FAC2602 - gimmenotes.co.zagimmenotes.co.za/.../2017/01/FAC2602-Study-guide.pdf · ... Consolidation...

MO001/3/2017

Selected Accounting Standards and Simple Group Structures

FAC2602

Semesters 1 & 2

Department of Financial Accounting

IMPORTANT INFORMATION:

This document contains the tutorial matter of your learning units.

2

CONTENTS

Page

1. Introduction 3

2. Lecturers and contact details 3

3. Learning Unit 1 4









12. Topic B: Learning Unit 1 258

3

INTRODUCTION

Dear Student,

Attached please find the following learning units:

Learning unit 1 – Provisions in respect of companies in a group context

Learning unit 2 – Consolidation of a wholly-owned subsidiary at date of acquisition

Learning unit 3 – Consolidation of a partly-owned subsidiary at date of acquisition

Learning unit 4 – Consolidation of a wholly-owned subsidiary after date of acquisition

Learning unit 5 – Consolidation of a partly-owned subsidiary after date of acquisition

Learning unit 6 – Acquisition of an interest in a subsidiary during the year

Learning unit 7 – Elimination of intragroup transactions

Learning unit 8 – Treatment of dividends during consolidation

Learning unit 9 – Treatment of preference shares during consolidation

Topic B: Learning unit 1 – Statements of cash flows

LECTURERS AND CONTACT DETAILS

Your FAC2602 lecturers and their offices are as follows: Ms C Wolfaardt - AJH van der Walt Building 2-43 Ms S Gani - AJH van der Walt Building 2-45 Ms R Grobler - AJH van der Walt Building 2-67 Ms MM Pholo - AJH van der Walt Building 2-44 Our contact details are as follows:

Telephone: 012 429 4234 Fax: 012 429 3335 E-mail: [email protected]

4

FAC2602

Introduction to group annual

financial statements

PROVISIONS IN RESPECT

OF COMPANIES IN A

GROUP CONTEXT

LEARNING UNIT 1

FAC2602 / Learning unit 1

5

LEARNING OUTCOME

Students should be able to identify and define a business combination, a parent and subsidiary

company as well as simple groups in relation to International Financial Reporting Standards (IFRS).

OVERVIEW

The learning unit is divided into the following:

1.1 INTRODUCTION ............................................................................................................ 6

1.2 BUSINESS COMBINATION, PARENT AND SUBSIDIARIES ....................................... 6

1.3 ACCOUNTING FOR GROUPS .................................................................................... 10

1.4 GENERAL PRINCIPLES .............................................................................................. 11

1.5 EXERCISES ................................................................................................................. 11

SELF-ASSESSMENT ............................................................................................................. 12

KEY CONCEPTS

Business combination

Acquire

Entity

Parent

Subsidiary

Sub-subsidiary

Control

Share capital

Simple group

Complex group


6

ASSESSMENT CRITERIA

After studying this learning unit, you should be able to

define a business combination

define a parent

define a subsidiary

explain the difference between simple and complex groups

describe the provisions regarding accounting and disclosure as they relate to

group financial statements of companies

1.1 INTRODUCTION

The first learning unit, which deals with group financial statements, is mainly background

knowledge. As you progress through the course, you will come to understand the purpose

that this background knowledge serves. We refer back to certain concepts and principles

discussed here in subsequent learning units, so they should become clearer to you later on in

the module.

1.2 BUSINESS COMBINATION, PARENT AND SUBSIDIARIES

Over the years, the tendency in the business world has been to form bigger and bigger

enterprises. Sole proprietors combined to form partnerships, which in turn amalgamated to

form yet bigger partnerships. However, these bigger partnerships posed one problem: all the

partners were not equally involved. Some partners merely contributed capital, whereas others

were more actively involved in managing the enterprise on a daily basis. The result was the

formation of companies to limit the liability of the inactive partners.

Companies also began to combine with other companies to form larger companies and groups

of companies.

IFRS 3 Business combinations regulates business combinations. We can define a business

combination as a transaction or other event in which an acquirer obtains control of one or more

businesses.


7

EXAMPLE

The following is an example of such a group:

P Ltd

75% of the control by

means of 75% of the

share capital

S Ltd

a) P Ltd is the parent. (P Ltd holds more than half of the issued share capital and it is

assumed also more than half the voting rights in S Ltd.)

b) S Ltd is the subsidiary.

Where a parent is linked with a subsidiary to form a larger economic unit, it is customary to

refer to the entity as a group.

IFRS 10 Consolidated Financial Statements (issued May 2011) defines a group as a parent

and all its subsidiaries. In such a group, the management of the different independent parent

and subsidiary entities would co-ordinate their efforts on a central and unified basis to serve

the interests of the group as a whole. It is possible for management to operate on a unified

basis because of the control that the parent exercises over its subsidiaries.

IFRS 10 determines that an investor (in this case the parent) controls an investee (the

subsidiary) 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.

The above is an example of a simple group. Although you will only have to deal with accounting

and disclosure for simple groups in this course, we would like to introduce you to the concept of

complex groups so that it will not be an entirely new or foreign concept to you in future.


8

EXAMPLE

The following are two examples of complex groups:

1. P Ltd

80% of the control through 60% of the control through

80% of the share capital 60% of the share capital

S1 Ltd S2 Ltd

a) P Ltd is the parent.

b) S1 Ltd and S2 Ltd are the subsidiaries.

c) P Ltd, S1 Ltd and S2 Ltd collectively form a complex group (horizontally).

2.

P Ltd

75% of the control through

75% of the share capital

S1 Ltd

80% of the control through

80% of the share capital

S2 Ltd

a) P Ltd is the parent.

b) S1 Ltd is the subsidiary, and S2 Ltd is the sub-subsidiary.

c) P Ltd, S1 Ltd and S2 Ltd collectively form a complex group (vertically).

It should be clear to you from the above that simple groups have only one subsidiary where

complex groups have more than one subsidiary.

The following definitions are important in the light of the above explanation:


9

Business combination

A business combination is defined as a transaction or another event in which an acquirer

obtains control of one or more businesses.

Parent

A parent is an entity that controls one or more other entities (subsidiaries).

Subsidiary

A subsidiary is an entity that is controlled by another entity (the parent).

Sub-subsidiary

A sub-subsidiary is a subsidiary of another subsidiary.

Control

An investor (parent) controls an investee (subsidiary) when the investor (parent) is exposed or has rights to variable returns from its involvement with the investee (subsidiary) and has the ability to affect those returns through its power over the investee (subsidiary).

An investor (parent) controls an investee (subsidiary) only if all of the following is true for the investor:

It has power over the investee (subsidiary).

It has exposure or rights to variable returns from its involvement with the investee.

It has the ability to use its power over the investee (subsidiary) to affect the amount of the investor's returns.

Please note that in FAC2602 we will assume that an investor obtains control by possessing 50% or more of the shares and voting rights of a company.

The issued share capital of a company may consist of both ordinary and preference shares.

Shares do not have a nominal or par value in terms of the Companies Act 71 of 2008. All

shares of the same class have the same rights, and each share has one voting right, except

when the company's memorandum of incorporation provides otherwise (e.g. the voting rights

of preference shares may be excluded).

It should now be clear to you that a parent can obtain control over a subsidiary when the

parent holds the majority of the shares in the subsidiary.

In the examples we use, the percentages of shareholding and voting rights usually

correspond, since each share normally carries one vote. However, it is important to know that

this is not always the case in practice and that the percentage of voting rights would

determine the percentage of equity if there are no other factors influencing control.

In learning unit 3, we will explain the calculation of the percentage interest in more detail.


10

1.3 ACCOUNTING FOR GROUPS

The essence of consolidations is that the parent is able to control the policy and management

of the subsidiary. Therefore, the group should be seen as an economic unit.

Although the parent shows investments in its subsidiaries on its statement of financial position,

it is highly probable that the value of the investments may have changed considerably since the

investments were made. The statements may therefore not be an accurate reflection of the

activities of the group.

For this reason, it is in the interest of the shareholders of the parent to have a single set of

annual financial statements drawn up for the group to give the shareholders an idea of the

earnings per share and the assets and liabilities of the group. We also call this set of

statements the consolidated statements, group annual financial statements or group

statements. Briefly, these are a combination of all the statements of the companies in the

group. They indicate that the investment represented in the parent's statements has been

replaced by the assets and liabilities of the subsidiary which represent this investment.

However, we need to make certain adjustments to represent these combined values

realistically as a single economic unit, which we will explain to you in the next learning unit.

IFRS 10 requires parent companies to consolidate their investments in subsidiaries and to

include all their subsidiaries in the consolidated financial statements. This implies that

consolidated financial statements are compulsory when a parent-subsidiary relationship

exists.

Group annual financial statements may include the following consolidated financial

statements: statement of profit or loss and other comprehensive income, statement of

changes in equity, statement of financial position, statement of cash flows and notes to the

consolidated financial statements.

When are group statements not required?

IFRS 10 however allows a parent not to present consolidated financial statements only if it

meets all of the following conditions:

The parent itself is a wholly-owned subsidiary, or the parent is a partially-owned sub-

sidiary of another entity and has informed its owners, including those not otherwise

entitled to vote, that it will not present consolidated financial statements, and its owners

do not object to this.

The parent's debt or equity instruments are not traded in a public market.

The parent did not file its financial statements with a securities commission or other

regulatory organisation for the purpose of issuing any class of instruments in a public

market, nor is in the process of doing so.

The ultimate or any intermediate parent of the parent produces consolidated financial

statements available for public use that comply with International Financial Reporting

Standards (IFRS).


11

A parent that elects in terms of the above-mentioned not to present consolidated financial

statements may present separate financial statements as its only financial statements.

1.4 GENERAL PRINCIPLES

Group statements should be a fair reflection of the state of affairs of the parent and its

subsidiaries as at the accounting date.

Eliminate profits or losses that have arisen as a result of transactions within the group

and that have not been realised outside the group.

Eliminate all intragroup balances when determining the total assets and liabilities of the

group.

Eliminate the carrying amount of the parent's investment in the subsidiary.

1.5 EXERCISES

We end the learning unit with a few revision questions. For your own sake, try to answer them

by referring to the notes before you look at the proposed solutions.

QUESTION 1

Explain the following concepts:

a) Parent

b) Subsidiary

c) Wholly-owned subsidiary

QUESTION 2

Distinguish between simple and complex groups and give a schematic representation of each.

QUESTION 3

When are consolidated annual financial statements not required?


12

SOLUTIONS

Refer to the following sections of this learning unit for the answers to the questions:

QUESTION 1

a) Section 1.2

b) Section 1.2

c) Section 1.2

QUESTION 2

Section 1.2

QUESTION 3

Section 1.3

SELF-ASSESSMENT

After studying this learning unit, are you able to

define a business combination?

define a parent?

define a subsidiary?

explain the difference between simple and complex groups?

13

FAC2602



CONSOLIDATION OF A

WHOLLY-OWNED

SUBSIDIARY AT DATE OF

ACQUISITION

LEARNING UNIT 2


14

LEARNING OUTCOME

Students should be able to consolidate the financial statements of a group of companies at the date of

acquisition if a subsidiary is wholly-owned in accordance with International Financial Reporting Stan-

dards (IFRS).

OVERVIEW


2.1 INTRODUCTION .......................................................................................................... 15

2.2 BASIC CONSOLIDATION TECHNIQUES ................................................................... 15

2.3 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF A WHOLLY-

OWNED SUBSIDIARY AT THE DATE OF ACQUISITION ......................................... 20

2.4 EXERCISES ................................................................................................................. 24

SELF-ASSESSMENT ............................................................................................................. 30

KEY CONCEPTS

Net asset value

Premium

Discount

Intragroup items

Common items

Goodwill

Gain from a bargain purchase


15

ASSESSMENT CRITERIA


draft the consolidated annual financial statements of a parent and its wholly-

owned subsidiary at the date of acquisition in accordance with International

Financial Reporting Standards (IFRS).

calculate intragroup items and common items

calculate goodwill and a gain from a bargain purchase at the acquisition of a

subsidiary

do the pro-forma consolidation journal entries

2.1 INTRODUCTION

As we explained in learning unit 1, the consolidated statements of a group are in principle

merely the combined statements of all the companies in the group. However, we will have to

make certain adjustments to the statements before we can refer to them as consolidated

statements.

We can represent consolidations schematically as follows:

A Ltds

financial

statement

B Ltds

financial

statement

Group consolidated

Financial statementsAdjustments to

A Ltd drafts its financial statements from its financial records, as does B Ltd. Once the

individual statements have been completed, the accountant use the information from these

statements to make the necessary consolidation adjustments and only then compiles the

consolidated statements. Note that the original financial statements of A Ltd and B Ltd are

never amended during the consolidation process. This process repeats itself year after year,

and the adjustments have to be made afresh every year. You will understand this better as

you study the following learning units.

2.2 BASIC CONSOLIDATION TECHNIQUES

Please follow the following basic steps when compiling consolidated annual financial state-

ments:

Eliminate common items.

Eliminate intragroup items.

Consolidate the remaining items.


16

2.2.1 Eliminating common items

One of the first adjustments the accountant should make to the consolidated statements is to

eliminate the investment in the parent's records and the owners' equity section in the

subsidiary's records as at the date when the investment was made. We do this because we

need to eliminate all intragroup transactions since the group is regarded as one economic

entity and cannot enter into transactions with itself.

Note:

In this module, we only deal with cases where the investment in the subsidiary is carried (in the

records of the parent) at the original cost price, which is assumed to be its fair value. For the

sake of simplicity, it is assumed that the fair value remains unchanged from the original cost

price.

EXAMPLE 1

The following example illustrates the elimination of investment in the parent's books at the

date of acquisition:

STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.5

ASSETS

A Ltd

R

B Ltd

R

Investment in B Ltd - at fair value 10 000 -

Cash and cash equivalents 10 000 10 000

20 000 10 000

EQUITY AND LIABILITIES

Share capital - ordinary shares (20 000/10 000 shares)

20 000

10 000

Draft the consolidated statement of financial position for the A Ltd Group at

28 February 20.5. Assume that A Ltd acquired its interest on that date. B Ltd was

incorporated on 28 February 20.5.


17

SOLUTION 1

Pro-forma consolidated journal entry

Dr

Cr

R

R

Share capital of B Ltd 10 000

Investment in B Ltd

10 000

Elimination of owners' equity of B Ltd at acquisition

The group consolidated statement of financial position would now be drafted as follows:

A LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.5

ASSETS

R

Cash and cash equivalents (10 000 + 10 000)

20 000


Share capital

20 000

EXAMPLE 2

The following example illustrates the elimination of investment in the parent's records a few

years after acquisition:


ASSETS

A Ltd R

B Ltd R

Investment in B Ltd - at fair value (cost price: R10 000) 10 000 - Trade and other receivables 12 000 8 000 Cash and cash equivalents 14 000 10 000

36 000 18 000

EQUITY AND LIABILITIES Share capital - ordinary shares (20 000/10 000 shares) 20 000 10 000 Retained earnings 16 000 8 000

36 000 18 000


18

REQUIRED

Draft the consolidated statement of financial position of the A Ltd Group at

28 February 20.9 in compliance with the requirements of International Financial

Reporting Standards (IFRS). Assume that A Ltd acquired its interest on

28 February 20.5 when B Ltd was incorporated.

SOLUTION 2


Dr

Cr

R

R

Share capital of B Ltd 10 000 Investment in B Ltd

10 000


A LTD GROUP Consolidated statement of financial position as at 28 February 20.9

ASSETS

R

Current assets

Trade and other receivables (12 000 + 8 000)

20 000 Cash and cash equivalents (14 000 + 10 000)

24 000

Total assets

44 000 EQUITY AND LIABILITIES

Total equity Share capital

20 000

Retained earnings (16 000 + 8 000)

24 000 Total equity and liabilities

44 000

With reference to the previous two examples, we can deduce the following:

The journal entry for the elimination of the investment and the owners' equity at the date of

acquisition will remain unchanged from one year to the next.

The share capital on the consolidated statement of financial position is always only that of

the parent.

The profits the subsidiary made after the date of acquisition become part of the retained

earnings of the group and are shown as such in the consolidated statements. We will

discuss this principle at greater length in learning unit 4.

The profits the subsidiary made before the date of acquisition cannot form part of the

retained earnings of the group. The parent pays for such profits. We will also take a closer

look at this principle in learning unit 4.

Since the parent obtained its interest in the subsidiary at the date of incorporation (the date

on which the company was established), there could not have been any retained earnings

in the records of B Ltd.


19

2.2.2 Eliminating intragroup items

It is common practice for companies in the same group to sell inventories and assets to one

another.

The following schematic representation is an example of this:

A Ltd Timber to public

Sells Sells

machine timber

B Ltd Wooden wagons to the public

The actual profit the group made from the sale of goods was the profit made from sales to the

public only, since all the other sales took place within the group. Sales within a group are

known as intragroup sales and therefore have to be eliminated during consolidations.

A Ltd may lend a sum of money or sell an asset to B Ltd. We also have to eliminate these

transactions. In learning unit 7, we will study intragroup transactions in detail.

2.2.3 Consolidating remaining items

Once we have eliminated all common and intragroup items, we can draw up the consolidated

statement of financial position, the consolidated statement of profit or loss and other

comprehensive income, the consolidated statement of changes in equity and the consolidated

statement of cash flows. In this module, we expect you to be able to do all relevant pro-forma

consolidation journal entries for consolidation purposes and to draft the consolidated state-

ment of financial position, consolidated statement of profit or loss and other comprehensive

income and consolidated statement of changes in equity.


20

2.3 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF A WHOLLY-OWNED SUBSIDIARY AT THE DATE OF ACQUISITION

We account for all business combinations on the purchase or acquisition method, and this

method involves the following four steps:

identifying the acquirer

determining the acquisition date

recognising and measuring the identifiable assets acquired, the liabilities assumed and any

non-controlling interest in the acquiree

recognising and measuring goodwill or a gain from a bargain purchase

The following three situations may arise if a parent obtains an interest in a subsidiary:

The price paid by the parent for the interest/investment in the subsidiary is equivalent to the

fair value of assets and liabilities acquired. An acquisition of this kind is known as an

acquisition at net asset value.

The price paid by the parent for the interest is higher than the fair value of assets and

liabilities acquired. This is known as acquisition at a premium. This premium should be

treated as goodwill.

After initial recognition, the parent must measure the goodwill acquired in a business

combination at cost less any accumulated impairment losses. We do not amortise

goodwill. Instead, the parent must test it for impairment annually, or more frequently if

events or changes in circumstances indicate that it might be impaired in accordance with

IAS 36 Impairment of Assets.

In this module, we will not be dealing with impairment losses, but will assume the initial cost

price of goodwill to be equal to current fair value.

The price paid by the parent is lower than the fair value of assets and liabilities acquired.

This is known as the acquisition of a subsidiary at a discount, which is also referred to as

a gain from a bargain purchase and is recognised at the acquisition date in profit or loss.

For the purpose of this module, note that a gain from a bargain purchase is a possibility

when acquiring a subsidiary. However, we will deal with this in Accounting III modules.

The following examples illustrate the possible situations which could arise:


21

EXAMPLE 1

Acquisition of a subsidiary at net asset value

The following represent the abridged statements of financial position of A Ltd and its wholly-

owned subsidiary, B Ltd, at 31 December 20.5, which is the date on which A Ltd acquired its

interest in B Ltd.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5

A Ltd

R

B Ltd

R

ASSETS

Investment in B Ltd - at fair value (cost price: R90 000) 90 000 -

Bank 30 000 55 000

Trade and other receivables 60 000 35 000

180 000 90 000


Share capital - ordinary shares (100 000/50 000 shares) 100 000 50 000

Retained earnings 80 000 40 000

180 000 90 000

SOLUTION 1

Calculations

1. Analysis of owners' equity of B Ltd

Total

R

At

R

Since

R

Share capital 50 000

50 000

–

Retained earnings 40 000

40 000

–

90 000

90 000

–

Purchase difference –

–

Consideration 90 000

90 000

–

Therefore, it is clear that the price A Ltd paid for the investment in B Ltd is equal to the

nett assets acquired. (90 000 = 50 000 + 40 000)


22

2. Pro-forma consolidated journal entry

Dr

R

Cr

R

Share capital (B Ltd) 50 000

Retained earnings (B Ltd) 40 000

Investment in B Ltd

90 000

Elimination of owners' equity of B Ltd at

acquisition

The price paid by A Ltd for the investment in B Ltd is equal to the value of the net assets

acquired. (90 000 = 50 000 + 40 000)

A LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5

R

ASSETS

Current assets

Cash and cash equivalents (30 000 + 55 000) 85 000

Trade and other receivables (60 000 + 35 000) 95 000

Total assets 180 000


Equity attributable to owners of the parent



Total equity 180 000

EXAMPLE 2

Acquisition of a subsidiary at a premium

The following represent the abridged statements of financial position of A Ltd and its wholly-

owned subsidiary B Ltd at 31 December 20.5. This is also the date on which A Ltd acquired

its interest in B Ltd. Note that the information is the same as in the previous example, except

for the investment, which is now R100 000 instead of R90 000.


23


ASSETS

A Ltd

R

B Ltd

R

Investment in B Ltd - at fair value (cost price: R100 000) 100 000 -

Bank 20 000 55 000


180 000 90 000



100 000

50 000


180 000 90 000

SOLUTION 2

Calculations

1

Analysis of owners' equity of B Ltd

Total R

At R

Since

R


50 000

–


40 000

–

90 000

90 000

–

Equity represented by goodwill ─ parent 10 000

10 000

–

Consideration 100 000

100 000

–

2


Dr R

Cr R



Goodwill 10 000

Investment in B Ltd

100 000


A LTD GROUP


R

ASSETS

Non-current assets

Goodwill

10 000

10 000

Current assets

Cash and cash equivalents (20 000 + 55 000)

75 000

Trade and other receivables (60 000 + 35 000)

95 000

170 000

Total assets

180 000


24


Equity attributable to owners of parent

Share capital

100 000

Retained earnings

80 000

Total equity and liabilities

180 000

COMMENTS

In this example, the parent paid more than the net asset value for its interest in the subsidiary,

which means that a premium (goodwill) was paid at acquisition. Goodwill is regarded as an

intangible asset and should be shown as a non-current asset in the consolidated statement of

financial position. In this module, we determine the goodwill at acquisition only. We are not

concerned with future changes in the value of goodwill, which will be dealt with on third-year level.

According to IFRS 3, the two options for calculating goodwill are as follows:

a) The partial method (the method used in this MO001)

b) The full goodwill method (which uses the non-controlling interest at fair value to determine

goodwill). However, this method will be dealt with later on third-year level.

EXAMPLE 3

Acquisition of a subsidiary at a discount

COMMENTS

This is when the parent pays less than the net asset value for its interest in the subsidiary. We will

deal with this on third-year level.

2.4 EXERCISES

To see whether you are able to apply the content of this learning unit, answer the following

questions. It is important to calculate the answers before looking at the suggested solutions.


25

QUESTION 1

You receive the following statements of financial position of P Ltd and S Ltd as at 30 June 20.6:

STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.6

P Ltd

R

S Ltd

R

ASSETS

Investment in S Ltd - 100 000 shares at fair value

(cost price: R145 000)

145 000 -

Current assets 40 000 115 000

185 000 115 000


Share capital - 100 000 ordinary shares 100 000 100 000


185 000 115 000

REQUIRED

Draft the consolidated statement of financial position of the P Ltd Group as

at 30 June 20.6 in compliance with the requirements of International

Financial Reporting Standards; if P Ltd acquired its interest in S Ltd at

30 June 20.6.


26

QUESTION 2

You receive the following trial balances:

TRIAL BALANCES AT 31 MARCH 20.5

P Ltd

Dr/(Cr)

R

S Ltd

Dr/(Cr)

R

Share capital - ordinary shares (100 000/50 000 shares) (100 000) (50 000)

Retained earnings (80 000) (20 000)


Inventories 20 000 35 000

Trade and other payables (15 000) (18 000)

Long-term borrowings (100 000) -

Loan – S Ltd 80 000 -

Investment in S Ltd – 50 000 shares at fair value


80 000 -

Loan – P Ltd - (80 000)

Bank 25 000 58 000

Property, plant and equipment 50 000 60 000

REQUIRED

Draft the consolidated statement of financial position of the P Ltd Group as at

31 March 20.5 in compliance with the requirements of International Financial

Reporting Standards; if P Ltd acquired its interest in S Ltd at 31 March 20.5.

SOLUTIONS

QUESTION 1

You should have followed the following steps:

Step 1 - determining the percentage interest

Investment in S Ltd

=

100 000 shares

x 100

Ordinary shares of S Ltd 100 000 shares

= 100% (therefore wholly-owned subsidiary)


27

Note that the interest in S Ltd is determined by the amount of shares held in S Ltd and not

the rand value. You must use 100 000 shares and not R145 000.

Step 2 - Draft the analysis of owners' equity of S Ltd:

Analysis of owners' equity of S Ltd

Total

R

At

R

Since

R

Share capital 100 000 100 000 -

Retained earnings 15 000 15 000 -

115 000 115 000 -

Equity represented by goodwill - parent 30 000 30 000 -

Consideration 145 000 145 000 -

Step 3 - eliminating all common items


Dr

Cr

R

R

Share capital – S Ltd 100 000

Retained earnings – S Ltd 15 000

Goodwill 30 000

Investment in S Ltd

145 000

Elimination of owners' equity of S Ltd at acquisition

Step 4 – drafting the consolidated statement of financial position

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.6

ASSETS R

Non-current assets

Goodwill 30 000

Current assets (40 000 + 115 000) 155 000



28





Total equity and liabilities 185 000

QUESTION 2

You should have followed the following steps:

Step 1 - determining the percentage interest

Investment in S Ltd = 50 000 shares x 100

Ordinary shares of S Ltd 50 000 shares

= 100% (wholly-owned subsidiary)

Step 2 - Draft the analysis of owners' equity of S Ltd

Analysis of owners' equity of S Ltd

Total

R

At

R

Since

R

Share capital 50 000 50 000 -


70 000 70 000 -

Equity represented by goodwill - parent 10 000 10 000 -


Step 3 - eliminating all common items


Dr

Cr

R

R

Loan – P Ltd 80 000

Loan – S Ltd 80 000

Elimination of intragroup loans

Share capital – S Ltd 50 000

Retained earnings – S Ltd 20 000

Goodwill 10 000

Investment in S Ltd

80 000



29

Step 4 - drafting the consolidated statement of financial position

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.5

31 MARCH 20.5

ASSETS

Non-current assets

Property, plant and equipment (50 000 + 60 000) 110 000

Goodwill 10 000

120 000

Current assets


Inventories (20 000 + 35 000) 55 000


193 000







Non-current liabilities

Long-term borrowings 100 000

Current liabilities

Trade and other payables (15 000 + 18 000) 33 000

Total liabilities 133 000



30

COMMENTS

You will note that in our proposed solutions to the assignments, we give the consolidated

statement of financial position followed by the calculations. We will not criticise the format of your

answer, but please ensure that you answer the question in full.

It would be perfectly acceptable to give some of the easier calculations in brackets, as in our

proposed solutions.

Note that this question included intragroup loans. We eliminated both the parent's and subsidiary's

debit and credit loans against each other.

SELF-ASSESSMENT


draft the consolidated annual financial statements of a parent and its wholly-

owned subsidiary at date of acquisition in accordance with International Financial

Reporting Standards?

calculate intragroup and common items?

calculate goodwill and a gain from a bargain purchase at the acquisition of a

subsidiary?

do the pro-forma consolidation journal entries?

31

FAC2602



CONSOLIDATION OF A

PARTLY-OWNED

SUBSIDIARY AT DATE OF

ACQUISITION

LEARNING UNIT 3


32

LEARNING OUTCOME

Students should be able to consolidate the financial statements of a group of companies at the date of

acquisition if a subsidiary is wholly-owned in accordance with International Financial Reporting Stan-

dards.

OVERVIEW


3.1 INTRODUCTION .......................................................................................................... 33

3.2 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF A PARTLY-

OWNED SUBSIDIARY AT THE DATE OF ACQUISITION ........................................ 33

3.3 EXERCISES ................................................................................................................. 40

SELF-ASSESSMENT ............................................................................................................. 46

KEY CONCEPTS

Partly-owned subsidiary

Outside owners

Non-controlling owners

Non-controlling interests (NCI)

ASSESSMENT CRITERIA


calculate the percentage applicable to non-controlling owners

draft the consolidated annual financial statements of a group with a partly-owned

subsidiary at the date of acquisition in accordance with International Financial

Reporting Standards



33

3.1 INTRODUCTION

In learning unit 2, we dealt only with wholly-owned subsidiaries, in other words, where the

parent has acquired the entire issued share capital of the subsidiary.

However, there may be various reasons why it could be impossible for the parent to take up

all the shares in the subsidiary. Some of the owners may not be prepared to sell their shares

to the parent, or the parent may not have sufficient funds to purchase all the shares. The

other owners of the subsidiary are known as non-controlling or outside owners. Non-

controlling owners may consist of ordinary owners and preference owners. We will deal with

subsidiaries with preference shares in learning unit 9.

3.2 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION OF A PARTLY-OWNED SUBSIDIARY AT THE DATE OF ACQUISITION

The same rules apply for consolidation purposes, except that we now have to make provision

for the non-controlling owners' interest in the profit of the subsidiary.

EXAMPLE

P Ltd

80% of voting rights

20% of voting rights

S Ltd Non-controlling owners

To make provision for the non-controlling owners' interest in the profit of the subsidiary, it is

important to know how to calculate the percentage interest in the subsidiary.


34

EXAMPLE 1

The following represent the condensed statements of financial position of A Ltd and its subsi-

diary, B Ltd:


SOLUTION 1

We calculate the parent's interest in the subsidiary as follows:

Investment in B Ltd =

80 000 shares x 100 = 80%

Issued shares of B Ltd 100 000 shares

Therefore, A Ltd has an 80% interest in B Ltd, and the non-controlling owners of B Ltd only

have a 20% interest in B Ltd.

A Ltd

R

B Ltd

R

ASSETS

Property, plant and equipment

Investment in B Ltd

150 000

200 000

– 80 000 ordinary shares at fair value (cost price: R90 000) 90 000 -


350 000 210 000



200 000

100 000


Long-term borrowings 100 000 80 000

350 000 210 000


35

EXAMPLE 2

The following represent the condensed statements of financial position of P Ltd and S Ltd:

STATEMENTS OF FINANCIAL POSITION AS AT 31 JULY 20.4

P Ltd

R

S Ltd

R

ASSETS


Investment in S Ltd

150 000

200 000

- 35 000 ordinary shares at fair value (cost price: R75 000) 75 000 -


350 000 210 000



200 000

100 000


Long-term borrowings 100 000 80 000

350 000 210 000

SOLUTION 2

We calculate the parent's interest in the subsidiary as follows:

Investment in S Ltd =

35 000 shares x 100 = 70%

Issued shares of S Ltd 50 000 shares

As for wholly-owned subsidiaries, the following three situations may occur when a parent

acquires an interest in a partly-owned subsidiary:

Acquired at net asset value

Acquired at a premium (goodwill)

Acquired at a discount (gain from a bargain purchase)

Examples 3 to 5 below illustrate the three situations that may arise:


36

EXAMPLE 3

Acquisition of a partly-owned subsidiary at net asset value

The following are the abridged statements of financial position of A Ltd and its subsidiary, B Ltd,

as at 31 December 20.9, which is the date on which A Ltd acquired its interest in B Ltd.


ASSETS

A Ltd

R

B Ltd

R


Investment in B Ltd - 56 000 ordinary shares at fair value


98 000 –


398 000 270 000




Trade and other payables 178 000 130 000

398 000 270 000

SOLUTION 3

We follow the basic consolidation procedures:

Determine the percentage interest.


Consolidate remaining items.

1. Determining the percentage interest

A Ltd acquired 56 000 shares

B Ltd has 80 000 shares

A Ltd's interest = 56 000

x 100

= 70% 80 000 1


37

2. Analysis of owners' equity of B Ltd at 31 December 20.9

Total

A Ltd 70 % NCI

30 %

At Since

At acquisition

Share capital

Retained earnings

R

80 000

60 000

R

56 000

42 000

R

R

24 000

18 000

Purchase difference

140 000

-

98 000

-

42 000

-

Consideration and NCI 140 000 98 000 42 000

COMMENT

In this question, the date of acquisition and the date of consolidation are the same, which is why

the statement of financial position does not include any of the subsidiary's other equity

components since these have been eliminated at acquisition (see pro-forma consolidated journal

entry).

Non-controlling interests are presented as a credit in the statement of financial position, as it

reflects what is owed to the non-controlling owners in terms of their share of the equity.


Dr

R

Cr

R

NCI#

R



Investment in B Ltd

98 000

Non-controlling interests (statement of financial position)

42 000

42 000


42 000

# Please note: We only show this column to reflect the movement of non-controlling interests

(NCI). It is not a journal entry. We will do this in all the exercises that follow.


38

A LTD GROUP


R

R

ASSETS

Non-current assets


Current assets







220 000

Non-controlling interests 42 000


Current liabilities



EXAMPLE 4

Acquisition of a partly-owned subsidiary at a premium (goodwill)

The following are the abridged statements of financial position of A Ltd and its subsidiary,

B Ltd, as at 31 December 20.9, which is the date on which A Ltd acquired its interest in B Ltd.


ASSETS

A Ltd

R

B Ltd

R

Property, plant and equipment 160 000

160 000

Investment in B Ltd

– 64 000 ordinary shares at fair value (cost price: R140 000) 140 000

-

Trade and other receivables 98 000

110 000

398 000

270 000


Share capital – ordinary shares (100 000/80 000 shares) 100 000 80 000


60 000

Trade and other payables 178 000

130 000

398 000

270 000


39

SOLUTION 4

Once again, we follow the basic consolidation procedures:

Determine the percentage interest.



1. Determine the percentage interest

A Ltd acquired 64 000 shares

B Ltd has 80 000 shares

A Ltd's interest = 64 000

x 100

= 80% 80 000 1

2. Analysis of owners' equity of B Ltd at 31 December 20.9


Dr

R

Cr

R

NCI

R



Goodwill 28 000

Investment in B Ltd

140 000


28 000

28 000


28 000

Total A Ltd 80% NCI

20% At Since

At acquisition

Share capital

Retained earnings

R

80 000

60 000

R

64 000

48 000

R

R

16 000

12 000

Equity represented by goodwill – parent

140 000

28 000

112 000

28 000

28 000

–

Consideration and NCI 168 000 140 000 28 000


40

A LTD GROUP


20 .9

R

ASSETS

Non-current assets


Goodwill 28 000

348 000

0 Current assets







220 000



Current liabilities



EXAMPLE 5

Acquisition of a partly-owned subsidiary at a discount (gain from a bargain purchase)

We will deal with the acquisition of a subsidiary at a discount in detail at third-year level; it

does not form part of this course.

3.3 EXERCISES

We shall now conclude this learning unit with a few revision questions. It is in your own interest

to try to answer these questions by referring to the learning unit before you look at the

proposed solutions.


41

QUESTION 1

P Ltd acquired its interest in S Ltd on 30 June 20.5. Each share carries one vote. The following

represent the condensed trial balances of P Ltd and S Ltd at 30 June 20.5:

P Ltd S Ltd

R R

Debits


Investment in S Ltd

– 75 000 shares at fair value (cost price: R90 000) 90 000 –

– 10 000 debentures at fair value (cost price: R10 000) 10 000 –

Bank 2 500 –


171 000 138 100

Credits



Debentures (20 000 debentures) – 20 000


Bank overdraft – 5 600

171 000 138 100

REQUIRED


30 June 20.5 in compliance with the requirements of International Financial

Reporting Standards.


42

QUESTION 2

P Ltd acquired 40 000 ordinary shares in S Ltd on 1 January 20.5, and each share carries one

vote.

The following represent the condensed statements of financial position of P Ltd and S Ltd at

1 January 20.5:

P Ltd

R

S Ltd

R ASSETS


103 200

157 300

Unsecured loan to P Ltd

-

20 000

Investment in S Ltd


-

Current assets 44 000

15 500

327 200

192 800


Share capital – ordinary shares (100 000/50 000 shares) 200 000

100 000

Revaluation of land and buildings -

50 000


40 000

Long-term borrowing from S Ltd 20 000

–

Current liabilities 11 500 2 800

327 200

192 800

REQUIRED


1 January 20.5 in compliance with the requirements of International Financial



43

SOLUTIONS

QUESTION 1

1. Calculate P Ltd's percentage interest in S Ltd

P Ltd acquired 75 000 shares, each carrying one vote.

S Ltd issued 100 000 shares, each carrying one vote.

P Ltd's interest = 75 000

x 100

= 75% 100 000 1

2. Analysis of owners' equity of S Ltd at 30 June 20.5


Dr

R

Cr

R

NCI

R



Goodwill (b)6 525

Investment in S Ltd

90 000


27 825

27 825


Debentures (S Ltd) 10 000

Investment in debentures (P Ltd) 10 000

Elimination of intragroup balances

27 825(a)

Total P Ltd 75% NCI

25% At Since

At acquisition

Share capital

Retained earnings

R

100 000

11 300

R

75 000

8 475

R

R

25 000

2 825


111 300

6 525

83 475

6 525(b)

27 825

–

Consideration and NCI 117 825 90 000 27 825(a)


44

P LTD GROUP


R

ASSETS

Non-current assets


Goodwill (b)6 525

193 125

Current assets

Inventories (15 800 + 4 200) 20 000

Cash and cash equivalents 2 500

22 500






162 200

Non-controlling interests (a)27 825



Debentures (20 000﹣10 000) 10 000

10 000

Current liabilities


Bank overdraft 5 600

15 600



COMMENT

Debit and credit bank balances may not be set off against each other upon consolidation.

Therefore, we show the parent's favourable bank balance and the subsidiary's bank overdraft

separately.

The balances can be offset against each other if the company with the favourable balance has

guaranteed the overdraft account, but only if both accounts are at the same bank.


45

QUESTION 2

1. Calculate P Ltd's percentage interest in S Ltd

P Ltd acquired 40 000 shares, each carrying one vote.

S Ltd issued 50 000 shares, each carrying one vote.

P Ltd's interest = 40 000

x 100

= 80% 50 000 1

2. Analysis of owners' equity of S Ltd at 1 January 20.5


Dr

R

Cr

R

NCI

R


Revaluation surplus 50 000


Goodwill (a)28 000

Investment in S Ltd

180 000

Non-controlling interests(statement of financial position)

38 000

38 000


Long-term loan from S Ltd (P Ltd) 20 000

Unsecured loan to P Ltd (S Ltd) 20 000


38 000(b)

Total P Ltd 80% NCI

20% At Since

At acquisition

Share capital

Retained earnings

Revaluation surplus

R

100 000

40 000

50 000

R

80 000

32 000

40 000

R

R

20 000

8 000

10 000


190 000

28 000

152 000

28 000(a)

38 000

–

Consideration and NCI 218 000 180 000 38 000(b)


46

P LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.5

R

ASSETS

Non-current assets


Goodwill (a)28 000

288 500

Current assets (44 000 + 15 500) 59 500






295 700

Non-controlling interests (b)38 000


Current liabilities (11 500 + 2 800) 14 300


SELF-ASSESSMENT


calculate the percentage applicable to non-controlling owners?

draft the consolidated annual financial statements of a group with a partly-

owned subsidiary at the date of acquisition in accordance with International

Financial Reporting Standards?


47

FAC2602



CONSOLIDATION OF A

WHOLLY-OWNED

SUBSIDIARY AFTER DATE

OF ACQUISITION

LEARNING UNIT 4


48

LEARNING OUTCOME

Students should be able to consolidate the financial statements of a group of companies if the interest

in the wholly-owned subsidiary was acquired a few years ago in accordance with International Finan-

cial Reporting Standards.

OVERVIEW


4.1 INTRODUCTION .......................................................................................................... 49

4.2 TREATMENT OF GOODWILL ARISING ON ACQUISITION ...................................... 49

4.3 CONSOLIDATION OF A WHOLLY-OWNED SUBSIDIARY AFTER THE DATE OF

ACQUISITION ............................................................................................................. 49

4.4 EXERCISES ................................................................................................................. 59

SELF-ASSESSMENT ............................................................................................................. 72

KEY CONCEPTS

Post-acquisition profits

ASSESSMENT CRITERIA


draft the consolidated annual financial statements of a group if the interest in

the wholly-owned subsidiary was acquired a few years ago in accordance with

International Financial Reporting Standards?



49

4.1 INTRODUCTION

In learning unit 2, we discussed the consolidation of a wholly-owned subsidiary at the date of

acquisition. In this learning unit, we deal with the compiling of consolidated annual financial

statements at any date after the acquisition of an interest in a subsidiary. We always eliminate

the owners' equity (share capital and other components) of a subsidiary that exist at the

acquisition of the subsidiary against the investment in the subsidiary. It does not form part of

the owners' equity (share capital and other components) of the group. The parent originally

paid for it. Refer to examples 1 to 3 in learning unit 2 if you need to make sure that you un-

derstand the above statement.

Therefore, all the profits the subsidiary makes after the date of acquisition become the profits

of the group and should be included as such in the consolidated statements. All components

of equity of a subsidiary which was formed after the date of acquisition form part of the total

equity of the group.

4.2 TREATMENT OF GOODWILL ARISING ON ACQUISITION

By now, you should be familiar with the term "goodwill". A parent may pay more or less than

the net asset value of the shares acquired with the purchase of the interest in the subsidiary.

This can be attributed to the following:

specific items which have a market value that is higher or lower than the carrying value

(e.g. property or plant)

the value of the undertaking as a whole

The goodwill that a parent pays for when acquiring a subsidiary represents the parent's

anticipation of future economic benefits. We reflect goodwill at cost price for the purposes of this

course. We will deal with future adjustments in value on third year level.

We will also deal further with the alternative option and methods in IFRS 3 regarding the

calculation of goodwill on third-year level.

4.3 CONSOLIDATION OF A WHOLLY-OWNED SUBSIDIARY AFTER THE DATE OF ACQUISITION

Where consolidation takes place at a date after the acquisition of the interest in the sub-

sidiary, we must consolidate both the statements of financial position and the statements of

profit and loss and other comprehensive income of the parent and the subsidiary.

We will still follow the same consolidation procedures:


Eliminate intragroup items.



50

We now turn our attention to a new aspect, namely that we will have to deal with various periods

when analysing the owners' equity of the subsidiary. The following serves as an example of

this:

Suppose A Ltd acquired its 100% interest in B Ltd on 1 January 20.1, and you are required to

draft the consolidated financial statements for the year ended 31 December 20.8. You will

have to divide the analysis of owners' equity into three parts.

Analysis of owners' equity of B Ltd

Total

R

At

R

Since

R

At acquisition

1 January 20.1

Since acquisition to beginning of current year

2 January 20.1 to 31 December 20.7

Current year

1 January 20.8 to 31 December 20.8

As in the previous learning units, we will deal with the three situations that may arise when a

parent acquire shares in a subsidiary.


51

EXAMPLE 1

Acquisition of a wholly-owned subsidiary at net asset value


B Ltd, as at 31 December 20.6:


A Ltd

R

B Ltd

R

ASSETS


180 000

Investment in B Ltd


-


90 000

398 000

270 000



80 000


60 000


130 000

398 000

270 000

A Ltd acquired its interest in B Ltd on 1 January 20.6. B Ltd's retained earnings amounted to

R44 000 at the time. Assume that the carrying amount of the assets and liabilities of B Ltd is

equal to the fair value thereof at the date of acquisition.

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 31 DECEMBER 20.6

A Ltd

R

B Ltd

R

Profit before tax 35 000 23 000

Income tax expense (11 000) (7 000)

PROFIT FOR THE YEAR 24 000 16 000

Other comprehensive income for the year - -

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 24 000 16 000


52

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.6

Share capital Retained

earnings

Total

A Ltd B Ltd A Ltd B Ltd A Ltd B Ltd

R R R R R R

Balance at 1 January 20.6 100 000 80 000 96 000 44 000 196 000 124 000

Changes in equity for 20.6

Total comprehensive income for

the year

Profit for the year 24 000 16 000 24 000 16 000

Balance at 31 December 20.6 100 000 80 000 120 000 60 000 220 000 140 000

Suppose you have to draft the consolidated statement of profit or loss and other

comprehensive income, the consolidated statement of changes in equity and the consolidated

statement of financial position at 31 December 20.6.

SOLUTION 1

Before you draft these statements, you can do the following:

Analyse the owners' equity in B Ltd.

Do the pro-forma consolidation journal entries.

1. Analysis of owners' equity in B Ltd

At acquisition – 1 Jan

2 .6

Share capital

Retained earnings Purchase difference

Consideration and NCI

Since acquisition

• Current year

Profit for the year

Total A Ltd 1 00%

NCI

0% At Since

At acquisition - 1 Jan 20.6

Share capital

Retained earnings

R

80 000

44 000

R

80 000

44 000

R R

-

-

Purchase difference

124 000

-

124 000

-

16 000

-

- Consideration and NCI

124 000

16 000

124 000

-

-

Since acquisition

Current year

Profit for the year

140 000

16 000

-


53

2. Pro-forma consolidated journal entries

Dr Cr

R R



Investment in B Ltd (A Ltd)

124 000


A LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 31 DECEMBER 20.6

R

Profit before tax (35 000 + 23 000) 58 000

Income tax expense (11 000 + 7 000) (18 000)

PROFIT FOR THE YEAR 40 000

Other comprehensive income for the year -

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 40 000

A LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

31 DECEMBER 20.6

Share capital

Retained earnings

Total

R

R

R

Balance at 1 January 20.6 100 000

96 000*

196 000 Changes in equity for 20.6

Total comprehensive income for the year Profit for the year 40 000

40 000

Balance at 31 December 20.6 100 000 136 000

236 000

* Only parent's interest due to the fact that the interest was acquired on 1 January 20.6


54

A LTD GROUP


R

ASSETS

Non-current assets


Current assets








Current liabilities




55

EXAMPLE 2

Acquisition of a wholly-owned subsidiary at a premium


B Ltd, as at 31 December 20.6:


ASSETS

A Ltd

R B Ltd

R


Investment in B Ltd - 80 000 ordinary shares at fair value


160 000

148 000

180 000

-


398 000 270 000



100 000

80 000



398 000 270 000

A Ltd acquired its interest in B Ltd on 1 January 20.5, at which time B Ltd's retained earnings

amounted to R26 000. At the date of acquisition, consider the carrying amount of the assets

and liabilities of B Ltd to be equal to the fair value thereof.



A Ltd

R B Ltd

R

Profit from operations 25 000 23 000

Dividends received from subsidiary 10 000 -

Profit before tax 35 000 23 000

Income tax expense (11 000) (7 000)

PROFIT FOR THE YEAR

Other comprehensive income for the year

24 000

- 16 000

-



56


Share capital Retained earnings

Total


R R R R R R

Balance at 1 January 20.6 100 000 80 000 111 000 54 000 211 000 134 000

Changes in equity for 20.6 Total comprehensive income for the year Profit for the year 24 000 16 000 24 000 16 000

Dividend paid: ordinary (15 000) (10 000) (15 000) (10 000)

Balance at 31 December 20.6 100 000 80 000 120 000 60 000 220 000 140 000

REQUIRED

You are required to draft the consolidated statement of profit or loss and other

comprehensive income, the consolidated statement of changes in equity and the

consolidated statement of financial position at 31 December 20.6 in compliance with

the requirements of International Financial Reporting Standards.


57

SOLUTION 2

Calculations


At acquisition - 1 Jan 20.5

Share capital

Retained earnings

Equity represented by goodwill

- parent

Consideration Since acquisition

• To beginning of current year

Retained earnings

(54 000 31/12/20.5 -

26 000 1/1/20.5)

• Current year

Profit for the year

Dividend paid

Total A Ltd 100%

NCI

0% At Since

R

80 000

26 000

R

80 000

26 000

R R

106 000

42 000

106 000

42 000(1)

28 000(2)

16 000

(10 000)

148 000

28 000

16 000

(10 000)

148 000

182 000

148 000

34 000


Dr

Cr

R

R



Goodwill 42 000(1)

Investment in B Ltd (A Ltd)

148 000


Dividend received (A Ltd) 10 000(4)

Dividend paid (B Ltd)

10 000

Elimination of intragroup dividend


58

A LTD GROUP



A LTD GROUP


31 DECEMBER 20.6

R

Profit before tax (35 000 – 10 000(4) + 23 000) 48 000


Profit for the year

Other comprehensive income for the year

(3)30 000

-


Share

capital

R

Retained

earnings

R

Total

R

Balance at 1 January 20.6


Total comprehensive income for the year

Profit for the year

100 000

139 000#

(3)30 000

239 000

30 000

Dividends paid: ordinary (15 000) (15 000)

Balance at 31 December 20.6 100 000 154 000 254 000

# [111 000 + 28 000(2)]


59

A LTD GROUP


R

ASSETS

Non-current assets

Property, plant and equipment (160 000 + 180 000) 340 000 Goodwill (1)42 000

382 000

Current assets





Share capital 100 000 Retained earnings 154 000


Current liabilities



COMMENT

Note that we eliminate all intragroup transactions. Therefore, we eliminate the dividends the

subsidiary paid to the parent. Consequently, the group's profit before tax will not include the

dividends received from the subsidiary. The dividends in the statement of changes in equity under

retained income will consist of dividends paid by the parent only.

EXAMPLE 3

Acquisition of a wholly-owned subsidiary at a discount

The acquisition of a wholly-owned subsidiary at a discount does not form part of this course

and will be dealt with in detail at third-year level.

4.4 EXERCISES

We conclude this learning unit with a few revision questions. It is important that you work

through these questions carefully while paying special attention to the comments, since by

now you have progressed so far with consolidations that it is easier to point out certain

important principles to you.


60

QUESTION 1

The following are the trial balances of P Ltd and its subsidiary, S Ltd, at 31 December 20.8:

Credits


P Ltd

R

100 000

S Ltd

R

50 000

Retained earnings - 1 January 20.8 250 000 130 000

Gross profit 410 000 360 000

Dividends received 30 000 -


Accumulated depreciation - 31 December 20.8 50 000 30 000

Bank overdraft 30 000 -

950 000 630 000

Debits

Property, plant and equipment at cost price

152 000

100 000

Investment in S Ltd

- 50 000 shares at fair value (cost price: R150 000)

150 000

-



Bank - 68 000

Auditors' remuneration 15 000 12 000

Staff cost 100 000 80 000

Depreciation 15 000 10 000

Taxation for the year 108 000 90 000

Dividends paid 40 000 30 000

950 000 630 000

Additional information

P Ltd acquired its interest in S Ltd on 2 January 20.5, at which date the retained earnings of

S Ltd was R80 000. Consider the carrying amount of the assets and liabilities of S Ltd to be


REQUIRED

Draft the consolidated statement of financial position, the consolidated

statement of profit or loss and other comprehensive income and the

consolidated statement of changes in equity of the P Ltd Group for the year

ended 31 December 20.8 in compliance with the requirements of

International Financial Reporting Standards.


61

QUESTION 2

The following are the trial balances of A Ltd and its subsidiary, B Ltd, at 31 December 20.8:

Credits

A Ltd

R B Ltd

R



Gross profit 410 000 360 000





950 000 630 000

Debits


152 000

100 000

Investment in B Ltd


150 000 -



Bank - 68 000


Staff cost 100 000 80 000




950 000 630 000


A Ltd acquired its interest in B Ltd on 2 January 20.5, and at that date the retained earnings of

B Ltd was R80 000. Consider the carrying amount of the assets and liabilities of B Ltd to be


REQUIRED

Draft the consolidated statement of financial position of the A Ltd Group as at

31 December 20.8 in compliance with the requirements of International

Financial Reporting Standards.


62

QUESTION 3

The following are the trial balances of J Ltd and its subsidiary, L Ltd, at 31 December 20.8:

Credits

J Ltd

R L Ltd

R



Gross profit 410 000 360 000





950 000 630 000

Debits


152 000

100 000

Investment in L Ltd


150 000

-



Bank - 68 000


Staff cost 100 000 80 000




950 000 630 000


J Ltd acquired its interest in L Ltd on 2 January 20.5, at which date the retained earnings of L Ltd

was R80 000. Consider the carrying amount of the assets and liabilities of L Ltd to be equal

to the fair value thereof at the date of acquisition.

REQUIRED

Draft the consolidated statement of profit or loss and other comprehensive

income and the consolidated statement of changes in equity of the J Ltd

Group for the year ended 31 December 20.8 in compliance with the

requirements of International Financial Reporting Standards.


63

SOLUTIONS

QUESTION 1

P LTD GROUP


R

ASSETS

Non-current assets

Property, plant and equipment 172 000 [(152 000 + 100 000) - (50 000 + 30 000)]

Goodwill (2)20 000

192 000

Current assets

Inventories (180 000 + 160 000) 340 000 Trade and other receivables (190 000 + 80 000) 270 000 Cash and cash equivalents 68 000

678 000


EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital 100 000 Retained earnings (3)600 000


Current liabilities

Trade and other payables (80 000 + 60 000) 140 000 Bank overdraft 30 000



P LTD GROUP



Note R

Gross profit (410 000 + 360 000) 770 000

Administrative expenses (15 000 + 12 000 + 15 000 + 10 000

+ 100 000 + 80 000) (232 000)

Profit before tax 1 538 000


PROFIT FOR THE YEAR

Other comprehensive income for the year 340 000

-



64

P LTD GROUP

NOTES FOR THE YEAR ENDED 31 DECEMBER 20.8

1. Profit before tax

Profit before tax is arrived at after taking into account the following: Expenses R Auditors remuneration (15 000 + 12 000) 27 000 Depreciation (15 000 + 10 000) 25 000 Staff cost (100 000 + 80 000) 180 000

P LTD GROUP


31 DECEMBER 20.8

Share capital

R

Retained earnings

R

Total

R


300 000#



Profit for the year

340 000 340 000

Dividend paid: ordinary

(40 000)

(40 000)

Balance at 31 December 20.8 100 000

(3)600 000

700 000

# (250 000 + 50 000(1))


65

Calculations

1. Analysis of owners' equity of S Ltd

Total

P Ltd 100% NCI 0% At Since

R R R R

At acquisition – 2 Jan 20.5

Share capital 50 000 50 000

-


130 000 130 000 -

Equity represented by goodwill – parent 20 000 20 000(2)


Since acquisition


Retained earnings 50 000 50 000(1)

(130 000 31/12/20.7 –

80 000 2/1/20.5)

• Current year

Profit for the year (calculation 2) Dividends paid

168 000 (30 000)

168 000 (30 000)

338 000 188 000 -

2. Profit for the year

R

Gross profit 360 000 Auditors' remuneration (12 000) Staff cost (80 000) Depreciation (10 000)

258 000

Taxation for the year (90 000)

168 000


66


Dr

Cr

R

R



Goodwill (2)20 000

Investment in S Ltd

150 000


Dividends received – P Ltd 30 000

Dividends paid – S Ltd

30 000

Elimination of intragroup dividends

COMMENT

In this example, we divide the analysis of owners' equity into three parts (periods) because we

require the figure for retained earnings for the subsidiary at the beginning of the year in order to

draft the statement of changes in equity.

Note that we eliminated the intragroup item, namely dividends of R30 000 paid by the subsidiary.

Note also that if the parent or a subsidiary has a bank overdraft, we may not deduct it from the

favourable bank balance of another company in the group (even if both companies hold their

accounts at the same bank). We must show both balances separately. The deduction is permitted

only if the company with the favourable balance has guaranteed the overdrawn account.


67

QUESTION 2

A LTD GROUP


ASSETS R

Non-current assets


[(152 000 + 100 000) - (50 000 + 30 000)]

Goodwill (calculation 1) (2)20 000

192 000

Current assets

Inventories (180 000 + 160 000) 340 000



678 000





Retained earnings [412 000 (calculation 2) - 30 000 (dividend received) 600 000

+ 188 000(1) + 30 000 (dividend paid)]


Current liabilities






68

Calculations 1. Analysis of owners' equity of B Ltd

At acquisition ─ 2 Jan 20.5

Share capital

Retained earnings

Equity represented by

goodwill - parent

Consideration Since acquisition

• To end of current year

3 Jan 20.5 to 31 Dec

20.8

Retained earnings

(31/12/20.8)

Profit for the year

Retained earnings

31/12/20.7

Retained earnings

2/1/20.5

Dividend paid

Total

A Ltd 100%

NCI

0% At Since

R

50 000

80 000

R

50 000

80 000

R R

130 000

20 000

130 000

(2)20 000

218 000

(30 000)

150 000

218 000

168 000* 130 000

(80 000)

(30 000)

150 000

338 000 188 000

(1)

* 360 000 - 90 000 - 12 000 - 80 000 - 10 000

2. Retained earnings of A Ltd – 31 December 20.8

R

Gross profit 410 000 Dividends received 30 000 Expenses (130 000)

Auditors' remuneration 15 000 Staff cost 100 000 Depreciation 15 000

310 000 Income tax expense (108 000) Dividends paid (40 000) Retained earnings 1 January 20.8 250 000

412 000


69


Dr

Cr

R

R



Goodwill (2)20 000

Investment in B Ltd

150 000


Dividends received – A Ltd 30 000

Dividends paid – B Ltd

30 000


COMMENT

Since the question merely asked for a consolidated statement of financial position, the analysis of

owners' equity is different from that in question 1. Because we had to do neither the consolidated

statement of profit or loss and other comprehensive income nor the consolidated statement of

changes in equity, we did not require the figure for retained earnings at the beginning of the year

(see (1) in question 1). Therefore, we can combine the "since acquisition" sections in the analysis

and include all movements in retained earnings for the period since acquisition to the end of the

current year.

Because a complete consolidated statement of changes in equity is no longer available, we should

calculate retained earnings separately, as in calculation 2 (100% holding).

QUESTION 3

J LTD GROUP



Note R

Gross profit (410 000 + 360 000)

770 000 Administrative expenses (15 000 + 12 000 + 15 000 (232 000) + 10 000 + 100 000 + 80 000)

Profit before tax 1 538 000 Income tax expense (108 000 + 90 000)

(198 000)

PROFIT FOR THE YEAR

(2)340 000 Other comprehensive income for the year -

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

340 000


70

J LTD GROUP



Profit before tax is arrived at after taking into account the following:

Expenses R Auditors' remuneration (15 000 + 12 000) 27 000 Depreciation (15 000 + 10 000) 25 000 Staff cost (100 000 + 80 000) 180 000

J LTD GROUP


31 DECEMBER 20.8

Share capital

R

Retained earnings

R

Total

R Balance at 1 January 20.8 100 000

300 000#

400 000 Changes in equity for 20.8 Total comprehensive income for the year

Profit for the year (2)340 000 340 000 Dividend paid: ordinary

(40 000)

(40 000)


600 000

700 000

# (250 000 + 50 000(1))


71

Calculations

1. Analysis of owners' equity of L Ltd

At acquisition – 2 Jan 20.5

Share capital

Retained earnings

.Equity represented by goodwill –

,,parent

Consideration

Since acquisition


Retained earnings

(130 000 31/12/20.7 –

80 000 2/1/20.5)

• Current year

Profit for the year (calc 2)

Dividends paid

Total J Ltd 100% NCI

0% At Since

R

50 000

80 000

R

50 000

80 000

R R

-

-

130 000

20 000

130 000

(3)20 000

50 000(1)

168 000

(30 000)

-

150 000

50 000

168 000

(30 000)

150 000 -

338 000 188 000 -

2. Profit for the year

Gross profit 360 000

Auditors' remuneration (12 000)

Staff cost (80 000)

Depreciation (10 000)

258 000

Taxation for the year (90 000)

168 000


72


Dr

Cr

R

R

Share capital 50 000 Retained earnings 80 000 Goodwill (3)20 000 Investment in L Ltd

150 000

Elimination of owners' equity of L Ltd at acquisition

Dividends received – J Ltd 30 000 Dividends paid – L Ltd

30 000


COMMENT

In this question, you are merely expected to draft a consolidated statement of profit or loss and

other comprehensive income and a consolidated statement of changes in equity. However, you will

notice that the calculations for questions 1 and 3 are very similar.

SELF-ASSESSMENT



the wholly-owned subsidiary was acquired a few years ago in accordance with

International Financial Reporting Standards?


73

FAC2602



CONSOLIDATION OF A

PARTLY-OWNED

SUBSIDIARY AFTER DATE

OF ACQUISITION

LEARNING UNIT 5


74

LEARNING OUTCOME

Students should be able to consolidate the financial statements of a group of companies if the interest

in the partly-owned subsidiary was acquired a few years ago in accordance with International Financial


OVERVIEW


5.1 INTRODUCTION .......................................................................................................... 75

5.2 CONSOLIDATION OF A PARTLY-OWNED SUBSIDIARY AFTER THE DATE OF

ACQUISITION ............................................................................................................. 75

5.3 INTRAGROUP TRANSACTIONS ................................................................................. 81

5.4 EXERCISES ................................................................................................................. 81

SELF-ASSESSMENT ............................................................................................................. 90

KEY CONCEPTS

Intragroup transactions

ASSESSMENT CRITERIA



the partly-owned subsidiary was acquired a few years ago in accordance with

International Financial Reporting Standards


calculate, measure and disclose the goodwill which arises at acquisition


75

5.1 INTRODUCTION

In learning unit 3, we introduced you to the consolidation process for a partly-owned subsidiary

at the date of acquisition. In learning unit 4, we went a step further by explaining the conso-

lidation process for a wholly-owned subsidiary after the date of acquisition. In this learning

unit, you will learn about the consolidation process which takes place when a partly-owned

subsidiary is consolidated at a date after acquisition.

We will follow the same basic calculations as in learning unit 4, except that we will always need

to make provision for the non-controlling interest in the profit. You will notice that we disclose

the profit attributable to the non-controlling owners separately in the consolidated statement of

profit or loss and other comprehensive income and the consolidated statement of changes in

equity.

5.2 CONSOLIDATION OF A PARTLY-OWNED SUBSIDIARY AFTER THE DATE OF ACQUISITION

As mentioned above, the consolidation process remains exactly the same as before, except

for the addition of a separate calculation for non-controlling owners.


76

EXAMPLE 1

The following represent the abridged financial statements of X Ltd and its subsidiary, Y Ltd:


X Ltd

Y Ltd

R R

ASSETS Property, plant and equipment 200 000

220 000 Investment in Y Ltd – 30 000 ordinary shares at fair value (cost price: R152 500)

152 500 –


80 000 Bank 27 000

45 000

430 000

345 000


Share capital – ordinary shares (50 000/40 000 shares) 100 000 80 000 Retained earnings 270 000

190 000


75 000

430 000

345 000

X Ltd acquired its interest in Y Ltd on 1 January 20.7, on which date Y Ltd's retained earnings

amounted to R110 000. Consider the carrying amount of the assets and liabilities of Y Ltd to

be equal to the fair value thereof at the date of acquisition.



X Ltd

Y Ltd

R

R


105 000 Dividends received from subsidiary 7 500

-

Profit before tax 114 500

105 000 Income tax expense (34 500)

(35 000)


70 000 Other comprehensive income for the year - -


70 000


77


Share capital

Retained earnings Total

X Ltd

Y Ltd

X Ltd Y Ltd

X Ltd Y Ltd

R

R

R R

R R


80 000

210 000 130 000

310 000 210 000


Total comprehensive income

for the year

Profit for the year

80 000 70 000

80 000 70 000


(20 000) (10 000)

(20 000) (10 000)


80 000

270 000 190 000

370 000 270 000

To draft the consolidated financial statements of the X Ltd Group for the year ended

31 December 20.9 we would proceed as follows:

SOLUTION 1

Calculations

1. Analysis of owners' equity of Y Ltd

At acquisition

Share capital

Retained earnings Equity represented by goodwill - parent


Since acquisition • To beginning of current

year

Retained earnings

(130 000 - 110 000)

• Current year

Profit for the year

Dividends paid

Total

X Ltd 75%*

NCI

25% At Since

R

80 000

110 000

R

60 000

82 500

R R

20 000

27 500

190 000

10 000

142 500

10 000

15 000(2)

52 500

(7 500)

47 500(a)

-

200 000

20 000

70 000

(10 000)

152 500

47 500

5 000(a)

17 500(1)/(b)

(2 500)(c)

280 000

60 000

67 500(3)/(d)

* 30 000 shares ÷ 40 000 shares = 75% interest


78


Dr

Cr

NCI

R

R

R



Goodwill 10 000

Investment in Y Ltd

152 500

Non-controlling interests

47 500

47 500

Elimination of owners' equity of Y Ltd at acquisition



5 000

5 000

Recording of non-controlling interests in Y Ltd for the period 1/1/20.7 to 31/12/20.8

52 500(a)

Non-controlling interests (SCI)* 17 500

Non-controlling interests (SFP)*

17 500

17 500(b)

Recording of non-controlling interests in profit after tax

Dividends received – X Ltd 7 500

Non-controlling interests (SFP) 2 500

(2 500)(c)

Dividends paid – Y Ltd

10 000

Elimination of intragroup dividend and recording of non-controlling interests in dividend

67 500(d)

* (SCI) = statement of profit or loss and other comprehensive income

(SFP) = statement of financial position

X LTD GROUP



R

Profit before tax (107 000 + 7 500 – 7 500 + 105 000) 212 000 Income tax expense (34 500 + 35 000) (69 500)

PROFIT FOR THE YEAR 142 500 Other comprehensive income for the year -


Total comprehensive income attributable to:

Owners of the parent (142 500 – 17 500) 125 000 (4) Non-controlling interests 17 500 (1)/(b)

142 500


79

X LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R R R

R


225 000#

325 000

52 500(a)

377 500



Profit for the year (4)125 000 125 000

17 500(b)

142 500


(20 000)

(20 000)

(2 500)(c)

(22 500)


(5)330 000

430 000

67 500(d)

497 500

# (210 000 + 15 000(2))

X LTD GROUP


R

ASSETS Non-current assets Property, plant and equipment (200 000 + 220 000) 420 000

Goodwill 10 000

430 000

Current assets Trade and other receivables (50 500 + 80 000) 130 500


202 500


EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital 100 000

Retained earnings (5) 330 000

430 000

Non-controlling interests (d)(3) 67 500


Current liabilities Trade and other payables (60 000 + 75 000) 135 000



80

COMMENT

Upon consolidation, all the assets, liabilities, profits and losses of a parent and its subsidiaries are

added together. However, the process does not take into account that the non-controlling owners

also have a percentage share. We credit the non-controlling interests in the statement of financial

position to show that it is the portion of equity owed to the non-controlling owners. We reduce the

retained earnings to allocate it to the non-controlling owners by debiting the retained earnings.

Hence:

Dr Retained earnings 5 000

Cr Non-controlling interests 5 000

Likewise, we need to allocate the non-controlling owners' portion of the current year's profit to

them. We credit the non-controlling interests in the statement of financial position to show that it is

the portion of the profit owed to them. We reduce the profit in the statement of profit or loss and

other comprehensive income to allocate it to the non-controlling owners by debiting profit.

Hence:

Dr Non-controlling interests (SCI) 17 500

Cr Non-controlling interests (SFP) 17 500

At the bottom of the statement of profit or loss and other comprehensive income, we can now

allocate the profit between the parent and the non-controlling owners. We include a separate

column for the non-controlling interests' share in equity in the statement of changes in equity.

In the previous learning unit, we eliminated the entire amount of the dividend paid by the

subsidiary against the dividend received by the parent as the subsidiary was wholly-owned. Here,

the subsidiary is partly-owned. To eliminate the dividends, we debit the dividends received by X

Ltd, amounting to R7 500, and credit the dividends paid by Y Ltd, amounting to R10 000. The

balancing figure in the journal is a debit balance of R2 500. We debit non-controlling interests,

thereby reducing the non-controlling interests balance in the statement of financial position, as

they realised a portion of their share in the profit in the form of a dividend received.

Hence:

Dr Dividends received – X Ltd R7 500

Dr Non-controlling interests R2 500

Cr Dividends paid – Y Ltd R10 000


81

5.3 INTRAGROUP TRANSACTIONS

In a previous learning unit, we explained to you that we must exclude profit which arises from

a transaction within the group (where this profit has not been realised in respect of a tran-

saction with a person outside the group) when determining total group profit.

When a parent sells inventories to a subsidiary at a profit and these inventories are still in the

possession of the subsidiary at year-end, this profit has not yet been realised. It is only when

the subsidiary sells the inventories to a person outside the group that the profit is realised. We

will therefore always show inventories in the consolidated statement of financial position at the

original amount for which a member of the group manufactured or purchased the inventories.

Another frequently occurring intragroup transaction is the amounts that are due or payable

between the parent and the subsidiary within the group. We will examine this aspect more

closely in learning unit 7.

5.4 EXERCISES

Work through the following questions and ensure that you fully understand the solutions,

since we will be adding more complicated aspects in the following four learning units.

QUESTION 1

P Ltd acquired 60 000 ordinary shares in S Ltd on 1 March 20.1, at which date the retained

earnings of S Ltd was R12 000.

Consider the carrying amount of the assets and liabilities of S Ltd to be equal to the fair value

thereof at the date of acquisition,.

The following represent the statements of financial position of P Ltd and S Ltd at

28 February 20.2:

P Ltd

S Ltd

R

R

ASSETS


218 200 Investment in S Ltd


- Current assets 8 600

10 100

166 400

228 300



200 000 Retained earnings 24 500

20 500

Long-term borrowings 30 800

2 200 Current liabilities 11 100

5 600

166 400

228 300


82

REQUIRED


28 February 20.2 in compliance with the requirements of International

Financial Reporting Standards if each share carries one vote.

QUESTION 2

The following are the condensed trial balances of X Ltd and Y Ltd at 31 December 20.6:

X Ltd

Y Ltd

R R


20 000

Retained earnings – 1 January 20.6 120 000

35 000


80 000

Current liabilities 45 000

30 000

Accumulated depreciation on property, plant and equipment 20 000

40 000

405 000

205 000


Investment in Y Ltd at fair value

– 16 000 ordinary shares (cost price: R33 600) 33 600 -

Taxation for the year 42 000

28 000


60 000

405 000

205 000


X Ltd acquired its interest in Y Ltd on 1 January 20.5, at which date the retained earnings of

Y Ltd amounted to R22 000. Consider the carrying amount of the assets and liabilities of Y Ltd

to be equal to the fair value thereof at the date of acquisition.

REQUIRED

Draft the consolidated statement of financial position, consolidated statement

of profit or loss and other comprehensive income and consolidated statement

of changes in equity of the X Ltd Group for the year ended

31 December 20.6 in compliance with the requirements of International



83

QUESTION 3

The following are the abridged statements of M Ltd and N Ltd for the year ended 30 June 20.8:


THE YEAR ENDED 30 JUNE 20.8

M Ltd

N Ltd

R R Profit before tax 90 000

70 000

Income tax expense (32 000)

(35 000)




35 000

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.8

Share capital Retained earnings Total

M Ltd

R

N Ltd R

M Ltd

R

N Ltd R

M Ltd

R

N Ltd R

Balance at 1 July 20.7 100 000

80 000

56 000

54 000

156 000


Total comprehensive income for the year Profit for the year

58 000

35 000

58 000

35 000


(5 000)

-

(5 000)

- Balance at 30 June 20.8 100 000

80 000

109 000

89 000

209 000

169 000


M Ltd acquired a 70% interest in N Ltd on 17 July 20.2. At that date, the retained earnings of

N Ltd was R10 000. There was no goodwill at the date of acquisition. Consider the carrying

amount of the assets and liabilities of N Ltd to be equal to the fair value thereof at the date of

acquisition.

REQUIRED


income and the consolidated statement of changes in equity of the M Ltd

Group for the year ended 30 June 20.8 in compliance with the requirements

of International Financial Reporting Standards.


84

SOLUTIONS

QUESTION 1

P LTD GROUP


R

ASSETS

Non-current assets

Property, plant and equipment (30 600 + 218 200) 248 800 Current assets (8 600 + 10 100) 18 700


EQUITY AND LIABILITIES Equity attributable to owners of the parent

Share capital 100 000 Retained earnings (24 500 + 5 100(1)) 29 600

129 600

Non-controlling interests(2)/(a) 88 200


Non-current liabilities Long-term borrowings (30 800 + 2 200) 33 000 Current liabilities (11 100 + 5 600) 16 700




85

Calculations

1. Analysis of owners' equity of S Ltd

At acquisition

Share capital Retained earnings

Purchase difference


Since acquisition

To end of the current year

Retained earnings

(20 500 - 12 000)

Total

P Ltd 60%* NCI

40% At Since

R

200 000 12 000

R

120 000 7 200

R R

80 000 4 800

212 000

-

127 200

-

5 100

84 800

-

212 000

8 500

127 200

84 800

3 400

220 500

5 100(1)

88 200(2)

* 60 000 X 100 = 60% 100 000 1


Dr

Cr

NCI

R

R

R



Investment in S Ltd

127 200


84 800

84 800




3 400

3 400

Recording of non-controlling interests in S Ltd for the period 1/3/20.1 to 28/2/20.2

(a) 88 200


86

QUESTION 2

X LTD GROUP


R

ASSETS Non-current assets Property, plant and equipment [(263 000 + 117 000) - (20 000 +

40 000)] 320 000

Current assets (66 400 + 60 000) 126 400


EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital 100 000

Retained earnings (4) 250 000

350 000

Non-controlling interests (3)/(c) 21 400




X LTD GROUP



R

Profit before tax (120 000 + 80 000) 200 000 Income tax expense (42 000 + 28 000) (70 000) PROFIT FOR THE YEAR 130 000 Other comprehensive income for the year - TOTAL COMPREHENSIVE INCOME FOR THE YEAR 130 000 Total comprehensive income attributable to:

Owners of the parent (130 000 - 10 400) 119 600 Non-controlling interests (1)/(b) 10 400

130 000


87

X LTD GROUP


31 DECEMBER 20.6

Share

capital

R

Retained

earnings

R

Total

R

Non-

controlling

interests

R

Total

equity

R


130 400#

230 400

11 000(a)

241 400



for the year

Profit for the year 119 600 119 600 10 400(b) 130 000


250 000(4)

350 000

21 400(c)

371 400

# 120 000 + 10 400(2)

Calculations


At acquisition

Share capital

Retained earnings

Purchase difference


Since acquisition

• To beginning of

current year

Retained earnings

(35 000 - 22 000)

• Current year

Profit for the year

Profit before tax

Income tax expense

Total

X Ltd 80 %* NCI

20 % At Since

R

20 000

22 000

R

16 000

17 600

R R

4 000

4 400

42 000

-

33 600

-

10 400(2)

41 600

8 400

2 600

10 400(1)

42 000

13 000

52 000

33 600

80 000

(28 000)

107 000 52 000 21 400(3)/(c)

* ( 16 000 X 100 ) = 80%

20 000 1


88


Dr

Cr

NCI

R

R

R



Investment in Y Ltd

33 600


8 400

8 400




2 600

2 600

Recording of non-controlling interests in Y Ltd for the period 1/1/20.5 to 31/12/20.5

(a) 11 000 Non-controlling interests (SCI)* 10 400

Non-controlling interests (SFP)*

10 400 (b) 10 400


(c) 21 400

* (SCI) = consolidated statement of profit or loss and other comprehensive income

(SFP) = statement of financial position

QUESTION 3

M LTD GROUP


INCOME FOR THE YEAR ENDED 30 JUNE 20.8

R

Profit before tax (90 000 + 70 000) 160 000 Income tax expense (32 000 + 35 000) (67 000)




Owners of the parent (93 000 - 10 500) 82 500 Non-controlling interests (b) 10 500

93 000


89

M LTD GROUP


30 JUNE 20.8

Share capital

Retained earnings

Total


Total equity

R R R

R R Balance at 1 July 20.7 100 000

86 800#

186 800

40 200(a)

227 000

Changes in equity for 20.8 Total comprehensive income for the year

Profit for the year 82 500 82 500

10 500(b) 93 000 Dividend paid: ordinary

(5 000)

(5 000)

-

(5 000)

Balance at 30 June 20.8 100 000

164 300

264 300

50 700(c)

315 000

# (56 000 + 30 800(d))

Calculations

1. Analysis of owners' equity of N Ltd

At acquisition

Share capital

Retained earnings

Purchase difference


Since acquisition


Retained earnings

(54 000 - 10 000)

• Current year

Profit for the year

Total

M Ltd 70 %

NCI

30 % At Since

R

80 000

10 000

R

56 000

7 000

R R

24 000

3 000

90 000

-

90 000

44 000

35 000

63 000

-

30 800(d)

24 500

27 000(a)

-

63 000

27 000

13 200(a)

10 500(b)

169 000

55 300

50 700(c)


90


Dr

Cr

NCI

R

R

R



Investment in N Ltd

63 000


27 000

27 000

Elimination of owners' equity of N Ltd at acquisition



13 200

13 200

Recording of non-controlling interests in N Ltd for the period 17/7/20.2 to 30/6/20.7

(a) 40 200 Non-controlling interests (SCI) 10 500

Non-controlling interests (SFP)

10 500 (b) 10 500

Recording of non-controlling interests in profit for the year

50 700

SELF-ASSESSMENT


draft the consolidated annual financial statements of a group if the

interest in the partly-owned subsidiary was acquired a few years ago in

accordance with International Financial Reporting Standards?


calculate, measure and disclose the goodwill which arises at acquisition?

91

FAC2602





ACQUISITION OF AN

INTEREST IN A

SUBSIDIARY DURING THE

YEAR

LEARNING UNIT 6


92

LEARNING OUTCOME

Students should be able to consolidate the financial statements of a group of companies where the

interest in a subsidiary was acquired on a date other than at the end of the financial year in

accordance with International Financial Reporting Standards.

OVERVIEW


6.1 INTRODUCTION .......................................................................................................... 93

6.2 APPORTIONMENT OF ITEMS IN THE STATEMENT OF PROFIT OR LOSS AND

OTHER COMPREHENSIVE INCOME ...................................................................... 93

6.3 APPORTIONMENT OF ITEMS IN THE STATEMENT OF CHANGES IN EQUITY ..... 93

6.4 PRESENTATION OF THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME AND THE CONSOLIDATED

STATEMENT OF CHANGES IN EQUITY ................................................................. 94

6.5 EFFECTIVE DATE OF ACQUISITION ......................................................................... 99

6.6 EXERCISE .................................................................................................................. 100

SELF-ASSESSMENT ........................................................................................................... 106

KEY CONCEPTS

Effective date

Apportion

Pre-acquisition period

Post-acquisition period


93

ASSESSMENT CRITERIA

After studying this learning unit, you should be able to:

allocate the profit of the subsidiary in the year of acquisition between pre- and

post-acquisition

draft the consolidated financial statements where the interest in a subsidiary

was acquired on a date other than at the end of the financial year in

accordance with International Financial Reporting Standards


6.1 INTRODUCTION

In the preceding learning units, the date of acquisition of an interest in a subsidiary has

always been the first day of the subsidiary's accounting period. In practice, the effective date

on which the delivery of shares takes place very rarely coincides with the end of a financial

year. The purchase of an interest in a subsidiary at a date other than the accounting date is

known as the interim acquisition of a subsidiary. We therefore need to allocate items in the

statement of profit or loss and other comprehensive income (to pre- and post-acquisition date

periods) to determine the amount of retained earnings at the effective date of acquisition,

which is a prerequisite for determining the goodwill at the date of acquisition.

6.2 APPORTIONMENT OF ITEMS IN THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

If it is not practicable to apportion the profit or loss of the subsidiary for any financial year with

reference to the facts, we may treat it as if it accrued evenly from day to day during the year

and apportion it accordingly.

We must examine income and expenditure items individually to determine the basis on which

we should apportion each item between the period before acquisition and the period since

acquisition.

6.3 APPORTIONMENT OF ITEMS IN THE STATEMENT OF CHANGES IN EQUITY

We must account for preference dividends in respect of issued preference shares of the sub-

sidiary on a time basis, even if it has not been declared.

Declared ordinary dividends are year-end items by nature and fall in the post-acquisition

period.


94

6.4 PRESENTATION OF THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME AND THE CON-SOLIDATED STATEMENT OF CHANGES IN EQUITY

The first step in preparing the consolidated statement of profit or loss and other comprehensive

during the current financial year is to apportion the income and expenditure of the current year

between pre- and post-acquisition periods. Once we have done this, we can draw up the

consolidated statement of profit or loss and other comprehensive income and the

consolidated statement of changes in equity using one of two methods.

In this module, we will only deal with the first method, where only the post-acquisition profits

are included in the operating profit.

EXAMPLE 1

The following are the trial balances of Sandy Ltd and South Ltd for the year ended

31 December 20.2:

Sandy

Ltd

R

South

Ltd

R

Share capital - ordinary shares (800 000/355 000 shares) (800 000) (355 000)

Retained earnings - 1 January 20.2 (480 000) (120 000)

Gross profit (422 700) (166 200)

Dividends received - 31 December 20.2 (23 800) -



Staff costs 95 000 35 000

Interest paid on bank overdraft 3 800 -

Income tax expense 12 000 4 200

Dividends declared and paid - 31 December 20.2 80 000 34 000

Property, plant and equipment at carrying amount 861 600 426 200

Investment in South Ltd at fair value

- 248 500 shares purchased on 1 July 20.2

364 700

-


Cash at bank 126 700 51 800

Inventory 72 200 43 000


South Ltd became a subsidiary of Sandy Ltd on 1 July 20.2. The profit of South Ltd was earned

evenly throughout the year. Consider the carrying amount of the assets and liabilities of South

Ltd to be equal to the fair value thereof at the date of acquisition, with the exception of land

and building. The excess of the purchase price over the net carrying amount of the assets at


95

the date of acquisition was due to the difference between the carrying amount and the fair

value of the land and buildings.

REQUIRED


income and the consolidated statement of changes in equity of the Sandy

Ltd Group for the year ended 31 December 20.2 in compliance with the

requirements of International Financial Reporting Standards. Do all

calculations to the nearest rand.

SOLUTION 1

SANDY LTD GROUP



Notes

R

Gross profit

505 800

[422 700 + (166 200/12 x 6)]

Administrative expenses

(246 500)

[102 000 + (42 000/12 x 6)] + [95 000 +

(35 000/12 x 6)] + [8 500 + (5 000/12 x 6)]

Finance costs

(3 800)

Profit before tax 1

255 500

Income tax expense [12 000 + (4 200/12 x 6)]

(14 100)

PROFIT FOR THE YEAR

241 400 Other comprehensive income for the year -


241 400


Owners of the parent (241 400 − 12 000)

229 400 Non-controlling interests

(b)12 000

241 400


96

SANDY LTD GROUP



Profit before tax is arrived at after taking into account the following: R Expenses

Auditors' remuneration (8 500 + 2 500) 11 000 Depreciation (102 000 + 21 000) 123 000 Staff costs (95 000 + 17 500) 112 500

SANDY LTD GROUP


31 DECEMBER 20.2

Share capital

Retained earnings

Total


Total equity

R R R

R R Balance at 1 January 20.2 800 000

480 000

1 280 000

–

1 280 000


Equity on date of acquisition 156 300(a) 156 300 Total comprehensive income for the year


12 000(b) 241 400 Dividend paid: ordinary

(80 000)

(80 000)

(10 200)(c)

(90 000)

Balance at 31 December 20.2

800 000

629 400

1 429 400

158 100(d)

1 587 500


97

Calculations

1. Analysis of owners' equity of South Ltd

At acquisition Share capital Retained earnings

(1/1/20.2)

Retained earnings (1/1/20.2 – 1/7/20.2)

Revaluation of land and buildings

Purchase difference


Since acquisition Current year

Profit for the year

Dividends

Total

Sandy Ltd 70 %(1)

NCI

30%

At Since

R

355 000 120 000

40 000(2)

6 000(4)

R

248 500

84 000

28 000

4 200(3)

R

28 000

(23 800)

R

106 500 36 000

12 000

1 800

521 000

-

364 700

-

156 300(a)

-

521 000

40 000(5)

(34 000)

364 700

156 300

12 000(b)

(10 200)(c)

527 000

4 200

158 100(d)

(1) 248 500/355 000 x 100 = 70% (2) Refer to calculation 2. (3) 364 700 - 248 500 - 84 000 - 28 000 = 4 200 (balancing figure) (4) 4 200/70% = 6 000 (2) Refer to calculation 3.


98

2. Allocation of items in the statement of profit or loss and other comprehensive

kjlkjlkjincome

Total 1/1/20.2

to 1/7/20.2

to

30/6/20.2 31/12/20.2

R R R

Gross profit 166 200 83 100 83 100 Auditors' remuneration (5 000) (2 500) (2 500) Depreciation (42 000) (21 000) (21 000) Staff costs (35 000) (17 500) (17 500) Income tax (4 200) (2 100) (2 100)

Profit earned throughout the year 80 000 40 000(2) 40 000(5)


Dr

Cr

NCI

R

R

R



Retained earnings (120 000 + 40 000(2)) 160 000

Investment in South Ltd

364 700


156 300 (a) 156 300

Elimination of owners' equity of South Ltd at acquisition

Non-controlling interests (SCI) 12 000


12 000 (b) 12 000


Dividends received – Sandy Ltd 23 800


(c) (10 200)

Dividends paid – South Ltd

34 000


(d) 158 100

According to the alternative method, we include both the pre- and post-acquisition profits after

tax of the subsidiary in the profit after tax for the year. Thereafter, we deduct the profit

earned by the subsidiary before acquisition of the controlling interest in order to determine

the profit of the group for the year. You will not be tested on this method in FAC2602.


99

6.5 EFFECTIVE DATE OF ACQUISITION

The date of acquisition is the date on which control over the net assets and operations of the

subsidiary is effectively transferred to the parent. In practice, there must be certainty as to the

date of acquisition as this is the date from which the results of the subsidiary must be included

in the group annual financial statements. The following are possible dates to consider for the

date of acquisition:

the date on which substantial agreement is reached

the date on which control over the net assets and activities of the subsidiary is transferred

to the parent

the date of signing of the agreement

the date specified in the agreement

the date of payment of the purchase consideration


100

6.6 EXERCISE

QUESTION 1

West Ltd became a subsidiary of East Ltd on 1 January 20.2. Consider the carrying amount

of the assets and liabilities of West Ltd to be equal to the fair value thereof at the date of

acquisition.

The following are the trial balances of East Ltd and West Ltd for the year ended

30 September 20.2:

East

West

Ltd

Ltd

R

R

Credits


1 250 –12% preference shares (20 000 shares) 20 000

–

6% Debentures 100 000

45 000 Retained earnings – 1 October 20.1 800 000

305 000

Sales 607 000

428 250 Interest received –

2 400

Dividends received 3 750

– Trade and other payables 8 300

47 840

Dividends payable 10 000

– Bank 4 000

–

Accumulated depreciation 53 500

22 950 Long-term borrowing – Bank Ltd –

105 000

1 681 550

1 081 440

Debits


452 000 Cost of sales 390 000

285 500

Administrative expenses 65 000

47 000 Depreciation 15 500

2 300

Interest paid – debentures 4 500

2 700 Income tax at 28% 36 960

20 202


208 738 Bank –

18 000

Dividends paid 15 000

5 000 Dividends declared – 30 September 20.2 10 000

–

Investment in West Ltd (75% equity) at fair value 349 453

– (cost price: R349 453) Investment in South Ltd – 6% debentures at fair value –

40 000


1 681 550

1 081 440


101


1. West Ltd applied for a loan at Bank Ltd on 1 July 20.1. Bank Ltd granted the loan at an

interest rate of 20% per annum for a period of five years. The interest for the year ended

30 September 20.2 has not been recorded yet and is payable on 1 October 20.2. Capital

repayment will only start in 20.4.

2. The sales of West Ltd are seasonal. 60% of the sales occurred during the first six months

of the financial year. The remaining amount of the sales figure was earned evenly spread

over the rest of the financial year. West Ltd maintains a gross profit percentage of 50%

on the cost price. All other income and expenditure were received and spent evenly

throughout the year. Income tax must be apportioned according to the profit before tax for

that period.

REQUIRED

Draft the consolidated annual financial statements of the East Ltd Group for

the year ended 30 September 20.2 in compliance with the requirements of

International Financial Reporting Standards (IFRS). Do all calculations to the

nearest rand.


102

SOLUTION 1

QUESTION 1

EAST LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.2

R

ASSETS Non-current assets Property, plant and equipment 856 650

(481 100 + 452 000 - 53 500 - 22 950)

Goodwill 13 358 Investment in South Ltd – 6% debentures at fair value 40 000

910 008



540 775

Total assets 1 450 783


Share capital (75 000 + 20 000)

95 000 Retained earnings(e)

893 907

988 907

Non-controlling interests(d)

119 236

Total equity

1 108 143


6% Debentures (100 000 + 45 000)

145 000 Long-term borrowing

105 000

250 000

Current liabilities

Trade and other payables (8 300 + 47 840 + 21 000(f) + 1 500(g))

78 640

Dividends payable

10 000 Bank overdraft

4 000

92 640

Total liabilities

342 640

Total equity and liabilities

1 450 783

(f) R105 000 loan x 20% = R21 000 (g) R100 000 debentures x 6% = R6 000

.In trial balance = R4 500

.Additional provision = R6 000 - R4 500 = R1 500


103

EAST LTD GROUP


INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20.2

Notes R

Revenue (607 000 + 299 775(2))

906 775

Cost of sales (390 000 + 199 850)

(589 850)

Gross profit

316 925 Other income(7)

1 800

Administrative expenses (15 500 + 1 725(5) + 65 000 + 35 250(4))

(117 475) Finance cost (4 500(g) + 1 500(g) + 17 775(6))

(23 775)

Profit before tax 1 177 475 Income tax expense (36 960 + 13 153(8))

(50 113)

PROFIT FOR THE YEAR

127 362 Other comprehensive income for the year

-


127 362


- Owners of the parent (127 362 - 8 455)

118 907

- Non-controlling interests

b)8 455

127 362

EAST LTD GROUP

NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.2


R

Profit before tax is arrived at after taking into account the following: Income

Income from investment(7) 1 800 Expenses

Depreciation (15 500 + 1 725(5)) 17 225


104

EAST LTD GROUP


30 SEPTEMBER 20.2

Ordi-nary share capital

12% prefe-rence share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R R R R

R R Balance at 1 October 20.1

75 000

20 000

800 000 895 000

–

895 000


Equity on date of acquisition 112 031(a)

112 031 Total comprehensive income for the year

Profit for the year

118 907 118 907

8 455(b)

127 362 Dividend declared: ordinary (10 000) (10 000) – (10 000) Dividend paid: ordinary

(15 000) (15 000)

(1 250)

(c)

(16 250)

Balance at 30 September 20.2

75 000

20 000

893 907(e)

988 907

119 236(d)

1 108 143

Calculations

1. Analysis of owners' equity of West Ltd

At acquisition

Share capital

Retained earnings 1/10/20.1

Retained earnings


jjj- parent


Since acquisition to end of the current year

Profit for the year

Dividends

Total

East Ltd 75%(1)

NCI 25% At Since

R

125 000

305 000

18 126(9)

R

93 750

228 750

13 595

R R

31 250

76 250

4 531

448 126

13 358

336 095

13 358

25 367

(3 750)

112 031(a)

-

461 484

33 822(10)

(5 000)

349 453

112 031

8 455(b)

(1 250)(c)

490 306 21 617 119 236(d)


105

2. Allocation of items in the statement of profit or loss and other comprehensive

hjhkjhincome

Total

1/10/20.1

1/1/20.2

to to

31/12/20.1

30/9/20.2

R

R

R

Sales 428 250 (2) 128 475 (2) 299 775

Cost of sales (285 500)

(85 650)

(199 850)

Gross profit 33,3% (50/150) 142 750 (3) 42 825 (3) 99 925

Administrative expenses (47 000) (4) (11 750) (4) (35 250)

Depreciation (2 300) (5) (575) (5) (1 725)

Profit from operations 93 450

30 500

62 950

Finance costs (2 700 + 21 000 (f)) (23 700) (6) (5 925) (6) (17 775)

Income from investments 2 400 (7) 600 (7) 1 800


25 175

46 975

Income tax expense (20 202) (8) (7 049) (8) (13 153)

PROFIT FOR THE YEAR 51 948 (9) 18 126 (10) 33 822

(1) 75% equity (given) (2) Sales

R428 250 x 60% = R256 950 for the first six months

for the first three months = R256 950/2 = R128 475

for the remaining nine months = R428 250 - R128 475 = R299 775 (3) Gross profit

R128 475 x 50/150 = R42 825

R299 775 x 50/150 = R99 925 (4) Administrative expenses

R47 000 x 3/12 = R11 750

R47 000 x 9/12 = R35 250 (5) Depreciation

R2 300 x 3/12 = R575

R2 300 x 9/12 = R1 725 (6) Finance costs

(R21 000 + R2 700) x 3/12 = R5 925

(R21 000 + R2 700) x 9/12 = R17 775 (7) Income from investments

R2 400 x 3/12 = R600

R2 400 x 9/12 = R1 800

(8) Income tax expense

R25 175 x 28% = R7 049

R46 975 x 28% = R13 153


106

3. Entry in the financial records of West Ltd

Dr Cr NCI

R R R

Interest paid on long-term borrowings 21 000

Trade and other payables

21 000


Share capital 125 000 Retained earnings (305 000 + 18 126 (a)) 323 126

Goodwill 13 358 Investment in West Ltd

349 453


112 031 (a) 112 031

Elimination of owners' equity of West Ltd at acquisition

Non-controlling interests (SCI) 8 455 Non-controlling interests (SFP)

8 455 (b) 8 455


Dividends received – East Ltd 3 750 Non-controlling interests (SFP) 1 250

(c) (1 250)

Dividends paid – West Ltd

5 000 Elimination of intragroup dividend and recording of

non-controlling interests in dividends

(d) 119 236

SELF-ASSESSMENT


allocate the profit of the subsidiary in the year of acquisition between, at

and since acquisition?

draft the consolidated annual financial statements where the interest in a

subsidiary was acquired on a date other than at the end of the financial

year in accordance with International Financial Reporting Standards?


107

FAC2602



ELIMINATION OF

INTRAGROUP

TRANSACTIONS

LEARNING UNIT 7


108

LEARNING OUTCOME

Students should be able to eliminate intragroup transactions in consolidated financial statements of

companies according to International Financial Reporting Standards.

OVERVIEW

The study unit is divided into the following:

7.1 INTRODUCTION ........................................................................................................ 109

7.2 INTRAGROUP BILLS OF EXCHANGE AND BANK OVERDRAFTS ........................ 109

7.3 REVALUATION OF PROPERTY, PLANT AND EQUIPMENT ................................... 110

7.4 UNREALISED PROFIT IN TRADING INVENTORIES ................................................ 117

7.5 PROPERTY, PLANT AND EQUIPMENT HELD BY COMPANIES IN THE GROUP . 128

7.6 EXERCISES ............................................................................................................... 151

SELF-ASSESSMENT ........................................................................................................... 161

KEY CONCEPTS

Intragroup bills of exchange

Discounting of bills of exchange



109

ASSESSMENT CRITERIA


record intragroup bills of exchange and bank overdrafts correctly in the

consolidated annual financial statements of companies

determine the surplus when revaluing property in respect of an interest in a

subsidiary at acquisition

calculate the unrealised profit effect in trading inventories in both the parent and

the subsidiary


draft the consolidated annual financial statements of a group if the sale of

property, plant and equipment or inventory have taken place between

companies in the group in accordance with International Financial Reporting

Standards

7.1 INTRODUCTION

In the preceding learning units, we introduced you to the basic consolidation process for

wholly and partly-owned subsidiaries.

In this learning unit, we deal mainly with other intragroup transactions that take place in

groups and therefore have to be eliminated for consolidation purposes. We will deal with

trading inventories as well as the property, plant and equipment held in a group.

We would like to emphasise that we do not deal with taxation on unrealised intragroup

profits or losses in this module.

7.2 INTRAGROUP BILLS OF EXCHANGE AND BANK OVERDRAFTS

A bill of exchange is a negotiable document. It is a written instruction directed by one person to

another instructing that person to pay, upon demand, a certain sum of money to the person

nominated in the bill of exchange.

For example:

Bill no. 111 30/10/20.8

To: P Ltd Amount: R2 000

Pay the amount of R2 000 to S Ltd on 30/11/20.8.

S Ltd would treat it as a bill receivable in their records, while P Ltd would show it as a bill

payable. Upon consolidation, the subsidiary's bill receivable would be offset against the bill

payable in P Ltd's records. From a group perspective, the group cannot enter into a

transaction with itself.


110

S Ltd could have converted the bill into cash before 30/11/20.8 by selling it to a financial

institution. This type of transaction is known as discounting.

On consolidation, we may only offset the bank overdraft of one company in the group against

the favourable bank balance of another company if:

both companies have their accounts at the same bank; and

the company with the favourable balance has guaranteed the overdraft of the other

company; or

the bank itself would offset the two amounts against each other in terms of an agreement

between the two companies and the bank.

7.3 REVALUATION OF PROPERTY, PLANT AND EQUIPMENT

The assets of a subsidiary could be revalued at the date of acquisition of the interest if the

carrying amounts and market values of the assets differ.

The following two situations may arise:

The subsidiary's assets may be revalued merely for the purposes of determining the

purchase price, without a journal entry being made in the subsidiary's financial records.

The assets of the subsidiary may be revalued in order to determine the purchase price,

and an adjustment is subsequently made in the subsidiary's financial records.

The revaluation of assets may lead to capital gains tax, which is ignored for the purposes of

this module.

We will use the following two questions as examples to explain the two situations to you:


111

QUESTION 1

A Ltd acquired 80 000 shares in B Ltd on 1 July 20.1. Each share carries one vote. At that

date, the land and buildings belonging to B Ltd were valued at R200 000. No adjustment was

made in the financial records of B Ltd.

The retained earnings was R46 000. At 30 June 20.4, the trial balances of A Ltd and B Ltd

were as follows:

A Ltd

B Ltd

R

R

Credits


100 000


92 000

Long-term borrowings – C Ltd 140 000

–

– A Ltd –

80 000


66 000

576 000

338 000

Debits

Land and buildings at cost price 250 000 140 000

Investment in B Ltd at fair value (cost price: R164 800) 164 800

–

Loan – B Ltd 80 000

–


198 000

576 000

338 000


1. Consider the carrying amount of all the other assets and liabilities of B Ltd to be equal to

the fair value thereof at the date of acquisition.

REQUIRED





112

SOLUTION 1

A LTD GROUP


R


Current assets (81 200 + 198 000) 279 200



Equity attributable to owners of the parent Share capital 300 000

Retained earnings (121 000 + 36 800(b)) 157 800

457 800

Non-controlling interests(a) 50 400


Non-current liabilities Long-term borrowings 140 000 Current liabilities (15 000 + 66 000) 81 000




113

Calculations


At acquisition

Share capital

Retained earnings

Revaluation surplus

(200 000 - 140 000)

Purchase difference Consideration and NCI

Since acquisition

to end of the current year

Retained earnings

(92 000 - 46 000)

Total

A Ltd 80 %*

NCI 20 % At Since

R

100 000

46 000

60 000

R

80 000

36 800

48 000

R R

20 000

9 200

12 000

206 000

-

164 800

-

36 800

41 200

-

206 000

46 000

164 800

41 200

9 200

252 000 36 800(b)

50 400(a)

* 80 000/100 000 shares x 100% = 80%

2. Entry in the separate financial records of B Ltd

Per the information, B Ltd has not yet included this in their financial records:

Dr Cr

R R

Land and buildings 60 000

Revaluation surplus

60 000

Revaluation of land and buildings


114


Dr Cr NCI

R R R




Goodwill NIL

Investment in B Ltd

164 800


41 200 41 200




9 200 9 200

Recording of non-controlling interests in

B Ltd for the period 1 July 20.1 to 30 June 20.4

Loan – A Ltd 80 000

Loan – B Ltd

80 000


50 400(a)


115

QUESTION 2

P Ltd acquired a 70% interest in S Ltd at 1 May 20.2. Each share carries one vote. At the

date of acquisition, P Ltd valued the land and buildings belonging to S Ltd with the carrying

amount of R200 000 at R300 000. It is company policy to value the land and buildings

belonging to S Ltd every second year at 31 August. At the date of acquisition, the retained

earnings of S Ltd was R20 000.

The following represent the condensed trial balances of P Ltd and S Ltd at 31 December

20.6:

P Ltd S Ltd

R R

Credits



Long-term borrowing – P Ltd – 100 000

Current liabilities 140 000 20 000

Revaluation of land and buildings 100 000 150 000

500 000 390 000

Debits

Land and buildings at valuation 200 000 350 000

Investment in S Ltd at fair value (cost price: R140 000) 140 000 –

Unsecured loan – S Ltd 100 000 –


500 000 390 000


Consider the carrying amount of all the other assets and liabilities of S Ltd to be equal to the

fair value thereof at the date of acquisition.

REQUIRED


31 December 20.6 in compliance with the requirements of International Financial



116

SOLUTION 2

P LTD GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.6

ASSETS R Non-current assets

Property, plant and equipment (200 000 + 350 000) 550 000 Current assets (60 000 + 40 000) 100 000



Share capital 100 000 Other components of equity (100 000 + 35 000(1)) 135 000 Retained earnings (160 000 + 14 000(2)) 174 000

409 000

Non-controlling interests(3)/(a) 81 000




Calculations 1. Analysis of owners' equity of S Ltd

At acquisition

Share capital

Retained earnings

Revaluation surplus

(300 000 - 200 000)

Purchase difference


Since acquisition To end of the current year

Retained earnings (40 000 - 20 000)

Revaluation surplus

(150 000 - 100 000)

Total

P Ltd 70%

NCI

30% At Since

R

80 000

20 000

100 000

R

56 000

14 000

70 000

R R

24 000

6 000

30 000

200 000

-

140 000

-

14 000 RE

35 000 OCE

60 000

-

200 000

20 000

50 000

140 000

60 000

6 000

15 000

270 000 14 000(2) RE 35 000(1) OCE

81 000(3)

RE = retained earnings

OCE = other components of equity


117


Dr

Cr

NCI

R

R

R




Goodwill NIL

Investment in S Ltd

140 000


60 000

60 000




6 000

6 000 Recording of non-controlling interests in S Ltd for the period 1 May 20.2 to 31 December 20.6



15 000

15 000 Recording of non-controlling interests in the revaluation surplus of S Ltd for the period

1 May 20.2 to 31 December 20.6

Loan – P Ltd 100 000

Loan – S Ltd

100 000


81 000(a)

7.4 UNREALISED PROFIT IN TRADING INVENTORIES

As mentioned previously, the purpose of consolidated annual financial statements is to offer

annual financial statements after the elimination of all intragroup transactions.

We should eliminate those profits or losses on transactions within the group, as the group is

regarded as one economic entity and will not enter into transactions with itself.

P Ltd S Ltd X Ltd

Suppose P Ltd sells inventories to S Ltd at a cost price of R1 000 plus 20% profit. S Ltd packs

the inventories and sells them to X Ltd, a company outside the group, at R1 500.

The following situation may arise from this scenario:

All the inventories have been sold to X Ltd by the end of the year. There will be no

change to the consolidated annual statements as the profit is actually realised by selling it

to a company outside the group.

If no inventories have been sold to X Ltd, we should eliminate the unrealised profit

of R200 (20% x R1 000) as the profit has not yet realised outside the group. The

inventory of S Ltd and P Ltd's profit includes this amount. To eliminate the unrealised


118

profit, S Ltd has to subtract the R200 from its closing inventory (i.e. inventory should be

credited.), while P Ltd has to decrease their profit by debiting cost of sales with R200.

If half the inventories have been sold outside the group, R100 should be eliminated.

A very important aspect of consolidations is that we must start by determining which company

is selling the inventories and which company is buying them.

P Ltd

sells to

S Ltd

If P Ltd sells inventories to S Ltd, P Ltd is making the profit, and no adjustment to non-

controlling interest is necessary.

P Ltd

sells to

S Ltd

If S Ltd sells inventories to P Ltd, S Ltd is making the profit, and the non-controlling interest

must be adjusted by its percentage interest in profit or loss. (This adjustment is made in the

analysis of the owners' equity.)

Note: Unrealised profits and losses have income tax implications, but we ignore these

for the purposed of this module. We will deal with this on third-year level.


119

EXAMPLE 1

Parent sells inventories to subsidiary

The following are the trial balances of A Ltd and its subsidiary, B Ltd, at 31 December 20.8:

A Ltd

B Ltd

R

R

Share capital – ordinary shares (200 000/100 000 shares) (200 000)

(100 000) Retained earnings – 1 January 20.8 (120 000)

(80 000)

Profit before tax (80 000)

(60 000) Investment in B Ltd – 80 000 ordinary shares

at fair value (cost price: R80 000) 80 000

- Property, plant and equipment 200 000

200 000

Inventories 50 000

30 000 Trade and other receivables 70 000

50 000

Trade and other payables (30 000)

(60 000) Taxation for the year 30 000

20 000


1. A Ltd acquired its interest in B Ltd at the time of the incorporation of B Ltd.

2. B Ltd purchases all its inventories from A Ltd at cost price plus 25%. The inventories on

B Ltd's financial records amounted to R20 000 at 1 January 20.8.

3. A Ltd's total sales to B Ltd during 20.8 amounted to R100 000.

REQUIRED

Draft the consolidated annual financial statements of the A Ltd Group for the year

ended 31 December 20.8 in compliance with the requirements of International



120

SOLUTION 1

A LTD GROUP




400 000

Current assets

Inventories [50 000 + 30 000 - (30 000 x 25 )] 74 000 Trade and other receivables (70 000 + 50 000) 120 000

194 000




Retained earnings(4) 260 000

460 000 Non-controlling interests(2)/(c) 44 000




A LTD GROUP



R

Profit before tax 138 000 [80 000 + 60 000 - 100 000 (sales) + 100 000 (purchases) - (30 000 x 25 ) + (20 000 x 25 )]





Owners of the parent (88 000 - 8 000) 80 000 Non-controlling interests(3)/(b) 8 000

88 000

125

125 125


121

125

A LTD GROUP


31 DECEMBER 20.8

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R

R R


180 000*

380 000

36 000(a)

416 000


Profit for the year

80 000 80 000

8 000(b) 88 000


200 000 (4)260 000

460 000 44 000(c)

504 000

* [120 000 - (20 000 x 25) + 64 000(1)

]

Calculations


At acquisition

Share capital

Purchase difference

Consideration and NCI Since acquisition


Retained earnings

• Current year

Profit for the year (60 000 -

20 000)

Total

A Ltd 80 %*

NCI

20 % At Since

R

100 000

-

R

80 000

-

R

64 000(1)

32 000

R

20 000

-

100 000

80 000

40 000

80 000 20 000

16 000

8 000(3)

220 000 96 000 44 00(2)

* 80 000/100 000 share x 100% = 80%


122


Dr

Cr

NCI

R

R

R


Goodwill NIL

Investment in B Ltd

80 000


20 000

20 000




16 000

16 000

Recording of non-controlling interests in B Ltd for the period ended 31 December 20.7

(a) 36 000



8 000 (b) 8 000


Income – sales (A Ltd) 100 000

Cost of sales (B Ltd)

100 000

Elimination of intragroup sales

Cost of sales (A Ltd) 6 000

Inventory (B Ltd)

6 000

Elimination of unrealised intragroup profit included in closing inventory of

B Ltd (30 000 x 25 )

Retained earnings (A Ltd) 4 000

Cost of sales (A Ltd)

4 000

Elimination of unrealised intragroup profit included in opening inventory of

B Ltd (20 000 x 25)

(c) 44 000

COMMENT

Note that in this example, the parent sold inventories to the subsidiary. The unrealised profit was

therefore included in the profit of A Ltd, and there were consequently no adjustments in the

analysis of owners' equity of B Ltd, but only in the consolidated statement of profit or loss and

other comprehensive income.

Also note that sales and cost of sales are not always given in questions. You will then have to

make all adjustments against profit before tax.

It is very important to understand the journal entries. When you know which accounts need to be

debited or credited, you will know where the amounts should be added or subtracted in the

125

125


123

statements.

We need to eliminate all intragroup transactions. When a shareholder or outsider evaluates the

group's statements, the group is regarded as one economic entity. As the single entity will not

enter into transactions with itself, we should eliminate any sales between companies in the group.

Therefore we need to eliminate the intragroup sales of R100 000 mentioned in point 3 of the

additional information. When these sales took place, A Ltd credited sales as it sold these goods. B

Ltd debited their inventory with the purchase. We assume B Ltd sold this inventory and hence had

already affected cost of sales. To eliminate the intragroup sales, we will debit the sales of A Ltd

with R100 000, hence subtracting the amount from sales. We will credit the cost of sales of B Ltd,

hence decreasing cost of sales.

A Ltd sells inventory to B Ltd at a profit of 25%. Both B Ltd's inventory left at year end, and A Ltd's

profit includes this intragroup profit. Since we evaluate the companies as a single entity, we need

to eliminate the intragroup profit (unrealised profit) as it was profit earned from within the group but

had not yet been realised outside the group.

At year end, B Ltd has inventory obtained from A Ltd in its financial records amounting to

R30 000. A Ltd made a profit of 25%. To calculate the unrealised profit portion, we have to

recognise that the R30 000 already includes 25% profit, which makes it 125%. We calculate the

profit of 25% as follows: R30 000 x 25 /125 = R6 000

To eliminate the unrealised profit, B Ltd has to subtract the R6 000 from its closing inventory in the

statement of financial position. We therefore credit inventory to decrease it. We should also

decrease A Ltd's profit by debiting cost of sales. Profit decreases when we debit cost of sales, but

the R6 000 is added to cost of sales. Refer to the journal entries.

In the previous year, the journal entry for eliminating the unrealised profit of R4 000 was

performed similar to what is described above. On consolidation, we have to repeat all the entries

annually because we combine the individual companies' financial records annually and these

current record does not contain the consolidation entries of the previous year. If profit was affected

in the previous year, we need to adjust the retained earnings in the current year. Therefore the

cost of sales of R4 000 that would have been debited in the previous year, will be debited against

the retained earnings in the current year. Due to the general view that the operating cycle of

entities is normally a year, we assume that B Ltd actually sold this inventory to outside parties

within a year, hence the profit is realised. Therefore, we credit cost of sales in A Ltd to increase

the profit again. Crediting the cost of sales implies that the cost of sales decreases, so the R 4 000

is subtracted from cost of sales in the statements.


124

EXAMPLE 2

Subsidiary sells inventories to parent

The following are the trial balances of D Ltd and its subsidiary, E Ltd, at 31 December 20.8:

D Ltd E Ltd

R R Share capital – ordinary shares (200 000/100 000 shares) (200 000) (100 000) Retained earnings – 1 January 20.8 (120 000) (80 000) Profit before tax (80 000) (60 000) Investment in E Ltd – 80 000 ordinary shares

at fair value (cost price: R80 000) 80 000 - Property, plant and equipment 200 000 200 000 Inventories 50 000 30 000 Trade and other receivables 70 000 50 000 Trade and other payables (30 000) (60 000) Taxation for the year 30 000 20 000


1. D Ltd acquired its interests in E Ltd at the time of the incorporation of E Ltd.

2. D Ltd purchased all its inventories from E Ltd at cost price plus 25%. The inventories

on D Ltd's books amounted to R40 000 at 1 January 20.8.

2. Total sales of E Ltd to D Ltd amounted to R100 000 during 20.8.

REQUIRED

Draft the consolidated annual financial statements of the D Ltd Group for the year




125

SOLUTION 2

D LTD GROUP




400 000

Current assets

Inventories [50 000 + 30 000 − (50 000 x 25 )] 70 000 Trade and other receivables (70 000 + 50 000) 120 000

190 000





458 000 Non-controlling interests(2)/(c) 42 000 Total equity 500 000

Current liabilities Trade and other payables (30 000 + 60 000) 90 000 Total equity and liabilities 590 000

D LTD GROUP



R

Profit before tax 138 000 [80 000 + 60 000 − 100 000 (sales) + 100 000 (purchases) – (50 000 x 25 ) + (40 000 x 25 )]





Owners of the parent (88 000 – 7 600) 80 400 Non-controlling interests(3)/(b) 7 600

88 000

125

125 125


126

D LTD GROUP


31 DECEMBER 20.8

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R

R R

R R Balance at 1 January 20.8

200 000

177 600*

377 600

34 400(a)

412 000


Profit for the year

80 400 80 400

7 600(b) 88 000


200 000 258 000

458 000 42 000(c)

500 000

* [120 000 + 57 600

(1))

(a) (20 000(4) + 14 400(5))

Calculations

1. Analysis of owners' equity of E Ltd

At acquisition

Share capital

Purchase difference



Retained earnings

[80 000 – (40 000 x 25 )

• Current year

Profit for the year [(60 000 -

20 000 + (40 000 x 25 ) –

(50 000 x 25 )]

Total

D Ltd 80 %*

NCI

20% At Since

R

100 000

-

R

80 000

-

R

57 600(1)

30 400

R

20 000

-

100 000

72 000

38 000

80 000 20 000(4)

14 400(5)

7 600(3)

210 000 88 000 42 000(2)

* 80 000/100 000 shares x 100% = 80%

125

125

125


127


Dr

Cr

NCI

R

R

R


Goodwill NIL

Investment in E Ltd

80 000


20 000

20 000

Elimination of owners' equity of E Ltd at acquisition



14 400

14 400

Recording of non-controlling interests in E Ltd for the period ended 31 December 20.7



7 600 (b) 7 600


Income – sales (E Ltd) 100 000

Cost of sales (D Ltd)

100 000


Cost of sales (E Ltd) 10 000

Inventory (D Ltd)

10 000

Elimination of unrealised intragroup profit included in closing inventory of D Ltd

(50 000 x 25 )

Retained earnings (E Ltd) 8 000

Cost of sales (E Ltd)

8 000

Elimination of unrealised intragroup profit included in opening inventory of D Ltd

(40 000 x 25 )

(c) 42 000

125

125


128

COMMENT

Since the subsidiary in this example has sold the inventories and made the profit, we should also

bring into account the adjustments in respect of unrealised profit in the analysis of owners' equity.

You have probably realised that we can quickly test whether the analysis of owners' equity

balances.

– To see whether the columns have been correctly added up we can say:

80 000 (at acquisition)

88 000 (since acquisition)

42 000 (Non-controlling interests)

R210 000 (total)

– To see whether the non-controlling interest column has been correctly calculated, we can say:

Total = R210 000

Non-controlling interests = 20%

Therefore, the non-controlling interests column must be equal to

R210 000 x 20% = R42 000.

7.5 PROPERTY, PLANT AND EQUIPMENT HELD BY COMPANIES IN THE GROUP

We should eliminate any profit realised when an asset belonging to one company in the

group is sold to another company in the group. However, the company that purchased the

asset is still providing for too much depreciation because the profit is included in the cost price

of the asset in its books. We should write back this portion of the depreciation for

consolidation purposes.

The unrealised profit on assets is realised either through the sale of the asset to an outsider

or the use of the asset at the rate of depreciation.

The following four situations may arise where assets are sold within a group:

The parent sells non-depreciable assets to the subsidiary.

The subsidiary sells non-depreciable assets to the parent.

The parent sells depreciable assets to the subsidiary.

The subsidiary sells depreciable assets to the parent.

Note: Unrealised profits and losses have income tax implications, which we ignore for

the purposes of this module. We will deal with this section on third-year level.


129

Study the following examples carefully as they provide a detailed explanation of the sale of

assets within a group:

EXAMPLE 1

Parent sells non-depreciable asset to subsidiary

The following represent the abridged statements of D Ltd and its subsidiary, E Ltd, at 31

December 20.9:


D Ltd

E Ltd

R R

ASSETS


Investment in E Ltd

‒ 70 000 ordinary shares at fair value 77 000 -



32 000

277 000

182 000


Share capital – ordinary shares 200 000 100 000

(200 000/100 000 shares)


37 000


45 000

277 000

182 000



D Ltd

E Ltd

R R

Profit before tax 20 000 30 000 Income tax expense (6 000)

(9 000)




21 000


130


Share capital

Retained earnings Total D Ltd

E Ltd

D Ltd

E Ltd

D Ltd

E Ltd

R R

R

R

R

R


100 000

15 000 16 000

215 000

116 000



Profit for the year

14 000 21 000

14 000

21 000


29 000

37 000

229 000

137 000


1. D Ltd acquired its interest in E Ltd on 1 January 20.7, on which date E Ltd's retained

earnings amounted to R10 000. Consider the carrying amount of the assets and liabilities

of E Ltd to be equal to the fair value thereof at the date of acquisition.

2. On 1 January 20.9, E Ltd bought property with a carrying amount of R40 000 from D Ltd.

D Ltd made a profit of R10 000.

REQUIRED

Draft the consolidated financial statements of the D Ltd Group for the year ended




131

SOLUTION 1

D LTD GROUP



Property, plant and equipment (180 000 + 150 000 ‒ 10 000 profit) 320 000 Current assets (20 000 + 32 000) 52 000




237 900 Non-controlling interests(3)/(c) 41 100




D LTD GROUP



R

Profit before tax (20 000 + 30 000 - 10 000 profit) 40 000 Income tax expense (6 000 + 9 000) (15 000)



Total comprehensive income attributable to: Owners of the parent (25 000 - 6 300) 18 700 Non-controlling interests(1)/(b) 6 300

25 000


132

D LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total

Non-control-

ling interest

s

Total equity

R

R R


200 000

19 200*

219 200

34 800(a)

254 000


Profit for the year

18 700 18 700

6 300(b) 25 000


200 000 37 900

237 900 41 100(c)

279 000

* (15 000 + 4 200(2)

)

(a) (33 000(4) + 1 800

(5)

)

Calculations

1. Analysis of owners' equity of E Ltd

At acquisition

Share capital




Retained earnings

(16 000 - 10 000 at acquisition)

• Current year

Profit for the year

Total

D Ltd 70 %*

NCI

30 % At Since

R

100 000

10 000

R

70 000

7 000

R R

30 000

3 000

110 000

-

77 000

-

4 200(2)

14 700

33 000

-

110 000

6 000

21 000

77 000 33 000(4)

1 800(5)

6 300(1)

137 000 18 900 41 100(3)

* 70 000/100 000 shares x 100% = 70%


133


Dr Cr NCI

R R R

Share capital 100 000 Retained earnings 10 000 Goodwill NIL Investment in E Ltd

77 000


33 000 33 000

Elimination of owners' equity of E Ltd at acquisition

Retained earnings 1 800 Non-controlling interests

1 800 1 800

Recording of non-controlling interests in E Ltd for the period ended 31 December 20.8

34 800(a)


6 300 6 300(b)


Profit from sale of property (D Ltd) 10 000 Property (E Ltd)

10 000

Elimination of unrealised intragroup profit included in E Ltd's property

41 100(c)


134

EXAMPLE 2

Subsidiary sells non-depreciable asset to parent

The following represent the abridged statements of Q Ltd and its subsidiary, R Ltd, at

31 December 20.9:


Q Ltd

R Ltd

R R


150 000 Investment in R Ltd – 70 000 ordinary shares at fair value (cost price: R77 000)

77 000 -


32 000

277 000

182 000



37 000


45 000

277 000

182 000

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 31 DECEMBER 20.9

Q Ltd

R Ltd

R

R Profit before tax 20 000

30 000


(9 000)




21 000


135


Share capital

Retained earnings

Total Q Ltd

R Ltd

Q Ltd

R Ltd Q Ltd R Ltd

R

R

R

R R R Balance at 1 January 20.9 200 000 100 000 15 000 16 000 215 000 116 000 Changes in equity for 20.9


Profit for the year

14 000

21 000 14 000 21 000


200 000 100 000

29 000

37 000

229 000

137 000


1. Q Ltd acquired its interest in R Ltd on 1 January 20.7, on which date R Ltd's retained

earnings amounted to R10 000. Consider the carrying amount of the assets and liabilities

of R Ltd to be equal to the fair value thereof at the date of acquisition.

2. On 1 January 20.8, Q Ltd bought property with a carrying amount of R40 000 from R Ltd.

R Ltd made a profit of R10 000.

REQUIRED

Draft the consolidated financial statements of the Q Ltd Group for the year ended




136

SOLUTION 2

Q LTD GROUP


R

ASSETS Non-current assets Property, plant and equipment (180 000 + 150 000 ‒ 10 000 profit) 320 000

Current assets (20 000 + 32 000) 52 000




240 900

Non-controlling interests(3)/(c) 38 100




Q LTD GROUP



R




Total comprehensive income attributable to: Owners of the parent (35 000 − 6 300) 28 700 Non-controlling interests(1)/(b) 6 300

35 000


137

Q LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R

R R


200 000

12 200*

212 200

31 800(a)

244 000


Profit for the year

28 700 28 700

6 300(b) 35 000


200 000 40 900

240 900 38 100(c)

279 000

* (15 000 - 2 800(2)

)

(a) (33 000(4) - 1 200

(5)

)

Calculations

1. Analysis of owners' equity of R Ltd

At acquisition

Share capital



Since acquisition


Retained earnings

(16 000 - 10 000 at

h.acquisition - 10 000 profit)

• Current year

Profit for the year

Total

Q Ltd 70 %* NCI

30 % At Since

R

100 000

10 000

R

70 000

7 000

R R

30 000

3 000

110 000

-

77 000

-

(2 800)(2)

14 700

33 000

-

110 000

(4 000)

21 000

77 000 33 000(4)

(1 200)(5)

6 300(1)

127 000 11 900 38 100(3)

* 70 000/100 000 shares x 100% = 70%


138


Dr Cr NCI

R R R



Goodwill NIL

Investment in R Ltd

77 000


33 000 33 000

Elimination of owners' equity of R Ltd at acquisition


(1 200)

Retained earnings

1 200

Recording of non-controlling interests in R Ltd for the period ended 31 December 20.8

31 800(a) Non-controlling interests (SCI) 6 300


6 300 6 300(b)


Retained earnings - beginning of year (R Ltd) 10 000

Property (Q Ltd)

10 000

Elimination of unrealised intragroup profit included in Q Ltd's property

38 100(c)

COMMENT

Note that R Ltd sold the property in a previous financial year, and the transaction therefore has no

effect on the current year's statement of profit or loss and other comprehensive income. However, it

does have an effect on the opening balance of retained earnings in the statement of changes in

equity. As the subsidiary made the profit, we take the R4 000 into account in the analysis of owners'

equity under the "since acquisition to beginning of current year" section (R2 800), and this affects the

opening balance of retained earnings.


139

EXAMPLE 3

Parent sells depreciable asset to subsidiary

The following represent the condensed statements of A Ltd and its subsidiary, B Ltd, at

31 December 20.9:


A Ltd

B Ltd

ASSETS R

R Investment in B Ltd – 16 000 ordinary shares 20 000

–

at fair value (cost price: R20 000) Machinery 24 000

16 000

Cost price 30 000

20 000

Accumulated depreciation (6 000)

(4 000)


19 000

80 000

35 000



15 000

80 000

35 000



A Ltd

B Ltd

R

R Gross profit 20 000

10 000

Depreciation (3 000)

(2 000)



(2 000)




6 000


140


Share capital

Retained earnings

Total Q Ltd

R Ltd

Q Ltd

R Ltd Q Ltd R Ltd

R

R

R

R R R Balance at 1 January 20.9 50 000 20 000

18 000

9 000

68 000 29 000 Changes in equity for 20.9


Profit for the year

12 000

6 000 12 000 6 000


30 000

15 000

80 000 35 000


1. A Ltd acquired its interest in B Ltd on 1 January 20.7, on which date B Ltd's retained

earnings amounted to R5 000. Consider the carrying amount of the assets and liabilities of

B Ltd to be equal to the fair value thereof at the date of acquisition.

2. On 1 January 20.8 B, Ltd purchased all its machinery from A Ltd at cost price plus

33,3%.

3. Both companies write off depreciation on machinery at 10% per annum according to the

straight-line method.

REQUIRED

Draft the consolidated financial statements of the A Ltd Group for the year ended




141

SOLUTION 3

A LTD GROUP


R

ASSETS Non-current assets Machinery [(30 000 + 20 000 − 5 000) − (6 000 + 4 000 − 500 − 500)] 36 000

Current assets (36 000 + 19 000) 55 000

Total assets 91 000



84 000



A LTD GROUP



Notes R

Gross profit (20 000 + 10 000) 30 000 Administrative expenses (3 000 + 2 000 − 500)

(4 500)

Profit before tax 1 25 500 Income tax expense (5 000 + 2 000) (7 000)

PROFIT FOR THE YEAR


-


18 500



17 300 Non-controlling interests(1)/(b)

1 200

18 500


142

A LTD GROUP


R



Expenses

Depreciation (3 000 + 2 000 - 500) 4 500

A LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total

Non-

control-

ling

interests

Total

equity

R R R

R

R


16 700(calc3)

66 700

5 800(a)

72 500




1 200(b)

18 500


34 000

84 000

7 000(c)

91 000

(a) (5 000(4) - 800

(3)

)


At acquisition

Share capital



Since acquisition


Retained earnings

(9 000 - 5 000)

• Current year

Profit for the year

Total

A Ltd 80 %* NCI

20 % At Since

R

20 000

5 000

R

16 000

4 000

R R

4 000

1 000

25 000

-

20 000

-

3 200(2)

4 800

5 000

-

25 000

4 000

6 000

20 000 5 000(4)

800(3)

1 200(1)

35 000 8 000 7 000(5)

*16 000/20 000 shares x 100% = 80%


143

2. Depreciation

R

Profit from sale of machinery (20 000 x 33,3/133,3) 5 000

Depreciation – 20.8 (5 000 x 10%) 500

– 20.9 (5 000 x 10%) 500

Depreciation up to 31 December 20.9 which has to be adjusted 1 000

3. Retained earnings at the beginning of year

Retained earnings of B Ltd(2) 3 200 Retained earnings of A Ltd 13 500

Given 18 000 Profit from sale of machinery (5 000) Depreciation realised in respect of 20.8 500

16 700


144


Dr

Cr

NCI

R

R

R



Goodwill NIL

Investment in B Ltd

20 000


5 000

5 000


Retained earnings 800


800

800




1 200 (b) 1 200

Recording of non-controlling interests in profit for the year

Retained earnings ‒ A Ltd 5 000

Machinery ‒ B Ltd

5 000

Elimination of unrealised intragroup profit included in B Ltd's assets

Accumulated depreciation ‒ B Ltd 1 000

Depreciation ‒ A Ltd

500

Retained earnings ‒ A Ltd

500

Elimination of depreciation associated with the sale of the asset

(c) 7 000

COMMENT

As B Ltd purchased all of its machinery from A Ltd at the beginning of the previous year, we

should debit retained earnings to eliminate the unrealised profit. A Ltd sold the machinery and

made the profit, therefore A Ltd's retained earnings need to decrease (be debited) to eliminate

the unrealised profit. B Ltd bought the machinery; therefore, B Ltd's machinery needs to be

credited to decrease it, as it contains the profit amount that needs to be eliminated.

Therefore:

Dr Cr

R R

Retained earnings – A Ltd 5 000

Machinery – B Ltd 5 000


145

In B Ltd's individual financial records, B Ltd depreciates machinery that still includes the

unrealised profit of R5 000. Therefore, excessive provision is made for depreciation. To

eliminate this, we debit accumulated depreciation. (We normally credit accumulated

depreciation when depreciation occurs.) The amount is calculated as follows:

R5 000 (unrealised profit) x 10% (depreciation rate)

As A Ltd made the profit, and the profit was eliminated in A Ltd's records, everything that affects profit or retained earnings will occur in A Ltd's records. As this machine is used, the profit that was first unrealised, now becomes realised each year through use of the asset, over the remaining useful life of the machine at the rate of depreciation. Therefore, we should credit the retained earnings or profit again since the profit is being realised gradually through the use of the asset. In the current year, we credit A Ltd's depreciation and we credit the retained earnings of A Ltd for the previous years.

Therefore:

Dr Cr

R R

Accumulated depreciation – B Ltd 1 000

Depreciation – A Ltd 500

Retained earnings – A Ltd 500


146

EXAMPLE 4

Subsidiary sells depreciable asset to parent

The following represent the condensed statements of X Ltd and its subsidiary, Y Ltd, at

30 June 20.9:


X Ltd

Y Ltd

R

R

ASSETS

R R

Investment in Y Ltd ‒ 15 000 ordinary shares 19 500

- at fair value (cost price: R19 500) Machinery 8 000

16 000

Cost price 14 000

20 000 Accumulated depreciation (6 000)

(4 000)


19 000

80 000

35 000


Share capital - ordinary shares (50 000/20 000 shares) 50 000


15 000

80 000

35 000



X Ltd

Y Ltd

R

R

Gross profit 20 000

10 000 Depreciation (3 000)

(2 000)



(2 000)


6 000 Other comprehensive income for the year -

-


6 000


147


Share capital

Retained earnings

Total

X Ltd

Y Ltd

X Ltd

Y Ltd

X Ltd

Y Ltd

R

R

R

R

R

R


20 000

18 000 9 000

68 000

29 000



12 000

6 000

12 000

6 000

Balance at 30 June 20.9 50 000

20 000

30 000

15 000 80 000

35 000


1. X Ltd acquired its interest in Y Ltd on 1 January 20.6, on which date Y Ltd's retained

earnings amounted to R6 000. Consider the carrying amount of the assets and liabilities of

Y Ltd to be equal to the fair value thereof at the date of acquisition.

2. On 1 January 20.8, X Ltd purchased all its machinery from Y Ltd at cost price plus 25%.

3. Both companies write off depreciation on machinery at 20% per annum according to the

straight-line method.

REQUIRED

Draft the consolidated financial statements of the X Ltd Group for the year ended




148

SOLUTION 4

X LTD GROUP



Machinery [(14 000 + 20 000 − 2 800) − (6 000 + 4 000 − 840)] 22 040 Current assets (52 500 + 19 000) 71 500

Total assets 93 540



85 280



X LTD GROUP



Notes R

Gross profit (20 000 + 10 000)

30 000 Administrative expenses (3 000 + 2 000 − 560)

(4 440)

Profit before tax 1

25 560 Income tax expense (5 000 + 2 000) (7 000)

PROFIT FOR THE YEAR


-


18 560

Total comprehensive income attributable to: Owners of the parent (18 560 − 1 640)

16 920

Non-controlling interests(1)/(b)

1 640

18 560

X LTD GROUP

NOTES FOR THE YEAR ENDED 30 JUNE 20.9

R



Expenses

Depreciation (3 000 + 2 000 - 560) 4 440


149

X LTD GROUP


30 JUNE 20.9

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R

R R

R

R


18 360*

68 360 6 620

(a)

74 980



Profit for the year

16 920 16 920 1 640

(b)

18 560

Balance at 30 June 20.9 50 000 35 280

85 280 8 260

(c)

93 540

* (18 000 + 360(2)) (a) (6 500(4) + 120(5))

Calculations


At acquisition

Share capital



Since acquisition


Retained earnings

[9 000 - 6 000 - 2 800 (profit)

+ 280 (depreciation)]

• Current year

Profit for the year

(6 000 + 560 depreciation)

Total

X Ltd 75% NCI

25% At Since

R

20 000

6 000

R

15 000

4 500

R R

5 000

1 500

26 000

-

19 500

-

360(2)

4 920

6 500

-

26 000

480

6 560

19 500 6 500(4)

120(5)

1 640(1)

33 040 5 280 8 260(3)

* 15 000/20 000 shares x 100% = 75%


150

2. Depreciation

R

Profit from the sale of machinery (14 000 x 25 ) 2 800

Depreciation – 1/1/20.8 to 30/6/20.8 (6 months) 2 800 x 20% x 6 280

– 1/7/20.8 to 30/6/20.9 (12 months) 2 800 x 20% 560

Depreciation for 18 months up to 30 June 20.9 for which an adjustment has to be made 840


Dr Cr NCI

R R R



Goodwill NIL

Investment in Y Ltd

19 500


6 500 6 500


Retained earnings ‒ Y Ltd 2 800

Machinery ‒ X Ltd

2 800

Elimination of unrealised intragroup profit from sale of machinery

Accumulated depreciation ‒ X Ltd 840

Depreciation ‒ Y Ltd

560

Retained earnings ‒ Y Ltd

280

Elimination of depreciation associated with the sale of the machinery

Retained earnings 120


120 120


Y Ltd for the period ended 30 June 20.8



1 640 1 640(b)

Recording of non-controlling interest in profit after tax

8 260(c)

125

12


151

7.6 EXERCISES

You should have mastered all the different aspects of consolidated annual financial

statements by now. You will find that the individual questions in the exercises are becoming

more integrated in the sense that they include more and more sections of the work we have

covered. It is therefore very important for you to work through each question before

comparing your own solution with our proposed solution.

QUESTION 1

You receive the following trial balances of A Ltd and B Ltd at 30 June 20.8:

A Ltd

B Ltd

R

R

Debits


– Land and buildings 574 000

408 200

– Motor vehicles 155 000

97 000

Investment in B Ltd

– 70 000 ordinary shares at fair value 290 000

- (cost price: R290 000)

– Unsecured loan at fair value 40 000

- Trade and other receivables 86 200

19 400

Inventories 45 000

72 000 Bank -

10 600

Bills receivable 8 000

-

1 198 200

607 200

Credits



137 600

Revaluation of land and buildings -

100 000 Long-term borrowing from A Ltd -

35 000


- Trade and other receivables 41 000

60 600

Accumulated depreciation – motor vehicles 130 000

64 000 Bills payable -

10 000

1 198 200

607 200


1. A Ltd acquired its interest in B Ltd on 1 July 20.5, on which date B Ltd's retained

earnings was R72 000.

2. At the date of acquisition, A Ltd valued the land and buildings belonging to B Ltd, which

had a carrying amount of R308 200, at R368 200. It is company policy to revalue B Ltd's

land and buildings every two years at 30 June. B Ltd has not purchased or sold any land


152

or buildings since 1 July 20.5. Consider the carrying amount of all the other assets and

liabilities of B Ltd to be equal to the fair value thereof at the date of acquisition.

3. A Ltd discounted R2 000 of the bills receivable from B Ltd at the bank before the expiry

date of 6 July 20.8.

4. Since A Ltd acquired its interest in B Ltd, A Ltd purchased all its inventories from B Ltd.

B Ltd supplied the inventories at cost price plus 25% profit. The inventories on hand of A

Ltd and B Ltd amounted to R36 000 and R48 000 respectively on 1 July 20.7.

5. On 29 June 20.8, B Ltd repaid R5 000 of the existing loan from A Ltd. A Ltd received this

repayment on 3 July 20.8.

REQUIRED


30 June 20.8 in accordance with the requirements of International Financial

Reporting Standards. (Ignore taxation on unrealised profits and/or losses.

Comparative figures and notes are not required.)

QUESTION 2

The following represent the condensed statements of profit or loss and other comprehensive

income and the statements of changes in equity of G Ltd and its subsidiary, L Ltd, for the year

ended 28 February 20.8:


THE YEAR ENDED 28 FEBRUARY 20.8

G Ltd

L Ltd

R

R


326 300 Other income 59 750

24 500

- Interest received 35 750

12 500

- Administration fees received 24 000

12 000

Expenses (270 900)

(221 650)

- Depreciation 158 000

134 400

- Staff costs 60 000

48 000

- Interest paid 28 500

24 650

- Auditors' remuneration 12 400

8 600

- Administration fees paid 12 000

6 000



(64 460)




64 690


153

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.8

Share capital Revaluation surplus Retained earnings Total

G Ltd L Ltd G Ltd L Ltd G Ltd L Ltd G Ltd L Ltd R R R R R R R R

Balance at 1 March 20.7

200 000 100 000 80 000 120 000 224 690 44 000 504 690 264 000

Changes in equity for 20.8 Total comprehensive income for the year Profit for the year 132 118 64 690 132 118 64 690

Balance at 28 February 20.8

200 000 100 000 80 000 120 000 356 808 108 690 636 808 328 690

Additional information 1. G Ltd acquired 80% of the voting rights in L Ltd on 1 March 20.5 for R250 000, at which

point L Ltd's owners' interest consisted of the following:

R




Consider the carrying amount of the assets and liabilities of L Ltd to be equal to the fair

value thereof at the date of acquisition.

2. On 1 December 20.6, L Ltd sold a machine with a carrying amount of R200 000 to G Ltd at a

profit of R50 000. It is the policy of the group to depreciate plant and machinery at 20% per

annum on the straight-line method.

3. G Ltd sold some of its inventories to L Ltd at a profit of 50% on cost price. L Ltd had the

following inventories on hand, which they purchased from G Ltd:

R

28 February 20.7 210 000

28 February 20.8 315 000

3. G Ltd lent the sum of R150 000 to L Ltd at an interest rate of 18% per annum, payable

annually in arrears, on 1 August 20.7. G Ltd received and banked the cheque for interest

for the month of February on 28 February 20.8. The interest did not qualify for capitalisation

and was accounted for by both companies.

REQUIRED

Draft the consolidated statement of profit or loss and other comprehensive income

and the consolidated statement of changes in equity for the G Ltd Group for the

year ended 28 February 20.8 in accordance with the requirements of International

Financial Reporting Standards. (Ignore taxation on unrealised profits and/or losses.

Do all calculations to the nearest rand.)


154

SOLUTIONS

QUESTION 1

A LTD GROUP


R

ASSETS Non-current assets Property, plant and equipment [(574 000 + 408 200) + (155 000 + 97 000) − (130 000 + 64 000)] 1 040 200

Goodwill 57 600

1 097 800

Current assets

Inventories (45 000 + 72 000 − 9 000) 108 000 Trade and other receivables (86 200 + 19 400) 105 600 Cash and cash equivalents 10 600

224 200



Share capital 800 000 Other components of equity 28 000 Retained earnings (213 000 + 39 620) 252 620

1 080 620

Non-controlling interests(a) 128 580

Total equity 1 209 200

Current liabilities Trade and other payables [41 000 + 60 600 + (10 000 − 8 000)] 103 600 Bank overdraft (14 200 − 5 000) 9 200


Total equity and liabilities 1 322 000


155

At acquisition

Share capital

Retained earnings

Revaluation surplus

(368 200 - 308 200) Equity represented by

goodwill - parent Consideration and NCI

Since acquisition

To end of current year

Revaluation surplus

(408 200 – 368 200)

Retained earnings

Total

A Ltd 70 %*

NCI

30 % At Since

R 200 000

72 000

60 000

R

140 000

50 400

42 000

R R

60 000

21 600

18 000

332 000

57 600

232 400

57 600

28 000 OCE

39 620 RE

99 600

-

389 600

40 000

56 600

290 000

99 600

12 000

16 980

End of the year

At acquisition

Unrealised profit –

closing inventories

Unrealised profit osin

g‒ opening inventories

‒ realised current

year

137 600

(72 000)

(9000)

(7 200)

7200

486 200

28 000 OCE

39 620 RE

128 580(a)

*70 000/100 000 shares x 100% = 70%

Calculations



156

2. Journal in A Ltd's financial records

Dr Cr NCI

R R R

Cash in transit 5 000 Unsecured loan to B Ltd

5 000

Recording of cash in transit



Retained earnings 72 000 Revaluation surplus 60 000 Goodwill 57 600 Investment in B Ltd

290 000


99 600 99 600


Revaluation surplus – B Ltd 12 000 Non-controlling interests (SFP)

12 000 12 000

Recording of non-controlling interests in revaluation surplus


16 980 16 980

Recording of non-controlling interests in B Ltd for the period ended 30 June 20.8 Bills payable – B Ltd 8 000

Bills receivable – A Ltd

8 000

Elimination of intragroup bills

Gross profit – B Ltd 9 000 Inventories – A Ltd (45 000 x 25)

9 000

Elimination of unrealised profits in closing inventory

Retained earnings – B Ltd (36 000 x 25/125) 7 200 Gross profit/Cost of sales – B Ltd

7 200

Elimination of unrealised profits in opening inventory (This journal is included for the sake of completeness. It has no effect, as only the statement of financial position is required and the net effect on retained earnings is nil.)

Long-term borrowing from A Ltd - B Ltd 35 000 Unsecured loan to B Ltd - A Ltd

35 000


128 580(a)

125


157

COMMENT

A Ltd holds 70 000 shares in B Ltd.

70 000 shares = 70%

100 000 shares

R

Current value of land and buildings 408 200

Valuation value at 1 July 20.5 (368 200)

Valuation of land and buildings since acquisition 40 000

In additional information 4, you were given A Ltd and B Ltd's inventories on hand at 1 July 20.7.

This information is irrelevant, however, since we did not ask you to draft a statement of profit or

loss and other comprehensive income. We included both the journal for opening inventory and

the calculation for R7 200 in the analysis for illustrative purposes only.

QUESTION 2

G LTD GROUP


INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.8

Note R

Gross profit (calculation 1)

775 980 Other income [35 750 + 12 500 − (150 000 x 7 x 18%)

68 500

+ 24 000 + 12 000]

Administrative expenses [158 000 + 134 400 − (50 000 x 20%)

(429 400)

+ 60 000 + 48 000 + 12 400 + 8 600 + 12 000 + 6 000]

Finance cost [28 500 + 24 650 − (150 000 x 7 x 18%)]

(37 400)


(205 872)

PROFIT FOR THE YEAR


-


171 808


Owners of the parent (171 808 − 14 938(b))

156 870 Non-controlling interests (calculation 2)

14 938(b)

171 808

12

12


158

G LTD GROUP

NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.8


R

Profit before tax is arrived at after taking into account the following: Income Interest received [35 750 + 12 500 − (150 000 x 7 x 18%)] 32 500

Administration fees received (24 000 + 12 000) 36 000 Expenses

Depreciation [158 000 + 134 400 − (50 000 x 20%)] 282 400 Staff cost (60 000 + 48 000) 108 000 Auditors' remuneration (12 400 + 8 600) 21 000 Administration fees paid (12 000 + 6 000) 18 000

G LTD GROUP


28 FEBRUARY 20.8

Share capital

Revalua-tion

surplus

Retained earnings

Total

Non-control-

ling interests

Total equity

R

R R R

R R Balance at 1 March 20.7 200 000

80 000

100 690

(2)

380 690

43 300

(a)

423 990



Profit for the year

156 870 156 870

14 938(b)

171 808

Balance at 28 February 20.8 200 000

80 000

257 560

537 560

58 238(c)

595 798

(2) 224 690 – 54 000(d) – 70 000(1)

(a) 56 800(3) - 13 500(4)

Calculations

1. Gross profit

R

G Ltd 484 680 Unrealised profit in opening inventories ( 50 x 210 000) 70 000(1) Unrealised profit in closing inventories ( 50 x 315 000) (105 000) L Ltd 326 300

775 980

12

150

150


159

2. Analysis of owners' equity of L Ltd

At acquisition

Share capital

Retained earnings

Revaluation surplus

Equity represented by goodwill -

parent



Retained earnings

Given (44 000 - 64 000)

Unrealised profit from machinery

Depreciation adjustment

(50 000 x 20% x 3 )

• Current year

Profit for the year

Given

Excess depreciation

(50 000 x 20%)

Total

G Ltd 80 %

NCI

20 % At Since

R

100 000

64 000

120 000

R

80 000

51 200

96 000

R R

20 000

12 800

24 000

284 000

22 800

227 200

22 800

(54 000)(d)

59 752

56 800

-

306 800

(67 500)

(20 000)

(50 000) 2 500

74 690

64 690

10 000

250 000 56 800

(3)

(13 500)(4)

14 938(b)

313 990 5 752 58 238(c)

12


160


Dr Cr NCI

R R R

Share capital 100 000 Retained earnings 64 000 Revaluation surplus 120 000 Goodwill 22 800 Investment in L Ltd

250 000


56 800 56 800


Retained earnings – L Ltd 50 000 Machinery – G Ltd

50 000

Elimination of intragroup profit from sale of machinery

Accumulated depreciation – G Ltd 2 500 Retained earnings – L Ltd

2 500

Elimination of depreciation associated with sale of machinery for the period ended 28 February 20.7

Accumulated depreciation – G Ltd 10 000 Depreciation – L Ltd

10 000

Elimination of depreciation associated with sale of machinery for the current year

Cost of sales – G Ltd 105 000 Inventory – L Ltd

105 000

Elimination of unrealised profits in closing inventories

Retained earnings – G Ltd 70 000 Cost of sales – G Ltd

70 000

Elimination of unrealised profits in opening inventories


(13 500) Retained earnings

13 500

Recording of non-controlling interests in L Ltd for the period ended 28 February 20.7

43 300(a)


14 938 14 938(b)

Recording of non-controlling interests in L Ltd for the current year

Loan from G Ltd – L Ltd 150 000 Loan to L Ltd – G Ltd

150 000


Interest received – G Ltd 15 750 Interest paid – L Ltd

15 750

Elimination of intragroup interest on loan

58 238(c)


161

COMMENT

When we write off depreciation over five years on the straight-line method, it actually means that

depreciation rate is 20%.

100% ÷ 5 = 20% per annum

With intragroup transactions, it is important to identify which entity made the profit. When the

subsidiary sells inventory or machinery to the parent, we account for the unrealised profit by

means of the calculation in the analysis of owners' equity, which will affect retained earnings.

(Remember, the analysis is a calculation to show the allocation of the subsidiary's equity

between the parent and non-controlling shareholders.) However, in this question, the parent sold

inventory to the subsidiary, hence we will adjust the unrealised profit of R70 000 in opening

inventories separately in the opening balance of retained earnings in the statement of changes in

equity.

SELF-ASSESSMENT

After studying this study unit, are you able to

record intragroup bills of exchange and bank overdrafts correctly in the

consolidated annual financial statements of companies?

determine the surplus when revaluing property at the acquisition of an interest

in a subsidiary?

calculate the unrealised profit effect in trading inventories in both the parent and

subsidiary?


draft the consolidated annual financial statements of a group, in accordance with

International Financial Reporting Standards, if a sale of property, plant and

equipment has taken place between companies in the group?

162

FAC2602



TREATMENT OF

DIVIDENDS DURING

CONSOLIDATION

LEARNING UNIT 8


163

LEARNING OUTCOME

Students should be able to account for any ordinary dividend declared or paid by a subsidiary in the

consolidated financial statements of companies in accordance with International Financial Reporting

Standards.

OVERVIEW


8.1 INTRODUCTION ........................................................................................................ 163

8.2 DIVIDENDS PAID OR DECLARED BY THE SUBSIDIARY ..................................... 164

8.3 EXERCISES ............................................................................................................... 189

SOLUTIONS ......................................................................................................................... 193

SELF-ASSESSMENT ........................................................................................................... 201

KEY CONCEPTS

Dividends paid or declared

ASSESSMENT CRITERIA


calculate any ordinary dividend declared or paid by a subsidiary in the


record any ordinary dividend declared or paid by a subsidiary in the



8.1 INTRODUCTION

Dividends paid and/or declared in the consolidated statement of changes in equity will always

be merely the dividends payable by the owners of the parent. We eliminate all dividends paid

and/or declared by the subsidiary. This principle is in accordance with the basic consolidation

principle, namely that we need to eliminate all intragroup transactions before we compile the

consolidated annual financial statements.


164

Non-controlling shareholders share in the subsidiary's profit before the payment of dividends.

Therefore, if a subsidiary pays a dividend, it means that the non-controlling owners have

realised part of their interest in the profit in the form of a dividend. This will reduce the credit

balance of the non-controlling interests in the consolidated statement of financial position, as

the subsidiary now owes the non-controlling owners less.

8.2 DIVIDENDS PAID OR DECLARED BY THE SUBSIDIARY

The following are the five situations that most frequently occur with regard to dividends in the

consolidated annual financial statements:

The subsidiary has made no provision and does not wish to make any provision for

dividends.

The subsidiary has paid a dividend to its owner.

The subsidiary has made provision for the dividend declared, and the parent has made

provision for the appropriate dividend receivable.

The subsidiary has made provision for the dividend declared, but the parent has made no

provision for the appropriate dividend receivable.

The subsidiary must make provision for a dividend declared.

Work carefully through the following five examples that will explain the five situations in more

detail:


165

EXAMPLE 1

The subsidiary paid or declared no dividends

The following represent the abridged financial statements of A Ltd and its subsidiary, B Ltd:


A Ltd

B Ltd

R R


170 000 Investment in B Ltd – 80 000 shares at fair value 88 000 -

(cost price: R88 000) Trade and other receivables 28 000

36 000

Current account with B Ltd 10 000

-

456 000

206 000



38 000

Current account with A Ltd -

10 000 Trade and other payables 136 000

58 000

456 000

206 000



A Ltd

B Ltd


33 000


(10 000)




23 000


166


Share capital

Retained earnings Total A Ltd B Ltd

A Ltd B Ltd

A Ltd

B Ltd

R R

R R

R

R Balance at 1 January 20 .9 200 000 100 000

84 000 15 000

284 000

115 000



Profit for the year

51 000 23 000

51 000

23 000 Dividend paid: ordinary

(15 000) -

(15 000)

-


200 000

100 000

120 000

38 000

320 000

138 000

A Ltd acquired its interest in B Ltd on 1 January 20.7, on which date the retained earnings of

B Ltd amounted to R10 000. Consider the carrying amount of the assets and liabilities of B

Ltd to be equal to the fair value thereof on the date of acquisition.

SOLUTION 1

We will draft the consolidated financial statements as follows:


At acquisition

Share capital



Since acquisition


Retained earnings

(15 000 - 10 000)

• Current year

Profit for the year

Total

A Ltd 80 %* NCI

20 % At Since

R

100 000

10 000

R

80 000

8 000

R R

20 000

2 000

110 000

-

88 000

-

4 000(2)

18 400

22 000

-

110 000

5 000

23 000

88 000 22 000

1 000

4 600(1)

138 000 22 400 27 600(3)

* 80 000/100 000 shares x 100% = 80%


167


Dr Cr NCI

R R R



Goodwill NIL

Investment in B Ltd

88 000


22 000 22 000




1 000 1 000


23 000(a)



4 600 4 600(b)


B Ltd for the current year Current account with A Ltd - B Ltd 10 000

Current account with B Ltd - A Ltd

10 000

Elimination of common items

27 600(c)


168

A LTD GROUP


R







342 400



Current liabilities



A LTD GROUP CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE


R




Total comprehensive income attributable to: Owners of the parent (74 000 − 4 600) 69 400 Non-controlling interests (1)/(b) 4 600

74 000


169

A LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31

DECEMBER 20.9

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R

R R


88 000*

288 000

23 000

(a)

311 000



Profit for the year

69 400 69 400

4 600(b)

74 000 Dividend paid: ordinary (15 000)

(15 000) -

(15 000)


342 400 27 600(c)

370 000

* (84 000 + 4 000(2)

)

EXAMPLE 2

Dividends paid by subsidiary



A Ltd

B Ltd

R R


170 000 Investment in B Ltd – 80 000 shares at fair value 88 000 - (cost price: R88 000) Trade and other receivables 28 000

36 000

Current account with B Ltd 10 000

-

456 000

206 000



26 000

Current account with A Ltd -


70 000

456 000

206 000


170



A Ltd

R B Ltd

R

Gross profit 73 000 33 000 Dividends received 9 600 -

Profit before tax 82 600 33 000 Income tax expense (22 000) (10 000) PROFIT FOR THE YEAR

Other comprehensive income for the year 60 600 -

23 000 -



Share capital Retained earnings Total


R R R R R R

Balance at 1 January 20.9

200 000

100 000

84 000

15 000

284 000

115 000



Profit for the year

60 600 23 000 60 600 23 000 Dividend paid: ordinary

(15 000) (12 000) (15 000) (12 000)


200 000

100 000

129 600

26 000

329 600

126 000


B Ltd amounted to R10 000. Consider the carrying amount of the assets and liabilities of

B Ltd to be equal to the fair value thereof on the date of acquisition.


171

SOLUTION 2


Calculations


At acquisition

Share capital

Retained earnings

Purchase difference

Consideration and NCI Since acquisition • To beginning of current year

Retained earnings

(15 000 -10 000)

• Current year

Profit for the year

Ordinary dividend

Total

A Ltd 80%*

NCI

20 % At Since

R

100 000

10 000

R

80 000

8 000

R R

20 000

2 000

110 000

-

88 000 -

4 000(2)

18 400

(9 600)

22 000 -

110 000

5 000

23 000

(12 000)

88 000 22 000

1 000

4 600(1)

(2 400)

126 000 12 800 25 200(3)

* 80 000/100 000 shares x 100% = 80%


172


Dr Cr NCI

R R R



Goodwill NIL

Investment in B Ltd

88 000


22 000 22 000

Elimination of owners' equity of

B Ltd at acquisition



1 000 1 000


B Ltd for the period ended 31 December 20.8

23 000(a)



4 600 4 600(b)


B Ltd for the current year

Dividends received (A Ltd) 9 600


(2 400)(c)

Dividends paid (B Ltd)

12 000


Current account with A Ltd (B Ltd) 10 000

Current account with B Ltd (A Ltd)

10 000


25 200(d)


173

A LTD GROUP


R R







342 400

Non-controlling interests(3)/(d) 25 200


Current liabilities



A LTD GROUP



R





74 000


174

A LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R R R


88 000*

288 000

23 000

(a)

311 000




4 600(b)


(15 000)

(15 000) (2 400)

(c)

(17 400)


142 400

342 400 25 200(d)

367 600

* (84 000 + 4 000(2)

)

COMMENT

We always eliminate the dividends paid by the subsidiary, as the transaction takes place within the

group. Dividends paid normally have a debit balance, while dividends received have a credit balance

as it is an income. To eliminate the dividends, we debit the dividends amounting to R9 600 received

by A Ltd and credit the dividends amounting to R12 000 paid by B Ltd. (That is why the statement of

profit or loss and other comprehensive income no longer includes dividends received.) The balancing

figure in the journal is a debit balance of R2 400. We debit non-controlling interests, thereby reducing

the balance in the statement of financial position as the non-controlling owners realised a portion of

their share in the profit in the form of a dividend received.

Dr Cr

R R

Dividends received – A Ltd R9 600

Non-controlling interests R2 400

Dividends paid – B Ltd R12 000


175

EXAMPLE 3

Parent made provision for dividend declared by subsidiary.



A Ltd

B Ltd

R R


170 000 Investment in B Ltd – 80 000 shares at fair value

(cost price: R88 000) 88 000 - Trade and other receivables 28 000

36 000

Current account: B Ltd 19 600

-

465 600

206 000



26 000

Current account: A Ltd -


58 000

Dividends payable -

12 000

465 600

206 000



A Ltd

B Ltd


33 000


(10 000)




23 000


Share capital

Retained earnings Total A Ltd B Ltd

A Ltd B Ltd

A Ltd

B Ltd

R R

R R

R

R Balance at 1 January 20.9 200 000 100 000

84 000 15 000

284 000

115 000



Profit for the year

60 600 23 000

60 600

23 000 Dividends declared and paid: ordinary

(15 000)

(12 000)

(15 000)

(12 000)


200 000

100 000

129 600

26 000

329 600

126 000


176




SOLUTION 3


Calculations


At acquisition

Share capital




Retained earnings

(15 000 - 10 000)

• Current year

Profit for the year

Ordinary dividend

Total

A Ltd 80 %* NCI

20 % At Since

R

100 000

10 000

R

80 000

8 000

R R

20 000

2 000

110 000

-

88 000

-

4 000(2)

18 400

(9 600)

22 000

-

110 000

5 000

23 000

(12 000)

88 000 22 000

1 000

4 600(1)

(2 400)

126 000 12 800 25 200(3)

* 80 000/100 000 shares x 100% = 80%


177


Dr Cr NCI

R R R

Share capital 100 000 Retained earnings 10 000 Goodwill NIL Investment in B Ltd

88 000


22 000 22 000



1 000 1 000


23 000(a)


4 600 4 600(b)

Recording of non-controlling interests in B Ltd for the current year

Dividend received (A Ltd) 9 600


(2 400)(c)

Dividend declared (B Ltd)

12 000


Dividends payable – B Ltd 9 600 Current account: A Ltd – B Ltd

9 600

Transfer of relevant share of dividend due by B Ltd to the current account of A Ltd

Current account: A Ltd – B Ltd 19 600

Current account: B Ltd – A Ltd

19 600


25 200(d)


178

A LTD GROUP


R







342 400



Current liabilities Dividends payable (12 000 − 9 600) 2 400 Trade and other payables (136 000 + 58 000) 194 000



A LTD GROUP



R

Profit before tax (82 600 − 9 600 + 33 000) 106 000 Income tax expense (22 000 + 10 000) (32 000)




Owners of the parent (74 000 − 4 600) 69 400 Non-controlling interests(1)/(b) 4 600

74 000


179

A LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R R R


88 000*

288 000

23 000

(a)

311 000




4 600(b)

74 000 Dividend declared and paid: ordinary

(15 000)

(15 000) (2 400)(c)

(17 400)


142 400

342 400 25 200(d)

367 600

* (84 000 + 4 000(2))

COMMENT

In this example, the subsidiary declared a dividend that it has not paid yet. In the subsidiary's

financial records, the dividend payable is a liability of R12 000. For the parent, it is a receivable

asset of R9 600.

We should eliminate the current accounts in the group (what they owe each other) against

each other, but we can only do this once the accounts are equal. R9 600 of the R12 000

dividends payable by B Ltd are payable to A Ltd. We transfer the liability of R9 600 from

dividends payable to the current account: A Ltd, as both represent what is payable to A Ltd.

Hence:

Dr Cr

R R

Dividends payable – B Ltd R9 600

Current account: A Ltd – B Ltd R9 600

After making the entry above, the current account in B Ltd is also equal to R19 600 (R10 000 +

R9 600), and we can eliminate the two accounts against each other.

Hence:

Dr Cr

R R

Current account: A Ltd – B Ltd R19 600

Current account: B Ltd – A Ltd R19 600


180

EXAMPLE 4

Parent made no provision for dividend.



A Ltd

B Ltd

ASSETS R R Property, plant and equipment 330 000



36 000


-

456 000

206 000



26 000



58 000

Dividends payable -

12 000

456 000

206 000



A Ltd

B Ltd


33 000


(10 000)




23 000


Share capital

Retained earnings Total A Ltd

B Ltd

A Ltd

B Ltd

A Ltd

B Ltd

R

R

R

R

R


100 000

84 000

15 000

284 000

115 000



51 000

23 000

51 000

23 000

Dividend declared: ordinary

(15 000) (12 000)

(15 000)

(12 000)


120 000 26 000

320 000

126 000


181




SOLUTION 4


Calculations


At acquisition

Share capital



Since acquisition


Retained earnings

(15 000 - 10 000)

• Current year

Profit for the year

Ordinary dividend

Total

A Ltd 80 %* NCI

20 % At Since

R

100 000

10 000

R

80 000

8 000

R R

20 000

2 000

110 000

-

88 000

-

4 000(2)

18 400

(9 600)

22 000

-

110 000

5 000

23 000

(12 000)

88 000 22 000

1 000

4 600(1)

(2 400)

126 000 12 800 25 200(3)

* 80 000/100 000 shares x 100% = 80%

2. Entry in the financial records of A Ltd

Dr Cr NCI

R R R


Dividend received

9 600

Recording of dividend receivable


182


Dr Cr NCI

R R R



Goodwill NIL

Investment in B Ltd

88 000


22 000 22 000




1 000 1 000


23 000(a)


4 600 4 600(b)


Dividend received (A Ltd) 9 600 Non-controlling interests 2 400

(2 400)(c) Dividend paid (B Ltd)

12 000


Dividends payable (B Ltd) 9 600 Current account: A Ltd (B Ltd)

9 600

Transfer of appropriate share of dividend due by B Ltd to the current account of A Ltd

Current account: A Ltd (B Ltd) 19 600

Current account: B Ltd (A Ltd)

19 600


25 200(d)


183

A LTD GROUP



Property, plant and equipment (330 000 + 170 000) 500 000 Current assets






342 400



Current liabilities

Dividends payable (12 000 − 9 600) 2 400 Trade and other payables (136 000 + 58 000) 194 000



A LTD GROUP



R





74 000


184

A LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R R R


88 000*

288 000

23 000

(a)

311 000




4 600(b)

74 000 Dividend declared: ordinary

(15 000)

(15 000) (2 400)

(c)

(17 400)


200 000

142 400

342 400 25 200(d)

367 600

* (84 000 + 4 000(2))

COMMENT

The only difference between this example and example three, is in this example the parent

has not accounted for the dividend receivable of R9 600 yet. That is why there is first an entry

in A Ltd's individual records, to account for this, before we make the consolidation journal

entries.

We do not adjust the profit before tax with the R9 600 as in example three. There are journals

where dividends receivable are debited and credited with R9 600 in this example. These

cancel out each other.


185

EXAMPLE 5

Subsidiary made no provision for dividend.



A Ltd

B Ltd

ASSETS R R Property, plant and equipment 330 000



36 000


-

456 000

206 000



38 000



58 000

456 000

206 000



A Ltd

B Ltd


33 000


(10 000)




23 000


186


Share capital

Retained earnings Total A Ltd

B Ltd

A Ltd

B Ltd

A Ltd

B Ltd

R

R

R

R

R


100 000

84 000

15 000

284 000

115 000



51 000

23 000

51 000

23 000


(15 000)

-

(15 000)

-


200 000 100 000

120 000

38 000

320 000

138 000




On 31 December 20.9, B Ltd decided to declare a dividend of R12 000.

SOLUTION 5



At acquisition

Share capital


Consideration and NCI Since acquisition • To beginning of current year


• Current year

Profit for the year

Ordinary dividend

Total

A Ltd 80 %*

NCI

20 % At Since

R

100 000

10 000

R

80 000

8 000

R R

20 000

2 000

110 000

-

88 000

-

4 000(2)

18 400 (9 600)

22 000

-

110 000

5 000

23 000

(12 000)

88 000 22 000

1 000

4 600(1)

(2 400)(4)

126 000 12 800 25 200(3)

* 80 000/100 000 shares x 100% = 80%


187

Because B Ltd has not yet made provision for the dividend and A Ltd has not yet reacted to it,

we only provide for the dividend owing to the non-controlling owners, as we would have

eliminated the dividends between A Ltd and B Ltd anyway.


Dr Cr NCI

R R R

Share capital 100 000 Retained earnings 10 000 Goodwill NIL Investment in B Ltd

88 000


22 000 22 000



1 000 1 000


23 000(a)


4 600 4 600(b)



(2 400)(c)

Dividends payable

2 400

Provision for dividend payable to non-controlling owners

Current account: A Ltd (B Ltd) 10 000 Current account: B Ltd (A Ltd)

10 000


25 200(d)


188

A LTD GROUP


R







342 400



Current liabilities

Dividends payable(4) 2 400 Trade and other payables (136 000 + 58 000) 194 000



A LTD GROUP



R





74 000


189

A LTD GROUP


31 DECEMBER 20.9

Share capital

Retained earnings

Total


Total equity

R

R R


88 000*

288 000

23 000

(a)

311 000

Changes in equity for 20 .9


Profit for the year

69 400

69 400

4 600(b)

74 000 Dividend paid: ordinary (15 000)

(15 000) (2 400)

(c)

(17 400)


200 000 142 400

342 400 25 200(d)

367 600

* (84 000 + 4 000(2)

)

8.3 EXERCISES

Answer the following two questions for further practice:

QUESTION 1

The following balances were obtained from the books of A Ltd and its subsidiary, B Ltd, for

the year ended 28 February 20.4:

A Ltd B Ltd

R R

Sales 600 000 400 000 Cost of sales 340 000 220 000 Repairs and maintenance 35 000 30 000 Depreciation – equipment 18 000 16 000 Dividends received 16 000 - Interest received on loan to B Ltd 10 000 - Loan from A Ltd - 15 000 Loan to B Ltd 20 000 - Staff cost 36 000 24 000 Interest paid 4 000 20 000 Auditors' remuneration 8 000 7 000 Taxation 67 600 32 800 Dividends paid 10 000 20 000 Retained earnings – 1 March 20.3 45 000 59 000 Included in cost of sales:

- Inventories 1 March 20.3 18 000 18 000

- Inventories 28 February 20.4 15 000 20 000



190


1. On 1 March 20.2, when B Ltd was incorporated, A Ltd acquired 80% of the shares and

voting rights in B Ltd. No goodwill was payable by A Ltd, and at the date of acquisition,

the carrying amount of the assets and liabilities were equal to the fair value thereof.

2. Since incorporation, A Ltd has bought all its inventories from B Ltd at cost plus 33,3%.

On 28 February 20.4 inventories to the value of R5 000 were still in transit. B Ltd sold

inventories of R317 000 to A Ltd during the year.

3. On 1 March 20.2, B Ltd sold equipment to A Ltd at a profit of R20 000. Both companies

depreciate equipment at 20% per annum on the straight-line method.

4. On 28 February 20.4, A Ltd sold property to B Ltd at a profit of R20 000. This profit was

included in the sales of the company.

REQUIRED


income and the consolidated statement of changes in equity of the A Ltd Group

for the year ended 28 February 20.4 in compliance with the requirements of

International Financial Reporting Standards. Show all your calculations and

ignore taxation on unrealised profits and/or losses as well as capital gains tax.


191

QUESTION 2

The following represent the condensed statements of profit or loss and other comprehensive

income and statements of changes in equity of X Ltd and its subsidiary, Y Ltd, for the year

ended 30 June 20.3:



X Ltd Y Ltd

R R

Gross profit 465 000 329 000 Other income 35 000 1 000


Interest received – trade receivables 5 000 1 000

500 000 330 000

Expenses (200 000) (150 000)


Staff cost 80 000 50 000

Profit before tax 300 000 180 000 Income tax expense (120 000) (70 000)

PROFIT FOR THE YEAR 180 000 110 000 Other comprehensive income for the year - -



Share capital

Retained earnings

Total

X Ltd

Y Ltd

X Ltd

Y Ltd

X Ltd

Y Ltd

R

R

R

R

R

R


200 000

150 000

160 000

450 000



180 000

110 000

180 000

110 000


(50 000)

(20 000)

(50 0000)

(20 000)

Balance at 30 June 20.3 300 000 200 000

280 000

250 000

580 000

450 000


192


1. On 1 July 20.0, X Ltd acquired 70% of the voting rights in Y Ltd for R155 000, on

which date Y Ltd's owners' equity consisted of the following:

R



Consider the carrying amount of the assets and liabilities of Y Ltd to be equal to the fair

value thereof on the date of acquisition. It is the policy of the group to show goodwill at

cost price in the financial statements.

2. Y Ltd manufactures the same kind of heavy machinery that X Ltd uses. On 1 July 20.1,

iupkjj.Y Ltd sold a machine, which had cost R150 000 to manufacture to X Ltd for R200 000.

3. The records with regard to X Ltd's machinery contain the following:

R

Machinery purchased – 1 July 20.0 400 000

Depreciation – 30 June 20.1 (80 000)

320 000

Purchase of new machinery from Y Ltd – 1 July 20.1 200 000 Depreciation – 30 June 20.2 (120 000) – 30 June 20.3 (120 000)

Machinery at carrying amount – 30 June 20.3 280 000

Depreciation is calculated at 20% per annum on the straight-line method.

4. X Ltd sells some of its inventories to Y Ltd at a profit of 20% on the cost price. Y Ltd

had the following inventories on hand, which they purchased from X Ltd:

R

30 June 20.2 36 000

30 June 20.3 72 000

REQUIRED


income and the consolidated statement of changes in equity of the X Ltd Group

for the year ended 30 June 20.3 in compliance with the requirements of

International Financial Reporting Standards. Show all your calculations. Ignore

taxation on unrealised profits and/or losses as well as capital gains tax.


193

SOLUTIONS

QUESTION 1

A LTD GROUP



Note R

Revenue (600 000 + 400 000 − 20 000 − 317 000)

663 000 Cost of sales (340 000 + 220 000 − 317 000 − 4 500 + 5 000)

(243 500)

Gross profit

419 500 Administrative expenses [(18 000 + 16 000 − 4 000) + 8 000

(170 000)

+ 7 000 + 36 000 + 24 000 + 35 000 + 30 000]

Finance cost (4 000 + 20 000 − 10 000)

(14 000)


(100 400)

PROFIT FOR THE YEAR


-


135 100



124 360 Non-controlling interests (calculation 1)(b)

10 740

135 100


194

A LTD GROUP

NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.4


R


Expenses

Auditors' remuneration (8 000 + 7 000) 15 000 Depreciation (18 000 + 16 000 − 4 000) 30 000 Staff cost (36 000 + 24 000) 60 000

A LTD GROUP


28 FEBRUARY 20.4

Share capital

Retained earnings

Total


Total equity

R R R R R Balance at 1 March 20.3 100 000

75 800#

175 800

23 700

(a)

199 500



Profit for the year 124 360 124 360 10 740

(b) 135 100


(10 000)

(10 000)

(4 000)(c)

(14 000)


190 160

290 160

30 440(d)

320 600

# 45 000 + 30 800(e)

(a) 16 000(a)

+ 7 700(a)


195

Calculations


At acquisition

Share capital

Purchase difference


Since acquisition


Retained earnings

Given

At acquisition

Unrealised profit in inventory

(18 000 x 33 )

Unrealised profit on sale of

equipment

Depreciation on unrealised profit

(20 000 x 20

)

• Current year

Profit for the year

Profit after tax

Unrealised profit in opening

inventory

Unrealised profit in closing inven-

tory (15 000 + 5 000) x 33

Depreciation on unrealised

profit

Dividend paid

Total

A Ltd 80 % NCI

20 % At Since

R

80 000

R

64 000

R R

16 000

80 000

-

64 000

-

30 800(e)

42 960

(16 000)

16 000

-

80 000

38 500

59 000

-

59 000

(4 500)

(20 000)

4 000

53 700

64 000 16 000(a)

7 700(a)

10 740(b)

(4 000)(c)

50 200(1)

4 500

(5 000)

4 000

(20 000)

152 200 57 760 30 440(d)

(1)

400 000 - 220 000 - 30 000 - 16 000 - 24 000 - 20 000 - 7 000 - 32 800

100

133 1

3

1

3

1

3

133 1

3


196

2. Entry in the financial records of A Ltd

Dr Cr

R R

Inventory 5 000 Loan to B Ltd

5 000

Recording of inventory in transit


Dr Cr NCI

R R R

Sales – B Ltd 317 000 Cost of sales – A Ltd

317 000


Cost of sales – B Ltd 5 000 Inventory – A Ltd

5 000

Elimination of unrealised profit in closing inventory of A Ltd

Retained earnings – B Ltd 4 500 Cost of sales – B Ltd

4 500

Elimination of unrealised profits in opening inventory of A Ltd

Retained earnings – B Ltd 20 000 Equipment – A Ltd

20 000

Elimination of unrealised profits on sale of equipment

Accumulated depreciation – A Ltd 4 000 Retained earnings – B Ltd

4 000

Elimination of depreciation associated with sale of equipment for the period ended 28 February 20.3

Accumulated depreciation – A Ltd 4 000 Depreciation – B Ltd

4 000

Elimination of depreciation associated with sale of equipment for the year ended 28 February 20.4

Sales – A Ltd 20 000 Property – B Ltd 20 000 Elimination of unrealised profits on sale of property

Interest received – A Ltd 10 000 Interest paid – B Ltd

10 000

Elimination of intragroup interests on loan

Share capital 80 000 Investment in B Ltd

64 000


16 000 16 000



7 700 7 700

Recording of non-controlling interests in B Ltd for the period ended 28 February 20.3

23 700

(a)


10 740 10 740

(b)



197

Dr Cr NCI R R R Dividend received – A Ltd

16 000


(4 000)(c)

Dividend paid – B Ltd

20 000

Elimination of intragroup dividends and recording of non-controlling interests in the dividend

Loan from A Ltd – B Ltd 15 000 Loan to B Ltd – A Ltd

15 000

Elimination of intragroup balances on loan accounts

30 440

(d)

QUESTION 2

X LTD GROUP



Note R

Gross profit [465 000 + 329 000 + (20/120 x 36 000) −

788 000 (20/120 x 72 000)]

Other income [5 000 + 1 000 + 30 000 − (20 000 x 70%)]

22 000 Administrative expenses [120 000 + 100 000 −

(340 000)

(50 000 x 20%) + 80 000 + 50 000]


(190 000)

PROFIT FOR THE YEAR


-


280 000



244 000 Non-controlling interests (calculation 1)(b)

36 000

280 000

X LTD GROUP

NOTES FOR THE YEAR ENDED 30 JUNE 20.3


R

Profit before tax is calculated after taking into account the following: Income Dividends received (30 000 - 14 000(f)) 16 000

Expenses Depreciation (120 000 + 100 000 - 10 000) 210 000

Staff costs (80 000 + 50 000) 130 000


198

X LTD GROUP


30 JUNE 20.3

Share capital

Retained earnings

Total


Total equity

R

R

R

R

R Balance at 1 July 20.2 300 000

214 000#

514 000

96 000

(a)

610 000



Profit for the year

244 000

244 000

36 000(b)


(50 000)

(50 000)

(6 000)

(c)

(56 000)

Balance at 30 June 20 .3 300 000 408 000 708 000 126 000(d)

834 000

# 150 000 - 6 000 (unrealised profit in opening inventory) + 70 000(e)

(a) 66 000(1) + 30 000(2)


199

Calculations


At acquisition

Share capital

Retained earnings

Equity represented by

jjjjjgoodwill - parent


Since acquisition

• To beginning of current

year

Retained earnings

Given

At acquisition

Unrealised profit on sale

of machinery (200 000 -

150 000)

Depreciation on unrealised

llprofit (50 000 x 20 )

• Current year

Profit for the year

Profit after tax

Depreciation on

unrealised profit

Dividend paid

Total

X Ltd 70 % NCI

30 % At Since

R

200 000

20 000

R

140 000

14 000

R R

60 000

6 000

220 000

1 000

154 000

1 000

70 000(e)

(84 000)

(14 000)(f)

66 000

-

221 000

100 000

155 000 66 000(1)

30 000(2)

36 000(b)

(6 000)(c)

160 000

(20 000)

140 000

(50 000)

10 000

120 000

110 000

10 000

(20 000)

421 000 140 000 126 000(d)

100


200


Dr Cr NCI

R R R

Share capital 200 000 Retained earnings 20 000 Goodwill 1 000 Investment in Y Ltd

155 000


66 000 66 000


Retained earnings – Y Ltd 50 000 Machinery – X Ltd

50 000

Elimination of intragroup profits on sale of machinery

Accumulated depreciation – X Ltd 10 000 Retained earnings – Y Ltd

10 000

Elimination of depreciation associated with sale of machinery for the period ended 30 June 20.2

Accumulated depreciation – X Ltd 10 000 Depreciation – Y Ltd

10 000

Elimination of depreciation associated with sale of the machinery for the current year

Cost of sales – X Ltd 12 000 Inventory – Y Ltd

12 000

Elimination of unrealised profits in closing inventories

Retained earnings – X Ltd 6 000 Cost of sales – X Ltd

6 000

Elimination of unrealised profits in opening inventories


30 000 30 000

Recording of non-controlling interests in Y Ltd for the period ended 30 June 20.2



36 000 36 000(b)

Recording of non-controlling interests in Y Ltd for the year ended 30 June 20.3

Dividends received – X Ltd 14 000


(6 000)(c)

Dividends paid – Y Ltd

20 000

Elimination of intragroup dividends and recording of non-controlling interests in the dividends

126 000(d)


201

SELF-ASSESSMENT


calculate any ordinary dividend declared or paid by a subsidiary in the


record any ordinary dividend declared or paid by a subsidiary in the




FAC2602



TREATMENT OF

PREFERENCE SHARES

DURING CONSOLIDATION

LEARNING UNIT 9


203

LEARNING OUTCOME

Students should be able to account for any preference dividends in the consolidated annual financial

statements of companies in accordance with International Financial Reporting Standards (IFRS).

OVERVIEW


9.1 INTRODUCTION ........................................................................................................ 204

9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL INCLUDES

PREFERENCE SHARES ........................................................................................ 205

9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY ..................... 212

9.4 EXERCISES ............................................................................................................... 240

SELF-ASSESSMENT ............................................................................................................. 60

KEY CONCEPTS

Preferential rights

Non-cumulative preference shares

Cumulative preference shares

Participating and non-participating

Arrear preference dividends

ASSESSMENT CRITERIA


calculate the parent's interest percentage in the preference share capital of the

subsidiary

record any preference dividends paid or declared by a subsidiary in the

consolidated annual financial statements in accordance with International

Financial Reporting Standards

record arrear cumulative preference dividends payable or paid by a subsidiary

in the consolidated annual financial statements in accordance with International

Financial Reporting Standards



204

9.1 INTRODUCTION

In learning unit 8, we discussed the treatment of dividends where the subsidiary's share

capital consists of ordinary share capital only. In this learning unit, we deal with the treatment

of preference share capital and preference dividends. Preference shares carry a fixed

dividend percentage. When adequate profits are available, these shares have a preference

right to dividends.

Preference shares can only exist when another class of shares (generally ordinary shares)

exists so the preference shares can enjoy certain preferential rights in comparison to the

other shares. We can summarise these preferential rights as follows:

For the purposes of the following discussion, the preferential rights in respect of

dividends are probably the most important right attached to preference shares. This right

is normally expressed as a percentage of the value of the share, for example 9%

preference shares with an issued value of R400 000 would receive a dividend of R36 000

(9% x R400 000).

If the subsidiary is liquidated, the preference owners will receive a maximum amount of

R400 000.

Where a subsidiary has issued preference shares, these shares have a preferential claim

to the profit of the company, whilst the balance is attributable to the ordinary owners. As in

the case of ordinary shares, preference owners cannot legally lay claim to their share of

the profit before a company has declared a preference dividend. If the preference

shares are cumulative, ordinary owners may receive no dividend in the current

reporting period, unless a preference dividend is declared.

We can classify preference shares as follows with regard to dividends:

Non-cumulative

These owners are not entitled to payment of arrear dividends.

Cumulative

If no dividend is declared in a specific reporting period, there is a cumulative preferential

right, which is a right to have preference to the arrear and current preference dividends

before a dividend may be declared on any other class of shares on the first subsequent

dividend declaration. Even if the company does not declare a formal dividend to the

preference owners, a dividend will accrue and become payable based on the terms of the

preference shares.

Normally, cumulative preferential rights to dividends are normally specifically prescribed in

the designation of the shares, for example 8% cumulative preference shares. Where it is

not specifically stipulated, it is assumed that preference shares are cumulative.

Participating preference shares share in the profits of a company after the payment of the

preference dividend, while convertible preference shares are convertible to ordinary

shares at a specific date in future. Although a company may not buy its own shares, it


205

may buy back (redeem) redeemable preference shares at a predetermined price after a

specific period.

Where preference shares are held in a subsidiary, this affects the calculation of the non-

controlling interests in the consolidated statement of profit or loss and other

comprehensive income and the statement of financial position. By the time you have

completed this learning unit, you should have a clear understanding of this concept.

Liability versus equity

When the issuer of preference shares has a contractual obligation to deliver cash or a

financial instrument to the holder of the preference shares, or does not have an unconditional

right to avoid delivering cash or a financial asset to settle the contractual obligation, the

obligation meets the definition of a financial liability (IAS 32.19). Likewise, if the issuer of

preference shares does have an unconditional right to avoid delivering cash or a financial

asset to settle the contractual obligation, the obligation meets the definition of an equity

instrument. An equity instrument is any contract that evidences a residual interest in the

assets of an entity after deducting the liabilities.

In FAC2602 we do not classify financial instruments. It is therefore assumed that preference

shares that provide for the mandatory redemption by the issuer of the shares, for a fixed

amount at a fixed future date, and where the payment of the dividends are compulsory are

classified as financial liabilities. Such an investment is not consolidated. In all other instances

preference shares are assumed to be non-redeemable and therefore regarded as equity

instruments. In FAC2602 we will assume all preference shares are classified as equity and

hence consolidate it when applicable.

9.2 CONSOLIDATION PROCEDURES IF THE SUBSIDIARY'S CAPITAL INCLUDES PREFERENCE SHARES

Since the parent's percentage interest in the ordinary share capital of the subsidiary is not

necessarily the same as its percentage interest in the preference share capital, we

recommend that you should always draw up two separate analyses of owners equities,

namely one for ordinary share capital and one for preference share capital.

Carefully work through the following example:


206

EXAMPLE

The following are the condensed financial statements of P Ltd and its subsidiary, S Ltd:


P Ltd S Ltd

R R

ASSETS


Land and buildings at cost price 100 000 80 000

Plant at carrying amount 40 000 20 000

Investment in S Ltd at fair value

75 000 ordinary shares (cost price: R120 000) 120 000 -

20 000 preference shares (cost price: R25 000) 25 000 - Current account in S Ltd 8 000 - Inventories 25 000 60 000 Trade and other receivables 20 000 48 000

338 000 208 000


Share capital – ordinary shares (200 000/100 000 shares) 200 000 100 000 Share capital – 10% preference shares (50 000 shares) - 50 000 Retained earnings 54 000 37 000 Current account in P Ltd - 5 000 Current liabilities 84 000 16 000

338 000 208 000



P Ltd

S Ltd

R R

Gross profit 60 500 58 000 Income received from S Ltd

Ordinary dividend 7 500 -

Preference dividend 2 000

-



(20 000)




38 000


207


Ordinary share capital

10% preference share capital

Retained earnings

Total

P Ltd

S Ltd

P Ltd

S Ltd

P Ltd

S Ltd

P Ltd

S Ltd

R

R

R

R

R

R

R


100 000

-

50 000

24 000

14 000

224 000

164 000



45 000

38 000

45 000

38 000

Dividend paid: preference

-

(5 000) -

(5 000)


(15 000)

(10 000)

(15 000)

(10 000)


200 000

100 000

-

50 000

54 000

37 000

254 000

187 000


1. P Ltd acquired its shareholding in S Ltd on 1 January 20.5, on which date S Ltd's retained

earnings was R9 000.

Consider the carrying amount of the assets and liabilities of S Ltd to be equal to the fair

value thereof at the date of acquisition, except for the land and buildings of S Ltd, which

are valued at R120 000. No entries have been made in the books of the subsidiary. No

purchases or sales of land and buildings have taken place subsequently.

2. Since 1 April 20.7, S Ltd has been buying some of its inventories from P Ltd at cost price

plus 25%. On 31 December 20.7, the inventories of S Ltd included inventories to the value

of R10 000 that had been purchased from P Ltd. Inventories that P Ltd invoiced at R3 000

were in transit to S Ltd at 31 December 20.7.

REQUIRED

Draft the consolidated annual financial statements of the P Ltd Group for the year


Financial Reporting Standards. Ignore taxation on unrealised profits and/or losses.


208

SOLUTION

P LTD GROUP


ASSETS R

Non-current assets

Property, plant and equipment [100 000 + 80 000 + 280 000 40 000 (revaluation) + 40 000 + 20 000]

Goodwill (8 250(4) + 5 000(4)) 13 250

293 250

Current assets

Inventories [25 000 + 60 000 + 3 000 (in transit) − (13 000 x 25)] 85 400 Trade and other receivables (20 000 + 48 000) 68 000

153 400



Share capital 200 000 Retained earnings (5) 72 400

272 400

Non-controlling interests (44 250(3) + 30 000(3)) (d) 74 250






R

Profit before tax (calculation 2) 115 900 Income tax expense (25 000 + 20 000) (45 000)



Total comprehensive income attributable to: Owners of the parent (70 900 − 11 250) 59 650 Non-controlling interest (9 500 − 1 250 + 3 000)(1)/(b) 11 250

70 900

125


209

P LTD GROUP


31 DECEMBER 20.7

Share capital

Retained earnings

Total


Total

equity

R R R R R Balance at 1 January 20.7 200 000 27 750* 227 750 68 500

(a) 296 250



Profit for the year 59 650 59 650 11 250(b)

70 900 Dividend paid: ordinary (15 000) (15 000) (5 500)

(c) (20 500)


200 000

72 400

272 400

74 250(d)

346 650

* (24 000 + 3 750(2))

Calculations 1. Analysis of owners' equity of S Ltd

Ordinary shares

At acquisition

Share capital

Retained earnings

Revaluation surplus

(120 000 - 80 000)


parent


Since acquisition


Retained earnings

(14 000 - 9 000)

• Current year

Profit for the year

Preference dividend*

Ordinary dividend

Total

P Ltd 75%* NCI

25% At Since

R

100 000

9 000

40 000

R

75 000

6 750

30 000

R R

25 000

2 250

10 000

149 000

8 250

111 750

8 250(4)

3 750(2)

28 500

(3 750)

(7 500)

37 250

-

157 250

5 000

38 000

(5 000)

(10 000)

120 000 37 250

1 250

9 500(1)

(1 250)(1)

(2 500)

185 250 21 000 44 250(3)

* Refer to the comments on page 167 for an explanation.

* 75 000/100 000 shares x 100% = 75%


210

Preference shares

At acquisition

Share capital

Equity attributable to goodwill -

parent


Since acquisition

• Current year

Attributable profit*

Preference dividend

Total

P Ltd 40 %* NCI

60 % At Since

R

50 000

5 000

R

20 000

5 000(4)

R

2 000

(2 000)

R

30 000

-

55 000

5 000

(5 000)

25 000 30 000

3 000(1)

(3 000)

55 000 - 30 000(3)

* Refer to the comments on page 167 for an explanation.

* 20 000/50 000 shares x 100% = 40%


R

P Ltd 70 000 S Ltd 58 000 Ordinary dividend received from S Ltd (7 500) Preference dividend received from S Ltd (2 000) Unrealised profit in closing inventories (2 600) [(10 000 + 3 000) x 25 ]

115 900

125


211

3. Entries in the financial records of S Ltd

Dr Cr NCI

R R R

Land and buildings 40 000 Revaluation surplus

40 000

Valuation of land and buildings at acquisition

Inventory 3 000 Current account in P Ltd 3 000 Inventory in transit at 31 December 20.7


Share capital 100 000 Retained earnings 9 000 Revaluation surplus 40 000 Goodwill 8 250 Investment in B Ltd

120 000


37 250 37 250 Elimination of owners' equity of S Ltd at acquisition


1 250 1 250

Recording of non-controlling interests in S Ltd for the period ended 31 December 20.6

Preference share capital 50 000

Goodwill 5 000 Investment in S Ltd

25 000


30 000 30 000 Elimination of owners' equity of S Ltd at acquisition

68 500(a) Non-controlling interests (SCI) [(38 000 - 5 000) x 25%] 8 250


8 250 8 250(b) Recording of non-controlling interests in profit after tax of S Ltd, after provision for preference dividends for current year ended 31 December 20.7

Dividends received – P Ltd 7 500 Non-controlling interests (SFP) 2 500

(2 500)(c)

Dividend paid – S Ltd

10 000 Elimination of intragroup dividend and recording of non-

controlling interests in the dividend


3 000 3 000(b)

Recording of non-controlling interests in profit after tax for the current year ended 31 December 20.7 in S Ltd

Dividends received (preference shares) – P Ltd 2 000 Non-controlling interests (SFP) 3 000

(3 000)(c)

Dividend paid (preference shares) – S Ltd

5 000 Elimination of intragroup dividend and recording of non-

controlling interests in the dividend


212

COMMENTS

Please note that if the parent pays more for its investment in the subsidiary's preference shares

than the value of the shares, we call this "goodwill".

Don't be confused: we do not take the preference dividend* into account twice in the two analyses

of owners' equity. We merely transfer the pro rata portion (10% x 50 000) of the preference

owners' interest in the profit from the ordinary owners' analysis to the preference owners' analysis

so that it can be distributed as dividends according to that percentage interest (40:60).

To calculate the goodwill and non-controlling interests' amounts in the statement of financial

position, we need to add together the amounts obtained from the ordinary and preference

analyses.

9.3 TREATMENT OF PREFERENCE DIVIDENDS OF THE SUBSIDIARY

You often come across situations where there are arrear preference dividends. Since we

are dealing with cumulative preference shares here, we need to make provision for any arrear

preference dividends. A company must pay all arrear preference dividends before it may pay

an ordinary dividend.

Dr Cr NCI

R R R

Gross profit/Profit before tax – P Ltd 2 600 Inventory – S Ltd 2 600 Elimination of unrealised profit in closing inventory Current account in P Ltd – S Ltd 8 000

Current account in S Ltd – P Ltd

8 000


74 250(d)


213

EXAMPLE 1

Preference dividend for 1 year outstanding at accounting date – must still be provided for



A Ltd

B Ltd

ASSETS R

R Plant 50 000

120 000

Investment in B Ltd at fair value

- 75 000 ordinary shares (cost price: R86 250) 86 250

– - 4 000 preference shares (cost price: R4 000) 4 000

–


48 000

167 000

168 000


Share capital – ordinary shares (100 000 shares) 100 000

100 000

– 12% preference shares (20 000/10 000 shares) 20 000 10 000



18 000

167 000

168 000



B Ltd amounted to R15 000. On 1 January 20.6, no preference dividends were in arrears.

Provision must still be made for the 20.9 preference dividend. Consider the carrying amount

of the assets and liabilities of B Ltd to be equal to the fair value thereof on the date of

acquisition.


12% preference share capital Retained earnings

Total

A Ltd

B Ltd

A Ltd

B Ltd

A Ltd

B Ltd

A Ltd

B Ltd

R

R

R

R

R

R

R


100 000

20 000

10 000

14 000

28 000

134 000

138 000



21 000

12 000

21 000

12 000


100 000

20 000

10 000

35 000

40 000

155 000

150 000


214

SOLUTION 1

Before we can draft the consolidated financial statements we must first do the two analyses of

owners' equity.

Calculations

1. Analysis of owners' equity in B Ltd

Ordinary shares

At acquisition

Share capital

Retained earnings

Purchase difference


Since acquisition


Retained earnings

(28 000 - 15 000)

• Current year

Profit for the year

Preference dividend *

(12% x 10 000)

Total

A Ltd 75%* NCI

25% At Since

R

100 000

15 000

R

75 000

11 250

R R

25 000

3 750

115 000

-

86 250

-

9 750(3)

9 000

(900)

28 750

-

115 000

13 000

12 000

(1 200)

86 250 28 750(a)

3 250(a)

3 000(2)

(300)(2)

138 800 1 7 850 34 700(4)

* 75 000/100 000 shares x 100% = 75%


215

Preference shares

At acquisition

Share capital

Purchase difference


Since acquisition

• Current year

Profit attributable to

preference owners*

Preference dividend

Total A Ltd 40 %* NCI

60 % At Since

R

10 000

-

R

4 000

-

R

480

(480)

R

6 000

-

10 000

1 200

(1 200)

4 000 6 000(a)

720(2)

(720)(1)

10 000 - 6 000(4)

* 4 000/10 000 shares x 100% = 40%


Dr Cr NCI

R R R

Share capital – ordinary shares 100 000 Retained earnings 15 000 Goodwill NIL Investment in B Ltd

86 250


28 750 28 750



3 250 3 250


Share capital – preference shares 10 000

Goodwill NIL Investment in B Ltd

4 000


6 000 6 000


38 000(a) Non-controlling interests (SCI) [(12 000 − 1 200) x 25%)]

2 700


2 700 2 700(b)

Recording of non-controlling interests in profit after tax of B Ltd for the current year ended 31 December 20.9 – ordinary shares


216

Dr Cr NCI R R R Non-controlling interests (SCI) 720


720 720(b)

Recording of non-controlling interests in profit after tax of B Ltd for the current year ended 31 December 20.9 – preference shares

Non-controlling interests (SFP) 720

(720)(c)

Dividends payable

720

Transfer of preference dividends proposed and due to non-controlling owners

40 700(d)

A LTD GROUP


R




EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital (100 000 + 20 000) 120 000


170 930

Non-controlling interests (34 700(4) + 6 000(4)) (d) 40 700


Current liabilities

Dividends payable [(20 000 x 12%) + 720(1)] 3 120 Trade and other payables (12 000 + 18 000) 30 000



A LTD GROUP



R

PROFIT FOR THE YEAR (21 000 + 12 000) 33 000 Other comprehensive income for the year -


Total comprehensive income attributable to: Owners of the parent (33 000 − 3 420) (5) 29 580

Non-controlling interests (3 000 − 300 + 720) (2)/(b) 3 420

33 000


217

A LTD GROUP


31 DECEMBER 20.9


12% prefe-rence share capital

Retained earnings

Total

Non-

control-ling

interests

Total equity

R R R R R

Balance at 1 January 20.9 100 000 20 000 23 750* 143 750 38 000(a)

181 750



Profit for the year

(5)29 580 29 580 3 420

(b) 33 000

Dividend declared: preference (20 000 x 12%)

(2 400)

(2 400)

(720)

(c)

(3 120)

Balance at 31 December 20.9 100 000 20 000 50 930 170 930 40 700(d)

211 630

* (14 000 + 9 750(3))

EXAMPLE 2

Arrear preference dividend - still in arrears

The following represent the condensed annual financial statements of F Ltd and G Ltd for the

year ended 28 February 20.7:


F Ltd G Ltd

R R

ASSETS

Land and buildings 475 990 308 700

Investment in G Ltd at fair value

70 000 ordinary shares (cost price: R156 800) 156 800 -

10 000 12% cumulative preference shares

(cost price: R12 500) 12 500 -

10% Debentures (cost price: R4 000) 4 000 - Inventories 15 510 45 280 Trade and other receivables 21 100 12 800 Loan account – F Ltd - 21 000

685 900 387 780


218


Share capital

- Ordinary shares (250 000/100 000 shares) 500 000 200 000

- 100 000 12% cumulative preference shares - 100 000

Retained earnings 112 600 28 400 Revaluation surplus 20 000 15 000 Bank overdraft 27 690 3 280 Trade and other payables 4 610 31 100 10% Debentures - 10 000

Loan account – G Ltd 21 000 -

685 900 387 780



F Ltd

G Ltd


16 300


(5 700)




10 600



Oridinary share capital

12% cumulative preference share

capital

Revaluation surplus

Retained earnings Total

F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd F Ltd G Ltd

Balance at 1 March 20.6 500 000

200 000

– 100 000

20 000

15 000

93 400

17 800

613 400

332 800



Profit for the year

– – 19 200 10 600 19 200 10 600


200 000

– 100 000

20 000

15 000

112 600

28 400

632 600

343 400


1. F Ltd acquired its interest in G Ltd on 1 March 20.5, on which date the other components of equity were as follows:

F Ltd G Ltd

R R

Revaluation surplus 20 000 - Retained earnings 19 000 8 600

Each share carries one vote.

Consider the carrying amount of the assets and liabilities of G Ltd to be equal to the fair value thereof on the date of acquisition.

2. No preference dividends were in arrears at 1 March 20.5. No dividends have been paid since.

3. Land and buildings of G Ltd was revalued on 31 January 20.6.

4. On 28 February 20.7, there was no arrear interest on debentures.


220

REQUIRED

Draft the consolidated annual financial statements of the F Ltd Group at

28 February 20.7 according to the requirements of International Financial Reporting

Standards (IFRS).

SOLUTION 2

F LTD GROUP


R


Goodwill (10 780 + 2 500)(5) 13 280

797 970

Current assets Inventories (15 510 + 45 280) 60 790


94 690




Other components of equity 30 500 Retained earnings 112 060

642 560

Non-controlling interests (65 820 + 111 600) (4)/(c) 177 420


Non-current liabilities Long-term borrowing – 10% debentures (10 000 – 4 000) 6 000

6 000

Current liabilities Bank overdraft (27 690 + 3 280) 30 970


66 680




242

F LTD GROUP



R




Total comprehensive income attributable to: Owners of the parent (29 800 − 10 380) 19 420

Non-controlling interests (3 180 − 3 600 + 10 800)(1)/(b) 10 380

29 800

F LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28

FEBRUARY 20.7

Share capital

Revalua-tion

surplus

Retained earnings

Total

Non-controlling

interest

Total equity

R

R

R

R

R

R


30 500*

92 640#

623 140

167 040

(a)

790 180




10 380(b)

29 800


30 500

112 060

642 560

177 420(c)

819 980

* (20 000 + 10 500(3)) # (93 400 - 1 960(2) + 1 200(2))

221


242

Calculations

1. Analysis of owners' equity of G Ltd

Ordinary shares

At acquisition

Share capital

Retained earnings


;l- parent


Since acquisition


Retained earnings/(loss)

Given (17 800 - 8 600)


(12% x 100 000 x 1 year)

Revaluation surplus

• Current year

Profit for the year

Preference dividends

Total

F Ltd 70 % NCI

30 % At Since

R

200 000

8 600

R

140 000

6 020

R R

60 000

2 580

208 600

10 780

146 020

10 780(5)

(1 960)(2)

RE

10 500(3)

OCE

7 420 RE

(8 400) RE

62 580

-

219 380

(2 800)

9 200

(12 000)

15 000

10 600

(12 000)

156 800 62 580

(840)

4 500

3 180(1)

(3 600)(1)

230 180

(2 940) RE

10 500 OCE

65 820(4)

* 70 000/100 000 shares x 100% = 70%

222


242

Preference shares

At acquisition

Share capital


.parent


Since acquisition



• Current year


Total

F Ltd 10 %* NCI

90 % At Since

R

100 000

R

10 000

R R

90 000

2 500

2 500(5)

1 200(2)

1 200

-

102 500

12 000

12 000

12 500 90 000

10 800

10 800(1)

126 500 2 400 111 600(4)

* 10 000/100 000 shares x 100% = 10%


R

F Ltd 29 600 G Ltd 16 300 Interest received on debentures (400) Interest paid on debentures 400

45 900


Dr Cr NCI

R R R

Share capital – ordinary shares 200 000 Retained earnings 8 600

Goodwill 10 780 Investment in G Ltd

156 800


62 580 62 580

Elimination of owners' equity of G Ltd at acquisition


(840)


840


profit/(loss) since acquisition to beginning of current year

223

3


242

Dr Cr NCI R R R Revaluation surplus 4 500


4 500 4 500

Recording of non-controlling interests in revaluation of assets for the period ended 29 February 20.6

Share capital – preference shares 100 000 Goodwill 2 500 Investment in G Ltd

12 500


90 000 90 000

Elimination of owners' equity of G Ltd at acquisition – preference shares

Retained earnings – preference shares

10 800


10 800 10 800

Recording of non-controlling interests in preference dividends for the period ended 29 February 20.6

167 040(a)

Non-controlling interests (SFP) [(10 600 - 12 000) x 30%]

420

(420)(b)

Non-controlling interests (SCI)

420

Recording of non-controlling interests in profit after tax for the current year ended 28 February 20.7



10 800 10 800(b)

Recording of non-controlling interests in preference dividends for the current year ended 28 February 20.7

10% Debentures – G Ltd 4 000 10% Debentures – F Ltd

4 000

Elimination of intragroup debentures

Loan account G Ltd – F Ltd 21 000 Loan account F Ltd – G Ltd

21 000

Elimination of intragroup loans Interest received from G Ltd – F Ltd 400

Interest paid to F Ltd – G Ltd

400

Elimination of intragroup transactions

177 420(c)

COMMENTS

Remember that we need to eliminate all intragroup transactions. Always scrutinise the

balances provided in the question carefully. We must also eliminate debentures and the

related interest issued within the group.

There is no journal for the preference dividends, since it hasn’t even been declared yet.

224


242

EXAMPLE 3

Arrear preference dividend - paid since then

The following represent the condensed annual financial statements of W Ltd and V Ltd for the

year ended 28 February 20.7:


W Ltd V Ltd

R R

ASSETS

Land and buildings 475 990 308 700

Investment in V Ltd at fair value

- 70 000 ordinary shares (cost price: R140 000) 150 000 -

- 10 000 12% cumulative preference shares (cost price: R12 500) 12 500 -

- 10% debentures (cost price: R4 000) 4 000 - Inventories 15 510 38 280 Trade and other receivables 21 100 12 800 Bank - 20 720 Loan account – W Ltd - 28 000

679 100 408 500


Share capital

- Ordinary shares (250 000/100 000 shares) 500 000 200 000

- 100 000 12% cumulative preference shares - 100 000 Retained earnings 112 600 52 400 Revaluation surplus 20 000 15 000 Bank overdraft 20 890 - Trade and other payables 4 610 21 100 10% Debentures - 10 000 Loan account – V Ltd 21 000 - Dividends payable - 10 000

679 100 408 500



W Ltd V Ltd

R R Profit before tax 29 600 106 000 Income tax expense (10 400) (37 400)

PROFIT FOR THE YEAR 19 200 68 600 Other comprehensive income for the year - -


225


220



12% cumulative

preference share capital Revaluation surplus

Retained earnings

Total

W Ltd

V Ltd

W Ltd

V Ltd

W Ltd

V Ltd

W Ltd

V Ltd

W Ltd

V Ltd

R

R

R

R

R

R

R

R

R

R


200 000

-

100 000

20 000

15 000

93 400

17 800

613 400

332 800



for the year

Profit for the year

-

-

-

- 19 200

68 600 19 200 68 600


- (10 000)

-

(10 000)


- (24 000)

-

(24 000)


200 000

-

100 000

20 000

15 000

112 600

52 400

632 600

367 400


1. W Ltd acquired its interest in V Ltd on 1 March 20.5, at which date the other components of equity were as follows:

W Ltd V Ltd

R R

Revaluation surplus 20 000 -


Each share carries one vote.

Consider the carrying amount of the assets and liabilities of V Ltd to be equal to the fair value thereof on the date of

acquisition.

2. On 1 March 20.5, no preference dividends were in arrears. All preference dividends since 1 March 20.5 were paid on 28 February 20.7.

3. The land and buildings of V Ltd were revalued on 31 January 20.6.

4. On 28 February 20.7, V Ltd declared a dividend of 10 cents per ordinary share. W Ltd recorded this receivable dividend.

5. On 28 February 20.7, there was no arrear interest on debentures.

226


242

REQUIRED

Draft the consolidated annual financial statements of the W Ltd Group at 28 February 20.7 according to the requirements of

International Financial Reporting Standards (IFRS).

227


220

SOLUTION 3

W LTD GROUP


R


Goodwill (3 980 + 2 500)(6) 6 480

791 170

Current assets Inventories (15 510 + 38 280) 53 790

Trade and other receivables (21 100 + 12 800) 33 900 Cash and cash equivalents 20 720

108 410




Other components of equity 30 500 Retained earnings 143 260

673 760

Non-controlling interests (80 220 + 90 000) (4)/(e) 170 220



Long-term borrowing – 10% debentures (10 000 − 4 000) 6 000

6 000

Current liabilities Bank overdraft 20 890

Trade and other payables (4 610 + 21 100) 25 710 Dividends payable (5) 3 000

49 600



228


242

W LTD GROUP



R





Owners of the parent (78 400 − 27 780) 50 620 Non-controlling interests (20 580 − 3 600 + 10 800) (1)/(b) 27 780

78 400

W LTD GROUP


28 FEBRUARY 20.7

Share capital

Revalua-tion

surplus

Retained earnings

Total

Non-controlling

interest

Total equity

R

R

R

R

R

R


30 500*

92 640#

623 140

167 040

(a)

790 180



Profit for the year 50 620 50 620 27 780(b)

78 400


–

–

(3 000)(c)

(3 000)


–

–

(21 600)(d)

(21 600)


30 500

143 260

673 760

170 220(e)

843 980

* (20 000 + 10 500(3)

)

# (93 400 – 1 960(2)

+ 1 200(2)

)

229


242

Calculations

1. Analysis of owners' equity of V Ltd

Ordinary shares At acquisition

Share capital

Retained earnings

Given Arrear preference dividends

(12% x 100 000 x 2 years)

Equity represented by goodwill - parent


Since acquisition



Given (17 800 - 8 600)


(12% x 100 000 x 1 year)

Revaluation surplus

• Current year

Profit for the year


Ordinary dividends

Total

W Ltd 70 %*

NCI

30 % At Since

R

200 000

8 600

R

140 000

6 020

R R

60 000

2 580

208 600

3 980

146 020

3 980(6)

(1 960)(2)

RE

10 500(3)

OCE

48 020 RE

(8 400)RE

(7 000)RE

62 580

-

212 580

(2 800)

9 200

(12 000)

15 000

68 600

(12 000)

(10 000)

150 000 62 580

(840)

4 500

20 580(1)

(3 600)(1)

(3 000)(5)

271 380

30 660RE

10 500OCE

80 220(4)

* 70 000/100 000 shares x 100% = 70%

230


242

Preference shares

At acquisition

Share capital



Since acquisition



• Current year

Profit attributable to preference owners

Arrear preference dividends paid

Total

W Ltd 10 %* NCI

90 % At Since

R

100 000

R

10 000

R R

90 000

2 500 2 500(6)

1 200(2)

1 200(5)

(2 400)

-

102 500

12 000

12 000

(24 000)

12 500 90 000

10 800

10 800(1)

(21 600)

102 500 - 90 000(4)

* 10 000/100 000 shares x 100% = 10%


R

W Ltd 29 600 V Ltd 106 000 Ordinary dividend declared by V Ltd (7 000) Preference dividend paid by V Ltd [(10 000 x 12%) x 4] (2 400) Interest received on debentures (400) Interest paid on debentures 400

126 200

231


242


Dr Cr NCI

R R R

Share capital – ordinary shares 200 000 Goodwill 3 980 Retained earnings 8 600

Investment in V Ltd

150 000


62 580 62 580

Elimination of owners' equity of V Ltd at acquisition


(840)


840

Recording of non-controlling interests in profit/(loss) since acquisition to beginning of

current year



4 500 4 500

Recording of non-controlling interest in revaluation surplus for the period ended 29 February 20.6

Share capital – preference shares 100 000 Goodwill 2 500 Investment in V Ltd

12 500


90 000 90 000

Elimination of owners' equity of V Ltd at acquisition – preference shares

Retained earnings – preference shares 10 800 Non-controlling interests

10 800 10 800


167 040(a)

Non-controlling interests (SCI) 16 980 [(68 600 − 12 000) x 30%]


16 980 16 980(b)

Recording of non-controlling interests in profit for the year ended 28 February 20.7

Dividends received – W Ltd 7 000 Non-controlling interests (SFP) 3 000

(3 000)(c)

Ordinary dividends paid – V Ltd

10 000

Elimination of intragroup dividends and recording of non-controlling interests in ordinary dividends


10 800 10 800(b)

Recording of non-controlling interests in preference dividends for the year ended 28 February 20.7

232


242

Dr Cr NCI R R R *Dividends received – W Ltd 2 400


(21 600)(d)

Preference dividends paid – V Ltd

24 000

Elimination of intragroup dividends and recording of non-controlling interests in preference dividends

10% Debentures – V Ltd 4 000 10% Debentures – W Ltd

4 000


Dividends payable – V Ltd (10 000 x 70%) 7 000 Loan account in W Ltd – V Ltd

7 000

Transfer of dividends payable to loan account

Loan account V Ltd – W Ltd 21 000 Loan account W Ltd – V Ltd

21 000

Elimination of intragroup loans (Please note: the two loan accounts of the parent

and the subsidiary balance on R21 000.)

Interest received on debentures – W Ltd 400 Interest paid on debentures – V Ltd

400

Elimination of intragroup interest on debentures (4 000 x 10%)

170 220(e)

COMMENTS

The only difference between example two and three is that the dividends have been declared

and paid in example three. There is an additional journal (*) to eliminate the intragroup

dividend. Remember that we must subtract the dividend of R2 400 that the parent received

(income) from the profit before tax in the statement of profit or loss and other comprehensive

income to eliminate it there.

233


242

3

9.4 EXERCISES

Now that you have studied group statements, you can work through the following three

exercises:

QUESTION 1

The following represent the condensed statement of financial position of K Ltd and its

subsidiary, L Ltd, as at 28 February 20.2:

K Ltd

L Ltd

R

R

ASSETS


Land and buildings at cost 80 000

75 000 Investment in L Ltd at fair value 130 000

-

– 32 000 ordinary shares (cost price: R117 000) 117 000

-

– 8 000 8% cumulative preference shares

(cost price: R13 000) 13 000

-

Loan – K Ltd -

20 000 Current assets 45 000

72 000

– Trade and other receivables 30 000

53 000

– Inventories 15 000

19 000

255 000

167 000



– Ordinary shares (50 000/40 000 shares) 100 000 100 000 – 8% cumulative preference shares (40 000/20 000 shares) 40 000 20 000


34 000 Loan – L Ltd 16 000

-

Current liabilities – trade and other payables 54 000 13 000

255 000 167 000


1. K Ltd acquired its total interest in L Ltd on 1 March 20.1, on which date the retained

earnings of L Ltd was R20 000.

2. On the date of acquisition, it was decided to revalue L Ltd's land and buildings upwards

with an amount of R20 000. Consider the carrying amount of all the other assets and

liabilities of L Ltd to be equal to the fair value thereof.

3. L Ltd's preference dividends are in arrears for the 20.2 financial year.

4. With effect from 1 March 20.1, K Ltd purchased some of its inventories from L Ltd. L Ltd

sold its inventories to K Ltd at cost plus 331%. On 28 February 20.2, K Ltd had inventories

to the value of R5 000 on hand, which it had purchased from L Ltd.

5. On 2 January 20.2, K Ltd sold a non-depreciable asset with a cost price of R10 000 to L

Ltd at cost plus 25%.

234


242

6. Cash to the value of R4 000 in respect of the last consignment of inventories that K Ltd

purchased from L Ltd was still in transit on 28 February 20.2.

7. Each share carries one vote.

REQUIRED

Draft the consolidated statement of financial position of the K Ltd Group as at


Reporting Standards (IFRS). Notes are not required. (Show all your calculations.)

QUESTION 2

The following balances were taken from the records of P Ltd and D Ltd for the year ended

30 June 20.9:

P Ltd

D Ltd

R

R

Debits

Property at cost 600 000

160 000 Equipment at cost 300 000

180 000

Inventories 100 000

80 000 Investment in D Ltd at fair value

– 30 000 ordinary shares (cost price: R204 000) 204 000

- Bank – O Bank 1 200

12 000


406 800 Income tax expense 190 000

170 000

Provisional tax payments 100 000

90 000 Loan to parent (interest-free) -

140 000

Dividends paid – ordinary shares 40 000

30 000 – preference shares 12 000 7 500

1 671 600 1 276 300

Credits

Share capital

– Ordinary shares (100 000/50 000 shares) 240 000

120 000

– 15% cumulative preference shares 80 000

50 000

(80 000/50 000 shares) Retained earnings at beginning of the year 150 000

118 000

Accumulated depreciation

– equipment 128 000

94 000 Bank overdraft – B Bank 48 000

-


238 300 Taxation payable 190 000

170 000

Loan from subsidiary 120 000

- Profit before tax 540 000 486 000

1 671 600 1 276 300

235


242


1. P Ltd acquired its interest in D Ltd on 1 July 20.5. At that date, D Ltd's retained earnings

amounted to R35 000. P Ltd paid R204 000 of which R75 000 was for goodwill. The

balance was attributable to the revaluation of D Ltd's property. The carrying amount of all

the other assets and liabilities were equal to the fair value thereof. At the date of

acquisition, there was no arrear preference dividend. Each share carries one vote.

2. P Ltd has bought all its inventories from D Ltd since 1 July 20.8. D Ltd made a profit of 25%

on the cost price of inventories sold to P Ltd.

3. D Ltd paid no preference dividends for the period 1 July 20.5 to 30 June 20.7. On

30 June 20.8, D Ltd paid a preference dividend of R22 500.

4. On 29 June 20.9, D Ltd sent goods to the value of R20 000 to P Ltd, which P Ltd only

received on 3 July 20.9.

5. On 2 January 20.8, P Ltd sold a machine to D Ltd at a profit of R40 000. It is group policy to

provide for depreciation at 25% per annum according to the reducing balance method.

REQUIRED

Draft the consolidated annual financial statements of the P Ltd Group for the

year ended 30 June 20.9 in accordance with the requirements of

International Financial Reporting Standards (IFRS). No notes are required.

Ignore taxation on unrealised profits and/or losses as well as capital gains

tax.

236


242

QUESTION 3

The following balances were extracted from the records of J Ltd and T Ltd at

31 December 20.3:

J Ltd

T Ltd

Debits R

R Land and buildings at cost 150 000

180 000

Machinery

- Cost price 128 400

180 000

- Accumulated depreciation (59 600)

(95 900)

Patents at carrying amount 7 600

9 500 Investment in T Ltd

- 70 000 ordinary shares at fair value

(cost price: R125 000) 125 000

-

- 40 000 6% cumulative preference shares

at fair value (cost price: R50 000) 50 000

- - 20 000 debentures at fair value (cost price: R20 000) 20 000

-

Loan account T Ltd 53 400

- Inventories 62 000

62 000

Provisional tax payments 14 000

17 000 Trade and other receivables 72 000

100 000

Cash in bank 69 000

-

691 800

452 600

J Ltd

T Ltd

Credits R

R Ordinary shares (320 000/100 000 shares) 352 000

100 000

6% cumulative preference shares (10 000/80 000 shares) 10 000


80 100

6% Debentures -

50 000 Loan account J Ltd -

50 000


36 500 Bank overdraft -

40 000

Tax payable 25 000

16 000

691 800

452 600

237


242



J Ltd

T Ltd

R R

Gross profit 106 300 97 900 Expenses (36 800)

(29 000)

Auditors' remuneration 2 000

1 000 Depreciation 19 800

10 400

Staff costs 15 000

13 000 Interest on debentures -

3 000

Interest on bank overdraft -

1 600

69 500

68 900

Other income 10 600 -

Interest received on debentures 1 200

- Preference dividends received 2 400

-

Ordinary dividends received 7 000

-



(16 000)




52 900

238


220



6% cumulative preference share

capital

Retained earnings

Total

J Ltd

T Ltd

J Ltd

T Ltd

J Ltd

T Ltd

J Ltd

T Ltd

R

R

R

R

R

R

R

R


100 000

10 000

80 000

95 950

42 000

457 950



Profit for the year 55 100 52 900 55 100 52 900 Dividend paid: ordinary

(20 000)

(10 000)

(20 000)

(10 000)


(600)

(4 800)

(600)

(4 800)


100 000

10 000

80 000

130 450

80 100

492 450

260 100


1. On 1 January 20.1, J Ltd acquired 70 000 ordinary shares and 40 000 6% cumulative preference shares in T Ltd. All the assets and

liabilities were considered to be reasonably valued, with the exception of the land and buildings, which were valued at R250 000. No

purchases or sales of land and buildings have taken place since then. No adjustment has been made in respect of this yet.

2. At the date of acquisition, the subsidiary had retained earnings of R8 000. No preference dividends were in arrears at acquisition.

3. J Ltd supplied goods to its subsidiary at cost plus 20%. Particulars of goods supplied to T Ltd by J Ltd during the year ended

31 December 20.3 were as follows:

R

Inventories 1 January 20.3 12 000

Purchases during the year 120 000

Inventories at 31 December 20.3 4 800

On 27 December 20.3, J Ltd sent goods to T Ltd which were invoiced at R1 800. However, T Ltd only received these goods on

5 January 20.4, and therefore the goods were not taken into inventories at 31 December 20.3.

4. T Ltd sent R1 600 to J Ltd on 28 December 20.3. J Ltd only received and banked this amount on 4 January 20.4.


242

5. J Ltd sold certain machinery to T Ltd at a price of R10 000 above the carrying amount after the date of acquisition of its interest in T Ltd.

T Ltd provides for depreciation on machinery at 20% per annum on cost price, based on the assumption that the machine will still have

five years of service left as from the date of purchase, namely 1 January 20.2.

6. Each ordinary share carries one vote.

7. The retained earnings to the amount of R42 000 as at 1 January 20.3 includes the preference dividends paid for the year-end

31 December 20.2.

REQUIRED

Draft the consolidated annual financial statements of the J Ltd Group for the year ended 31 December 20.3 in compliance

with the requirements of International Financial Reporting Standards (IFRS). Ignore taxation on unrealised profits and/or

losses as well as capital gains tax.


241

SOLUTIONS

QUESTION 1

K LTD GROUP


R

ASSETS

Non-current assets

Property, plant and equipment [80 000 + 75 000 + 20 000 (revaluation) 172 500

– 2 500(5)]

Goodwill (5 000 + 5 000)(1) 10 000

182 500

Current assets

Trade and other receivables (30 000 + 53 000) 83 000 Inventories (15 000 + 19 000 − 1 250(4)) 32 750 Cash and cash equivalents 4 000

119 750



Equity attributable to the owners of the parent

Share capital (100 000 + 40 000) 140 000 Retained earnings 52 060

(45 000 − 2 500(5) + 8 920(2) + 640(2))

192 060

Non-controlling interests (30 230 + 12 960)(3)/(a) 43 190


Current liabilities




242

* 32,000

3 3

Calculations 1. Analysis of owners' equity of L Ltd

40,000 x 100% = 80%

Ordinary shares

At acquisition


Revaluation surplus

Retained earnings


parent


Since acquisition


Retained earnings

Given

At acquisition

Arrear preference dividends 20.2

Unrealised profit in closing

inventories (331 /1331 x 5 000)

Total

K Ltd 80 %* NCI

20 % At Since

R

100 000

20 000

20 000

R

80 000

16 000

16 000

R R

20 000

4 000

4 000

140 000

5 000

112 000

5 000(1)

8 920

28 000

-

145 000

11 150

117 000 28 000

2 230

34 000

(20 000)

(1 600)

(1 250)(4)

156 150 8 920(2) 30 230(3)


242

* 8,000

Preference shares

At acquisition

Preference share capital


.parent


Since acquisition


Arrear preference dividend 20.2

Total

K Ltd 40 %* NCI

60 % At Since

R

20 000

R

8 000

R R

12 000

5 000

5 000(1)

640

-

25 000

1 600

13 000 12 000

960

26 600 640(2) 12 960(3)

20,000 x 100% = 40%

2. Profit on sale of non-depreciable asset

Cost price R10 000

Profit 25%

Profit to be eliminated 10 000 x 25% = R2 500(5)

3. Entries in the financial records of L Ltd

Dr Cr NCI

R R R


20 000

Recording of the revaluation of land and buildings in L Ltd

Bank (cash in transit) 4 000 Loan K Ltd

4 000

Recording of cash in transit from K Ltd to L Ltd

243


242


Dr Cr NCI

R R R

Share capital – ordinary shares 100 000 Revaluation surplus 20 000 Retained earnings 20 000 Goodwill 5 000 Investment in L Ltd

117 000


28 000 28 000


Cost of sales – L Ltd 1 250

Inventories – K Ltd

1 250

Elimination of unrealised profit on closing inventory

Profit on sale of property – K Ltd 2 500

Property – L Ltd

2 500

Elimination of unrealised profit included in L Ltd's property

Loan L Ltd – K Ltd 16 000 Loan K Ltd – L Ltd

16 000

Elimination of intragroup loan accounts

Retained earnings 2 230 Non-controlling interests (SFP)

2 230 2 230

Recording of non-controlling interests in profit/(loss)

Share capital – preference shares

20 000 Goodwill 5 000 Investment in L Ltd

13 000


12 000 12 000

Elimination of owners' equity of L Ltd at acquisition – preference shares

Retained earnings – preference shares 960 Non-controlling interests

960 960


43 190(a)

COMMENTS

On consolidation, we add the parent's retained earnings (100%) to the subsidiary's retained

earnings, but limited to the parent's share in the subsidiary's equity. We will disclose the non-

controlling interests' portion separately under non-controlling interests in the statement of

changes in equity. We will include only the "since acquisition date" portion of the subsidiary's

retained earnings which we obtained from the analysis. We eliminated the "at acquisition

date" portion against the investment in the subsidiary. We have already taken the unrealised

244


242

profits the subsidiary made into account in the analysis. However, we must account for the

unrealised profit of R2 500 that the parent made on the sale of the property additionally in

retained earnings.

QUESTION 2

P LTD GROUP


R

ASSETS Non-current assets Property, plant and equipment [(600 000 + 160 000 + 60 000) + 1 051 750

(300 000 + 180 000 − 40 000) − (128 000 + 94 000 − 5 000(4) − 8 750(5))] Goodwill (6)75 000

1 126 750

Current assets

Inventories (100 000 + 80 000 + 20 000 − 24 000) 176 000 Trade and other receivables (124 400 + 406 800) 531 200 Cash and cash equivalents (1 200 + 12 000) 13 200

720 400



Share capital (240 000 + 80 000) 320 000 Retained earnings (8)624 250

944 250

Non-controlling interests (221 000 + 50 000)(7)/(e) 271 000

Total equity 1 215 250

Current liabilities

Bank overdraft 48 000 Trade and other payables (175 600 + 238 300) 413 900 Tax payable (190 000 + 170 000 - 100 000 - 90 000) 170 000


Total equity and liabilities 1 847 150

245


242

P LTD GROUP



R




Total comprehensive income attributable to: Owners of the parent (632 750 − 121 300) 511 450 Non-controlling interests (113 800 + 7 500)(2)/(b) 121 300

632 750


30 JUNE 20.9

Ordinaryshare capital

15% cum. prefe-rence share capital

Retained earnings

Total

Non-control-

ling interests

Total equity

R R R R R R


80 000

164 800*

484 800

169 200(a)

654 000



Profit for the year

511 450 511 450 121 300(b)

632 750


(40 000)

(40 000)

(12 000)(c)

(52 000)


(12 000)

(12 000)

(7 500)(d)

(19 500)

Balance at 30 June 2 .9 240 000

80 000 (8)

624 250 944 250

271 000

(e)

1 215 250

* (150 000 + 49 800

(1) – 40 000

(3) + 5 000

(4) )

246


242

Calculations

1. Analysis of owners' equity of D Ltd

Ordinary shares

At acquisition

Share capital

Retained earnings

Revaluation surplus


Consideration and NCI#

Since acquisition



• Current year

Profit for the year

Profit after tax

(486 000 -170 000)

Unrealised profit in inventories

(120 000 x 25 )

Preference dividend

Ordinary dividends paid

Total

P Ltd 60 %* NCI

40 % At Since

R

120 000

35 000

60 000*

R

72 000

21 000

36 000

R R

48 000

14 000

24 000

215 000

75 000

129 000

75 000(6)

49 800(1)

170 700

(18 000)

86 000

-

290 000

83 000

284 500

316 000

(24 000)

(7 500)

(30 000)

204 000 86 000

33 200

113 800(2)

(12 000)

627 500 202 500 221 000(7)

* 30 000/50 000 shares x 100% = 60%

R

# P Ltd paid 204 000 Goodwill (75 000)

60% investment 129 000

129 000 − (72 000 + 21 000) = 36 000 (60%)

36 000 x 100 = 60 000 60

125

247


242

Preference shares

At acquisition

Preference share capital

Since acquisition

• Current year

Profit attributable to preference owners

Preference dividend paid

Total

P Ltd 0 % NCI

10% At Since

R

50 000

7 500

(7 500)

R

-

R

-

R

50 000

7 500(2)

(7 500)

50 000 - - 50 000(7)

2 Profit before tax

R

Profit – P Ltd

540 000

Dividends received from D Ltd (30 000 x 60%)

(18 000)

Adjustment for depreciation (calculation 3)

8 750

Profit – D Ltd

486 000

Unrealised profit in closing inventories

(24 000)

992 750

3 Depreciation

Profit – 2 January 20.8

40 000(3)

Depreciation adjustment in 20.8 (40 000 x 6 x 25%)

(5 000)(4)

35 000

Depreciation adjustment in 20.9 (35 000 x 25%)

(8 750)(5)

4 Entry in D Ltd's financial records

Land and buildings 60 000

Revaluation surplus

60 000

Recording of the revaluation of land and buildings in D Ltd

5 Entry in P Ltd's financial records

Inventories 20 000

Loan account D Ltd

20 000

Recording of inventories sent to P Ltd

12

248


242

6 Pro-forma consolidated journal entries Dr Cr NCI

R R R

Share capital – ordinary shares 120 000



Goodwill 75 000

Investment in D Ltd

204 000


86 000 86 000

Elimination of owners' equity of D Ltd at acquisition



33 200 33 200

Recording of non-controlling interests in retained earnings for the period ended 30 June 20.8

Share capital – preference shares 50 000


50 000 50 000

Elimination of owners' equity of D Ltd at acquisition

– preference shares

169 200(a)

Cost of sales – D Ltd 24 000

Inventories – P Ltd

24 000


Retained earnings – P Ltd 40 000

Machinery – D Ltd

40 000

Elimination of unrealised profit included in

D Ltd's machinery

Accumulated depreciation – D Ltd 13 750

Retained earnings – P Ltd

5 000

Depreciation – P Ltd

8 750

Elimination of the depreciation associated with the

profit on sale of machinery

Loan D Ltd – P Ltd 140 000

Loan P Ltd – D Ltd

140 000




113 800 113 800(b)

Recording of non-controlling interests in profit after

tax

Dividends received – P Ltd 18 000


(12 000)(c)

Ordinary dividends paid – D Ltd

30 000

Elimination of intragroup dividends and recording

of non-controlling interests in ordinary dividends

249


242

Dr Cr NCI

R R R

Dividends received – P Ltd NIL


(7 500)(d)

Preference dividends paid – D Ltd

7 500

Elimination of intragroup dividends and recording

of non-controlling interests in preference dividends



7 500 (7 500)(b)

Recording of non-controlling interests in preference

dividend for the period ended 30 June 20.9

271 000(e)

COMMENTS

It is still advisable to do the analysis of preference owners, even though the parent does not

hold any preference shares of the subsidiary because of the following:

- We should still allocate the preference share capital of R50 000 to non-controlling

interests.

- We should still allocate the non-controlling owners' share of profit of R7 500 to them in

the statement of profit or loss and other comprehensive income.

250


242

QUESTION 3

J LTD GROUP


R

ASSETS Non-current assets Property, plant and equipment [(150 000 + 250 000) + 564 000

298 400 (calculation 4) − 151 500 (calculation 4) + (7 600 + 9 500)] Goodwill (400(2) + 10 000(2)) 10 400

574 400

Current assets Inventories [62 000 + 62 000 + 1 800 (in transit) − 1 100 (unrealised profit)] 124 700

Trade and other receivables (72 000 + 100 000) 172 000 Cash and cash equivalents [69 000 + 1 600 (in transit)] 70 600

367 300



Share capital (352 000 + 10 000) 362 000 Retained earnings 173 820

535 820

Non-controlling interests (75 030 + 40 000)(4)/(e) 115 030


Non-current liabilities Long-term borrowing – 6% debentures (50 000 − 20 000) 30 000

30 000


Bank overdraft 40 000 Tax payable (25 000 + 16 000 − 14 000 − 17 000) 10 000

260 850



251


242

J LTD GROUP



Note R

Gross profit (calculation 2)

205 100 Administrative expenses [2 000 + 1 000 + 19 800 + 10 400 −

(59 200)

(10 000 x 20%) + 15 000 + 13 000]

Finance costs [3 000 + 1 600 − (3 000 x 40%)]

(3 400)


(41 000)

PROFIT FOR THE YEAR


-


101 500

Total comprehensive income attributable to: R Owners of the parent (101 500 − 16 830) 84 670 Non-controlling interest (14 430 + 2 400)(1)/(b) 16 830

101 500

J LTD GROUP



R


Expenses Auditors' remuneration (2 000 + 1 000) 3 000

Depreciation 28 200 [19 800 + 10 400 − (10 000 x 20%)]

Staff costs (15 000 + 13 000) 28 000

252


242

J LTD GROUP


31 DECEMBER 20.3

Share capital

15% cum preference

share capital

Retained earnings

Total

Non- controlling interests

Total equity

R R

R

R R

R


10 000

109 750*

471 750

103 600(a)

575 350



Profit for the year

84 670 84 670 16 830(b)

101 500

Dividends paid: ordinary

(20 000)

(20 000)

(3 000)(c)

(23 000)


(600)

(600)

(2 400)(d)

(3 000)


10 000

173 820

535 820

115 030(e)

650 850

* calculation 3

Calculations 1. Analysis of owners' equity of T Ltd

Ordinary shares

At acquisition

Share capital

Revaluation surplus

Retained earnings


parent


Since acquisition


Retained earnings

Given (42 000 – 8 000)

• Current year

Profit after tax and preference

dividend (52 900 - 4 800)

Ordinary dividend paid

Total

J Ltd 70 %* NCI

30 % At Since

R

100 000

70 000

8 000

R

70 000

49 000

5 600

R R

30 000

21 000

2 400

178 000

400

124 600

400(2)

23 800(3)

33 670

(7 000)

53 400

-

178 400

34 000

48 100

(10 000)

125 000 53 400

10 200

14 430(1)

(3 000)

250 500 50 470 75 030(4)

* 70 000/100 000 shares x 100% = 70%

253


242

Cumulative preference shares

At acquisition

Share capital


parent


Since acquisition

• Current year

Profit attributable to preference

owners

Preference dividend paid

Total J Ltd 50 %* NCI

50 % At Since

R

80 000

R

40 000

R R

40 000

10 000

10 000(2)

2 400

(2 400)

-

90 000

4 800

(4 800)

50 000 40 000

2 400(1)

(2 400)

90 000 - 40 000(4)

* 40 000/80 000 shares x 100% = 50%

2. Gross profit

R

Profit – J Ltd 106 300 – T Ltd 97 900

Unrealised profit in opening inventories (12 000 x 20) 2 000 Unrealised profit in closing inventories [(4 800 + 1 800) x 20 ] (1 100)

205 100

3. Retained earnings at the beginning of the year

Retained earnings – J Ltd 95 950 – T Ltd(3) 23 800

Profit on sale of machinery (10 000) Depreciation adjustment on machinery sold 2 000

(10 000 x 20% x 1 year)

Unrealised profit in opening inventories (2 000)

109 750

120

120

254


242

4. Machinery

R

Cost price – J Ltd 128 400 – T Ltd 180 000 – profit on sale (10 000)

298 400

Accumulated depreciation – J Ltd 59 600 – T Ltd 95 900 – depreciation on machinery sold

– 20.2 (2 000)

– 20.3 (2 000)

151 500

5. Entries in T Ltd's financial records

Dr Cr NCI

R R R


70 000

Recording of the revaluation of land and buildings in D Ltd

Inventories 1 800 Loan account J Ltd

1 800

Recording of inventories sent to P Ltd

6. Entries J Ltd's financial records

Bank – cash in transit 1 600 Loan account T Ltd

1 600

Recording of cash sent by T Ltd to J Ltd


Share capital – ordinary shares 100 000



Goodwill 400

Investment in T Ltd

125 000


53 400 53 400

Elimination of owners' equity of T Ltd at acquisition

255


242

Dr Cr NCI

R R R


10 200 10 200

Recording of non-controlling interests in retained earnings for the period ended 31 December 20.2

Share capital – preference shares 80 000 Goodwill 10 000 Investment in T Ltd

50 000


40 000 40 000

Elimination of owners' equity of T Ltd at acquisition – preference shares

103 600(a)

Income – sales – J Ltd 120 000 Cost of sales – T Ltd

120 000


Cost of sales – J Ltd 1 100 Inventories – T Ltd

1 100


Retained earnings – J Ltd 2 000 Cost of sales – J Ltd

2 000

Elimination of unrealised profit on opening inventory

Retained earnings – J Ltd 10 000 Machinery – T Ltd

10 000

Elimination of unrealised profit included in T Ltd's machinery

Accumulated depreciation – T Ltd 4 000 Retained earnings – J Ltd

2 000

Depreciation – J Ltd

2 000

Elimination of the depreciation associated with the profit on sale of machinery

Loan J Ltd – T Ltd 51 800 Loan T Ltd – J Ltd

51 800


256


242

Dr Cr NCI

R R R

6% Debentures – T Ltd 20 000 6% Debentures – J Ltd

20 000


Interest on debentures received – J Ltd 1 200 Interest on debentures paid – T Ltd

1 200

Elimination of intragroup interests on debentures

Non-controlling interests (SCI) 14 430 Non-controlling interests (SFP) 14 430 14 430(b)


Dividends received – J Ltd 7 000 Non-controlling interests (SFP) 3 000

(3 000)(c)

Ordinary dividends paid – T Ltd

10 000 Elimination of intragroup dividends and recording of non-

controlling interests in ordinary dividends

Dividends received – J Ltd 2 400 Non-controlling interests (SFP) 2 400

(2 400)(d)

Preference dividends paid – T Ltd

4 800 Elimination of intragroup dividends and recording of non-

controlling interests in preference dividends


2 400 2 400(b)

Recording of non-controlling interests in preference dividends

115 030(e)

SELF-ASSESSMENT


calculate the parent's percentage interest in the preference share capital

of the subsidiary?

record any preference dividends a subsidiary paid or declared in the

consolidated annual financial statements in accordance with

International Financial Reporting Standards (IFRS)?

record arrear cumulative preference dividends payable/paid by a

subsidiary in the consolidated annual financial statements in accordance

with International Financial Reporting Standards (IFRS)?


257

258

FAC2602

Statements of cash flows

STATEMENTS OF

CASH FLOWS

TOPIC B: LEARNING UNIT 1

FAC2602 / TOPIC B / Learning unit 1

259

LEARNING OUTCOMES

Students should be able to draft the statement of cash flows for a company in accordance with

International Financial Reporting Standards (IFRS).

OVERVIEW

The study unit is divided into the following:

1.1 INTRODUCTION ........................................................................................................ 260

1.2 PURPOSE AND PRESENTATION OF A STATEMENT OF CASH FLOWS ............. 261

1.3 ELEMENTS AND FRAMEWORK OF A STATEMENT OF CASH FLOWS ............... 261

SELF-ASSESSMENT ........................................................................................................... 284

KEY CONCEPTS

Cash

Cash flow equivalents

Cash flow

Operating activities

Investing activities

Financing activities

ASSESSMENT CRITERIA


draft a statement of cash flows, with accompanying notes, for a company by

means of the direct method in accordance with International Financial Reporting

Standards (IFRS)

draft a statement of cash flows, with accompanying notes, for a company using

the indirect method in accordance with International Financial Reporting

Standards (IFRS).


260

1.1 INTRODUCTION

In Accounting I, we introduced you to company annual financial statements. You studied

aspects such as the statement of financial position and the statement of profit or loss and

other comprehensive income. In Accounting II, you will be studying the above aspects in

greater detail and will acquire knowledge of International Financial Reporting Standards

(IFRS).

Although the sections of the Companies Act and the IFRS statements are very important for

your studies, we do not expect you to read them all. However, in order to equip you thoroughly,

we will refer to them in the learning unit from time to time.

Cash flow information involves the meaningful presentation of the cash that the entity

generated and applied. We present this information to the readers of financial statements in

the form of a statement of cash flows.

A complete set of financial statements comprises of the following:

statement of financial position

statement of profit or loss and other comprehensive income

statements of changes in equity

statement of cash flows

notes

Users of financial statements are interested in the information on cash flow, which can be

derived from the statement of cash flows. As the name indicates, this statement has to do with

the cash flows in an enterprise, which implies that we omit all the items in the annual

financial statements that have nothing to do with the cash flow when we compile the

statement of cash flows.


261

1.2 PURPOSE AND PRESENTATION OF A STATEMENT OF CASH FLOWS

The purpose of the statement of cash flows is to provide information to the various users of

financial statements. Each enterprise presents its cash flows from operations, investment and

financing in the way most suitable for its business.

The following would be a logical presentation:

Net cash flow from operating activities

- cash receipts from customers

- cash paid to suppliers and employees

- investment income

- interest paid

- income tax paid

- dividends paid

-.proceeds from the sale of financial assets at fair value through profit or loss: held for

asdtrading

Net cash flow from investing activities

Net cash flow from financing activities

Net change in cash and cash equivalents

Operating activities are the principal income-producing activities of the enterprise as well as

other activities which are not investing or financing activities.

Investing activities include the acquisition and sale of non-current assets and other

investments not included in cash flow equivalents.

Financing activities are activities that result in changes in the size and composition of the

equity capital and borrowings to the enterprise.

1.3 ELEMENTS AND FRAMEWORK OF A STATEMENT OF CASH FLOWS

The elements of a statement of cash flows are the following:

operating activities

investing activities

financing activities

Operating activities

The amount of cash arising from operating activities is a key indicator of the extent to which the

operations of the entity have generated sufficient cash to repay loans, maintain the operating


262

capability of the entity, pay dividends and make new investments without recourse to external

financing.

Cash flows from operating activities are derived primarily from the principal revenue-producing

activities of the entity. Therefore, they generally result from the transactions and other events

that determine profit or loss. The following are examples of cash flows from operating

activities:

cash receipts from the sale of goods and the rendering of services

cash payments to suppliers for goods and services

cash payments to and on behalf of employees

cash payments and refunds in respect of income taxes

Investing activities

It is important to disclose cash flows from investing activities because they represent the

extent to which payments have been made for resources intended to generate future receipts

and cash flows.

The following are examples of cash flows arising from investing activities:

cash payments to acquire property, plant and equipment and other non-current assets

cash receipts from sales of property, plant and equipment and other non-current assets

Financing activities

It is important to disclose cash flows arising from financing activities because they are useful in

predicting claims from providers of capital to the entity on future cash flows.

The following are examples of cash flows arising from financing activities:

cash proceeds from issuing shares

cash payments to owners to acquire or redeem the entity's shares

cash proceeds from issuing debentures, loans, mortgage bonds and current or non-current

borrowings

cash repayments for amounts borrowed

We can represent a statement of cash flows schematically as follows:


263

STATEMENT OF CASH FLOWS

CASH FLOW FROM OPERATING ACTIVITIES

minus

CASH APPLIED IN INVESTING ACTIVITIES

plus/minus

CASH INFLOW/(OUTFLOW) FROM

FINANCING ACTIVITIES

is represented by, or is equal to

net increase/(decrease) in CASH AND CASH EQUIVALENTS

We do not compile the statement of cash flows from separate transactions. To draft a

statement of cash flows for the year ended 31 December 20.8, we use the following:

statement of profit or loss and other comprehensive income for the year ended

31 December 20.8

statements of financial position as at 31 December 20.7 and 31 December 20.8

additional information

Remember: amounts that are not in brackets represent the inflow of cash, and

amounts in brackets represent the outflow of cash.

An enterprise should report cash flow from operating activities by means of either the direct or

the indirect method.

If it uses the direct method, it will disclose the principal categories of gross cash proceeds

and gross cash payments. On the other hand, if it uses the indirect method, profit or loss is

adjusted for the effect of non-cash transactions as well as any deferrals or accruals of

previous or future operating cash receipts or payments and income or expenditure items

which are related to investment or financing cash flow.

The only difference between the direct and indirect method lies in the presentation of the section

dealing with cash flow from operating activities. The sections dealing with investing and

financing activities remain in the same format irrespective of the method used.

Study the following frameworks of the two methods:


264

FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE WITH THE

DIRECT METHOD

R

R

Cash flows from operating activities Cash receipts from customers xxx

Cash paid to suppliers and employees (xxx)

Cash generated from operations xxx

Interest received xxx

Interest paid (xxx)

Dividends received xxx

Dividends paid (xxx)

Tax paid (xxx)

Proceeds from the sale of financial assets at fair value through profit or

loss: held for trading (such as listed shares) xxx

Net cash from/(used in) operating activities

xxx Cash flows from investing activities

Investment to maintain production capacity (xxx)

Replacement of non-current assets xxx

Investment to expand production capacity (xxx)

Additions to non-current assets xxx

Proceeds from the sale of property,plant and equipment xxx

Proceeds from the sale of investments (such as in equity shares or loans) xxx

Net cash from/(used in) investing activities

(xxx) Cash flows from financing activities

Proceeds from the issue of shares xxx

Proceeds from long-term borrowings/debentures xxx

Repayment of loans (xxx) Redemption of redeemable preference shares (xxx)

Net cash from/(used in) financing activities

xxx

Net increase in cash and cash equivalents

xxx Cash and cash equivalents at beginning of year

xxx

Cash and cash equivalents at end of year

xxx


265

FRAMEWORK OF A STATEMENT OF CASH FLOWS IN ACCORDANCE WITH THE

INDIRECT METHOD

Cash flows from operating activities R

R Profit before tax xxx

Adjustments for:

Depreciation xxx

Loss on sale of non-current assets xxx

Profit on sale of non-current assets (xxx)

Investment income (xxx)

Interest expense xxx

xxx

Changes in working capital xxx

Decrease/(Increase) in inventory xxx

Decrease/(Increase) in trade and other receivables xxx

(Decrease)/Increase in trade and other payables (xxx)

Cash generated from operations xxx

Interest received xxx

Interest paid (xxx)

Dividends received xxx

Dividends paid (xxx)

Tax paid (xxx)

Proceeds from the sale of financial assets at fair value through profit or loss: held for trading (such as listed shares)

xxx

Net cash from/(used in) operating activities

xxx Cash flows from investing activities

Investment to maintain production capacity (xxx)

Replacement of non-current assets xxx

Investment to expand production capacity (xxx)

Additions to non-current assets xxx

Proceeds from the sale of property,plant and equipment xxx

Proceeds from the sale of investments (such as in equity shares or loans)

xxx

Net cash from/(used in) investing activities

(xxx) Cash flows from financing activities

Proceeds from the issue of shares xxx

Proceeds from long-term borrowings/debentures xxx

Repayment of loans (xxx)

Redemption of redeemable preference shares (xxx)

Net cash from/(used in) financing activities

xxx

Net increase in cash and cash equivalents

xxx Cash and cash equivalents at beginning of period

xxx

Cash and cash equivalents at end of period

xxx


266

We will use the following example throughout the learning unit to illustrate certain aspects of

cash flow information:

The following balances appear in the books of Ross Ltd for the financial year ended 30 June:

20.6

20.5

R

R Land and buildings 350 000

340 000

Plant and machinery 105 000

124 000 Motor vehicles 108 900

67 300

Financial assets at amortised cost -

25 200 Inventory 67 000

50 000


50 000 Prepaid expenses 500

2 600

Bank 2 000

-

670 800

659 100

Share capital (280 000/250 000 shares)

292 000

258 200

Long-term borrowings -

80 000

Revaluation surplus – land and buildings 15 000

-


220 000

10% R200 Debentures 40 000

-

Tax payable 23 300

46 600

Ordinary dividends payable 16 800

-

Accumulated depreciation

- Plant and machinery 27 000

18 000

- Motor vehicles 27 200

10 000


26 000

Accrued interest 2 000

-

Bank overdraft -

300

670 800

659 100


267

ROSS LTD

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 30 JUNE 20.6

R

Revenue 500 000 Cost of sales (250 000)

Gross profit 250 000 Other income (3 000 + 2 000) 5 000 Administrative expenses (78 200 + 63 600) (141 800) Selling expenses (87 400) Other costs (8 000) Finance cost (7 300)

Profit before tax 10 500 Income tax expense -



Additional information 1. The long-term borrowing bears interest at 12% per annum, payable in arrears, and was

repaid on 31 December 20.5. Interest did not qualify for capitalisation.

2. In December 20.5, a piece of land that cost R15 000 was sold for its carrying amount and

replaced with another piece of land. On 30 June 20.6, the remaining land was revalued.

These were the only transactions in respect of land and buildings for the current financial

year.

3. During the current financial year, a machine with a carrying amount of R51 000 was sold at

a loss of R8 000 and replaced with a new machine which cost R62 000. The total

depreciation on plant and machinery for the current financial year amounted to R39 000.

4. A motor vehicle with a cost price of R14 400 on which depreciation of R7 400 had

already been written off was traded in for R9 000 on a new vehicle that cost R35 000.

5. No other machines or motor vehicles were sold during the year, but one additional motor

vehicle was purchased.

6. The provision for tax for the current financial year was R15 000. This includes an

underprovision of R5 100 for the 20.5 tax year.

7. New shares were issued on 30 April 20.6.

8. On 31 December 20.5, an interim ordinary dividend of 4c per share was declared and paid.

9. Ordinary dividends of 6c per share were declared on 30 June 20.6.

10. The financial assets were sold at amortised cost on 1 July 20.5. These shares were

purchased without the intention of short-term profit taking as part of the business model.


268

11. During the year, dividends to the value of R3 000 were received.

Cash flows from operating activities (using the direct method)

Cash receipts from customers

Please note: This amount is determined by reconstructing the trade and other receivables

account.

Cash receipts from customers

Trade and other receivables

R R

Balance b/d 50 000 Bank* 512 600

Sales 500 000 Balance c/d 37 400

550 000 550 000

* Balancing figure

Cash paid to suppliers and employees

We calculate this amount by comparing the figures for inventory and trade and other payables

as given in the two statements of financial position. If inventory increased from one year to the

next, the effect on cash flow would be negative, as it implies more cash flowed out to

purchase inventory. If the figure of trade and other payables increased from one year to the

next, this means that less cash flowed out to pay creditors and the figure would then be positive

in respect of cash flow. All purchases of inventory and expenses which were paid for in cash

are also included in the calculation.


269


R R

Balances b/d Balance b/d

Inventory 50 000 Trade and other payables 26 000

Prepaid

expenses

2 600 Cost of sales 250 000

Bank* 417 700 Administrative

Balance c/d expenses 78 200

Trade and other payables 38 800 Selling expenses 87 400

Balances c/d

Inventory 67 000

Prepaid expenses 500

509 100 509 100

* Balancing figure

Depreciation to the value of R63 600 does not give rise to a cash flow.

Plant and machinery 39 000 (given)

Vehicles 24 600 [27 200 − (10 000 − 7 400)]

63 600

Cash generated from operations

We obtain this amount by subtracting the cash paid to suppliers and employees from cash

receipts from customers.

Interest paid, dividends received and paid and normal tax paid

The company normally make all payments to the South African Revenue Service (SARS) and

to suppliers of funds from cash generated by operating activities. We should therefore disclose

interest paid as well as tax and dividends paid during a year separately from cash generated

by operating activities.


270

Dividends paid R Unpaid amount at beginning of period (statement of financial position 20.5)

Amount debited against income* (total dividends declared for 20.6) 26 800 Unpaid amount at end of period (statement of financial position 20.6) (16 800)

10 000

*Ordinary dividends - Interim (250 000 x 4c) 10 000

- Final (280 000 x 6c) 16 800

26 800

Tax paid

Unpaid amount at beginning of period (statement of financial position 20.5) 46 600 Amount debited against income (additional information 6) 15 000 Unpaid amount at end of period (statement of financial position 20.6) (23 300)

38 300

We can now complete the section described as cash flows from operating activities using the

direct method:

Cash flows from operating activities (according to the direct method):

ROSS LTD

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20.6

R

R

Cash flows from operating activities

Cash receipts from customers 512 600

Cash paid to suppliers and employees (417 700)

Cash generated from operations 94 900

Interest paid (7 300 − 2 000) (5 300)


Dividends paid (10 000)

Tax paid (38 300)

Net cash from operating activities

44 300

Cash flows from operating activities (using the indirect method)

When we prepare the statement of cash flows using the indirect method, we must ignore the

calculations for cash received from customers and cash payments to suppliers and

employees. We now calculate cash generated by operations by adjusting profit or loss for the

effect of non-cash transactions, any deferrals or accruals of previous or future operating cash

receipts or payments and income or expenditure items related to investment or financing cash

flow. The calculations for interest, dividends and tax remain unaltered, irrespective of the

method used.


271

Cash flows from operating activities (using the indirect method):

ROSS LTD

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20.6

R

R



Adjustments for:

Depreciation 63 600

Profit on sale of non-current asset (2 000)

Loss on sale of non-current asset 8 000

Interest expense 7 300

Investment income (3 000)

84 400

Changes in working capital 10 500

Increase in inventory (50 000 − 67 000) (17 000)

Decrease in trade and other receivables (50 000 − 37 400) 12 600

Decrease in prepaid expenses (2 600 − 500) 2 100

Increase in trade and other payables (38 800 − 26 000) 12 800


Interest paid (7 300 − 2 000) (5 300)


Dividends paid (10 000)

Tax paid (38 300)


44 300

Cash flows from investing activities

Cash flows related to investing activities may include both the inflow and the outflow of cash.

The outflow of cash includes the purchase of assets and investments, while the inflow of cash

includes items such as proceeds from the sale of non-current assets.

Regarding the amount of assets purchased, we distinguish between the amount for

replacement and that for addition to assets. Replacement refers to the maintenance of

operations, while additions refers to the expansion of operations.

Assets purchased

When the increase in the balance of the accumulated depreciation accounts in the two

statements of financial position is equal to the depreciation in the statement of profit or loss

and other comprehensive income, the company did not sell or write off any assets during

the year. We can then account for any increase in the asset account (at cost price) directly as

purchases of assets.


272

Revaluation of property

Companies often revalue property, and when this happens during a particular financial year,

we treat it as follows: the value of the property increased because of the revaluation and

because there was in fact no flow of cash, we can ignore it when drafting the statement of

cash flows. The increase in the revaluation surplus represents the increase in the value of the

property.

Purchase and sale of assets

If an enterprise has purchased or sold assets during the year, it is desirable to reconstruct the

ledger accounts concerned.

Land and buildings

R R

Balance b/d 340 000 Proceeds on sale 15 000

Revaluation# 15 000 Balance c/d 350 000

Replacement* 10 000

365 000 365 000

Balance b/d 350 000

# Increase in balance of surplus on revaluation account

* Balancing figure

Motor vehicles at cost price

R R

Balance b/d 67 300 Cost of trade-in 14 400

Replacement (given) 35 000 Balance c/d 108 900

Addition* 21 000

123 300 123 300

Balance b/d 108 900

* Balancing figure

Accumulated depreciation: motor vehicles

R R

Accumulated depreciation Balance b/d 10 000

on trade-in 7 400 Depreciation* 24 600

Balance c/d 27 200

34 600 34 600

Balance b/d 27 200

* Balancing figure


273

Realisation account: motor vehicles

R R

Cost price of trade-in 14 400 Accumulated depreciation 7 400

Profit on trade-in on trade-in [(14 400 - 7 400) - 9 000] 2 000 Proceeds 9 000

16 400 16 400

Plant and machinery at carrying amount

R R

Balance b/d 106 000 Carrying amount -

sold

51 000

Replacement (given) 62 000 Depreciation 39 000

Balance c/d 78 000

168 000 168 000

Balance b/d 78 000

Realisation account: plant and machinery

R R

Carrying amount sold 51 000 Proceeds on sale 43 000

(51 000 – 8 000)

Loss on sale 8 000

51 000 51 000

Financial assets

When trading in shares is part of the business model of the company and there is an intention

of short-term profit taking, typically listed shares held for trading, the increase or decrease in

cash would be part of operating activities. In this example however, the shares were

purchased without the intention of short-term profit taking as part of the business model.

These shares not held for trading, will be disclosed in the cash flows from investing activities

section.

We are now able to complete the section described as cash flows from investing activities.

Cash flows from investing activities (both methods)

R

R

Investment to maintain production capacity (107 000)

Replacement of land 10 000

Replacement of motor vehicle 35 000

Replacement of machine 62 000

Investment to expand production capacity (21 000)

Addition to motor vehicles 21 000


274

Proceeds from the sale of financial assets at amortised cost 25 200

Proceeds of sale of land 15 000

Proceeds on sale of motor vehicle 9 000

Proceeds on sale of machine 43 000

Net cash used in investing activities

(35 800)

Cash flows from financing activities (both methods)

An enterprise must report on the main classes of gross cash receipts and gross cash

payments that resulted from financing activities separately.

We usually derive the effecting of new borrowings, the redemption of existing borrowings and

the issue of shares from the given statements of financial position.

2 .6 2 .5 Change R R R

10% R200 Debentures 40 000 - 40 000 Long-term borrowings - 80 000 80 000 Share capital (280 000/250 000 shares) 292 000 258 200 33 800

The share capital increased by R33 800. Therefore, the total amount received upon issue of

the shares was R33 800.

We can now complete the section that deals with cash flows from financing activities.

Cash flows from financing activities (both methods)

R

R

Proceeds from debentures issued 40 000

Payment on redemption of long-term borrowings (80 000)

Proceeds on issue of shares 33 800

Net cash used in financing activities

(6 200)

Net change in cash and cash equivalents

The net effect of the first three sections of the statement of cash flows produced the net

change.

R

Net cash from operating activities 44 300 Net cash used in investing activities (35 800) Net cash used in financing activities (6 200)

Net increase in cash and cash equivalents 2 300 Cash and cash equivalents at beginning of year (300)

Cash and cash equivalents at end of year 2 000


275

1.4 EXERCISES

QUESTION 1


1. The following information was obtained from the statement of profit or loss and other

comprehensive income of A Ltd for the year ended 31 October 20.3:

R


Gross profit 450 000 Other income 4 000 Administrative and selling expenses (88 000 + 48 000 + 72 000) (208 000) Other expenses (26 000)

Profit before tax 220 000 Income tax expense (85 000)

PROFIT FOR THE YEAR 135 000 Other comprehensive income for the year - Revaluation surplus 210 000


20 .3

20.2

R R

Debits

Property 1 750 000 1 400 000 Motor vehicles 436 000

410 000

Machinery 385 000

370 000 Inventory 178 000

154 000


220 000 Cash in bank 2 000

76 000

Financial assets at fair value through profit or loss -

40 000

2 965 000

2 670 000

Credits

Share capital (400 000/300 000 shares) 440 000 330 000 Revaluation surplus 220 000

10 000


870 000 Long-term borrowings: interest free 900 000

1 100 000

Accumulated depreciation – Motor vehicles 76 000

54 000

– Machinery 141 000

120 000


142 000 Tax payable 44 000

28 000

Dividends payables (ordinary) 24 000

16 000

2 965 000

2 670 000


276

2. Extract from the statement of changes in equity for the year ended 31 October 20.3

Revaluation surplus

Retained earnings

Total

R R R

Profit for the year

135 000 155 000 Dividends declared

(24 000) (24 000)


210 000

3. On 31 October 20.3, A Ltd purchased a new motor car for R54 000 and sold an old

vehicle at its carrying amount.

4. A Ltd traded in a machine with a carrying amount of R60 000 on which R51 000 had

already been written off in depreciation for R54 000 and replaced it with a new machine.

5. Depreciation for the current year R

Vehicles 48 000

Machinery 72 000

6. A Ltd sold the investment for R24 000 on 28 February 20.3, at a profit of R4 000. There

was also a fair value adjustment during the current year. Trading in shares is part of the

business model of A Ltd.

REQUIRED

Draft the statement of cash flows of A Ltd for the year ended 31 October 20.3 in

accordance with the requirements of International Financial Reporting Standards

(IFRS) using the direct method. Ignore comparative figures, but show the following

calculations:

1. cash receipts from clients

2. cash paid to suppliers and employees

3. normal tax paid

4. dividends paid


277

QUESTION 2

The following information was derived from the books of B Ltd:

TRIAL BALANCE AT 28 FEBRUARY

20.5 20.4

R R

Land and buildings at valuation 244 500 200 000

Machinery at cost price 14 800 52 300 Financial assets at amortised cost - 2 400 Inventory 15 000 19 000 Trade and other receivables 18 000 15 400 Bank 8 000 14 000

300 300 303 100

Share capital – 100 000 shares 100 000 100 000

Interest free long-term borrowings 40 000 50 000 Revaluation surplus 59 500 15 000 Retained earnings 65 000 107 000 Dividends payables 20 000 10 000 Accumulated depreciation – machinery 3 400 4 800 Allowance for credit losses 1 000 1 200 Trade and other payables 7 400 11 300 Tax payable 4 000 3 800

300 300 303 100


1. The following information was derived from the statement of profit or loss and other

comprehensive income of B Ltd for the year ended 28 February 20.5:

R


Gross profit 103 300 Other income (1 000 + 200) 1 200 Administrative and selling expenses (48 000 + 42 600) (90 600) Other expenses (400)

Profit before tax 13 500 Income tax expense (5 500)

PROFIT FOR THE YEAR 8 000 Other comprehensive income for the year - Revaluation surplus 44 500



278

2. Extract from the statement of changes in equity for the year ended 28 February 20.5

Revalua-tion

surplus

Retai-ned

earnings R

Total

R

R

R Balance at 1 March 20.4 15 000

107 000

122 000



Profit for the year

8 000

8 000 Other comprehensive income for the year 44 500

44 500


(50 000)

(50 000)

Balance at 28 February 20.5 59 500 65 000

124 500

3. B Ltd grew rapidly during the year, and unless otherwise indicated, they purchased all

assets for the purposes of expanding the enterprise. The following transactions occurred

during the year ended 28 February 20.5:

3.1 B Ltd purchased new machinery to the value of R8 000 during the year to replace

the obsolete machinery. The cost price of the old machinery was R45 500, and

B Ltd resold it for R2 500. The accumulated depreciation on the machinery that was

sold was R44 000.

3.2 The company sold its financial assets at 1 March 20.4 for R2 000. These assets

were not held with the intention of short-term profit taking as part of the business

model.

REQUIRED

Draft the statement of cash flows for B Ltd for the financial year ended


Reporting Standards (IFRS) using the indirect method. Ignore comparative figures,

but show the following calculations:

1. normal tax paid

2. dividends paid


279

SOLUTION

QUESTION 1

A LTD

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER 20.3

R R R


Cash receipts from customers (C1) 756 000

Cash paid to suppliers and employees (C2) (415 000)


Dividends paid (C3) (16 000)

Tax paid (C4) (69 000)

Proceeds from the sale of financial assets at fair value through profit or loss: held for trading

24 000


280 000


Investment to maintain production capacity (180 000)

Replacement of machinery (C5) (126 000)

Replacement of motor vehicle (C5) (54 000)

Investment to expand production capacity (140 000)

Additions to property (C5) (140 000)

Proceeds from sale of motor vehicles (28 000 – 26 000) 2 000

Proceeds from sale of machinery (60 000 – 6 000) 54 000

Net cash used in investing activities

(264 000) Cash flows from financing activities

Proceeds from issue of shares (440 000 – 330 000) 110 000

Repayment of long-term borrowings (1 100 000 – 900 000) (200 000)

Net cash used in financing activities

(90 000)

Net decrease in cash and cash equivalents

(74 000)

Cash and cash equivalents at the beginning of the year

76 000

Cash and cash equivalents at the end of the year

2 000


280

Calculations

C1. Cash receipts from customers

Trade and other receivables

R R

Balance b/d 220 000 Bank* 756 000

Sales 750 000 Balance c/d 214 000

970 000 970 000

* Balancing figure

C2. Cash paid to suppliers and employees


R R

Balance (inventory) b/d 154 000 Balance (trade and b/d

Bank* 415 000 other payables) 142 000

Balance (trade and other Cost of sales 300 000

payables) c/d 139 000 Administrative and

selling expenses 88 000

Balance (inventory) c/d 178 000

708 000 708 000

* Balancing figure

C3. Dividends paid

Unpaid amounts at the beginning of the period 16 000 Amounts debited to income 24 000 Unpaid amounts at the end of the period (24 000)

16 000

C4. Tax paid

Unpaid amounts at the beginning of the year 28 000 Amounts debited to income 85 000 Unpaid amounts at the end of the year (44 000)

69 000


281

C5. Ledger accounts

Property

R R

Balance b/d 1 400 000 Balance c/d 1 750 000

Revaluation 210 000

Purchases 140 000

1 750 000 1 750 000

Motor vehicles at cost

R R

Balance b/d 410 000 Sales* 28 000

New purchases 54 000 Balance c/d 436 000

464 000 464 000

* Balancing figure

Accumulated depreciation – motor vehicles

R R

Sales* c/d 26 000 Balance b/d 54 000

Balance 76 000 Depreciation 48 000

102 000 102 000 * Balancing figure

Machinery at cost

R R

Balance b/d 370 000 Sales (60 000 + 51 000) 111 000

New purchases* 126 000 Balance c/d 385 000

496 000 496 000

* Balancing figure

Accumulated depreciation – machinery

R R

Sales 51 000 Balance b/d 120 000

Balance c/d 141 000 Depreciation 72 000

192 000 192 000


282

QUESTION 2

B LTD

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 20.5

R R


Profit before tax

13 500

Adjustments for:

Depreciation (C4)

42 600

Decrease in allowance for credit losses

(200)

Profit on sale of non-current assets

(1 000)

Loss on sale of financial assets at amortised cost

400

55 300

Changes in working capital

(2 500)

Decrease in inventory (15 000 − 19 000)

4 000

Increase in trade and other receivables (18 000 – 15 400)

(2 600)

Decrease in trade and other payables (7 400 – 11 300)

(3 900)

Cash generated from operations

52 800 Dividends paid (C1)

(40 000)

Tax paid (C2)

(5 300)


7 500


Investment to maintain production capacity (8 000) Replacement of machinery (C3) (8 000)

Proceeds from sale of non-current assets 2 500 Proceeds from sale of financial assets at amortised cost 2 000 Net cash used in investing activities

(3 500)

Cash flows from financing activities

Redemption of long-term borrowings (50 000 – 40 000) (10 000) Net cash used in financing activities

(10 000)

Net decrease in cash and cash equivalents

(6 000) Cash and cash equivalents at the beginning of the year

14 000

Cash and cash equivalents at the end of the year

8 000

Financial assets at fair value through profit or loss

R R

Balance b/d 40 000 Sold (24 000 – 4 000) 20 000

Impairment loss * 20 000

Balance b/d -

40 000 40 000

* Balancing figure


283

Calculations

C1. Dividends paid

Unpaid amounts at the beginning of the year 10 000 Amount debited to income 50 000 Unpaid amounts at the end of the year (20 000)

40 000

C2. Tax paid

Unpaid amounts at the beginning of the year 3 800 Amount debited to income 5 500 Unpaid amounts at the end of the year (4 000)

5 300

C3.

Machinery

R R

Balance b/d 52 300 Sales 45 500

New purchases* 8 000 Balance c/d 14 800

60 300 60 300

* Balancing figure

C4.

Accumulated depreciation – machinery

R R

Sales 44 000 Balance b/d 4 800

Balance c/d 3 400 Depreciation current year* 42 600

47 400 47 400

* Balancing figure


284

SELF-ASSESSMENT

After studying this study unit, are you able to:

draft a statement of cash flows with accompanying notes for a company using

the direct method in accordance with International Financial Reporting

Standards (IFRS)?

draft a statement of cash flows with accompanying notes for a company using

the indirect method in accordance with International Financial Reporting

Standards (IFRS)?

FAC2602 - gimmenotes.co.zagimmenotes.co.za/.../2017/01/FAC2602-Study-guide.pdf · ... Consolidation...

Documents

Transcript of FAC2602 - gimmenotes.co.zagimmenotes.co.za/.../2017/01/FAC2602-Study-guide.pdf · ... Consolidation...