Complex Group

Table of Content

 Group accounts
 Pre and post-acquisition reserves
 Non-controlling interest
 Complex group

Learning Outcome:

 Introduction of Group accounts

 Complexities in Group Accounts
 Understanding of complex groups
 Accounting of vertical group
 Accounting of D shaped group

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Group accounts: the statement of financial position

IFRS 3 Business Combinations looks into the working of a group (the parent company,
its subsidiaries and associates) and provides guidelines towards the working of the
fair values and goodwill.

Goodwill is the residual amount paid at the time of the acquisition of the company
after valuing the net assets of the company at their fair values. It is an intangible
asset which is created due to reputation, strong customer base or the technical skills
that the entity possesses.

Structure of the consolidated SOFP

A consolidated Statement of Financial Position shows:

• Goodwill;
• The net assets of the whole group;
•the share capital of the group (which always equals the share capital of the parent
only);
•the retained profits which consists of the profits made by the group
(i.e. the parent’s historical profits plus post acquisition profits of the subsidiary).

Complexities

In reality, consolidation is not as straightforward. It involves further complexities

that impact the creation of the consolidated SOFP, such as:

•Accounting for intra-group transactions;

•Accounting for adjustments to fair values of assets and liabilities at the acquisition
date;
•Accounting for partly owned subsidiaries;
•Accounting for acquisitions done part way through the year.

The chapter will progress from a straightforward consolidation to handling of the

more complex scenarios.

Pre and post-acquisition reserves

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Subsidiary pre-acquisition reserves
The subsidiary’s pre-acquisition reserves are not consolidated in the group reserves
as they are included as part of the cost of investment. This is then replaced by assets
and liabilities on consolidation. If a premium is paid for the subsidiary’s net assets
then this is capitalized as goodwill.

Component Reflected in...

Premium Goodwill asset

Equity Assets and liabilities
Cost of Investment
Retained Earnings Assets

(Pre-acq’n)

Subsidiary post-acquisition reserves

After the initial acquisition, earnings will be made in the subsidiary and it is
these earnings the group will be entitled to. The group share of post-acquisition
earnings will form part of the total of consolidated retained earnings, balanced by
increases in net assets on the other side of the statement of financial position in the
future.

Component Reflected in...

Premium Goodwill asset

Shares &

Retained Earnings Assets and liabilities

(Pre-acq’n) (At acq’n)
Cost of Investment
Retained Earnings Increases in net assets

(Post-acq’n) Group reserves

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Non-controlling interest

It refers to that stake of the subsidiary which is owned by other shareholders and not
by the parent company. Since, the subsidiary is a part of the group of the parent
company; the NCI shareholders are also considered a part of the group. Therefore,
their interests are also reported in the consolidated financial statements of the parent
company.

As already learnt, the two methods of valuing the NCI are:

a. Fair Value b. Proportion of Net Assets

Complex Group

Complex Structures

Mixed Group
Vertical Group (D Structure)

Parent Parent

Control Control

Subsidiary Subsidiary Control

Control Control

Sub Subsidiary
Sub Subsidiary

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COMPLEX GROUP ACCOUNTING

In order to establish a group structure, it is important to consider the control of the parent
company (direct or indirect control), the stake of ownership in the subsidiaries and the date of
acquisition of each company.

Vertical Groups

A vertical group exists when the parent company indirectly controls a subsidiary company
via another subsidiary company. The subsidiary controlled indirectly by the parent company
is referred to as the sub-subsidiary.

 If the sub-subsidiary is acquired by the Subsidiary prior to the Subsidiary being acquired
by the Parent, the date of acquisition of both the subsidiary and the sub-subsidiary is
the same as the date of acquisition of the subsidiary.

Example1: P (Parent company) acquires S (subsidiary company) on 12.05.2015.

S acquires Q (sub-subsidiary) on 13.06.2014.

So, S is consolidated from 12.05.2015

Q is consolidated from 12.05.2015

But if the sub-subsidiary is acquired by the subsidiary after the subsidiary has been
acquired by the parent company, then the date for consolidation for the sub-subsidiary
will be the date of its acquisition by the subsidiary.

Example 2: P (Parent company) acquires S (subsidiary company) on 12.05.2015.

S acquires Q (sub-subsidiary) on 13.06.2015.

So, S is consolidated from 12.05.2015

Q is consolidated from 13.06.2015

 Parent’s effective interest in a sub-subsidiary= Parent’s interest in the subsidiary *

subsidiary’s interest in its sub-subsidiary

Example: P owns 80% of the ordinary shares in S. S owns 70% of the ordinary shares
in Q.

Therefore, P owns (80%*70%) 56% in Q.

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Indirect Holding Adjustments (IHA): Affects the NCI & Goodwill calculation.

 Goodwill
o Goodwill for sub-subsidiary
 Group’s cost of investment in sub-subsidiary(i.e. group’s share of
Subsidiary’s cost of investment in sub-subsidiary, e.g. 80% of
Subsidiary’s cost of investment in sub-subsidiary)
 – Group’s share (using effective interest) of net assets of Sub-
Subsidiary

Example 3:

A B C
Investments $000 $000 $000
In B 800
In C 500

A owns 90% of B. B owns 80% of C. Calculate the goodwill of C.

Solution: A owns 90% of B and 10% of B is acquired by the NCI. Therefore, the cost of
acquiring C is incurred by A and the NCI in 90:10 proportion, which is, A’s cost (90%*500)
& NCI’s cost (10%*500)

Goodwill of C

$000
Investment (incurred by B) 500
Less: IHA (10%*500) (50)
Investment by A (90%*500) 450
Value of NCI at acquisition X
Less: Fair Value of Net assets of C at (X)
acquisition
Goodwill at Acquisition X

o Calculate Goodwill for Subsidiary as per normal, add both Goodwill’s

together.
 NCI
o Calculate NCI for Subsidiary as per normal
o Calculate NCI for Sub-Subsidiary as per normal, but subtract the NCI’s share
of Subsidiary’s cost of investment in Sub-Subsidiary (e.g. Parent owns 80% of
Subsidiary, so subtract 20% * Subsidiary’s cost of investment in Sub-
Subsidiary). This is because in the Goodwill computation, the cost excludes
the NCI’s share of Subsidiary’s cost of investment in Sub-Subsidiary, so this

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 amount needs to be correspondingly removed in the NCI for the Sub-
Subsidiary.

Example 3 (continued):

A B C
Investments $000 $000 $000
In B 800
In C 500

A owns 90% of B. B owns 80% of C. Calculate the NCI of B.

Solution:

$000
Value of B’s NCI at acquisition X
Less: IHA (in goodwill calculation) (50)
NCI% of B’s post-acquisition reserves X
X

o Add the two NCI answers together.

 NCI (for sub-subsidiary)’s effective interest

o = 1 – Parent’s effective interest, OR
o = (1 – Subsidiary’s interest) + (Subsidiary’s interest * (1 – Parent’s interest in
Subsidiary)), i.e. the direct NCI of the sub-subsidiary+ the indirect NCI within
the portion owned by the Subsidiary
 Reserves
o Parent’s reserves + Parent’s share of Subsidiary’s post-acquisition reserves +
Parent’s share of Sub-Subsidiary’s post-acquisition reserves – Parent’s share
of Goodwill impairment

Example 4 (integrated question): The following are the statements of financial position at 31
December 2014 for X group companies:

X Y Z
$000 $000 $000
Investment in 70 50
Subsidiaries
Sundry Assets 290 130 100
345 188 100
Equity Share Capital 100 80 50
Retained Earnings 55 30 25
Liabilities 150 70 25
345 188 100

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On 1st January 2005, X acquired 60,000 equity shares of Y for $65,000 in cash when the
retained earnings of Y were $15,000.

On the same date, Y acquired 35,000 of the $1 equity shares of Z for $55,000 in cash. The
retained earnings of Z at this date were $5,000.

It is group policy to measure NCI at fair value at the date of acquisition. At 1 January 2005,
the fair value of the NCI in Y was $30,000 and the fair value of the NCI in Z, reflecting X’s
effective holding was $50,000.

Required:

Prepare the consolidated statement of financial position of the X group as at 31 December

2014.

Solution: Consolidated statement of financial position as at 31 December 2014

$
Goodwill (5000+70,000) (W3) 75,000
Other net assets 520,000
(290,000+130,000+100,000)
595,000
Capital & Reserves
Equity Share Capital 100,000
Retained Earnings (W5) 76,750
NCI (W4) 80,750
Liabilities (150,000+70,000+117,500) 337,500
595,000

Workings:

(W1) Group Structure

| 60/80= 75% on 1.1.2005

| 35/50= 70% on 1.1.2005

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Effective consolidated percentages:

Y Z
Group Interest 75% 52.5% (75%*70%)
Non-Controlling Interest 25% 47.5%
100% 100%

(W2) Net Assets

Y Z
Acq’n Date Rep. Date Acq’n Date Rep. Date
(1.1.2005 (31.12.2015) (1.1.2005 (31.12.2015)
$ $ $ $
Share Capital 80,000 80,000 50,000 50,000
Retained 15,000 30,000 5,000 25,000
Earnings
95,000 110,000 55,000 75,000

(W3) Goodwill

Y Z
$ $
Y’s investment in Z 50,000
IHA (25%*50,000) (12,500)
Fair Value of X’s 70,000 37,500
Investment
NCI at fair value 30,000 50,000
Fair Value of Y’s & Z’s Net (95,000) (55,000)
assets at acquisition (W2)
5000 70,000

(W4) Non-Controlling Interest

$
Y:
NCI at acquisition (W3) 30,000
NCI%*post acquisition reserves 3750
[25%*(110,000-95000)] (W2)
IHA (W3) (12,500)
Z:
NCI at acquisition (W3) 50,000
NCI%* post acquisition reserves 9500
[47.5%*(75,000-55,000)] (W2)
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 80,750

(W5) Consolidated Retained Earnings

$
Retained earnings of X 55,000
Group share of post-acquisition profits
Y:75%*(110,000-95,000) (W2) 11,250
Z:52.5%*(75,000-55,000) (W2) 10,500
76,750

Consolidated Statement of Comprehensive Income for Vertical Group

The SOCI with the sub-subsidiary is prepared in the same way as for the subsidiary.
The effective percentages of control are used in order to distribute the expenses and
income between the parent, subsidiary and the sub-subsidiary.

Vertical Group with Subsidiary invested in an Associate

 Think of it as preparing the Subsidiary’s separate financial statements, which would

include its share of the Associate’s profits, then consolidating the Subsidiary’s
statements into the Parent’s.
 Consolidated Balance Sheet
o Includes the “Investment in Associates” based on Subsidiary’s share in
Associate.
o NCI includes share of Associate’s post-acquisition reserves, share being (1 –
Parent’s share in Subsidiary) * (Subsidiary’s share in Associate).
o Parent’s reserves includes share of Associate’s post-acquisition reserves, share
being (Parent’s share in Subsidiary) * (Subsidiary’s share in Associate).
 Consolidated Income Statement
o Includes the “Share of profit after tax of Associate”, with the share being the
interest of the Associate owned by the Subsidiary.
o Profit attributable to
 NCI includes the share of profit after tax of the Associate, with the
share being (1 – Parent’s share in Subsidiary) * (Subsidiary’s share in
Associate).
 Owners of Parent includes the share of profit after tax of the Associate
with the share being (Parent’s share in Subsidiary) * (Subsidiary’s
share in Associate)

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 Sub Associates

Parent

Control (Acquisition Method)

Subsidiary
Significant Influence (Equity Accounting)

Associate

In S books, Investment in Associate would be made up of Cost of Investment & S’s

share in post-acquisition profit. In P’s book, the asset of S will be fully consolidated
as it is under control of P

In context to S’s share in Post-Acquisition Profit of A, P only own the profit

equivalent to P’s share in S. & rest by NCI i.e. if P own S 75% & S own A 40%, P own
in A 30% (i.e. 75X40) & rest 10 by NCI.

Hence post acquisition profit will be split in 40:10 ratio.

Mixed Group (D Structure)

Parent

Control

Subsidiary
Control
Control

Sub Subsidiary

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First it needs to be decided whether control (direct or indirect) is there or not on first
date of acquisition of interest. If there is control (direct or indirect) and later on
additional interest is acquired (indirectly or directly), apply the control to control
approach.

If there is no control (direct or indirect) on first date of acquisition of interest and

later on control (indirectly or directly) is acquired, apply the non-control to control
approach.

Secondly, if the first transaction of interest acquisition is through indirect way, than
use the approach of Indirect Holding Adjustment also.

D-shaped Groups

 Same as Vertical Groups, just that Parent has a direct holding in the Sub-Subsidiary as
well.
 The computation for Goodwill in the Sub-Subsidiary will need to include the cost of
direct and in-direct investments.

Chapter Summary

This chapter deals with the complexities in a group structure. There can be vertical
and D structure groups. Also, it is important to consider the control of the parent
company over the other companies in the group, the percentage of the ownership
and the date of acquisition. These 3 factors bring about the change in the structure of
the group.

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