Complex groups

Horizontal group (single level structures)

A horizontal group is a group consisting of a parent which holds a direct interest in several
other entities (subsidiaries).

The group can be schematically illustrated as follows:

Vertical group (multiple level structures)

A vertical group is a group consisting of a parent which holds a direct interest in a subsidiary
which in turn holds a direct interest in its own subsidiary. The parent thus holds an indirect
interest in the bottom subsidiary. The group can be schematically illustrated as follows:

A Limited
(parent)

B Limited
(subsidiary)

C Limited
(sub-subsidiary)

Mixed group
A mixed group is a group consisting of a horizontal and vertical group. The group can be
schematically illustrated as follows:

1
 3.1 Horizontal groups

Example 3.1

The following are the abridged trial balances o A Limited, B Limited and C Limited at
f
31 December 20.3:

A Limited B Limited C Limited

R R R
Credits
Share capital
— 100 000 ordinary shares 100 000 — —
— 80 000 ordinary shares — 80 000 —
— 30 000 ordinary shares — — 60 000
Retained earnings – beginning of year 200 000 150 000 110 000
Profit before tax 345 000 220 000 95 000
645 000 450 000 265 000
Debits
Property, plant and equipment 266 500 284 000 136 500
Investment in B Limited at fair value 110 000 — —
Investment in C Limited at fair value 100 000 — —
Trade and other receivables 35 000 60 000 65 000
Income tax expense 103 500 66 000 28 500
Dividends paid 30 000 40 000 35 000
645 000 450 000 265 000

Additional information
1. A Limited purchased 60 000 shares in B Limited on 1 January 20.0 when B Limited’s
retained earnings amounted to R60 000. On 1 January 20.1 A Limited acquired 27 000
shares in C Limited, when the retained earnings of C Limited amounted to R40 000. On
both acquisition dates the fair values of the identifiable assets, liabilities and contingent
liabilities were considered to be equal to the carrying amounts of these items.
2. Each share carries one vote.
3. The group uses the partial goodwill method to recognise goodwill. (The non-controlling
interest is measured at its proportionate interest in the net identifiable assets of the
acquirer.) Goodwill was not considered to be impaired at year end.
4. The fair value of available-for-sale financial assets is equal to the cost price thereof. All fair
value adjustments are recognised in equity.

31 December 20.3. Your answer must comply with the requirements of

GenerallyAccepted Accounting Practice.

Solution 3.1
A LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.3

R
ASSETS
Non-current assets 702 000
Property, plant and equipment (266 500 + 284 000 + 136 500) 687 000
Goodwill (5 000a + 10 000g) 15 000
Current assets 160 000
Trade and other receivables (35 000 + 60 000 + 65 000) 160 000
Total assets 862 000
EQUITY AND LIABILITIES
Total equity 862 000
Equity attributable to owners of the parent 755 850
Share capital 100 000
Retained earnings 655 850
Non-controlling interest (86 000f + 20 150m) 106 150

Total equity and liabilities 862 000

A LIMITED GROUP

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR

ENDED31 DECEMBER 20.3

Profit before tax (345 000 + 220 000 + 95 000 – 30 000(div) – 31 500(div)) 598 500
Income tax expense (103 500 + 66 000 + 28 500) (198 000)
PROFIT FOR THE YEAR 400 500
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 400 500
Total comprehensive income attrbutable to:
Owners of the parent 355 350
Non-controlling interest (38 500d + 6 650j) 45 150
400 500

3
A LIMITED GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR

ENDED31 DECEMBER 20.3

Non-
Share Retained controlling Total
capital earnings Total interest equity
R R R R R

Balance at 1 January 20.3 100 000 330 5001 430 500 74 5002 505 000
Changes in equity for 20.3
Dividends paid (30 000) (30 000) (13 500)3 (43 500)
Profit for the year/Total
comprehensive income for
the year 355 350 355 350 45 150 400 500
Balance at 31 December 20.3 100 000 655 850 755 850 106 1504 862 000

1 200 000 + 67 500b + 63 000h = 330 500 or 200 000 + ((110 000 – 40 000) – 7 000 (J6)) +

((150 000 – 60 000) – 22 500 (J2)) = 330 500

2 57 500c + 17 000i = 74 500

3 10 000e + 3 500k = 13 500

4 Check: 86 000f + 20 150m = 106 150

Calculations
C1 Analysis of owners’ equity of B Limited

100% 75% 25%

Total At Since NCI
R R R R
At acquisition
Share capital 80 000 60 000 20 000
Retained earnings 60 000 45 000 15 000
140 000 105 000 35 000
Equity represented by goodwill 5 000 5 000a —
Consideration and NCI 145 000 110 000 35 000

Since acquisition
Retained earnings (150 000 – 60 000) 90 000 67 500b 22 500
57 500c
Current year
Profit for the year (220 000 – 66 000) 154 000 115 500 38 500d
Dividends paid (40 000) (30 000) (10 000)e
349 000 5 000 153 000 86 000f
 C2 Analysis of owners’ equity of C Limited

100% 90% 10%

Total At Since NCI
R R R R
At acquisition
Share capital 60 000 54 000 6 000
Retained earnings 40 000 36 000 4 000
100 000 90 000 10 000
Equity represented by goodwill 10 000 10 000g —
Consideration and NCI 110 000 100 000 10 000

Since acquisition
Retained earnings (110 000 – 40 000) 70 000 63 000b 7 000
17 000i
Current year
Profit for the year (95 000 – 28 500) 66 500 59 850 6 650j
Dividends paid (35 000) (31 500) (3 500)k
211 500 (10 000) 91 350 20 150m

Comments

Percentage interest that A Limited has in:

B Limited: 60 000/80 000 = 75%
C Limited: 27 000/(60 000/R2) = 90%

Structure of group:
A
Limited

1 January 20.0 1 January 20.1

75% 90%

B C
Limited Limited

From the above it is clear that A Limited has a direct interest in B Limited and a direct
interest in C Limited thus the group is a horizontal group.

An analysis will be prepared for B Limited and C Limited. An analysis is prepared for each
subsidiary individually as the group is a horizontal group and there is no direct relationship
between B Limited and C Limited.

5
C3 Pro forma consolidation journals

Dr Cr NCI
R R R
J1 Share capital 80 000
Retained earnings 60 000
Goodwill 5 000a
Non-controlling interest (SFP) 35 000 35 000
Investment in B Limited 110 000
Elimination of owners’ equity in B Limited
at acquisition

J2 Retained earnings — beginning of year 22 500

Non-controlling interest (SFP) 22 500 22 500
Recording of the non-controlling interest in
retained earnings of B Limited
[(150 000 – 60 000) × 25%]
57 500c

J3 Non-controlling interest (SCI) 38 500

Non-controlling interest (SFP) 38 500 38 500d
Recording of non-controlling interest in profit for
the year of B Limited [(220 000 – 66 000) × 25%]

J4 Profit before tax (other income) 30 000

Non-controlling interest (SFP) 10 000 (10 000)e
Dividends paid 40 000
Elimination of intragroup dividend and recording
portion of non-controlling interest therein
86 000f

J5 Share capital 60 000

Retained earnings 40 000
Goodwill 10 000g
Non-controlling interest (SFP) 10 000 10 000
Investment in C Limited 100 000
Elimination of owners’ equity in C Limited at
acquisition

J6 Retained earnings — beginning of year 7 000

Non-controlling interest (SFP) 7 000 7 000
Recording of non-controlling interest in retained
earnings of C Limited [(110 000 – 40 000) 10%]
17 000i
J7 Non-controlling interest (SCI) 6 650
Non-controlling interest (SFP) 6 650 6 650j
Recording of non-controlling interest in profit for
the period of C Limited [(95 000 – 28 500) × 10%]

J8 Profit before tax (other income) 31 500

Non-controlling interest (SFP) 3 500 (3 500)k
Dividends paid 35 000
Elimination of intragroup dividend and portion of
non-controlling interest therein,
20 150m
 3.2 VERTICAL GROUP

A Limited
70% (31 July 20.5)
B Limited
65% (1 January 20.3)
C Limited

Comments

A vertical group is always consolidated from bottom to the top.

The owners’ equity of C Limited will always be analysed before the owners’ equity of
B Limited. The date of acquisition of an interest in a subsidiary is therefore very important.
If B Limited purchased its interest in C Limited on 1 January 20.3 andA Limited
purchased its interest in B Limited on 31 July 20.5, C Limited will only become asubsidiary
of A Limited on 31 July 20.5, the date the group was formed. In simple terms we will only
take into account profits of the sub-subsidiary ‘‘C Limited’’ from 31 July 20.5(the date the
group was formed.)

3.2
The following are the abridged trial balances of A Limited, B Limited and C Limited at
31 December 20.3:
A Limited B Limited C Limited
R R R
Credits
Share capital — 200 000 ordinary shares 200 000 — —
— 140 000 ordinary shares — 140 000 —
— 150 000 ordinary shares — — 150 000
Retained earnings — beginning of year 300 000 190 000 210 000
Profit before tax 250 000 200 000 210 000
Long-term liability 70 000 — 95 000
820 000 530 000 665 000
Debits
Property, plant and equipment 345 000 150 000 437 000
Investment in B Limited at fair value 165 000 — —
Investment in C Limited at fair value — 232 000 —
Trade and other receivables 205 000 48 000 130 000
Income tax expense 75 000 60 000 63 000
Dividends paid 30 000 40 000 35 000
820 000 530 000 665 000

7
 Additional information
1. A Limited purchased 98 000 shares in B Limited on 1 January 20.0 when B Limited’s
retained earnings amounted to R90 000. The fair values of the identifiable assets, liabilities and
contingent liabilities at the acquisition date of B Limited were considered to be equal tothe
carrying amounts of these items.
2. B Limited acquired 127 500 shares in C Limited on 1 January 20.1, when C Limited’s
retained earnings amounted to R120 000. The fair values of the identifiable assets,
liabilities and contingent liabilities at the acquisition date of C Limited were considered to
be equal to the carrying amounts of these items.
3. Each share carries one vote.
4. The group uses the partial goodwill method to recognise goodwill. (The non-controlling
interest is recognised at its proportionate share of the acquirer’s net identifiable assets.)
Goodwill was not considered to be impaired at year end.
5. The fair value of available-for-sale financial assets is equal to the cost price thereof.

31 December 20.3. Your answer must comply with the requirements of

GenerallyAccepted Accounting Practice.

Solution 3.2
A LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.3

R
ASSETS
Non-current assets 937 750
Property, plant and equipment (345 000 + 150 000 + 43f 000) 932 000
Goodwill (4 000g + 1 f50o (2 500a × 70%)) 5 750
Current assets 383 000
Trade and other receivables (205 000 + 48 000 + 130 000) 383 000
Total assets 1 320 750
R

EQUITY AND LIABILITIES

Total equity 1 155 750
Equity attributable to owners of the parent 905 190
Share capital 200 000
Retained earnings 705 190
Non-controlling interest (f0 800f + 1f9 f60n) 250 560
Total liabilities 165 000
Non-current liabilities 165 000
Long-term borrowings (f0 000 + 95 000) 165 000
Total equity and liabilities 1 320 750

A LIMITED GROUP

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR

ENDED31 DECEMBER 20.3

Profit before tax (C3) 602 250

Income tax expense (f5 000 + 60 000 + 63 000) (198 000)
PROFIT FOR THE YEAR 404 250
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 404 250
Total comprehensive income attributable to:
Owners of the parent 311 640
Non-controlling interest (42 000k + 28 560l + 22 050d) 92 610
404 250

A LIMITED GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR

ENDED31 DECEMBER 20.3

Non-
Share Retained controlling Total
capital earnings Total interest equity
R R R R R

Balance at 1 January 20.3 200 000 423 5501 623 550 175 2002 798 750
Changes in equity for 20.3
Profit for the year/Total com-
prehensive income for the year 311 640 311 640 92 610 404 250
Dividends paid (30 000) (30 000) (17 250)3 (47 250)
Balance at 31 December 20.3 200 000 705 190 905 190 250 5604 1 155 750

1
300 000 + 70 000h + 53 550i = 423 550 or 300 000 + ((190 000 – 90 000) – 30 000 (J6)) +
(210 000 – 120 000 – 13 500 (J2) – 22 950 (J7)) = 423 550
2
54 000c + 121 200j = 175 200
3 5 250e + 12 000m = 17 250

9
Calculations
C1 Analysis of owners’ equity of C Limited

100% 85% 15%

Total At Since NCI
R R R R
At acquisition
Share capital 150 000 127 500 22 500
Retained earnings — 01/01/20.1 120 000 102 000 18 000
270 000 229 500 40 500
Equity represented by goodwill 2 500 2 500a —
Consideration and NCI 272 500 232 000 40 500

Since acquisition
Retained earnings (210 000 – 120 000) 90 000 76 500b 13 500
54 000c
Current year
Profit for the year (210 000 – 63 000) 147 000 124 950 22 050d
Dividends paid (35 000) (29 750) (5 250)e
474 500 171 700 70 800f

C2 Analysis of owners’ equity of B Limited

100% 70% 30%

Total At Since NCI
R R R R

At acquisition
Share capital 140 000 98 000 42 000
Retained earnings — 01/01/20.0 90 000 63 000 27 000
230 000 161 000 69 000
Equity represented by goodwill 4 000 4 000g —
Consideration and NCI 234 000 165 000 69 000

Since acquisition
Retained earnings (190 000 – 90 000) 100 000 70 000h 30 000
C Limited: Retained earnings 76 500 53 550i 22 950
Goodwill (2 500)a (1 750)o (750)
408 000 121 200i
Current year
Profit for the year — B Limited
(200 000 – 60 000) 140 000 98 000 42 000k
Profit for the year — C Limited 95 200 66 640 28 560l
(124 950 – 29 750)
Dividends paid (40 000) (28 000) (12 000)m
603 200 260 190 179 760n
 C3 Profit before tax

Profit before tax – A Limited 250 000

Intragroup dividends received from B Limited (40 000 × f0%) (28 000)
Profit before tax – B Limited 200 000
Intragroup dividends received from C Limited (35 000 × 85%) (29 750)
Profit before tax – C Limited 210 000
Profit before tax – Group 602 250

Comments

Percentage interest that A Limited has in:

B Limited: 98 000/140 000 = 70%
C Limited: 127 500/150 000 = 85%

Structure of group:

A Limited

1 January 20.0
70%
B Limited

1 January 20.1
85%
C Limited

A Limited acquired its interest in B Limited before B Limited acquired its interest in
C Limited. The group therefore was formed on the date (1 January 20.0) that A Limited
acquired its interest in B Limited.

From the above it is clear that A Limited has a direct interest in B Limited and an indirect
interest in C Limited (due to B Limited having a direct interest in C Limited) thus the group
is a vertical group.

An analysis will first be prepared for C Limited and then for B Limited due to the group
being a vertical group.

C4 Pro forma consolidation journals

Dr Cr NCI
R R R
J1 Share capital 150 000
Retained earnings 120 000
Goodwill 2 500a
Non-controlling interest (SFP) 40 500 40 500
Investment in C Limited 232 000
Elimination of owners’ equity in C Limited at
acquisition

11
 Dr Cr NCI
R R R
J2 Retained earnings — beginning of year 13 500
Non-controlling interest (SFP) 13 500 13 500
Recording of non-controlling interest in retained
earnings of C Limited
[(210 000 – 120 000) × 15%]
54 000c
J3 Non-controlling interest (SCI) 22 050

Non-controlling interest (SFP) 22 050 22 050d

Recording of non-controlling interest in retained
earnings of C Limited
[(210 000 – 120 000) × 15%]

J4 Profit before tax 29 750

Non-controlling interest (SFP) 5 250 (5 250)e
Dividends paid 35 000
Elimination of intragroup dividend and recording
of portion of non-controlling interest therein
70 800f

J5 Share capital 140 000

Retained earnings 90 000
Goodwill 4 000g
Non-controlling interest (SFP) 69 000 69 000
Investment in B Limited 165 000
Elimination of owners’ equity in B Limited at
acquisition

J6 Retained earnings — beginning of year 30 000

Non-controlling interest (SFP) 30 000 30 000
Recording of non-controlling interest in retained
earnings of B Limited
[(190 000 – 90 000) × 30%]

J7 Retained earnings — beginning of year 22 950

Non-controlling interest (SFP) 22 950 22 950
Recording of non-controlling interest of B Limited
in retained earnings of C Limited
[(210 000 – 120 000) × 85% × 30%]

J8 Non-controlling interest (SFP) 750 (750)

Goodwill 750
Recording of non-controlling interest of B Limited
in goodwill of C Limited (2 500 × 30%)
121 200j
J9 Non-controlling interest (SCI) 42 000

Non-controlling interest (SFP) 42 000 42 000k

Recording of non-controlling interest in profit for
the year of B Limited [(200 000 – 60 000 × 30%]
 Dr Cr NCI
R R R
J10 Non-controlling interest (SCI) 28 560
Non-controlling interest (SFP) 28 560 28 560l
Recording of non-controlling interest of B Limited
in profit for the year of C Limited,
[(210 000 – 63 000 – 35 000) × 85% × 30%]

J11 Profit before tax (other income) 28 000

Non-controlling interest (SFP) 12 000 (12 000)m
Dividends paid 35 000
Elimination of intragroup dividend and recording of
portion of non-controlling interest therein,
179 760n

13