GROUP
ACCOUNTING
IFRS3 and IFRS10
1
OBJECTIVES
Understand what is a business combination.
Apply the definition of control to scenario based
questions.
Understanding and applying the 4 steps in the
acquisition method.
Understand the difference between wholly owned
and partly owned subsidiary.
Preparing pro-forma journals
Preparing consolidated financial statements.
2
Introduction
• Asset definition
– Present economic resource (rights)
– Control
– Past events
• Companies and share ownership
– Ordinary shares
– Voting rights
– Dividends
3
Introduction
• Assume that Company P Ltd buys
1% of the shares in Company S Ltd
– Present economic resource
– Controlled
– Past event
• What rights does Company P have?
– Vote in shareholder meetings
– Receive dividends when declared
– Sell shares in the future
4
Ordinary Shares
• Assume that Company P Ltd buys 51% of the
shares in Company S Ltd
– Present economic resource controlled
– Past event
Dr Investment in Company S Ltd R100 000
Cr Bank R100 000
• But does Company P only control the shares?
• Economic substance?
5
Introduction
In today’s business world, it is common for one entity to purchase
(acquire) another entity. For example company A acquired
company B on 1 March 2017.
In business world, they speak about acquiring the net assets of an
entity.
Net assets are equal to total assets minus total liability (accounting
equation = net assets are equal to total equity).
The purchaser of the net assets of a business is referred to the
investor and the entity which has been acquired (bought) are
referred to as the investee in terms of IFRS 10.
If the investor has control over the investee, the investor is referred
to as the parent and the investee as the subsidiary in terms of
IFRS 10.
6
BUSINESS COMBINATIONS
A business combination is a transaction, or other event in
which the acquirer obtains control of one or more businesses
(IFRS 3:Appendix A).
IFRS 3 refers to acquirer and acquiree which is similar to IFRS
10’s parent and subsidiary.
A business is an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of
providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners,
members or participants. (IFRS 3: Appendix A).
From the above definitions, it is clear that a business
combination is not just the acquisition of assets and liabilities,
but rather the acquisition of a business.
7
BUSINESS
COMBINATION
IFRS 3:B7 states that business consists out of input and
processes which are applied to create outputs.
Inputs – any economic resource that creates outputs when one or
made processes are applied to it ( item of property, plant and
equipment, etc).
Processes – any system, standard, protocol, convention of rule
that when applied to inputs creates or has the ability to create
outputs.
Outputs – The results of inputs and processes applied to these
inputs that provide or have the ability to provide a return in the
form of dividends lower costs or other economic benefits directly to
investors, other owners, members of participants.
Example 1 page 51
8
CONTROL
Based on the definition of a business combination it is clear that
there should be control before we have a business combination.
Based on IFRS 10.5, an investor must determine whether it is a
parent by assessing whether it controls the investee.
IFRS 10.6 states that an investor controls an investee when it is
exposed, or has rights to variable returns from its involvement with
the investee and has the ability to affect those returns through its
power over the investee.
IFRS 10.7 mentions 3 elements must be present for control:
1. Power over the investee,
2. Exposure, or rights, to variable returns from its involvement with the
investee, and
3. The ability to use its power over the investee to affect the amount of
the investor’s returns. 9
CONTROL
Power:
IFRS 10:10 states that an investor has power when it
has existing rights that gives it the current ability to
direct the relevant activities.
Relevant activities are activities that significantly
influence an investee’s returns.
Power normally arises from rights.
It is easy to assess whether an investor has power if
power is based on voting rights. A majority voting rights
will constitute power.
10
CONTROL
Power (continue):
IFRS 10:B15 provides a list of items which constitutes power:
1. Rights in terms voting rights,
2. Rights to appoint, reassign or remove members of an
investee’s key management personnel who have the ability to
direct the relevant activities,
3. Rights to appoint or remove another entity that directs the
relevant activities,
4. Right to direct the investee to enter into, or veto any changes
to, transactions for the benefit of the investor,
5. Other rights that give the holder the ability to direct the
relevant activities.
11
CONTROL
Power (continue):
An investor hold the majority voting rights if investees
activities are directed by the votes of the investors or when
the investor has the right to appoint the majority of the
Board of Directors (IFRS 10:B35).
Rights can be substantive rights or protective rights.
Substantive rights are rights which are exercisable when the
decisions are made (IFRS 10:B22).
Protective rights are rights to protect without giving any
power over the investee. An investor who holds protective
rights has no power over the investee (IFRS 10:B27).
12
CONTROL
Variable returns:
The investor must have the right to variable returns of
the investee. This variable returns can be positive or
negative (IFRS 10:15).
IFRS 10:57B provides a list of examples of returns:
1.Dividends
2.Remuneration for servicing an investee’s assets and
liabilities
3.Returns that are not available to other interest
holders.
13
CONTROL
Link power with returns:
An investor has control over an investee if it has an
ability to use its power to affect decisions in the investee
which effects the investor’s return from the investee
(IFRS 10:17).
Example 1 on page 35
14
CONTROL
Example 1 on page 35
Assume Cup has 100 Ord Shares and 200 N shares in issue
15
CONSOLIDATION
Once has been determined that the investor has control
over the investee, consolidated financial statements
must be prepared.
Based on IFRS 10:Appendix A, consolidated financial
statements of a group is where assets, liabilities, equity,
income, expenses and cash flows of the parents and its
subsidiaries are presented as a single economic entity.
This is done by using the acquisition method as
described in IFRS3.
16
