Consolidation Notes: Lecture 8 Lecture Notes

Consolidation Lecture 8
Notes Step Acquisitions

INTRODUCTION
A step acquisition occurs when the parent entity acquires control of subsidiary in stages
(sometimes referred to as piecemeal acquisition). IFRS 3 states that acquisition accounting is only
applied when control is achieved.

FURTHER SHARES TO ACHIEVE CONTROL

If equity shareholding is subsequently increased and control is achieved, the following adjustments
are made:
(a) previously held equity investment is re-measured to its fair value at the date control is
acquired.
(b) any resulting gain or loss is recognized in profit or loss.

For example if the fair value at the date of control acquisition is higher than existing carrying
amount, the following entry is passed (in opposite case, it will be reversed):
Investment XX
(-) #
RE / Other Income (Parent) XX
Investment restated to fair value
Fair value at acquisition date – carrying amount

EXAMPLE 8A
The statements of financial positions of two companies, A and B as at 31 December 2006 are as
follows:
A Ltd B Ltd
$ $
Investment 160,000
Property, plant and equipment 290,000 222,000
Current assets 100,000 80,000
550,000 302,000
Ordinary share capital ($1 shares) 200,000 100,000
Retained Earnings 250,000 122,000

Long term loans 60,000 50,000

Current liabilities 40,000 30,000
550,000 302,000
A acquired 40% of B on 31 December 2001 for $90,000. At this time the reserves of B stood at
$76,000. A further 20% of shares in B were acquired by A three years later for $70,000. On this
date, the fair value of the existing holding in B was $105,000. B’s reserves were $100,000 on the
second acquisition date.

Required:
Produce the consolidated SFP of the A group at 31 December 2006, assuming that it is a group
policy to value the NCI using the proportion of net asset method.

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Consolidation Notes: Lecture 8 Lecture Notes

In statement of profit or loss and other comprehensive income, if subsidiary is acquired part
way through the year, then the subsidiary’s results should only be consolidated from the date of
acquisition, i.e. the date on which control is obtained. For this purpose, it is often assumed that
profit accrues evenly throughout the year.

FURTHER SHARES IN EXISTING SUBSIDIARY

This is the case where a parent entity acquires further shares in an existing subsidiary. In this
case:
(a) goodwill is not re-measured
(b) no gain or loss is recognized in PL
(c) all calculations are based on group and NCI share as at when control was first acquired
(d) any difference between change in NCI and FV of consideration paid is recognized directly
in equity.

NCI [decrease in NCI] XX

(-) # RE (parent) [directly in equity] β XX XX
Cash / Consideration at fair value / Investment XX
Further shares after acquisition
This entry is passed at year end. Post acquisition changes are automatically accounted for.

EXAMPLE 8B
The statements of financial positions of two companies, C and D as at 31 December 2001 are as
follows:
C Ltd D Ltd
$000
Investment in D Ltd 400
Property, plant and equipment 600 550
Current assets 100 80
1,100 630
Ordinary share capital ($1 shares) 200 100
Retained Earnings 800 450

Long term loans 60 50

Current liabilities 40 30
1,100 630

C acquired its holding in D Ltd as follows:

Proportion acquired Cost of investment D’s Retained earnings
Date % $000
30 September 2000 60 250 300
31 July 2001 20 150 400

Goodwill is calculated on the proportion of net assets method.

Required:
Produce the consolidated SFP of the C group at 31 December 2001, assuming that it is a group
policy to value the NCI using the proportion of net asset method.

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Consolidation Notes: Lecture 8 Lecture Notes

In statement of profit or loss and other comprehensive income, NCI relating to the periods
before and after the further acquisition are calculated separately and then added together. For
example, [S’s profit x ?/12 months x NCI% before] + [S’s profit x ?/12 months x NCI% after]

ANSWER 8A
A Group
SFP as at 31 December 20X6
$ $
PPE $290,000+222,000 512,000
Goodwill W3 55,000 567,000

Current assets $100,000+80,000 180,000

747,000

Share Capital 200,000

Retained earnings W6 278,200
478,200
NCI W5 88,800 567,000

Long term loans $60,000+50,000 110,000

Current Liabilities $40,000+30,000 70,000

747,000

W1 GROUP STRUCTURE
B Subsidiary Acquisition: 31 Dec 2004 Group 40 % + 20% = 60% NCI 40%
$

W2 NET ASSETS (of subsidiaries) AT ACQUISITION B Ltd

Equity share capital 100,000
Retained earnings (pre) 100,000
200,000

W3 GOODWILL B Ltd
Investment [160,000 + 15,000 J1] 175,000
Less: [200,000 W2 x 60%] (120,000)
55,000

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

B Ltd
Balance 22,000
22,000

W5 NON CONTROLLING INTEREST B Ltd

[200,000 W2 x 40%] 80,000
[22,000 W4 x 40%] 8,800
88,800

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Consolidation Notes: Lecture 8 Lecture Notes

W6 GROUP RESERVES RE
Parent reserves 250,000
J1 15,000
265,000
B Limited [22,000 W4 x 60%] 13,200
278,200

$
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment 15,000
(-) 1
Retained earnings (Parent) 15,000
The fair value increase in existing investment: $105,000 - $90,000 = $15,000

ANSWER 8B
C Group - SFP as at 31 December 20X1
$000 $000
PPE $600+550 1,150
Goodwill W3 10 1,160

Current assets $100+80 180

1,340

Share Capital 200

Retained earnings W6 850
1,050
NCI W5 110 1,160

Long term loans $60+50 110

Current Liabilities $40+30 70

1,340

W1 GROUP STRUCTURE
D Subsidiary Acquisition: 30 Sep 2000 Group 60% NCI 40%
$000
The current group share is 80% (i.e. 60% + 20%) and NCI is 20%. (Decrease in NCI 20%)

W2 NET ASSETS (of subsidiaries) AT ACQUISITION D Ltd

Equity share capital 100
Retained earnings (pre) 300
400

W3 GOODWILL D Ltd
Investment [400 - 150 J1] 250
Less: [400 W2 x 60%] (240)
10

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Consolidation Notes: Lecture 8 Lecture Notes

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

D Ltd
Balance 150
150

W5 NON CONTROLLING INTEREST D Ltd

[400 W2 x 40%] 160
[150 W4 x 40%] 60
220
J1 (110)
110

W6 GROUP RESERVES RE
Parent reserves 800
J1 (40)
760
D Limited [150 W4 x 60%] 90
850

$ 000
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

NCI 110
(-) 1 RE (C Ltd) 40
Investment in D (extra) 150
Decrease in NCI = $160+60 =$220 /40% x 20% =$110

Dated: 20 September 2016

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