Applying FRS 110 (2011) and FRS 103 (2009) Change/no change in control - Supplementary Illustrations 1 to 4 Assume the

following financial statement figures for S Co in which P Co has an investment. S Co S Co Income Statement 31/12/2009 31/12/2010 Net profit Tax expense Profit after tax Retained earnings, 1 Jan Retained earnings, 31 Dec 1,000,000 (200,000) 800,000 5,000,000 5,800,000 31/12/2009 Balance sheet Total assets Total liabilities 20,000,000 (4,200,000) 15,800,000 10,000,000 5,800,000 15,800,000 1,900,000 (200,000) 1,700,000 5,800,000 7,500,000 31/12/2010 25,000,000 (7,500,000) 17,500,000 10,000,000 7,500,000 17,500,000

Share capital Retained earnings

Illustration 1: P Co increases ownership from 90% to 95% on 1 January 2010 There is no change in control. Under FRS 110, there is no need to revalue goodwill or recognize change in fair value adjustment as of the date of the 2nd step acquisition. For illustration purposes, the 2nd step acquisition took place on the beginning of the year. If the date of the step acquisition was another date (e.g. 4 July 2010), the principles applied below are the same. However, a set of interim financial statements have to be prepared at the date of the 2nd step acquisition (i.e. 4 July 2010) for the subsidiary. As at acquisition date As at 01-01-2010 in interest Investment by P Co 18,000,000 20,000,000 Fair value of NCI 1,600,000 19,600,000 Percentage held by P Co 90% 95% NCI percentage 10% 5% Share capital Pre-acquisition RE Intangible asset (FV-BV) Deferred tax liability Fair value of INA Goodwill 10,000,000 2,000,000 600,000 Remain unimpaired at current date (120,000) 12,480,000 7,120,000

5% -5%

Consolidation entries passed in 2010 CJE1: Recognition of goodwill Dr Share capital Dr Retained earnings Dr Intangible asset Dr Goodwill Cr Deferred tax liability Cr Investment in S Co Cr NCI

10,000,000 2,000,000 600,000 7,120,000 120,000 18,000,000 1,600,000 19,720,000

19,720,000

2012 All rights reserved, Pearl Tan

Applying FRS 110 (2011) and FRS 103 (2009) Change/no change in control - Supplementary Illustrations 1 to 4 CJE2: Allocation of post-acquisition change in RE to NCI Dr RE Cr NCI RE at date of second step acquisition RE at first acquisition date Change in RE

380,000 380,000 5,800,000 (2,000,000) 3,800,000

CJE3: Loss on purchase of additional 5% (no change in control) Dr NCI 990,000 Dr Equity (Loss on purchase) 1,010,000 Cr Investment in S Co Excess of investment in S Co written off to equity Workings: Initial FV of NCI Change in RE attributable to NCI NCI balance as at 1 Jan 2010 5% is acquired by P Co, i.e 50% of NCI CJE4: Allocation of current income to NCI Dr Income to NCI Cr NCI Current income allocated to NCI Analytical check of NCI CJE1 CJE2 CJE3 CJE4 NCI as at 31 Dec 2010 Book value of equity as at 31 Dec 2010 Unimpaired balance of intangible asset, net of tax Adjusted book value of equity NCI's share of adjusted book value of equity NCI's goodwill NCI as at 31 Dec 2010

2,000,000

1,600,000 380,000 1,980,000 990,000

85,000

5%*1700000

85,000

1,600,000 380,000 (990,000) 85,000 1,075,000 17,500,000 480,000 17,980,000 899,000 176,000 1,075,000

800000-(5%*12480000)

FRS 110: (1) Changes in a parent's ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (ie transactions with owners in their capacity as owners). (2) The carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the (i) amount by which the non-controlling interest are adjusted and the (ii) fair value of the consideration paid or received are recognized directly in equity and attributed to the owners of the parent.

2012 All rights reserved, Pearl Tan

Applying FRS 110 (2011) and FRS 103 (2009) Change/no change in control - Supplementary Illustrations 1 to 4 Illustration 2: P Co decreases ownership from 90% to 60% on 1 January 2010 There is no change in control. Under FRS 110, gain or loss on disposal of investment is taken to equity. As at acquisition date in interest As at 01-01-2010 Investment by P Co 18,000,000 (6,000,000) 12,000,000 Fair value of NCI 1,600,000 6,000,000 7,600,000 19,600,000 19,600,000 Percentage held by P Co 90% -30% 60% NCI percentage 10% 30% 40% Sales proceeds 15,000,000 Share capital Pre-acquisition RE Intangible asset (FV-BV) Deferred tax liability Fair value of INA Parent's share of INA NCI's share of INA 10,000,000 2,000,000 600,000 (120,000) 12,480,000 11,232,000 1,248,000 12,480,000 7,120,000 6,768,000 352,000 Note 1 7,120,000 (2,256,000) 2,256,000 4,512,000 2,608,000 7,120,000 (3,744,000) 3,744,000 7,488,000 4,992,000 12,480,000

Goodwill

19600000-12480000

Parent's goodwill NCI's goodwill

As of acquisition date Parent's share of subsidiary NCI's share of subsidiary

18,000,000 1,600,000 19,600,000

(6,000,000) 6,000,000

12,000,000 7,600,000 19,600,000

Note 1: Assumption is that NCI retains its original goodwill and recognizes the increase in goodwill arising from the increase in its relative interest in the subsidiary. Total goodwill remains the same as of acquisition date. Consolidation entries passed in 2010 CJE1: Recognition of goodwill Dr Share capital Dr Retained earnings Dr Intangible asset Dr Goodwill Cr Deferred tax liability Cr Investment in S Co Cr NCI

10,000,000 2,000,000 600,000 7,120,000 120,000 12,000,000 7,600,000 19,720,000

19,720,000

2012 All rights reserved, Pearl Tan

Applying FRS 110 (2011) and FRS 103 (2009) Change/no change in control - Supplementary Illustrations 1 to 4 CJE2: Allocation of post-acquisition change in RE to NCI Dr RE Cr NCI RE at date of partial divestment by P Co RE at acquisition date Change in RE

380,000 380,000 5,800,000 (2,000,000) 3,800,000

CJE3: Profit on sale of 30% (no change in control) taken to equity Dr Profit on sale (P Co's books) 9,000,000 Note 2 Cr NCI Cr Equity Note 3 Workings: Sales proceeds Investment in S Co 30% share of equity Profit on sale 30% is disposed by P Co Note 2: Note 3:

1,140,000 7,860,000

Note 4

Parent's PL Group equity 15,000,000 15,000,000 (6,000,000) (7,140,000) 9,000,000 7,860,000

Reclassify profit on sale to equity from P Co's separate financial statements Reduction in post-acquisition retained earnings Profit on sale of 30% interest Net increase in equity attributable to P's owners Transfer 30% to NCI (1,140,000) 9,000,000 7,860,000

Note 4:

=30%*(FV of INA + Change in post-acq equity)+ goodwill

30%*(12480000+3800000)+2256000 7,140,000 CJE4: Allocation of current income to NCI Dr Income to NCI Cr NCI Current income allocated to NCI Analytical check of NCI CJE1 CJE2 CJE3 CJE4 NCI as at 31 Dec 2010 Book value of equity as at 31 Dec 2010 Unimpaired balance of intangible asset, net of tax Adjusted book value of equity NCI's share of adjusted book value of equity NCI's goodwill NCI as at 31 Dec 2010

680,000 40%*1700000 680,000

7,600,000 380,000 1,140,000 680,000 9,800,000 17,500,000 480,000 17,980,000 7,192,000 2,608,000 9,800,000

2012 All rights reserved, Pearl Tan

Applying FRS 110 (2011) and FRS 103 (2009) Change/no change in control - Supplementary Illustrations 1 to 4
Illustration 3: P Co decreases ownership from 90% to 30% on 1 January 2010 (Loss of control)

Under FRS 110, there is an effective sale of a subsidiary and a purchase of a new investment (an associate). As at acquisition date As at 01-01-2010 in interest Investment in S Co 18,000,000 6,000,000 12,000,000 Fair value of NCI 1,600,000 19,600,000 Percentage held by P Co 90% 30% -60% NCI percentage 10% Sales proceeds 9,000,000
We need to re-enact the RE entry so that the opening RE at the beginning of the period is the same as the closing RE. If the transaction was at another point in time (e.g. 9th August 2010), the principles remain the same. We have to prepare interim financial statements to 9th August 2010, consolidate the interim P&L to that date and then show the divestment entry as at that date.

Profit/(loss) on sale and re-measurement Sales proceeds Remeasurement loss of retained investment Investment in S Co Consolidated profits of S Co forgone Profit/(loss) on sale

Group PL Note 1 Note 2 9,000,000 (1,500,000) (12,000,000) (3,420,000) (7,920,000)

Alternatively, applying FRS 110 Appendix B, paragraph B98: If a parent loses control a subsidiary, it: (a) derecognizes assets (including goodwill) and liabilities at their carrying amounts at the date when control is lost: Book value of net assets at 1 Jan 2010 Intangible asset at 1 Jan 2010 Goodwill at 1 Jan 2010 (b) derecognizes the carrying amount of any NCI a the date when control is lost NCI's share of BV of net assets at 1 Jan 2010 NCI's share of intangible asset at 1 Jan 2010 NCI's goodwill at 1 Jan 2010 (c) recognizes: (i) fair value of consideration received (if any) (ii) distribution of shares (if any)
(d) recognizes any investment retained at fair value at the date when control is lost

(15,800,000) (480,000) (7,120,000)

1,580,000 48,000 352,000

9,000,000

4,500,000

(e) reclassifies to PL any balance in OCI (f) recognizes any resulting difference as a gain or loss attributable to the parent. (7,920,000) Note 1:
Retained investment of 30% is "remeasured" to fair value. We assume that the sales proceeds of $9m is at fair value for the interest sold of 60% of S Co. Hence, proportionately, the retained investment is $4,500,000. 9000000*30/60

Note 2:

From the group's perspective, the "cost of sale" is considerably higher than in the parent's separate financial statements. The "cost of sale" includes share of S Co's profits that are included in consolidated retained earnings from the date of acquisition.

2012 All rights reserved, Pearl Tan

Applying FRS 110 (2011) and FRS 103 (2009) Change/no change in control - Supplementary Illustrations 1 to 4

RE at date of loss of control RE at acquisition date Change in RE P Co's share @90%

5,800,000 (2,000,000) 3,800,000 3,420,000

If S Co had OCI items, equivalent entries for the change in OCI from acquisition date to the date of the loss of control has to be passed through as well.

Illustration 4: P Co gains control on 1 January 2010

In this scenario, P Co increases ownership interests from 20% to 80%, crossing the default control threshold. Assuming no other contradictory factors, P Co has acquired a subsidiary. Under FRS 110, P Co has effectively sold an associate and acquired a new subsidiary. P Co has to remeasure the original investment to fair value and recognize the gain or loss in income. It then recognizes goodwill based on the following relationship: Goodwill = Consid. transferred + Remeasured previously held interests + Fair value of NCI - FV of INA

Percentage held by P Co NCI percentage

31-Dec-09 20%

1-Jan-10 in interest 80% 20% Carrying amount 2,760,000 25,000,000

60% 20%

Investment in Associate under equity accounting Fair value of investee on 1 January 2010 Re-measurement gain on gain of control Fair value of previously-held interests Carrying amount of investment in associate Remeasurement of previously held interests to fair value Fair value of consideration transferred

5,000,000 (20%*25000000) (2,760,000) 2,240,000 15,000,000 Note 1

Note 1: The remeasured investment is proportional to the fair value of consideration transferred in this illustration. It need not be so if the control premium is deemed not to apply to previously held investment. Fair value of identifiable net assets of subsidiary at acquisition date Share capital 10,000,000 Pre-acquisition RE 5,800,000 Intangible asset (FV-BV) 900,000 Unimpaired Deferred tax liability (180,000) Fair value of INA 16,520,000 Fair value of NCI 5,000,000 Determination of goodwill under FRS103 paragraph 32 Fair value of consideration transferred Fair value of previously-held interests Fair value of NCI Less fair value of INA Goodwill

15,000,000 5,000,000 5,000,000 (16,520,000) 8,480,000

2012 All rights reserved, Pearl Tan

Applying FRS 110 (2011) and FRS 103 (2009) Change/no change in control - Supplementary Illustrations 1 to 4

Parent's goodwill NCI's goodwill

5000000-20%*16520000

6,784,000 1,696,000 8,480,000

Consolidation entries passed in 2010 CJE1: Recognition of goodwill Dr Share capital Dr Retained earnings Dr Intangible asset Dr Goodwill Cr Deferred tax liability Cr Investment in S Co Cr NCI

10,000,000 5,800,000 900,000 8,480,000 180,000 20,000,000 5,000,000 25,180,000

25,180,000 CJE2: Allocation of current income to NCI Dr Income to NCI Cr NCI Current income allocated to NCI Analytical check of NCI CJE1 CJE2 NCI as at 31 Dec 2010 Book value of equity as at 31 Dec 2010 Unimpaired balance of intangible asset, net of tax 80%*900000 Adjusted book value of equity NCI's share of adjusted book value of equity NCI's goodwill 5000000-20%*16520000 NCI as at 31 Dec 2010

340,000 20%*1700000 340,000

5,000,000 340,000 5,340,000 17,500,000 720,000 18,220,000 3,644,000 1,696,000 5,340,000

2012 All rights reserved, Pearl Tan