AFA-342: GROUP ACCOUNTS

Question # 1: Define Consolidated Financial Statements. When a parent does not need to present
consolidated financial statements?
Consolidated financial statements:
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash
flows of the parent and its subsidiaries are presented as those of a single economic entity.
The financial statements of a group presented as those of a single economic entity. (IFRS 10)
A parent need not present consolidated financial statements if and only if all of the following hold:
a) The parent is itself a wholly owned subsidiary or it is a partially owned subsidiary of another entity
and its other owners, including those not otherwise entitled to vote, have been informed about, and
do not object to, the parent not presenting consolidated financial statements.
b) Its debt or equity instruments are not publicly traded.
c) It is not in the process of issuing securities in public securities markets.
d) The ultimate or intermediate parent publishes consolidated financial statements that comply with
International Financial Reporting Standards.
A parent that does not present consolidated financial statements must comply with the IAS 27 rules on
separate financial statements.

Question # 2: IFRS 3 Business combinations permits a non-controlling interest at the date of acquisition
to be valued by one of two methods:
(i) at its proportionate share of the subsidiary's identifiable net assets; or
(ii) at its fair value (usually determined by the directors of the parent company).
➢ The traditional method of measuring the NCI at the acquisition date is to measure it at the NCI’s
share of the fair value of the acquiree’s identifiable assets acquired and liabilities assumed, known as
the proportionate basis throughout the Financial Accounting and Reporting materials.
This method results in goodwill being in effect the difference between the cost of the acquirer’s
investment and its share of the fair value of the identifiable assets acquired and liabilities assumed at
the date of acquisition. The rationale is that the market transaction which is the business
combination has only provided evidence of the amount of the parent entity’s goodwill; there has
been no market transaction to provide evidence of the amount of goodwill attributable to the NCI.
Hence only the acquirer’s share of the goodwill is recognized.
➢ The alternative approach works on the basis that the goodwill attributable to the NCI can be
calculated from the estimate of the fair value of the NCI itself. It is an approach which is consistent
with the rest of IFRS 3 which requires the consideration transferred, the assets acquired and the
liabilities assumed all to be measured at fair value.
The fair value method usually results in a higher amount for the NCI; the difference between this and
the amount as traditionally measured is added to the goodwill acquired in the business combination
and is the goodwill attributable to the NCI at the acquisition date.

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Question # 3: What is significant influence? What are the different ways significant influence can be
determined according to BAS 28?
Significant influence:
Significant influence is presumed to exist if an investor holds 20% or more of the voting power of the
investee, unless it can be clearly shown that this is not the case.
However, the existence of significant influence can also be evidenced in other ways.
✓ Representation on the board of directors of the investee
✓ Participation in the policy making process
✓ Material transactions between investor and investee
✓ Interchange of management personnel
✓ Provision of essential technical information

Some definition of Group Accounts:

Control: The power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities. (IFRS 3 (revised), IFRS 10,)
Subsidiary: An entity that is controlled by another entity (known as the parent). (IFRS 10)
Parent: An entity that has one or more subsidiaries. (IFRS 10)
Group: A parent and all its subsidiaries. (IFRS 10)
Associate: An entity, including an unincorporated entity such as a partnership, in which an investor has
significant influence and which is neither a subsidiary nor an interest in a joint venture. (IAS 28)
Significant influence is the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies. (IAS 28)
Joint arrangement: An arrangement of which two or more parties have joint control. (IAS 28)
Joint control: The contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require the unanimous consent of the parties sharing control. (IAS
28)
Joint venture: A joint arrangement whereby the parties that have joint control (the joint venturers) of the
arrangement have rights to the net assets of the arrangement. (IAS 28, IFRS 11)
Acquiree: The business or businesses that the acquirer obtains control of in a business combination (IFRS
3 (revised))
Acquirer: The entity that obtains control of the acquiree (IFRS 3 (revised))
Business combination: A transaction or other event in which an acquirer obtains control of one or more
businesses. (IFRS 3 (revised))
Contingent consideration: Usually, an obligation of the acquirer to transfer additional assets or equity
(IFRS 3 (revised)) interests to the former owners of an acquiree as part of the exchange for control of the
acquiree if specified future events occur or conditions are met. (IFRS 3 (revised))
Equity interests: Broadly used in IFRS 3 (revised) to mean ownership interests.

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Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market at the measurement date. (IFRS 13)
Non-controlling interest: The equity in a subsidiary not attributable, directly or indirectly, to a parent.
(IFRS 3 (revised))
Equity method:
A method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for
the post acquisition change in the investor's share of net assets of the investee. The profit or loss of the
investor includes the investor's share of the profit or loss of the investee and the investor’s other
comprehensive income includes its share of the investee's other comprehensive income.

The acquisition method

Entities must account for each business combination by applying the acquisition method. This requires:
(a) Identifying the acquirer. This is generally the party that obtains control.
(b) Determining the acquisition date. This is generally the date the consideration is legally transferred,
but it may be another date if control is obtained on that date.
(c) Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquiree. (See below.)
(d) Recognizing and measuring goodwill or a gain from a bargain purchase

IFRS 3 (revised) goodwill calculation

Consideration paid by parent + fair value of non-controlling interest – fair value of the subsidiary's
net identifiable assets = consolidated goodwill

The existence of significant influence is evidenced in one or more of the following ways.
(a) Representation on the board of directors (or equivalent) of the investee
(b) Participation in the policy making process
(c) Material transactions between investor and investee
(d) Interchange of management personnel
(e) Provision of essential technical information

Consolidated financial statements:

The financial statements of a group presented as those of a single economic entity.

Power is defined as existing rights that give the current ability to direct the relevant activities of the
investee. There is no requirement for that power to have been exercised.
Relevant activities may include:
➢ Selling and purchasing goods or services
➢ Managing financial assets
➢ Selecting, acquiring and disposing of assets
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➢ Researching and developing new products and processes

➢ Determining a funding structure or obtaining funding

Explain the following terms: control, power, subsidiary, parent, group and associate.
Control: An investor controls an investee 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 power over the
investee.
Power: Existing rights that give the current ability to direct the relevant activities of the investee
Parent: An entity that controls one or more subsidiaries.
Group: A parent and all its subsidiaries.
Associate: An entity over which an investor has significant influence and which is neither a subsidiary nor
an interest in a joint venture.

Fair value:
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market at the measurement date.
IFRS 13 provides a hierarchy of inputs for arriving at fair value. It requires that Level 1 inputs are used
where possible:
Level 1:
Quoted prices in active markets for identical assets that the entity can access at the measurement date.
Level 2:
Inputs other than quoted prices that are directly or indirectly observable for the asset.
Level 3:
Unobservable inputs for the asset

"Financial Accounting usually emphasizes on the economic substance of events though the legal form
may differ and suggest different treatments." Do you agree? If so, state the circumstances and give
example in each case.
In very simple terms, a group is a collection of entities, where one, the parent, controls the activities of
the others, its subsidiaries. A group is required to produce ‘consolidated’ financial statements which
present the position and results of the group as if it was a single entity rather than a collection of
individual companies. This reflects the economic substance of the situation.

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Substance over form:

Substance over form is the principle that transactions and other events are accounted for and presented
in accordance with their substance and economic reality and not merely their legal form.
❖ The objective of IFRS 3 is to set out the accounting and disclosure requirements for a business
combination. In practice business combinations can be structured in all sorts of different ways,
usually for reasons which are peculiar to the parties to the combination and/or to suit the legal
and tax environments in which they operate.
❖ In an area of such potential complexity, IFRS 3 applies the concept of substance over form: it
looks beyond the legal form of the transaction to the underlying substance. This can be seen in
the definitions below.

Business combination:
A transaction or other event in which an acquirer obtains control of one or more businesses.
Business:
An integrated set of activities and assets capable of being conducted and managed for the purpose of:
✓ providing goods or services to customers;
✓ generating investment income (such as dividends or interest); or
✓ generating other income from ordinary activities.
A business generally consists of inputs and processes applied to those inputs that have the ability to
create outputs (although outputs are not required for qualification as a business).

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(i) Star Limited has purchased 8,000 shares of White Limited out of its total outstanding ordinary shares
of 20,000. Star Limited is assumed to have significant influence over the affairs of White Limited.
(ii) X Limited a banking company has acquired 25% interest in Y Limited which is engaged in managing the
mutual funds. By virtue of an agreement, X Limited shall have control over the affairs of Y Limited.
(iii) Faisal Limited has purchased 15,000 shares of K Limited @ TK10 per share, being 15% of total
outstanding shares, which are classified as available-for-sale securities.
(iv) A Limited has acquired 55% share in B Limited for an investment of TK 2,500,000.
(v) Zahid Limited has acquired 20% interest in Abid Limited. Zahid Limited is entitled to exercise
significant influence.
Required: Identify which one of the following three valuation methods is to be used to record the
above-mentioned investment transactions -
➢ Consolidation Method

➢ Equity Method

➢ Fair Value Method

Answer:

i) Equity Method

ii) Consolidation method

iii) Fair value method

iv) Consolidation method

v) Equity Method

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