity for S Ltd

J7
Investment in S Ltd (SFP) (1 230 – 1 200) 30

Mark-to-market reserve (OCI) (30 × 77,6%) (rounded)

23

Deferred

tax

(SFP)

(30 × 80% × 28%) (rounded)

Recognition of fair value increase on retained

investment for period after sale of interest

(comment (e))

277

Chapter 13

Comments

a The

fair value adjustments to the investment in S Ltd were as follows: Cost of

investment (4 500 shares)

5 200
Fair value adjustment to beginning of current year

3 350

Fair value at beginning of current year (4 500 × R1,90)

8 550

Fair value adjustment to 30 June 20.14

450

Fair value at 30 June 20.14 (4 500 × R2,00)

9 000

Carrying amount of shares sold (3 900 × R2,00)

(7 800)

Fair value of remaining investment

1 200

Fair value adjustment to end of current year

30

Fair value at end of current year (600 × R2,05)

R1 230

b If a parent loses control, as is the case with S Ltd here, the gain or loss on
the disposal of the interest would be calculated as follows using IFRS
10.B98: Derecognise assets (including goodwill) and lliabilities on date
control is lost (7 800 other net assets + 400 goodwill)

(8 200)

Derecognise non-controlling interests

1 950

Carrying amount of P Ltd’s interest in S Ltd lost

(6 250)

Recognise consideration received

7 800

Fair value of investment retained (600 shares × R2,00)

1 200

Gain (consolidated) recognised in profit or loss

R2 750

The total gain should effectively be presented as a gain on the disposal of an

interest in the subsidiary and a remeasurement gain on remeasuring the
retained investment to fair value (IFRS 12.19). These items could be
calculated as follows: Carrying amount of interest sold (65/75 × R6 250
(above))

(5 417)

Recognise consideration received

7 800

Profit on disposal

R2 383

Carrying amount of interest retained (10/75 × R6 250 (above)) (833)

Fair value of investment retained (600 shares × R2,00)

1 200
Remeasurement gain

R367

continued

278

Changes in ownership of subsidiaries through buying or selling shares c By

means of the relevant amounts (as contained in the analysis of the ownership
interest of S Ltd), the gain on disposal of shares in S Ltd can be analysed as
follows: Proceeds on disposal of interest

7 800

Historic cost of shares disposed of (5 200 × 3 900/4 500)

(4 507)

At-acquisition equity disposed of (4 800 × 65/75)

(4 160)

Goodwill realised (only for the parent company) (400 × 65/75) (347)

Gain on disposal of interest per separate records of P Ltd 3 293

(P Ltd would have recognised this gain as an after tax transfer from the
mark-to-market reserve of R2 555 (3 293 × 77,6%) to retained earnings and
a reversal of deferred tax of R738 (3 293 × 80% × 28%).

These entries are again reversed upon consolidation – see J3 and J4.)
Attributable post-acquisition retained earnings disposed of ((900 + 150)) ×
65/75)

(910)

2 383

Plus remeasurement of retained investment to fair value

(1 200 – ((4 800 × 10/75) + (1 050 × 10/75) + (400 × 10/75)) or (1 200 –
((net asset value of 7 800 × 10%) + (400 × 10/75)) 367

Consolidated gain on disposal of the interest

R2 750

Or

Proceeds on disposal of interest

7 800

Attributable net assets disposed of (net asset value of R7 800 × 65%) (5 070)

Goodwill realised (only for the parent company) (400 × 65/75) (347)

Profit on disposal

2 383

Remeasurement of retained investment to fair value

367

Consolidated gain on disposal of the interest

R2 750

Care should be taken not to confuse the proceeds of R7 800 with the net
asset value of the subsidiary of R7 800 at the date of the loss of control. It is
purely coincidence that the amounts are the same.

d In the consolidation, the financial statements of S Ltd are not combined

(i.e. added together) with those of P Ltd as S Ltd is not a subsidiary of P Ltd
at the end of the reporting period. The amounts in respect of S Ltd are
accounted for by means of J5

(i.e. these amounts have to be journalised into the consolidated statement

of profit or loss and other comprehensive income and the consolidated
statement of changes in equity for the period while S Ltd was a
subsidiary).

e In J1 and J2 the total fair value adjustment on the investment was reversed,
similar to the approach in the examples in the chapter. In J7 the fair value
adjustment after the partial sale of the investment is again accounted for on
the investment to illustrate the group’s treatment of the fair value
adjustments. As an alternative, the R30 fair value gain after 30 June 20.14
could not have been included in the reversal in J2 and J7 would then not be
needed.

f After the loss of control, the investment in S Ltd is treated as a simple

investment (at fair value through other comprehensive income). The
investment account should therefore be equal to the fair value of R1 230 (see
comment (a)). The mark-to-market reserve should reflect the fair value gain
after the loss of control, being R23 (see J7).

These balances should remain after all the consolidation journals, as follows:
Investment in S Ltd: 1 230(given) – 3 350(J1) – 480(J2) + 3 800(J5) +
30(J7) = 1 230

Mark-to-market reserve: 417(given) – 2 600(J1) – 372(J2) + 2 555(J3) +

23(J7) = 23

279

Chapter 13

Alternative pro forma consolidation journal entries for sale of interest

Dr

Cr

J5
Investment in S Ltd (SFP)

900

Retained

earnings

– Beginning of year (SCE)

900

Accounting for retained earnings at the beginning

of the year

J6

Investment in S Ltd (SFP)

150

Revenue

(P/L)

(2 000 × 6/12)

000

Cost of sales (P/L) (1 400 × 6/12)

700

Income tax expense (P/L) (200 × 6/12)

100
Non-controlling

interests (P/L)

50

Accounting for profit of subsidiary for the year

J7

Investment in S Ltd (SFP)

2 383

Gain on disposal of interest (group context) (P/L)

2 383

Recognition of gain at group level

J8

Investment in S Ltd (SFP)

367

Gain on disposal of interest (remeasurement

of retained investment to fair value) (P/L)

367

Recognition of gain at group level from

remeasurement of retained investment to fair value

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 75%–10%

Total

NCI

At

Since

i At acquisition (1/1/20.12)

Share capital

6 000

4 500

1 500

Retained earnings

400

300

100

6 400

4 800

1 600

Equity represented by goodwill

– Parent

400
400

Consideration and NCI

6 800

5 200

1 600

ii Since acquisition

• To beginning of current year:

Retained

earnings

(1 600 – 400)

1 200

900

300

• Current year:

Profit:

1/1/20.14–30/6/20.14

((2 000 – 1 400 – 200) × 6/12)

200

150
50

Total equity (represented by other net

assets of R7 800 and goodwill of R400)

8 200

1 050

1 950

Derecognise

assets

(including

goodwill), liabilities and NCI

(4 800)

(IFRS 10.B98)

(8 200)

(400)

(1 050)

(1 950)

280
Changes in ownership of subsidiaries through buying or selling shares C2
Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 5 200

Amount of non-controlling interests: IFRS 3.32(a)(ii)

1 600

6 800

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(6 400)

Goodwill (parent)

R400

281

14

Changes resulting from the issue

of additional shares by investees

and other changes in ownership

Introduction
.....................................................................................................

285

Changes in subsidiaries .............................................................................

286

Issue of shares
14.1

Issue of capitalisation shares ...................................................................

286

Example 14.1:

Capitalisation issue giving rise to fractional dealings ........

286

14.2

Rights issue by a subsidiary ....................................................................

287

Example 14.2:

Illustrative example of the entries by the subsidiary

and the parent with a rights issue ..................................

288

Example 14.3:

Rights issue by subsidiary with no change in relative

interests (there is no loss of control with the rights issue)

and no change in status as the subsidiary remains a

subsidiary (NCI is measured at its proportionate share

of the acquiree’s identifiable net assets at the

acquisition date).............................................................
288

Example 14.4:

Illustrative example of a parent’s owners’ equity

increasing after a rights issue (i.e. the parent takes

up more than its proportionate share of the new shares

on offer in the rights issue) .............................................

295

Example 14.5:

Rights issue by a subsidiary resulting in an increase

of the interest of the parent (control is not lost in the

rights issue) and the status does not change as the

subsidiary remains a subsidiary (NCI is measured at its

proportionate share of the acquiree’s identifiable net

assets at the acquisition date) ........................................

296

Example 14.6:

Rights issue by a subsidiary resulting in a decrease

of the interest of the parent (control is not lost in the

rights issue) and the status does not change as the

subsidiary remains a subsidiary (NCI is measured at

fair value at the acquisition date) ....................................

303

283

Chapter 14

Buy-back of shares

14.3

Buy-back of shares by a subsidiary .........................................................

311

Example 14.7:

Simple illustration of a share buy-back. ...........................

312

Example 14.8:

Buy-back of shares by a subsidiary with no change in

relative interests (there is no loss of control) (NCI is

measured at its proportionate share of the acquiree’s

identifiable net assets at the acquisition date) .................

314

Example 14.9:

Buy-back of shares by a subsidiary with no change in

status as an increase in the parent’s interest occurs

(there is no loss of control) and the subsidiary remains

a subsidiary (NCI is measured at its proportionate share

of the acquiree’s identifiable net assets at the

acquisition date).............................................................

323

Example 14.10: Buy-back of shares by a subsidiary where there is no

change in the status as the subsidiary remains a

subsidiary (there is no loss of control) and a decrease

in the parent’s interest occurs due to the share buy-back

(NCI is measured at fair value at the acquisition date) .....

331

Other changes in ownership

14.4

Share-based payments of a subsidiary ....................................................

340

Example 14.11: Issue of new shares by a subsidiary in terms of a

share-based payment transaction resulting in a

decrease of the interest of the parent (control is not lost)

and the status does not change as the subsidiary

remains a subsidiary (NCI is measured at its

proportionate share of the acquiree’s identifiable net

assets at the acquisition date) ........................................

340

14.5

Loss of control through expiry of an agreement and obtaining control

through an agreement ..............................................................................

347

Example 14.12: Loss of control over a subsidiary on expiry of agreement

(NCI is measured at fair value at the acquisition date) .....

348

Example 14.13: Obtaining control through an agreement where an

associate becomes a subsidiary (NCI is measured

at its proportionate share of the acquiree’s identifiable

net assets at the acquisition date) .................................... 354

14.6

Accounting for a change in investment entity status ................................

360

Changes in associates and joint ventures .........................................

360

14.7
Accounting for other changes in the net assets of an associate ..............

360

IFRS 5 and investments held for sale ...................................................

362

14.8 Important

definitions

.................................................................................

362

14.9

Applying IFRS 5 in the consolidated financial statements .......................

363

14.10

Associates classified as held for sale ......................................................

365

Self-assessment question

Question 14.1
........................................................................................................

366

284

Changes resulting from the issue of additional shares by investees Changes

resulting from the issue of additional shares by investees and other
changes in ownership
Same principles for changes in interest as in previous chapter, for the
following transactions:

Capitalisation

issue

Rights issue by subsidiary

Rights issue by associate

No change in parent’s interest

Increase in parent’s interest

Increase in parent’s interest

Decrease in parent’s interest

Decrease in parent’s interest

Buy-back of shares by subsidiary

No change in parent’s interest

Buy-back of shares by associate

Increase in parent’s interest

Loss of significant influence

Decrease in parent’s interest

Other changes in ownership

Loss of control through expiry

Share-based payment by

of an agreement and obtaining control

subsidiary

through an agreement

Introduction

The preceding chapter dealt with changes in the ownership of subsidiaries

which primarily came about as a result of an action by the investor, i.e. an
acquisition of additional shares or a disposal (or partial disposal) of
interests in a subsidiary. This chapter deals mainly with the appropriate
consolidation procedures that occur when an investee issues additional
shares or buys back shares and other changes in ownership.

The issue of additional shares can occur by way of a new issue, a

capitalisation issue or a rights issue.

It is important to note that the concepts and procedures followed for the
accounting treatment of changes in the parent’s/investor’s interest in a
subsidiary/associate/joint venture in this chapter are similar to those covered
in the preceding chapters and the same accounting principles will be
applied. Furthermore, the same presentation and disclosure requirements
should be adhered to as were discussed and illustrated in the preceding
chapters. The presentation and disclosure examples of the preceding chapters
are thus equally applicable to this chapter. These aspects are thus not
repeated in this chapter.

285

Chapter 14

Changes in subsidiaries

Issue of shares

14.1 Issue of capitalisation shares

If authorised to do so by its memorandum of incorporation, a company may

use its retained earnings and other reserves to issue fully paid up
capitalisation shares instead of distributing a cash dividend. A capitalisation
share dividend is merely a book entry executed by transferring reserves or
retained earnings to share capital. This amounts to a capitalisation of
retained earnings or other reserves.

The amount thus capitalised represents reserves of the group and must be
disclosed as such. The same principle applies should the investment be
realised at any point in time. In the consolidation worksheet, the
capitalisation issue is merely reversed as a consolidation adjustment before
the analysis of the owners’ equity of the subsidiary is prepared. The total
equity of the subsidiary to be analysed still remains the same, although the
individual composition of the equity differs from the composition before the
capitalisation issue.

The issue of capitalisation shares by a company to its owners does not

normally result in a change in the percentage owners’ equity of the various
owners. Thus, a capitalisation issue by a partially-owned subsidiary will
normally be taken up by its parent and the non-controlling interests in
proportion to their existing ownership before the capitalisation issue.

From the point of view of the investor, the receipt of capitalisation shares,
regardless of whether the investment is in a subsidiary or not, is merely
recorded by means of a memorandum entry, as a capitalisation issue is not
regarded as income. An important fact, which must be borne in mind on
consolidation after such a capitalisation issue, is that the issue does not
normally change the pro rata interest in the investee.

Fractional dealings in shares

A change in the proportionate owners’ equity could, however, come about as

a result of fractional dealings in shares, as illustrated below.

Example 14.1

Capitalisation issue giving rise to fractional dealings

The following are the abridged statements of financial position of P Ltd and
its subsidiary S Ltd immediately before the issue of capitalisation shares by
S Ltd: STATEMENTS OF FINANCIAL POSITION
P Ltd

S Ltd

ASSETS

Inventory

160 000

110 000

Investment in S Ltd: 45 000 shares at cost price

120 000

Total assets

R280 000

R110 000

EQUITY AND LIABILITIES

Share capital

(200 000/60 000 shares before the capitalisation issue) 200

000

60 000

Retained earnings

80 000

50 000
Total assets and liabilities

R280 000

R110 000

286

Changes resulting from the issue of additional shares by investees

Additional information

1 The non-controlling interests in S Ltd consist of 2 500 persons each

holding six shares (i.e. 15 000 shares). S Ltd makes a capitalisation issue on
the basis of one share for each five shares held (i.e. 1:5 = 3 000 additional
shares to the non-controlling shareholders). Each of the non-controlling
owners will thus be entitled to 11/5 shares. Although shares cannot be held
in fractions, the memorandum of incorporation of a company usually
authorise the directors to deal in the fractional shares in such cases. Assume
that the directors of S Ltd decide in the present case to sell the fractional
shares concerned (i.e. 2 500 × 1/5 = 500 shares) to P Ltd, in which case the
interest of the parent (P Ltd) in S Ltd will change from 75% to 75,7%

(54 500/72 000 shares), as follows:

Shares held before capitalisation issue

45 000

Capitalisation issue (45 000/5)

9 000

Shares purchased as fractional shares

500

Shares held after the capitalisation issue

54 500
The purchase of the 500 shares is dealt with in the same way as the purchase
of any additional interest in a subsidiary, the specific procedures depending
on whether it gives rise to control, a loss of control, or neither.

14.2 Rights issue by a subsidiary

A rights issue of shares takes place when the right to apply for the shares
(which are issued to obtain cash funds) is at first only granted to existing
owners of a company, in proportion to their existing ownership. The existing
owners can then either decide to exercise their rights and thus acquire further
shares in the company, or in the case of renounceable rights issues, sell their
rights to apply for additional shares to someone else.

In the case of a parent/subsidiary relationship, the parent, as controlling

owner, frequently underwrites the rights issue of a subsidiary. If all the
owners exercise their rights to take up all the shares offered to them, the
relative interests of all the owners remain exactly the same. The parent’s
relative interest could however increase if the parent takes up more shares
than those originally allocated to it (e.g. due to underwriting the rights issue
where the parent had to take up those shares that were not taken up by the
other owners).

In instances where the parent desires to dilute its owners’ equity in a

subsidiary, it can undertake not to take up its full share of the rights issue.
The parent can even relinquish its rights in favour of a particular investor
whom the parent would like to see become involved in the group. Both these
actions will result in the relative interest of the parent being diminished
(diluted).

1 No change in parent’s interest

If the parent and the non-controlling owners take up all of their respective
rights fully, there is no change in the relative ownership in the subsidiary.
The new shares issued as a result of the rights issue, however, have an equal
claim on the reserves of the subsidiary as the existing issued shares. On the
same basis, the new equity arising from the rights issue accrues to all the
issued shares in the same proportion as is held by every owner directly after
the rights issue.
287

Chapter 14

Illustrative example of the entries by the subsidiary and the

Example 14.2

parent with a rights issue

P Ltd has held 120 000 of S Ltd’s 150 000 issued shares (80%) since 20.17.
S Ltd made a rights issue on 30 June 20.19 of 1 share for every 3 shares
held. All the owners exercised their rights.

The following actual journal entry will be processed in the individual

financial statements of S Ltd:

Dr

Cr

Bank (SFP) (50 000 shares × R2 per share)

100 000

Share capital (SCE)

100 000

Rights issue of shares

The following actual journal entry will be processed in the separate

financial statements of P Ltd:

Dr
Cr

Investment in S Ltd (SFP)

80 000

Bank (SFP) (40 000 shares × R2,00 per share) 80

000

Additional investment in shares of S Ltd

Comment

Similar journals will be processed by the parent (P Ltd) and the subsidiary (S
Ltd) in the next few examples on rights issues, but are not repeated there.

Rights issue by subsidiary with no change in relative

interests (there is no loss of control with the rights issue)

Example 14.3

and no change in status as the subsidiary remains a

subsidiary (NCI is measured at its proportionate share of the

acquiree’s identifiable net assets at the acquisition date)

The following represents the abridged financial statements of P Ltd and its
subsidiary S Ltd on 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd
S Ltd

ASSETS

Inventory

354 000

415 000

Investment in S Ltd: 160 000 shares at cost (150 000 + 80 000) 230 000

Total assets

R584 000

R415 000

EQUITY AND LIABILITIES

Share capital (300 000/200 000 shares)

300 000

250 000

Retained earnings

284 000

165 000

Total equity and liabilities

R584 000

R415 000
288

Changes resulting from the issue of additional shares by investees

STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

500 000

300 000

Cost of sales

(300 000)

(200 000)

Gross profit

200 000

100 000

Other income (dividend received)

16 000

Profit before tax

216 000
100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

136 000

60 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R136 000

R60 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

164 000

125 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

136 000

60 000

Other comprehensive income

Dividend paid: 31/5/20.19

(16 000)

(20 000)

Balance at 31 December 20.19

R284 000

R165 000

Additional information

1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R150 000
when the equity of S Ltd consisted of the following:

Share capital (150 000 shares)

150 000
Retained earnings 30

000

R180 000

2 P Ltd elected to measure non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.

3 S Ltd made a rights issue on 30 June 20.19 of 1 share for every 3 shares
held previously, at R2,00 per share. All the owners of S Ltd took up their
rights in proportion to their existing owners’ equity.

4 S Ltd’s profit after tax for 20.19 accrued evenly.

5 P Ltd accounts for the investment in S Ltd at cost in its separate financial
statements.

6 The company tax rate is 28% and CGT is calculated at 80% thereof.

289

Chapter 14

Comment

The journal entries of the parent (P Ltd) and the subsidiary (S Ltd) were
illustrated in the preceding example. These journals must be reversed upon
consolidation as common items should be eliminated. This reversal is done
in J5 below, after which the adjustment to the non-controlling interests and
the change of ownership, if any, are recognised in equity (IFRS 10.B96).

Solution 14.3

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Non-current assets

Goodwill (parent only)

6 000

Current assets

Inventory (354 000(P) + 415 000(S))

769 000

Total assets

R775 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

300 000

Retained earnings 392

000

Non-controlling interests

83 000

Total equity and liabilities R775

000

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)

Gross profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

168 000

Non-controlling interests (6 000 + 6 000)

12 000

R180 000

Total comprehensive income attributable to:

Owners of the parent

168 000

Non-controlling interests (6 000 + 6 000)

12 000

R180 000

290

Changes resulting from the issue of additional shares by investees P LTD

GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Non-

Share

Retained

con-

Total
Total

capital

earnings

trolling

equity

interests

Balance at 1 January 20.19

300 000

* 240 000

540 000

55 000

595 000

Changes in equity for 20.19

Dividends

(16 000)

(16 000)

(4 000)

(20 000)

Total comprehensive
income for the year:

Profit for the year:

168 000

168 000

12 000

180 000

Rights issue (comment (a))

20 000

20 000

Balance at

31 December 20.19

R300 000 # R392 000 R692 000

R83 000 R775 000

164 000(P) + 76 000(S) = 240 000

#
Test: 284 000(P) + 108 000(S) = 392 000

Comment

a No reserves in respect of the rights issue are allocated to the parent in the
statement of changes in equity as the share capital belonging to the parent
have been eliminated against the consideration paid for the additional shares
acquired by the parent (investment made by P Ltd) (refer to J5). However,
the NCI increased by R20 000 in the process, as these owners contributed
R20 000 in cash to the group.

291

Chapter 14

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%

Total

NCI

At

Since

i At acquisition (1/1/20.17)

Share capital

150 000

120 000

30 000

Retained earnings
30 000

24 000

6 000

180 000

144 000

36 000

Equity represented by goodwill

– Parent

6 000

6 000

Consideration and NCI

186 000

150 000

36 000

ii Since acquisition

• To beginning of current year:

Retained

earnings

(125 000 – 30 000)

95 000

76 000

19 000

• Current year:

Profit:

1/1/20.19–30/6/20.19

(60 000 × 6/12)

30 000

24 000

6 000

Dividend

(20 000)

(16 000)

(4 000)

Owners’ equity before rights issue

291 000

84 000

57 000

Rights issue (30/6/20.19)

Shares
issued

(250 000 – 150 000)

100 000

80 000

20 000

Changes in ownership (equity)

391 000

77 000

Profit:

1/7/20.19–31/12/20.19

30 000

24 000

6 000

R421 000

R108 000

R83 000

292

Changes resulting from the issue of additional shares by investees

Comments
a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To
30/6/20.19 (120 000/150 000 shares in issue)

80%

Since 1/7/20.19 (160 000/200 000 shares in issue)

80%

Consequently,

there

is no loss of control and IFRS 10.23 is thus applicable. The parent’s interest
in the subsidiary did not change (remained 80%) and the parent paid exactly
the same amount (R80 000) as the increase in the parent’s total equity
interest (R80 000). Therefore, there is no gain or loss on a change in
ownership to be recognised directly in equity.

b The profit and the dividend are analysed up to the date of the change in
ownership.

c The exact amount paid by P Ltd and the non-controlling shareholders for
the shares taken up by them respectively (i.e. the amounts paid for the
increase in the total equity for the rights issue) is analysed in the “At” and
“Non-controlling interest”

columns. This approach then resembles the pro forma consolidation journal
entry (see J5) to account for the rights issue and any change in ownership. It
is accepted that there may be different possible methods to incorporate a
rights issue in the analysis. However, the analysis remains only a tool
(calculation) to assist in the consolidation procedure. An alternative
approach for the calculations for a rights issue in the analysis is given in
examples 14.5 and 14.6, which may also be applicable to the other examples
in this chapter.

d The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96):
Fair value of the consideration paid by NCI for new shares issued to them
(20 000)

Amount by which the non-controlling interests are adjusted 20 000

NCI after rights issue ((391 000 – 6 000GW) × 20%)

77 000

NCI before rights issue ((291 000 – 6 000GW) × 20%)

(57 000)

Amount to be recognised directly in equity

e The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspective of the parent): Fair value
of the consideration paid by the parent

(80 000)

Increase in parent’s interest

80 000

Parent’s interest after rights issue

((391 000 – 6 000GW) × 80%) + 6 000GW)

314 000

Parent’s interest before rights issue

((291 000 – 6 000GW) × 80%) + 6 000GW)

(234 000)
Amount to be recognised directly in equity

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 150 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

36 000

186 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(180 000)

Goodwill (parent)

R6 000

293

Chapter 14

C3 Pro forma consolidation journal entries

Dr

Cr

J1 Share

capital (SCE) 150

000

Retained

earnings (SCE)

30 000

Goodwill (SFP) (parent only) 6

000

Non-controlling interests (SFP/SCE)

36 000

Investment in S Ltd (SFP)

150 000

Main elimination journal entry

J2 Retained

earnings – Beginning of year (SCE) 19

000

Non-controlling interests (SFP/SCE)

19 000

Allocation of non-controlling interests’ portion

of retained earnings

J3 Non-controlling interests (P/L) 6

000
Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion

of current year’s profit before the rights issue

J4

Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE) 4

000

Dividend paid (SCE)

20 000

Elimination of intragroup dividend

J5 Share

capital (SCE) 100

000

Non-controlling interests (SFP/SCE)

20 000

Investment in S Ltd (SFP)

80 000

Elimination of rights issue transaction

J6 Non-controlling interests (P/L) 6

000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion

of current year’s profit after the rights issue

2 Increase in parent’s interest

Should the interest of the parent increases as a result of the rights issue, the
attributable reserves at the date of the rights issue must be allocated to the
new parcel of shares, so that it can be eliminated against the consideration
transferred for those shares. The reserves so allocated are yielded by the
owners’ equity of the parent prior to the rights issue as well as by the non-
controlling owners.

294

Changes resulting from the issue of additional shares by investees

Illustrative example of a parent’s owners’ equity increasing

after a rights issue (i.e. the parent takes up more than its

Example 14.4

proportionate share of the new shares on offer in the rights

issue)

P Ltd held 120 000 of S Ltd’s 150 000 issued shares since 20.17. S Ltd made
a rights issue on 30 June 20.19 of 1 share for every 3 shares held and P Ltd
underwrote the rights issue. The non-controlling owners of S Ltd took up
only 4 000 shares, with the result that P Ltd had to take up 46 000 shares
instead of just the 40 000 that it was entitled to originally (based on its
original share ownership).

The increase in P Ltd’s interest from 80% to 83% can be analysed as

follows: Original parcel of shares (120 000/150 000 to 120 000/200 000)
60%

New parcel of shares (46 000/200 000)

23%

P Ltd’s new owners’ equity after the rights issue (166 000/200 000) 83%

As a result, a part of the reserves which pertained to P Ltd’s original owners’

equity as well as to that of the non-controlling interests should be allocated
to the new parcel of shares.

The above scenario may be treated as:

(a) A dilution of the original 80% owners’ equity to 60% due to the rights
issue; and (b) a re-purchase of 20% owners’ equity diluted (i.e. lost) in
respect of the original parcel of shares; and

(c) a purchase of an additional 3% owners’ equity not held before.

Note that in this scenario, IFRS 10.23 should be read very carefully. The
paragraph states that changes in the owners’ equity of a subsidiary that do
not result in the loss of control are accounted for as equity transactions (i.e.
transactions with owners in their capacity as owners). Broadly interpreted,
this means that no goodwill, gain from a bargain purchase, or gain or loss on
a rights issue may be recognised, but any such purchase difference, where
control was not lost in the rights issue, shall be accounted for as an equity
transaction (i.e. directly in equity). As in the examples in the previous
chapter, this equity adjustment, if any, will be done against “changes in
ownership”

directly in equity. Some are of the opinion that this adjustment may also be
processed directly to retained earnings, which is also an acceptable
alternative.
295

Chapter 14

Rights issue by a subsidiary resulting in an increase of the

interest of the parent (control is not lost in the rights issue)

Example 14.5

and the status does not change as the subsidiary remains

a subsidiary (NCI is measured at its proportionate share of

the acquiree’s identifiable net assets at the acquisition date)

The following represents the abridged financial statements of P Ltd and its
subsidiary S Ltd at 31 December 20.19.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Inventory

342 000

415 000

Investment in S Ltd: 166 000 shares at cost (150 000 + 92 000) 242 000

Total assets
R584 000

R415 000

EQUITY AND LIABILITIES

Share capital (300 000/200 000 shares)

300 000

250 000

Retained earnings

284 000

165 000

Total equity and liabilities

R584 000

R415 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

500 000

300 000

Cost of sales
(300 000)

(200 000)

Gross profit

200 000

100 000

Other income (dividend received)

16 000

Profit before tax

216 000

100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

136 000

60 000

Other comprehensive income

–
TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R136 000

R60 000

296

Changes resulting from the issue of additional shares by investees

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

164 000

125 000

Changes in equity for 20.19

Total comprehensive income for the year

Profit for the year

136 000

60 000

Other comprehensive income

–
–

Dividend paid: 31/5/20.19

(16 000)

(20 000)

Balance at 31 December 20.19

R284 000

R165 000

Additional information

1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R150 000
when the equity of S Ltd consisted of the following:

Share capital (150 000 shares)

150 000

Retained earnings 30

000

R180 000

2 On 30 June 20.19 S Ltd made a rights issue of 1 share for every 3 shares
previously held, at R2.00 per share.

3 The rights issue was taken up as follows:

Number of shares

Non-controlling interests

4 000
P Ltd

46 000

4 S Ltd’s profit after tax for 20.19 accrued evenly.

5 P Ltd classified the investment in S Ltd at cost in its separate financial

statements.

6 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.

7 The company tax rate is 28% and CGT is calculated at 80% thereof.

297

Chapter 14

Solution 14.5

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Non-current assets

Goodwill (parent only)

6 000

Current assets

Inventory (342 000(P) + 415 000(S))

757 000

Total assets

R763 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

300 000

Retained earnings

392 900

Other components of equity (changes in ownership)

(450)

692 450

Non-controlling interests

70 550

Total equity

763 000

Total equity and liabilities

R763 000

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)

Gross profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

168 900

Non-controlling interests (6 000 + 5 100)

11 100

R180 000

Total comprehensive income attributable to:

Owners of the parent

168 900

Non-controlling interests (6 000 + 5 100)

11 100

R180 000

298

Changes resulting from the issue of additional shares by investees P LTD

GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Changes

Non-

Share

Retained

in

control-

Total

Total
capital

earnings

owner-

ling

equity

ship

interests

Balance at

1 Jan 20.19

300 000

* 240 000

540 000 § 55 000

595 000

Changes in

equity for 20.19

Dividends

(16 000)

–
(16 000)

(4 000)

(20 000)

Total

comprehensive

income for the

year:

Profit for the year

– 168

900

168 900

11 100

180 000

Rights issue

(450)

(450)

8 450
8 000

Balance at

31 Dec 20.19

R300 000 # R392 900

(R450) R692 450 R70 550 R763 000

164 000(P) + 76 000(S) = 240 000

# 284 000(P) + 108 900(S) = 392 900

§ 36 000 + 19 000 = 55 000

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–83%

Total

NCI

At

Since

i At acquisition (1/1/20.17)

Share

capital

150 000
120 000

30 000

Retained earnings

30 000

24 000

6 000

180 000

144 000

36 000

Equity represented by goodwill

– Parent

6 000

6 000

Consideration and NCI

186 000

150 000

36 000

ii Since acquisition

• To beginning of current year :

Retained

earnings (125 000 – 30 000)

95 000

76 000

19 000

• Current year:

Profit:

1/1/20.19–30/6/20.19

(60 000 × 6/12)

30 000

24 000

6 000

Dividend paid: 31/5/20.19

(20 000)

(16 000)

(4 000)

Owners’

equity before rights issue

291 000

84 000
57 000

Rights issue (30/6/20.19)

Shares issued

100 000

92 000

8 000

Changes in ownership (equity)

(450)

450

391 000

65 450

Profit:

1/7/20.19–31/12/20.19

30 000

24 900

5 100

R421 000

R108 900

R70 550

299
Chapter 14

Comments

a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To

30/6/20.19 (120 000/150 000 shares in issue)

80%

Since 1/7/20.19 (166 000/200 000 issued shares)

83%

Consequently, there is no loss of control. However, there is a change in the

ownership interest that should be recognised directly in equity in terms of
IFRS 10.23.

b The exact amount paid by P Ltd and the non-controlling shareholders for
the shares taken up by them respectively is analysed in the “At” and “Non-
controlling interest”

columns. This approach then resembles the pro forma consolidation journal
entry (see J5) to account for the rights issue and any change in ownership.
An alternative approach for the calculations for a rights issue in the analysis
is given below, which may also be applicable to the other examples in this
chapter.

c The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration paid by NCI for new shares issued to them (8
000)

Amount by which the non-controlling interests are adjusted 8 450

NCI after rights issue ((391 000 – 6 000GW) × 17%)

65 450

NCI before rights issue ((291 000 – 6 000GW) × 20%)

(57 000)

Amount to be recognised directly in equity

R450

The NCI decreased by 3% in this example (from 20% to 17%). Thus the
NCI ceded 3% of its equity to P Ltd’s new parcel of shares. Also remember
that, due to the fact that goodwill was not calculated for the NCI in this
example, there is no equity that is represented by goodwill that should be
reattributed to the parent. Thus, the calculation can also be performed as
follows:

Fair value of the consideration paid by NCI for new shares issued to them (8
000)

Amount by which the non-controlling interests are adjusted 8 450

Previous equity interest held relinquished (57 000 × 3/20) (8 550)

Increased equity attributable to NCI as a result of the rights issue (100 000 ×
17%)

17 000

Amount to be recognised directly in equity

R450

d The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):

Fair value of the consideration paid by the parent for new shares issued (92
000)

Increase in P Ltd owners’ equity through rights issue:

91 550
Owners’ equity held by P Ltd before rights issue

(((291 000 – 6 000GW) × 80%) + 6 000GW)

(234 000)

Owners’ equity held by P Ltd after rights issue

(((391 000 – 6 000GW) × 83%) + 6 000GW)

325 550

Amount to be recognised directly in equity

(R450)

continued

300

Changes resulting from the issue of additional shares by investees The

amount of R450 is the amount paid in excess of the carrying amount of the
interest acquired, being R91 550.

Goodwill

is

excluded from total owners’ equity in the calculation above since, although
it forms part of total owners’ equity, it does not represent 100% of goodwill,
but only the parent’s portion. This is due to the non-controlling interests
being measured at their proportionate share of the acquiree’s identifiable net
assets at the acquisition date. Refer to self-assessment question 1 where the
NCI is measured at fair value, and goodwill is then reattributed to the parent.

e The difference of R450 results from 6 000 new shares additionally taken
up by P Ltd as the issue price is higher than the net asset value of the shares
after the issue ((R385 000/200 000 shares – R2,00) × 6 000 shares).
f When the interest of the parent increases (e.g., 80% – 83%) as a result of a
rights issue, no gain or loss on the rights issue, additional goodwill, or gain
from a bargain purchase can be recognised in terms of IFRS 10.23. Instead,
any difference between the consideration paid for the shares and the increase
in owners’ equity is attributed to changes in ownership directly in equity as
is indicated above.

C1.1 Alternative approach for the rights issue in the analysis P Ltd
80%–83%

Total

NCI

At

Since

Owners’ equity before rights issue

291 000

84 000

57 000

Rights issue (30/6/20.19)

Shares issued (83%:17%)

100 000

83 000

17 000

Transfer from NCI (57 000 × 3/20)

8 550
(8 550)

391 000

91 550

Changes in ownership (equity)

450

Consideration and NCI

92 000

65 450

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 150 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

36 000

186 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(180 000)

Goodwill (parent)

R6 000

301

Chapter 14

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Share capital (SCE)

150 000

Retained earnings (SCE)

30 000

Goodwill (SFP) (parent only)

6 000

Non-controlling interests (SFP/SCE)

36 000

Investment in S Ltd (SFP)

150 000

Main elimination journal entry

J2

Retained earnings – Beginning of year (SCE)

19 000

Non-controlling interests (SFP/SCE)

19 000

Allocation of non-controlling interests’ portion of

retained earnings

J3

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion of

current year’s profit before rights issue

J4

Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE)

4 000

Dividend paid (SCE)

20 000

Elimination of intragroup dividend

J5

Share capital (SCE)

100 000

Changes in ownership (SCE)

450

Non-controlling interests (SFP/SCE) (8 000 + 450)

450

Investment in S Ltd (SFP) (46 000 × R2,00)

92

000

Elimination of rights issue transaction

J6

Non-controlling interests (P/L)

5 100

Non-controlling interests (SFP/SCE)

5 100

Allocation of non-controlling interests’ portion of

current year’s profit after rights issue

3 Reduction in interest of the parent

Should the parent’s interest decrease (without losing control) as a result of a

rights issue, a part of the reserves that was attributed to the previous owners’
equity must be transferred from the parent’s owners’ equity to the non-
controlling interests.
302

Changes resulting from the issue of additional shares by investees

Rights issue by a subsidiary resulting in a decrease of the

interest of the parent (control is not lost in the rights issue)

Example 14.6

and the status does not change as the subsidiary remains a

subsidiary (NCI is measured at fair value at the acquisition

date)

The following represents the abridged financial statements of P Ltd and its
subsidiary S Ltd on 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Inventory

434 000

415 000

Investment in S Ltd: 120 000 shares at cost

150 000

–
Total assets

R584 000

R415 000

EQUITY AND LIABILITIES

Share capital (300 000/200 000 shares)

300 000

250 000

Retained earnings

284 000

165 000

Total equity and liabilities

R584 000

R415 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

500 000

300 000
Cost of sales

(300 000)

(200 000)

Gross profit

200 000

100 000

Other income (dividend received)

16 000

Profit before tax

216 000

100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

136 000

60 000

Other comprehensive income

–
–

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R136 000

R60 000

303

Chapter 14

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

164 000

125 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

136 000

60 000
Other comprehensive income

Dividend paid: 31/5/20.19

(16 000)

(20 000)

Balance at 31 December 20.19

R284 000

R165 000

Additional information

1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17, when the
equity of S Ltd consisted of the following:

Share capital (150 000 shares)

150 000

Retained earnings 30

000

R180 000

The fair value of the non-controlling interests amounted to R36 600 (i.e. 30
000

shares × R1,22 per share) at the acquisition date.

2 On 30 June 20.19, S Ltd made a rights issue of 1 share for every 3 shares
held previously, at R2,00 per share.
3 All shares available in terms of the rights issue were taken up by the non-
controlling interests. P Ltd did not participate in the rights issue at all.

4 S Ltd’s profit after tax for 20.19 accrued evenly.

5 P Ltd classified the investment in S Ltd at cost in its separate financial

statements.

6 P Ltd elected to measure the non-controlling interests at their fair value at

the acquisition date.

7 The company tax rate is 28% and CGT is calculated at 80% thereof.

304

Changes resulting from the issue of additional shares by investees Solution

14.6

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Non-current assets

Goodwill (parent and NCI)

6 600

Current assets

Inventory (434 000(P) + 415 000(S))

849 000
Total assets R855

600

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

300 000

Retained earnings

386 000

Other components of equity (changes in ownership)

1 500

687 500

Non-controlling interests

168 100

Total equity and liabilities R855

600

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)

Gross profit

300 000

Other income

Profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

162 000
Non-controlling interests (6 000 + 12 000)

18 000

R180 000

Total comprehensive income attributable to:

Owners of the parent

162 000

Non-controlling interests (6 000 + 12 000)

18 000

R180 000

305

Chapter 14

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Changes

Non-

Share

Retained

in

Total
Total

controlling

capital

earnings

owner-

equity

interests

ship

Balance at

1 Jan 20.19

300 000

* 240 000

540 000

!55 600

595 600

Changes in

equity for

20.19

Dividends
– (16

000)

(16 000)

(4 000)

(20 000)

Total

compre-

hensive

income for

the year:

Profit for the

year

162 000

162 000

18 000

180 000

Rights issue
–

1 500

1 500

98 500

100 000

Balance at

31 Dec

20.19

R300 000 # R386 000

R1 500

R687 500 R168 100

R855 600

164 000(P) + 76 000(S) = 240 000

36 600 + 19 000 = 55 600

# 284 000(P) + 102 000(S) = 386 000

306

Changes resulting from the issue of additional shares by investees

Calculations
C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–60%

Total

NCI

At

Since

i At acquisition (1/1/20.17)

Share capital

150 000

120 000

30 000

Retained earnings

30 000

24 000

6 000

180 000

144 000

36 000

Equity represented by goodwill

– Parent and NCI

6 600

6 000

600

Consideration and NCI

186 600

150 000

36 600

ii Since acquisition

• To beginning of current year:

Retained

earnings

(125 000 – 30 000)

95 000

76 000

19 000

• Current year:

Profit:

1/1/20.19–30/6/20.19

(60 000 × 6/12)

30 000
24 000

6 000

Dividend paid: 31/5/20.19

(20 000)

(16 000)

(4 000)

291 600

84 000

57 600

Rights issue (30/6/20.19)

Shares issued

100 000

100 000

Changes in ownership (equity)

1 500

(1 500)

391 600

84 000

156 100

Profit:
1/7/20.19–31/12/20.19

30 000

18 000

12 000

R421 600

R102 000

R168 100

307

Chapter 14

Comments

a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To

30/6/20.19 (120 000/150 000 shares in issue)

80%

Since 1/7/20.19 (120 000/200 000 issued shares)

60%

Consequently, there is no loss of control. However, there is a change in the

ownership interest that should be recognised directly in equity in terms of
IFRS 10.23.

b The exact amount paid by P Ltd (Rnil) and the non-controlling

shareholders for the shares taken up by them respectively is analysed in the
“At” and “Non-controlling interest” columns. This approach then resembles
the pro forma consolidation journal entry (see J5) to account for the rights
issue and any change in ownership – see below. An alternative approach for
the calculations for a rights issue in the analysis is given below, which may
also be applicable to the other examples in this chapter.

c The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration paid by NCI for new shares issued to them
(100 000) Amount by which the non-controlling interests are adjusted 98
500

NCI after rights issue ((391 600 – 6 600GW) × 40%) + (600 initial GW of
NCI) + (6 000 GW of parent × 20/80) relinquished to NCI)

156 100

NCI before rights issue ((291 600 – 6 600GW) × 20%+ (600 initial GW

of NCI))

(57 600)

Amount to be recognised directly in equity

(R1 500)

d The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):

Fair value of the consideration paid by the parent for new shares issued

Increase in P Ltd owners’ equity through rights issue (including goodwill

reattributed):

1 500

Owners’ equity held by P Ltd before rights issue

(((291 600 – 6 600GW) × 80%) + 6 000GW)

(234 000)

Owners’ equity held by P Ltd after rights issue

((391 600 – 6 600GW) × 60%) + 6 000GW - (6 000 GW of parent ×

20/80) relinquished to NCI)

235 500

Amount to be recognised directly in equity

R1 500

Note in this case that the equity represented by the goodwill amount now
forms part of the calculations. This is because the NCI is measured at its fair
value at the acquisition date and therefore goodwill is measured for all
owners. With the change in the ownership interest as a result of the right-
issue, P Ltd effectively relinquished some of its goodwill to the non-
controlling interests. This approach is explained in more detail in chapter
13.3.

308

Changes resulting from the issue of additional shares by investees C1.1

Alternative approach for the rights issue in the analysis

P Ltd 80%–60%

Total

NCI

At

Since

Owners’ equity before rights issue

291 600
84 000

57 600

Rights issue (30/6/20.19)

Shares issued (60%:40%) (1)

100 000

39 000

21 000

40 000

Transfer to NCI (2)

(36 000)

(21 000)

57 000

Goodwill reattributed to NCI (3)

(1 500)

1 500

391 600

1 500

Changes in ownership (equity)

(1 500)

Consideration and NCI

–

156 100

(1) 100 000 × 60% (thus new ownership interest) = 60 000; allocated 39 000
and 21 000

Although the parent did not take up any shares, it is nonetheless still entitled
to a portion of the new equity because of its existing ownership interest in
the ratio of ownership interest after the rights were exercised. This “bonus”
serves as compensation for the equity lost (ceded) to the non-controlling
interests.

(2) 144 000 × 20/80 = 36 000; 84 000 × 20/80 = 21 000

(3) 6 000 × 20/80 = 1 500

Comments

A gain (R1 500) results from the parent’s new ownership interest, as the
parent’s new attributable equity (R60 000) is higher than the equity and
goodwill ceded to the non-controlling interests (R36 000 + R21 000 + R1
500 = R58 500). This gain is to be treated in terms of IFRS 10.23 – i.e. taken
directly to equity, as the parent (P Ltd) does not relinquish control over S
Ltd. Although P Ltd’s interest decreased from 80% to 60%, its actual
ownership interest increased with R1 500.

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 150 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

36 600

186 600

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)
(180 000)

Goodwill (parent and NCI)

R6 600

309

Chapter 14

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Share capital (SCE)

150 000

Retained earnings (SCE)

30 000

Goodwill (SFP) (parent and NCI)

6 600

Non-controlling interests (SFP/SCE)

36 600

Investment in S Ltd (SFP)

150 000

Main elimination journal entry

J2

Retained earnings – Beginning of year (SCE)

19 000

Non-controlling interests (SFP/SCE)

19 000

Allocation of non-controlling interests’ portion of

retained earnings

J3

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion of

current year’s profit before rights issue

J4

Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE)

4 000

Dividend paid (SCE)

20 000

Elimination of intragroup dividend

J5

Share capital (SCE)

100 000

Non-controlling interests (SFP/SCE) (100 000 – 1 500)

98 500

Changes in ownership (equity) (SCE)

1 500

Elimination of rights issue transaction

J6

Non-controlling interests (P/L)

12 000

Non-controlling interests (SFP/SCE)

12 000

Allocation of non-controlling interests’ portion of

current year’s profit after rights issue

4 Obtaining or losing control as a result of a rights issue by subsidiary In

the previous examples, the rights issues of the subsidiary did not result in a
loss of control. In terms of IFRS 10.23 such transactions between equity
participants are recognised within equity. In some instances, a rights issue by
an investee (e.g. an associate or joint venture) may lead to the investor
gaining control. In such case the investor would treat the acquisition of the
subsidiary as a business combination.

The same principles (refer to IFRS 3) would be followed as was discussed in

chapter 9

and chapter 13 (e.g., in cases where the associate or joint venture would
become a 310

Changes resulting from the issue of additional shares by investees

subsidiary). A rights issue of a subsidiary may also lead to the parent losing
control over the subsidiary. The same principles (refer to IFRS 10.25 and
B98) would be followed as was discussed in chapter 13 (e.g. where the
subsidiary would become an associate).

Buy-back of shares

14.3 Buy-back of shares by a subsidiary

Entities sometimes buy back their issued share capital from the existing
owners to avoid issuing new shares or to avoid amending their authorised
share capital. These shares might be required by the entity for issue in
employee-share participation schemes, for share-based payment transactions
in terms of IFRS 2 Share-based Payment, or for many more similar
transactions.

This section is not as complex as the section dealing with rights issues. This
is because the parent receives cash back from the subsidiary for the shares
bought back by the subsidiary and is not “reimbursed” by means of “new
equity” in terms of a rights issue for giving up reserves. A gain or loss on the
share buy-back for the group should, however, still be calculated under
certain circumstances. This is done by applying the method used in the
previous chapter. It should still be borne in mind that those share buy-back
transactions leading to a change in ownership but not resulting in the loss
of control should be treated as equity transactions (i.e. transactions with
owners in their capacity as owners) in terms of IFRS 10.23. Furthermore, it
should be noted that where there is a loss of control due to a share buy-back
transaction, such loss of control is regarded as a significant event in terms of
IFRS 10.BCZ180–183, and in most cases leads to the remeasurement, at fair
value, of the remaining investment in the investee in terms of IFRS 10.25(b).
Note that this principle also applies to the loss of significant influence or
joint control where the retained interest is a financial asset (IAS 28.22(b)).
The situation is similar to the principles dealt with under the disposal of an
interest in an entity as was illustrated in the previous chapter.

The following summarises the approach:

l Share buy-back with no loss of control:

gain or loss to be treated as equity transaction (i.e. changes in ownership)

and no remeasurement of remaining investment at the date of the share buy-
back; l Share buy-back with no loss of significant influence or joint control:
gain or loss to be recognised as gain or loss on share buy-back in profit or
loss and no remeasurement of remaining investment at the date of the share
buy-back; l Share buy-back with a loss of control, significant influence or
joint control: gain or loss recognised as gain or loss on share buy-back in
profit or loss in terms of IFRS 10.25(b) and IAS 28.22(b). Any remaining
investment is remeasured at fair value at the date of loss of control,
significant influence or joint control; and l Share buy-back in which investor
obtains control, significant influence or joint control:

the previously held investment is measured at its fair value (IFRS 3.42 and
IAS 28.26). The acquisition of control is accounted for as a business
combination (goodwill or gain from a bargain purchase is recognised).

311

Chapter 14

The journal entry processed in the separate financial statements of the

parent is similar to a normal journal entry to recognise the disposal of an
equity investment (i.e.
shares in another company) in the accounting records. The parent’s entries
for the sale of shares in another company depend on the accounting policy
adopted for the treatment of its investment in a subsidiary, an associate or
joint venture (i.e. at cost or in accordance with IFRS 9 – see chapter 13.7):

l Investment is measured at cost:

The parent debits the bank account with the cash received and credits the
investment with the historical cost price of the shares bought back. The
difference between these two items constitutes a gain or loss on share buy-
back which is recognised in profit or loss (this is the gain/loss in the parent’s
separate financial statements and will not be the same as the gain/loss at
group level).

l Investment is measured in accordance with IFRS 9: If the fair value

method is used to measure the investment in the separate financial
statements of the parent, it is assumed (for this chapter) that the parent will
remeasure its investment to fair value through other comprehensive income.
The investment would then be remeasured to fair value (taking the
consideration received for the shares bought back into account). The parent
debits the bank account with the cash received and credits the investment
with this fair value of the shares bought back. The parent then transfers the
cumulative fair value adjustments on these shares (after tax) from the mark-
to-market reserve (if this policy was chosen) to another equity item
(assumed to be the retained earnings).

The journal entry arising in the parent’s separate financial statements will
be reversed upon consolidation where control was not lost or obtained and
the true fair value of the shares bought back by the investee will be taken
into account (similar to the journal entry when the parent disposes of an
interest in a subsidiary, where the parent’s initial gain/loss on disposal or the
transfer within equity, is replaced by the correct gain/loss on disposal at
group level, which takes into account the equity and/or reserves relinquished
in the transaction).

The shares bought back by an investee (subsidiary, associate of joint

venture) are referred to as “treasury shares” in terms of IAS 32.33–.34.
When an entity reacquires its own equity shares, those shares shall be
deducted from equity (share capital and retained earnings). No gain or loss
on the buy-back of shares shall be recognised in profit or loss in the entity’s
separate financial statements. The amount of treasury shares held is
disclosed separately either in the statement of financial position, statement of
changes in equity or in the notes, in accordance with IAS 1. Disclosure in
accordance with IAS 24 Related Party Disclosures is also required if the
entity reacquires its own shares from related parties (e.g. the parent).

Example 14.7

Simple illustration of a share buy-back

Assume the equity of S Ltd is composed as follows at 31 December 20.18:

R’000

Share capital (100 000 shares issued at R1,50 each at incorporation) 150

Retained earnings 2

000

2 150

312

Changes resulting from the issue of additional shares by investees On 31

December 20.18, S Ltd buys back 10 000 shares from its parent (P Ltd) at a
cash price of R20.00 per share. P Ltd paid R3,00 per share when it invested
in 50 000

shares of S Ltd on 1 January 20.12. The company tax rate is 28% and CGT
is calculated at 80% thereof.

Solution 14.7

(a) P Ltd measures the investment in S Ltd at cost in its separate financial
statements in terms of IAS 27.

The
actual journal entry to recognise the share buy-back in the separate
financial statements of the parent will be:

Dr

Cr

J1 Bank

(SFP)

(10 000 × R20,00 per share)

200 000

Investment at cost price (SFP)

(10/50 × (50 000 × R3,00 per share)) 30

000

Gain on share buy-back (P/L)

170 000

Recording proceeds and profit on sale of shares

J2

Income tax expense (P/L) (170 000 × 80% × 28%)

38 080

SARS

tax
payable/Bank (SFP)

38 080

Capital gains tax (current tax) payable on disposal

of shares

(b) P Ltd measures the investment in S Ltd in accordance with IFRS 9 in its
separate financial statements (per choice in terms of IAS 27).

P Ltd remeasures its investment to R1 000 000 (50 000 shares × R20)
through other comprehensive income and recognises the related deferred tax.
The actual journal entry to recognise the share buy-back in the separate
financial statements of the parent will be:

Dr

Cr

J1 Bank

(SFP)

(10 000 × R20,00 per share) 200

000

Investment at fair value (SFP)

200 000

Recording proceeds on sale of shares

J2
Income tax expense (P/L) (170 000 × 80% × 28%) 38

080

SARS

tax

payable/Bank (SFP)

38 080

Capital gains tax (current tax) payable on disposal

of shares

J3

Mark-to-market reserve (SCE)

(10 000 × (R20 – R3) × 77,6%) 131

920

Retained earnings (SCE)

131 920

Transfer of cumulative gains within equity

on portion of investment sold

J4 Deferred

tax

(SFP)

(170 000 × 80% × 28%) 38

080

Income tax expense (P/L)

38 080

Movement in deferred tax on investment

derecognised

313

Chapter 14

Comment

All these respective journal entries by the parent (except for the cash
received and the entry to recognise the current tax payable) must be reversed
upon consolidation, where control of a subsidiary is not obtained or lost (i.e.
the subsidiary remains a subsidiary after the share buy-back).

The journal entry in the individual financial statements of the investee (S

Ltd) will depend on the way in which the investee utilises its reserves to buy
back the shares (mostly due to tax reasons which are beyond the scope of
this work).

In the above-mentioned example, the actual journal entry to recognise the

share buyback in the individual financial statements of the investee is: Dr

Cr

Share capital (SCE) (10 000/100 000 × R150 000 share capital) 15 000

Retained earnings (SCE) (balancing)

185 000
Bank (SFP) (10 000 × R20,00 per share)

200 000

Recording of share buy-back transaction

1 No change in parent’s interest

The only new principle in this section is the recognition of the journal entry
by the investee to adjust its own equity in respect of the buy-back
information. Note that the debits per the journal entry (as above) are
processed in the total column of the analysis of ownership interest. This is
logical, as the investee is reducing its own equity by the amount of the share
capital bought back, as well as the premium (additional amount over and
above share capital) paid on the buy-back of the shares, which is funded
from other reserves (e.g. retained earnings). Once again, these adjustments
have to be allocated to the parent and the non-controlling interests.

Buy-back of shares by a subsidiary with no change in

relative interests (there is no loss of control) (NCI is

Example 14.8

measured at its proportionate share of the acquiree’s

identifiable net assets at the acquisition date)

The following are the abridged financial statements of P Ltd and its
subsidiary S Ltd at 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS
Inventory

484 000

265 000

Investment in S Ltd at cost (220 000 – 44 000)

176 000

Total assets

R660 000

R265 000

EQUITY AND LIABILITIES

Share capital (300 000/120 000 shares)

300 000

200 000

Retained earnings

360 000

65 000

Total equity and liabilities

R660 000

R265 000

314
Changes resulting from the issue of additional shares by investees
STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

500 000

300 000

Cost of sales

(300 000)

(200 000)

Gross profit

200 000

100 000

Other income (gain on buy-back of shares)

76 000

Other income (dividend received)

16 000

–
Profit before tax

292 000

100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

212 000

60 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R212 000

R60 000

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained earnings

P Ltd

S Ltd
Balance at 1 January 20.19

164 000

125 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

212 000

60 000

Dividend paid: 31 May 20.19

(16 000)

(20 000)

Buy-back of shares

(100 000)

Balance at 31 December 20.19

R360 000

R65 000

Additional information

1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R220 000,
when the equity of S Ltd consisted of the following:

Share capital (150 000 shares)

250 000

Retained earnings 30

000

R280 000

2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 each. The
shares were bought back proportionally from all owners, i.e. 24 000 shares
were bought back from P Ltd, while the remaining 6 000 shares were bought
back from the non-controlling interests.

315

Chapter 14

3 S Ltd’s profit and tax accrued as follows for 20.19:

1/1/20.19 to 1/7/20.19 to

Total

30/6/20.19 31/12/20.19

Profit before tax

100 000

52 000

48 000

Tax

(40 000)

(22 000)

(18 000)
R60 000

R30 000

R30 000

4 P Ltd accounted for the investment in S Ltd at cost in its separate financial
statements.

5 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.

6 Ignore any tax consequences for S Ltd in respect of the share buy-back.

7 The company tax rate is 28% and CGT is calculated at 80% thereof.

From the information provided, it is evident that the following actual journal
entry was processed in the separate financial statements of P Ltd: Dr Cr

RR

Bank (SFP) (24 000 shares × R5,00 per share) 120

000

Investment in S Ltd (SFP) (1)

44 000

Gain on buy-back of shares (P/L)

76 000

Recording proceeds and profit on sale of shares

(1) 24 000/120 000 × 220 000 = 44 000 or 176 000 × 24 000/96 000

From the information provided, it is also evident that the following actual
journal entry was processed in the individual financial statements of S Ltd:
Dr Cr
RR

Share capital (SCE) (30 000/150 000 shares × R250 000)

50 000

Retained earnings (SCE) (balancing)

100 000

Bank

(SFP)

(30 000 shares × R5 per share)

150

000

Recording of share buy-back transaction

Comment

These journals must be reversed upon consolidation of the parent (P Ltd) and
the subsidiary (S Ltd), as the share buy-back represents an intragroup
transaction between P Ltd and S Ltd at group level as S Ltd is a subsidiary
of P Ltd. This reversal (i.e. elimination of common items) is done in J6
below, after which the adjustment to non-controlling interests and the change
of ownership, if any, are recognised in equity (IFRS 10.B96).

316

Changes resulting from the issue of additional shares by investees Solution

14.8

The consolidated financial statements of P Ltd and its subsidiary S Ltd for
the year ended 31 December 20.19 will be prepared as follows:

P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Current assets

Inventory (484 000(P) + 265 000(S))

749 000

Total assets

R749 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital (P)

300 000

Retained earnings (360 000(P) – 76 000(J6) profit reversed + 4 000(J1) gain

from a bargain purchase + 108 000(S) analysis) 396

000

696 000

Non-controlling interests

53 000

Total equity

749 000

Total equity and liabilities

R749 000

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)

Gross profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

168 000

Non-controlling interests (6 000 + 6 000)

12 000

R180 000

Total comprehensive income attributable to:

Owners of the parent

168 000

Non-controlling interests (6 000 + 6 000)

12 000

R180 000

317

Chapter 14

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Non-

Share

Retained

con-
Total

Total

capital

earnings

trolling

equity

interests

Balance at

1 January 20.19

300 000 * 244 000

544 000

! 75 000

619 000

Changes in equity

for 20.19

Dividends

(16 000)

(16 000)

(4 000)
(20 000)

Total comprehensive

income

for

the

year:

Profit for the year

168 000

168 000

^ 12 000

180 000

Share buy-back (@)

– $ (30 000)

(30 000)

Balance at

31 December 20.19

R300 000 R396 000 R696 000

R53 000 R749 000

164 000(P) + 76 000(S) + 4 000(bargain gain) = 244 000

56 000 + 19 000 = 75 000

6 000(before buy-back) + 6 000(after buy-back) = 12 000

$ 6 000 shares × R5 = 30 000 (see analysis)

@ See comment below

Comments

The share capital and retained earnings affected by the share buy-back in
respect of the parent (P Ltd), have all been eliminated on a pro-forma basis
at group level as the share buy-back transaction represents an intragroup
transaction between the parent (P Ltd) and the subsidiary (S Ltd). The
parent’s interest in the subsidiary did not change (remained 80%) and there
is no gain or loss on a change in ownership to be recognised directly in
equity.

318

Changes resulting from the issue of additional shares by investees

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%

Total

NCI
At

Since

i At acquisition (1/1/20.17)

Share capital

250 000

200 000

50 000

Retained earnings

30 000

24 000

6 000

280 000

224 000

56 000

Gain from a bargain purchase

– Parent

(4 000)

(4 000)

Consideration and NCI

276 000

220 000

56 000

ii Since acquisition

• To beginning of current year:

Retained

earnings

(125 000 – 30 000)

95 000

76 000

19 000

• Current year:

Profit:

1/1/20.19–30/6/20.19 (given)

30 000

24 000

6 000

Dividend: 31/5/20.19

(20 000)

(16 000)
(4 000)

381 000

84 000

77 000

Share buy-back

Share capital and retained earnings

utilised (100 000 + 50 000)

(150 000) (120 000)

(30 000)

231 000

47 000

Profit:

1/7/20.19–31/12/20.19 (given)

30 000

24 000

6 000

R261 000

R108 000

R53 000

319
Chapter 14

Comments

a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To

30/6/20.19 (120 000/150 000 shares in issue)

80%

Since 1/7/20.19 ((120 000 – 24 000)/(150 000 – 30 000) shares in issue)

80%

No change in ownership interest or loss of control is evident.

b The exact amount received by P Ltd and the non-controlling shareholders

for the shares bought back from them respectively is analysed in the “At”
and “Non-controlling interest” columns. P Ltd received R120 000 (24 000
shares × R5) and NCI received R30 000 (6 000 shares × R5). This approach
then resembles the pro forma consolidation journal entry (see J6) to account
for the buy-back and any change in ownership. The alternative approach for
the calculations for a rights issue in the analysis may also be applicable to
the examples on buy-back of shares in this chapter.

c The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration received by NCI for shares bought back (6
000 shares × R5)

30 000

Amount by which the non-controlling interests are adjusted (30 000)

NCI after buy-back ((231 000 + 4 000) × 20%)

47 000

NCI before buy-back ((381 000 + 4 000) × 20%)

(77 000)
Amount to be recognised directly in equity

d The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):

Fair value of the consideration received by parent for shares bought back (24
000 shares × R5)

120 000

Decrease in P Ltd owners’ equity through buy-back:

(120 000)

Owners’ equity held by P Ltd before buy-back ((381 000 + 4 000) × 80%)
(308 000) Owners’ equity held by P Ltd after buy-back ((231 000 + 4 000) ×
80%) 188 000

Amount to be recognised directly in equity

C2 Proof of calculation of gain from a bargain purchase in terms of

IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 220 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

56 000

276 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(280 000)
Gain from a bargain purchase (parent)

(R4 000)

320

Changes resulting from the issue of additional shares by investees C3 Pro

forma consolidation journal entries

Dr

Cr

J1

Share capital (SCE)

250 000

Retained earnings (SCE)

30 000

Investment in S Ltd (SFP)

220 000

Retained earnings (SCE)

(gain from a bargain purchase)

4 000

Non-controlling interests (SFP/SCE)

56 000
Main elimination journal entry at acquisition date

J2

Retained earnings (SCE)

19 000

Non-controlling interests (SFP/SCE)

19 000

Allocation of non-controlling interests’ portion

of retained earnings

J3

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion

of current year’s profit before buy-back

J4

Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE)

4 000
Dividend paid (SCE)

20 000

Elimination of intragroup dividend

J5

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion

of current year’s profit after buy-back

J6

Non-controlling interests (SFP/SCE)

30 000

Investment in S Ltd (reverse over-elimination)

44 000

Other income (gain on buy-back) (P)(P/L)

76 000

Share capital (SCE)

50 000

Retained earnings (SCE)

100 000

Changes in ownership (equity) (SCE)

Elimination of share buy-back transaction

321

Chapter 14

Comments

a Note that pro forma consolidation journal entries are processed in

chronological order. The historic cost price of the investment in S Ltd (as per
P Ltd’s separate financial statements) is only R176 000 after the recognition
of the share buy-back.

The investment in S Ltd at R220 000 (in J1) is therefore “over-eliminated”

in order to determine the gain from the bargain purchase and to keep the
amount for the gain constant as at the acquisition date. J6 therefore
subsequently corrects the over-elimination caused by J1.

Thus the following happens to the investment in S Ltd on consolidation:

176 000 (given) – 220 000(J1) + 44 000(J6) = Rnil.

b J6 is the journal entry that deals with the buy-back of the shares. Note that
the debit processed by P Ltd (R120 000) in its separate financial statements
is not reversed, as the cash value received for the shares does not change due
to consolidation. The cost of the shares bought back (per P Ltd’s separate
financial statements) is replaced by the fair value of the shares bought back
(in the group), thereby accounting for the changes in ownership account in
respect of the buy-back at group level.

The credit side of the journal entry re-establishes the share capital and
retained earnings due to the chronological order in which the journal entries
take place (as explained previously).
Remember that S Ltd reduced (debited) the share capital and the retained
earnings

by means of an actual journal entry (as discussed above) in its individual

financial statements. This leaves, for example, a share capital of R200 000
(250 000 – 50 000

= R200 000 as given in the statement of financial position of S Ltd) flowing

into the consolidation. “At-acquisition” information (that cannot
subsequently change because of the effect that such a change would have on
goodwill/gain from a bargain purchase at acquisition) dictates that share
capital of R250 000 be debited (refer to J1). Yet only R200 000 flowed into
the consolidation from S Ltd. Thus the share capital has been over-
eliminated and J6 must therefore be processed to correct this over-
elimination.

Thus the following happens to the share capital of S Ltd on consolidation:

200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.

2 Increase in parent’s interest

A parent’s percentage interest in an existing subsidiary may increase as a

result of the share buy-back. Where the subsidiary remains a subsidiary
(parent is not obtaining control), the buy-back transaction by both the parent
and subsidiary will effectively be reversed upon consolidation and the effect
of the transaction will be recognised within equity in the consolidated
financial statements (IFRS 10.23).

322

Changes resulting from the issue of additional shares by investees

Buy-back of shares by a subsidiary with no change in status

as an increase in the parent’s interest occurs (there is no

Example 14.9

loss of control) and the subsidiary remains a subsidiary

(NCI is measured at its proportionate share of the acquiree’s

identifiable net assets at the acquisition date)

The following are the abridged financial statements of P Ltd and its
subsidiary S Ltd at 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Inventory

484 000

265 000

Investment in S Ltd at cost (200 000 – 33 333)

166 667

Total assets

R650 667

R265 000

EQUITY AND LIABILITIES

Share capital (300 000/120 000 shares)

300 000
200 000

Retained earnings

350 667

65 000

Total equity and liabilities

R650 667

R265 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

500 000

300 000

Cost of sales

(300 000)

(200 000)

Gross profit

200 000

100 000
Other income (gain on the buy-back of shares)

66 667

Other income (dividend received)

16 000

Profit before tax

282 667

100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

202 667

60 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R202 667
R60 000

323

Chapter 14

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

164 000

125 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

202 667

60 000

Dividend paid: 31 May 20.19

(16 000)

(20 000)
Buy-back of shares

(100 000)

Balance at 31 December 20.19

R350 667

R65 000

Additional information

1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R200 000,
when the equity of S Ltd consisted of the following:

Share capital (150 000 shares)

250 000

Retained earnings 30

000

R280 000

2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 per share. 20
000 of these shares were bought back from P Ltd, while the other 10 000
were bought back from the non-controlling interests.

3 S Ltd’s profit before tax and tax accrued as follows for 20.19: 1/1/20.19 to
1/7/20.19 to

Total

30/6/20.19 31/12/20.19

Profit before tax

100 000

52 000

48 000

Tax

(40 000)

(22 000)

(18 000)

R60 000

R30 000

R30 000

4 P Ltd accounted for the investment in S Ltd at cost in its separate financial
statements.

5 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.

6 Ignore any tax consequences for S Ltd in respect of the share buy-back.

7 The company tax rate is 28% and CGT is calculated at 80% thereof.

From the information provided, it is evident that the following actual journal
entry was processed in the separate financial statements of P Ltd: Dr

Cr

Bank (SFP) (20 000 shares × R5,00 per share)

100 000

Investment in S Ltd (SFP)(1)

33 333

Gain on buy-back of shares (P/L)

66 667

Recording proceeds and profit on sale of shares

(1) 20 000/120 000 × 200 000 = 33 333

324

Changes resulting from the issue of additional shares by investees From the
information provided, it is also evident that the following actual journal
entry was processed in the individual financial statements of S Ltd: Dr Cr

RR

Share capital (SCE) (30 000/150 000 shares × R250 000)

50 000

Retained earnings (SCE) (balancing)

100 000

Bank (SFP) (30 000 shares × R5 per share)

150

000

Recording of share buy-back transaction

Comment
These journals must be reversed (i.e. elimination of common items) upon
consolidation of the parent (P Ltd) and the subsidiary (S Ltd), as the share
buy-back represents an intragroup transaction between P Ltd and S Ltd at
group level.

Solution 14.9

The consolidated financial statements of P Ltd and subsidiary S Ltd for the
year ended 31 December 20.19 will be prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Current assets

Inventory (484 000(P) + 265 000(S))

749 000

Total assets

R749 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital (P)

300 000

Retained earnings (350 667(P) – 66 667(J6) profit reversed + 24 000(J1)

gain from a bargain purchase + 109 000(S) analysis)

417 000
Other components of equity (changes in ownership)

(12 167)

704 833

Non-controlling interests

44 167

Total equity

749 000

Total equity and liabilities

R749 000

325

Chapter 14

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)

Gross profit
300 000

Other income (no gain on buy-back is recognised here)

Profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

169 000

Non-controlling interests (6 000 + 5 000)

11 000

R180 000

Total comprehensive income attributable to:

Owners of the parent

169 000

Non-controlling interests (6 000 + 5 000)

11 000

R180 000

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Changes

Non-

Share

Retained

in

con-

Total

Total

capital

earnings

owner-

trolling
equity

ship

interests

Balance at

1 January 20.19

300 000 * 264 000

564 000

! 75 000

639 000

Changes in equity

for 20.19

Dividends

(16 000)

(16 000)

(4 000)

(20 000)

Total comprehensive
income for the

year:

Profit for the year

169 000

169 000

11 000

180 000

Share buy-back

(12 167)

(12 167) # (37 833)

(50 000)

Balance at

31 Dec 20.19

R300 000 R417 000 (R12 167) R704 833

R44 167 R749 000

*
164 000(P) + 76 000(S) + 24 000(gain from a bargain purchase) = 264 000

56 000 + 19 000 = 75 000

# 10 000 shares × R5 = 50 000; 50 000 – 12 167 = 37 833 or 77 000 – 39

167 = 37 833 (see analysis) 326

Changes resulting from the issue of additional shares by investees

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–83,33%

Total

NCI

At

Since

i At acquisition (1/1/20.17)

Share

capital

250 000

200 000

50 000

Retained earnings

30 000
24 000

6 000

280 000

224 000

56 000

Gain from a bargain purchase

– Parent

(24 000)

(24 000)

Consideration and NCI

256 000

200 000

56 000

ii Since acquisition

• To beginning of current year:

Retained earnings

(125 000 – 30 000)

95 000

76 000
19 000

Current

year:

• Profit: 1/1/20.19–30/6/20.19

(given)

30 000

24 000

6 000

Dividend: 31/5/20.19

(20 000)

(16 000)

(4 000)

361 000

84 000

77 000

Share buy-back

Share capital and retained

earnings utilised (100 000 + 50 000)

(comment (b))

(150 000)
(100 000)

(50 000)

Changes in ownership (equity)

(12 167)

12 167

211 000

39 167

Profit: 1/7/20.19–31/12/20.19

30 000

25 000

5 000

R241 000

R109 000

R44 167

327

Chapter 14

Comments

a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To

30/6/20.19 (120 000/150 000 shares in issue)

80%
Since 1/7/20.19 ((120 000 – 20 000)/(150 000 – 30 000) shares in issue)
83,33%

Consequently there is no loss of control. However, there is a change in the

ownership interest that should be recognised directly in equity in terms of
IFRS 10.23. The parent’s ownership interest in the subsidiary increased as
the subsidiary bought back fewer shares from the parent company than from
the other owners (i.e. the buy-back does not take place in the same
proportion as the existing ownership).

b The exact amount received by P Ltd and the non-controlling shareholders

for the shares bought back from them respectively is analysed in the “At”
and “Non-controlling interest” columns. P Ltd received R100 000 (20 000
shares × R5) and NCI received R50 000 (10 000 shares × R5). This approach
then resembles the pro forma consolidation journal entry (see J6) to account
for the buy-back and any change in ownership. An alternative approach for
the calculations for the buy-back of shares in the analysis is given below,
which may also be applicable to the other examples in this chapter.

c The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration received by NCI for shares bought back (10
000 shares × R5)

50 000

Amount by which the non-controlling interests are adjusted (37 833)

NCI after buy-back ((211 000 + 24 000) × 16,667%)

39 167

NCI before buy-back ((361 000 + 24 000) × 20%)

(77 000)

Amount to be recognised directly in equity

R12 167
d The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):

Fair value of the consideration received by parent for shares bought back (20
000 shares × R5)

100 000

Decrease in P Ltd owners’ equity through buy-back:

(112 167)

Owners’ equity held by P Ltd before buy-back ((361 000 + 24 000) × 80%)
(308 000) Owners’ equity held by P Ltd after buy-back

((211 000 + 24 000) × 83,33%)

195 833

Amount to be recognised directly in equity

(R12 167)

328

Changes resulting from the issue of additional shares by investees C1.1

Alternative approach for the buy-back of shares in the analysis

P Ltd 80%–83,33%

Total

NCI

At

Since

Owner’s equity before buy-back

361 000

84 000

77 000

Share buy-back

Equity reduced with buy-back

(83,33:16.67%)

(150 000) (125 000)

(25 000)

Transfer from NCI (77 000 × 3,33/20)

12 833

(12 833)

211 000 (112 167)

Changes in ownership (equity)

12 167

Consideration received and NCI

(100 000)

39 167

C2 Proof of calculation of gain from a bargain purchase in terms of

IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 200 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

56 000

256 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(280 000)

Gain from a bargain purchase (parent)

(R24 000)

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Share capital (SCE)

250 000

Retained earnings (SCE)

30 000

Investment in S Ltd (SFP)

200 000

Retained earnings (SCE)

(gain from a bargain purchase)

24 000

Non-controlling interests (SFP/SCE)

56 000

Main elimination journal entry at the acquisition

date

J2

Retained earnings (SCE)

19 000

Non-controlling interests (SFP/SCE)

19 000

Allocation on non-controlling interests’ portion

of retained earnings

J3

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion

of current year’s profit before buy-back

J4
Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE)

4 000

Dividend paid (SCE)

20 000

Elimination of intragroup dividend

continued

329

Chapter 14

Dr

Cr

J5

Non-controlling interests (P/L)

5 000

Non-controlling interests (SFP/SCE)

5 000

Allocation of non-controlling interests’ portion

of current year’s profit after buy-back

J6

Non-controlling interests (SFP/SCE) (50 000 – 12 167) 37

833

Investment in S Ltd (reverse over-elimination) 33

333

Gain on share buy-back (P)(P/L)

66 667

Changes in ownership (equity) (SCE)

12 167

Share capital (SCE)

50 000

Retained earnings (SCE)

100 000

Elimination of share buy-back transaction

Comments

a Note that pro forma consolidation journal entries are processed in

chronological order. The historic cost price of the investment in S Ltd (as per
P Ltd’s separate financial statements) is only R166 667 after the recognition
of the share buy-back.

The investment in S Ltd at R200 000 (in J1) is therefore “over-eliminated”

in order to determine the gain from the bargain purchase and to keep the
amount for the gain constant as at the acquisition date. J6 therefore
subsequently corrects the over-elimination caused by J1.

Thus the following happens to the investment in S

Ltd on consolidation:

166 667 (given) – 200 000(J1) + 33 333(J6) = Rnil.

b J6 is the journal entry that deals with the buy-back of the shares. Note that
the debit processed by P Ltd (R100 000) in its separate financial statements
is not reversed, as the cash value received for the shares does not change due
to consolidation. The cost of the shares bought back (per P Ltd’s separate
financial statements) is replaced by the fair value of the shares bought back
(in the group), thereby accounting for the changes in ownership account in
respect of the buy-back at group level.

The credit side of the journal entry re-establishes the share capital and
retained earnings due to the chronological order in which the journal entries
take place (as explained previously).

Remember that S Ltd reduced (debited) the share capital and the retained
earnings

by means of an actual journal entry (as discussed above) in its individual

financial statements. This leaves, for example, a share capital of R200 000
(250 000 – 50 000

= R200 000 as given in the statement of financial position of S Ltd) flowing

into the consolidation. “At-acquisition” information (that cannot
subsequently change because of the effect that such a change would have on
goodwill/gain from a bargain purchase at acquisition) dictates that share
capital of R250 000 be debited (refer to J1). Yet only R200 000 flowed into
the consolidation from S Ltd. Thus the share capital has been over-
eliminated and J6 must therefore be processed to correct this over-
elimination.

Thus the following happens to the share capital of S Ltd on consolidation:

200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.
330

Changes resulting from the issue of additional shares by investees 3

Decrease in parent’s interest

A parent’s percentage interest in an existing subsidiary may decrease as a

result of the share buy-back. Where the subsidiary remains a subsidiary
(control is not lost), the buyback transaction by both the parent and
subsidiary will effectively be reversed upon consolidation and the effect of
the transaction will be recognised within equity in the consolidated financial
statements (IFRS 10.23).

Buy-back of shares by a subsidiary where there is no change

in the status as the subsidiary remains a subsidiary (there is

Example 14.10

no loss of control) and a decrease in the parent’s interest

occurs due to the share buy-back (NCI is measured at fair

value at the acquisition date)

The following are the abridged financial statements of P Ltd and its
subsidiary S Ltd at 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Inventory

484 000
265 000

Investment in S Ltd at cost (240 000 – 56 000)

184 000

Total assets

R668 000

R265 000

EQUITY AND LIABILITIES

Share capital (300 000/120 000 shares)

300 000

200 000

Retained earnings

368 000

65 000

Total equity and liabilities

R668 000

R265 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd
S Ltd

Revenue

500 000

300 000

Cost of sales

(300 000)

(200 000)

Gross profit

200 000

100 000

Other income (gain on buy-back of shares)

84 000

Other income (dividend received)

16 000

Profit before tax

300 000

100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

220 000

60 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R220 000

R60 000

331

Chapter 14

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

164 000

125 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

220 000

60 000

Dividend paid: 31 May 20.19

(16 000)

(20 000)

Buy-back of shares

(100 000)

Balance at 31 December 20.19

R368 000

R65 000

Additional information

1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R240 000,
when the equity of S Ltd consisted of the following:

Share capital (150 000 shares)

250 000
Retained earnings 30

000

R280 000

The fair value of the NCI was R60 000 at the date of acquisition.

2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 per share. 28
000 of these shares were bought back from P Ltd, while the remaining 2 000
shares were bought back from the non-controlling interests.

3 S Ltd’s profit before tax and tax accrued as follows for 20.19: 1/1/20.19 to
1/7/20.19 to

Total

30/6/20.19 31/12/20.19

Profit before tax

100 000

52 000

48 000

Tax

(40 000)

(22 000)

(18 000)

R60 000

R30 000

R30 000
4 P Ltd accounted for the investment in S Ltd at cost in its separate financial
statements.

5 P Ltd elected to measure the non-controlling interests at their fair value at

the acquisition date.

6 Ignore any tax consequences for S Ltd in respect of the share buy-back.

7 The company tax rate is 28% and CGT is calculated at 80% thereof.

From the information provided, it is evident that the following actual journal
entry was processed in the separate financial statements of P Ltd: Dr

Cr

Bank (SFP) (28 000 shares × R5,00 per share)

140 000

Investment in S Ltd (SFP)(1)

56 000

Gain on buy-back of shares (P/L)

84 000

Recording proceeds and profit on sale of shares

(1) 28 000/120 000 × 240 000 = 56 000, or 28 000/92 000 × 184 000 = 56
000

332

Changes resulting from the issue of additional shares by investees From the
information provided, it is also evident that the following actual journal
entry was processed in the individual financial statements of S Ltd: Dr Cr

RR

Share capital (SCE) (30 000/150 000 shares × R250 000)

50 000

Retained earnings (SCE) (balancing)

100 000

Bank (SFP) (30 000 shares × R5 per share)

150

000

Recording of share buy-back transaction

Comment

These journals must be reversed (i.e. elimination of common items) upon

consolidation of the parent (P Ltd) and the subsidiary (S Ltd), as the share
buy-back represents an intragroup transaction between P Ltd and S Ltd at
group level.

Solution 14.10

The consolidated financial statements of P Ltd and subsidiary S Ltd for the
year ended 31 December 20.19 will be prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS
Non-current assets

Goodwill (parent and NCI) (comment (a))

20 000

Current assets

Inventory (484 000(P) + 265 000(S)) 749

000

Total assets

R769 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital (P) 300

000

Retained earnings

(368 000(P) – 84 000(J6) profit reversed + 107 000(S) analysis) 391

000

Other components of equity (changes in ownership)

11 500

702 500

Non-controlling interests

66 500
Total equity

769 000

Total equity and liabilities

R769 000

333

Chapter 14

Comment

Note that goodwill is not realised, as control is not relinquished by the parent
(P Ltd) in this example. Goodwill is however reattributed proportionately to
the NCI in this example, because of the decrease in the ownership interest of
the parent (P Ltd) and the NCI being measured at fair value at the acquisition
date (i.e. goodwill was calculated for the NCI and for the parent (P Ltd)). In
the previous examples, this was not the case, and goodwill was not
reattributed from P Ltd to the NCI as the NCI was not measured at fair value
at the acquisition date (meaning that goodwill was not calculated for all
owners at the acquisition date).

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)
Gross profit before tax

300 000

Other income (no gain on buy-back is recognised here)

Profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income –

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

167 000

Non-controlling interests (6 000 + 7 000)

13 000

R180 000

Total comprehensive income attributable to:

Owners of the parent

167 000

Non-controlling interests (6 000 + 7 000)

13 000

R180 000

334

Changes resulting from the issue of additional shares by investees P LTD

GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Changes

Non-

Share

Retained

in

Total

Total

controlling

capital

earnings

owner-
equity

interests

ship

Balance at

1 Jan 20.19

300 000 # 240 000

540 000

! 79 000

619 000

Changes in

equity for

20.19

Dividends

– (16

000)

(16 000)

(4 000)

(20 000)
Total

comprehensive

income for the

year:

Profit for the year

– 167

000

167 000 @ 13 000

180 000

Share buy-back

11 500

11 500 * (21 500)

(10 000)

Balance at

31 Dec 20.19

R300 000 R391 000

R11 500 R702 500

R66 500

R769 000

# 164 000(P) + 76 000(S) = 240 000

60 000 + 19 000 = 79 000

@ 6 000(before buy-back) + 7 000(after buy-back) = 13 000

10 000 + 11 500 = 21 500(see analysis)

335

Chapter 14

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–76,67%

Total

NCI

At

Since

i At acquisition (1/1/20.17)

Share

capital
250 000

200 000

50 000

Retained earnings

30 000

24 000

6 000

280 000

224 000

56 000

Equity represented by goodwill

– Parent and NCI

20 000

16 000

4 000

Consideration and NCI

300 000

240 000

60 000

ii Since acquisition
• To beginning of current year:

Retained earnings

(125 000 – 30 000)

95 000

76 000

19 000

• Current year:

Profit:

1/1/20.19–30/6/20.19

30 000

24 000

6 000

Dividend: 31/5/20.19

(20 000)

(16 000)

(4 000)

405 000

84 000

81 000

Share buy-back
Share capital and retained

earnings utilised

(100 000 + 50 000) (comment (b))

(150 000)

(140 000)

(10 000)

Changes in ownership (equity)

11 500

(11 500)

255 000

59 500

Profit: 1/7/20.19–31/12/20.19

30 000

23 000

7 000

R285 000

R107 000

R66 500

336

Changes resulting from the issue of additional shares by investees

Comments
a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To
30/6/20.19 (120 000/150 000 shares in issue)

80%

Since 1/7/20.19 ((120 000 – 28 000)/(150 000 – 30 000) shares in issue)

76,67%

Consequently, there is no loss of control. However, there is a change in the

ownership interest that should be recognised directly in equity in terms of
IFRS 10.23. The parent’s ownership interest in the subsidiary decreased as
the subsidiary bought back more shares from the parent company than from
the other owners (i.e. the buy-back does not take place in the same
proportion as the existing ownership).

b The exact amount received by P Ltd and the non-controlling shareholders

for the shares bought back from them respectively is analysed in the “At”
and “Non-controlling interest” columns. P Ltd received R140 000 (28 000
shares × R5) and NCI received R10 000 (2 000 shares × R5). This approach
then resembles the pro forma consolidation journal entry (see J6) to account
for the buy-back and any change in ownership.

c The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration received by NCI for shares bought back (2
000 shares × R5)

10 000

Amount by which the non-controlling interests are adjusted (21 500)

NCI after buy-back ((255 000 – 20 000GW) × 23,33%) + (4 000 initial GW

of NCI) + (16 000 GW of parent × 3,33/80) relinquished to NCI) 59 500

NCI before buy-back ((405 000 – 20 000GW) × 20%) + (4 000 initial GW of

NCI)

(81 000)
Amount to be recognised directly in equity

(R11 500)

The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):

Fair value of the consideration received by parent for shares bought back (28
000 shares × R5)

140 000

Decrease in P Ltd owners’ equity through buy-back:

(128 500)

Owners’ equity held by P Ltd before buy-back

(((405 000 – 20 000GW) × 80%) + 16 000GW)

(324 000)

Owners’ equity held by P Ltd after buy-back

(((255 000 – 20 000GW) × 76,67%) + 16 000GW – (16 000 GW of 195 500

parent × 3,33/80) relinquished to NCI)

Amount to be recognised directly in equity

R11 500

Note in this case that the equity represented by the goodwill figure now
forms part of the calculations. This is because the NCI is measured at its fair
value at the acquisition date and therefore goodwill is measured for all
owners. With the change in the ownership interest as a result of the buy-
back, P Ltd effectively relinquished some of its goodwill to the non-
controlling interests.

337
Chapter 14

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 240 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

60 000

300 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(280 000)

Goodwill (parent and NCI)

R20 000

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Share capital (SCE)

250 000

Retained earnings (SCE)

30 000
Goodwill (SFP) (parent and NCI)

20 000

Investment in S Ltd (SFP)

240 000

Non-controlling interests (SFP/SCE)

60 000

Main elimination journal entry at the acquisition

date

J2

Retained earnings (SCE)

19 000

Non-controlling interests (SFP/SCE)

19 000

Allocation of non-controlling interests’ portion

of retained earnings

J3

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000
Allocation of non-controlling interests’ portion

of current year’s profit before buy-back

J4

Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE)

4 000

Dividend paid (SCE)

20 000

Elimination of intragroup dividend

J5

Non-controlling interests (P/L)

7 000

Non-controlling interests (SFP/SCE)

7 000

Allocation of non-controlling interests’ portion

of current year’s profit after buy-back

J6

Non-controlling interests (SFP/SCE) (10 000 + 11 500) 21

500
Investment in S Ltd (SCE) (reverse over-elimination)

56 000

Other income (gain on share buy-back) (P)(P/L)

84 000

Share capital (SCE)

50 000

Retained earnings (SCE)

100 000

Changes in ownership (equity) (SCE)

11 500

Elimination of share buy-back transaction

338

Changes resulting from the issue of additional shares by investees

Comments

a Note that pro forma consolidation journal entries are processed in

chronological order. The historic cost price of the investment in S Ltd (as per
P Ltd’s separate financial statements) is only R184 000 after the recognition
of the share buy-back.

The investment in S Ltd at R240 000 (in J1) is therefore “over-eliminated”

in order to determine the goodwill and to keep the amount for the goodwill
constant as at the acquisition date. J6 therefore subsequently corrects the
over-elimination caused by J1.

Thus the following happens to the investment in S

Ltd on consolidation:

184 000 (given) – 240 000(J1) + 56 000(J6) = Rnil.

b J6 is the journal entry that deals with the buy-back of the shares. Note that
the debit processed by P Ltd (R140 000) in its separate financial statements
is not reversed, as the cash value received for the shares does not change due
to consolidation. The cost of the shares bought back (per P Ltd’s separate
financial statements) is replaced by the fair value of the shares bought back
(in the group), thereby accounting for the changes in ownership account in
respect of the buy-back at group level.

The credit side of the journal entry re-establishes the share capital and
retained earnings due to the chronological order in which the journal entries
take place (as explained previously).

Remember that S Ltd reduced (debited) the share capital and the retained
earnings

by means of an actual journal entry (as discussed above) in its individual

financial statements. This leaves, for example, a share capital of R200 000
(250 000 – 50 000

= R200 000 as given in the statement of financial position of S Ltd) flowing

into the consolidation. “At-acquisition” information (that cannot
subsequently change because of the effect that such a change would have on
goodwill/gain from a bargain purchase at acquisition) dictates that share
capital of R250 000 be debited (refer to J1). Yet only R200 000 flowed into
the consolidation from S Ltd. Thus the share capital has been over-
eliminated and J6 must therefore be processed to correct this over-
elimination.

Thus the following happens to the share capital of S Ltd on consolidation:

200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.

4 Obtaining or losing control as a result of a share buy-back In the

previous examples, the share buy-back of the subsidiary did not result in a
loss of control. In terms of IFRS 10.23 such transactions between equity
participants are recognised within equity. In some instances, a rights issue by
an investee (e.g. an associate or joint venture) may lead to the investor
gaining control. In such case the investor would treat the acquisition of the
subsidiary as a business combination. The same principles (refer to IFRS 3)
would be followed as was discussed in chapter 9 and chapter 13 (e.g., in
cases where the associate or joint venture would become a subsidiary). A
share buy-back of a subsidiary may also lead to the parent losing control
over the subsidiary. The same principles (refer to IFRS 10.25 and B98)
would be followed as was discussed in chapter 13 (e.g. where the subsidiary
would become an associate).

339

Chapter 14

Other changes in ownership

14.4 Share-based payments of a subsidiary

In terms of a typical share-based payment transaction a subsidiary may grant

shares or options to its employees. When the new shares are issued to the
employees, the total number of issued shares will increase, but the number of
shares held by the parent will stay the same. This will lead to a decline in the
parent’s equity interest in the subsidiary, which should be accounted for by
applying the same principles as was illustrated previously.

Issue of new shares by a subsidiary in terms of a share-

based payment transaction resulting in a decrease of the

interest of the parent (control is not lost) and the status does

Example 14.11

not change as the subsidiary remains a subsidiary (NCI is

measured at its proportionate share of the acquiree’s

identifiable net assets at the acquisition date)

The following represents the abridged financial statements of P Ltd and its
subsidiary S Ltd on 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Inventory

434 000

415 000

Investment in S Ltd: 120 000 shares at cost

150 000

Total assets

R584 000

R415 000

EQUITY AND LIABILITIES

Share capital (300 000/200 000 shares)

300 000

270 000

Retained earnings
284 000

145 000

Total equity and liabilities

R584 000

R415 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

500 000

300 000

Cost of sales

(300 000)

(200 000)

Gross profit

200 000

100 000

Other income (dividend received)

16 000
–

Profit before tax

216 000

100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

136 000

60 000

Other comprehensive income for the year

––

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R136 000

R60 000

340

Changes resulting from the issue of additional shares by investees

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings
P Ltd

S Ltd

Balance at 1 January 20.19

164 000

105 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

136 000

60 000

Dividend paid: 31/5/20.19

(16 000)

(20 000)

Balance at 31 December 20.19

R284 000

R145 000

Additional information

1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17, when the
equity of S Ltd consisted of the following:

Share capital (150 000 shares)

150 000
Retained earnings 30

000

R180 000

2 On 1 January 20.18 S Ltd granted options to its employees conditional

upon one year’s service. The vesting date was 31 December 20.18. The
exercise price was set at R2.00 per share. On 31 December 20.18, 50 000
options vested and S Ltd recorded R20 000 in equity in terms of IFRS 2
Share-based Payment.

3 On 30 June 20.19 the employees of S Ltd exercised all their options. S Ltd
passed the following journal entry:

Dr Cr

Bank (SFP) (50 000 options × R2,00 each)

100 000

Share-based payment reserve (transfer within equity)

20 000

Share capital

120 000

Issue of shares after employees exercised their options 4 S Ltd’s profit

after tax for 20.19 accrued evenly.

5 P Ltd accounted for the investment in S Ltd at cost in its separate financial
statements.
6 P Ltd elected to measure the non-controlling interests at their proportionate
share of the acquiree’s identifiable net assets at the acquisition date.

7 The company tax rate is 28% and CGT is calculated at 80% thereof.

341

Chapter 14

Solution 14.11

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Non-current assets

Goodwill (parent)

6 000

Current assets

Inventory (434 000(P) + 415 000(S))

849 000

Total assets R855

000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

300 000

Retained earnings 370

000

Other components of equity (changes in ownership)

19 000

689 000

Non-controlling interests

166 000

Total equity and liabilities R855

000

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)
Gross profit

300 000

Other income

Profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

162 000

Non-controlling interests (6 000 + 12 000)

18 000

R180 000
Total comprehensive income attributable to:

Owners of the parent

162 000

Non-controlling interests (6 000 + 12 000)

18 000

R180 000

342

Changes resulting from the issue of additional shares by investees P LTD

GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Changes

Non-

Share

Retained

in

Total

Total

controlling

capital

earnings
owner-

equity

interests

ship

Balance at

1 Jan 20.19

300 000

* 224 000

524 000

! 71 000

595 000

Changes in

equity for

20.19

Dividends

(16 000)

(16 000)
(4 000)

(20 000)

Total compre-

hensive

income for the

year:

Profit for the year

– 162

000

162 000

18 000

180 000

Options exer-

cised and new

issue

19 000

19 000
$ 81 000

100 000

Balance at

31 Dec 20.19

R300 000 # R370 000

R19 000 R689 000 R166 000 R855 000

164 000(P) + 60 000(S) = 224 000

36 000 + 15 000 + 20 000 = 71 000

284 000(P) + 86 000(S) = 370 000

$ See

J6

343

Chapter 14

Calculations

C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–60%

Total
NCI

At

Since

i At acquisition (1/1/20.17)

Share capital

150 000

120 000

30 000

Retained earnings

30 000

24 000

6 000

180 000

144 000

36 000

Equity represented by goodwill

– Parent

6 000

6 000

–
Consideration and NCI

186 000

150 000

36 000

ii Since acquisition

• To beginning of current year:

Retained

earnings

(105 000 – 30 000)

75 000

60 000

15 000

Share-based payment

(comment (b))

20 000

– 20

000

• Current year:

Profit:

1/1/20.19–30/6/20.19
(60 000 × 6/12)

30 000

24 000

6 000

Dividend paid: 31/5/20.19

(20 000)

(16 000)

(4 000)

291 000

68 000

73 000

Options exercised (30/6/20.19)

Shares issued

120 000

120 000

Equity transferred

(20 000)

(20 000)

Changes in ownership (equity)

(comment (d) and (e))

19 000

(19 000)

391 000

68 000

154 000

Profit:

1/7/20.19–31/12/20.19

30 000

18 000

12 000

R421 000

R86 000

R166 000

344

Changes resulting from the issue of additional shares by investees

Comments

a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To

30/6/20.19 (120 000/150 000 shares in issue)

80%

Since 1/7/20.19 (120 000/200 000 issued shares)

60%
Consequently there is no loss of control. However, there is a change in the
ownership interest that should be recognised directly in equity in terms of
IFRS 10.23.

b S Ltd granted options to its employees in terms of the share-based payment

transaction. These options (equity) are not held by the parent (P Ltd) and are
therefore analysed in the column for the “non-controlling interests”. These
options represent other equity instruments held only by the employees (not
the parent).

Similar to the treatment of preferences shares (refer to chapter 6 of this

work), a separate analysis could have been prepared for these equity
instruments.

c The exact amount paid by P Ltd (Rnil) and the non-controlling

shareholders for the shares taken up by them respectively is analysed in the
“At” and “Non-controlling interest” columns. This approach then resembles
the pro forma consolidation journal entry (see J6) to account for the issue of
shares and any change in ownership – see below.

d The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration paid by NCI for new shares issued to them
(R100 000 cash)

(100 000)

Amount by which the non-controlling interests are adjusted 81 000

NCI after transaction ((391 000 – 6 000GW) × 40%)

154 000

NCI before transaction ((291 000 – 6 000GW – 20 000) × 20% +

(20 000 share-based payment))

(73 000)
Amount to be recognised directly in equity

(R19 000)

e The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):

Fair value of the consideration paid by the parent for new shares issued

Increase in P Ltd owners’ equity through new issue:

19 000

Owners’ equity held by P Ltd before issue

(((291 000 – 6 000GW – 20 000) × 80%) + 6 000GW)

(218 000)

Owners’ equity held by P Ltd after issue

(((391 000 – 6 000GW) × 60%) + 6 000GW)

237 000

Amount to be recognised directly in equity

R19 000

345

Chapter 14

C1.1 Alternative approach for analysis

P Ltd 80%–60%

Total
NCI

At

Since

Owner’s equity before share issue

291 000

68 000

73 000

Options exercised (30/6/20.19)

Equity transferred

(20 000)

(20 000)

Changes in ownership:

– Equity relinquished (1)

(36 000)

(17 000)

53 000

– Compensation by sharing

in new equity (2)

120 000

55 000
17 000

48 000

391 000

19 000

Changes in ownership (equity)

(see comment below)

(19

000)

Consideration and NCI

R154 000

(1) 144 000 × 20/80 = 36 000; 68 000 × 20/80 = 17 000

(2) 120 000 × 60% (thus new ownership interest) = 72 000; allocated 55 000
and 17 000

Although the parent did not take up any shares, it is nonetheless still entitled
to a portion of the new equity because of its existing ownership interest in
the ratio of ownership interest after the issue of the new shares (i.e. 60:40).
This “bonus” serves as compensation for the equity lost (ceded) to the non-
controlling interests.

Comment

A gain (R19 000) results from the parent’s new ownership interest, as the
parent’s new attributable equity (R72 000) is higher than the equity ceded to
the non-controlling interests (R36 000 + R17 000 = R53 000). This gain is to
be treated in terms of IFRS 10.23 – i.e. taken directly to equity, as the parent
(P Ltd) does not relinquish control over S Ltd. Although P Ltd’s interest
decreased from 80% to 60%, its actual ownership interest increased with
R19 000.

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 150 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

36 000

186 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(180 000)

Goodwill (parent)

R6 000

346

Changes resulting from the issue of additional shares by investees C3 Pro

forma consolidation journal entries

Dr

Cr

J1

Share capital (SCE)

150 000

Retained

earnings (SCE)

30 000

Goodwill (SFP) (parent)

6 000

Non-controlling interests (SFP/SCE)

36 000

Investment in S Ltd (SFP)

150 000

Main elimination journal entry

J2

Retained earnings – Beginning of year (SCE)

15 000

Non-controlling interests (SFP/SCE)

15 000

Allocation of non-controlling interests’ portion of

retained earnings

J3

Share-based payment reserve – Beginning of year

(SCE) 20

000

Non-controlling interests (SFP/SCE)

20 000

Allocation of non-controlling interests’ portion of the share-based

payment recognised in equity

J4

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion of

current year’s profit before options exercised

J5

Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE)

4 000

Dividend paid (SCE)

20 000

Elimination of intragroup dividend

J6

Share capital (SCE)

120 000

Share-based payment reserve

(transfer within equity) (SCE)

20 000

Non-controlling interests (SFP/SCE)

(120 000 – 20 000 – 19 000) 81

000

Changes in ownership (equity) (SCE)

19 000

Elimination of option exercised and new shares

issued, resulting in change in ownership interest

J7 Non-controlling interests (P/L)

12 000

Non-controlling interests (SFP/SCE)

12 000

Allocation of non-controlling interests’ portion of

current year’s profit after new issue

14.5 Loss of control through expiry of an agreement and obtaining

control through an agreement

There may be various circumstances in which a parent may control a

subsidiary in terms of IFRS 10. Control can, for example, exist when the
parent owns half or less of the voting power of an entity but enjoys power
over more than half of the voting rights by virtue of an agreement with other
investors (IFRS 10.11). IFRS 3.43–.44 also stipulates that a business
combination (gaining control) can be effected without the transfer of any
consideration and/or by virtue of an agreement.

347

Chapter 14

A parent may lose control of a subsidiary with or without a change in

absolute or relative ownership levels. Loss of control can result from the sale
of an ownership interest to other parties (see chapter 13) or by other means,
such as when a subsidiary, for example, issues new shares to other parties
(see previous sections of this chapter).

Loss of control can also occur in the absence of a transaction. It may, for
example, occur on the expiry of an agreement that previously allowed an
entity to control a subsidiary (also see IFRS 10.BCZ180).

Loss of control over a subsidiary on expiry of agreement

Example 14.12

(NCI is measured at fair value at the acquisition date)

P Ltd had control over S Ltd through an agreement with other shareholders.
The following represents the abridged financial statements of P Ltd and its
subsidiary S Ltd on 31 December 20.19:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd
S Ltd

ASSETS

Inventory

725 000

300 000

Investment in S Ltd: 30 000 shares at cost

55 000

Total assets

R780 000

R300 000

EQUITY AND LIABILITIES

Share capital (300 000/100 000 shares)

300 000

100 000

Retained earnings

480 000

200 000

Total equity and liabilities

R780 000
R300 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

600 000

400 000

Cost of sales

(250 000)

(300 000)

Profit before tax

350 000

100 000

Income tax expense

(170 000)

(50 000)

PROFIT FOR THE YEAR

180 000

50 000
Other comprehensive income for the year

––

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

R50 000

348

Changes resulting from the issue of additional shares by investees

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

300 000

150 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

180 000

50 000
Balance at 31 December 20.19

R480 000

R200 000

Additional information

1 P Ltd acquired 30 000 shares in S Ltd on 1 January 20.17, when the equity
of S Ltd consisted of the following:

Share capital

100 000

Retained earnings 80

000

R180 000

2 P Ltd accounted for the investment in S Ltd at cost in its separate financial
statements.

3 P Ltd elected to measure the non-controlling interests at their fair value at

the acquisition date. The fair value of the non-controlling interests at the
acquisition date was R130 000.

4 On 1 January 20.17, P Ltd signed an agreement with one of the other

shareholders (with 25% interest) whereby P Ltd became entitled to control
its vote at a shareholders’ meeting. P Ltd was not an agent of the other
shareholder and did not act on his behalf. P Ltd thus gained control over S
Ltd as P Ltd has 55% of the voting rights.

5 This agreement expired on 31 December 20.19. From this date P Ltd no

longer enjoyed control over S Ltd. The fair value of the investment by P Ltd
in S Ltd was R95 000 at the date when control was lost. After 31 December
20.19 P Ltd accounts for its investment in S Ltd as an associate.
6 The company tax rate is 28% and CGT is calculated at 80% thereof.

349

Chapter 14

Solution 14.12

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Non-current assets

Goodwill

Investment in associate (55 000(cost) + 40 000(J1)) 95

000

95 000

Current assets

Inventory (725 000(P)) 725

000

Total assets

R820 000
EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

300 000

Retained earnings 520

000

Non-controlling interests

Total equity and liabilities R820

000

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (600 000(P) + 400 000(S))

1 000 000

Cost of sales (250 000(P) + 300 000(S))

(550 000)

Gross profit

450 000
Other income (gain on loss of control)

4 000

Share of profit of associate

Profit before tax

454 000

Income tax expense (170 000(P) + 50 000(S)) (220

000)

PROFIT FOR THE YEAR

234 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R234 000

Profit attributable to:

Owners of the parent

199 000

Non-controlling interests

35 000

R234 000
Total comprehensive income attributable to:

Owners of the parent

199 000

Non-controlling interests

35 000

R234 000

350

Changes resulting from the issue of additional shares by investees P LTD

GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Non-

Share

Retained

control-

Total

Total

capital

earnings

ling

equity
interests

Balance at 1 January 20.19

300 000

* 321 000

621 000

179 000

800 000

Changes in equity for 20.19

Total comprehensive

income for the year:

Profit for the year

199 000

199 000

35 000

234 000

Control over subsidiary lost

– (214 000) (214 000)

Balance at

31 December 20.19

R300 000 # R520 000 R820 000

– R820 000

300 000(P) + 21 000(S) = 321 000

Test: 480 000(P) + 40 000(S) = 520 000

Calculations

C1 Analysis of the owners’ equity of S Ltd – as subsidiary

P Ltd 30%

Total

NCI

At

Since

i At acquisition (1/1/20.17)

Share capital

100 000

30 000

70 000
Retained earnings

80 000

24 000

56 000

180 000

54 000

126 000

Equity represented by goodwill

– Parent and NCI

5 000

1 000

4 000

Consideration and NCI

185 000

55 000

130 000

ii Since acquisition

• To beginning of current year:

Retained

earnings
(150 000 – 80 000)

70 000

21 000

49 000

• Current year: Profit

50 000

15 000

35 000

305 000

36 000

214 000

Loss of control over subsidiary:

Derecognition of assets (including

goodwill), liabilities and NCI

(IFRS 10.B98(a))

(305 000)

(55 000)

(36 000)

(214 000)

–
–

351

Chapter 14

C1 Analysis of the owners’ equity of A Ltd – as associate

P Ltd 30%

Total

NCI

At

Since

i At acquisition

Recognise remaining interest at fair

value

316 667

95 000

n/a

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 55 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

130 000

185 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(180 000)

Goodwill (parent and NCI)

R5 000

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in S Ltd (SFP) (95 000 fair value – cost of

R55 000 in separate financial statements of P Ltd)

40 000

Gain on disposal of interest (P)(P/L)

Cost of sales (P/L) (comment (a))

300 000

Non-controlling interests (P/L) (full year) (comment (a)) 35

000

Income tax expense (P/L) (comment (a))

50 000

Revenue (P/L) (comment (a))

400

000

Retained earnings – Beginning of year (SCE)

21 000

Gain on disposal of interest (group context) (P/L)

Gain on disposal of interest (group context) (P/L)

(Remeasurement gain) (IFRS 10.25))

4 000

Consolidation of subsidiary for full year and recogni-

tion of loss of control

J2 Non-controlling interests (SFP/SCE) (derecognised) 214

000

Non-controlling interests (SFP/SCE)

(opening balance in equity) (130 000 + 49 000)

179 000
Non-controlling interests (SFP/SCE)

(Current year’s interest in profit)

35 000

Accounting for various line items of non-controlling

interests in equity for S Ltd

352

Changes resulting from the issue of additional shares by investees

Comments

a Note that S Ltd was a subsidiary of P Ltd for the full year. Since S Ltd was
not a subsidiary of P Ltd at the reporting date, S Ltd’s separate financial
statements will not be combined with those of the parent (P Ltd) as a starting
point for consolidation.

This means that the results for S Ltd would have to be journalised into the
consolidation, as is seen in the pro forma consolidation journal entry above.

b Even though P Ltd did not dispose of any shares in S Ltd, it lost control
over S Ltd through expiry of the agreement by which P Ltd controlled S Ltd.
The gain or loss on the disposal of the interest would be calculated as
follows, using IFRS 10.B98: Derecognise assets (including goodwill) and
liabilities on date control is lost (300 000 other net assets + 5 000 goodwill)
(IFRS 10.B98(a)) (305 000)

Derecognise non-controlling interests (IFRS 10.B98(a))

214 000

Net asset value attributable to parent derecognised

(91 000)
Fair value of consideration received recognised (i.e. cash received) (IFRS
10.B98(b))

Recognise fair value of investment in former subsidiary retained (IFRS

10.B98(b))

95 000

Net gain on disposal of interest (group context) (IFRS 10.B98(d))

attributable to the owners of the parent

R4 000

The amount of R4 000 only comprises the fair value remeasurement of the
retained interest, because P Ltd did not dispose of any shares in S Ltd c
Remeasurement of investment retained in terms of IFRS 10.25: Fair value of
retained 30% investment in former subsidiary (given) (IFRS 10.25(b))

95 000

Carrying amount of retained 30% investment in former subsidiary (55 000 +

36 000) (analysis))

(91 000)

Remeasurement (gain) to be recognised in profit or loss (refer to J1) R4 000

d To obtain continuity between the amounts of the current and previous

periods’

consolidated statements of profit or loss and other comprehensive income,

the gain of R0 (per the separate financial statements of the parent) is
included in the current period’s consolidated statement of profit or loss and
other comprehensive income and the consolidated statement of changes in
equity, as follows: Included in opening consolidated retained earnings at the
beginning of the period
21 000

Included in profit for the current period (*) as various line items 15 000

36 000

Group’s net gain in the consolidated statement of profit or loss and other
comprehensive income (comment (b) above)

4 000

Adjustment of carrying amount of the investment to fair value (40 000)

Gain on disposal of interest per separate records of P Ltd Rnil

This approach is also evident from J1 above where the investment in S Ltd is
increased with R40 000 (fair value of R95 000 less cost price of R55 000
still contained in the separate financial statements of P Ltd), the amount
profit according to P Ltd is reversed (Rnil in this example) and replaced by
the parent’s portion of the retained earnings at the beginning of the period,
the various line items in profit or loss and the group’s profit on the loss of
control over the subsidiary.

e The R15 000(*) is taken up in the consolidated statement of profit or loss

and other comprehensive income by adding R50 000 to the profit of the
group, and by adding (thereafter) R35 000 to the non-controlling interests.

353

Chapter 14

Obtaining control through an agreement where an associate

becomes a subsidiary (NCI is measured at its proportionate

Example 14.13

share of the acquiree’s identifiable net assets at the

acquisition date)

On 31 December 20.12 the following summarised financial information

relating to P Ltd and other subsidiaries (consolidated) and S Ltd is supplied:
SUMMARISED FINANCIAL INFORMATION AS AT 31 DECEMBER
20.12

Ltd

and sub-

sidiaries

S Ltd

(consoli-

dated)

DEBITS

Property, plant and equipment

57 500

9 000

Investment in S Ltd at cost:

8 000 shares purchased on 1/1/20.1 (consideration)

8 000

Inventory

144 500
31 000

Cost of sales (*)

8 000

3 000

Income tax expense (*)

2 000

1 000

R220 000

R44 000

CREDITS

Share capital (150 000/20 000 shares)

150 000

20 000

Retained earnings: 1/1/20.12

50 000

5 000

Sundry liabilities (including deferred tax)

9 000

Revenue (*)
20 000

10 000

R220 000

R44 000

(*) Accrued/incurred

evenly

Additional information

1P

Ltd acquired 8

000 shares in S

Ltd at the incorporation of S

Ltd on

1 January 20.11. On 30 April 20.12, P Ltd signed an agreement with one of

the other shareholders whereby P Ltd can exercise another 30% of the voting
rights at a meeting. P Ltd is not an agent of the other shareholder and does
not act on his behalf. P Ltd thereby obtained control of S Ltd in terms of
IFRS 10.

2 At the acquisition date (i.e. the date on which P Ltd obtained control of S
Ltd), the assets and liabilities of S Ltd were regarded as a fair reflection in
terms of the requirements of IFRS 3, except for land for which the fair value
was R548 more than its carrying amount. The acquisition-date fair value of
P Ltd’s previously held equity interest was R11 100.

3 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.
4 P Ltd accounts for all investments in associates in accordance with the
equity method in its consolidated financial statements, as none of the
exceptions in IAS 28.13 applies.

354

Changes resulting from the issue of additional shares by investees 5 P Ltd

measures the investment in S Ltd at cost in its separate financial statements.

6 The company tax rate is 28% and CGT is calculated at 80% thereof.

Solution 14.13

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.12

ASSETS

Non-current assets

Property, plant and equipment (57 500(P) + 9 000(S) + 548 (J4)) 67 048

Goodwill (parent)

130

67 178

Current assets

Inventory (144 500(P) + 31 000(S)) 175

500
Total assets R242

678

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

150 000

Retained earnings

64 700

214 700

Non-controlling interests (S) 18

855

Total equity

233 555

Liabilities (9 000(S) + 123 (J4))

9 123

Total equity and liabilities R242

678

355

Chapter 14

P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.12

Revenue (20 000(P) + 10 000(S) – 3 333(J5))

26 667

Cost of sales (8 000(P) + 3 000(S) – 1 000(J5))

(10 000)

Gross profit

16 667

Other income (remeasurement gain) (J3)

300

Share of profit of associate (J2)

800

Profit before tax

17 767

Income tax expense (2 000(P) + 1 000(S) – 333(J5)) (2

667)

PROFIT FOR THE YEAR

15 100

Other comprehensive income

–

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R15 100

Profit attributable to:

Owners of the parent

12 700

Non-controlling interests (last eight months of current period) (J6) 2 400

R15 100

Total comprehensive income attributable to:

Owners of the parent

12 700

Non-controlling interests (last eight months of current period) (J6) 2 400

R15 100

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.12

Non-

Share

Retained

Total
Total

controlling

capital

earnings

equity

interests

Balance at

1 January 20.12

150 000

* 52 000

202 000

– 202

000

Changes in equity

for 20.12

Acquisition

of subsidiary

–
16 455

16 455

Total comprehensive

income for the year:

Profit for the year

12 700

12 700

2 400

15 100

Balance at

31 December 20.12

R150 000

R64 700

R214 700

R18 855

R233 555

50 000(P) + 2 000(S) = 52 000

356
Changes resulting from the issue of additional shares by investees
Calculations

C1 Analysis of the owners’ equity of S Ltd – as associate

P Ltd 40%

Total

NCI

At

Since

i Date of first purchase

Share capital

20 000

8 000

n/a

Retained

earnings

20 000

8 000

n/a

Consideration
8 000

ii Since date of first purchase

• To beginning of current year:

Retained

earnings (5 000 – 0)

5 000

2 000

n/a

• Current year:

Profit: 1/1/20.12–30/4/20.12

(6 000 × 4/12 = 2 000(accrued evenly))

2 000

800

n/a

27 000

2 800

n/a

Associate becomes a subsidiary

Derecognise associate

(27 000)
(8 000)

(2 800)

n/a

C1 Analysis of the owners’ equity of S Ltd – as subsidiary

P Ltd 40%

Total

NCI

At

Since

i At acquisition (30 April 20.12)

Share capital

20 000

8 000

12 000

Retained earnings at beginning of year

5 000
2 000

3 000

Profit for current year before acquisition

2 000

800

1 200

Revaluation

surplus

(548 × 77,6%) 425

170

255

Total equity acquired

27 425

10 970

16 455

Equity represented by goodwill

– Parent

130

130

–
Consideration and NCI

27 555

11 100

16 455

ii Since acquisition

Profit: 1/5/20.12–31/12/20.12

(6 000 × 8/12 = 4 000(accrued evenly))

4 000

1 600

2 400

R31 555

R1 600 R18 855

357

Chapter 14

Comments

a The retained earnings at acquisition of S Ltd as a subsidiary comprises of

the balance at the beginning of the year and the net profit for the first four
months up to the date of the business combination.

b This is a business combination (obtained control through an agreement) in

which no consideration was transferred (IFRS 3.33 and B46). The
consideration for the business combination is therefore replaced by the fair
value of the equity interest previously held. In terms of IFRS 3.42, P Ltd
should remeasure its equity interest previously held (i.e. investment in
associate) to the fair value of R11 100 at the date
of acquisition. Note that the carrying amount of the investment in S Ltd
(previously held equity interest) at the acquisition date (in the consolidated
financial statements) is R10 800 (i.e. R8 000 (cost) + R2 000 (share in
retained earnings) + R800 (current-period share of profit of associate)). The
investment is remeasured to R11 100 and a remeasurement gain of R300
(11 100 – 10 800) is recognised in the consolidated financial statements –
refer to journal 3 below.

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) now replaced

by the acquisition-date fair value of acquirer’s previously held equity interest
in the acquiree:

11 100

Amount of non-controlling interests: IFRS 3.32(a)(ii)

16 455

27 555

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(27 425)

Goodwill (parent)

R130

C3 Pro forma consolidation journal entries

Dr

Cr

R
R

J1

Investment in S Ltd (associate) (SFP) (comment (a)) 2

000

Retained earnings (SCE)

2 000

Accounting for investor’s interest in reserves of

associate at beginning of current year

J2

Investment in S Ltd (associate) (SFP) (comment (a)) 800

Share of profits of associate (P/L)

800

Accounting for investor’s share of current year’s

profit (1/1/20.12–30/4/20.12 i.e. before the business

combination) of associate

J3

Investment in S Ltd (associate) (SFP) (comment (b)) 300

Other income (remeasurement gain) (P/L)

300

Accounting for remeasurement gain on equity

interest previously held

continued

358

Changes resulting from the issue of additional shares by investees Dr

Cr

J4 Land

(SFP)

548

Equity at acquisition (548 × 77,6%) 425

Deferred

tax

(548 × 80% × 28%) 123

Revaluation of land to the acquisition date fair value

J5

Share capital (SCE)

20 000

Retained earnings: opening balance (SCE)

(comment (c)) 5
000

Equity at acquisition

425

Goodwill (SFP) (parent)

130

Revenue

(P/L)

(comment (c)) (10 000 × 4/12)

3 333

Cost of sales (P/L) (comment (c)) (3 000 × 4/12)

1 000

Income tax expense (P/L) (comment (c))

(1 000 × 4/12)

333

Investment in S Ltd (SFP) (now subsidiary)

(8 000 + 2 000 + 800 + 300)

11 100

Non-controlling interests (SFP/SCE)

16 455

Main elimination journal entry at acquisition date

J6

Non-controlling interests (P/L)

2 400

Non-controlling interests (SFP/SCE)

2 400

Non-controlling interests’ portion of current year’s

profit (1/5/20.12–31/12/20.12 i.e. after the business

combination)

Comments

a Journal 1 and 2 are typical journal entries for the accounting of associates
in terms of the equity method (see chapter 11 for detail).

b Journal 3 represent the adjustment of the equity interest previously held to

fair value, with the recognition of the remeasurement gain in the
consolidated financial statements in terms of IFRS 3.42.

c To prepare the consolidated financial statements, the financial statements

of S Ltd are combined (consolidated) to the financial statement of P Ltd (i.e.
adding every line item in the financial statement of S Ltd to those of P Ltd).
This implies that the whole amount (i.e. for the full year) of all items of
profit or loss is added to that of P Ltd.

S Ltd was not a subsidiary of P Ltd for the first four months and the profit
earned during those four months should not form part of the profit or loss for
the group and should be eliminated from the group’s profit or loss. The
profits for the first four months are actually part of the reserves at the
acquisition date and should be eliminated as such in accounting for the
business combination.

359
Chapter 14

14.6 Accounting for a change in investment entity status

An investment entity (as defined) (see chapter 10.2) may have control over
another entity, but is excluded from the requirement to prepare consolidated
financial statements. Instead, the investment in a subsidiary will be measured
at fair value through profit or loss. A change in the status of an investment
entity should be accounted for as follows:

1 An entity ceases to be an investment entity

When an entity ceases to be an investment entity, it shall follow the same

principles as were discussed previously in this and the preceding chapter: l
apply IFRS 3 to any subsidiary that was previously measured at fair value
through profit or loss (i.e. account for it as a business combination); l the
date of the change of status shall be the deemed acquisition date; l the
previously held interest shall be deemed disposed of; l use the fair value of
the subsidiary at the deemed acquisition date as the transferred deemed
consideration when measuring any goodwill or gain from a bargain purchase
that arises from the deemed acquisition; and

l consolidate the subsidiary from the date of the change of status.

2 An entity becomes be an investment entity

When an entity becomes an investment entity, it shall again follow the same
principles as were discussed previously:

l it shall cease to consolidate its subsidiaries at the date of the change in

status; and l account for the loss of control of those subsidiaries at that date.

Changes in associates and joint ventures

14.7 Accounting for other changes in the net assets of an associate

The current version of IAS 28 Investments in Associates and Joint

Ventures does not specifically address other changes in the net assets of an
investee (e.g. issuing of new shares). The standard only stipulates the
treatment of items in profit or loss, and other comprehensive income of the
associate or joint venture under the equity method.

The IASB embarked on a project to address the accounting treatment of

other changes in the net assets of an associate or joint venture under the
equity method. In November 2012, the IASB published an Exposure Draft
Equity Method: Share of Other Net Asset Changes to amendment IAS
28. The proposed accounting treatment was that an investor should
recognise, in the investor’s equity, its share of the changes in the net assets
of the investee that are not recognised in profit or loss or other
comprehensive income of the investee, and that are not distributions
received (i.e.

the other net asset changes). Furthermore, the investor shall reclassify to
profit or loss the cumulative amount of equity that the investor had
previously recognised when the investor discontinues the use of the equity
method. However, a considerable number of respondents to the ED
disagreed with the IASB’s proposal.

The Interpretations Committee (IFRIC) observed that, under the equity

method, the investor accounts for the share of the other net asset changes in
the carrying amount of its investment if such changes arise. A change in the
carrying amount of the investment 360

Changes resulting from the issue of additional shares by investees caused by

the other net asset changes is an increase or decrease in the investor’s assets
and is not related to contributions from, or distributions to, equity
participants.

Consequently, the IFRIC noted that, from an investor’s perspective, other net
asset changes of an investee meet the definition of income and expenses as
set out in the Conceptual Framework. In addition, the IFRIC noted that the
other net asset changes represent performance of the investor’s investments.
Furthermore, the IFRIC observed that the other net asset changes of the
investee are economically similar to direct acquisitions or disposals of
investments and thus they should be accounted for similarly.
During the process, the IFRIC upheld its original proposal to the IASB as in
June 2012

and proposed that:

l where an investor‘s ownership interest in the investment is reduced,

whether directly or indirectly, the impact of the change should be accounted
for as a partial disposal and recognised in profit or loss of the investor; and
l where an investor’s ownership interest in the investment increases, whether
directly or indirectly, the impact of the change should be accounted for as an
incremental purchase of the investment and be recognised at cost.

However, the members of the IASB could not reach an agreement on the
correct accounting treatment for other changes in the net assets of an
associate or joint venture under the equity method and abandoned the project
to amend IAS 28 (refer to the IASB Update of May 2014). To date, the
specific treatment of such changes is not clear. The brief discussion below
generally follows the approach that share issues or a buy-back of shares by
an associate or joint venture are treated similarly to a partial sale or an
incremental purchase of an interest in the investee as proposed by the IFRIC
(see above).

1 Rights issue by an associate

When an associate makes a rights issue, as in the case of a subsidiary, the

relative interest of the owners in the associate will only change if all the
owners do not take up their proportionate rights. Nevertheless, if the
percentage interest of the investor changes as a result of the rights issue, the
carrying amount of the investment accounted for under the equity method
must be adjusted accordingly. Although IFRS 3

and IAS 28 do not provide specific guidance relating to the piecemeal

acquisition of associates, it seems that the purchase price of the additional
interest acquired is added to the existing carrying amount for the associate
under the equity method. The amount that has been added to the existing
carrying amount should still be split between goodwill/gain from a bargain
purchase and the additional interest in the net assets of the associate at the
date of the increase in the associate.
When the percentage interest in the associate increases as a result of the
rights issue, the carrying amount of the interest in the associate at the date of
the rights issue is merely increased by the amount of the additional payment
made to acquire such increased interest. Any amount in respect of goodwill
is already included in the carrying amount of the investment in the associate.
Any gain from a bargain purchase is recognised in profit or loss of the
investor.

In a rights issue where the investor does not take up any new shares (which
effectively may lead to a reduction in the investor’s share in the net assets of
the associate) it seems appropriate to recognise a gain or loss in profit or
loss. This approach is similar to a partial sale of an interest in an associate.

361

Chapter 14

When the percentage interest in the associate decreases as a result of the

rights issue, a potential loss arises as a consequence of the fact that P Ltd’s
attributable reserves in A Ltd decrease. P Ltd is compensated for this loss by
the other owners, who effectively contributed most, if not all, of the equity
(shares issued) in the rights issue, and P Ltd obtains its share of the new
equity having given less or no consideration in return. The difference
between the attributable equity ceded and the attributable equity obtained is
a gain or loss on the rights issue in cases where the investor made no
additional investment. The carrying amount of the investment in the
associate must be increased or decreased as a result of the change in the
investor’s interest in the associate.

2 Buy-back of shares by an associate

The accounting treatment is arguably similar to the buy-back of shares by a

subsidiary in chapter 14.3. It is also similar to the sale of an interest in an
associate as discussed in chapter 11. The investor would recognise a gain or
loss on the shares bought back by the associate and the carrying amount of
the investment in the associate would be reduced accordingly.

The following summarises the proposed approach:

l Share buy-back with no loss of significant influence or joint control: gain
or loss to be recognised as gain or loss on share buy-back in profit or loss
and no remeasurement of remaining investment at the date of the share buy-
back; and

l Share buy-back with a loss of significant influence or joint control where

the retained interest is a financial asset:

gain or loss recognised as gain or loss on share buy-back in profit or loss

in terms of IAS 28.22(b). Any remaining investment is remeasured at fair
value at the date of loss of significant influence.

IFRS 5 and investments held for sale

The preceding chapters ignored the implication of IFRS 5 on the sale of an

interest in a subsidiary or associate/joint venture. This section does not aim
to provide a comprehensive overview of the principles contained within
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
but only those sections from IFRS 5 that have a direct impact on the
preparation of consolidated financial statements will be addressed. It is
recommended that IFRS 5 be consulted directly in conjunction with this
section of the work.

14.8 Important

definitions

Disposal group

A disposal group is a group of assets (both non-current and current) to be

disposed of by sale or otherwise, together as a group in a single transaction.
The liabilities associated with those assets will be included in the
transaction. The disposal group will include goodwill acquired in a business
combination if the group is a cash-generating unit to which goodwill has
been allocated. A disposal group can also be an operation within a cash-
generating unit with or without goodwill acquired.

362
Changes resulting from the issue of additional shares by investees
Discontinued operation

A discontinued operation is a component of an entity that either has been

disposed of, or is classified as held for sale and:

l represents a separate major line of business or geographical area of

operations; and

l is part of a single co-ordinated plan to dispose of a separate major line of

business or geographical area of operations; or

l is a subsidiary acquired exclusively with a view to resale.

14.9 Applying IFRS 5 in the consolidated financial statements

A subsidiary held for sale refers to a situation where the parent is planning to
dispose of its interest in the subsidiary (i.e. selling the investment) but not
by disposing of the individual assets and liabilities of that subsidiary (for the
latter, refer to chapter 14).

Subsidiaries held for sale shall still be included in the consolidated financial
statements of the parent and are not exempt from consolidation. A parent
that is committed to a sale plan involving loss of control of a subsidiary
shall classify that subsidiary as held for sale when the criteria set out above
are met, even if the parent will retain a non-controlling interest in its former
subsidiary after the sale.

The effect of IFRS 5 is that the subsidiary held for sale is still consolidated
in the consolidated financial statements, but the assets and liabilities of the
subsidiary are classified as a disposal group that is held for sale and are
presented separately in the consolidated financial statements.

1 Subsidiaries classified as held for sale subsequent to the acquisition

date The classification of a subsidiary as held for sale subsequent to the
acquisition date has the following implications on the consolidation process:

l The assets of the subsidiary will not be classified as held for sale in the
individual financial statements of the subsidiary, as it is not the subsidiary
that is planning to sell its assets; it is the parent that plans to sell its interest
in the subsidiary whereby control over the subsidiary will be lost. The
subsidiary (in its individual financial statements) will keep on accounting for
its assets and liabilities under the relevant accounting standards, ignoring
IFRS 5 (i.e. depreciate the items of property, plant and equipment and
measure deferred tax with reference to the tax consequences flowing from
using the assets).

l The parent will classify its investment in subsidiary (in the separate
financial statements of the parent) as held for sale. If the parent kept the
investment at cost, it shall now be measured in accordance with IFRS 5 at
the lower of the carrying amount of the investment and the fair value less
costs to sell. If the parent accounted for the investment in accordance with
IFRS 9, the measurement will not change as such investments are scoped out
from the measurement provisions of IFRS 5 (see IFRS 5.5(c)).

l Any adjustments to the carrying amount of the non-current asset held for
sale in the parent’s separate financial statements (impairment or fair value
adjustments) will need to be reversed upon consolidation so that the
investment is at the amount of initial recognition before the consolidation
process can begin.

363

Chapter 14

l The deferred tax balance relating to the investment in the subsidiary held
for sale should reflect the tax consequences from selling the investment in
the subsidiary.

The tax consequence for the parent would normally be the capital gain or
loss on disposing of the shares (investment) in the subsidiary at its carrying
amount.

Deferred tax should therefore be measured at the effective capital gains tax
rate (currently 80% × 28%). It should be borne in mind that the individual
assets of the subsidiary will not be sold and there is no need to change the
measurement of the deferred tax on the individual assets and liabilities in the
individual financial statements of the subsidiary itself.

l The subsidiary would continue to recognise depreciation or amortisation

on specific assets in its individual financial statements (as explained above).
For consolidation purposes, any depreciation or amortisation recognised by
the subsidiary after it was classified as held for sale (in the consolidated
financial statements) should be reversed as the group has classified the assets
as held for sale.

l The assets, liabilities and any amount previously recognised in other

comprehensive income of the subsidiary held for sale, should be presented
separately as held for sale in the consolidated statement of financial
position (this implies that the assets, liabilities and items of other
comprehensive income of the subsidiary should not be consolidated on a
line-by-line basis; the consolidation may perhaps be described as a three-line
consolidation).

l The assets and liabilities of the subsidiary would be the disposal group held
for sale and the disposal group must be measured at the lower of the
consolidated carrying amount and the fair value less costs to sell.

l The group may need to recognise an impairment loss (in profit or loss) in
measuring the disposal group at fair value less costs to sell. The impairment
loss should first be allocated against any goodwill recognised in respect of
this subsidiary and thereafter allocated to other assets measured according to
IFRS 5

(refer to IFRS 5.23 and IAS 36.104). This allocation to the various assets is
needed as IFRS 5 requires disclosure of the major classes of assets classified
as held for sale. The impairment of any goodwill may need to be allocated
between the parent and the non-controlling interests in terms of Appendix C
of IAS 36.

2 Subsidiaries acquired exclusively with a view to resale A subsidiary

acquired exclusively with a view to resale would immediately meet the
definition of a discontinued operation in terms of IFRS 5 and the results of
the subsidiary will be presented as a discontinued operation line item in the
statement of profit or loss and other comprehensive income. By nature, all
the assets and liabilities of the subsidiary will be classified as held for sale.

The classification of a subsidiary as acquired exclusively with a view to

resale at the acquisition date has the following implications on the
consolidation process: l The assets of the subsidiary will not be classified as
held for sale in the individual financial statements of the subsidiary, as it is
not the subsidiary that is planning to sell its assets; it is the parent that plans
to sell its interest in the subsidiary whereby control over the subsidiary will
be lost. The subsidiary (in its individual financial statements) will keep on
accounting for its assets and liabilities under the relevant accounting
standards, ignoring IFRS 5 (i.e. depreciate the items of property, plant and
equipment and measure deferred tax with reference to the tax consequences
flowing from using the assets).

364

Changes resulting from the issue of additional shares by investees l The

parent will classify its investment in subsidiary (in the separate financial
statements of the parent) as a non-current asset held for sale on the
acquisition date. The investment will be measured on initial recognition at
the lower of its carrying amount had it not been so classified (e.g., cost) and
fair value less costs to sell. Accordingly, it shall be measured at fair value
less costs to sell. The parent’s intention is to sell the shares of the subsidiary
and therefore the fair value less cost to sell referred to on initial recognition
refers to the fair value less cost to sell of the shares and not to that of all the
individual net assets. This could result in an impairment recognised on initial
recognition.

l Any subsequent adjustments to the carrying amount of the non-current

asset held for sale (i.e. the share investment) in the parent’s separate
financial statements (impairment or fair value adjustments) will need to be
reversed upon consolidation so that the investment is at the amount of initial
recognition before the consolidation process can begin.

l In the consolidated financials the disposal group (i.e. the subsidiary as a

whole with all its assets and liabilities) is measured as fair value less cost to
sell on acquisition date, with reference to the fair value of the subsidiary’s
shares. This value is compared to the net asset value of the subsidiary and
any impairment is recognised in the subsidiary’s retained earnings and the
assets of the disposal group held for sale.

l The normal consolidation procedures should then be followed whereby all

the line items of the subsidiary are added to that of the parent.

l The liabilities of the subsidiary are measured in terms of their respective

standards and transferred to liabilities directly associated with the assets of
the disposal group held for sale. Next the assets of the subsidiary will be
transferred to the assets of the disposal group held for sale.

l At the reporting date the disposal group held for sale must be remeasured to
the lower of the consolidated carrying amount and the fair value less costs to
sell of the subsidiary’s shares.

l The subsidiary would continue to recognise depreciation or amortisation on

specific assets in its individual financial statements (as explained above). For
consolidation purposes, any depreciation or amortisation recognised by the
subsidiary should be reversed as the group has classified the assets as held
for sale.

l The results (profit or loss) of the subsidiary will be presented as a

discontinued operation in the statement of profit or loss and other
comprehensive income. This line item will be made up of the profit after tax
of the subsidiary as well as any subsequent impairment recognised in the
consolidated financial statements. All profit or loss line items will be
transferred to the profit/loss for the period from discontinued operations.

14.10 Associates classified as held for sale

If an entity decides to sell an investment in an associate, or a portion of an

investment, and it meets the criteria contained in IFRS 5, the investment
becomes a non-current asset held for sale, and is accounted for in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations (IAS 28.20).

365
Chapter 14

Any retained portion of an investment in an associate that has not been

classified as held for sale should be accounted for using the equity method
(until the disposal of the portion that was classified as held for sale). After
the disposal takes place, the retained portion of the investment should be
accounted for in accordance with IFRS 9 Financial Instruments unless the
retained investment continues to be an associate, in which case the equity
method should be used.

In instances where the investment in the associate no longer complies with

the criteria for classification as held for sale, the equity method is applied
and the financial statements are adjusted retrospectively, as if the investment
had never been carried as held for sale (IAS 28.21).

Self-assessment questions

Question 14.1

The following represents the abridged financial statements of P Ltd and its
subsidiary S Ltd at 31 December 20.19.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.19

P Ltd

S Ltd

ASSETS

Inventory

342 000

415 000

Investment in S Ltd: 166 000 shares at cost (150 000 + 92 000) 242 000
–

Total assets

R584 000

R415 000

EQUITY AND LIABILITIES

Share capital (300 000/200 000 shares)

300 000

250 000

Retained earnings

284 000

165 000

Total equity and liabilities

R584 000

R415 000

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

P Ltd

S Ltd

Revenue

500 000
300 000

Cost of sales

(300 000)

(200 000)

Gross profit

200 000

100 000

Other income (dividend received)

16 000

Profit before tax

216 000

100 000

Income tax expense

(80 000)

(40 000)

PROFIT FOR THE YEAR

136 000

60 000

Other comprehensive income

––

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R136 000

R60 000

366

Changes resulting from the issue of additional shares by investees

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Retained

earnings

P Ltd

S Ltd

Balance at 1 January 20.19

164 000

125 000

Changes in equity for 20.19

Total comprehensive income for the year:

Profit for the year

136 000

60 000

Other comprehensive income

–

Dividend paid: 31/5/20.19

(16 000)

(20 000)

Balance at 31 December 20.19

R284 000

R165 000

Additional information

1 On 1 January 20.17 P Ltd acquired 120 000 shares in S Ltd for R150 000
when the equity of S Ltd consisted of the following:

Share capital (150 000 shares)

150 000

Retained earnings 30

000

R180 000

The fair value of the non-controlling interests at the acquisition date

amounted to R1,22 per share, amounting to R36 600 in total (30 000 shares
× R1,22 per share).

2 On 30 June 20.19 S Ltd made a rights issue of 1 share for every 3 shares
held previously, at R2,00 per share.

3 The rights issue was taken up as follows:

Number of shares

Non-controlling interests

4 000

P Ltd

46 000

4 S Ltd’s profit after tax for 20.19 accrued evenly.

5 P Ltd classified the investment in S Ltd at cost in its separate financial

statements.

6 P Ltd elected to measure the non-controlling interests at their fair value at

the acquisition date.

7 The company tax rate is 28% and CGT is calculated at 80% thereof.

Required

Prepare the consolidated financial statements of the P Ltd group for the year
ended 31 December 20.19. Notes are not required.

367

Chapter 14

Suggested solution 14.1

Comment

This question is similar to example 14.5, but the NCI is measured at fair
value at the acquisition date. The question therefore facilitates comparison
between the methods of measuring NCI for accounting for the change in
ownership where the parent’s interest increases as a result of a rights issue.

The consolidated financial statements of P Ltd and its subsidiary S Ltd are
prepared as follows:
P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.19

ASSETS

Non-current assets

Goodwill (parent and NCI)

6 600

Current assets

Inventory (342 000(P) + 415 000(S))

757 000

Total assets

R763 600

EQUITY AND LIABILITIES

Total equity

Equity attributable to owners of the parent

Share capital

300 000

Retained earnings

392 900

Other components of equity (changes in ownership)

(360)

692 540

Non-controlling interests

71 060

Total equity and liabilities

R763 600

368

Changes resulting from the issue of additional shares by investees P LTD

GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.19

Revenue (500 000(P) + 300 000(S))

800 000

Cost of sales (300 000(P) + 200 000(S))

(500 000)

Gross profit before tax

300 000

Income tax expense (80 000(P) + 40 000(S))

(120 000)

PROFIT FOR THE YEAR

180 000

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R180 000

Profit attributable to:

Owners of the parent

168 900

Non-controlling interests (6 000 + 5 100)

11 100

R180 000

Total comprehensive income attributable to:

Owners of the parent

168 900

Non-controlling interests (6 000 + 5 100)

11 100

R180 000

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.19

Changes

Non-

Share

Retained

in

con-

Total

Total

capital

earnings

owner-

trolling

equity

ship

interests

Balance at

1 January 20.19

300 000

* 240 000

–
540 000 § 55 600

595 600

Changes in equi-

ty for 20.19

Dividends

– (16

000)

(16 000)

(4 000)

(20 000)

Total

comprehensive

income for the

year:

Profit for the year

– 168

900

168 900
11 100

180 000

Rights issue

(360)

(360)

8 360

8 000

Balance at

31 Dec 20.19

R300 000 # R392 900

(R360) R692 540 R71 060 R763 600

164 000(P) + 76 000(S) = 240 000

# 284 000(P) + 108 900(S) = 392 900

§ 36 000 + 19 000 + 600(goodwill relating to NCI) = 55 600

369

Chapter 14

Calculations
C1 Analysis of the owners’ equity of S Ltd

P Ltd 80%–83%

Total

NCI

At

Since

i At acquisition (1/1/20.17)

Share capital

150 000

120 000

30 000

Retained earnings

30 000

24 000

6 000

180 000

144 000

36 000

Equity represented by goodwill

– Parent and NCI

6 600

6 000

600

Consideration and NCI

186 600

150 000

36 600

ii Since acquisition

• To beginning of current year:

Retained

earnings

(125 000 – 30 000)

95 000

76 000

19 000

• Current year:

Profit:

1/1/20.19–30/6/20.19

(60 000 × 6/12)

30 000
24 000

6 000

Dividend paid: 31/5/20.19

(20 000)

(16 000)

(4 000)

Owners’ equity before rights

issue

291 600

84 000

57 600

Rights issue (30/6/20.19)

Shares issued

100 000

92 000

8 000

Changes in ownership (equity)

(360)

360

391 600
65 960

Profit:

1/7/20.19–31/12/20.19

30 000

24 900

5 100

R421 600

R108 900

R71 060

Comments

a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To

30/6/20.19 (120 000/150 000 shares in issue)

80%

Since 1/7/20.19 (166 000/200 000 issued shares)

83%

Consequently, there is no loss of control. However, there is a change in the

ownership interest that should be recognised directly in equity in terms of
IFRS 10.23.

b The exact amount paid by P Ltd and the non-controlling shareholders for
the shares taken up by them respectively is analysed in the “At” and “Non-
controlling interest”

columns. This approach then closely resembles the pro forma consolidation
journal entry (see J5) to account for the rights issue and any change in
ownership.
c The amount for the change in ownership recognised in equity can be
calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration paid by NCI for new shares issued to them (8
000)

Amount by which the non-controlling interests are adjusted 8 360

NCI after rights issue ((391 600 – 6 600GW) × 17%) + (600GW × 17/20))
65 960

NCI before rights issue ((291 600 – 6 600GW) × 20%+ (600GW × 20/20))
(57 600) Amount to be recognised directly in equity

R360

continued

370

Changes resulting from the issue of additional shares by investees The NCI
decreased by 3% in this example (from 20% to 17%). Thus, the NCI ceded
3% of its equity to P Ltd’s new parcel of shares. Also remember that, since
goodwill was calculated for the NCI (because NCI was measured at fair
value at the acquisition date), there is equity represented by goodwill that
was ceded to the parent in this example. Thus the calculation can also be
performed as follows: Fair value of the consideration paid by NCI for new
shares issued to them (8 000)

Amount by which the non-controlling interests are adjusted 8 360

Previous equity interest held relinquished (including goodwill) (57 600 ×

3/20)

(8 640)

Increased equity attributable to NCI as a result of the rights issue (100 000 ×
17%)

17 000
Amount to be recognised directly in equity

R360

d The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):

Fair value of the consideration paid by the parent for new shares issued (92
000)

Increase in P Ltd’s owners’ equity through rights issue (including goodwill

reattributed):

91 640

Owners’ equity held by P Ltd before rights issue

(((291 600 – 6 600GW) × 80%) + 6 000GW)

(234 000)

Owners’ equity held by P Ltd after rights issue

(((391 600 – 6 600GW) × 83%) + 6 000GW)

325 550

Goodwill relating to NCI now transferred to parent (600 × 3/20) 90

Amount to be recognised directly in equity

(R360)

The amount of R360 is the amount paid in excess of the carrying amount of
the interest acquired, being R91 640.

Note in this case that the equity represented by the goodwill amount now
forms part of the calculations. This is because the NCI is measured at its fair
value at the acquisition date and therefore goodwill is measured for all
owners. This means that the goodwill is treated as part of the assets of the
subsidiary and therefore also the equity of the subsidiary. In this case, the
inclusion of the goodwill as part of the assets of the subsidiary resulted in the
change in ownership declining from R450

(example 14.5) to R360. This is because an additional R90 equity (i.e. R600
× 3/20) was transferred to the parent (P Ltd) from the non-controlling
interests at the date of the rights issue. The amount that P Ltd therefore
“overpaid” was R90 less than example 14.5.

e The difference of R360 results from 6 000 new shares additionally taken
up by P Ltd as the issue price is higher than the net asset value of the shares
after the issue (((R385 000/200 000 shares – R2.00) × 6 000 shares) +
(600GW × 3/20)).

f When the interest of the parent increases (e.g., 80% – 83%) as a result of a
rights issue, no gain or loss on the rights issue, additional goodwill, or gain
from a bargain purchase can be recognised in terms of IFRS 10.23. Instead,
any difference between the consideration paid for the shares and the increase
in owners’ equity is attributed to changes in ownership directly in equity as
indicated above.

371

Chapter 14

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 150 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

36 600

186 600

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(180 000)
Goodwill (parent and NCI)

R6 600

C3 Pro forma consolidation journal entries

Dr

Cr

J1

Share capital (SCE)

150 000

Retained earnings (SCE)

30 000

Goodwill (SFP) (parent and NCI)

6 600

Non-controlling interests (SFP/SCE)

36 600

Investment in S Ltd (SFP)

150 000

Main elimination journal entry

J2
Retained earnings – Beginning of year (SCE)

19 000

Non-controlling interests (SFP/SCE)

19 000

Allocation of non-controlling interests’ portion of

retained earnings

J3

Non-controlling interests (P/L)

6 000

Non-controlling interests (SFP/SCE)

6 000

Allocation of non-controlling interests’ portion of

current year’s profit before rights issue

J4

Dividend received (P/L)

16 000

Non-controlling interests (SFP/SCE)

4 000

Dividend paid (SCE)

20 000
Elimination of intragroup dividend

J5

Share capital (SCE)

100 000

Changes in ownership (SCE)

360

Non-controlling

interests (SFP/SCE) (8 000 + 360)

360

Investment in S Ltd (SFP) (46 000 × R2.00)

92

000

Elimination of rights issue transaction

J6

Non-controlling interests (P/L)

5 100

Non-controlling interests (SFP/SCE)

5 100

Allocation of non-controlling interests’ portion of

current year’s profit after rights issue

372

15

Foreign operations

Introduction
.....................................................................................................

375

Important definitions

15.1 Foreign

operation

.....................................................................................

375

15.2 Functional

currency

..................................................................................

375

15.3 Presentation

currency

..............................................................................

376

15.4
Spot exchange rate ..................................................................................

377

15.5 Closing

rate

..............................................................................................

377

15.6 Monetary

item

..........................................................................................

377

15.7

Net investment in a foreign operation ......................................................

377

Translation from the functional currency to the presentation

currency

15.8

Translation of financial statements to the presentation currency .............

378

15.9

Translation of a foreign operation ............................................................

380

Example 15.1

Basic conversion of the financial statements

of a foreign subsidiary ....................................................

381

Example 15.2

The impact of goodwill and IFRS 3 fair value

remeasurements on foreign operations ...........................

391

15.10

Foreign operation and reporting entity have different reporting dates .....

399

15.11

Net investment in a foreign operation ......................................................

399

Example 15.3

Loan to subsidiary as part of the net investment

in a foreign operation ........................................................

400

15.12
Foreign operations – Associates and joint ventures ................................

403

Example

15.4

Foreign

operation – Associate ..........................................

403

15.13

Disposal of a foreign operation ................................................................

405

Example 15.5

Disposal of a foreign operation resulting in a loss of

control (NCI is measured at fair value at the

acquisition date).............................................................

407

Example 15.6

Partial disposal of an interest in a foreign subsidiary

with no change in the status as the subsidiary remains

a subsidiary (control is not lost) (NCI is measured at its

proportionate share of the acquiree’s identifiable net

assets at the acquisition date) ........................................

415

Self-assessment question

Question 15.1
........................................................................................................

424

373

Foreign operations

Introduction

An entity may carry on foreign activities in two ways. It may have individual
transactions in foreign currencies, or it may have foreign operations. In
addition, an entity may also decide to present its financial statements in a
foreign presentation currency.

IAS 21 The Effects of Changes in Foreign Exchange Rates prescribes

how to include individual foreign currency transactions, as well as the
financial results of foreign operations, in the financial statements of an
entity. The standard also prescribes the translation of a set of financial
statements into a presentation currency other than its functional currency.
This chapter focuses on the following two aspects of IAS 21: l how to
include the financial results of foreign operations in the financial statements
of the reporting entity; and

l how to translate financial statements into a presentation currency.

Important definitions

15.1 Foreign

operations
IAS 21.08 defines a foreign operation as an entity that is a subsidiary,
associate, joint arrangement or branch of a reporting entity the activities of
which are based or conducted in a country or currency other than those of
the reporting entity. Many South African undertakings have branches,
subsidiaries, associates and/or joint arrangements in other countries.

It is also important to note that a foreign operation is not only an entity that
is situated in a country other than the country of the reporting entity. It is
clear from the definition that a foreign operation is either:

l an entity that conducts its activities in a country other than the country of
the reporting entity; or

l conducts its activities in a currency other than the currency of the reporting
entity.

This could therefore result in a scenario where a South African reporting

entity has a foreign operation that is situated in South Africa which has a
functional currency different from that of the reporting entity. The term
“functional currency” is defined below.

15.2 Functional

currency

IAS 21.08 defines a functional currency as the currency of the primary

economic environment in which the entity operates. The primary economic
environment in which an entity operates is normally the one in which it
primarily generates and expends cash.

According to IAS 21.09, an entity considers the following primary factors

when determining its functional currency:

l The currency

• that mainly influences sales prices for goods and services (this will often be
the currency in which sales prices for its goods and services are denominated
(quoted) and settled); and
• of the country whose competitive forces and regulations mainly determine
the sales prices of its goods and services.

375

Chapter 15

l The currency that mainly influences labour, material and other costs of
providing goods or services (this will often be the currency in which such
costs are denominated and settled).

According to IAS 21.10, the following factors may also provide evidence of
an entity’s functional currency:

l the currency in which funds from financing activities (i.e. issuing debt and
equity instruments) are generated; or

l the currency in which receipts from operating activities are usually

retained.

According to IAS 21.11, the following additional factors are considered

when determining the functional currency of a foreign operation, and
whether its functional currency is the same as that of the reporting entity (the
reporting entity in this context being the entity that has the foreign operation
as its subsidiary, branch, associate or joint arrangement): l whether the
activities of the foreign operation are carried out as an extension of the
reporting entity’s activities, rather than being carried out with a significant
degree of autonomy (independence). An example of the former is when the
foreign operation only sells goods imported from the reporting entity and
remits the proceeds to it. An example of the latter is when the operation
accumulates cash and other monetary items, incurs expenses, generates
income and arranges borrowings, all substantially in its local currency;

l whether transactions with the reporting entity constitute a high or a low

proportion of the foreign operation’s activities;

l whether cash flows from the activities of the foreign operation directly
affect the cash flows of the reporting entity and are readily available for
remittance to it; and l whether cash flows from the activities of the foreign
operation are sufficient to service existing and normally expected debt
obligations without funds being made available by the reporting entity.

When the above indicators give a mixed result, and the functional currency
is not obvious, management uses its judgement to determine the functional
currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions. Management gives priority to
the primary indicators in IAS 21.09 before considering the indicators in IAS
21.10 and IAS 21.11, which are designed to provide additional supporting
evidence to determine an entity’s functional currency.

An entity’s functional currency reflects the underlying transactions, events

and conditions that are relevant to it. Accordingly, once determined, the
functional currency is not changed unless there is a change in those
underlying transactions, events and conditions.

The functional currency of an entity is not a free choice and must be

carefully determined.

15.3 Presentation

currency

IAS 21.08 defines presentation currency as the currency in which the

financial statements are presented.

376

Foreign operations

The presentation currency of an entity is a free choice, in contrast to the

functional currency (as indicated above).

15.4 Spot exchange rate

The spot exchange rate is the exchange rate for immediate delivery.

15.5 Closing
rate

The closing rate is the spot exchange rate at the end of the reporting period.

15.6 Monetary

item

A monetary item is defined as units of currency held and assets and

liabilities to be received or paid in a fixed or determinable number of units of
currency. Examples of monetary items will include:

l pensions and other employee benefits to be paid in cash; l provisions that

are to be settled in cash; and

l cash dividends that are recognised as a liability.

The following are examples of non-monetary items:

l amounts prepaid for goods and services;

l goodwill;

l intangible assets;

l inventory;

l property, plant and equipment; and

l provisions that are to be settled by the delivery of a non-monetary asset.

15.7 Net investment in a foreign operation

An entity may have a monetary item that is receivable from or payable to a

foreign operation. An item for which settlement is neither planned nor likely
to occur in the foreseeable future is, in substance, a part of the reporting
entity’s net investment in that foreign operation. Such monetary items may
include long-term receivables or loans.

They do not include trade receivables or trade payables.

Translation from the functional currency to the presentation

currency

IAS 21 requires the following approach in respect of the preparation of

financial statements in another currency than the functional currency: l Each
entity (whether stand-alone, an entity with foreign operations or a foreign
operation itself) determines its functional currency in terms of the principles
discussed in chapter 15.2 above.

l An entity translates foreign currency items (i.e. implying individual

transactions that did not take place in the functional currency of the entity)
into its functional currency and treats the translation in terms of IAS
21.20–.37 and .50.

377

Chapter 15

l All entities forming part of the reporting entity should be included in the
financial statements of the reporting entity. The financial results should be
included in the financial statements of the reporting entity in the same
presentation currency as that of the reporting entity, which could of course
be any currency/currencies.

l Should the entity to be included in the reporting entity have a different

functional currency than the presentation currency of the reporting entity, the
results of the entity will be translated in terms of the principles discussed in
chapter 15.8 below.

l Furthermore, any stand-alone entity that prepares financial statements (or

an entity preparing separate financial statements in terms of IAS 27
Separate Financial Statements) may present its financial statements in any
currency. If the presentation currency selected differs from the functional
currency of that entity, the financial statements in the functional currency
shall also be translated into the presentation currency selected using the
principles discussed in chapter 15.8.

15.8 Translation of financial statements to the presentation currency

The profit or loss, other comprehensive income and financial position of an
entity shall be translated into a different presentation currency using the
following procedures: l assets and liabilities (including comparatives) shall
be translated at the closing rate at the date of the statement of financial
position; l income and expenses (including comparatives) shall be translated
at the exchange rate applicable at the date of the transaction. For practical
reasons an average exchange rate for the period is often used to translate
income and expense items.

However, if exchange rates fluctuate significantly, the use of the average rate
for a period would be inappropriate; and

l all resulting exchange differences shall be recognised as a separate

component of equity (commonly referred to as the foreign currency
translation reserve (FCTR)) in other comprehensive income.

These exchange differences are not recognised in profit or loss, because the
changes in exchange rates have little or no direct effect on the present and
future cash flows from operations. The exchange differences simply resulted
from translating income and expenses at the actual exchange rates and assets
and liabilities at the closing rate, as well as the fact that the opening net
assets are translated at the current closing rate that differs from the closing
rate previously used to translate the balances in the previous period.

Equity is defined by the Conceptual Framework as the residual interest in

the assets of an entity after deducting all its liabilities. However, the
individual items of equity shall be translated at various different rates of
exchange, depending on the category of equity. The following procedure in
translating equity is typically used: l Share capital is translated at the
exchange rates that existed at the date of issue of the shares.

l Income and expense items are translated at the actual rate of exchange or
the average rate that existed during the financial reporting period in which
they arose.

Therefore, the same principle will apply to retained earnings.

l Reserves that arose on specific dates (e.g., revaluation surpluses) are
translated at the spot exchange rates that existed on the date the reserves
arose.

378

Foreign operations

When translating the financial statements of the reporting entity from its
functional currency to the presentation currency, it is important to keep the
accounting equation in mind.

The following example illustrates the above:

The financial results of X Ltd, a South African stand-alone entity with a

functional currency of US Dollar (USD) and a chosen presentation currency
of South African Rand (ZAR), are as follows at 31 December 20.18:

ASSETS USD

Property, plant and equipment

$100

EQUITY AND LIABILITIES

Share capital

20

Retained earnings accumulated in 20.17

40

Profit for 20.18

30

Total equity
90

Long-term liability

10

$100

Applicable exchange rates

USD1,00 = ZAR

At inception (spot exchange rate)

3,00

Average rate for the 20.17 financial year

4,00

Average rate for the 20.18 financial year

5,00

31 December 20.18 (closing rate at reporting date)

6,50

The translated results of X Ltd on 31 December 20.18 are therefore as

follows: ASSETS ZAR

Property, plant and equipment (USD100 × ZAR6,50) 650

EQUITY AND LIABILITIES

Share capital (USD20 × ZAR3,00)

60

Retained earnings accumulated in 20.17 (USD40 × ZAR4,00)

160

Profit for 20.18 (USD30 × ZAR5,00)

150

Foreign currency translation reserve (FCTR) (balancing figure) 215

Total equity 585

Long-term liability (USD10 × ZAR6,50)

65

R650

379

Chapter 15

Proof of foreign currency translation reserve balance

As discussed above, equity is the residual interest in the assets of an entity

after deducting all its liabilities. Therefore, total equity shall also be
translated to the presentation currency using the closing rate as assets and
liabilities are translated using the closing rate. As a result the foreign
currency translation reserve balance can also be calculated by analysing only
the equity section of the statement of financial position:

ZAR

Share capital (USD20 × ZAR3,00)

60

Retained earnings accumulated in 20.17 (USD40 × ZAR4,00) 160

Profit for 20.18 (USD30 × ZAR5,00) 150

370
Total equity should be (USD90 × ZAR6,50) 585

Thus, the foreign currency translation reserve balance is

R215

Comment

It is important to remember that all items in the financial statements should

be translated at an exchange rate that best approximates the value of that
item on the reporting date.

Assets and liabilities should therefore be translated at the closing rate on the
reporting date. Share capital is translated at the spot exchange rate at the
share issue date.

Retained earnings, income and expense items accrued over time and are
therefore translated at the average exchange rates during the financial
reporting period in which they arose.

15.9 Translation of a foreign operation

Many reporting entities comprise a number of individual entities (e.g., a

group is made up of a parent and one or more subsidiaries). Various types of
entities, whether members of a group or otherwise, may have investments in
associates or joint arrangements.

They may also have branches. It is necessary for the results and financial
position of each entity included in the reporting entity to be translated from
the functional currencies of the individual entities into the presentation
currency of the reporting entity’s financial statements.

When the results and financial position of a foreign operation are translated
from the functional currencies of the individual entities into the presentation
currency (so that the foreign operation can be included in the financial
statements of the reporting entity by consolidation or the equity method) the
applicable procedures discussed earlier in chapter 15.8 should be applied in a
similar way. In addition, the following principles should also be applied:
l Although total owners’ interest is converted at the closing rate, certain
components of owners’ interest are translated at the historical exchange rate.

l Items of owners’ interest at acquisition are translated at the historical spot

exchange rate applicable when the equity interest was acquired. This
conversion basis ensures that the goodwill or gain from a bargain purchase is
determined once and for all and that it does not change in future, purely
because exchange rates subsequently changed.

380

Foreign operations

l Increases in components of owners’ interest since acquisition to the

beginning of the current period are converted at the presentation currency
equivalent at the time at which these increases appeared in the previous
period’s conversion trial balance. This approach is essential to ensure that
the consolidated balances at the beginning of the current period agree with
the consolidated balances at the end of the previous period.

l Any goodwill arising on the acquisition of a foreign operation, and any

IFRS 3 fair value remeasurements to the carrying amounts of assets and
liabilities arising on the acquisition of that foreign operation, shall be treated
as assets and liabilities of the foreign operation. Thus, they shall be
expressed in the functional currency of the foreign operation and shall be
translated at the closing rate annually. This principle is illustrated in example
15.2.

l Common items between the parent and the foreign operation (for example,
dividends received/paid) are converted at the actual exchange rate applicable
to these items on the respective dates that they arose.

l Transfers to reserves for the current period by the foreign operation are
converted at the closing rate.

The cumulative amount of the exchange differences is presented in a

separate component of equity (the foreign currency translation reserve) until
disposal of the foreign operation.
When the exchange differences relate to a foreign operation that is
consolidated but not wholly-owned, accumulated exchange differences
arising from translation and attributable to non-controlling interests are
allocated to, and recognised as part of, non-controlling interests in the
consolidated statement of financial position.

After the translation of the results and financial position of a foreign

operation into the presentation currency in terms of chapter 15.8, and taking
into account the above, the incorporation of the results and financial position
of a foreign operation with those of the reporting entity follows normal
consolidation procedures, for example, the elimination of intragroup
balances and intragroup transactions of a subsidiary.

Basic conversion of the financial statements of a foreign

Example 15.1

subsidiary

1 P Ltd is a South African company and has the South African Rand (ZAR)
as its functional currency.

2 P Ltd acquired 80% of the issued shares of S Ltd, a foreign entity with FC
as its functional currency, at the incorporation of the latter on 1 January
20.11. From this date P Ltd had control over S Ltd in accordance with IFRS
10. The reporting date of the group is 31 December.

3 P Ltd recognised the equity investment in S Ltd in its separate records

using the cost price method.

4 The P Ltd group of companies elected to measure the non-controlling

interest at its proportionate share of the acquiree’s identifiable net assets at
the acquisition date.

5 Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.

381

Chapter 15
The following are the abbreviated trial balances of P Ltd and S Ltd for each
of the financial periods 20.11, 20.12 and 20.13:

20.11 20.12 20.13

P LTD

Assets

Investment in S Ltd

80 000

80 000

80 000

Inventory

120 000

147 500

182 500

R200 000

R227 500

R262 500

Equity

Share capital (100 000 shares)

100 000

100 000

100 000
Retained earnings: beginning of the period

75 000

100 000

127 500

Profit for the current period

25 000

27 500

25 000

Dividends received from S Ltd

– 10

000

R200 000

R227 500

R262 500

S LTD

Assets

Trade receivables

FC120 000

FC145 000
FC165 000

Equity

Share capital (100 000 shares)

100 000

100 000

100 000

Retained earnings: beginning of the period

20 000

45 000

Profit for the current period

20 000

25 000

30 000

Dividend paid

– (10

000)

FC120 000

FC145 000
FC165 000

Comment

FC represents the foreign currency unit concerned.

Applicable exchange rates

FC1,00 = ZAR

1/1/20.11 1,00

Average for period 20.11

1,05

31/12/20.11 1,11

Average for period 20.12

1,18

31/12/20.12 1,25

Average for period 20.13

1,28

31/12/20.13 1,33

382

Foreign operations

Solution 15.1

The consolidated financial statements of P Ltd and its foreign subsidiary will
be drafted as follows for each of the periods concerned:

P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER

20.11 20.12 20.13

ASSETS

Current assets

Trade receivables

253 200

328 750

401 950

Total assets

R253 200

R328 750

R401 950

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

100 000

100 000

100 000

Retained earnings

116 800
167 900

223 620

Other components of equity

9 760

24 600

34 440

226 560

292 250

358 060

Non-controlling interests

26 640

36 250

43 890

Total equity

253 200

328 750

401 950

Total equity and liabilities

R253 200

R328 750
R401 950

P LTD GROUP

EXTRACT FROM CONSOLIDATED STATEMENT OF PROFIT OR

LOSS

AND OTHER COMPREHENSIVE INCOME FOR THE YEAR

ENDED 31 DECEMBER

20.11 20.12 20.13

PROFIT FOR THE YEAR

46 000

57 000

63 400

Other comprehensive income:

Items that may be reclassified

subsequently to profit or loss:

Exchange differences arising on translating

foreign operations

12 200

18 550

12 300

Other comprehensive income for the year,

net of tax
12 200

18 550

12 300

TOTAL COMPREHENSIVE INCOME

FOR THE YEAR

R58 200

R75 550

R75 700

Profit attributable to:

Owners of the parent

41 800

51 100

55 720

Non-controlling interests

4 200

5 900

7 680

R46 000

R57 000

R63 400
Total comprehensive income attributable to:

Owners of the parent

51 560

65 940

65 560

Non-controlling interests

6 640

9 610

10 140

R58 200

R75 550

R75 700

383

Chapter 15

Comments

a Exchange differences arising on translating foreign operations are

presented at 100% (i.e. not net of non-controlling interest) in the statement
of profit or loss and

other comprehensive income.

b The non-controlling interests in total comprehensive income can be

reconciled as follows:

20.11
20.12

20.13

Profit for the year

4 200

5 900

7 680

Other comprehensive income for the year

2 440

3 710

2 460

R6 640

R9 610

R10 140

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER

Share

Retained

Total

capital
FCTR

earnings

Total NCI equity

Balance at

1 January 20.11

100 000

75 000

175 000

– 175 000

Acquisition

of subsidiary

––

––

20

000

20 000

Total comprehensive

income for the year:

Profit for the year

–

41 800

41 800

4 200

46 000

Other comprehensive

income –

9 760

9 760

2 440

12 200

Balance at

31 December 20.11

100 000

9 760 1116 800 226 560

26 640 253 200

Total comprehensive

income for the year:

Profit for the year

51 100

51 100

5 900

57 000

Other comprehensive

income

14 840

14 840

3 710

18 550

Balance at

31 December 20.12

100 000

24 600 2167 900

292 500
36 250

328 750

Dividends

(2 500)

(2 500)

Total comprehensive

income for the year:

Profit for the year

55 720

55 720

7 680

63 400

Other comprehensive

income
–9

840

9 840

2 460

12 300

Balance at

31 December 20.13

R100 000 R34 440 3R223 620 R358 060 R43 890 R401 950

FCTR = Foreign currency translation reserve

NCI = Non-controlling interests

(1) Test: 100 000 + 16 800 = 116 800

(2) Test: 127 500 + 40 400 = 167 900

(3) Test: 162 500 + 61 120 = 223 620

384

Foreign operations

Calculations

C1 Conversion trial balance of S Ltd at 31 December 20.11

FC Rate R

Trade receivables
120 000

R1,11

133 200

Share capital

(100 000)

R1,00

(100 000)

Profit for 20.11

(20 000)

R1,05

(21 000)

Exchange differences on translation:

31/12/20.11 (Balancing)

(12 200)

Comments

a All assets and liabilities as well as the total ownership interest of S Ltd are
converted at the closing rate (i.e. R1,11 = F1,00) on 31 December 20.11.
Always keep in mind
the accounting equation, i.e.:

Equity = Assets – Liabilities

b The exchange rate conversion difference, which is known as the foreign

currency translation reserve (FCTR), is brought about by the fact that
components of equity are not all converted at the closing rate, as assets and
liabilities.

l The acquisition date equity is converted at the historical exchange rate

applicable when the equity investment was made (e.g. R1,00 = F1,00). The
use of the historical exchange rate ensures that the goodwill or gain from a
bargain purchase on consolidation is determined once and for all, so that it
will not change in the future merely because the exchange rate has changed.

l Items of profit or loss for the current period are generally converted at the
average exchange rate for the period (e.g. R1,05 = F1,00).

c The net assets of the subsidiary increased during 20.11 by R33 200 (being
R133 200

less R100 000). R21 000 is attributable to the net profit for 20.11. The
balance of the increase, namely R12 200, arose because the Rand weakened
against the foreign monetary unit. The exchange differences on translation
are recognised in other comprehensive income. These movements in other
comprehensive income are then accumulated in equity under the heading of
foreign currency translation reserve. The foreign currency translation reserve
in essence represents a revaluation surplus originating from the revaluation
of P Ltd’s net investment in S Ltd. In this example, deferred tax has not been
provided for on the exchange differences accumulated in the foreign
currency translation reserve. Valid arguments also exist for the provision of
deferred tax on the translation gain or loss. Refer IAS 12 Income Taxes in
this regard.

385

Chapter 15

C2 Analysis of owners’ equity of S Ltd at 31 December 20.11

P Ltd 80%

Total

NCI

At

Since

i At acquisition date

Share capital

100 000

80 000

20 000

100 000

80 000

20 000

Equity represented by goodwill

– Parent

Consideration and NCI

100 000
80 000

20 000

ii Since acquisition

• Current year:

Profit for the year

21 000

16 800

4 200

Exchange

differences

on translation

12 200

9 760

2 440

R133 200

R16 800 RE

R26 640

R9

760 FCTR

RE = Retained earnings
FCTR = Foreign currency translation reserve

C3 Pro forma consolidation journal entries at 31 December 20.11

Dr

Cr

J1

Share capital (SCE)

100 000

Investment in S Ltd (SFP)

80 000

Non-controlling interests (SFP/SCE)

20 000

Elimination of equity at acquisition date

J2

Non-controlling interests (P/L)

4 200

Non-controlling interests (SFP/SCE)

4 200

Recognition of non-controlling interests’ portion

in current year’s profit

J3

Non-controlling interests (OCI)

2 440

Non-controlling interests (SFP/SCE)

2 440

Recognition of non-controlling interests’ portion

in the exchange differences on translation

for current year

Comment

Note that the total exchange differences on translation of R12 200 do not get
journalised into the consolidated financial statements. It is included in the
converted Rand trial

balance which is combined with the parent’s trial balance on a line-by-line

basis. The only journal required in respect of the exchange differences on
translation is the allocation of the non-controlling interests’ portion (refer
journal 3).

386

Foreign operations

C4 Conversion trial balance of S Ltd at 31 December 20.12

FC Rate R

Trade receivables

145 000
R1,25

181 250

Share capital

(100 000)

R1,00

(100 000)

Retained earnings 1/1/20.11 to 31/12/20.11

(20 000)

(21 000)

FCTR balance 31/12/20.11

(12 200)

Profit for 20.12

(25 000)

R1,18

(29 500)

Exchange differences on translation:

Movement for 20.12 (Balancing)

–
(18 550)

A = Actual amount as per previous period’s consolidated statement of

financial position Comments

a All assets and liabilities (i.e. total ownership interest) are converted at the
closing rate (i.e. R1,25 = FC1,00) on 31 December 20.12.

b The exchange differences on translation for 20.12 occur because: l The

profit for 20.12 is translated at the average rate of exchange, while the
corresponding assets and liabilities are translated at the closing rate of
exchange on 31 December 20.12.

l The opening net assets for 20.12 are translated at the closing rate of
exchange on 31 December 20.12, which differs from the previous 20.11
closing rate of exchange.

c Note that the balance of the foreign currency translation reserve as at the
end of 20.11 (i.e. R12

200) is taken up in the conversion trial balance at

31 December 20.12.

C5 Analysis of owners’ equity of S Ltd at 31 December 20.12

P Ltd 80%

Total

NCI

At

Since
i At acquisition date

Share capital

100 000

80 000

20 000

100 000

80 000

20 000

Equity represented by goodwill

– Parent

––

Consideration and NCI

100 000

80 000

20 000

ii Since acquisition

• To beginning of current year:

Retained earnings

21 000
16 800

4 200

Foreign currency translation reserve

12 200

9 760

2 440

• Current year:

Profit for the year

29 500

23 600

5 900

Exchange differences on translation

18 550

14 840

3 710

R181 250

R40 400 RE

R36 250

R24 600 FCTR

387
Chapter 15

C6 Pro forma consolidation journal entries at 31 December 20.12

Dr

Cr

J1

Share capital (SCE)

100 000

Investment in S Ltd (SFP)

80 000

Non-controlling interests (SFP/SCE)

20 000

Elimination of equity at acquisition date

J2

Retained earnings (SCE)

4 200

FCTR (SCE)

2 440

Non-controlling interests (SFP/SCE)

6 640

Recognition of non-controlling interests’ portion in

retained earnings and FCTR to beginning of current

year

J3

Non-controlling interests (P/L)

5 900

Non-controlling interests (SFP/SCE)

5 900

Recognition of non-controlling interests’ portion in

current year’s profit

J4

Non-controlling interests (OCI)

3 710

Non-controlling interests (SFP/SCE)

3 710

Recognition of non-controlling interests’ portion in

current year’s FCTR movement

C7 Conversion trial balance of S Ltd at 31 December 20.13

FC Rate R
Trade receivables

165 000

R1,33

219 450

Share capital

(100 000)

R1,00

(100 000)

Retained earnings: 1/1/20.11 to 31/12/20.12

(45 000)

(50 500)

Foreign currency translation reserve

(12 200 + 18 550) –

(30 750)

Profit for 20.13

(30 000)

R1,28

(38 400)

Dividend paid
10 000

12 500

Exchange differences on translation:

Movement for 20.13 (Balancing)

(12 300)

388

Foreign operations

Comments

a All assets and liabilities (i.e. total ownership interest) are converted at the
closing rate (i.e. R1,33 = FC1,00) on 31 December 20.13.

b The exchange differences on translation for 20.13 occur because: l the

profit for 20.13 is translated at the average rate of exchange, while the
corresponding assets and liabilities are translated at the closing rate of
exchange on 31 December 20.13; and

l the opening net assets for 20.13 are translated at the closing rate of
exchange on 31 December 20.13, which differs from the previous 20.12
closing rate of exchange.

c Note that the balance of the foreign currency translation reserve at the end
of 20.12
(i.e. R30 750) has been directly taken up in the conversion trial balance at 31
December 20.13.

d The dividends paid by the subsidiary are converted to an appropriate

equivalent by scaling up the actual amount received by P Ltd to 100% (R10
000/0,8).

e The net assets of the subsidiary increased during 20.13 by R38 200 (R219
450 –

R181 250); R25 900 (R38 400 – R12 500) of which is attributable to
retained earnings for 20.13. The balance of the increase, namely R12 300,
occurred as a result of the weakening of the Rand against the foreign
currency unit.

C8 Analysis of owners’ equity of S Ltd at 31 December 20.13

Total

P Ltd 80%

NCI

At

Since

i At acquisition date

Share capital

100 000

80 000

20 000

100 000

80 000
20 000

Equity represented by goodwill

– Parent

Consideration and NCI

100 000

80 000

20 000

ii Since acquisition

• To beginning of current year:

Retained

earnings

50 500

40 400

10 100

Foreign currency translation

reserve (12 200 + 18 550)

30 750
24 600

6 150

• Current year:

Profit for the year

38 400

30 720

7 680

Dividend

(12 500)

(10 000)

(2 500)

Exchange differences on translation

12 300

9 840

2 460

R219 450

R61 120 RE

R43 890

R34 440 FCTR

389
Chapter 15

C9 Pro forma consolidation journal entries at 31 December 20.13

Dr

Cr

J1

Share capital

100 000

Investment in S Ltd

80 000

Non-controlling interests (SFP/SCE)

20 000

Elimination of equity at acquisition date

J2

Retained earnings (SCE) (4 200 + 5 900) 10

100

FCTR

(SCE)

(3 710 + 2 440)
6 150

Non-controlling interests (SFP/SCE)

16 250

Recognition of non-controlling interests’ portion in

retained earnings and FCTR to beginning of current

year

J3

Non-controlling interests (P/L)

7 680

Non-controlling interests (SFP/SCE)

7 680

Recognition of non-controlling interests’ portion in

current year’s profit

J4

Non-controlling interests (OCI)

2 460

Non-controlling interests (SFP/SCE)

2 460

Recognition of non-controlling interests’ portion in

current year’s FCTR movement

J5

Dividend received (P/L) (P’s portion)

10 000

Non-controlling interests (SFP/SCE)

2 500

Dividend paid (SCE)

12 500

Elimination of intragroup dividend in consolidated

financial statements

390

Foreign operations

The impact of goodwill and IFRS 3 fair value

Example 15.2

remeasurements on foreign operations

1 P Ltd is a South African company and has the South African Rand (ZAR)
as its functional currency.

2 P Ltd acquired 75% of S Ltd, a foreign entity with FC as its functional

currency, on 1 January 20.11 for FC3 000. At that date, S Ltd had share
capital of FC1 000 and retained earnings of FC2 000. From 1 January 20.11,
P Ltd had control over S Ltd as per the definition of control in accordance
with IFRS 10 Consolidated Financial Statements. All of S Ltd’s assets
and liabilities were considered to be fairly valued on acquisition date, except
for land which was undervalued by FC500.
3 S Ltd’s retained earnings increased by FC300 in 20.11 and FC400 in
20.12.

4 During the 20.12 financial year, P Ltd sold inventory to S Ltd. On 31

December 20.12, inventory purchased from P Ltd amounting to FC20 was
still on hand. Total sales from P Ltd to S Ltd for the 20.12 financial year
amounted to FC30.

P Ltd sells inventory at a mark-up of 20% on cost.

5 P Ltd recognised the equity investment in S Ltd in its separate records

using the cost price method.

6 The P Ltd group elected to measure the non-controlling interest at its

proportionate share of the acquiree’s identifiable net assets at the acquisition
date. Ignore any effects of taxation.

7 It is the accounting policy of S Ltd to measure all items of property, plant

and equipment according to the cost model in terms of IAS 16 Property,
Plant and Equipment.

8 Ignore any effects of taxation.

9 The following exchange rates are applicable:

FC1,00 = ZAR

1/1/20.11 2,00

Average 20.11

2,10

31/12/20.11 2,20

Average 20.12

2,40
31/12/20.12 2,50

Comments

Remember goodwill and the fair value remeasurements are deemed to be

part of the foreign entity (IAS 21.47).

391

Chapter 15

Solution 15.2

C1 Analysis of owners’ equity of S Ltd

(FC)

(R)

(R) 75% (R) 75% (R) 25%

Rate

100%

100%

At

Since

NCI

i At

acquisition

Share capital

1 000
R2,00

2 000

1 500

500

Retained earnings

2 000

R2,00

4 000

3 000

1 000

Fair

value

remeasure-

ment (land)

500

R2,00

1 000

750

250

3 500
R2,00

7 000

5 250

1 750

Equity represented

by goodwill – Parent

375

R2,00

750

750

Consideration and NCI

3 875

7 750

6 000

1 750

ii Since acquisition

• To beginning of current

year:

Retained earnings
300

R2,10

630

472

158

increase 20.11

(average)

FCTR

(excluding goodwill)

730

548 182

FCTR (goodwill only)

175

75

4 175

R2,20

9 185

1 095

2 090
• Current

year:

Retained earnings

400

R2,40

960

720

240

increase 20.12

(average)

Exchange differences

on translation

(excluding goodwill)

1 180

885

295

Exchange differences

on translation

(goodwill only)

2113
113 –

4 575

R2,50 R11 438

R2 813

R2 625

392

Foreign operations

Comments

The following steps are followed in calculating the exchange differences on

translation of R730 for the 20.11 financial year:

Step 1: Translate the foreign currency at acquisition owners’ equity of FC3

500 to the presentation currency using the rate applicable at acquisition.

Step 2: Calculate the goodwill in the presentation currency and convert back
to the foreign currency as IAS 21 states goodwill is treated as an asset of the
foreign operation.

Step 3: Translate the profit for the 20.11 financial year to the presentation
currency.

Step 4: Remeasure goodwill to the closing rate at the end of the 20.11
financial year (see below).

Step 5: Translate the year end total foreign currency owners’ equity of FC4
175 to the presentation currency using the closing rate.

Step 6: The exchange differences on translation for the 20.11 financial year
will be the balancing amount in the presentation currency column (R9 185 –
R75 – R630 –
R7 750).

The same principle will apply when calculating the exchange differences on
translation of R1 180 for the 20.12 financial year.

Goodwill remeasurement calculation (method only used in respect of foreign

entities)

FC

Rate

At acquisition date

FC375

R2,00

750

FCTR 20.11

175

31/12/20.11

FC375

R2,20

825

Exchange differences on translation: 20.12

2113

31/12/20.12
FC375

R2,50

R938

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 6 000

Amount of non-controlling interest: IFRS 3.32(a)(ii)

1 750

7 750

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(7 000)

Goodwill (parent only)

R750

393

Chapter 15

C3 Proof of foreign currency translation reserve balance at 31

December 20.12

FC Rate R

Share capital

(1 000)

R2
(2 000)

Land remeasurement

(500)

R2

(1 000)

Retained earnings:

At acquisition

(2 000)

R2

(4 000)

Profit

for

20.11

(300)

R2,10

(630)

Profit

for

20.12

(400)
R2,40

(960)

Net assets

14 200

R2,50

10 500

Foreign currency translation reserve

1(1 910)

(1) Balancing

Comments

The foreign currency translation reserve of R1 910 agrees to the year end
balance of the reserve and includes the opening balance of R730 as well as
the current year

movement of R1 180.

C4 Pro forma consolidation journal entries

Dr

Cr

R
R

J1

Land (SFP)

1 000

Equity at acquisition (SCE)

1 000

Fair value remeasurement on land

J2

Share capital (SCE)

2 000

Retained earnings (SCE)

4 000

Equity at acquisition (SCE)

1 000

Goodwill

(SFP)

750

Non-controlling interests (SFP/SCE)

1 750

Investment in S Ltd (SFP) (at cost price)

6 000

Elimination of acquisition date equity

J3

Retained earnings (SCE)

158

Non-controlling interests (SFP/SCE)

158

Recognition of non-controlling interests’ portion of

retained earnings since acquisition to beginning of

current year

J4 FCTR

(SCE)

182

Non-controlling interests (SFP/SCE)

182

Recognition of non-controlling interests’ portion of

FCTR since acquisition to beginning of current year

continued

394

Foreign operations
Dr

Cr

J5

Non-controlling interests (P/L)

240

Non-controlling interests (SFP/SCE)

240

Recognition of non-controlling interests’ portion of

current year’s profit

J6

Non-controlling interests (OCI)

295

Non-controlling interests (SFP/SCE)

295

Allocate non-controlling interests’ portion of current

year’s FCTR

J7 Goodwill

(SFP)
(R938 – R750) 188

FCTR

(SCE)

75

Exchange differences on translation (OCI)

113

Remeasure goodwill to closing rate at reporting date –

the non-controlling interest does NOT share in this

portion of the FCTR (comment (b))

J8 Land

(SFP)

250

FCTR

(SCE)

(FC500 × (R2,20 – R2,00)) 100

Exchange differences on translation (OCI)

(FC500 × (R2,50 – R2,20))

150

Recording effect of movement in exchange rate i.r.o.

fair value remeasurement on land (comment (a))

J9 Revenue

(P/L)

(FC30 × R2,40)

72

Cost of sales (P/L)

72

Elimination of intragroup sales

J10 Cost of sales (P/L) (FC20 × 2,50 × 20/120)

Inventory (SFP)

Elimination of unrealised profit on inventory

(comment (c))

395

Chapter 15

Comments

a Land is not presented on the subsidiary’s FC-denominated trial balance

(i.e. before conversion) at the remeasured amount. Therefore, the FCTR that
arose on the

subsidiary’s Rand-denominated trial balance (i.e. after conversion and before

consolidation) was not completely correct from a group perspective, because

the
pre-conversion trial balance does not take into account any pro forma
adjustments that are required at group level (e.g. fair value remeasurement
on land i.t.o. IFRS 3).

This principle is very similar to an asset that is remeasured on a pro forma

basis at group level, where the subsequent depreciation is then also corrected
at group level on a pro forma basis. The non-controlling interest does share
in this FCTR

movement of R250 and this is already taken into account in the non-
controlling

interest amounts of R182 (prior-period FCTR) and R295 (current-period

exchange

difference). This is so because the FCTR movements in the analysis above

are

calculated on a net equity value inclusive of the effect of the remeasurement

on land.

b In this example, the non-controlling interest is measured at the

proportionate share of the acquiree’s identifiable net assets at acquisition.
When this method is followed, the non-controlling interest does NOT share
in the FCTR on goodwill. However, where the non-controlling interest is
measured at fair value at acquisition, the non-controlling interest will have a
share in the FCTR on goodwill. This share is based on the profit-sharing
(ownership interest) ratio.

c Journal 10 is eliminating the unrealised profit included in the inventory

balance at

year end. As the unrealised profit is only eliminated at year end and not
throughout the year, the closing rate (R2,50) will be used to translate the
journal to the functional currency. There are, however, different schools of
thought on this principle. It can

also be argued that the elimination of any intragroup transactions will follow
the same translation principle, as discussed in chapter 15.8 above: l assets
and liabilities shall be translated at the closing rate at the date of the
statement of financial position;

l income and expenses shall be translated at the exchange rate applicable at

the date of the transaction or an average exchange rate for the period; and l
all resulting exchange differences shall be recognised in the foreign currency
translation reserve (FCTR)) in other comprehensive income.

396

Foreign operations

Assuming that P

Ltd measures the non-controlling interest at fair value at the

acquisition date and that the fair value of the non-controlling interest is R1
800 at that date, the analysis of owners’ equity of S Ltd and pro forma
consolidation journal entries would be as follows:

C1 Analysis of owners’ equity of S Ltd

(FC)

(R)

(R) 75% (R) 75% (R) 25%

Rate

100%

100%

At

Since

NCI
I At acquisition

Share capital

1 000

R2,00

2 000

1 500

500

Retained earnings

2 000

R2,00

4 000

3 000

1 000

Fair value remeasurement

(land)

500

R2,00 1

000

750

250
3 500

R2,00

7 000

5 250

1 750

Equity represented by goodwill

– Parent and NCI

400

R2,00

800

750

50

Consideration and NCI

3 900

7 800

6 000

1 800

ii Since acquisition

• To beginning of current year:

Retained
earnings

movement

R2,10

20.11 300 (average)

630

472

158

FCTR (excluding goodwill)

730

548

182

FCTR (goodwill only)

80

60

20

4 200

R2,20

9 240

1 080

2 160
• Current year:

Retained

earnings

movement

400

R2,40

960

720

240

20.12

(average)

Exchange

differences

on translation

(excluding goodwill)

1 180

885

295

Exchange

differences
on translation

(goodwill only)

120

90

30

FC4 600

R2,50 R11 500

R2 775

R2 725

Comment

Goodwill remeasurement calculation (method only used in respect of foreign

entities)

FC

Rate

At acquisition date

FC400

R2,00

800

FCTR 20.11

80
31/12/20.11

FC400

R2,20

880

Exchange differences on translation: 20.12

120

31/12/20.12

FC400

R2,50

R1 000

397

Chapter 15

C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 6 000

Amount of non-controlling interests: IFRS 3.32(a)(ii)

1 800

7 800

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(7 000)

Goodwill (parent and NCI)

R800

C3 Pro forma consolidation journal entries

Dr

Cr

J1 Land (SFP)

1 000

Equity at acquisition (SCE)

1 000

Fair value remeasurement on land

J2 Share capital (SCE)

2 000

Retained earnings (SCE)

4 000

Equity at acquisition (SCE)

1 000

Goodwill

(SFP)

800
Non-controlling interests (SFP/SCE)

1 800

Investment in S Ltd (SFP) (at cost price)

6 000

Elimination of acquisition date equity

J3 Retained earnings (SCE)

158

Non-controlling interests (SFP/SCE)

158

Recognition of non-controlling interests’ portion of

retained earnings since acquisition to beginning of

current year

J4 FCTR

(SCE)

202

Non-controlling interests (SFP/SCE) (182 + 20)

202

Recognition of non-controlling interests’ portion of

FCTR since acquisition to beginning of current year

J5 Non-controlling interests (P/L)

240

Non-controlling interests (SFP/SCE)

240

Recognition of non-controlling interests’ portion of

current year’s profit

J6 Non-controlling interests (OCI)

325

Non-controlling interests (SFP/SCE) (295 + 30)

325

Recognition of non-controlling interests’ portion of

current year’s FCTR

J7 Goodwill

(SFP)

(1 000 – 800) 200

FCTR

(SCE)

80

Exchange differences on translation (OCI)

120

Remeasure goodwill to closing rate at reporting date –

the non-controlling interests does share in this portion of the FCTR
(comment (a))

continued

398

Foreign operations

Dr

Cr

J8

Land (SFP)

250

FCTR

(SCE)

(FC500 × (R2,20 – R2,00))

100

Exchange differences on translation (OCI)

(FC500 × (R2,50 – R2,20))

150

Recording effect of movement in exchange rate i.r.o.

fair value remeasurement on land

J9

Revenue (P/L) (FC30 × R2,40)

72

Cost of sales (P/L)

72

Elimination of intragroup sales

J10 Cost of sales (P/L) (FC20 × 2,50 × 20/120)

Inventory (SFP)

Elimination of unrealised profit on inventory

Comment

The non-controlling interest does share in the FCTR on goodwill and this is
already taken into account in the non-controlling interest amounts of R202
(R182 + R20) and

R325 (R295 + R30).

15.10 Foreign operation and reporting entity have different reporting

dates

When the financial statements of a foreign operation are as of a date

different from that of the reporting entity, the foreign operation often
prepares additional statements as of the same date as the reporting entity’s
financial statements. When this is not done, IFRS 10 Consolidated
Financial Statements allows the use of a different reporting date, provided
that the difference is no greater than three months and adjustments are made
for the effects of any significant transactions or other events that occur
between the different dates. In such a case, the assets and liabilities of the
foreign operation are translated at the exchange rate on the statement of
financial position date of the foreign operation. Adjustments are made for
significant changes in exchange rates up to the statement of financial
position date of the reporting entity in accordance with IFRS 10.

The same approach is used in applying the equity method to associates and
joint

ventures in accordance with IAS 28 Investments in Associates and Joint

Ventures.

15.11 Net investment in a foreign operation

Exchange differences arising on a monetary item that forms part of a

reporting entity’s net investment in a foreign operation shall be recognised in
profit or loss in the separate financial statements of the reporting entity or
the individual financial statements of the foreign operation, as appropriate.
However, in the consolidated financial statements of the reporting entity that
include the foreign operation, such an exchange difference shall be
recognised in other comprehensive income (foreign currency translation
reserve).

Thus, the pro forma consolidation journals would normally include a

reclassification journal that reclassifies the exchange differences from profit
or loss to other comprehensive income.

399

Chapter 15

Loan to subsidiary as part of the net investment in a foreign

Example 15.3

operation
1 P Ltd is a South African company and has the South African Rand (ZAR)
as its functional currency.

2 P Ltd obtained a controlling interest in S Ltd, a foreign subsidiary, with FC

as its functional currency, at the beginning of the financial year.

3 As part of the purchase agreement P Ltd granted a loan to S Ltd to the

value of FC1

000. The loan bears interest at a market-related interest rate of 10% per
annum, payable annually. The repayment of the loan is, however, not
expected in the foreseeable future. P Ltd regarded the loan as part of its net
investment in S Ltd.

4 According to P Ltd’s accounting policy, only the capital amount of the loan
amount is included as part of the net investment in a foreign operation.

5 Ignore any effects of taxation.

6 The following exchange rates are applicable:

FC1,00 = ZAR

At acquistion

2,00

Average for period

2,50

Year end

3,00

The journal entries in the separate accounting records of P Ltd would be as

follows: Dr

Cr
R

Initial recognition

J1 Loan to subsidiary (SFP) (1 000 × 2,00) 2

000

Bank (SFP)

2 000

Initial recognition of the loan at the spot exchange rate

Year end

J1 Bank

(SFP) (1 000 × 10% × 3,00) 300

Interest received (P/L) (100 × 2,50)

250

Foreign exchange differences (P/L)

50

Recognition of interest received on foreign loan

J2 Loan to subsidiary (SFP) ((1 000 × 3,00) – 2 000) 1

000

Foreign exchange differences (P/L)

1 000
Restatement of foreign loan to the spot exchange rate

400

Foreign operations

The journal entries in the individual accounting records of S Ltd would be as

follows: Dr

Cr

FC

FC

Initial recognition

J1

Bank (SFP)

1 000

Loan from parent (SFP)

1 000

Initial recognition of the loan

Year end

J1

Interest paid (P/L) (1 000 × 10%) 100

Bank

(SFP)

100
Recognition of interest paid on loan from parent

The conversion trial balance of S Ltd at year end

FC Rate R

Interest paid

100

R2,50

250

Loan from parent

(1 000)

R3,00

(3 000)

Equity (Balancing)

900

R3,00

2 700

Exchange differences on translation:

Year end (Balancing)

50

–
–

The following pro forma consolidation journal entries should be processed at

year end: Dr

Cr

J1 Foreign exchange differences (P/L)

1 000

Exchange differences on translation (OCI)

1 000

Reclassification of the exchange differences that relate

the net investment in the foreign operation

J2 Interest received (P/L)

250

Interest

paid (P/L)

250

Elimination of intragroup interest received and paid

J3 Loan from parent (SFP)

3 000

Loan to subsidiary (SFP)

3 000

Elimination of intragroup loan

Assume the same information as stated above, except that the loan granted
was denominated in the functional currency of the parent. The loan to S
Ltd amounted to R2 000.

401

Chapter 15

The journal entries in the separate accounting records of P Ltd would be as

follows: Dr

Cr

Initial recognition

J1

Loan to subsidiary (SFP)

2 000

Bank (SFP)

2 000

Initial recognition of the loan

Year end

J1 Bank

(SFP) (2 000 × 10%) 200

Interest received (P/L)

200

Recognition of interest received on foreign loan

The journal entries in the individual accounting records of S Ltd would be as

follows: Dr

Cr

FC

FC

Initial recognition

J1 Bank

(SFP)

(2 000/2,00) 1

000

Loan from parent (SFP)

1 000

Initial recognition of the loan at the spot exchange

rate

Year end

J1

Interest paid (P/L) ((2 000 × 10%)/2,50) 80

Bank
(SFP)

((2 000 × 10%)/3,00)

67

Foreign exchange differences (P/L)

13

Recognition of interest paid on loan from parent

J2

Loan from parent (SFP) ((2 000/3,00) – 1 000)

333

Foreign exchange differences (P/L)

333

Restatement of foreign loan to the spot exchange

rate

The conversion trial balance of S Ltd at year end:

FC Rate R

Interest expense

80

R2,50

200

Foreign exchange differences on interest

(13)

R2,50

(33)

Foreign exchange differences on loan

(333)

R2,50

(832)

Loan from parent (1 000 – 333) (667)

R3,00

(2

000)

Equity (Balancing)

933

R3,00

2 799

Exchange differences on translation:

Year end (Balancing)

(134)

–
–

402

Foreign operations

The following pro forma consolidation journal entries should be processed at

year end: Dr

Cr

J1

Foreign exchange differences (P/L)

832

Exchange differences on translation (OCI)

832

Reclassification of the exchange differences that relate

the net investment in the foreign operation

J2

Interest received (P/L)

200

Interest paid (P/L)

200

Elimination of intragroup interest received and paid

J3

Loan from parent (SFP)

2 000

Loan to subsidiary (SFP)

2 000

Elimination of intragroup loan

Comments

In the example above, P Ltd’s accounting policy is to include only the capital
amount of the loan (not the interest component) amount as part of the net
investment in a foreign operation. There are, however, different schools of
thought on this principle. It can also be argued that the interest is considered
part of the net investment in a foreign operation. If this is the case, the
exchange differences on translation of the interest to the presentation
currency will also be reclassified to other comprehensive income in
accordance with IAS 21.32 upon consolidation. It would be sensible to
disclose what is included (capital and/or interest) in the net investment in a
foreign operation in the accounting policy of the group.

15.12 Foreign operations – Associates and joint ventures

When a parent has an investment in a foreign operation in the form of an

associate or joint venture, the translation of the foreign operation follows the
same guidelines as discussed in chapter 15.8. Assets and liabilities shall be
translated at the closing rate and income and expenses shall be translated at
the exchange rate applicable at the date of the transaction or an average rate.
The resulting exchange differences shall be recognised as a separate
component of equity (commonly referred to as the foreign currency
translation reserve (FCTR)) in other comprehensive income until such time
as the associates or joint ventures are disposed of.

Example 15.4
Foreign operation – Associate

1 P Ltd is a South African company and has the South African Rand (ZAR)
as its functional currency.

2 P Ltd obtained a 30% interest in A Ltd, a foreign entity with FC as its

functional currency, on 1 January 20.15 for FC3 000 and as a result obtained
significant influence over A Ltd from that date.

3 At acquisition date A Ltd’s net asset value amounted to FC8 000.

4 For the year ended 31 December 20.15, A Ltd made a net profit of FC1
500 and a dividend of FC800 was declared and paid on 30 November 20.15.

403

Chapter 15

5 P Ltd accounts for investments in associates at cost in terms of IAS

27.10(a).

6 Ignore any effects of taxation.

7 The following exchange rates are applicable:

FC1,00 = ZAR

1 January 20.15

2,00

30 November 20.15

2,80

Average for period

2,50

31 December 20.15
3,00

The journal entry in the separate accounting records of P Ltd would be as

follows: Dr

Cr

1 January 20.15

J1 Investment in associate (SFP) (3 000 × 2) 6

000

Bank (SFP)

6 000

Initial recognition of investment in associate at the

sport exchange rate

30 November 20.15

J2 Bank

(SFP)

(800 × 30% × 2,80) 672

Dividend received (P/L)

672

Recognition of dividend received

Comments
The dividend received and paid will be translated at spot exchange rate on
the date of payment.

The pro forma consolidation journal entries would be as follows: Dr

Cr

31 December 20.15

J1 Investment in associate (SFP) (1 500 × 30% × 2,50) 1

125

Share of profit of associate (P/L)

1 125

Recognition of share of profit of foreign associate

J2 Dividend received (P/L)

672

Investment in associate (SFP)

672

Elimination of intragroup dividend received

J3 Investment in associate (SFP)

3 177

Exchange differences on translation (OCI)

3 177
Remeasure the investment in associate to closing rate

404

Foreign operations

C1 Analysis of owners’ equity of A Ltd

(FC)

(FC)

(R) 30% (R) 30%

Rate

100%

30%

At

Since

i At acquisition

Net asset value

8 000

2 400

R2,00

4 800

Investment in A Ltd

(3 000)
R2,00

(6 000)

Goodwill

(600) R2,00

(1

200)

ii Since acquisition

Current

year:

Profit for the year

1 500

450

R2,50

125

(average)

Dividends

(800)

(240)
R2,80

(672)

700

210

453

Exchange differences on translation

(OCI)

23 177

1F3 210

R3,00

R9 630

(1) FC3 000 + FC210

(2) R9 630 – R453 – R6 000

Comments

The difference between translating a foreign subsidiary and a foreign

associate is that when the foreign operation is an associate, the net assets at
year end are not translated to the presentation currency but rather the initial
investment and since acquisition reserves of the associate. This is because
associates are accounted for using the 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.

When equity accounting, the goodwill is not accounted for separately as it is

included in the initial investment in A Ltd. Therefore, no additional
exchange difference on translation adjustment is required for goodwill, as is
the case for subsidiaries.

15.13 Disposal of a foreign operation

On the disposal of a foreign operation, the cumulative amount of the

exchange differences relating to that foreign operation, recognised in other
comprehensive income and accumulated in the separate component of
equity, shall be reclassified from equity to profit or loss (as a reclassification
adjustment) when the consolidated gain or loss on disposal is recognised.
IAS 1 Presentation of Financial Statements addresses the issue of
reclassification adjustments.

The following are accounted for as a disposal of a foreign operation: l the

disposal of an entity’s entire interest in a foreign operation; l the partial
disposal of an entity’s interest in a foreign operation (an interest in the
former subsidiary, associate or jointly controlled entity is retained) and:

• the entity loses control of a subsidiary that includes a foreign operation;

405

Chapter 15

• the entity loses significant influence over an associate that includes a

foreign operation; and

• the entity loses joint control over a jointly controlled entity that includes a
foreign operation.

Therefore, on the disposal of a foreign operation, the cumulative amount of

the exchange differences relating to that foreign operation shall be
reclassified from equity to profit or loss as a reclassification adjustment.
When disposing of a foreign subsidiary, the cumulative amount of the
exchange differences relating to that foreign operation that have been
attributed to the non-controlling interests shall be derecognised, but
shall not be reclassified to profit or loss. This means that the cumulative
amount of exchange differences reclassified to profit or loss will be done on
a net basis, net of the non-controlling interests. Example 15.5 illustrates this
principle.
An entity can also partially dispose of its interest in a foreign operation
without losing control, significant influence or joint control. This would
be any reduction in an entity’s ownership in a foreign operation, except those
reductions referred to above as disposals. Partial disposals therefore include,
amongst others, changes in a parent’s ownership interest in a subsidiary that
do not result in a loss of control.

Upon the partial disposal of a subsidiary that includes a foreign operation,

the entity is required to re-attribute the proportionate share of the cumulative
amount of the exchange differences to the non-controlling interests in that
foreign operation.

Example15.6 below illustrates this principle. In any other partial disposal of

a foreign operation (e.g., a branch), the entity is required to reclassify to
profit or loss only the proportionate share of the cumulative amount of the
exchange differences.

An entity may dispose (or partially dispose) of its interest in a foreign

operation through sale, liquidation, repayment of share capital or
abandonment of all, or part of, that entity. A write-down of the carrying
amount of a foreign operation does not constitute a partial disposal.
Accordingly, no part of the foreign exchange gain or loss recognised in other
comprehensive income is reclassified to profit or loss at the time of a write-
down.

406

Foreign operations

Disposal of a foreign operation resulting in a loss of control

Example 15.5

(NCI is measured at fair value at the acquisition date)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

P Ltd and
sub-

sidiaries

A Ltd

(consoli-

dated)

FC

ASSETS

Property, plant and equipment

500 000

7 000

Investment in A Ltd – 4 000 shares at cost price

50 000

Inventory

200 000

12 750

Total assets

R750 000

FC19 750
EQUITY AND LIABILITIES

Share capital (400 000/10 000 shares)

400 000

10 000

Retained earnings

250 000

9 750

Non-controlling interests

100 000

Total equity and liabilities

R750 000

FC19 750

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd and

subsidiaries

A Ltd

(consoli-

dated)
R FC

Revenue

500 000

30 000

Cost of sales

(210 000)

(20 000)

Gross profit

290 000

10 000

Other income (gain on disposal of interest)

36 000

Other income (dividend received)

10 000

Profit before tax

336 000

10 000

Income tax expense

(146 000)

(5 250)

PROFIT FOR THE YEAR

190 000

4 750

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R190 000

FC4 750

Total comprehensive income attributable to:

Owners of the parent

150 000

4 750

Non-controlling interests

40 000

R190 000

FC4 750
407

Chapter 15

EXTRACT FROM STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

P Ltd and

sub-

sidiaries

A Ltd

(consoli-

dated)

FC

Balance at 1 January 20.17

150 000

7 500

Changes in equity for 20.17

Total comprehensive income for the year:

Profit for the year

150 000

4 750

Dividend paid: 31/12/20.17

(50 000)

(2 500)

Balance at 31 December 20.17

R250 000

FC9 750

1 P Ltd is a South African company and has the South African Rand (ZAR)
as its functional currency. P Ltd purchased 8 000 shares in A Ltd, a foreign
subsidiary with FC as its functional currency, on 1 January 20.13 for R100
000. The analysis of owners’ equity of A Ltd, calculated correctly up to 31
December 20.16, is as follows: Analysis of owners’ equity of A Ltd

(FC)

(R)

(R) 80% (R) 80% (R) 20%

Rate

100%

100%

At

Since

NCI
i At

acquisition

Share capital

10 000

R8,00 80 000

64 000

16 000

Retained earnings

2 500

R8,00 20 000

16 000

4 000

12 500

R8,00 100 000

80 000

20 000

Equity represented by good-

will – Parent and NCI

3 250

R8,00 26 000
20 000

6 000

Consideration and NCI

15 750

126 000 100 000

26 000

ii Since acquisition

• Current year:

Retained earnings

5 000 (average) 42 250

33 800

8 450

FCTR (excluding goodwill)

15 250

12 200

3 050

FCTR (goodwill only)

3 250

2 600

650
31 December 20.16

20 750

R9,00 186 750

48 600 38 150

2 On 31 March 20.17, P Ltd disposed of 4 000 shares in A Ltd for R86 000.
P Ltd exercised significant influence over the financial and operating policy
decisions of A Ltd from that date. The fair value of the remaining investment
by P Ltd in A Ltd was R80 000 at the date of disposal of the interest.

3 A Ltd’s profit and tax for 20.17 accrued evenly.

4P

Ltd accounted for the investment in A

Ltd at cost in its separate financial

statements.

408

Foreign operations

5 P Ltd elected to measure the non-controlling interest at fair value at the

date of acquisition.

6 The disposal of the interest in the subsidiary did not comply with the
criteria of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations until the date of disposal thereof and A Ltd does not represent a
separate major line of business or geographical area of the group.

7 None of P Ltd’s subsidiaries declared or paid a dividend during the 20.17

financial year.
8 The company tax rate is 28%. Ignore capital gains tax consequences.
Assume there are no deferred tax consequences on the exchange differences
on translation of the foreign operation.

9 The following exchange rates are applicable:

FC1,00 = ZAR

31/12/20.16

9,00

Average 1/1/20.17–31/3/20.17

9,20

31/3/20.17

9,50

Average 1/4/20.17–31/12/20.17

9,80

31/12/20.17 10,00

Solution 15.5

The consolidated financial statements, incorporating the results of A Ltd in

accordance with the equity method, for the year ended 31 December 20.17
are prepared as follows: P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets
Property, plant and equipment (P and other subsidiaries)

500 000

Investment in associate (50 000(remaining cost) + 30 000(J1) + 8 460(J3))

or (80 000(fair value of retained investment after loss of control) + 8
460(since)) 88 460

588 460

Current assets

Inventory (P and other subsidiaries) 200

000

Total assets

R788 460

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

400 000

Retained earnings 283

965

Other components of equity

4 495

688 460

Non-controlling interests (i.r.o. other subsidiaries)

100 000

Total equity

788 460

Total equity and liabilities R788

460

409

Chapter 15

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31

DECEMBER 20.17

Revenue (500 000(P) + 69 000(A))

569 000

Cost of sales (210 000(P) + 46 000(A))

(256 000)

Gross profit (290 000(P) + 23 000(A))

313 000

Other income

(71(gain on disposal of interest) + 23 385(reclassification adjustment)) 23

456

Share of profit of associate

13 965

Profit before tax

350 421

Income tax expense (146 000(P) + 12 070(A)) (158

070)

PROFIT FOR THE YEAR

192 351

Other comprehensive income:

Items that may be reclassified subsequently to profit or loss: Exchange

differences on translating foreign operations

10 731

Less: Reclassification adjustment

(23 385)

Share of other comprehensive income of associate

4 495

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R184 192

Profit attributable to:

Owners of the parent

150 165

Non-controlling interests (40 000(other) + 2 186(A))

42 186

R192 351

Total comprehensive income attributable to:

Owners of the parent

139 860

Non-controlling interests (42 186 + 1 821(A) + 325(A))

44 332

R184 192

410

Foreign operations

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Share

Retained

Total

FCTR Total NCI

capital

earnings

equity
Balance at

1 Jan 20.17

400 000 1183 800 214 800

598 600

398 150

696 750

Changes in equity

for 20.17

Dividends

(50 000)

– (50

000)

– (50

000)

Total comprehen-

sive income for

the year:

Profit for the year

–
150 165

150 165

42 186

192 351

Other comprehen-

sive income

– 4(10 305)

(10 305)

52 146

(8 159)

Derecognition of

non-controlling

interests

(42 482)
(42 482)

Balance at

31 Dec 20.17

R400 000 R283 965

R4 495 R688 460 R100 000

R788 460

FCTR = Foreign currency translation reserve

NCI = Non-controlling interests

(1) 150 000(P) + 33 800(A) = 183 800

(2) 12 200 + 2 600 = 14 800

(3) 100 000 + 42 482 – 2 146 – 42 186 = 98 150

(4) 139 860 – 150 165 = 10 305

(5) 44 332 – 42 186 = 2 146

(6) The cumulative amount of the exchange differences has been reclassified
from equity to profit or loss as a reclassification adjustment, on a net basis,
in terms of IAS 21.48 and IAS 21.48B. The balance of R4 495 remaining in
the FCTR arises subsequent to the loss of control in the period in which A
Ltd is an associate. The originating entry for this is the share of other
comprehensive income of the associate presented in the statement of profit
or loss and other comprehensive income.

411

Chapter 15
Calculations

C1 Analysis of owners’ equity of A Ltd – as subsidiary

(FC)

(R)

(R) 80% (R) 80% (R) 20%

Rate

100%

100%

At

Since

NCI

i At acquisition

Share capital

10 000

R8,00

80 000

64 000

16 000

Retained earnings

2 500
R8,00

20 000

16 000

4 000

12 500

R8,00

100 000

80 000

20 000

Equity represented by

goodwill –Parent and

NCI 3

250

R8,00

26 000

20 000

6 000

Consideration and NCI

15 750

126 000 100 000

26 000

ii Since acquisition

• To beginning of current

year:

Retained earnings

5 000

42 250

33 800

8 450

FCTR

(excluding goodwill)

15 250

12 200

3 050

FCTR (goodwill only)

3 250

2 600

650

31 December 20.16

20 750
R9,00

186 750

48 600

38 150

• Current year:

Profit: first three months

11 188 R9,20

10 930

8 744

2 186

Exchange differences

on translation

(excluding goodwill)

9 106

7 285

1 821

Exchange differences

on translation

(goodwill only)

1 625
1 300

325

31 March 20.17

21 938

R9,50

208 411

65 929

42 482

iii Loss of control over

subsidiary

Derecognise assets and

liabilities (IFRS 10.B98) (21 938)

(208 411) (100 000) (65 929) (42 482)

(1) FC4 750/12 × 3 = FC1 188

412
Foreign operations

C2 Analysis of owners’ equity of A Ltd – as associate

(FC)

(FC)

(R) 40% (R) 40%

Rate

100%

40%

At

Since

i At

acquisition

Recognise remaining interest at fair

value

8 421

R9,50

80 000

ii Since acquisition

• Current year:

Profit: last nine months

13 562 1

425

R9,80

13

965

Dividend

(2 500) (1

000)

R10,00

(10

000)

965

Exchange differences on translation

24 495

31 December 20.17

FC8 846 R10,00

R88

460

(1) FC4 750 – FC1 188 = FC3 562

(2) R88 460 – R3 965 – R80 000 = R4 495 as balancing amount Comments

a If a parent loses control, as is the case with A Ltd here, the gain or loss on
disposal of interest would be calculated as follows using IFRS 10.B98:

Derecognise assets (incl. goodwill) and liabilities on date control is lost (208
411)

Derecognise non-controlling interest

42 482

Recognise consideration received

86 000

Fair value of investment retained

80 000

Gain (consolidated) recognised in profit or loss

R71

b By means of the relevant amounts (as contained in the analysis of the

ownership interest of A Ltd), the gain on disposal of shares in A Ltd can be
analysed as follows: Proceeds on disposal of interest

86 000

Attributable net assets disposed of [(208 411 – 26 000(GW)) × 40%]

(72 964)

13 036

Goodwill realised (only for the parent company) (20 000 × 40/80) (10 000)

3 036
Remeasurement gain (80 000 versus (72 965 + 10 000))

(2 965)

Capital (consolidated) gain on disposal of the interest

R71

c In this example, A Ltd had post-acquisition reserves comprising FCTR and

retained earnings. Any balance of the FCTR would, on the date of the
disposal, be reclassified through other comprehensive income to profit or
loss on a net basis. See journal entry 2. If A Ltd had other post-acquisition
reserves, any balance of these reserves would, on the date of the disposal, be
transferred to retained earnings (e.g.

revaluation surplus or mark-to-market reserve).

413

Chapter 15

C3 Proof of calculation of goodwill of A Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 100 000

Amount of non-controlling interest: IFRS 3.32(a)(ii)

26 000

126 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(100 000)

Goodwill (parent and NCI)

R26 000
C4 Pro forma consolidation journal entries

Dr

Cr

J1

Investment in A Ltd (SFP)

30 000

Gain on disposal of interest (P/L) (per P) (comment (a)) 36

000

Cost of sales (P/L) (20 000 × 3/12 × R9,20) 46

000

Non-controlling interest (P/L) (first 3 months)

2 186

Income tax expense (P/L) (5 250 × 3/12 = 1 312 × R9,20) 12

070

Non-controlling interest (OCI) (1 821 + 325) 2

146

Revenue (P/L) (30 000 × 3/12 × R9,20)

69
000

Retained earnings (SCE) (opening balance)

33 800

FCTR (SCE) (opening balance)

14 800

Gain on disposal of interest (P/L) (group context)

71

Exchange differences on translation of foreign

operation (OCI) (9 106 + 1 625)

10 731

Consolidating the relevant amounts in respect of

period when A Ltd was a subsidiary

J2

Reclassification adjustment (OCI) (comment (b)) 23

385

Gain on disposal of interest (P/L)

23 385

Reclassification of realised exchange gains to P/L

J3

Non-controlling interests (SFP/SCE) (derecognised)

42 482

Non-controlling interests (SFP/SCE) (opening balance

in equity)

38 150

Non-controlling interests (SFP/SCE) (current year’s

interest in profit)

2 186

Non-controlling interests (SFP/SCE) (1 821 + 325)

(current year’s exchange differences on translation)

2146

Accounting for various line items of non-controlling

interests in equity for A Ltd (comment (c))

J4

Investment in A Ltd (SFP)

8 460

Other income (dividend received) (P/L)

10 000

Share of profit of associate (P/L)

13 965

Share of other comprehensive income

of associate (OCI)

4 495

Equity accounting of associate for current year

414

Foreign operations

Comments

a The gain on disposal in the separate accounting records of P Ltd could also
be calculated as 86 000 – (100 000 × 4 000/8 000) = 36 000 profit.

b 12 200 + 2 600 + 7 285 + 1 300 = 23 385 Done on a net basis in terms of

IAS 21.48B. Hence, no NCI is recognised in this journal entry.

c All entries in J3 are made against the same ledger account with no net
effect. Thus, it may be argued that J3 is not needed. J3 only assists in
preparing the various line items for the non-controlling interests in the
consolidated statement of changes in equity.

Partial disposal of an interest in a foreign subsidiary with no

change in the status as the subsidiary remains a subsidiary

Example 15.6

(control is not lost) (NCI is measured at its proportionate

share of the acquiree’s identifiable net assets at the

acquisition date)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17

P Ltd and
sub-

sidiaries

A Ltd

(consoli-

dated)

FC

ASSETS

Property, plant and equipment

500 000

7 000

Investment in A Ltd – 6 000 shares at cost price

60 000

Inventory

167 000

15 250

Total assets

R727 000

FC22 250
EQUITY AND LIABILITIES

Share capital (400 000/10 000 shares)

400 000

10 000

Retained earnings

227 000

12 250

Non-controlling interests

100 000

Total equity and liabilities

R727 000

FC22 250

415

Chapter 15

STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

P Ltd and

subsidiaries

A Ltd
(consoli-

dated)

FC

Revenue

500 000

30 000

Cost of sales

(210 000)

(20 000)

Gross profit

290 000

10 000

Other income (gain on disposal of interest)

23 000

Profit before tax

313 000

10 000

Income tax expense

(146 000)

(5 250)

PROFIT FOR THE YEAR

167 000

4 750

Other comprehensive income

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R167 000

FC4 750

Total comprehensive income attributable to:

Owners of the parent

127 000

4 750

Non-controlling interests

40 000

R167 000

FC4 750
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Retained

earnings

P Ltd and

subsidiaries

A Ltd

(consoli-

dated)

FC

Balance at 1 January 20.17

150 000

7 500

Changes in equity for 20.17

Total comprehensive income for the year:

Profit for the year

127 000

4 750

Dividend paid: 31/12/20.17

(50 000)

Balance at 31 December 20.17

R227 000

FC12 250

1 P Ltd is a South African company and has the South African Rand (ZAR)
as its functional currency. P Ltd purchased 8 000 shares in A Ltd, a foreign
entity with FC

as its functional currency, for R80 000. From this date, P Ltd had control
over A Ltd in accordance with IFRS 10. The analysis of owners’ equity of A
Ltd, calculated correctly up to 31 December 20.16, is as follows:

416

Foreign operations

Analysis of owners’ equity of A Ltd

(FC)

Rate (R)

(R) 80% (R) 80% (R) 20%

100%

100%

At

Since

NCI
i At acquisition

Share capital

10 000

R8,00

80 000

64 000

16 000

Retained earnings

2 500

R8,00

20 000

16 000

4 000

12 500

R8,00

100 000

80 000

20 000

Equity represented by

goodwill – Parent
–

Consideration

and NCI

12 500

100 000

80 000

20 000

i Since acquisition

• Current year:

Retained earnings

5 000 (average)

42 250

33 800

8 450

FCTR

15 250
12 200

3 050

31 December 20.16

FC17 500

R9,00 R157 500

1R46 000 R31 500

(1) 33 800(RE) + 12 200(FCTR) = 46 000

2 On 31 March 20.17, P Ltd disposed of 2 000 shares in A Ltd for R43 000.

3 A Ltd’s profit and taxation for 20.17 accrued evenly.

4 P Ltd accounted for the investment in A Ltd at cost in its separate financial
statements.

5 P Ltd elected to measure the non-controlling interest at its proportionate

share of the acquiree’s identifiable net assets at the acquisition date.

6 The disposal of the interest in the subsidiary did not comply with the
criteria of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations.

7 None of P Ltd’s subsidiaries declared or paid a dividend during the 20.17

financial year.

8 The non-controlling interest opening balance on 1 January 20.17 in the

statement of changes in equity for all other subsidiaries (excluding A Ltd)
was R60 000.

9 Ignore any effects of taxation.

10 The following exchange rates are applicable:

FC1,00 = ZAR
31/12/20.16 9,00

Average 1/1/20.17–31/3/20.17

9,20

31/3/20.17 9,50

Average 1/4/20.17–31/12/20.17

9,80

31/12/20.17 10,00

417

Chapter 15

Solution 15.6

The consolidated financial statements for the year ended 31 December 20.17
are prepared as follows:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

ASSETS

Non-current assets

Property, plant and equipment (500 000(P) + (7 000 × R10,00)(A)) 570

000

Current assets

Inventory (167 000(P) + (15 250 × R10,00)(A)) 319

500

Total assets

R889 500

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

400 000

Retained earnings

267 489

Other components of equity (12 364 + 20 648) 33

012

700 501

Non-controlling interests

188 999

Total equity

889 500

Total equity and liabilities

R889 500

418

Foreign operations
P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue (500 000(P) + 289 500(A))

789 500

Cost of sales (210 000(P) + 193 000(A))

(403 000)

Gross profit (290 000(P) + 96 500(A))

386 500

Other income (23 000(P) – 23 000(J5))

Profit before tax

386 500

Income tax expense (146 000 + 50 662) (196

662)

PROFIT FOR THE YEAR

R189 838

Other comprehensive income:

Items that may be reclassified subsequently to profit or loss: Exchange

differences on translating foreign operations
(9 106(analysis) + 10 056(analysis))

19 162

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R209 000

Profit attributable to:

Owners of the parent

133 689

Non-controlling interests (40 000(other) + 2 186(analysis) + 13

963(analysis)) 56 149

R189 838

Total comprehensive income attributable to:

Owners of the parent

147 008

Non-controlling interests (56 149 + 1 821(analysis) + 4 022(analysis)) 61

992

R209 000

419

Chapter 15

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Changes

Re-

Share

Total

in owner-

tained

FCTR Total NCI

capital

equity

ship

earnings

Balance at

1 Jan 20.17

400 000

1183 800 12 200

596 000

291 500 687 500

Changes in

equity for
20.17

Dividends

(50 000)

(50 000)

(50 000)

Total

compre-

hensive

income for

the year:

Profit for the

year –

133 689

133 689
56 149

189 838

Other

compre-

hensive

income –

– 413 319

13 319

35 843

19 162

Disposal of

interest (J5)

12 364

12 364

30 636

43 000
Transfer of

FCTR (J5)

(4 871)

(4 871)

4 871

Balance at

31 Dec

20.17

R400 000 R12 364 R267 489 R20 648 R700 501 R188 999 R889 500

FCTR = Foreign currency translation reserve

NCI = Non-controlling interests

(1) 150 000(P) + 33 800(A) = 183 800

(2) 31 500(A) + 60 000(other subsidiaries) = 91 500

(3) 61 992 – 56 149 = 5 843

(4) 19 162(OCI) – 5 843 = 13 319 or 19 162(OCI) – 1 821(NCI) – 4

022(NCI) = 13 319

420
Foreign operations

Calculations

C1 Analysis of owners’ equity of A Ltd

(FC)

(R)

(R) 80% (R) 80% (R) 20%

Rate

100%

100%

At

Since

NCI

i At acquisition

Share capital

10 000

R8,00

80 000

64 000

16 000

Retained earnings
2 500

R8,00

20 000

16 000

4 000

12 500

R8,00

100 000

80 000

20 000

Equity represented by

goodwill – Parent

Consideration and NCI

12 500

100 000

80 000
20 000

ii Since acquisition

• To beginning of current

year:

Retained earnings

5 000

42 250

33 800

8 450

FCTR

15 250

12 200

3 050

31 December 20.16

17 500

R9,00

157 500

46 000

31 500

• Current year:
Profit: first three months

11 188 R9,20

10 930

8 744

2 186

Exchange differences

on translation

9 106

7 285

1 821

31 March 20.17

18 688

R9,50

177 536

62 029

35 507

Sale of 2 000 shares2

(20 000) (15 507)

35 507

46 522
71 014

Profit:

last nine months

33 562 R9,80

34 908

20 945

13 963

Exchange differences

on translation

10 056

6 034

4 022

31 December 20.174

FC22 250 R10,00

R222 500

R73 501 R88 999

(1) FC4 750/12 × 3 = FC1 188

(2) 80 000 × 20/80 = 20 000At

(33 800 + 8 744) × 20/80 = 10 636 RE

(12 200 + 7 285) × 20/80 = 4 871 FCTR

10 636 + 4 871 = 15 507

Equity acquired from parent = 35 507

(3) FC4 750 – FC1 188 = FC3 562

(4) (33 800 + 8 744 – 10 636 + 20 945) = 52 853 RE

(12 200 + 7 285 – 4 871 + 6 034) = 20 648 FCTR

Total Since = 52 853 + 20 648 = 73 501

421

Chapter 15

Comments

a The amount for the change in ownership recognised in equity can be

calculated as

follows (see IFRS 10.B96) (from the perspective of the NCI): Fair value of
the consideration paid by NCI

43 000

Amount by which the non-controlling interests are adjusted (reserves

acquired from parent – see below)

(35 507)

NCI after transaction (177 536 × 40%)

71 014

NCI before transaction (177 536 × 20%)

(35 507)

7 493
Add: FCTR already treated as equity

4 871

Amount to be recognised directly in equity

R12 364

b The amount for the change in ownership recognised in equity can also be
calculated

as follows (from the change in the parent’s interest): Fair value of the
consideration received by the parent

43 000

Equity relinquished to NCI

(35 507)

Historic fair value of shares disposed of

(20 000)

Attributable post-acquisition equity disposed of:

Retained earnings

(10 636)

FCTR

(4 871)

7 493

Add: FCTR already treated as equity

4 871
Amount to be recognised directly in equity/Capital gain on disposal of
interest (in group context)

R12 364

c Alternatively, the amount can also be calculated as follows: Proceeds on

disposal of interest

43 000

Attributable net assets disposed

(35 507)

7 493

Add: FCTR already treated as equity

4 871

Amount to be recognised directly in equity/Capital gain on disposal of

interest (in group context)

R12 364

C2 Proof of calculation of goodwill of A Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 80 000

Amount of non-controlling interest: IFRS 3.32(a)(ii)

20 000

100 000

Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)

(100 000)
Goodwill (parent)

422

Foreign operations

C3 Pro forma consolidation journal entries for the consolidation Dr

Cr

J1

Share capital (SCE)

80 000

Retained earnings (SCE)

20 000

Goodwill

(SFP)

Investment in A Ltd (SFP)

80 000

Non-controlling interests (SFP/SCE)

20 000
Main elimination journal entry at acquisition

J2

Retained earnings (SCE)

8 450

FCTR (SCE)

3 050

Non-controlling interests (SFP/SCE)

11 500

Recognition of of non-controlling interests’ portion

of retained earnings & FCTR

J3

Non-controlling interests (P/L)

2 186

Non-controlling interests (SFP/SCE)

2 186

Recognition of of non-controlling interests’ portion

of current year’s profit at 20%

J4

Non-controlling interests (OCI)

1 821
Non-controlling interests (SFP/SCE)

1 821

Recognition of of non-controlling interests’ portion

of exchange differences on translation at 20%

J5

Investment in A Ltd (SFP)

20 000

Gain on disposal of interest (P/L) (per P)

23 000

FCTR (SCE)

4 871

Changes in ownership (SCE)

12 364

Non-controlling interests (SFP/SCE)

(20 000(At) + 10 636(RE) + 4 871(FCTR))

35 507

Pro forma correction of group gain on disposal

J6

Non-controlling interests (P/L)

13 963
Non-controlling interests (SFP/SCE)

13 963

Recognition of of non-controlling interests’ portion

of current year’s profit at 40%

J7

Non-controlling interests (OCI)

4 022

Non-controlling interests (SFP/SCE)

4 022

Recognition of of non-controlling interests’ portion

of exchange differences on translation at 40%

423

Chapter 15

Comment

Conversion statement of profit or loss and other comprehensive income of A

Ltd for the year ended 31 December 20.1 7

First 3 months Last 9 months

TOTAL

FC

(R9,20)

(R9,80)
R

Revenue

30 000

69 000

220 500

289 500

Cost of sales

(20 000)

(46 000)

(147 000)

(193 000)

Gross profit

10 000

23 000

73 500

96 500

Income tax expense

(5 250)
(12 070)

(38 592)

(50 662)

FC4 750

R10 930

R34 908

R45 838

Self-assessment question

Question 15.1

Eastern Ltd is a South African company and has the South African Rand
(ZAR) as its functional currency. You have commenced with the final audit
of Eastern Ltd for the financial reporting period ended 30 June 20.18.

A few weeks into the engagement, a few unresolved accounting issues have
arisen.

These issues need to be dealt with by you and have been summarised below.

Separate/Individual financial statements of group companies are included in

the appendix.

Information relevant to the consolidation

Eastern Ltd acquired its 80% controlling interest in Travel Ltd, a foreign
entity, on 1 July 20.17 for LSL3 million when the equity of Travel Ltd
consisted of the following: LSL

Share capital (100 000 shares)

100 000
Retained earnings

1 254 687

Revaluation surplus

1 228 125

Equity

2 582 812

The functional currency of Travel Ltd is the Lesotho Loti (LSL). The fair
value of Travel Ltd ordinary shares at the acquisition date amounted to
LSL36,00 per share.

All the assets and liabilities of Travel Ltd were deemed to be fairly valued at
the acquisition date, except for a factory building. No additional assets,
liabilities or contingent liabilities were identified at the acquisition date.

It was determined at the acquisition date that a factory building, owned by

Travel Ltd, appeared to be undervalued. Travel Ltd is entitled to a capital
allowance on the building, which is the same as the depreciation on the
building. The building is measured according to the revaluation model in the
individual financial statements of Travel Ltd.

424

Foreign operations

Details of the building are as follows:

LSL’000

Revalued carrying amount (1 July 20.17)

3 200

Fair value (1 July 20.17)

4 000

The directors of Travel Ltd have no intention of disposing of the building in

the near future. The building is depreciated on the straight-line basis over its
estimated remaining useful life of 10 years on 1 July 20.17. There is no
residual value for the purposes of depreciation. The factory building was
revalued at the reporting date 30 June 20.18 in the individual financial
statements of Travel Ltd.

Eastern Ltd disposed of a 20% interest in Travel Ltd on 30 June 20.18 for
R250 000

cash. Eastern Ltd therefore now holds a 60% interest in Travel Ltd after the
date of disposal and retains control over the board of directors of Travel Ltd.
The accountant was unsure how to account for the disposal in the separate
financial statements and therefore recorded the proceeds in a suspense
account.

Additional information

l The South African tax rate of companies is 28% and the capital gains tax
inclusion rate is 80%.

l The applicable tax rate of companies is 25% in Lesotho.

l The following exchange rates are applicable:

LSL1,00

ZAR

1 July 20.17

0,50

30 June 20.18
0,70

Average for the 20.18 financial reporting period

0,60

Information about group accounting policies

l The Eastern Ltd Group elected to measure the non-controlling interests at

fair value at the acquisition date.

l The Eastern Ltd Group measures factory buildings according to the cost
model in terms of IAS 16 Property, Plant and Equipment.

l Eastern Ltd accounts for investments in subsidiaries at cost in accordance

with IAS 27.10(a) in its separate financial statements.

Required

Provide the pro forma journal entries that should be processed in respect of
Travel Ltd in the consolidated annual financial statements of Eastern Ltd for
the financial reporting period ended 30 June 20.18.

425

Chapter 15

APPENDIX

EXTRACTS FROM SEPARATE/INDIVIDUAL FINANCIAL

STATEMENTS

OF GROUP COMPANIES

FOR THE YEAR ENDED 30 JUNE 20.18

STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18

Eastern
Travel

Ltd

Ltd

R’000 LSL’000

ASSETS

Non-current assets

Property, plant and equipment

2 085

4 000

Equity investments at fair value (through other comprehensive income)

8 500

Investment in subsidiary: Travel Ltd

1 500

Current assets

Inventory

– 300

Trade receivables

5 800
280

Cash and cash equivalents

2 800

435

Total assets

20 685

5 015

EQUITY AND LIABILITIES

Share capital (1 000 000/100 000 shares)

8 000

100

Revaluation surplus

– 445

Mark-to-market reserve

2 000

Retained earnings

5 000

1 778

Total equity
15 000

2 323

Non-current liabilities

Long-term borrowings

4 000

2 155

Deferred tax

350

120

Total non-current liabilities

4 350

2 275

Current liabilities

Trade and other payables

985

280

Suspense account: Proceeds on disposal

250

Current tax payable

100

137

Total current liabilities

1 335

417

Total liabilities

5 685

2 692

Total equity and liabilities

20 685

5 015

426

Foreign operations

STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 20.18

Eastern

Travel

Ltd

Ltd

R’000 LSL’000
Revenue

100

2 000

Cost of sales

(20)

(500)

Gross profit

80

1 500

Other income

2 000

300

Other expenses

(500)

(500)

Finance costs (net)

(700)

(50)

Profit before tax

880
1 250

Income tax expense

(180)

(600)

PROFIT FOR THE YEAR

700

650

Other comprehensive income:

Items that will not be reclassified to profit or loss,

net of tax:

Gains on equity investments at fair value

300

Loss on property revaluation

(660)

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

1 000

(10)

STATEMENT OF CHANGES IN EQUITY THE YEAR ENDED 30

JUNE 20.18
Eastern

Travel

Ltd

Ltd

R’000 LSL’000

Retained earnings

Balance at 1 July 20.17

5 800

1 255

Changes in equity for 20.18

Total comprehensive income for the year

700

650

Transfer from revaluation surplus (on 30 June)

123

Dividend declared and paid (on 30 June)

(1 500)

(250)

Balance at 30 June 20.18

5 000

1 778

427

Chapter 15

Suggested solution 15.1

Pro forma consolidation journal entries for Travel Ltd

Dr

Cr

J1

Factory building (SFP) (LSL800 000 × R0,50) 400

000

Deferred

tax

(SFP)

(LSL800 000 × 25% × R0,50)

100

000

Equity at acquisition (SCE) (balancing)

300 000

Pro forma IFRS 3 remeasurement of factory building at

acquisition including tax consequences

J2

Share capital (SCE) (LSL100 000 × R0,50) 50

000

Retained earnings (SCE) (LSL1 254 687 × R0,50) 627

344

Revaluation surplus (SCE) (LSL1 228 125 × R0,50)

614 063

Equity at acquisition (SCE) (J1 above)

300 000

Goodwill (SFP)

268 593

Investment in Travel Ltd (SFP)

1 500 000

Non-controlling interests (SFP/SCE) (at fair value)

(20 000 × LSL36 × R0,50)

360 000

Main elimination journal entry for Travel Ltd

at acquisition date

J3 Depreciation

(P/L)

((LSL800 000/10 years) × R0,70 (closing spot))

56 000

Accumulated depreciation (SFP)

56 000

Pro forma adjustment of depreciation at group level

J4 Deferred

tax

(SFP)

(R56 000 × 25%)

14 000

Income tax expense (P/L)

14 000

Tax effect for depreciation adjustment

J5

Factory building (SFP)

(LSL660 000 × 1/0,75 × R0,70 (closing spot))

616 000
Loss on property revaluation (OCI)

616 000

Elimination of subsequent revaluation done by the

subsidiary due to group accounting policy of cost

J6

Tax on other comprehensive income (OCI)

(R616 000 (J6) × 25%)

154 000

Deferred

tax

(SFP)

154 000

Elimination of tax effect for building revaluation at year

end

J7

Retained earnings (SCE) (LSL123 000 × R0,70 (closing spot)) 86

100

Revaluation surplus (SCE)

86 100

Reversal of realisation of revaluation surplus to

retained earnings

continued

428

Foreign operations

Dr

Cr

J8 Goodwill

(SFP)

(LSL537 186 × (R0,70 – R0,50)) 107

437

Factory building (SFP) (LSL800 000 × (R0,70 – R0,50))

160 000

Deferred

tax

(SFP)

(LSL200 000 × (R0,70 – R0,50))

40 000

Exchange differences on translation (OCI) (balancing)

227 437

Exchange differences on translation due to non-

inclusion of pro forma IFRS 3 remeasurement of

building and goodwill on pre-consolidation

conversion trial balance

J9 Non-controlling interests (P/L)

70 800

Non-controlling interests (OCI)

160 600

Non-controlling interests (SFP/SCE)

231 400

Recognition of NCI’s portion of profit and exchange

differences on translation for the current year

J10 Other income: Dividend received (P/L)

140 000

Non-controlling interests (SFP/SCE)

35 000

Dividend paid (SCE) (LSL250 000 × R0,70 (closing spot)) 175

000

Elimination of intragroup dividend

J11 Suspense account: Proceeds on disposal (SFP)

250 000

Foreign currency translation reserve (SCE) (analysis)

160 600

Changes in ownership (SCE) (balancing)

160 800

Non-controlling interests (SFP/SCE) (analysis)

571 400

Change in ownership interest on disposal of 20% to

separate equity category

429

Chapter 15

Comments

a The amount for the change in ownership recognised in equity can be

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):

Fair value of the consideration paid by NCI

250 000

Amount by which the non-controlling interests are adjusted (reserves

acquired from parent)

(571 400)

NCI after transaction (analysis)

1 127 800

NCI before transaction (analysis)

(556 400)

(321 400)

Add: FCTR already treated as equity

160 600

Amount to be recognised directly in equity

(R160 800)

b Alternatively, the amount for the change in ownership recognised in equity

can also be calculated as follows (from the change in the parent’s
interest): Fair value of the consideration received by the parent

250 000

Equity relinquished to NCI

(571 400)

Historic fair value of shares disposed of

(375 000)

Attributable post-acquisition equity disposed of:

Retained earnings

(35 800)

FCTR

(160 600)
(321 400)

Add: FCTR already treated as equity

160 600

Amount to be recognised directly in equity

(R160 800)

430

Foreign operations

Calculations

C1 Analysis of owners’ equity of Travel Ltd

Total

ECT (80%–60%)

NCI

Total

LSL

Rate

ZAR

(20%–40%)

At

Since

i At acquisition
(1/7/20.17)

Share capital

100 000

0,50

50 000

40 000

10 000

Retained earnings

1 254 687

0,50

627 344

501 875

125 469

Revaluation surplus 1 228 125

0,50

614 063

491 250

122 813

Remeasurement

of
factory building

(4 million – 3,2 million)

800 000

0,50

400 000

320 000

80 000

Deferred

tax

(800 000 × 25%)

(200 000)

0,50

(100 000)

(80 000)

(20 000)

3 182 812

0,50 1 591 407 1 273 125

318 282

Equity

represented
by goodwill –

Parent and NCI

537 188

0,50

268 593

226 875

41 718

Consideration

(3 000 000 × 0,5)

and NCI (100 000 ×

20% × 36 × 0,5)

3 720 000

0,50 1 860 000 1 500 000

360 000

ii Since acquisition

• Current year:

Profit

(650 000 –

180 000 + 220 000)

590 000
0,60

354 000

283 200

70 800

Dividend

paid

(30/06/20.18)

(250 000)

0,70

(175 000)

(140 000)

(35 000)

Exchange

differences on

translation

802 999

642 399

160 600
Equity/NAV

(30/06/20.18)

4 059 998

0,70 2 841 999

785 599

556 400

30/06/20.18

Disposal of interest

3(375 000) 4(196 400)

571 400

589 199 1 127 800

(1) 800 000 / 10 years remaining useful life = 80 000 depreciation (2) 200
000 / 10 years remaining useful life = 20 000 deferred tax (3) 1 500 000 ×
20/80 = 375 000

(4) (283 200 – 140 000) × 20/80

35 800 RE

642 399 × 20/80

160 600 FCTR

196 400
431

Chapter 15

C2 Goodwill remeasurement

LSL Rate

At acquisition date

537 186

R0,50

268 593

Exchange differences on translation: 20.18

107 437

30/06/20.18

537 186

R0,70

376 030

C3 Factory building remeasurement

LSL Rate

At acquisition date

800 000
R0,50

400 0000

Exchange differences on translation: 20.18

160 000

30/06/20.18

800 000

R0,70

560 0000

C4 Deferred tax remeasurement

LSL Rate

At acquisition date

(200 000)

R0,50

(100 000)

Exchange differences on translation: 20.18

(40 000)

30/06/20.18

(200 000)

R0,70
(140 0000)

432

16

Consolidated statement of cash flows

Introduction

16.1 Background

..............................................................................................

436

Example

16.1:

Consolidated

statement

of cash flows ..............................

437

Associates and joint ventures

16.2

Investments in associates and joint ventures ..........................................

442

Example

16.2:
Investment in associate ....................................................

443

16.3

Acquisition and disposal of associates and joint ventures .......................

444

Example 16.3:

Acquisition and disposal of associate ...............................

444

Changes in ownership interests in subsidiaries

16.4

Acquisition and disposal of a subsidiary ..................................................

446

Example 16.4:

Acquisition and disposal of a subsidiary ...........................

449

16.5

Acquisition of a subsidiary in terms of a non-cash transaction ................

457

16.6

An associate becomes a subsidiary and a subsidiary

becomes an associate .............................................................................

457

Example 16.5:

Associate becomes a subsidiary and a subsidiary

becomes an associate ......................................................

459

16.7

Financing activities between non-controlling shareholders

and the group ...........................................................................................

469

16.8

Acquisition and disposal of an interest in an existing subsidiary

that does not result in a loss of control ....................................................

469

Sundry aspects

16.9 Foreign

operations

...................................................................................

469

16.10
Discontinued operations ..........................................................................

470

16.11 Intragroup

loans

.......................................................................................

470

Example 16.6:

Sundry aspects .................................................................

471

Self-assessment question

Question 16.1
........................................................................................................

479

433

Consolidated statement of cash flows

STATEMENT OF CASH FLOWS – IAS 7

Definitions

Accounting

treatment

Cash

Operating
activities

Cash on hand and demand deposits.

+/- Investing activities

Cash equivalents

+/- Financing activities

Short-term, highly liquid investments that are

= Movement in cash and cash equivalents

readily convertible to known amounts of cash and

Use:

which are subject to an insignificant risk of

l Direct method

changes in value.

Receipts from customers less payments to

Operating activities

suppliers and employees.

Principal revenue-producing activities of the entity

l Indirect

method

and other activities that are not investing or

financing activities.
Profit or loss adjusted for non-cash items,

investment income, finance costs and

Investing activities

movements in debtors, creditors and inventory.

Acquisition and disposal of long-term assets and

other investments not included in cash

equivalents.

Financing activities

Activities that result in changes in the size and

composition of the contributed equity and

borrowings of the entity.

Operating activities

Financing activities

Principal revenue-producing activities; generally

Activities that result in changes in the size and

result from the transactions and other events that

composition of the contributed equity and

enter into the determination of profit or loss.

borrowings of the entity.

Examples:
Examples:

l Sale of goods and rendering of services;

l Issuing or redemption of shares or other equity

l Royalties, fees, commissions and other

instruments;

revenue;

l Proceeds from issuing debentures, loans,

l Payments to suppliers for goods and services;

notes, bonds, mortgages and other short- or

long-term borrowings;

Payments to and on behalf of employees;

l Repayments of amounts borrowed;

Receipts and payments of an insurance entity

for premiums and claims, annuities and other

l Payments by a lessee for the reduction of the

policy benefits;

outstanding liability relating to a finance lease.

l Income taxes;
l Receipts and payments from contracts held for

dealing or trading purposes;

l Interest received/paid and dividends

received/paid disclosed separately.

Investing activities

Acquisition and disposal of long-term assets and

other investments not included in cash

equivalents.

Examples:

l Acquisition or sale of property, plant and

equipment, intangibles and other long-term

assets;

l Acquisition or sale of financial assets that are not held for trading;

l Loans granted and repayment of loans.

435

Chapter 16

Introduction

16.1 Background
1 The

contents and format of the consolidated statement of cash flows are

essentially identical to those of the statement of cash flows of an individual
company and are prescribed by IAS 7.

2 The

consolidated statement of cash flows comprises four elements: l cash flows

from operatinng activities;

l cash flows from investinng activities;

l cash flows from financinng activities;

l net changes in cash and cash equivalents, representing the differences

between cash and cash equivalents at the beginning and end of the reporting
period.

Comment

The statement of cash flows of a company in effect represents a summary (in

a specific

format) of the company’s primary record of first entry, namely the cashbook.

436

Consolidated statement of cash flows

Example 16.1

Consolidated statement of cash flows

The following represents the abridged consolidated statements of the P Ltd

Group for the year ended 31 December 20.17:

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

20.17

20.16

ASSETS

Non-current assets

Land and buildings at valuation

122 389

102 000

Plant and equipment

Cost price

196 684

157 824

Accumulated depreciation

(71 449)

(54 100)

Goodwill

3 200

3 200

Investment in associate

12 973
7 505

Other financial assets

4 738

4 679

268 535

221 108

Current assets

Inventory

46 655

32 625

Receivables

68 387

60 345

Bank and money market assets

2 833

3 011

117 875

95 981

Total assets

R386 410
R317 089

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

15 650

15 650

Retained earnings

86 971

76 708

Other components of equity

99 149

78 760

201 770

171 118

Non-controlling interests

8 008

7 082

Total equity

209 778

178 200
Non-current liabilities

Deferred tax

40 351

34 639

Interest-bearing loans

49 308

34 423

Total non-current liabilities

89 659

69 062

Current liabilities

Payables

45 270

36 033

Tax due

2 388

2 712

Shareholders for dividends

6 291

6 291
Short-term loans

33 024

24 791

Total current liabilities

86 973

69 827

Total liabilities

176 632

138 889

Total equity and liabilities

R386 410

R317 089

437

Chapter 16

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue

140 421

Cost of sales
(62 502)

Gross profit

77 919

Other income (dividends received – R725; interest received – R2 264) 2

989

Other expenses

(39 023)

Finance costs

(9 920)

Share of profit of associate (including dividend received R2 615) 4 745

Profit before tax

36 710

Income tax expense

(13 616)

PROFIT FOR THE YEAR

23 094

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation surplus

20 389
Other comprehensive income for the year, net of tax

20 389

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R43 483

Profit attributable to:

Owners of the parent

21 946

Non-controlling interests

1 148

R23 094

Total comprehensive income attributable to:

Owners of the parent

42 335

Non-controlling interests

1 148

R43 483

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-
Revalua-

Share

Retained

control-

Total

tion

capital

earnings

Total

ling

equity

reserve

interests

Balance at

1 January 20.17

15 650

78 760

76 708

171 118

7 082
178 200

Changes in equity

for 20.17

Dividends declared

(11 683)

(11 683)

(222)

(11 905)

Total comprehensive

income for the year:

Profit for the year

21 946

21 946

1 148

23 094

Other comprehensive
income

– 20

389

– 20 389

20 389

Balance at

31 December 20.17

R15 650 R99 149 R86 971 R201 770

R8 008 R209 778

438

Consolidated statement of cash flows

Additional information

1 An analysis of the notes to the statement of profit or loss and other

comprehensive income indicates that the following items were included in
profit before tax: Depreciation on plant and equipment

R18 640

Profit on sale of plant and equipment

R280

2 The short-term portion of long-term loans included in short-term loans was

R7 704

(20.16: R14 701).

3 No land and buildings were purchased or sold during the current year.
Plant and equipment with a cost price of R2 000 and a carrying amount of
R709 was sold for R989 during the current year. It is estimated that R12 000
of the current year’s purchases of property, plant and equipment were
incurred to expand activities.

4 There were no changes in the shareholdings in subsidiaries during the year

under review.

5 Ignore the deferred tax implications of the revaluation of the land of the
parent.

Solution 16.1

P LTD GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 20.17

Cash flows from operating activities

Cash receipts from customers (C1)

132 379

Cash paid to suppliers and employees (C2)

(87 958)

Cash generated from operations

44 421

Investment income (2 264 + 725 + 2 615)

5 604

Interest paid
(9 920)

Tax paid (C7)

(8 228)

Dividend paid (C8)

(11 905)

Net cash from operating activities

R19 972

Cash flows from investing activities

Replacement of plant and equipment (C6)

(28 860)

Investment in other financial assets (4 738 – 4 679)

(59)

Additions to plant and equipment (C6)

(12 000)

Investment in associate (12 973 – 7 505 – (4 745 – 2 615)) (3

338)

Proceeds from sale of plant and equipment

989

Net cash used in investing activities

(R43
268)

Cash flows from financing activities

Long-term loans raised (C3)

7 888

Short-term loans raised (C4)

15 230

Net cash used in financing activities

R23 118

Net decrease in cash and cash equivalents

(178)

Cash and cash equivalents at beginning of period

3 011

Cash and cash equivalents at end of period

R2 833

439

Chapter 16

Calculations

C1 Cash received from customers

Receivables Dr

Cr
Balance at beginning of year 60

345

Revenue 140

421

Bank (balancing figure)

132

379

Balance at end of year

68 387

R200 766

R200 766

or

Revenue

140 421

Increase in receivables

(8 042)

R132 379

C2 Cash paid to suppliers and employees

Profit and loss account

Dr
Cr

Revenue

140

421

Depreciation 18

640

Interest paid

9 920

Interest received

2 264

Dividend received – other

725

Dividend received – associate

2 615

Equity accounted profit

2 130

Profit on sale of plant and equipment

280

Expenses (balancing figure) 83

165
Profit before tax

36 710

R148 435

R148 435

or

Cost of sales

62 502

Other expenses (statement of profit or loss and other comprehensive income)

39 023

Depreciation (18

640)

Profit on sale of plant and equipment

280

Expenses

R83 165

Expenses (83

165)

Increase in inventory

(14 030)

Increase in payables 9

237
(R87 958)

C3 Long-term loans raised

Long-term loans

Dr

Cr

Balance at beginning of year (34 423 + 14 701) 49

124

Raised (balancing figure)

7 888

Balance at end of year (49 308 + 7 704) 57

012

R57 012

R57 012

440

Consolidated statement of cash flows

Comment

The reclassification of part of long-term loans as short-term loans does not

represent cash flow.
C4 Short-term loans raised

Short-term loans

Dr

Cr

Balance at beginning of year (24 791 – 14 701)

10 090

Raised (balancing figure)

15 230

Balance at end of year (33 024 – 7 704)

25 320

R25 320

R25 320

C5 Land and buildings

Land and buildings

Dr

Cr

Balance at beginning of year

102 000

Revaluation (99 149 – 78 760)

20 389
Balance at end of year

122 389

R122 389

R122 389

C6 Plant and equipment

Plant and equipment: Cost

Dr

Cr

Balance at beginning of year

157 824

Plant and equipment sold

2 000

Purchases – expansion

12 000

Purchases – replacement (balancing figure)

28 860

Balance at end of year

196 684

R198 684

R198 684
Plant and equipment: Accumulated depreciation

Dr

Cr

Balance at beginning of year

54 100

Sold

1 291

Depreciation

18 640

Balance at end of year

71 449

R72 740

R72 740

C7 Taxation

Taxation payable

Dr

Cr

Balance at beginning of year

2 712

Statement of profit or loss and other comprehensive income (13 616 – 5

712(deferred tax))
7 904

Bank (balancing figure)

8 228

Balance at end of year

2 388

R10 616

R10 616

441

Chapter 16

Deferred tax

Dr

Cr

Balance at beginning of year

34 639

Statement of profit or loss and other comprehensive income (balancing

figure)

5 712

Balance at end of year

40 351

R40 351

R40 351

C8 Dividends paid

Shareholders for dividends

Dr

Cr

Balance at beginning of year

6 291

Dividends declared

11 905

Bank (balancing figure)

11 905

Balance at end of year

6 291

R18 196

R18 196

Comment

Dividends paid by a subsidiary only have an influence on a group’s cash

flows insofar as the portion attributable to non-controlling shareholders is
concerned. The dividends
declared and paid by the parent, as well as the non-controlling shareholder’s
portion of the subsidiaries dividend, are shown in the consolidated statement
of changes in equity.

As far as dividends declared by subsidiaries are concerned, only the portion

due to the non-controlling shareholders is included in the consolidated
statement of financial position as part of current liabilities. The cash effect of
the dividend paid is disclosed in the statement of cash flows.

Associates and joint ventures

16.2 Investments in associates and joint ven

ntures

Where an associate is equity accounted in the consolidated financial

statements of the group, an

ny profits received in cash by the investor will be reflected as dividends

received in the statement of cash flows either as an investing or operatin ng
activity (as

other dividends received). Because the accumulated equity profits of the

associate in the consolidated statement of comprehensive income do not
represent a flow of cash, they are excluded from the consolidated statement
of cash flows. Advances made to or by the associate during the financial
year will be reflected in the statement of cash flows and classified as
investing activities.

442

Consolidated statement of cash flows

Example 16.2

Investment in associate

P Ltd acquired an investment in an associate, A Ltd, on 31 December 20.16.

P Ltd granted a loan to A Ltd on 1 July 20.17. A Ltd made repayments of
R17 000 on the loan. Extracts from the consolidated financial statements of
P Ltd reflect the following at 31 December 20.17:

STATEMENT OF FINANCIAL POSITION

20.17

20.16

Investment in associate – at carrying amount

38 850

18 000

Loan to associate

18 000

STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

20.17

20.16

Share of profit of associate

22 650
–

The only cash flows in respect of the investment in A Ltd will be the
dividends received.

Investment in associate

RR

Opening balance

18 000 Dividend received (balancing)

1 800

Share of profit of associate

22 650 Closing balance

38 850

40 650

40 650

Loan to associate

RR

Opening balance

– Repayments (given)

17 000

Loan advanced

35 000 Closing balance

18 000
35 000

35 000

The information will be presented as follows in the consolidated cash flow

statement: CONSOLIDATED STATEMENT OF CASH FLOWS FOR
THE YEAR ENDED

31 DECEMBER 20.17

Cash flows from operating activities

Dividends received

1 800

Cash flows from investing activities

Repayment of loan by associate

17 000

Advances to associate

(35 000)

443

Chapter 16

16.3 Acquisition and disposal of associates and joint ventures

Acquisitions

An investment made during the year in an associate or joint venture should

be disclosed as cash flow from an investing activity. An additional
investment in an existing associate or joint venture (provided that there is no
change in status, e.g. the associate does not become a subsidiary) will also be
disclosed as an investing activity.

Disposals

If the total investment in an associate of joint venture is disposed of, the

proceeds should be presented as an investing activity. Since the total
proceeds are reflected as an investing activity, the gain/loss on the disposal
recognised in profit or loss should be eliminated from operating activities for
cash flow purposes.

If a portion of the investment is sold and the retained investment remains an

associate or joint venture, the total proceeds are reflected as an investing
activity and the gain or loss should be eliminated from operating activities.

If a portion of the investment is sold and significant influence or joint

control is lost, the total proceeds are reflected as an investing activity. Both
the gain or loss on disposal and the fair value adjustment on the retained
investment should be eliminated from operating activities for cash flow
purposes.

Example 16.3

Acquisition and disposal of an associate

P Ltd acquired a 30% interest in A Ltd on 1 January 20.17 for R120 000. On
1 July 20.17 P Ltd acquired an additional 5% interest in A Ltd for R25 500,
when the net asset value of A Ltd was R570 000 (fairly valued). Extracts
from the consolidated financial statements of P Ltd reflect the following at
31 December 20.17: STATEMENT OF FINANCIAL POSITION

20.17

Investment in associate – at carrying amount

180 000
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME

20.17

Share of profit of associate

45 000

The cash flows in respect of the investment in A Ltd will be the dividends
received and amounts paid for the acquisition of the associate and additional
interest acquired.

444

Consolidated statement of cash flows

Investment in associate

RR

Acquisition of associate

120 000 Dividend received (balancing)

13 500

Acquisition of additional interest

25 500 Closing balance

180 000

Excess ((R570 000 × 5%) – R25 500)

3 000

Share of profit of associate

45 000

193 500

193 500

The information will be presented as follows in the consolidated cash flow

statement: CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 20.17

Cash flows from operating activities

Cash paid to suppliers and employees (+R3 000 excess)

(XXX)

Dividends received

13 500

Cash flows from investing activities

Investment in associate (120 000 + 25 500)

(145

500)

Assume that P Ltd sold the total investment on 31 December 20.17 for
R195 000.

The information will be presented as follows in the consolidated cash flow

statement: CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 20.17

R
Cash flows from operating activities

Cash paid to suppliers and employees

(XXX)

(+R15 000(profit) (195 000 – 180 000)

Dividends received

13 500

Cash flows from investing activities

Disposal of associate

195 000

Assume that P Ltd sold 50% of the investment on 31 December 20.17

for R85 000.

Significant influence was lost and the retained investment was classified as
at fair value through other comprehensive income. The fair value adjustment
(loss) on the retained investment amounted to R2 000.

445

Chapter 16

The information will be presented as follows in the consolidated cash flow

statement: CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 20.17

Cash flows from operating activities

Cash paid to suppliers and employees

(XXX)

(–R5 000(loss) (180 000/2 – 85 000) – 2 000(fair value adjustment))

Dividends received

13 500

Cash flows from investing activities

Disposal of part of associate

85 000

Changes in ownership interests in subsidiaries

16.4 Acquisition and disposal of a subsidiary

1 Where control of a subsidiary is obtained or lost, the amount of cash paid

or received as a purchase or sales consideration is entered into the statement
of cash flows (under investing activities) net of cash and cash equivalents
acquired or sold. In both cases, it is incumbent upon a group to provide full
disclosure during a period of each of the following:

l the total consideration paid or received;

l the portion of the consideration consisting of cash and cash equivalents; l

the amount of cash or cash equivalents in the subsidiary over which control
is obtained or lost; and

l the amount of the other assets and liabilities in the subsidiary over which
control is obtained or lost, summarised by each major category (IAS 7.40).

2 Obtaining or losing control of a subsidiary is therefore accounted for in

terms of an

owner approach, rather than the entity approach, which forms the basis for
the preparation of the consolidated annual financial statements. The
inclusion of the net cash cost price of shares purchased/net cash proceeds
from shares sold in the statement of cash flows implies that the following
items were calculated at the date of the transaction (acquisition date/disposal
date), and that they are thus excluded from the consolidated statement of
cash flows:

l the underlying assets and liabilities of the subsidiary acquired/disposed of; l

financing provided/discontinued by the non-controlling shareholders; l
goodwill or excess on acquisition arising from the purchase of the shares; l
excess of fair value over the cost of the purchase of shares in a subsidiary; l
the profit arising from the sale of shares; and

l the carrying amount of the investment in the associate at the date of the
transaction (in the case where an associate becomes a subsidiary, or a
subsidiary becomes an associate).

446

Consolidated statement of cash flows

3 The treatment of the cash consideration paid or received at the time of

obtaining or losing control of a subsidiary is in principle a simple procedure.
Consider the following summary, which expresses the purchasing by P Ltd
of an 80% equity share in the subsidiary S Ltd at date of acquisition.

Net assets acquired

Land and buildings

(1 200 000)

Plant and equipment:

Cost price

(800 000)

Accumulated depreciation

300 000
Mortgage bond

500 000

Inventory (350

000)

Receivables (550

000)

Payables 180

000

Bank (30

000)

(1 950 000)

Non-controlling interests

390 000

Goodwill (40

000)

Cost price of shares

R1 600 000

In the consolidated statement of cash flows the following will be included as

part of

“investing activities”:

Net cash cost price of shares in subsidiary (1 600 000 – 30 000) R1 570 000
It should be borne in mind that the collection of R1 570 000 implies that a
portion of the movement which occurred in the relevant statement of
financial position items (between the two “statement of financial position”
dates) has been included in the statement of cash flows. The portions of the
movements that have been entered into the statement of cash flows (as a
result of the inclusion of the net cash cost price) are represented by the
amounts on the transaction date, as indicated in the above summary. In
addition, when analysing the movements that occurred in the statement of
financial position items, cognisance should be taken of assets and liabilities
(on the transaction date) purchased from and sold to subsidiaries. The outline
of the analysis of the movement in the statement of financial position items
under land and buildings would have to be expanded as follows: 447

Chapter 16

LAND AND BUILDINGS

Dr

Cr

Balance at beginning of year

XX

Non-cash portion of movement

Revaluation (the full revaluation movement for the current year, not only the
parent’s portion)

XX

Mortgage bond

XX

Portion of movement entered elsewhere in the statement

of cash flows
Interest charge (interest capitalised)

XX

Land and buildings owned by a newly purchased subsidiary

at date of acquisition (at fair value in terms of IFRS 3)

XX

Land and buildings owned by a subsidiary sold at the date

of sale of the subsidiary (at consolidated carrying amount) XX

Portion of movement arising from the relevant calculation to be

included in the statement of cash flows

Land and buildings sold

(sales by individual companies within the group)

XX

Land and buildings purchased

XX

Balance at end of year

XX

RXXX

RXXX

448

Consolidated statement of cash flows

Example 16.4
Acquisition and disposal of a subsidiary

The following represents the abridged consolidated statements of the P Ltd

Group for the year ended 31 December 20.17.

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

20.17

20.16

ASSETS

Non-current assets

Land and buildings at cost price

955 000

650 000

Plant and equipment

Cost price

2 610 000

1 850 000

Accumulated depreciation

(750 000)

(740 000)

Goodwill
75 000

50 000

Investment in associate

1 835 000

910 000

4 725 000

2 720 000

Current assets

Inventory

675 000

405 000

Receivables

805 000

625 000

Bank and money market assets

2 500

75 000

1 482 500

1 105 000

Total assets
R6 207 500 R3 825 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

1 050 000

600 000

Retained earnings

1 687 500

965 000

2 737 500

1 565 000

Non-controlling interests

495 000

400 000

Total equity

3 232 500

1 965 000

Non-current liabilities

Deferred tax

205 000
125 000

Interest-bearing loans

2 030 000

1 200 000

Total non-current liabilities

2 235 000

1 325 000

Current liabilities

Payables

445 000

305 000

Tax due

45 000

30 000

Shareholders for dividends

250 000

200 000

Total current liabilities

740 000

535 000
Total liabilities

2 975 000

1 860 000

Total equity and liabilities

R6 207 500 R3 825 000

449

Chapter 16

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue

3 250 000

Cost of sales

(1 250 000)

Gross profit

2 000 000

Other expenses

(767 500)

Finance costs
(135 000)

Share of profit of associate

(dividend received – R125 000; equity-accounted profit – R375 000) 500

000

Profit before tax

1 597 500

Income tax expense

(400 000)

PROFIT FOR THE YEAR

1 197 500

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R1 197 500

Total comprehensive income attributable to:

Owners of the parent

972 500

Non-controlling interests

(225 000)

R1 197 500

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Non-

Share

Retained

Total

controlling

capital

earnings

Total

equity

interests

Balance at

1 January 20.17

600 000

965 000

1 565 000

400 000

1 965 000

Changes in

equity for 20.17

Issue of shares
450 000

– 450

000

450 000

Acquisition

of interest in

subsidiary –

160 000

160 000

Sale of interest

in subsidiary

(260 000)

(260 000)

Dividends
declared

(250 000)

(250 000)

(30 000)

(280 000)

Total comprehensive

income for the year:

Profit for the year

972 500

972 5000

225 000

1 197 500

Balance at

31 December 20.17

R1 050 000 R1 687 500 R2 737 500 R495 000 R3 232 500

450

Consolidated statement of cash flows

Additional information
1 The following items were included in the calculation of profit before tax:
Depreciation R370

000

Loss on sale of plant

R30 000

Exchange rate loss on foreign loan

R150 000

Profit on sale of land and buildings

R200 000

2 Companies in the group sold plant and equipment for R50 000. Details of
the plant at date of sale were as follows:

Cost R350

000

Accumulated depreciation

R270 000

The land and buildings of a subsidiary were expropriated by the local

authority for R450 000.

3 A portion of the plant and equipment purchased during the year under
review, to the value of R550 000, was used to replace the sold plant. In
addition, a portion of these purchases was financed through a finance lease
of R300 000. The balance of the property, plant and equipment purchased
was for the expansion of operations.

4 During the year under review, long-term loans amounting to R500 000
were redeemed.
5 P Ltd has several subsidiaries and associates. During the year under
review, the equity investment in associates was increased; a subsidiary (S
Ltd) was acquired, and the whole interest in subsidiary T Ltd was sold.

Acquisition of subsidiary S Ltd

On 30 June 20.17, P Ltd obtained 80% of the issued shares in S Ltd for R665
000.

On this date, the abridged statement of financial position of S Ltd was as

follows: Land and buildings

225 000

Plant and equipment (fair value)

240 000

465 000

Inventory 250

000

Receivables 495

000

Bank 15

000

R1 225 000

Share capital (500 000 shares)

500 000

Retained earnings 300

000

Loans 200

000

Deferred tax

50 000

Payables 175

000

R1 225 000

Disposal of subsidiary T Ltd

On 3 January 20.15, P Ltd obtained 75% of the issued shares in T Ltd for
R675 000.

On that date, the owners’ equity of T Ltd was as follows:

Share capital (600 000 shares)

R600 000

Retained earnings R300

000

451

Chapter 16

On 30 September 20.17, P Ltd sold its entire interest in T Ltd for R850 000.
Particulars of the net assets of T Ltd on 30 September 20.17 were as follows:
Land and buildings

350 000
Plant and equipment:

Cost

450 000

Accumulated depreciation

(210 000)

Inventory 180

000

Receivables 420

000

Bank overdraft

(30 000)

Payables (120

000)

R1 040 000

Solution 16.4

P LTD GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 20.17

Note

Cash flows from operating activities

Cash receipts from customers

3 145 000

Cash paid to suppliers and employees

(1 852 500)

Cash generated from operations

1 292 500

Investment income

125 000

Interest paid

(135 000)

Tax paid (30 000 + 370 000 – 45 000)

(355

000)

Dividend paid (200 000 + 280 000 – 250 000)

(230

000)

Net cash from operating activities

R697 500

Cash flows from investing activities

Replacement of plant and equipment

(550 000)

Additions to land and buildings

(680 000)

Additions to plant and equipment

(350 000)

Proceeds from sale of plant and equipment

50 000

Proceeds on sale of land and buildings

450 000

Purchase of subsidiary (665 000 – 15 000)

1 (650

000)

Investment in associate

(550 000)

Proceeds on sale of subsidiary (850 000 + 30 000)

880 000

Net cash used in investing activities

(R1 400 000)

Cash flows from financing activities

Long-term loans repaid

(500 000)

Long-term loans raised

680 000

Proceeds from issue of shares

450 000

Net cash from financing activities

R630 000

Net decrease in cash and cash equivalents

(72

500)

Cash and cash equivalents at beginning of period

75 000

Cash and cash equivalents at end of period

R2 500

452

Consolidated statement of cash flows

Notes to the statement of cash flows

1 Purchase of subsidiary S Ltd

Fair

value of assets acquired:

Land

and buildings

(225 000)

Plant

(240 000)

Inventory

(250 000)

Receivables

(495 000)

Payables

175 000

Loan

200 000

Deferred tax

50 000

Bank

(15 000)
(800 000)

Non-controlling interests

160 000

Goodwill

(25 000)

Purchase price

(665 000)

Cash

on acquisition

15 000

Net

cash purchase price

(R650 000)

2 Disposal of subsidiary T Ltd

Land

and buildings

350 000

Plant

and equipment

240 000
Inventory

180 000

Receivables

420 000

Payables

(120 000)

Bank

overdraft

(30 000)

1 040 000

Non-controlling interests

(260 000)

Goodwill

Profit

on sale of shares

70 000

Proceeds from sale

850 000

Bank
overdraft of subsidiary sold

30 000

Net

cash proceeds

R880 000

Comment

Note that IAS 7 does not specifically require the disclosure of the non-
controlling interests and goodwill in the purchase or disposal of a subsidiary
note to the statement

of cash flows, but it is regarded as useful information and thus disclosed.

453

Chapter 16

Calculations

C1 Net changes in receivables, inventory and payables

Inventory

Dr

Cr

Balance at beginning of year

405 000
Subsidiary acquired

250 000

Subsidiary disposed of

180 000

Net increase (balancing figure)

200 000

Balance at end of year

675 000

R855 000

R855 000

Receivables

Dr

Cr

Balance at beginning of year

625 000

Subsidiary acquired

495 000

Subsidiary disposed of

420 000

Net increase (balancing figure)

105 000

Balance at end of year

805 000

R1 225 000 R1 225 000

Payables

Dr

Cr

Balance at beginning of year

305 000

Subsidiary acquired

175 000

Subsidiary disposed of

120 000

Net increase (balancing figure)

85 000

Balance at end of year

445 000

R565 000

R565 000

C2 Cash received from customers

Sales

3 250 000

Net increase in receivables

(105 000)

R3 145 000

Comment

If sales are taken up directly in the “receivables” reconstruction, cash

received from

customers can be determined as the balancing figure.

454

Consolidated statement of cash flows

C3 Cash paid to suppliers and employees

Profit and loss account

Dr

Cr

Revenue

3 250 000

Depreciation 370

000

Loss on sale of plant

30 000
Exchange rate loss

150 000

Interest paid

135 000

Investment income

125 000

Equity income of associate

375 000

Profit on sale of land

200 000

Profit on sale of subsidiary

70 000

Expenses (balancing figure)

1 737 500

Profit before tax

1 597 500

R4 020 000

R4 020 000

or

Cost of sales (statement of profit or loss and other comprehensive income) 1

250 000
Other expenses (statement of profit or loss and other comprehensive income)

767 500

Depreciation

(370 000)

Exchange rate loss

(150 000)

Profit on sale of subsidiary (850 000 – (1 040 000 × 75%)) 70 000

Profit on sale of land

200 000

Loss on sale of plant

(30 000)

Expenses

R1 737 500

Expenses

(1 737 000)

Net increase in inventory

(200 000)

Net increase in payables

85 000

(R1 852 500)

C4 Taxation

Deferred tax

Dr

Cr

Balance at beginning of year

125 000

Subsidiary acquired

50 000

Tax expense (balancing figure)

30 000

Balance at end of year

205 000

R205 000

R205 000

Tax payable

Dr

Cr

Balance at beginning of year

30 000

Statement of profit or loss and other comprehensive income (400 000 – 30

000)
370 000

Bank (balancing figure)

355 000

Balance at end of year

45 000

R400 000

R400 000

455

Chapter 16

C5 Plant and equipment purchased

Plant and equipment: Cost

Dr

Cr

Balance at beginning of year

1 850 000

Subsidiary acquired (fair value)

240 000

Subsidiary disposed of

450 000

Plant sold by individual companies in the group

350 000

Finance lease

300 000

Cash purchases (balancing figure)

900 000

Balance at end of year

2 490 000

R3 290 000 R3 290 000

Plant and equipment: Accumulated depreciation

Dr

Cr

Balance at beginning of year 740

000

Subsidiary disposed of

210 000

Plant sold by individual companies in the group

270 000

Depreciation expense

370 000

Balance at end of year

630 000

R1 110 000 R1 110 000

C6 Land and buildings purchased

Land and buildings

Dr

Cr

Balance at beginning of year 650

000

Subsidiary acquired

225 000

Subsidiary disposed of

350 000

Land and buildings sold by individual companies

in the group (450 000 – 200 000)

250 000

Cash purchases (balancing figure)

680 000

Balance at end of year

955 000

R1 555 000 R1 555 000

C7 Long-term loans raised

Long-term loans

Dr

Cr

Balance at beginning of year

1 200 000

Subsidiary acquired

200 000

Loans repaid

500 000

Exchange rate loss

150 000

Plant (finance lease) 300

000

Loans raised (balancing figure) 680

000

Balance at end of year

2 030 000

R2 530 000 R2 530 000

456
Consolidated statement of cash flows

C8 Dividends paid

Shareholders for dividends

Dr

Cr

Balance at beginning of year 200

000

Dividends declared

280 000

Bank (balancing figure) 230

000

Balance at end of year

250 000

R480 000

R480 000

C9 Investment in associate

Investment in associate

Dr

Cr

Balance at beginning of year 910

000

Share of profit of associate

375 000

Bank (balancing figure) 550

000

Balance at end of year

1 835 000

R1 835 000 R1 835 000

16.5 Acquisition of a subsidiary in terms of a non-cash transaction

1 No cash flow takes place when the purchase price of a subsidiary is fully
settled by the issue of shares in the parent. Consequently, the acquisition of
the subsidiary and the issue of the shares, respectively, are not reported as
part of investing activities or financing activities. However, should cash
and cash equivalents be held by a subsidiary at date of acquisition under the
particular circumstances, they would be reported as follows as an investing
activity:

Cash and cash equivalents held by a subsidiary at date of acquisition RXXX

2 In the event of a subsidiary being acquired in terms of a non-cash

transaction, details regarding the subsidiary’s assets, liabilities and other
relevant information should once again be provided by way of a note.
Should the subsidiary be acquired partly for cash and partly for the issue of
shares in the parent, only the net cash portion of the purchase price is entered
as an investing activity. The note on assets, liabilities and other relevant
information should, however, still be provided.

16.6 An associate becomes a subsidiary and a subsidiary becomes

an associate
1 The acquisition of an additional equity interest in an associate during the
current year that causes the associate to become a subsidiary will: l cause the
acquirer to remeasure its previously held equity interest in the associate at its
acquisition date fair value and recognise the difference in profit or loss
(IFRS 3.42);

l eliminate the carrying amount of the investment in the associate at the

acquisition date; and

l cause the net asset (assets and liabilities valued in terms of IFRS3) of the
subsidiary at date of acquisition, including any accruals since the date of
acquisition, to be entered in the consolidated statement of financial position.

457

Chapter 16

2 The fair value adjustment included in profit or loss does not represent cash
flow.

3 The net cash cost price of the additional equity interest in the subsidiary is
entered into the statement of cash flows as part of “investing activities”.
Details of the assets, liabilities, carrying amount of the investment in the
former associate, as well as other relevant information, are provided in a
note to the statement of cash flows.

4 In bringing into account the net cash cost price, part of the movements that
occurred in the individual statement of financial position items between the
two “statement of financial position” dates has been entered into the
statement of cash flows. The portion of the movements that has already been
entered represents the portion attributable to the individual assets, liabilities
and non-controlling owners’ equity of the subsidiary at date of acquisition.

5 The disposal of an equity interest in a subsidiary during the current year

that causes the subsidiary to become an associate will:

l at the date of the transaction, create an investment against the carrying

amount in an associate;
l cause the remeasurement of the carrying amount of the abovementioned
investment at the acquisition date fair value, and recognition of the
difference in profit or loss; and

l cause the net assets (assets and liabilities measured at the consolidated
carrying amount) of the subsidiary at date of the transaction to be excluded
from the consolidated statement of financial position.

6 The fair value adjustment included in profit or loss does not represent cash
flow.

7 The net cash proceeds from the equity interest disposed of are entered into
the statement of cash flows as part of “investing activities”. Details of the
assets, liabilities, non-controlling owners’ equity, profit/loss on the sale of an
interest and the carrying amount of the resulting investment in the associate
are provided in a note to the statement of cash flows.

8 A portion of the movements that occurred in the individual statement of

financial position items between the two “statement of financial position”
dates was entered into the statement of cash flows when the net cash
proceeds were accounted for.

The portion of the movements already entered represents the portion

attributable to the individual assets, liabilities and owners’ equity of the
subsidiary on the transaction date.

458

Consolidated statement of cash flows

Associate becomes a subsidiary and a subsidiary becomes

Example 16.5

an associate

The following represent the abridged consolidated statements of the P Ltd

Group for the year ended 31 December 20.17.
P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.17

20.17

20.16

ASSETS

Non-current assets

Property at valuation

1 008 000

650 000

Plant and equipment

Cost price

2 610 000

1 850 000

Accumulated depreciation

(750 000)

(740 000)

Goodwill

97 500

55 000
Investment in associate

400 000

275 000

Investment in unlisted shares

840 000

840 000

4 202 500

2 930 000

Current assets

Inventory

675 000

405 000

Receivables

805 000

625 000

Bank and money market assets

15 000

75 000

1 495 000

1 105 000
Total assets

R5 700 500 R4 035 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

1 050 000

600 000

Retained earnings

1 052 500

477 000

Other components of equity

240 000

2 342 500

1 077 000

Non-controlling interests

520 000

400 000

Total equity

2 862 500
1 477 000

Non-current liabilities

Deferred tax

258 000

125 000

Interest-bearing loans

1 840 000

1 898 000

Total non-current liabilities

2 098 000

2 023 000

Current liabilities

Payables

445 000

305 000

Tax due

45 000

30 000

Shareholders for dividends

250 000
200 000

Total current liabilities

740 000

535 000

Total liabilities

2 838 000

2 558 000

Total equity and liabilities

R5 700 500 R4 035 000

459

Chapter 16

P LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17

Revenue

3 250 000

Cost of sales

(1 250 000)

Gross profit
2 000 000

Other income (dividend received on listed investments)

60 000

Other expenses

(719 500)

Interest paid

(135 000)

Share of profit of associate

210 000

Profit before tax

1 415 500

Income tax expense

(400 000)

PROFIT FOR THE YEAR

1 015 500

Other comprehensive income

Items that will not be reclassified to profit or loss

Revaluation surplus

300 000

Other comprehensive income, net of tax

300 000

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R1 315 500

Profit attributable to:

Owners of the parent

825 500

Non-controlling interests

190 000

R1 015 500

Total comprehensive income attributable to:

Owners of the parent

1 065 500

Non-controlling interests

250 000

R1 315 500

460

Consolidated statement of cash flows

P LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17

Re-

Non-

Share

Retained

Total

valuation

controlling

capital

earnings

Total

equity

reserve

interests

Balance at

1 January 20.17

600 000

477 000 1 077 000

400 000

1 477 000
Changes in equity

for 20.17

Issue of shares

450 000

450 000

450 000

Associate becomes

a subsidiary

––

160 000

160 000

Subsidiary becomes

an associate

––

–
– (260 000)

(260 000)

Dividends declared

(250 000)

(250 000)

(30 000)

(280 000)

Total comprehensive

income for the year:

Profit for the year

825 500

825 500

190 000

1 015 500

Other comprehensive

income
–

240 000

240 000

60 000

300 000

Balance at

31 December 20.17

R1 050 000 R240 000 R1 052 500 R2 342 500 R520 000 R2 862 500

Additional information

1 The following items were, amongst others, included in other expenses:

Expenses

Depreciation R370

000

Impairment of goodwill

R12 500

Income

Profit on sale of plant

R30 000

Exchange rate loss on foreign loan

R50 000
Profit on sale of property R200

000

Profit on sale of shares in subsidiary

R67 000

Fair value adjustments on carrying amounts of investments in associates

after changes in shareholdings

R51 000

(R35 000 (S Ltd) + R16 000 (A Ltd))

2 Companies in the group sold plant and equipment for R110 000. Details of
the plant at date of sale were as follows:

Cost R350

000

Accumulated depreciation

R270 000

Certain land and buildings of a subsidiary were sold for an amount of R450
000, whilst another subsidiary, in which P Ltd has an 80% equity interest,
revalued its land and buildings at an amount of R353 000. Attributable
deferred tax is R53 000.

461

Chapter 16

3 A portion of the plant and equipment purchased during the year under
review, to the value of R580 000, was used to replace the sold plant. The
balance of the property, plant and equipment purchased was for the
expansion of operations. R20 000 is still due in respect of these purchases,
which amount has been included under payables.

4 During the year under review, long-term loans amounting to R500 000
were redeemed.

5 P Ltd has interests in several subsidiaries and an associate. During the year
under review, the following changes in interest took place:

l An associate (S Ltd) became a subsidiary due to the purchase of an

additional interest in equity for R345 000. The fair value of the 40% interest
previously held amounted to R355 000 at the date of the change in the
shareholding. Assume that all net assets values were equal to the IFRS 3
values.

l A subsidiary (A Ltd) became an associate due to the sale of an interest in

equity for R538 000. The fair value of the remaining 30% interest held
amounted to R330 000 at the date of the change in the shareholding.

l P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.

6 The following equity analyses were applied inter alia in the preparation of
the given consolidated financial statements:

(a) Analysis of owners’ equity of S Ltd

P Ltd 40%–80%

Total

NCI

At

Since

i At acquisition (1/1/20.14)
Share capital

487 500

195 000

300 000

Retained earnings

80 000

32 000

48 000

567 500

227 000

348 000

Investment in S Ltd

R227 000

ii Since acquisition

• To beginning of current year:

Retained earnings

120 000

48 000

72 000

• Current year:
Profit

1/1/20.17–30/6/20.17

100 000

40 000

60 000

800 000

88 000

480 000

Purchase 200 000 shares

320 000

(320 000)

160 000

Cost price of shares

(345 000)

Profit

1/7/20.17–31/12/20.17

150 000

120 000

30 000

R950 000
R208 000

R190 000

P Ltd received dividends amounting to R95 000 from S Ltd while S Ltd was
an associate.

462

Consolidated statement of cash flows

(b) Analysis of owners’ equity of A Ltd

P Ltd 75%–30%

Total

NCI

At

Since

i At acquisition (1/1/20.2)

Share capital

200 000

150 000

50 000

Retained earnings

100 000

75 000

25 000
300 000

225 000

75 000

Equity represented by goodwill

5 000

Consideration and NCI

R230 000

ii Since acquisition

• To beginning of current year:

Retained earnings

600 000

450 000

150 000

• Current year:

Profit

1/1/20.17–31/3/20.17

140 000

105 000

35 000

1 040 000
555 000

R260 000

Sold 90 000 shares

(135 000)

(333 000)

R468 000

Profit

1/4/20.17–31/12/20.17

250 000

75 000

R1 290 000

R297 000

8 Details of the net assets of S Ltd and A Ltd on the respective dates of the
changes in interest are as follows:

S Ltd

A Ltd

30/6/20.17

31/3/20.17

Land and buildings

225 000

350 000
Plant and equipment:

Cost

360 000

450 000

Accumulated depreciation

(120 000)

(210 000)

Long-term loans

(200 000)

Deferred tax

(50 000)

Inventory

250 000

180 000

Receivables

495 000

420 000

Bank

15 000

(30 000)
Payables

(175 000)

(120 000)

R800 000 R1 040 000

463

Chapter 16

Solution 16.5

P LTD GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 20.17

Note

Cash flows from operating activities

Cash receipts from customers

3 145 000

Cash paid to suppliers and employees

(2 020 000)

Cash generated from operations

1 125 000

Dividends received (60 000 + 95 000)

155 000
Interest paid

(135 000)

Tax paid (30 000 + (400 000 – 30 000(C4)) – 45 000)

(355

000)

Dividend paid (200 000 + 280 000 – 250 000)

(230

000)

Net cash from operating activities

R560 000

Cash flows from investing activities

Replacement of plant and equipment

(580 000)

Additions to land and buildings

(380 000)

Additions to plant and equipment

(600 000)

Proceeds from sale of plant and equipment

110 000

Proceeds on sale of land and buildings

450 000

Purchase of subsidiary

(330 000)

Proceeds on sale of subsidiary

568 000

Net cash used in investing activities

(R762

000)

Cash flows from financing activities

Long-term loans repaid

(500 000)

Long-term loans raised

192 000

Proceeds from issue of shares

450 000

Net cash from financing activities

R142 000

Net decrease in cash and cash equivalents

(60

000)

Cash and cash equivalents at beginning of period

75 000

Cash and cash equivalents at end of period

R15 000

464

Consolidated statement of cash flows

Notes to the statement of cash flows

1 Purchase of subsidiary S Ltd

Fair value of assets acquired:

Land and buildings (225

000)

Plant (240

000)

Inventory (250

000)

Receivables (495

000)

Payables 175
000

Loan 200

000

Deferred tax

50 000

Bank (15

000)

(800 000)

Non-controlling interests

160 000

Fair value of investment previously accounted for on the equity method 355
000

Goodwill (345 000 + 160 000 + 355 000 – 800 000) (60

000)

Purchase price

(345 000)

Cash on acquisition

15 000

Net cash purchase price

(R330 000)

2 Disposal of subsidiary A Ltd

Land and buildings

350 000

Plant and equipment

240 000

Inventory 180

000

Receivables 420

000

Payables (120

000)

Bank overdraft

(30 000)

1 040 000

Non-controlling interests

(260 000)

Goodwill realised

5 000

Fair value of remaining investment

(330 000)

Fair value adjustment on carrying amount of investment in associate (330

000 – 30/75 (230 000 + 555 000)) 16
000

Profit on sale of shares

67 000

Proceeds from sale

538 000

Bank overdraft on sale

30 000

Net cash proceeds

R568 000

465

Chapter 16

Calculations

C1 Net changes in receivables, inventory and payables

Inventory

Dr

Cr

Balance at beginning of year

405 000
Subsidiary acquired

250 000

Subsidiary disposed of

180 000

Net increase (balancing figure)

200 000

Balance at end of year

675 000

R855 000

R855 000

Receivables

Dr

Cr

Balance at beginning of year

625 000

Subsidiary acquired

495 000

Subsidiary disposed of

420 000

Net increase (balancing figure)

105 000

Balance at end of year

805 000

R1 225 000 R1 225 000

Payables

Dr

Cr

Balance at beginning of year

305 000

Subsidiary acquired

175 000

Subsidiary disposed of

120 000

Property, plant and equipment acquired

20 000

Net increase (balancing figure)

65 000

Balance at end of year

445 000

R565 000
R565 000

C2 Cash received from customers

Revenue

3 250 000

Net increase in receivables

(105 000)

R3 145 000

Comment

If sales are taken up directly in the “receivables” reconstruction, cash

received from

customers can be determined as the balancing figure.

466

Consolidated statement of cash flows

C3 Cash paid to suppliers and employees

Profit and loss account

Dr

Cr

Revenue

3 250 000

Depreciation of assets and impairment of goodwill 382

500
Profit on sale of plant

30 000

Interest paid

135 000

Exchange rate loss

50 000

Dividend received – other

60 000

Dividend received – associate

95 000

Share of profit of associate

115 000

Profit on sale of property

200 000

Profit on sale of subsidiary

67 000

Fair value adjustments on carrying amounts of investments

in associates

51 000

Expenses (balancing figure)

1 885 000

Profit before tax

1 415 500

R3 868 000 R3 868 000

Expenses

(1 885 000)

Net increase in inventory

(200 000)

Net increase in payables

65 000

(R2 020 000)

C4 Deferred tax expense

Deferred tax

Dr

Cr

Balance at beginning of year

125 000

Revaluation of land and buildings

53 000

Subsidiary acquired
50 000

Tax expense (balancing figure)

30 000

Balance at end of year

258 000

R258 000

R258 000

C5 Plant and equipment purchased

Plant and equipment: Cost

Dr

Cr

Balance at beginning of year

1 850 000

Subsidiary acquired

240 000

Subsidiary disposed of

450 000

Plant sold by individual companies in the group

350 000

Payables 20
000

Cash purchases (balancing figure)

1 180 000

Balance at end of year

2 490 000

R3 290 000 R3 290 000

467

Chapter 16

Plant and equipment: Accumulated depreciation

Dr

Cr

Balance at beginning of year

740 000

Subsidiary disposed of

210 000

Plant sold by individual companies in the group

270 000

Depreciation expense

370 000

Balance at end of year

630 000

R1 110 000 R1 110 000

C6 Land and buildings purchased

Land and buildings

Dr

Cr

Balance at beginning of year

650 000

Subsidiary acquired

225 000

Subsidiary disposed of

350 000

Land and buildings sold by individual companies in the group 250 000

Revaluation 353

000

Cash purchases (balancing figure)

380 000

Balance at end of year

1 008 000

R1 608 000 R1 608 000

C7 Investment in associate

Investment in associate

Dr

Cr

Balance at beginning of year

275 000

Share of profit of associate

210 000

Dividend received

95 000

Fair value adjustment

35 000

Investment in S Ltd derecognised

355 000

Investment in A Ltd recognised

330 000

Balance at end of year

400 000

R850 000

R850 000
C8 Long-term loans raised

Long-term loans

Dr

Cr

Balance at beginning of year

1 898 000

Subsidiary acquired

200 000

Loans repaid

500 000

Exchange rate loss

50 000

Loans raised (balancing figure)

192 000

Balance at end of year

1 840 000

R2 340 000 R2 340 000

468

Consolidated statement of cash flows

16.7 Financing activities between non-controlling shareholders

and the group

1 Loans from non-controlling shareholders and proceeds from shares

issued by a subsidiary to non-controlling shareholders are entered
separately in the consolidated statement of cash flows as part of financing
activities.

2 A share issue to non-controlling shareholders results in a reduction

(dilution) of the parent’s interest in the subsidiary. The inclusion in the
consolidated statement of cash flows of the proceeds from the shares issued
to non-controlling shareholders implies that the following items were
brought into account on the date of issue and should therefore be excluded
from the consolidated statement of cash flows: l the increase in the non-
controlling interests (comprising shares and the reserves transferred to non-
controlling shareholders); and

l the change in ownership accounted for as an equity transaction.

3 Notwithstanding the change in ownership accounted for as an equity

transaction, the issue of shares by a subsidiary to non-controlling
shareholders only affects the movements in one statement of financial
position item, namely “non-controlling interest”.

16.8 Acquisition and disposal of an interest in an existing subsidiary

that does not result in a loss of control

1 This paragraph deals with the following two cases in particular : l the
increase in an interest in an existing subsidiary arising from the acquisition
of an additional equity interest for cash; and

l the decrease in an interest in a subsidiary (the investee remains a

subsidiary) arising from the disposal of an equity interest for cash.

2 The expenditure relating to the investment or the proceeds from the sale of
the investment is shown separately as part of financing activities. The
inclusion of the cash cost price/proceeds in respect of the abovementioned
changes in interest implies that the following items were brought into
account at date of the transaction and that they should therefore be excluded
from the consolidated statement of cash flows:

l the change in the non-controlling interests; and

l the change in ownership accounted for as an equity transaction.

3 Notwithstanding the possible change in ownership accounted for as an

equity transaction, the acquisition of an interest in an existing subsidiary, as
well as the disposal of an interest in a subsidiary (to the extent that the
investee remains a subsidiary), only affects the movement in non-controlling
shareholders.

Sundry aspects

16.9 Foreign

operations

1 The translation of the financial statements of foreign operations gives rise

to exchange rate conversion differences. The question of whether the
exchange rate conversion differences and the changes which occur in the
amounts of the assets and liabilities represent cash flow solely because the
exchange rates have changed now arises.

469

Chapter 16

2 Exchange differences arising from these translations are recognised in

other comprehensive income. The parent’s attributable portion thereof is
included in a reserve known as the foreign currency translation reserve. The
portion attributable to non-controlling shareholders is included in equity as
part of the non-controlling interests.

3 In preparing the statement of cash flows, the exchange differences arising

from currency translations allocated to the foreign currency translation
reserve and non-controlling interests are reversed. A corresponding
adjustment is made to a non-current asset and/or current liability. In this
work, the full amount is taken into account (when analysing the changes that
occurred) in “land and buildings”.

16.10 Discontinued operations

1 IFRS 5.33 (c) requires that the net cash flows of discontinued operations
attributable to operating, investing and financing activities shall be
disclosed. These disclosures may be presented either in the notes or in the
financial statements. In example 16.6

in this work, the disclosure is presented in the notes.

16.11 Intragroup loans

1 Loans made by a parent to a subsidiary during the normal course of

business have no effect on the group’s cash and cash equivalents. Such
intragroup loans are, in any event, eliminated during the preparation of the
consolidated statement of financial position.

2 However, an existing shareholders’ loan is often taken over on the

acquisition of a subsidiary. In such a case, an outflow of cash takes place in
respect of both the shares and the loan purchased. The purchasing of the
shares and the loan are shown as part of “investing activities”. Details of the
loan assumed are also provided in the note to the statement of cash flows
that deals with the acquisition of the subsidiary. When a loan is sold upon
disposal of a subsidiary, the resulting cash inflow is shown as part of
“investing activities”.

470

Consolidated statement of cash flows

Example 16.6

Sundry aspects

The following information relates to the Rain Ltd Group for the year ended
31 December 20.16:
RAIN LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 20.16

20.16 20.15

ASSETS

Non-current assets

Land at valuation

1 941 413

1 632 300

Plant and equipment at cost less accumulated depreciation

2 667 100

2 143 500

Investments in associates

345 000

335 000

Investment in Snow Ltd at fair value

190 000

Goodwill

52 000
52 000

5 005 513

4 352 800

Current assets

Inventory

960 800

957 200

Trade receivables

1 055 900

1 040 200

Cash and cash equivalents

64 700

66 510

Non-current assets held for sale

72 000

2 153 400

2 063 910

Total assets

R7 158 913
R6 416 710

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital (2 200 000 shares; 2 000 000 shares)

2 307 500

2 000 000

Foreign currency translation reserve

36 000

Mark-to-market reserve

65 082

Revaluation surplus

115 000

50 000

Retained earnings

1 856 750

992 518

4 279 250

3 143 600
Non-controlling interests

343 325

23 210

Total equity

4 622 575

3 166 810

Non-current liabilities

Long-term loan

700 000

Deferred tax

59 538

44 200

Total non-current liabilities

59 538

744 200

Current liabilities

Trade payables

2 438 700

2 444 000
Shareholders for dividends

4 200

5 000

Tax payable

33 900

56 700

Total current liabilities

2 476 800

2 505 700

Total liabilities

2 536 338

3 249 900

Total equity and liabilities

R7 158 913

R6 416 710

471

Chapter 16

RAIN LTD GROUP

EXTRACT OF CONSOLIDATED STATEMENT OF PROFIT OR

LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.16

Revenue

4 500 200

Cost of sales

(1 925 000)

Gross profit

2 575 200

Other expenses

(874 400)

Finance costs

(250 600)

Share of profit of associates

14 000

Profit before tax

1 464 200

Income tax expense

(435 800)

PROFIT FOR THE YEAR

R1 028 400

Profit attributable to:

Owners of the parent

840 400

Non-controlling interests

188 000

R1 028 400

The following additional information has already been taken into

account in the financial statements above.

1 Included in other expenses in the consolidated profit before tax of the Rain
Ltd Group are the following:

Depreciation on plant and equipment

R480 000

Unrealised exchange gain on foreign debtors

R(127 000)

Realised exchange loss on long-term loan

R115 000

Other expenses are furthermore shown net of any other income,

reclassification adjustments and/or profit that may be forthcoming from the
additional information which follows.

2 Investment in Snow Ltd

Rain Ltd acquired 100 000 shares in Snow Ltd on 2 January 20.15 for a cash
amount of R110 000 when the equity of Snow Ltd was as follows: Share
capital (1 000 000 shares)

R1 000 000
Retained earnings R100

000

Rain Ltd purchased another 500 000 shares in Snow Ltd for a cash amount
of R1 225 000 on 1 January 20.16. On this date, Rain Ltd obtained control
over Snow Ltd. The fair value of the plant and equipment (the only
asset/liability of Snow Ltd) was R2 500 000 on that date.

3 Investment in Hail Ltd

Rain Ltd acquired a 60% interest in Hail Ltd on 1 January 20.15. On this
date, Rain Ltd obtained control over Hail Ltd. Hail Ltd is incorporated in
Go-Go land and has a functional currency of FC. No goodwill arose at
acquisition date.

Rain Ltd sold its entire interest in Hail Ltd on 1 October 20.16 for R1 366
920. On this date, Rain Ltd lost control over Hail Ltd. The exchange rate
was FC1 = R17,28

on 1 October 20.16.

472

Consolidated statement of cash flows

Particulars of the net assets of Hail Ltd at 1 October 20.16 were as follows:
Plant and equipment

105 000

Trade receivables

52 500

Bank overdraft

(30 000)
FC127

500

An amount of R7 980 regarding the foreign exchange rate gain in the current
year on this investment has been allocated to the non-controlling interests. It
may be assumed that the movement in the foreign currency translation
reserve (FCTR) is attributable to plant and equipment only.

Hail Ltd was the only foreign operation of Rain Ltd.

4 The minutes of the directors’ meeting of Rain Ltd, held on 1 January

20.16, confirm that the management decision to discontinue the operations
of the packaging department of Rain Ltd was ratified with effect from 1
January 20.16. The decision was announced on this date. The packaging
department specialises in the distribution of packaging and has always been
a material division of Rain Ltd. The division was separately identifiable for
physical, operational and financial reporting purposes.

The operations of the packaging department were discontinued on 31 August

20.16.

The enforcement of the formal plan to end operations had a material

influence on the packaging department for the period 1 January 20.16 to 31
August 20.16. An extract of the financial statements, prepared by
management for the packaging department, for the eight months ending 31
August 20.16 was as follows: STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 AUGUST 20.16

Revenue

483 000

Cost of sales

(246 000)
Gross profit

237 000

Other expenses

(654 000)

Loss before tax

(417 000)

Taxation relief – current

166 500

LOSS AFTER TAX

(R250 500)

STATEMENT OF FINANCIAL POSITION ITEMS AS AT 31

AUGUST 20.16

31/8/20.16 31/12/20.15

Inventory

R370 500

Trade receivables

– R579

000

Trade payables

– (R393
000)

The above statement of profit or loss and other comprehensive income

figures of the packaging department are included in the applicable profit or
loss categories in the statement of profit or loss and other comprehensive
income of Rain Ltd. All losses incurred by the packaging department are
deductible for tax purposes.

473

Chapter 16

5 Finance costs incurred on qualifying equipment amounted to R286 000

during the 20.16 financial year. This interest was incurred on a loan that was
acquired specifically for the acquisition and installation of the equipment,
which took a substantial time to complete. Half of the finance costs incurred
is still outstanding and is included in trade payables at 31 December 20.16.
The equipment was installed and ready for use as intended by management
on 31 December 20.16. Interest earned on the temporary investment of
borrowed funds amounted to R146 900 for the year and is included in other
expenses.

6 Rain Ltd classified plant, with a carrying amount of R78 000, as held for
sale on 31 December 20.16. This was the only asset classified as such by the
group. No plant or equipment was disposed of during the year.

7 The only companies in the group that own land are Rain Ltd and Ice Ltd, a
subsidiary in which Rain Ltd has an 80% interest and control over. Both
these companies revalued their land during the 20.16 financial year. The land
of Ice Ltd increased in value with R90 000 during 20.16. Neither party
disposed of any land during the year.

8 Rain Ltd declared a dividend of R41 250 for the year ended 31 December
20.16.

9 It may be assumed that no impairment relating to goodwill has taken place.

10 Apart from movements that are clearly evident from the information
above, no disposals or acquisitions of investments took place during the
year.

11 Rain Ltd elected to measure non-controlling interests for all acquisitions

at the proportionate share of the net asset value.

12 Cash flows from dividends and interest paid and received are classified as
operating activities.

13 Rain Ltd irrevocably elected to present any subsequent changes in the fair
value of their equity instruments in other comprehensive income in terms of
IFRS 9 Financial Instruments.

14 Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
Ignore the effects of value-added tax (VAT) and dividends tax.

474

Consolidated statement of cash flows

Solution 16.6

RAIN LTD GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR

ENDED

31 DECEMBER 20.16

Con-

Discon-

Total

tinuing

tinued

Cash flows from operating activities

Cash receipts from customers (C1)

2 642 300

1 062 000

3 704 300

Cash payments to suppliers

and employees (C2)

(1 879 670)

(922 500)

(2 802 170)

Cash generated by operations

762 630

139 500

902 130

Interest paid (C3)

(246 700)

(246 700)

Dividends paid (C9)

(50 603)

(50 603)

Income taxes paid (C5)

(632 557)

166 500

(466 057)

Dividends received (C10)

4 000

4 000

Interest received (given)

146 900

146 900

Net cash from operating activities

(R16 330)

R306 000

R289 670

Cash flows from investing activities

Acquisition of property, plant

and equipment

(207 350 [C6] + 236 950 [C7])

(444 300)

Acquisition of subsidiary (given)

(1 225 000)
Proceeds on disposal of subsidiary *

(1 366 920 + (30 000 x R17,28))

1 885 320

Net cash from investing activities

R216 020

Cash flows from financing activities

Proceeds from issue of share capital

(2 307 500 – 2 000 000)

307 500

Loan repaid (700 000 + 115 000) (815

000)

Net cash used in financing activities

(R507

500)

Net decrease in cash and cash

equivalents

(1 810)

Cash and cash equivalents at

beginning of period

66 510
Cash and cash equivalents at end

of period

R64 700

475

Chapter 16

Calculations

C1 Cash receipts from customers

Continuing

Trade receivables – opening balance (1 040 200 – 579 000)

461 200

– closing balance (given)

(1 055 900)

Foreign exchange gain (given)

127 000

Revenue (4 500 200 – 483 000)

4 017 200

Disposal of subsidiary (52 500 × R17,28) (907

200)

2 642 300

Discontinued
Trade receivables – opening balance (given)

579 000

Revenue (given)

483 000

R1 062 000

C2 Cash paid to suppliers and employees

Continuing

Cost of sales (1 925 000 – 246 000)

(1 679 000)

Other expenses (874 400 + 146 900 – 654 000) (367

300)

Non-cash items:

Depreciation (non-cash) (given)

480 000

Exchange gain on debtors (non-cash) (given)

(127 000)

Exchange loss on long-term loan (financing activity) (given) 115 000

Gain on bargain purchase [1 225 000 + 190 000 – (60% × 2 500 000)]

(85 000)

Impairment loss on held for sale asset (non-cash) (78 000 – 72 000) 6 000
Profit on disposal of subsidiary [1 366 920 – (60% × 127 500 × 17,28)]

(45 000)

Reclassification adjustment of FCTR [36 000 + (7 980 / 40% × 60%)] (47

970)

Movements in working capital:

Inventory [960 800 – (957 200 – 370 500)]

(374 100)

Trade payables – opening balance (2 444 000 – 393 000)

(2 051 000)

– closing balance (2 438 700 – 143 000)

(50% of outstanding finance cost)

2 295 700

(R1 879 670)

Discontinued

Cost of sales (given)

(246 000)

Other expenses (given)

(654 000)

Movements in working capital:

Inventory – opening balance (given)

370 500

Trade payables – opening balance (given)

(393 000)

(R922 500)

476

Consolidated statement of cash flows

C3 Interest paid

Finance costs (given)

(250 600)

Borrowing costs capitalised to plant and equipment

(286 000 – 146 900) (139

100)

Finance costs unpaid at year end (286 000 × 50%) (given)

143 000

(R246 700)

C4 Revaluation surplus of Rain Ltd

Revaluation surplus

– opening balance (given)

50 000

– closing balance (given)

(115 000)

Revaluation by Ice Ltd

[(90 000 × 80%) – (90 000 × 80% × 80% (CGT rate) × 28%)]

55 872

Post-tax revaluation of Rain Ltd

(R9 128)

C5 Income taxes paid

Deferred tax – opening balance (given)

(44 200)

– closing balance (given)

59 538

Revaluation by Ice Ltd (90 000 × 80% × 28%) (20

160)

Revaluation by Rain Ltd [9 128 [C4] / (1 – (80% × 28%)) × 80% × 28%] (2

635)

Deferred tax movement included in income tax expense in P/L

(7 457)

Continued operations tax expense (435 800 + 166 500)

(602 300)

Current tax for the year

(609 757)

Tax payable – opening balance (given)

(56 700)

– closing balance (given)

33 900

(R632 557)

C6 Land – additions

Land – opening balance (given)

1 632 300

– closing balance (given)

(1 941 413)

Revaluation by Ice Ltd (given)

90 000

Revaluation by Rain Ltd [9 128 [C4]/(1 – (80% × 28%))]

11 763

(R207 350)

C7 Plant and equipment – additions

Plant and equipment – opening balance (given)

2 143 500

– closing balance (given)

(2 667 100)

Increase in FCTR (7 980 / 0,4)

19 950

Subsidiary acquired (given)

2 500 000

Subsidiary sold (105 000 × R17,28)

(1 814 400)

Depreciation (given)

(480 000)

Borrowing costs capitalised (C3)

139 100

Plant classified as held for sale (given)

(78 000)

(R236 950)

477

Chapter 16

C8 Dividends declared by subsidiaries to NCI

NCI – opening balance (given)

(23 210)

– closing balance (given)

343 325

Profit for the year (given)

(188 000)

FCTR attributable to NCI (given)

(7 980)

Revaluation [(90 000 × 20%) – (90 000 × 20% × 80% × 28%)]

(13 968)

Subsidiary acquired (2 500 000 × 40%)

(1 000 000)

Subsidiary sold (127 500 × R17,28 × 40%)

881 280

(R8 553)

C9 Dividends paid

Shareholders for dividends – opening balance (given)

(5 000)

– closing balance (given)

4 200

Rain Ltd (given)

(41 250)

NCI (C8)
(8 553)

(R50 603)

C10 Dividends received

Investments in associates – opening balance (given)

335 000

– closing balance (given)

(345 000)

Share of profit of associates (given)

14 000

R4 000

478

Consolidated statement of cash flows

Self-assessment question

Question 16.1

The following information relates to Ronda Ltd, a company with several

subsidiaries and associates:

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 20.18

20.18 20.17

ASSETS

Non-current assets
Property, plant and equipment

4 440 500

5 750 000

Goodwill

103 000

137 000

Investments in associates

600 000

210 000

5 143 500

6 097 000

Current assets

Receivables

483 000

465 000

Inventories

520 000

680 000

Bank

1 886 000
183 500

2 889 000

1 328 500

Total assets

R8 032 500

R7 425 500

EQUITY AND LIABILITIES

Equity attributable to owners of the parent

Share capital

3 600 000

2 550 000

Retained earnings

2 127 500

1 476 000

5 727 500

4 026 000

Non-controlling interests

1 135 500

2 521 000

Total equity
6 863 000

6 547 000

Non-current liabilities

Interest bearing borrowings

400 500

150 000

Deferred tax

391 000

463 000

Total non-current liabilities

791 500

613 000

Current liabilities

Trade payables and accumulated interest

275 000

150 000

Short-term portion of interest bearing borrowings

60 000

50 500

South African Revenue Service

43 000

65 000

Total current liabilities

378 000

265 500

Total liabilities

1 169 500

878 500

Total equity and liabilities

R8 032 500

R7 425 500

479

Chapter 16

EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 20.18

Revenue

3 120 000

Cost of sales

(1 184 000)
Gross profit

1 936 000

Net operating costs

(732 000)

Finance costs paid

(24 000)

Income from associates

Share of profit

27 000

Dividends received

12 000

Profit before tax

1 219 000

Income tax expense

(348 000)

PROFIT FOR THE YEAR

R871 000

Profit attributable to:

Owners of the parent

771 500
Non-controlling interests

99 500

R871 000

Additional information

1 On 1 March 20.18, Ronda Ltd increased its 70% interest in Matador Ltd to
90%, at a total cost of R1 000 000. The purchase price was settled partly by
issuing 100 000

R1 shares for R700 000. The remainder was paid in cash. At the date of
acquisition of the interest, the net assets of Matador Ltd were as follows:
Property, plant and equipment

5 250 000

Receivables 380

000

Interest-bearing borrowings (430

000)

Trade and other payables

(180 000)

Bank overdraft

(20 000)

R5 000 000

2 Ronda Ltd purchased a 60% interest in Ring Ltd on 1 July 20.16 for R300
000. On that date, the carrying values of the net identifiable assets
approximated their fair values and the balance sheet of Ring Ltd indicated
the following equity: Share capital (250 000 shares)
250 000

Retained earnings 200

000

R450

000

480

Consolidated statement of cash flows

On 1 January 20.18, a third of this interest was sold for R160 000. On 1
January 20.18, the fair value of the remaining investment in Ring Ltd was
R320 000 and the carrying amounts of the assets of Ring Ltd were as
follows: Property, plant and equipment

1 300 000

Receivables 300

000

Inventories 150

000

Bank 40

000

Interest bearing borrowings

(685 000)

Deferred tax

(260 000)
Trade and other payables

(170 000)

R675

000

The recoverable amount of goodwill was R27 000 on 30 June 20.17 and R25
500

on 1 January 20.18.

3 On 1 July 20.17, Ronda Ltd entered into a lease agreement. Ronda Ltd did
not elect the simplified accounting treatment for the equipment. In terms of
the agreement, equipment with a cost of R55 000 was leased for a period of
five years. The interest rate is 10% per annum and instalments are payable
annually in arrears on 1 July.

4 The following are, inter alia, included in profit before taxation:

Depreciation R355

000

Realised exchange loss on interest bearing foreign loan

80 000

Unrealised exchange loss on interest bearing foreign loan

70 000

Bad debts written off

22 000

Impairment of goodwill

8 500
5 Ronda Ltd invested $10 000 in a fixed deposit in the USA on 30 June
20.17. At that date, the exchange rate was $1 = R6,90. On 30 June 20.18, the
exchange rate was $1 = R9,30.

6 Accept a tax rate of 30%. Ignore capital gains tax and VAT.

Required

Prepare the statement of cash flows of the Ronda Ltd Group for the year
ended 30 June 20.18 according to the direct method. No notes are required.

481

Chapter 16

Suggested solution 16.1

RONDA LTD GROUP

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 20.18

Cash flows from operating activities

Cash receipts from customers (C1)

2 780 000

Cash paid to suppliers and employees (C3)

(1 154 500)

Cash generated from operations

1 625 500

Financing cost paid (24 000 – 5 500) (18

500)
Dividends received

12 000

Dividends paid (C5)

(335 000)

Tax paid (C6)

(182 000)

R1 102 000

Cash flows from investment activities

Additions of property, plant and equipment (C7)

(290 500)

Purchase of interest in associate (C4)

(43 000)

Proceeds from disposal of interest in subsidiary (160 000 – 40 000) 120

000

(R213 500)

Cash flows from financing activities

Proceeds from long-term borrowings (C8)

740 000

Proceeds from issue of share capital by parent (C9)

350 000
Acquire additional interest in subsidiary [1 000 000 – (100 000 × 7)] (300

000)

R790 000

Net increase in cash and cash equivalents

1 726 500

Exchange rate profit on cash and cash equivalents (C3)

24 000

Cash and cash equivalents beginning of year

183 500

Cash and cash equivalents end of year

R1 886 000

Calculations

C1 Cash receipts from clients

Sales

3 120 000

Movement on receivables

(34 000)

Opening balance

465 000

Ring Ltd
(300 000)

Bad debt

(22 000)

Closing balance

(483 000)

R2 780 000

482

Consolidated statement of cash flows

C2 Owners’ equity of Ring Ltd

(60%–40%)

Total

NCI

At

Since

At acquisition

450 000 270 000

180 000

Investment

300 000

Goodwill
30 000

Since

225 000

135 000

90 000

Interest disposed of (1/3)

(90 000) (45 000)

135 000

Goodwill

30

000

Impairment 20.17

(3 000)

Impairment until 1 January 20.18

(1 500)

25

500

Realised (25 500 × 1/3)

(8

500)
R17

000

Profit on disposal of interest

Proceeds

160

000

Equity sold

(135 000)

Goodwill realised

(8 500)

R16

500

Profit on remeasurement

Fair value (given)

320 000

Carrying amounts (300 000 – (3 000 + 1 500) + 135 000 × 2/3) (287 000)

R33

000

483

Chapter 16
C3 Cash paid to suppliers and employees

Cost of sales

(1 184 000)

Operating cost

(732 000)

Movement on inventories

10 000

Opening balance

680 000

Ring Ltd

(150 000)

Closing balance

(520 000)

Movement on payables

289 500

Opening balance

(150 000)

Ring Ltd

170 000

Accumulated interest (55 000 × 10%)

(5

500)

Closing balance

275 000

Non-cash items

406 000

Depreciation

355 000

Goodwill

8 500

Bad debts

22 000

Unrealised exchange rate losses

70 000

Remeasurement profit (C2)

(33 000)

Profit on disposal of interest (C2)

(16 500)

Reclassification

Realised exchange rate loss

80 000

Exchange rate profit [(6,9 – 9,3) × 10 000]

(24

000)

(R1 154 500)

C4 Investment in associate

Investment in associate opening balance

210 000

Share of profit of associate

27 000

Ring Ltd

320 000

Closing balance

(600 000)

R43

000

C5 Dividends paid

Non-controlling interests opening balance

2 521 000

Interest in profit for year

99 500

Matador Ltd (20% × 5 000 000)

(1 000 000)

Ring Ltd (180 000 + 90 000) (C2)

(270 000)

Closing balance

(1 135 500)

Dividend to non-controlling shareholders

215 000

Dividend paid by Ronda Ltd (2 127 500 – (1 476 000 + 771 500)) 120

000

R335

000

484

Consolidated statement of cash flows

C6 Tax paid

Deferred tax opening balance

463 000

Ring Ltd

(260 000)
Deferred tax closing balance

(391 000)

Deferred tax

(188 000)

Total tax expenses

348 000

Current tax

160 000

SARS opening balance

65 000

SARS closing balance

(43 000)

R182

000

C7 Additions to property, plant and equipment

Opening balance

5 750 000

Ring Ltd

(1 300 000)

Right-of-use asset
55 000

Depreciation

(355

000)

Closing balance

(4 440 500)

R290

500

C8 Loan incurred

Opening balance (150 000 + 50 500)

200

500

Lease liability

55 000

Unrealised exchange rate loss

70 000

Realised exchange rate loss

80 000

Ring Ltd

(685 000)
Closing balance (400 500 + 60 000)

(460

500)

R740

000

C9 Proceeds on share issues

Opening balance (450 000 + 2 100 000)

2 550 000

Issue in exchange for subsidiary

700 000

Closing balance (600 000 + 3 000 000)

(3 600 000)

R350

000

C10 Goodwill

Opening balance

137 000

Impairment (given)

(8 500)

Sell subsidiary Ring Ltd (C2)

(25 500)

R103

000

485
Document Outline
Cover
Half Title
Title Page
Copyright Page
Preface
Contents
9 IFRS 3 Business combinations – Advanced aspects
Introduction
9.1 Overview of the topic
The acquisition method
Recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interests in the
acquiree
9.2 Recognition principle
Example 9.1: Recognition of identifiable liabilities
Example 9.2: Classification of identifiable assets
acquired
Example 9.3: Recognition of intangible assets
9.3 Measurement principle
Example 9.4: Remeasurement of liability to fair value
Example 9.5: Fair value of operating lease – Lessor
Example 9.6: Fair value of items used differently
Example 9.7: Measurement of non-controlling interests
9.4 Exceptions to the recognition and measurement principles
Example 9.8: Contingent liabilities
Example 9.9: Deferred tax
Example 9.10: Indemnification asset
Example 9.11: Recognition and measurement of a
favourable operating lease
Example 9.12: Non-current assets held for sale
Consideration transferred
9.5 Measurement of consideration transferred
Example 9.13: Measurement of consideration transferred
 Example 9.14: Measurement of consideration transferred
– Asset
9.6 Measurement of contingent consideration transferred
Example 9.15: Contingent consideration – Financial
liability
Example 9.16: Contingent consideration – Asset
Example 9.17: Compensation for reduction in equity
instruments
Measurement period
9.7 Measurement period adjustments
Example 9.18: Measurement period and adjustment to
goodwill
Example 9.19: Measurement period adjustment – Non-
controlling interest measured at proportionate share
Example 9.20: Measurement-period adjustment – Non-
controlling interest measured at fair value
Self-assessment question
Question 9.1
10 IFRS 10 Consolidated financial statements – Control
Introduction
10.1 Overview of the topic
10.2 Investment entities
Example 10.1: Investment entities
Control
10.3 Purpose and design of the investee
Example 10.2: Purpose and design of the investee
10.4 Power of an investee
Example 10.3: Substantive rights
Example 10.4: Protective rights
Example 10.5: Majority of voting rights without power
Example 10.6: Power without a majority of voting rights
Example 10.7: Potential voting rights
10.5 Exposure to variable returns from an investee
10.6 Link between power and variable returns
Example 10.8: Investor acting as agent or principal
10.7 Unconsolidated structured entities
10.8 Summary of control assessment
 Self-assessment question
Question 10.1
11 Investments in associates and joint ventures
Introduction
11.1 Background
11.2 Significant influence
Accounting for investments in associates in the separate financial
statements of the investor
Accounting for investments in associates in the consolidated
financial statements of the investor
11.3 Equity method
Application of the equity method
11.4 Equity method procedures
Example 11.1a: Application of the equity method
Example 11.1b: Fair value adjustment at acquisition date
Example 11.2: Revaluation surplus of an associate
Example 11.3: Attributable loss of an associate
Example 11.4: Elimination of unrealised profit in
inventories (investor company sells to associate)
Example 11.5: Elimination of unrealised profit in
inventories (associate sold to investor company)
Example 11.6: Elimination of unrealised profit in
equipment (investor sells to associate)
Example 11.7: Elimination of unrealised profit in
equipment (associate sells to investor company)
Example 11.8: Associates in a horizontal group
Example 11.9: Investment in an associate which itself is
a parent
Example 11.10: Investment in associate by a partially-
owned subsidiary
11.5 Classification as held for sale
11.6 Impairment losses
11.7 Discontinuing the use of the equity method
11.8 Disclosure
Piecemeal acquisition of interests in investees
11.9 Changes in ownership interest
 Example 11.11: Piecemeal acquisition whereby the
status of an investment changes to that of an associate
(significant influence is obtained)
Example 11.12: Acquisition of additional interest
Disposal of interests in an investee
Example 11.13: Disposal of the entire interest in an associate
(significant influence is lost)
Example 11.14: Partial disposal of an interest in an associate
– Loss of significant influence (associate becomes IFRS 9
investment
Self-assessment questions
Question 11.1 Basic equity accounting/interest received
Question 11.2 Basic equity accounting/reporting dates differ
12 Interests in joint arrangements
Basic concepts
12.1 Description of basic concepts
12.2 Types of joint arrangements
Classification of joint arrangements
12.3 Structure of the joint arrangement
12.4 Legal form of the separate vehicle
12.5 Terms of the contractual arrangement
12.6 Other facts and circumstances
Accounting for joint arrangements
12.7 Joint operations
12.8 Joint ventures
Disclosure
Examples
Example 12.1: Basic approach – Joint arrangement in a
separate entity
Example 12.2: Joint operation not structured in a separate
entity
13 Changes in ownership of subsidiaries through buying or selling
shares
Introduction
13.1 Methods of change in ownership
Acquisition of interests in subsidiaries
13.2 Methods of step-acquisition
 13.3 Acquisition of an additional interest in an existing
subsidiary
Example 13.1a: Acquisition of a further interest in an
existing subsidiary where the subsidiary remains a
subsidiary (there is no change in status) (NCI is
measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date)
Example 13.1b: Acquisition of a further interest in an
existing subsidiary where the subsidiary remains a
subsidiary (there is no change in status) (NCI is
measured at fair value at the date of acquisition)
13.4 Acquisition of an additional interest whereby the
investee (investment) becomes a subsidiary
Example 13.2: Acquisition of a further interest where the
investment becomes a subsidiary (NCI is measured at
fair value at the date of acquisition)
13.5 Acquisition of an additional interest whereby an
associate becomes a subsidiary
Example 13.3: Acquisition of a further interest where an
associate becomes a subsidiary (control is obtained)
(NCI is measured at its proportionate share of the
acquiree’s identifiable net assets at the acquisition date)
Disposal of interests in a subsidiary
13.6 Basic approach on disposal of an interest
13.7 Partial disposal of an interest in a subsidiary where
control is not lost
Example 13.4a: Partial disposal of an interest in a
subsidiary with no change in the status as the subsidiary
remains a subsidiary (control is not lost) (NCI is
measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date)
Example 13.4b: Partial disposal of an interest in a
subsidiary with no change in the status as the subsidiary
remains a subsidiary (control is not lost) (NCI is
measured at fair value at the date of acquisition)
13.8 Loss of control with partial disposal of a subsidiary, with
a simple investment retained
 Example 13.5: Partial disposal of a subsidiary (loss of
control) and an investment retained (NCI is measured at
their proportionate share of the acquiree’s identifiable
net assets at the acquisition date)
13.9 Partial disposal of an interest in a subsidiary, whereby it
becomes an associate
Example 13.6: Partial disposal of an interest in a
subsidiary resulting in a change in status as the
subsidiary becomes an associate (a loss of control by the
parent occurs) (NCI is measured at its proportionate
share of the acquiree’s identifiable net assets at the
acquisition date)
13.10 Loss of control and intragroup sale of assets
Example 13.7: Loss of control over a subsidiary with
previous intragroup profits on the sale of depreciable
assets
13.11 Changes of interest in complex groups
Self-assessment questions
Question 13.1
Question 13.2
Question 13.3
14 Changes resulting from the issue of additional shares by investees
and other changes in ownership
Introduction
Changes in subsidiaries
Issue of shares
14.1 Issue of capitalisation shares
Example 14.1: Capitalisation issue giving rise to
fractional dealings
14.2 Rights issue by a subsidiary
Example 14.2: Illustrative example of the entries by
the subsidiary and the parent with a rights issue
Example 14.3: Rights issue by subsidiary with no
change in relative interests (there is no loss of
control with the rights issue) and no change in
status as the subsidiary remains a subsidiary (NCI is
 measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date)
Example 14.4: Illustrative example of a parent’s
owners’ equity increasing after a rights issue (i.e.
the parent takes up more than its proportionate
share of the new shares on offer in the rights issue)
Example 14.5: Rights issue by a subsidiary
resulting in an increase of the interest of the parent
(control is not lost in the rights issue) and the status
does not change as the subsidiary remains a
subsidiary (NCI is measured at its proportionate
share of the acquiree’s identifiable net assets at the
acquisition date)
Example 14.6: Rights issue by a subsidiary
resulting in a decrease of the interest of the parent
(control is not lost in the rights issue) and the status
does not change as the subsidiary remains a
subsidiary (NCI is measured at fair value at the
acquisition date)
Buy-back of shares
14.3 Buy-back of shares by a subsidiary
Example 14.7: Simple illustration of a share buy-back
Example 14.8: Buy-back of shares by a subsidiary with
no change in relative interests (there is no loss of
control) (NCI is measured at its proportionate share of
the acquiree’s identifiable net assets at the acquisition
date)
Example 14.9: Buy-back of shares by a subsidiary with
no change in status as an increase in the parent’s interest
occurs (there is no loss of control) and the subsidiary
remains a subsidiary (NCI is measured at its
proportionate share of the acquiree’s identifiable net
assets at the acquisition date)
Example 14.10: Buy-back of shares by a subsidiary
where there is no change in the status as the subsidiary
remains a subsidiary (there is no loss of control) and a
decrease in the parent’s interest occurs due to the share
 buy-back (NCI is measured at fair value at the
acquisition date)
Other changes in ownership
14.4 Share-based payments of a subsidiary
Example 14.11: Issue of new shares by a subsidiary in
terms of a share-based payment transaction resulting in a
decrease of the interest of the parent (control is not lost)
and the status does not change as the subsidiary remains
a subsidiary (NCI is measured at its proportionate share
of the acquiree’s identifiable net assets at the acquisition
date)
14.5 Loss of control through expiry of an agreement and
obtaining control through an agreement
Example 14.12: Loss of control over a subsidiary on
expiry of agreement (NCI is measured at fair value at the
acquisition date)
Example 14.13: Obtaining control through an agreement
where an associate becomes a subsidiary (NCI is
measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date)
14.6 Accounting for a change in investment entity status
Changes in associates and joint ventures
14.7 Accounting for other changes in the net assets of an
associate
IFRS 5 and investments held for sale
14.8 Important definitions
14.9 Applying IFRS 5 in the consolidated financial
statements
14.10 Associates classified as held for sale
Self-assessment question
Question 14.1
15 Foreign operations
Introduction
Important definitions
15.1 Foreign operation
15.2 Functional currency
15.3 Presentation currency
 15.4 Spot exchange rate
15.5 Closing rate
15.6 Monetary item
15.7 Net investment in a foreign operation
Translation from the functional currency to the presentation
currency
15.8 Translation of financial statements to the presentation
currency
15.9 Translation of a foreign operation
Example 15.1 Basic conversion of the financial
statements of a foreign subsidiary
Example 15.2 The impact of goodwill and IFRS 3 fair
value remeasurements on foreign operations
15.10 Foreign operation and reporting entity have different
reporting dates
15.11 Net investment in a foreign operation
Example 15.3 Loan to subsidiary as part of the net
investment in a foreign operation
15.12 Foreign operations – Associates and joint ventures
Example 15.4 Foreign operation – Associate
15.13 Disposal of a foreign operation
Example 15.5 Disposal of a foreign operation resulting
in a loss of control (NCI is measured at fair value at the
acquisition date)
Example 15.6 Partial disposal of an interest in a foreign
subsidiary with no change in the status as the subsidiary
remains a subsidiary (control is not lost) (NCI is
measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date)
Self-assessment question
Question 15.1
16 Consolidated statement of cash flows
Introduction
16.1 Background
Example 16.1: Consolidated statement of cash flows
Associates and joint ventures
16.2 Investments in associates and joint ventures
 Example 16.2: Investment in associate
16.3 Acquisition and disposal of associates and joint ventures
Example 16.3: Acquisition and disposal of associate
Changes in ownership interests in subsidiaries
16.4 Acquisition and disposal of a subsidiary
Example 16.4: Acquisition and disposal of a subsidiary
16.5 Acquisition of a subsidiary in terms of a non-cash
transaction
16.6 An associate becomes a subsidiary and a subsidiary
becomes an associate
Example 16.5: Associate becomes a subsidiary and a
subsidiary becomes an associate
16.7 Financing activities between non-controlling
shareholders and the group
16.8 Acquisition and disposal of an interest in an existing
subsidiary that does not result in a loss of control
Sundry aspects
16.9 Foreign operations
16.10 Discontinued operations
16.11 Intragroup loans
Example 16.6: Sundry aspects
Self-assessment question
Question 16.1