DPA50143 –

FINANCIAL
ACCOUNTING 5
C H A P T E R 1 – I N T R O D U C T I O N TO
C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T
COURSE LEARNING OUTCOME

• 1.1 Explain the terms in the context of group accounting

• 1.2 Illustrate the consolidation procedures in preparing the simple group’s account by
acquisition method
EXPLAIN THE TERMS IN
THE CONTEXT OF GROUP
ACCOUNTING
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• A. BUSINESS COMBINATION
– May arise when one entity acquires control over another entity
– MFRS Business Combination defines a business combination as a ‘transaction or other event in which an
acquirer obtains control of one or more businesses’
– For example, it arises when an entity acquired the share capital of another or when the two entities
exchange their issued share capital.
• B. HOLDING COMPANY
– Section 5 of the Companies Act 2016:
– - A corporation shall be deemed to be the ultimate holding of another corporation of if:-
• (a) The other corporation is a subsidiary of the corporation; and
• (b) The corporation is not itself a subsidiary of any corporation
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• SUBSIDIARIES COMPANIES
– Section 4 (1)(3) of the companies Act 2016:
– A corporation shall be deemed to be a subsidiary of another corporation, but only if:-
– (a) The other corporation-
• i. Control the composition of the board of directors of the corporation
• Ii. Control more than half the voting power of corporation; or
• Iii. Holds more than half of the issued share capital of the corporation, excluding any part of the share
capital which consists of preference shares); or
– (b) The corporation is a subsidiary of any corporation which is that other corporation’s subsidiary
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• A. CONTROL
– When an entity acquires control over another entity, the acquirer is called the holding or parent
entity and the acquire is called subsidiary
– Together they form a group although both the entities remain separate.
– The investor controls the investee only if it has all the following
• a. Power over the investee
• b. Exposure, or right, to variable returns from its involvement with the investee and
• c. The ability to use its power over the investee to affect the amount of the investor’s return.
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• B. POWER OVER INVESTEE

– Power arises from existence of rights. Power could result from voting rights or rights embedded in
contractual arrangements.
– Right that give power to the investor include these:
• a. Voting rights ( or potential voting rights)
• b. Right to appoint, reassign or remove key management personnel who direct the relevant activities;
• c. Right to appoint or remove another entity that directs the relevant activities;
• d. Right to direct the investee to enter into, or veto any changes to, transactions for the benefit of the
investor and
• e. Other rights such as decision-making rights specified in management contracts.
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• C.VARIABLE RETURNS
– The criterion that the investor should be exposed to , or has rights to variable returns from its
involvement with the investee may be present when the investor’s returns from its involvement have
potential to vary as a result of the performance of the investee.
– The investor has the ability to use its power over the investee to affect the amount of the investor’s
return from its involvement with investee
– The returns include dividends, fees, and exposure to loss from providing credit support,
remuneration for servicing the investee’s assets and liabilities and returns as a result of achieving
synergies or economic scale by combining the assets of the investor and investee.
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• D. CONSOLIDATED OR GROUP FINANCIAL STATEMENTS

– The Companies Act requires the holding company to draw up (in addition to its own statement of
profit or loss and statement of financial position) the consolidated statement of profit and loss and
other comprehensive income, the consolidated statement of financial position and the consolidated
statement cash flows to give a true and fair view of the results and state of affairs of the companies
in the group.
– Consolidated financial statements are the financial statements of a group presented as those of a
single economic entity in compliance with MFRS
– Consolidated financial statements are the financial statements of an economic entity in which the
assets, liabilities, net assets/equity, revenue, expenses and cash flows of the controlling entity and its
controlled entities are presented as those of a single economic entity
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• E. NON-CONTROLLING INTEREST (NCI)

– Sometimes the group owns less than 100% of a subsidiary, for example 90%. Non-controlling
interests are the ownership rights in the net assets and profits belongs to the minority shareholders,
say 10% in this case.
– Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to
the parent company, it represents the net assets of the subsidiary that belongs to the shareholders
other than the holding company.
– MFRS 10 (Para 22) states that “a parent shall present non-controlling interests in the
consolidated statement of financial position within equity, separately from the equity of
the owners of the parent”.
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• IDENTIFY THE CONSIDERATION TRANSFERRED

• The consideration transferred in a business combination shall be measured at fair value, which shall
be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer,
the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests
issued by the acquirer. (However, any portion of the acquirer’s share-based payment awards
exchanged for awards held by the acquiree’s employees that is included in consideration transferred
in the business combination shall be measured in accordance with paragraph 30 rather than at fair
value.)
• Examples of potential forms of consideration include cash, other assets, a business or a subsidiary of
the acquirer, contingent consideration, ordinary or preference equity instruments, options, warrants
and member interests of mutual entities.
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• IDENTIFY THE CONSIDERATION TRANSFERRED

• The consideration transferred may include assets or liabilities of the acquirer that have carrying
amounts that differ from their fair values at the acquisition date (for example, non-monetary assets
or a business of the acquirer).
• If so, the acquirer shall re-measure the transferred assets or liabilities to their fair values as of the
acquisition date and recognise the resulting gains or losses, if any, in profit or loss.
• However, sometimes the transferred assets or liabilities remain within the combined entity after the
business combination (for example, because the assets or liabilities were transferred to the acquire
rather than to its former owners), and the acquirer therefore retains control of them. In that
situation, the acquirer shall measure those assets and liabilities at their carrying amounts
immediately before the acquisition date and shall not recognise a gain or loss in profit or loss on
assets or liabilities it controls both before and after the business combination.
DEFINE TERMS IN GROUP ACCOUNTING IN
ACCORDANCE TO COMPANY ACT 2016 AND MFRS

• THE PURPOSE OF THE CONSOLIDATED FINANCIAL STATEMENT

– Reporting the financial condition and operating result of a consolidated business group, which is
considered as a single entity comprised of more than one companies under a common control (also
counting entities other than “companies”)
– To provide financial information about a parent and its subsidiaries as a single economic entity.
– To show the financial position of the group as a whole by showing the economic resources
controlled by them, the obligations of the group and the results the group achieves with its
resources.
– To understand the position of the group as a whole and also the inter flow of funds between holding
(parent) and subsidiary companies.
I L L U S T R AT E T H E
C O N S O L I D AT I O N
PROSEDURE IN PREPARING
THE SIMPLE GROUP’S
ACCOUNT BY ACQUISITION
METHOD
OUTLINE THE JOURNAL OF THE INVESTMENT IN
SUBSIDIARY AND CONSIDERATION TRANSFERRED.

• Consideration paid to acquire the equity shares of a subsidiary is referred to as consideration

transferred. The investor has to recognize the consideration transferred to acquired the equity
interest in the investee.
• The consideration transferred will be measured at the fair values of:
– a. assets transferred by the investor;
– b. liabilities incurred by the investor to the former owners of the investee;
– c. equity instruments issued by the investor; and
– d. contingent consideration
OUTLINE THE JOURNAL OF THE INVESTMENT IN
SUBSIDIARY AND CONSIDERATION TRANSFERRED.

• Example 1
• H acquired 1 million ordinary shares of S by issuing 800,000 ordinary shares in H and paying
cash of RM400,000. The market price of H’s shares was RM3.00 each.
• Require: Show the journal entries in the book of H to record the acquisition of the shares in S
Dr. Investment RM2,800,000
Cr. Cash RM400,000
Cr. Ordinary share capital RM2,400,000
PRE-ACQUISITION RESERVES AND
POST-ACQUISITION RESERVES
• When preparing consolidated financial statements it is important to distinguish between pre-acquisition
reserves and post-acquisition reserves.
• Pre-Acquisition Reserves
– The reserves (revenue, share premium, capital or general reserves) exists in the subsidiary on the date the shares were
acquired by the parent are referred to as pre acquisition reserves.
– Pre-acquisition reserves are retained profits and other reserves that exist in a subsidiary’s statement of financial position
at the date of acquisition.
– Pre-acquisition reserves are capitalized at the date of acquisition by including in the goodwill calculation. They must not
be included in the consolidated revenue reserves or consolidated statement of financial position.
• Post-Acquisition Reserves
– Reserves made by the subsidiary after the shares are acquired
– Only the group share of the post-acquisition reserves of S is included in the group statement of financial position, i.e. the
reserves of S which arose after acquisition by H
TREATMENT OF GOODWILL ON
CONSOLIDATION
• Goodwill on consolidation arises when the cost of the investment exceeds the acquirer’s share of
the fair value.
• Goodwill is recorded after a company acquires assets and liabilities, and pays a price in excess of
their identifiable value.
• Goodwill = Cost of investment + NCI at acquisition – FV of net assets of Sub at acquisition
• Notes:
– Investment > net asset = GOODWILL (CSOFP: INTANGIBLE ASSET)
– Investment < net assets = BARGAIN PURCHASE (set off immediately against CSOCI)
• Retain goodwill at cost less impairment
– Goodwill is treated as a non-depreciable assets and will appear in the CSOFP as an intangible non-current
asset at cost less impairment. It is assumed that goodwill has an indefinite life.
ACCOUNTING TREATMENT OF NON-
CONTROLLING INTEREST (NCI)
• NCI can be measured in two ways:
• a) Measured as proportionate share of the net assets of the Subsidiary (sub)
– f NCI is measured as share of net assets of sub, the goodwill calculated is just the goodwill attributed to the parent’s share.There
is no goodwill attributed to the NCI’s share.
• b) At fair value:
– If NCI is measured at fair value, a portion of the goodwill is attributed to the parent, and a portion is attributed to the NCI.

• Method #1: Share of net assets at reporting date + NCI goodwill – share of goodwill impairment loss
• Method #2: FV of NCI at acquisition + share of post-acquisition change in net assets – share of goodwill impairment
loss (commonly used method to determine NCI)
• - Methods #1 and #2 are equivalent, both are fair value methods, because share of net assets at reporting date = share
of net assets at acquisition + share of post-acquisition change in net assets, and share of net assets at acquisition +
NCI goodwill = FV of NCI at acquisition
CONSTRUCT THE PRO-FORMA
ACCOUNTS
• When preparing consolidated financial statements:
• We are replacing the cost of the investment in the holding entity’s accounts with the fair value
of the assets and liabilities of the subsidiary.
• Goodwill is likely to arise on acquisition. Shares purchased at the market price may not reflect
the fair value of the assets and liabilities of the subsidiary. Any difference between the amount
paid and the value of the assets is goodwill.
• There must be no double counting. All items that relate to transfers within the group must be
eliminated on consolidation.
PREPARED THE GROUP’S ACCOUNT

• a. Adjustment account
Adjustment Account
RM RM
Investment in S XX Ordinary Shares XX
NCI * XX Shares premium XX
CSOCI: Bargain purchase XX General reserve XX
Revenue reserve XX
CSOFP: Goodwill XX
XXX XXX
– *NCI is calculated based on its share of net assets at the date of acquisition
PREPARED THE GROUP’S ACCOUNT

• b. Non-controlling Interest
Non-controlling Interest a/c (NCI)
RM RM
CSOFP XXX Adjustment Account XX
Revenue reserve ** XX
General reserve *** XX
XXX XXX
PREPARED THE GROUP’S ACCOUNT
• c. Subsidiary and Consolidated Reserve, which includes:
– Consolidated Statement of Comprehensive Income (or Revenue Reserves)
** Revenue Reserve (Subsidiary)
RM RM
Adjustment Account XX Balance b/d XX
NCI (% x post profit) XX
CRR XX
XX XX
** Consolidated Revenue Reserve (CRR)
RM RM
Goodwill (if any impairment) XX Balance b/d XX
CSOFP XX Revenue reserve (S)
XX XX
PREPARED THE GROUP’S ACCOUNT
• c. Subsidiary and Consolidated Reserve, which includes:
– Consolidated General Reserves
*** General Reserve (Subsidiary)
RM RM
Adjustment Account XX Balance b/d XX
NCI (% x post GR) XX
CGR XX
XX XX
** Consolidated General Reserve (CGR)
RM RM
Balance b/d XX
CSOFP XX General reserve (S)
XX XX
PREPARED THE GROUP’S ACCOUNT
• Analyze the group’s account when the holding acquired the preference shares in subsidiaries:
• a) If holding acquire the preference share in the subsidiary:
– A parent company, in addition to the ordinary shares by which it gained control, may be acquired
preference shares in the subsidiary
– Preference shares acquired by the parent are used in the calculation of Goodwill
– On consolidation, the preferred shares purchased by the parent and included in the cost of investment will
be cancelled out against the liability of the subsidiary.
– Where all the preferred equity and there is no non-controlling interest on preferred. Therefore, the
preference share of subsidiary does not appear in a consolidated statement of financial position.
– Sometimes, when the preference shares are acquired at par, it will have no impact on Goodwill calculation
– When 50% of the stock is held by the parent, the investment in preferred shares is eliminated against 50%
of the preferred equity and the other 50% is reported as a non-controlling interest.
PREPARED THE GROUP’S ACCOUNT
• Analyze the group’s account when the holding acquired the preference shares in subsidiaries:
• b) If holding do not acquired the preference share in the subsidiary:
– Any preferred shares not held by the parent are part of non-controlling interest
– Where all of the preferred stock is held by NCI, it is recognized as liabilities of the subsidiary under
IAS 32 Financial Instruments: Presentation and Disclosure, they are accounted for in the same way as
bonds/debenture/loans
– But for consolidation purposes it will be recorded under equity
PREPARED THE GROUP’S ACCOUNT
• Construct the group’s account when the holding acquired the debentures in subsidiaries
– The debentures in the subsidiary are treated as any other liability and shown as a liability of the
group in the CSOFP
– However, if the holding company has acquired any part of the debentures of the subsidiary, the coat
of investment in debentures will be offset against the nominal value of the debentures
– The nominal value of the debentures not held by the holding company is NOT credited to the NCI
account but to be disclosed as a liability in the CSOFP.
• Prepare the consolidate group/s financial statement:
– a. On the date shares acquired
– b. On subsequent dates if acquisition