# Complex groups p2

Complex group structures

Complex group structures exist where a subsidiary of a parent entity owns a shareholding in another entity which makes that other entity also a subsidiary of the parent entity.

Complex structures can be classified under two headings:

• Vertical groups

• Mixed groups.

2 Vertical groups

Definition

A vertical group arises where a subsidiary of the parent entity holds shares in a further entity such that control is achieved. The parent entity therefore controls both the subsidiary entity and, in turn, its subsidiary (often referred to as a sub-subsidiary entity).

Look at the following two situations:

In both situations, H controls S, and S controls T. H is therefore able to exert control over T by virtue of its ability to control S. All three companies form a vertical group.

Both companies that are controlled by the parent are consolidated.

The basic techniques of consolidation are the same as seen previously, with some changes to the goodwill, NCI and group reserves calculations.

Approach to a question

When establishing the group structure, follow these steps:

• Control – which entities does the parent control directly or indirectly?

• Percentages – what are the effective ownership percentages for consolidation?

• Dates – when did the parent achieve control over the subsidiary and the sub-subsidiary?

Illustration 1 – Vertical group structure

Control

H controls S and S controls T. Therefore, H can indirectly control T.

Effective consolidation percentage

S will be consolidated with H owning 90% and the NCI owning 10%.

T will be consolidated with H owning 72% (90% × 80%) and the NCI owning 28% (100% – 72%).

These effective ownership percentages will be used in standard workings (W4) and (W5).

Dates

S will be consolidated from 31 December 20X0.

When H acquires control of S, it also acquires indirect control over T.

Therefore H will consolidate T from 31 December 20X0.

Illustration 2 – Vertical group structure

Control

H controls S and S controls T. Therefore, H can indirectly control T.

Effective consolidation percentage

S will be consolidated with H owning 70% and the NCI owning 30%.

T will be consolidated with H owning 42% (70% × 60%) and the NCI owning 58% (100% – 42%).

The effective ownership percentages will be used in standard workings (W4) and (W5).

Do not be put off by the fact that the effective group interest in T is less than 50%, and that the effective non-controlling interest in T is more than 50%.

Dates

S will be consolidated from 31 December 20X1.

However, S did not gain control of T until 30 April 20X2 meaning that H does not indirectly control T until this date. Therefore, T is consolidated into the H group from 30 April 20X2.

Accounting for a sub-subsidiary requires an indirect holding adjustment.

• Goodwill in the sub-subsidiary is calculated from the perspective of the ultimate parent company. Therefore, the cost of the investment in the sub-subsidiary should be the parent’s share of the amount paid by its subsidiary.

– The NCI’s share of the cost of the investment in the sub-subsidiary must be eliminated from the goodwill calculation.

• The value of the non-controlling interest in the subsidiary includes the NCI’s share of the cost of the investment in the sub-subsidiary.

– The NCI’s share of the cost of the investment in the sub-subsidiary must be eliminated from the NCI calculation.

Illustration 3 – Indirect holding adjustment

On 31 December 20X1, A purchased 90% of the equity shares in B for \$150,000 and B purchased 80% of the equity shares in C for \$100,000.

At this date, the fair value of the net assets of B and C were \$144,000 and \$90,000 respectively. The fair value of the non-controlling interest in B and C was \$17,000 and \$15,000 respectively.

Required:

Calculate goodwill and the non-controlling interest for inclusion in the consolidated statement of financial position as at 31 December 20X1.

Solution

 Goodwill B C \$ \$ Consideration 150,000 100,000 Indirect holding adjustment (10% × \$100,000) (10,000) Add: FV of non-controlling interest at acquisition 17,000 15,000 –––––– –––––– 167,000 105,000 Less: Net assets at acquisition (144,000) (90,000) Goodwill at acquisition –––––– –––––– 23,000 15,000 –––––– –––––– Non-controlling interest \$ B: NCI at acquisition (W3) 17,000 B: Indirect holding adjustment (W3) (10,000) C: NCI at acquisition (W3) 15,000 –––––– Non-controlling interest 22,000 ––––––

Note: In subsequent years, the NCI will be adjusted for its share of the post-acquisition net asset movement of each subsidiary.

The NCI % in B is 10% (100% – 90%).

The NCI % in C is 28% (100% – (90% × 80%))

Illustration 4 – Vertical group 1

The draft statements of financial position of David, Colin and John, as at 31 December 20X4, are as follows:

 D C J \$000 \$000 \$000 Sundry assets 280 180 130 Shares in subsidiary 120 80 –––– –––– –––– 400 260 130 –––– –––– –––– Equity capital (\$1 shares) 200 100 50 Retained earnings 100 60 30 Liabilities 100 100 50 –––– –––– –––– 400 260 130 –––– –––– ––––

The following information is also available:

• David acquired 75,000 \$1 shares in Colin on 1 January 20X4 when the retained earnings of Colin amounted to \$40,000. At that date, the fair value of the non-controlling interest in Colin was valued at \$38,000.

• Colin acquired 40,000 \$1 shares in John on 30 June 20X4 when the retained earnings of John amounted to \$25,000. The retained earnings of John had been \$20,000 on the date of David’s acquisition of Colin. On 30 June 20X4, the fair value of the non-controlling interest in John (both direct and indirect), based upon effective shareholdings, was \$31,000.

• Goodwill has suffered no impairment. It is group policy to use the full goodwill method.

Required:

Produce the consolidated statement of financial position of the David group as at 31 December 20X4.

Solution

Statement of financial position for the David group at 31 December 20X4

 \$000 Goodwill (\$18 + \$16) (W3) 34 Sundry assets (\$280 + \$180 + \$130) 590 –––– 624 Equity and liabilities: –––– Equity capital 200 Retained earnings (W5) 118 –––– Non-controlling interest (W4) 318 56 –––– Total equity 374 Liabilities (\$100 + \$100 + \$50) 250 ––––

624

––––

(W1) Group structure

Control

David controls Colin and Colin controls John. Therefore, David can indirectly control John.

Effective consolidation percentage

Colin will be consolidated with David owning 75% and the NCI owning 25%.

John will be consolidated with David owning 60% (75% × 80%) and the NCI owning 40% (100% – 60%).

The effective ownership percentages will be used in standard workings (W4) and (W5).

Dates

Colin will be consolidated from 1 Jan 20X4.

However, Colin did not gain control of John until 30 June X4. Therefore, David does not indirectly control John until this date. As such, John is consolidated from 30 June 20X4.

(W2) Net assets

The acquisition date will be the date on which David (the parent company) gained control over each entity:

–   Colin: 1 January 20X4

–   John: 30 June 20X4

This means that the information given regarding John’s retained earnings at 1 January 20X4 is irrelevant in this context.

Net assets of subsidiaries

 Colin John At acq’n At rep date At acq’n At rep date Equity capital \$000 \$000 \$000 \$000 100 100 50 50 Retained earnings 40 60 25 30 –––– –––– –––– –––– 140 160 75 80 –––– –––– –––– ––––

(W3) Goodwill

A separate goodwill calculation is required for each subsidiary.

For the sub-subsidiary, goodwill is calculated from the perspective of the ultimate parent entity (David) rather than the immediate parent (Colin). Therefore, the effective cost of John is only David’s share of the amount that Colin paid for John, i.e. \$80,000 × 75% = \$60,000.

 Colin John \$000 \$000 Cost of investment in subsidiary 120 80 Indirect holding adjustment (25% × \$80,000) – (20) Fair value of NCI 38 31 –––– –––– 158 91 FV of net assets (W2) (140) (75) –––– –––– 18 16 –––– –––– (W4) Non-controlling interest \$000 Colin: NCI at acquisition (W3) 38 Colin: NCI share of post-acq’n net assets (25% × \$20,000 (W2)) 5 Less: Indirect holding adjustment (25% × 80,000) (20) John: NCI at acquisition (W3) 31 John NCI share of post acq’n net assets (40% × \$5,000 (W2)) 2 –––– 56 –––– (W5) Group retained earnings \$000 David 100 Colin: 75% × \$20,000 (W2) 15 John: 60% × \$5,000 (W2) 3 ––––

118

––––

Note that only the group’s effective share (60%) is taken of John’s post-acquisition retained earnings.

Illustration 5 – Vertical group 2

The draft statements of financial position of Daniel, Craig and James as at 31 December 20X4 are as follows:

 D C J \$000 \$000 \$000 Sundry assets 180 80 80 Shares in subsidiary 120 80 ––– ––– ––– 300 160 80 ––– ––– ––– Equity capital 200 100 50 Retained earnings 100 60 30 ––– ––– ––– 300 160 80 ––– ––– –––

• Craig acquired 40,000 \$1 shares in James on 1 January 20X4 when the retained earnings of James amounted to \$25,000.

• Daniel acquired 75,000 \$1 shares in Craig on 30 June 20X4 when the retained earnings of Craig amounted to \$40,000 and those of James amounted to \$30,000.

It is group policy to value the non-controlling interest using the proportion of net assets method.

Required:

Produce the consolidated statement of financial position of the Daniel group at 31 December 20X4.

Solution

Consolidated statement of financial position of the Daniel group at 31 December 20X4

 Assets: \$000 Goodwill (\$15 + \$12) (W3) 27 Sundry assets (\$180 + \$80 + \$80) 340 ––––– 367 Equity and liabilities: ––––– Equity capital 200 Retained earnings (W5) 115 Non-controlling interest (W4) 52 –––––

367

–––––

(W1) Group structure

Control

Daniel controls Craig and Craig controls James. Therefore, Daniel can indirectly control James.

Effective consolidation percentage

Craig will be consolidated with Daniel owning 75% and the NCI owning 25%.

James will be consolidated with Daniel owning 60% (75% × 80%)

and the NCI owning 40% (100% – 60%).

The effective ownership percentages will be used in standard workings (W4) and (W5). They will also be used in (W3) to calculate goodwill, as the group policy is to use the proportion of net assets method.

Dates

Craig will be consolidated from 30 June 20X4.

When Daniel acquires control of Craig, it also acquires indirect control over James. Therefore Daniel will consolidate James from 30 June 20X4.

 (W2) Net assets Craig James Acq’n date Rep date Acq’n date Rep date Share capital \$000 \$000 \$000 \$000 100 100 50 50 Retained 40 60 30 30 earnings ——— ——— ——— ——— 140 160 80 80 ——— ——— ——— ——— (W3) Goodwill Craig James \$000 \$000 Cost of investment 120 80 Indirect holding adjustment – (20) (25% × \$80,000) NCI at acquisition: 35 32 Craig: 25% × \$140,000 (W2) James: 40% × \$80,000 (W2) ——— ——— 155 92 FV of NA at acquisition (W2) (140) (80) ——— ——— Goodwill 15 12 ——— ———

 (W4) Non-controlling interest \$000 Craig: NCI at acquisition (W3) 35 Craig: NCI % post-acq’n net assets 5 (25% × (\$160,000 – \$140,000)) (W2) Less: indirect holding adjustment (W3) (20) James: NCI at acquisition (W3) 32 James: NCI % post-acq’n net assets – (40% × (\$80,000 – \$80,000)) (W2) —— 52 —— (W5) Group retained earnings \$000 Daniel 100 Craig: 75% × (\$60,000 – \$40,000) (W2) 15 James: 60% × (\$30,000 – \$30,000) (W2) – –––– 115 ––––

Test your understanding 1 – H, S & T

The following are the statements of financial position at 31 December 20X7 for H group companies:

 H S T \$ \$ \$ 75% of the shares in S 65,000 – – 60% of the shares in T – 55,000 – Sundry assets 280,000 133,000 100,000 ––––––– ––––––– ––––––– 345,000 188,000 100,000 ––––––– ––––––– ––––––– Equity share capital (\$1 shares) 100,000 60,000 50,000 Retained earnings 45,000 28,000 25,000 Liabilities 200,000 100,000 25,000 ––––––– ––––––– ––––––– 345,000 188,000 100,000 ––––––– ––––––– –––––––

All the shareholdings were acquired on 1 January 20X1 when the retained earnings of S were \$10,000 and those of T were \$8,000. At that date, the fair value of the non-controlling interest in S was \$20,000. The fair value of the total non-controlling interest (direct and indirect) in T was \$50,000. It is group policy to value the non-controlling interest using the full goodwill method.

At the reporting date, the recoverable amount of the net assets of S were \$93,000. It was deemed that goodwill arising on the acquisition of T was not impaired.

Required:

Prepare the consolidated statement of financial position for the H group at 31 December 20X7.

Test your understanding 2 – Grape, Vine and Wine

The statements of financial position of three entities at 30 June 20X6 were as follows:

 Grape Vine Wine \$000 \$000 \$000 Investment 110 60 – Sundry assets 350 200 120 –––– –––– –––– 460 260 120 –––– –––– –––– Equity share capital 100 50 10 Retained earnings 210 110 70 Liabilities 150 100 40 –––– –––– –––– 460 260 120 –––– –––– ––––

Grape purchased 40,000 of the 50,000 \$1 shares in Vine on 1 July 20X5, when the retained earnings of that entity were \$80,000. At that time, Vine held 7,500 of the 10,000 \$1 shares in Wine. These had been purchased on 1 January 20X5 when Wine’s retained earnings were \$65,000. On 1 July 20X5, Wine’s retained earnings were \$67,000.

At 1 July 20X5, the fair value of the non-controlling interest in Vine was \$27,000, and that of Wine (both direct and indirect) was \$31,500. It is group policy to value the non-controlling interest using the full goodwill method.

The equity share capital of Grape includes \$20,000 received from the issue of 20,000 class B shares on 30 June 20X6. These shares entitle the holders to fixed annual dividends. The holders of these B shares can also demand the repayment of their capital from 30 June 20X9.

Included in the liabilities of Grape are \$100,000 proceeds from the issue of a loan on 1 July 20X5. There are no annual interest payments and Grape therefore believes that no further accounting entries are required until the repayment date. The loan is repayable on 30 June 20X8 at a premium of 100%. The effective rate of interest on the loan is 26.0%.

Required:

Prepare the consolidated statement of financial position for the Grape group at 30 June 20X6.

3 Mixed (D-shaped) groups

Definition

In a mixed group situation the parent entity has a direct controlling interest in at least one subsidiary. In addition, the parent entity and the subsidiary together hold a controlling interest in a further entity.

For example:

• H has 60% of the shares of S. S is therefore a subsidiary of H.

• H has a 30% direct holding in T. H also controls S, who has a 30% holding in T. H therefore controls T through its direct and indirect holdings. This means that T is part of H’s group and must be consolidated.

Accounting for a mixed group is similar to accounting for a vertical group.

Approach to a question

Follow the same steps as with a vertical group when establishing group structure:

• Control

• Percentages of ownership

• Dates of acquisition

Illustration 6 – Mixed group structure

P acquired a 70% interest in S on 1 April 20X4, and acquired a 25% interest in Q on the same date.

S acquired a 40% interest in Q on 1 April 20X4.

Control

P controls S. This makes S a subsidiary of P.

P is able to direct 25% + 40% = 65% of the voting rights of Q. Q is a sub-subsidiary of P.

Effective consolidation percentage

S will be consolidated with P owning 70% and the NCI owning 30%.

 P’s effective interest in Q is calculated as follows: Direct 25% Indirect (70% × 40%) 28% P’s effective interest in Q –––– 53% ––––

The NCI interest in Q is therefore 47% (100% – 53%).

Dates

The date of acquisition for S and Q is 1 April 20X4.

Illustration 7 – Mixed group structure

H acquired a 60% interest in S on 1 January 20X6, and acquired a 30% interest in T on the same date.

S acquired a 30% interest in T on 1 July 20X4.

Control

H controls S. This makes S a subsidiary of H.

H is able to direct 30% + 30% = 60% of the voting rights of T. T is a sub-subsidiary of H.

Effective consolidation percentage

S will be consolidated with H owning 60% and the NCI owning 40%.

 H’s effective interest in T is calculated as follows: Direct 30% Indirect (60% × 30%) 18% H’s effective interest in T –––– 48% ––––

The NCI interest in T is therefore 52% (100% – 48%).

Dates

The date of acquisition for S and T is 1 January 20X6.

Further detail on mixed groups

Note that the definition of a mixed group does not include the situation where the parent and an associate together hold a controlling interest in a further entity.

E.g.

H owns 35% of S, S owns 40% of W and H owns 40% of W.

This is not a mixed group situation. Neither S nor W is a member of the H group, although S and W may both be ‘associates’ of H.

H’s interest in W might be calculated as before as (35% × 40%) + 40% = 54%. Although H has an arithmetic interest in W that is more than 50%, it does not have parent entity control of W, as it does not control S’s 40% stake in W.

Consolidation

All consolidation workings are the same as those used in vertical group situations, with the exception of goodwill.

The goodwill calculation for the sub-subsidiary differs slightly from a vertical group. The cost of the sub-subsidiary must include the following:

• the cost of the parent’s holding (the direct holding)

• the cost of the subsidiary’s holding (the indirect holding)

Illustration 8 – H, S, C

The statements of financial position of H, S and C as at 31 December 20X5 were as follows:

 H S C \$ \$ \$ 75% of shares in S 72,000 – – 40% of shares in C 25,000 – – 30% of shares in C – 20,000 – Sundry assets 125,000 120,000 78,000 ––––––– ––––––– ––––––– 222,000 140,000 78,000 ––––––– ––––––– ––––––– Equity share capital (\$1 shares) 120,000 60,000 40,000 Retained earnings 95,000 75,000 35,000 Liabilities 7,000 5,000 3,000 ––––––– ––––––– ––––––– 222,000 140,000 78,000 ––––––– ––––––– –––––––

All shares were acquired on 31 December 20X2 when the retained earnings of S amounted to \$30,000 and those of C amounted to \$10,000.

It is group accounting policy to value the non-controlling interest on a proportionate basis.

Required:

Prepare the statement of financial position for the H group as at 31 December 20X5.

Solution

Group statement of financial position for H group as at 31 December 20X5

 \$ Goodwill (\$4,500 + \$8.750) (W3) 13,250 Sundry assets (\$125,000 + \$120,000 + \$78,000) 323,000 –––––––– 336,250 –––––––– Equity and liabilities: \$ Equity share capital 120,000 Retained earnings (W5) 144,375 Non-controlling interest (W4) 56,875 –––––––– Total equity 321,250 Liabilities (\$7,000 + \$5,000 + \$3,000) 15,000 –––––––– 336,250 ––––––––

(W1) Group structure

 H’s interest in S in 75%. The NCI interest in S is 25%. H’s effective interest in C: Direct 40.0% Indirect (75% × 30%) 22.5% ––––– 62.5% –––––

The NCI interest in C is 37.5% (100% – 62.5%).

 (W2) Net assets S’s net assets At acq’n At rep date \$ \$ Equity capital 60,000 60,000 Retained earnings 30,000 75,000 –––––– –––––– 90,000 135,000 C’s net assets –––––– –––––– \$ \$ Equity capital 40,000 40,000 Retained earnings 10,000 35,000 –––––– –––––– 50,000 75,000 (W3) Goodwill –––––– –––––– Goodwill arising on acquisition of S \$ Cost of H’s investment 72,000 NCI at acquisition (25% × \$90,000 (W2)) 22,500 –––––– 94,500 Less: FV of net assets at acquisition (W2) (90,000) –––––– Goodwill 4,500 Goodwill arising on acquisition of C –––––– \$ Cost of H’s investment 25,000 Cost of S’s investment 20,000 Indirect holding adjustment (25% × \$20,000) (5,000) NCI at acquisition (37.5% × \$50,000 (W2)) 18,750 –––––– 58,750 Less: FV of net assets at acquisition (W2) (50,000) –––––– Goodwill 8,750 ––––––

 (W4) Non-controlling interest \$ S – NCI at acquisition (W3) 22,500 S – NCI % of post acquisition net assets 11,250 (25% × \$45,000 (W2)) Indirect holding adjustment (W3) (5,000) C – NCI at acquisition (W3) 18,750 C – NCI % of post acquisition net assets 9,375 (37.5% × \$25,000 (W2)) ––––– 56,875 (W5) Retained earnings ––––– \$ 100% of H’s retained earnings 95,000 Group share of S’s post acquisition retained earnings 33,750 (75% × \$45,000 (W2)) Group share of C’s post acquisition retained earnings 15,625 (62.5% × \$25,000 (W2)) –––––– 144,375 ––––––

Test your understanding 3 – T, S & R

The following are the summarised statements of financial position of T, S and R as at 31 December 20X4.

 T S R \$ \$ \$ Non-current assets 140,000 61,000 170,000 Investments 200,000 65,000 – Current assets 30,000 28,000 15,000 ––––––– ––––––– ––––––– 370,000 154,000 185,000 ––––––– ––––––– ––––––– Equity shares of \$1 each 200,000 80,000 100,000 Retained earnings 150,000 60,000 80,000 Other components of equity 10,000 8,000 – Liabilities 10,000 6,000 5,000 ––––––– ––––––– ––––––– 370,000 154,000 185,000 ––––––– ––––––– –––––––

On 1 January 20X3 S acquired 35,000 ordinary shares in R at a cost of \$65,000 when the retained earnings of R amounted to \$40,000.

On 1 January 20X4 T acquired 64,000 shares in S at a cost of \$120,000 and 40,000 shares in R at a cost of \$80,000. On this date, the retained earnings of S and R amounted to \$50,000 and \$60,000 respectively. S also had other components of equity of \$3,000. The fair value of the NCI in S on 1 January 20X4 was \$27,000. The fair value of the NCI (direct and indirect) in R was \$56,000. The non-controlling interest is measured using the full goodwill method. At the reporting date, goodwill has not been impaired.

On 1 January 20X4, T entered into a lease agreement. T is the lessor and is leasing a machine to a third party for two years. The machine has a useful economic life of ten years. No receipt was due during 20X4 so no accounting entries have been posted. T is due a receipt of \$10,000 on 31 December 20X5.

On 1 January 20X4, T granted 100 share appreciation rights (SARs) to 60 managers. These entitle the holders to a cash bonus based on the share price of T. The SARs vest if the managers are still employed by T at 31 December 20X7. Five managers left during 20X4 and it is expected that another 15 will leave prior to 31 December 20X7. The fair value of each SAR was \$10 on 1 January 20X4 and \$14 on 31 December 20X4.

Required:

Prepare the consolidated statement of financial position of the T group as at 31 December 20X4.

Test your understanding 1 – H, S & T

Consolidated statement of financial position as at 31 December 20X7

 \$ Goodwill (\$5,000 + \$33,250) (W3) 38,250 Sundry net assets (\$280,000 + \$133,000 + \$100,000) 513,000 ––––––– 551,250 ––––––– Equity and liabilities Equity share capital 100,000 Retained earnings (W5) 58,650 NCI (W4) 67,600 Liabilities (\$200,000 + \$100,000 + \$25,000) 325,000 ––––––– 551,250 –––––––

 S: % Group share 75 NCI 25 T: Group share (75% × 60%) 45 NCI (100% – 45%) 55

 (W2) Net assets S T acq’n rep date acq’n  rep date Equity capital \$ \$ \$ \$ 60,000 60,000 50,000 50,000 Retained earnings 10,000 28,000 8,000 25,000 –––––– –––––– –––––– –––––– 70,000 88,000 58,000 75,000 –––––– –––––– –––––– –––––– (W3) Goodwill S T \$ \$ Consideration paid 65,000 55,000 FV of NCI 20,000 50,000 Indirect Holding Adjustment (25% × \$55,000) – (13,750) –––––– –––––– 85,000 91,250 FV of NA at acquisition (70,000) (58,000) –––––– –––––– Goodwill at acquisition 15,000 33,250 Impairment (W5) (10,000) – –––––– –––––– Goodwill at reporting date 5,000 33,250 –––––– –––––– (W4) Non-controlling interest \$ S – FV at date of acquisition 20,000 S – NCI % of post-acq’n net assets (25% × \$18,000 (W2)) 4,500 Indirect Holding Adjustment (W3) (13,750) T – FV at date of acquisition 50,000 T – NCI % of post-acq’n net assets (55% × \$17,000 (W2)) 9,350 NCI % of S’s goodwill impairment (25% × \$10,000 (W3)) (2,500) –––––– 67,600 ––––––

 (W5) Consolidated retained earnings \$ Retained earnings of H 45,000 Group % of post-acquisition retained earnings: S – (75% × \$18,000 (W2)) 13,500 T – (45% × \$17,000 (W2)) 7,650 H’s % of S’s goodwill impairment (75% × \$10,000 (W3)) (7,500) ––––––– 58,650 ––––––– (W6) Goodwill impairment \$ Goodwill in S before impairment review (W3) 15,000 Net assets of S at reporting date (W2) 88,000 ––––––– 103,000 Recoverable amount (93,000) ––––––– Goodwill impairment 10,000 –––––––

Test your understanding 2 – Grape, Vine and Wine

Consolidated statement of financial position as at 30 June 20X6

 \$ Goodwill (\$7,000 + \$2,500 (W3)) 9,500 Sundry assets (\$350,000 + \$200,000 + \$120,000) 670,000 –––––– 679,500 –––––– Equity and liabilities \$ Equity share capital (\$100,000 – \$20,000 (W6)) 80,000 Retained earnings (W5) 209,800 Non-controlling interest (W4) 53,700 Liabilities (\$150,000 + \$100,000 + \$40,000 + \$20,000 (W6) 336,000 + \$26,000 (W7)) –––––– 679,500 ––––––

(W1) Group structure

Effective consolidation percentage

Vine will be consolidated with Grape owning 80% and the NCI owning 20%.

Wine will be consolidated with Grape owning 60% (80% × 75%) and the NCI owning 40% (100% – 60%).

The effective ownership percentages will be used in standard workings (W4) and (W5).

Dates

Grape gained control over Vine and Wine on 1 July 20X5.

 (W2) Net assets Vine Wine acq’n rep. date acq’n rep. date \$ \$ \$ \$ Equity capital 50,000 50,000 10,000 10,000 Retained earnings 80,000 110,000 67,000 70,000 ––––––– ––––––– –––––– –––––– 130,000 160,000 77,000 80,000 ––––––– ––––––– –––––– ––––––

The acquisition date for both entities is the date they joined the Grape group, i.e. 1 July 20X5.

 (W3) Goodwill Vine Wine \$ \$ Consideration paid 110,000 60,000 Indirect holding adjustment (12,000) (20% × \$60,000) FV of NCI at acquisition 27,000 31,500 ––––––– –––––– 137,000 79,500 FV of net assets at acquisition (W2) (130,000) (77,000) ––––––– –––––– Goodwill 7,000 2,500 ––––––– –––––– (W4) Non-controlling interest \$ V – NCI at acquisition (W3) 27,000 V – NCI share of post acq’n net assets 6,000 (20% × \$30,000 (W2)) Indirect holding adjustment (W3) (12,000) W – NCI at acquisition (W3) 31,500 W – NCI share of post acq’n net assets 1,200 (40% × \$3,000 (W2)) –––––– 53,700 –––––– (W5) Consolidated retained earnings \$ Retained earnings of Grape 210,000 Interest on liability (W7) (26,000) Group share of post-acquisition retained earnings V (80% × \$30,000 (W2)) 24,000 W (60% × \$3,000 (W2)) 1,800 ––––––– 209,800 –––––––

(W6) Shares

A financial liability exists if there is an obligation to deliver cash.

The class B shares are a financial liability and must be reclassified:

 Dr Equity share capital \$20,000 Cr Liabilities \$20,000

(W7) Loan

The loan will be measured at amortised cost. A finance cost must be charged using the effective rate. The finance cost for the year is \$26,000 (\$100,000 × 26%).

 Dr Finance costs/retained earnings (W5) \$26,000 Cr Liabilities \$26,000

Test your understanding 3 – T, S & R

T consolidated statement of financial position as at 31 December 20X4

 \$ Goodwill (\$14,000 + \$28,000 (W3)) 42,000 Non-current assets (\$140,000 + \$61,000 + \$170,000) 371,000 Current assets 78,000 (\$30,000 + \$28,000 + \$15,000 + \$5,000 (W6)) ––––––– 491,000 ––––––– \$ Equity share capital 200,000 Retained earnings (W5) 162,600 Other components of equity (W5) 14,000 ––––––– 376,600 Non-controlling interest (W4) 79,400 Liabilities 35,000 (\$10,000 + \$6,000 + \$5,000 + \$14,000 (W7))

–––––––

491,000

–––––––

(W1) Group structure

 T has an 80% holding in S. The NCI holding is 20%. T’s effective holding in R is calculated as follows: Direct 40% Indirect (80% × 35%) 28% –––– 68% –––– The NCI holding in R is 32% (100% – 68%). T’s acquisition date for both entities is 1 January 20X4. (W2) Net assets S’s Net assets At acq’n At rep date \$ \$ Equity share capital 80,000 80,000 Retained earnings 50,000 60,000 Other components of 3,000 8,000 equity ––––––– ––––––– 133,000 148,000 ––––––– ––––––– R’s Net assets \$ \$ Equity share capital 100,000 100,000 Retained earnings 60,000 80,000 ––––––– ––––––– 160,000 180,000 ––––––– –––––––

 (W3) Goodwill Goodwill arising on the acquisition of S \$ Consideration paid 120,000 FV of NCI 27,000 ––––––– 147,000 FV of net assets at acquisition (W2) (133,000) ––––––– Goodwill 14,000 ––––––– Goodwill arising on the acquisition of R \$ Cost of T’s investment 80,000 Cost of S’s investment 65,000 Indirect holding adjustment (20% × 65,000) (13,000) Fair value of NCI at acquisition 56,000 ––––––– 188,000 FV of net assets at acquisition (W2) (160,000) ––––––– Goodwill 28,000 ––––––– (W4) Non-controlling interest \$ S – FV of NCI at acquisition 27,000 NCI share of S’s post acquisition net assets 3,000 (20% × (\$148,000 – \$133,000) (W2)) Indirect holding adjustment (W3) (13,000) R – FV of NCI at acquisition 56,000 NCI share of R’s post acquisition net assets 6,400

(32% × (\$180,000 – \$160,000) (W2))

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79,400

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 (W5) Group retained earnings \$ 100% of T’s retained earnings 150,000 Operating lease (W6) 5,000 Share-based payment (W7) (14,000) Group share of S’s post acquisition retained earnings 8,000 (80% × (\$60,000 – \$50,000) (W2)) Group share of R’s post acquisition retained earnings 13,600 (68% × (\$80,000 – \$60,000) (W2)) ––––––– 162,600 ––––––– Other components of equity \$ 100% of T’s other components of equity 10,000 Group share of S’s post acquisition other components 4,000 (80% × (\$8,000 – \$3,000) (W2)) Group share of R’s post acquisition other components – (68% × nil (W2)) ––––––– 14,000 –––––––

(W6) Operating lease

The lease term is much shorter than the useful life of the asset so it appears to be an operating lease. The total lease receipts should be recognised as income in the statement of profit or loss on a straight line basis.

The annual operating lease income is \$5,000 (\$10,000/2 years).

 The adjusting entry is: Dr Current assets \$5,000 Cr Profit or loss/Retained earnings (W5) \$5,000

(W7) Share-based payments

This is a cash-settled share-based payment scheme.

The expense should be spread across the vesting period. The expense to be recognised is based on the fair value of the scheme at the period end and the number of SARs that are expected to vest.

 (60 employees – 5 – 15) × 100 × \$14 × 1/4 = \$14,000 The adjusting entry is: Dr Profit or loss/Retained earnings (W5) \$14,000 Cr Liabilities \$14,000

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