Financial Accounting and Reporting in Malaysia

Financial Accounting and
Reporting in Malaysia
Volume 2
Fourth Edition
TAN LIONG TONG
Dip. Agriculture, B.S. Agribusiness, MBA, CA, CPA
xi
TABLE OF CONTENTS
About CCH .......................................................................................................iii
About the Author ............................................................................................. iv
Dedication ........................................................................................................ vi
Preface ............................................................................................................. vii
Index of Referenced Financial Reporting Standards .................................. xvii
CHAPTER 1
Financial Instruments Recognition

and Derecognition............................................................. 1
1.1
Introduction..................................................................................... 3
1.2
Definitions........................................................................................ 4
1.3
Categories of Financial Assets...................................................... 12
1.4
Categories of Financial Liabilities................................................ 29
1.5
Recognition..................................................................................... 33
1.6
Accounting for Derivative Instruments........................................ 34
1.7
Embedded Derivatives.................................................................. 63
1.8
Derecognition................................................................................. 76
CHAPTER 2
Financial Instruments Measurement

and Reclassification........................................................ 99
2.1
Measurement............................................................................... 101
2.2
Fair Value Measurement Considerations................................... 120
2.3
Reclassifications........................................................................... 130
2.4
Gains and Losses on Remeasurement........................................ 134
2.5
Impairment of Financial Assets.................................................. 144
2.6
MFRS 9, Financial Instruments Classification and

Measurement............................................................................... 155
CHAPTER 3
Hedging and Hedge Accounting................................. 173
3.1
Introduction to Hedging and Hedge Accounting........................ 175
3.2
Identification of a Hedge............................................................. 176
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3.3
Conditions for the Specified Hedge

Accounting Treatments............................................................... 180
3.4
Fair Value Hedge Accounting...................................................... 181
3.5
Cash Flow Hedge Accounting..................................................... 193
3.6
Accounting for Hedges of Net Investments................................ 228
3.7
Assessing Hedge Effectiveness................................................... 235
CHAPTER 4
4.1
MFRS 132, Financial Instruments: Presentation...................... 253
4.2
Presentation of Liabilities and Equity....................................... 253
4.3
Classification of Compound Instruments by the Issuer............ 261
4.4
Accounting for Free Warrants with Rights Issue....................... 278
4.5
Treasury Shares.......................................................................... 279
4.6
Interest, Dividends, Losses and Gains....................................... 280
4.7
Offsetting a Financial Asset and a Financial Liability............. 289
4.8
MFRS 7, Financial Instruments: Disclosures............................ 292
4.9
Classes of Financial Instruments and Level of Disclosure....... 293
4.10
Other Disclosures........................................................................ 303
4.11
Nature and Extent of Risks Arising from

Financial Instruments................................................................. 310
CHAPTER 5
Financial Instruments Presentation

and Disclosures.............................................................. 251
Earnings Per Share....................................................... 327
5.1
Introduction................................................................................. 329
5.2
The Measurement and Presentation Standards........................ 329
5.3
Basic Principles........................................................................... 333
5.4
Basic Earnings Per Share........................................................... 334
5.5
Changes in Capital Structure..................................................... 342
5.6
Diluted Earnings Per Share........................................................ 360
5.7
Sundry Issues in EPS Calculation.............................................. 383
5.8
Disclosure..................................................................................... 390
5.9
Some Limitations of EPS Information....................................... 392
CCH Asia Pte Limited
Table of Contents
CHAPTER 6
xiii
Business Combinations................................................ 393
6.1
Introduction................................................................................. 395
6.2
Identifying a Business................................................................. 397
6.3
Identifying a Business Combination.......................................... 400
6.4
Application of the Acquisition Method....................................... 404
6.5
Business Combination Achieved in Stages................................ 475
6.6
Business Combination Achieved Without

Transfer of Consideration........................................................... 495
6.7
Business Combination Achieved by Contract Alone.................. 500
6.8
Measurement Period................................................................... 502
6.9
Determining What is Part of the Business

Combination Transaction............................................................ 507
6.10
Subsequent Measurement and Accounting................................ 514
6.11
Tax Effects Arising in a Business Combination......................... 515
6.12
Disclosure Requirements............................................................ 520
6.13
Reverse Acquisition Accounting.................................................. 528
CHAPTER 7
Consolidated and Separate

Financial Statements.................................................... 553
7.1
Introduction................................................................................. 555
7.2
Background to the Standards on Consolidation........................ 555
7.3
Application of MFRS 10.............................................................. 565
7.4
Consolidation Procedures............................................................ 578
7.5
Allocating Losses to Non-controlling Interest............................ 616
7.6
The Separate Financial Statements of the Parent.................... 626
7.7
Complex Group Structures......................................................... 639
CHAPTER 8
Advanced Consolidation Principles.......................... 667
8.1
Introduction................................................................................. 669
8.2
Reduction in Stake Without Loss of Control.............................. 669
8.3
Subsidiaries Held for Sale and Discontinued Operations......... 677
8.4
Loss of Control and Derecognition of a Subsidiary.................... 689
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8.5
Reorganisations and Other Changes in Group Structure......... 726
8.6
Reciprocal Shareholdings between

Parent and Subsidiaries.............................................................. 750
8.7
Mutual Holdings Amongst Subsidiaries in a Group.................. 759
CHAPTER 9
Joint Arrangements and Associates.......................... 765
9.1
Summary of the Requirements of MFRS 11 and

MFRS 128 (Revised) ................................................................... 767
9.2
Principles of Investments in Joint Arrangements..................... 771
9.3
Principles of Investments in Associates..................................... 776
9.4
The Equity Method of Accounting.............................................. 778
9.5
Transactions with an Associate or Joint Venture...................... 795
9.6
Goodwill and Impairment Test................................................... 802
9.7
When the Associate or Joint Venture is a Group....................... 803
9.8
Separate Financial Statements of an Investor Without

Subsidiaries................................................................................. 808
9.9
Share of Losses in Associates and Joint Ventures..................... 810
9.10
Mutual Holdings of Shares......................................................... 814
9.11
Discontinuation of Equity Method of Accounting ..................... 822
CHAPTER 10 Disclosures of Interests in Other Entities and

FairValue Measurement.............................................. 829
10.1
MFRS 12, Disclosures of Interests in Other Entities................ 831
10.2
MFRS 13, Fair Value Measurement........................................... 840
CHAPTER 11 The Effects of Changes in Foreign

Exchange Rates.............................................................. 861
11.1
Foreign Currency Transactions and Operations........................ 863
11.2
Functional Currency and Presentation Currency..................... 865
11.3
Reporting Foreign Currency Transactions in the

FunctionalCurrency.................................................................... 868
11.4
Use of a Presentation Currency Other Than the Functional

Currency....................................................................................... 885
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11.5
Translation of Financial Statements of

Foreign Operations...................................................................... 889
11.6
Foreign Branches, Associates and Joint Ventures .................... 925
11.7
Disposal of a Foreign Operation................................................. 931
CHAPTER 12 Consolidated Statement of Cash Flows.................... 939

12.1
Theoretical Considerations of Statements of Cash Flows......... 941
12.2
Group Statement of Cash Flows................................................. 942
12.3
Consolidating Separate Cash Flows of

Parent and Subsidiaries.............................................................. 965
12.4
Foreign Currency Cash Flows..................................................... 968
CHAPTER 13 Segment Reporting and

Related Party Disclosures............................................ 987
13.1
Introduction................................................................................. 989
13.2
Statutes and Accounting Standards on

Segment Information................................................................... 989
13.3
Statutes and Accounting Standards on Related Parties........... 992
13.4
Principles of Segment Reporting.............................................. 1001
13.5
MFRS 8, Operating Segments ................................................. 1003
13.6
Principles of Related Party Disclosures................................... 1023
CHAPTER 14 Specialised Industries in Malaysia I.................... 1041

14.1
Accounting and Reporting by Banks and Similar

FinancialInstitutions................................................................ 1043
14.2
Accounting and Reporting by Insurance Entities.................... 1093
14.3
Accounting and Reporting by Unit Trust Funds..................... 1129
CHAPTER 15 Specialised Industries in Malaysia II................... 1149

15.1
Accounting for Plantation Operations...................................... 1151
15.2
Accounting for Aquaculture...................................................... 1174
15.3
Accounting for Agriculture........................................................ 1186
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15.4
Accounting Issues of Extractive Industries............................. 1220
15.5
IC Int. 20, Stripping Costs in the Production Phase of a

SurfaceMine.............................................................................. 1235
CHAPTER 16 Interim Reporting, Corporate Governance,

Socialand Voluntary Reporting............................... 1239
16.1
Reasons for Interim Financial Reporting................................. 1241
16.2
MFRS 134, Interim Financial Reporting.................................. 1243
16.3
Regulatory Requirements on Interim Reporting..................... 1264
16.4
Corporate Governance and Reporting...................................... 1274
16.5
Corporate Social Reporting and Voluntary Disclosures.......... 1278
16.6
Reporting of Profit Forecasts and Projections.......................... 1281
16.7
Likely Future Accounting and Reporting Practices................. 1283
Index............................................................................................................. 1285
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CHAPTER 7
CONSOLIDATED AND
SEPARATE FINANCIAL
STATEMENTS
The Chapter will help you in the following areas:
to understand the background to the Standards on
consolidation;
to understand the changes in the principles made in the new
MFRS 10 and the revised MFRS 127;
to be able to apply the standards prescribed in the new and
the revised Standards;
to be able to deal with the consolidation procedures in
preparing group financial statements; and
to be able to deal with consolidation of complex group
structures.
Chapter 7: Consolidated and Separate Financial Statements
555
7.1 Introduction
In May 2011, the IASB simultaneously issued six IFRSs, five of which
relate to consolidation and one on fair value measurement. The IFRSs related
to consolidation are:
IFRS 10, Consolidated Financial Statements;
IFRS 11, Joint Arrangements;
IFRS 12, Disclosures of Interests in Other Entities;
IAS 27(r), Separate Financial Statements; and
IAS 28(r), Investments in Associates and Joint Ventures.
IFRS 10 replaces the consolidation part of the former IAS 27. IAS 27(r)
deals only with accounting for investments in subsidiaries, joint ventures
and associates in the separate financial statements of an investor (retains
the part on separate financial statements in the former IAS 27). IFRS
11 supersedes the former IAS 31 on accounting for joint arrangements.
Disclosure requirements on subsidiaries, joint arrangements, associates and
involvement in unconsolidated structured entities are prescribed in IFRS 12.
The Flowchart to the Background section of this chapter provides guidance
on the application of the various IFRSs for a reporting entitys involvement
with other entities.
7.2 Background to the Standards on Consolidation

7.2.1Reasons for Issuing IFRS 10, Consolidated Financial
Statements
The former IFRSs dealing with consolidation were IAS 27, Consolidated
and Separate Financial Standards, and SIC 12, Consolidation Special
Purpose Entities. The first version of former IAS 27 was issued by the
then IASC in April 1989, subsequently revised by the IASB in December
2003 and a second revision in January 2008. In between those dates, there
were also amendments for improvements, the last before the current
IAS 27(r) was made in July 2010. The former SIC 12 was first issued in
November 1998 by the then SIC and was subsequently amended by IFRIC
in November 2004.
There were some inconsistencies and conflicts when applying those two
Standards. In the former IAS 27, control was defined as the power to govern
the financial and operating policies of an entity so as to obtain benefits from
its activities. However, the Standard did not elaborate on the meaning of
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power and benefits and did not explain how those two components have to be
linked to constitute control. Also, the criterion of to obtain benefits tended
to be interpreted as positive returns and related to ownership interest only.
SIC 12, although referring to IAS 27, used a risks and rewards model
to identify indicators of control in deciding whether a special purpose entity
(SPE) shall be consolidated. Those indicators did not necessarily identify a
control relationship. Also, SIC 12 appeared to focus primarily on vehicles that
were structured to operate on auto-pilot mechanism for specific purpose.
Conceptually, each of the two former IFRSs was based on a different model
and this gave rise to structuring opportunities, inconsistencies and diversity
in practice. The potential conflict was when an investor in applying IAS 27
might consolidate an investee that would not be consolidated in accordance
with SIC 12, or not consolidate an investee that would be consolidated
in accordance with SIC 12. The IASB noted the divergence in practice in
the application of the former IAS 27s control concept, for example, in the
following circumstances:
(a) when an investor controls an investee but the investor has less than
a majority of the voting rights of the investee (and voting rights are
clearly the basis for control);
(b) involving special purpose entities (where the notion of economic
substance in SIC 12 applied);
(c) involving agency relationships; and
(d) involving protective rights.
The global financial crisis which started in 2007 saw the emergence of
newer entities that do not take the conventional form. Assets and liabilities
of reporting entities are transferred to, or securitised in, special purpose
vehicles. Troubled debts of financial institutions are restructured and sold to
structured entities, but a transferor-entity continues to be involved in those
structured entities. Some reporting entities also provide social and financial
support to troubled entities during the financial crisis although the reporting
entities do not have a legal or constructive obligation to do so (they may have
a reputation at stake i.e. a reputational risk rather than a financial risk).
Involvement in those non-conventional entities exposes a reporting entity to
risks, whether financial or reputational.
The former IAS 27 and SIC 12 were unable to provide sufficient guidance
on the accounting for these newer entities, resulting in many resources
(assets) and claims (liabilities and equity) being unrecognised (off-balance
sheet). Users, particularly existing and potential investors and lenders,
have expressed concern that it has become increasingly difficult to analyse
properly an entitys returns and exposure to risks when those assets and
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liabilities were parked in separate vehicles. This created the need for the
IASB to respond to the changing business phenomenon of structured entities.
In response to the impact of the global financial crisis, the IASB was also
asked to consider reputational risk as a basis in deciding whether an investor
should consolidate a special purpose or structured entity which the investor
has sponsored or provided financial and other support, and whether the
consolidation requirements of the then current standards (IAS 27 and SIC 12)
were sufficient for structured entities, as many such newer entities emerged
in the current global financial crisis to cater for financial reorganisation or
reengineering of troubled entities.
The rationale of the single control model for consolidation in IFRS 10 is
based on the view that all assets and liabilities under the control of an investor
shall be consolidated, regardless of how those assets and liabilities have been
structured in other entities. This change in approach is necessary to reflect
properly a groups financial position (particularly its financial structure in
terms of gearing) and financial performance. It would provide more useful
information to users of financial statements in making economic decisions.
The project on consolidation was initiated by the IASB in April 2002, the
exposure draft ED 10, Consolidated Financial Statements, was issued in
December 2008, and the current IFRS 10 Consolidated Financial Statements,
was published in May 2011. In Malaysia, this IFRS takes the nomenclature
of MFRS 10.
7.2.2 The Salient Features of MFRS 10

MFRS 10 requires an investor, regardless of the nature of its involvement
with an entity (the investee), shall determine whether it is a parent, by
assessing whether it controls the investee [MFRS 10.5]. In this new Standard,
the nature of involvement need not necessarily require an investment in the
investee. It may be an involvement by sponsorship, by providing financial
support, including providing guarantees, or social support to another entity.
MFRS 10 introduces a new single control model to identify a parentsubsidiary relationship by specifying that 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 its power over the investee [MFRS 10.6].
The Control Model
In this new control model, an investor controls an investee if, and only if,
the investor has all of the following three elements:
(a) power over the investee (the Power);
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(b) exposure, or rights, to variable returns from its involvement with the
investee (the Returns); and
(c) the ability to use its power over the investee to affect the amount of the
investors returns (the Link between Power and Returns). [MFRS 10.7]
The diagram below depicts the new control model.
POWER
LINK
RETURNS
In this single control model, power is not defined as a legal or contractual

right to direct relevant activities, but is based on the ability to direct relevant
activities unilaterally. The consolidation model is not a quantitative model
(based on risks and rewards) but a qualitative model (based on power,
returns and a link between the two elements). The control model is built on
the principles (of three elements) rather than on bright lines. As such, the
application of this model will require judgements, by considering the relevant
facts and circumstances in making consolidation decisions. In the IASB
view, this consolidation model will better reflect the economic substance of
relationships with other entities.
The Power Element
An investor has power over an investee when the investor has existing
rights that give it the current ability to direct the relevant activities, i.e.
the activities that significantly affect the investees returns [MFRS 10.10].
Power can arise from voting rights (such as by holding equity instruments)
or contractual arrangements, or a combination of both. An investor can
have the power even if its rights to direct have yet to be exercised (a passive
parent). Similarly, an investor can have the power even if other parties have
existing rights, to participate in the direction of the relevant activities or hold
protective rights, including special rights, to veto certain decisions. Protective
rights held by other parties may restrict but do not preclude an investor from
having the power to direct.
The Returns Element
The Standard clarifies that an investor must be exposed, or have rights, to
variable returns from its involvement with an investee to control the investee.
The former FRS 127 used the term to obtain benefits from its activities,
which might imply only positive returns. In this MFRS, the returns must
have the potential to vary as a result of the investees performance and can
be only positive, only negative, or wholly positive and negative [MFRS 10.15].
Thus, returns include not only dividends and other distributions from holding
equity instruments in the investee, but may also include upfront fees, access
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559
to cash, servicing fee, returns not available to non-controlling interest, cost

savings, etc.
For example, an investor may transfer a loan receivable to a structured
entity and receives a servicing fee for managing the loan receivable. Similarly,
a property developer may transfer a land to a special purpose vehicle and
receives income from the land development, even though it may hold little or
no equity interest in the special purpose vehicle.
The Link Element
An investor must not only have power over an investee and exposure or
rights to variable returns from its involvement with the investee. It must also
have the ability to use its power over the investee to affect its return from
its involvement with the investee [MFRS 10.17]. In other words, there must
be a link between the two components of power and returns. For example, if
an investor is the majority shareholder of an investee, it receives the most
dividends (returns) but if the investor does not have the power to direct
the relevant activities (for example, due to a contractual arrangement), the
investee is not a subsidiary of the investor. Similarly, an entity may have
decision-making rights delegated to it when acting as an agent, but it does
not have exposure or rights to variable returns, and accordingly, it does not
control the investee. For example, a fund manager of a unit trust fund may
have decision-making rights with respect to investments of the fund, but it
does not have the ability to direct the relevant activities (buying or selling
investments) unilaterally and it is neither exposed nor have rights to variable
returns. It receives a fee acting as an agent of the unit holders of the fund.
7.2.3 Application of the Control Model

The IFRS sets out the requirements on how to apply this control model in:
(a) circumstances when voting rights or similar rights give an investor
power, including situations where the investor holds less than a majority
of the voting rights, and in circumstances involving potential voting
rights;
(b) circumstances when an investee is designed so that voting rights are
not the dominant factor in deciding who controls the investee, such
as when any voting rights relate to administrative tasks only and the
relevant activities are directed by means of contractual arrangements
(for example, in determining control of a structured entity);
(c) in circumstances involving agency relationships; and
(d) in circumstances when the investor has control over specified assets (a
silo) of an investee.
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Control by Voting Rights

If the relevant activities of an investee are directed through voting
rights, an investor considers whether it has the current ability, through
voting or similar rights, to direct the relevant activities. MFRS 10 retains
the presumption in the former FRS 127 that an investor who can exercise
more than a majority of the voting rights has control of the investee (unless
circumstances indicate otherwise). The more than a majority criterion can
be attained by holding, directly or indirectly, more than half the voting equity
instruments of an investee, or by holding voting equity instruments and having
contractual arrangements with other investors. For example, an investor
owns 40% equity shares of an investee. It enters into an arrangement with
another shareholder of the investee to have the power to exercise the other
shareholders 11% voting rights. In this case, the investors own shareholdings
and the arrangement with the other shareholder give it the current ability to
exercise more than a majority of the voting rights in the investee.
When no party holds a majority of the voting rights in an investee, and
voting rights are clearly the only basis for assessment (in the absence of any
additional arrangements altering decision-making), the assessment of control
will focus on which party, if any, is able to exercise voting rights sufficient
to direct the relevant activities of the investee unilaterally [MFRS 10.B41].
When assessing whether an investors voting rights are sufficient to give it
power, an investor considers all facts and circumstances, such as: (a) the size
of its holding of voting rights relative to the size and dispersion of holdings of
other vote holders; (b) potential voting rights, regardless of whether they are
currently exercisable or not (the former IAS 27 required that the potential
voting rights must be currently exercisable); and (c) rights from contractual
arrangements.
The MFRS clarifies that when the direction of the relevant activities is
determined by a majority vote and an investor holds significantly more voting
rights than any other vote holders or organised group of vote holders, and the
other shareholdings are widely dispersed, it may be clear, after considering
the relevant facts and circumstances alone, that the investor has power over
the investee [MFRS 10.B43].
For example, an investor can have the power to direct the relevant activities
of a public listed company if the investor is the dominant shareholder who
holds voting rights and all the other shareholders with voting rights are
widely dispersed and are not organised in such a way that they actively cooperate when they exercise their votes so as to have more voting power than
the investor. In such a case, the investor, being the dominant shareholder, is
said to have de facto control over the investee. This dominant shareholder
concept was implicit in the former FRS 127.
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Control by Contractual Arrangements

When an investee is designed or structured in a manner that voting rights
relate to administrative tasks only but the relevant activities are directed by
contractual arrangements, the assessment of control would need to consider
those contractual arrangements to decide who is able to direct the relevant
activities.
For more complex cases of contractual arrangements (for example, when
assessing control of structured entities or special purpose entities), it may
be necessary to consider many or all of the following factors to determine
whether an investor controls an investee:
(a) what the relevant activities are, and how decisions about those activities
are made;
(b) whether the rights of the investor give it the current ability to direct
those activities;
(c) whether the investor is exposed, or has rights, to variable returns from
its involvement with the investee; and
(d) whether the investor has the ability to use its power over the investee to
affect the amount of the investors returns.
This assessment should include the consideration of risks that the investee
was designed to create, the risks it was designed to pass on to the parties
involved in the transaction, and whether the investor is exposed to some,
or all of those risks. The investor should consider the decisions made at the
investees inception as part of its design, including call rights, put rights or
liquidation rights. If these contractual arrangements involve activities that
are closely related to the investee, then they are, in substance, an integral
part of the investees relevant activities.
The investee may be designed so that the direction of its activities and its
returns are predetermined unless, and until, those particular circumstances
arise or events occur. In this case, only the decisions about the investees
activities when those circumstances or events occur, can significantly affect
its returns, and are thus considered as relevant activities.
Being involved in the design of an investee, although not sufficient, may
indicate that the investor had the opportunity to obtain rights that are
sufficient to give it power over the investee. Similarly, an investors explicit
or implicit commitment to ensure that an investee continues to operate as
designed, may increase the investors exposure to the variability of returns
and thus the likelihood that it has power. The commitment alone, however,
neither give an investor power nor does it prevents another party from having
power.
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Agency Relationships
An investor needs to assess whether its relationship with other parties is
such that those other parties are acting on the investors behalf i.e. they are
de facto agents. A party is a de facto agent when the investor has, or those
that direct the activities of the investee have, the ability to direct that party
to act on the investors behalf. Thus, an investor can control an investee by
appointing agents to act on its behalf. But if the investor is acting only as an
agent, it does not control the investee.
The MFRS provides examples of such other parties that, by the nature
of their relationship, may act as de facto agents of the investor, and these
include the investors related parties, a party that received its interest in
the investee as a contribution or loan from the investor; a party that cannot
finance its operations without subordinated financial support from the
investor; an investee for which the majority of the members of its governing
body or for which its key management personnel is the same as that of the
investor; and a party that has a close business relationship with the investor,
such as the relationship between a professional service provider and one of
its significant clients.
Control Over Specified Assets (A Silo)
Sometimes, an investor may only have power over specified assets (or over
a portion) of an investee. In such cases, the IFRS requires that the investor
shall treat the portion of that investee as a separate entity if and only if the
following condition is satisfied:

Specified assets of the investee (and related credit enhancements, if any)
are the only source of payments for specified liabilities of, or specified
other interests in, the investee. Parties other than those with the specified
liabilities do not have rights or obligations related to the specified assets
or to residual cash flows from those assets. In substance, none of the
returns from the specified assets can be used by the remaining investee
and none of the liabilities of the deemed separate entity are payable from
the assets of the remaining investee. Thus, in substance all of the assets,
liabilities and equity of that deemed separate entity are economically
ringed-fenced from the overall investee. Such a deemed separate entity is
often called a silo.
If an investor controls a silo in an investee, it consolidates a portion of
an investee as a separate entity. Other parties exclude that portion of the
investee when assessing control of, and in consolidating the investee.
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Reassessment of Control
The MFRS requires that an investor shall reassess whether it controls an
investee only if facts and circumstances indicate that there are changes to
one or more of the three elements of control.
A change in power over an investee can occur when there are changes
to decision-making rights, for example, when the relevant activities are no
longer directed through voting rights, but instead by other agreements, such
as a contract, that give another party or parties the current ability to direct
the relevant activities.
An investor may also gain or lose power over an investee without the
investor being involved in that event. For example, an investor can gain
power over an investee because decision-making rights held by another party
or parties that previously prevented the investor from controlling an investee
have lapsed.
Changes to exposure, or rights, to variable returns from its involvement
may also cause an investor to lose control of an investee, for example when the
investor ceases to be entitled to receive returns or to be exposed to obligations,
such as when a contract to receive performance-related fees is terminated.
7.2.3.1 Other Requirements of MFRS 10

The requirements for consolidation and the consolidation procedures of the
former FRS 127 remain unchanged in MFRS 10. The disclosure requirements
of the former FRS 127 are dealt with in the new MFRS 12.
7.2.4 Implications of MFRS 10 on Practice

MFRS 10 may bring about fundamental changes to the current practice
of some reporting entities. It is not just about learning and understanding
the MFRS as the new requirements may require changes in the accounting
processes and procedures of a reporting entity.
Contractual arrangements with other parties would need to be reassessed
to determine whether voting rights are transferred to an investor, whether an
investor holds special rights by statute (such as when a golden share owned by
a government is passed to the investor for control of an investee), or whether
an investor controls an investee by a contract with a major shareholder.
A reporting entity would also need to reassess its involvement with all
other entities, regardless of whether they are the conventional type or the
structured type, and determine the nature of the relationship. Applying the
new control model might result in some subsidiaries consolidated under the
former FRS 127 failing the control test, and thus requiring deconsolidation.
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The new control model would more probably result in some investees
not consolidated under the former FRS 127 meeting the control test, and
henceforth shall be consolidated. For example, the requirements on the
dominant shareholder concept may result in some investees previously
treated as associates becoming subsidiaries under the new control model.
Even if a reporting entity is a passive investor (i.e. have yet to exercise its
voting rights) in such investee, the investor would still need to test whether it
would have that current and practical ability to direct the relevant activities
of the investee if it wants to do so.
A reporting entity would also need to reassess its involvement in structured
entities (SEs) as the scope is wider than the guidance on special purpose
entities (SPEs) in SIC 12. The conditions for SPEs in SIC 12 were narrowly
focussed on vehicles established for specific purposes. The requirement on
SEs in MFRS 10 applies to any entity that is not managed by the traditional
means. These may include vehicles created for transfers of assets and
liabilities, entities that an investor sponsors or provides financial (including
guarantees) and other support, and involvement in clubs, trusts and nonprofit organisations.
Although the control model is premised on the three elements of power,
returns and link between power and returns, a reporting entity needs to
consider all relevant facts and circumstances. Significant judgements are
required in deciding whether a reporting entity has the power to direct and
generate returns when the voting rights held are less than a majority, or
when the power to direct the relevant activities are based on contractual
arrangements.
The changes in accounting will probably be in the following four situations:
(a) some current subsidiaries may fail the control test and thus require
deconsolidation;
(b) some current investees may meet the control test and thus require
consolidation;
(c) structured entities that an investor controls shall henceforth be
consolidated; and
(d) silos (ringed-fenced assets, liabilities and equity) that an investor
controls shall henceforth be consolidated.
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Appendix: A Decision Flowchart for Involvement with Other Entities

An investor shall assess its
involvement with each other entity
Yes
Has control?
Apply MFRS 10,

consolidate investee
No
Has joint control?
Yes
No
Yes
Joint
operation?
Apply MFRS 11,

account for assets,
liabilities, revenues
& expenses directly
Joint
venture?
Has significant influence?
Apply MFRS 128,

equity accounting
No
Hold equity
and debt
instruments?
Apply MFRS
132, MFRS 139
and MFRS 7
Unconsolidated
structured entity
Apply MFRS 12 for disclosures
7.3 Application of MFRS 10

7.3.1 The Main Principles of MFRS 10
There are no changes to the consolidation requirements and the
consolidation procedures in the new MFRS 10. The main principles, which
are the same as those in the original FRS 127(2008), are summarised as follows:
(a) Changes in the parents ownership interest that do not result in the loss
of control of a subsidiary shall be accounted for as transactions with
7.3
566
(b)
(c)
(d)
(e)
7.3
equity holders in their capacity as equity holders. Consequently, such

changes would not result in a gain or loss being recognised in profit
or loss. For example, if a parent lists its wholly-owned subsidiary in a
stock exchange and the parents equity stake after the listing is diluted
to 60%, the decrease in stake of 40% is treated as an equity transaction
(rather than as a deemed disposal under the former practice) with the
gain or loss recognised directly in equity.
The new MFRS specifies how an entity measures a gain or loss arising
on loss of control of a subsidiary, and it requires that any such gain or
loss to be recognised in profit or loss. The gain or loss arising on loss of
control includes the parents share of post-acquisition gains or losses of
the subsidiary that were previously recognised in other comprehensive
income (and deferred in equity). In other words, the parents share of
any post-acquisition fair value reserve, exchange reserve and hedged
reserve, shall be reclassified to profit or loss as part of the gain or loss
arising on loss of control.
The new MFRS requires that any remaining non-controlling equity
investment in a former subsidiary shall be remeasured to its fair value
in the consolidated financial statements on the date control of it is lost.
For example, if the remaining equity stake becomes an investment in an
associate, that stake shall be measured to fair value at the date control
is lost and the difference between fair value and carrying amount is
included in the calculation of the gain or loss arising on loss of control.
The new MFRS also provides guidance on determining when two or
more transactions or arrangements that result in a loss of control of a
subsidiary shall be treated as a single transaction. For example, when
a disposal arrangement has been structured in a series of transactions
to nullify the impact on profit or loss, those series of transactions shall
be accounted as a single transaction to reflect the economic substance of
the arrangement as a whole.
The new MFRS requires that losses applicable to the non-controlling
interest shall be allocated to the non-controlling interest, even if this
results in a deficit to the amount of the non-controlling interest. Any
guarantees or other support arrangements from the controlling and noncontrolling interests shall be accounted for separately. The previous FRS
127 did not permit allocation of losses to non-controlling interest that
was in excess of their capital contribution except when non-controlling
shareholders have given a guarantee to share losses in excess of their
capital contribution.
567
7.3.2 Objective
The objective of MFRS 10 remains the same as the original FRS 127 in that
it establishes principles for the preparation and presentation of consolidated
financial statements when an entity controls one or more other entities. To
meet the objective, the MFRS:
(a) requires an entity (the parent) that controls one or more other entities
(subsidiaries) to present consolidated financial statements;
(b) defines the principle of control and establishes control as the basis for
consolidation;
(c) sets out how to apply the principle of control to identify whether an
investor controls an investee and therefore must consolidate the
investee; and
(d) sets out the accounting requirements for the preparation of consolidated
financial statements.
7.3.3 Scope
The Standard requires that an entity that is a parent shall present
consolidated financial statements. This MFRS applies to all entities except
for:
(a) a parent need not present consolidated financial statements if it meets
all of the following conditions:
(i) it is a wholly-owned subsidiary, or 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;
(ii) its debt or equity instruments are not traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market,
including local and regional market);
(iii) it did not file, nor is it in the process of filing, its financial statements
with a securities commission or other regulatory organisation for
the purpose of issuing any class of instruments in a public market;
and
(iv) its ultimate or any intermediate parent of the parent produces
consolidated financial statements available for public use that
comply with MFRSs [MFRS 10.4].

In practice, this exemption is normally only availed when the parent is
itself a wholly-owned subsidiary of another parent (i.e. its immediate
parent). This is because there is no other shareholder, other than its
immediate parent, and the shareholders of its immediate parent would
be better served by consolidating at the immediate parents level. For a
7.3
568
partially-owned subsidiary, it may be practicable to avail the exemption

if there are only a few non-controlling shareholders (for example,
corporate minority shareholders) and consent has been obtained from
them for not presenting consolidated financial statements. It shall be
noted that in some jurisdictions, the local laws permit the exemption
only if the intermediate or ultimate parent is incorporated in that local
jurisdiction. Thus, for a wholly-owned parent that is a subsidiary of
another parent incorporated outside that jurisdiction, the exemption
does not apply. It must produce consolidated financial statements in
that local jurisdiction.
(b) post-employment benefit plans or other long-term employee benefit
plans to which MFRS 119, Employee Benefits applies.
7.3.3.1 Scope of Consolidated Financial Statements

There is no change made to the scope of consolidation in the former FRS
127 as the MFRS continues to require that consolidated financial statements
shall include all subsidiaries of the parent.
The exceptions in some past standards, which required that a subsidiary
shall be excluded from consolidation on the grounds of temporary control
and severe restrictions, have been removed in the former FRS 127. The
Standard clarifies that if a subsidiary is acquired exclusively with the view
to disposal within 12 months, it shall be consolidated, and then presented as
non-current assets held for sale and discontinued operation when the criteria
of MFRS 5, Non-Current Assets Held for Sale and Discontinued Operations,
are met. Similarly, a subsidiary is not excluded from consolidation because
its business activities are dissimilar from those of the other entities within
the group. The Standard clarifies that relevant information is provided by
consolidating such subsidiaries and disclosing additional information in the
consolidated financial statements about the different business activities in
accordance with MFRS 8, Operating Segments.
A subsidiary is also not excluded from consolidation on the ground that
it operates under conditions of severe long-term restrictions in its ability
to transfer funds to the parent. So long as control continues to exist, the
subsidiary shall be consolidated although additional information may be
disclosed about the long-term restrictions. Similarly, non-controlling interests
and other parties may hold protective rights in a subsidiary that limit, but
do not preclude, the parent from exercising its power to direct the activities
of the subsidiary. For example, a non-controlling shareholder may hold veto
power for approval of capital expenditure of a subsidiary but this is not
sufficient to preclude the parent from controlling the subsidiary.
7.3
569
It has been argued that for venture capital entities and mutual funds,
the main purpose of their investments in subsidiaries is to achieve wealth
or value creation for those investments. Thus, some commentators have
suggested that the investments in subsidiaries made by such entities should
be measured on the fair value model (for example, in accordance with
MFRS 9), rather than by consolidation. The revised Standard clarifies that
a subsidiary is not excluded from consolidation simply because the investor
is a venture capital organisation, mutual fund, unit trust or similar entity.
Note that in August 2011, the IASB issued Exposure Draft ED/2011/4
Investment Entities, to propose exemption for such investment entities from
the consolidation requirement of IFRS 10 provided their investments in
subsidiaries are measured at fair value through profit or loss.
Thus, for a subsidiary to be excluded from consolidation, the parent must
have lost control. A parent loses control when it loses the power to direct
the relevant activities of the investee or when it ceases to be exposed, or
have rights, to variable returns from the investee. For example, when shares
in a subsidiary are disposed and the parent loses control. Also, the loss of
control can occur with or without a change in absolute or relative ownership
levels. It could occur, for example, when a subsidiary is subject to control
of a government, court, administrator or regulator. It could also occur as a
result of a contractual agreement. For example, an agreement that previously
allowed the entity to gain control in an investee but is not renewed on expiry
of the agreement.
7.3.4 Definitions
In general, consolidated financial statements shall be presented when
there is a group of entities under the control of a parent. A group is defined
in the Standard as a parent and its subsidiaries. There must therefore be a
parent-subsidiary relationship for a group to exist. The test of the existence of
a parent-subsidiary relationship rests on the criterion of control. A subsidiary
is defined as an entity that is controlled by another entity.
It shall be emphasised that as control is the central criterion, it need not
necessarily be accompanied by an ownership interest in an investee, to qualify
the latter to be a subsidiary. The IFRS defines control of an investee as 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 its power over the investee.
In a parent-subsidiary relationship, control is exercised with benefits and
risks attached, and this will normally (though not necessarily) arise if the
investor has substantial ownership interest at stake. Thus, when an entity
has the power to direct the relevant activities and policies of another entity
7.3
570
purely by virtue of a management contract, there are no risks or benefits

attached to the exercise of power (apart from perhaps an agreed management
fee for acting as an agent), and accordingly, no parent-subsidiary relationship
arises. The control exercised by the parent must also be a unilateral or sole
control, which is the power to direct the relevant activities and policies of
the investee without having to make reference to, or to seek the concurrence
of, another third party, or to share control with another party. In some
situations, benefits and risks can arise in arrangements other than the
holding of ownership interest, such as in the case of an entitys involvement
in a structured entity and the entity holds little or no equity interest in the
structured entity.
The most commonly used test of a parent-subsidiary relationship is the
more than 50 per cent ownership interest. In the case of a subsidiary
company, this interest is satisfied if the parent holds 50% plus one more
share of the subsidiary company. Note that it is not necessary for the parent
to own directly, more than 50% of the equity share capital of another company
for the existence of a parent-subsidiary relationship. Control is presumed
to exist when the parent owns, directly or indirectly through subsidiaries,
more than one half of the voting rights of an entity unless, in exceptional
circumstances, it can be clearly demonstrated that such ownership does not
constitute control. In other words, when a group as a whole owns more than
50% of the equity share capital, control is generally presumed.
An investor may sometimes hold more than 50% ownership interest in
an investee but does not have unilateral control. Such is the case when a
local investor may have entered into a joint venture agreement with a
foreign partner to set up a joint venture company. The local investor may
hold more than 50% ownership interest in the joint venture company, but if
the agreement provides for a joint control, the joint venture company is not
a subsidiary of the local investor because it does not have unilateral control.
An investor may hold more than 50% ownership interest in an investee, but
if it has entered into an agreement with another investor that provides the
other investor veto rights to all strategic decisions that affect the relevant
activities of the investee, the investor has no unilateral power. However, if the
other investor only holds veto rights to some strategic decisions (protective
rights), they do not preclude the investor from having the power to direct the
relevant activities of the investee.
Control may exist in certain circumstances, even when the more than 50%
equity interest is not met. This may arise when:
(a) the power to direct is obtained by operation of law or by agreement with
other investors;
7.3
571
(b) the investor is the single largest shareholder and the other shareholders
are thinly spread out among many investors (the dominant shareholder
concept);
(c) the investor holds potential voting rights that enable it to have the
current ability to direct the relevant activities of an investee; and
(d) by contractual arrangement, such as control of a structured entity
7.3.4.1Control by Operation of Law or by Agreement with Other

Investors
The following group structures illustrate how control exists when the
equity interest is not more than 50% but the power to direct is obtained by
operation of law or by agreement with other investors that allows the investor
to have more than a majority of the voting rights.
P Bhd
40% Control by law
P Bhd
Agreement
40%
Mr. X
11%
S Bhd
S Bhd
P Bhd owns 40% equity shares in S

Bhd and controls it by operation of law.
Agreement with Mr. X allows P Bhd to

control 51% of the voting rights in S Bhd
7.3.4.2 Control by Holding Sufficient Voting Rights

The following cases illustrate how to assess whether an investor has
sufficient voting rights to have the power to direct the relevant activities of
an investee (i.e. the application of the dominant shareholder concept).
Example 1 (Cases on Investors Voting Rights that are 50% or less)
Case 1
Entity P holds 40% of the ordinary shares of Entity Q. The next two largest
shareholdings of Entity Q are 10% and 5% respectively and the remaining
ordinary shares are held by thousands of shareholders, none individually more
than 1%. None of the shareholders has any arrangement to consult each other or
to make collective decisions.
In this case, on the basis of the absolute size of its holding and the relative
size of the holdings of other shareholders, Entity P has sufficient dominant voting
rights to meet the power criterion without the need to consider any other evidence
of power.
7.3
572
Case 2
Entity P holds 30% of the ordinary shares of Entity Q and seven other
shareholders each hold 10% of the ordinary shares of Entity Q. A shareholder
agreement between Entity P and all the other shareholders grants Entity P the
right to appoint, remove and set the compensation of management responsible for
the relevant activities of Entity Q. However, Entity P has yet to exercise this right
and chooses to remain as a passive investor.
In this case, considering the absolute size of its holding and the relative size
of the other shareholdings alone is not conclusive to determine that Entity P has
rights sufficient to give it power over Entity Q. However, the fact that Entity P
has the contractual right to appoint, remove and set the compensation of key
management is sufficient to conclude that Entity P has power. The fact that
Entity P has not exercised this right yet or the likelihood of it exercising this
right should not be considered when assessing if it has the power.
Case 3
Entity P holds 40% of the ordinary shares of Entity Q. Three other investors
each hold 20% of the ordinary shares of Entity Q. Entity P has two representations
on the board of directors of Entity Q whilst the other three investors each have
one representation. There are no other arrangements that affect decision-making
policies of Entity Q.
In this case, considering the absolute size of Entity Ps voting right and its
relative size to the other three shareholdings is sufficient to conclude that Entity
P does not have power over Entity Q. This is because only three other investors
would need to cooperate to be able to prevent Entity P from controlling Entity Q
unilaterally.
Case 4
Entity P holds 40% of the ordinary shares of Entity Q. Twelve other investors
each hold 5% of the ordinary shares of Entity Q. None of the other shareholders
has any contractual arrangement to consult each other or to make collective
decisions.
In this case, considering the absolute size of Entity Ps holding and the relative
size of the other shareholdings alone is not conclusive to determine if Entity P has
rights sufficient to give it power over Entity Q. Additional facts and circumstances
that indicate that Entity P has, or does not have power should be considered.
7.3.4.3 Potential Voting Rights

An entity may hold warrants, share options or convertible securities
that are exercisable or convertible into ordinary shares, or other similar
7.3
573
instruments that have the potential, if exercised or converted, to give the

entity voting power or reduce another partys voting power over the financial
and operating policies of another entity (potential voting rights). The IFRS
requires that the existence and effects of potential voting rights, including
potential voting rights held by another entity, are considered when assessing
whether an entity has the power to direct the relevant activities of an investee.
In assessing whether potential voting rights contribute to control, the entity
examines all facts and circumstances (including the terms of the exercise of
the potential voting rights and any other contractual arrangements whether
considered individually or in combination) that affect potential voting rights,
except the intention of management and the financial ability to exercise or
convert. The condition of currently exercisable in the former FRS 127 has
been removed.
Example 2
X Bhd and Y Bhd each holds a 30% interest in the 100 million ordinary shares
of S Bhd. The remaining shareholders are spread out evenly among the public
investors. X Bhd also holds 50 million warrants of S Bhd, which are exercisable into
50 million new ordinary shares of S Bhd.
In this case, if X Bhd were to exercise the warrants it holds in S Bhd, its effective
ownership in S Bhd would be [30m + 50m]/[100m + 50m] = 53.3%. This would give
X Bhd a voting power of more than half. Thus, with the potential voting rights and
considering all other relevant factors, it is probable that X Bhd would have control
of S Bhd, and should therefore treat S Bhd as a subsidiary.
Example 3 (Cases on Potential Voting Rights)

Case 1 Potential voting rights that are not substantive
Entity A and Entity B currently hold 60% and 40% respectively of the voting
ordinary shares of Entity C. However, Entity B has a call option to acquire half
of Entity As voting ordinary shares of Entity C. The option is exercisable at any
time in the next three years at a fixed price that is deeply out of the money (and
is expected to remain so for that three-year period). Entity A has been exercising
its votes and is actively directing the relevant activities of Entity C.
In this case, Entity A is more likely to meet the power criterion because it has
the current ability to direct the relevant activities of Entity C. Although Entity B
has a current exercisable call option to purchase additional voting rights that if
exercised would give it a majority of the voting rights in Entity C, the terms and
conditions associated with the option (the fact that the option is deeply out of the
money and likely to remain so in the next three years) are such that the option is
not considered to be substantive.
7.3
574
Case 2 Potential voting rights that are substantive

Entity O has three shareholders, Entity L, Entity M and Entity N, each holding
one third of the ordinary shares of Entity O. Entity L also holds convertible
loanstocks of Entity O which are exercisable at a fixed conversion price at any
time in the next two years. If exercised, Entity L would have a majority of the
voting rights in Entity O. The conversion option in the loanstocks is currently out
of the money (but not deeply out of the money).
In this case, Entity L is likely to have the power because it holds voting rights
in the investee together with rights to obtain voting rights, to give it the current
ability to direct the relevant activities of Entity O. The potential voting rights
in this case is substantive. However, to conclude whether Entity L has power
over the investee, it needs to consider additional evidence, such as whether it
can appoint or approve the investees key management personnel, whether
it can direct the investee to enter into, or can veto any changes to, significant
transactions that affect its returns, whether it can dominate the nomination
process of electing members of the investees governing body or whether the key
management personnel or board members are its related parties
7.3.4.4 Control of Structured Entities

A structured entity is defined in the MFRS as an entity that has been
designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when any voting rights relate to
administrative tasks only and the relevant activities are directed by means
of contractual arrangements.
Features or attributes of a structured entity may include some or all of
the following:
(a) restricted activities.
(b) a narrow and well-defined objective, such as to effect a tax-efficient
lease, carry out research and development activities, provide a source of
capital or funding to an entity or provide investment opportunities for
investors by passing risks and rewards associated with the assets of the
structured entity to investors.
(c) insufficient equity to permit the structured entity to finance its activities
without subordinated financial support.
(d) Financing in the form of multiple contractually linked instruments to
investors that create concentrations of credit or other risks (tranches).
Examples of structured entities are:
(a) Securitisation vehicles;
(b) Asset-backed financings
(c) Some investment funds
7.3
575
An investor needs to assess its involvement with a structured entity to

determine whether it has the power to direct the relevant activities and is
exposed, or have rights, to variable returns of the structured entity. If its
involvement meets the control model, it shall treat the structured entity as its
subsidiary. Otherwise the investee is treated as an unconsolidated structured
entity and the disclosure requirements of MFRS 12 would apply.
Example 4
On 1 January 20x0 Setia Bhd, a property development company, creates Damai
Trust for the sole purpose of developing a shopping complex that will be leased to
Jusco Bhd. The cost to develop the shopping complex, including land cost, is estimated
at RM500 million. To provide the necessary financing for the development of the
shopping complex, two banks are invited to each take up a 40% stake in the equity of
Damai Trust and the balance of the 20% stake will be invested by Setia Bhd.
For its 20% stake, Setia Bhd will transfer its land to Damai Trust and undertake
the entire development of the shopping complex. Damai Trust will then enter into
an operating lease arrangement whereby upon completion, the shopping complex
will be leased to Jusco Bhd for a lease period of 20 years at a minimum lease
payment of RM50 million per year. The lease payments received in each year, after
deducting operating expenses of Damai Trust, will be paid out as dividends to the
stakeholders (the bankers and Setia Bhd). The governing board of Damai Trust will
consist of representations from the two bankers and Setia Bhd but its functions are
limited to ensuring that the payments for development are in accordance with the
stage of development, the lease arrangement with Jusco Bhd is set out properly, and
the approval of the annual dividends to the stakeholders.
At the end of year 20, the shopping complex will be taken over by Setia Bhd.
Damai Trust will be dissolved and the initial capital provided by the bankers will
be returned to them.
Required
Explain whether Setia Bhd should consolidate the financial statements of
Damai Trust.
Solution 4
Although Setia Bhd only holds a 20% stake in the equity of Damai Trust, the
substance of the arrangement is that Damai Trust is a structured entity that is
controlled by Setia Bhd. Accordingly, Setia Bhd should consolidate the financial
statements of Damai Trust. Damai Trust operates on an autopilot mechanism
whereby its policies are predetermined. The control is evident because Setia Bhd is
the creator of the Trust and it derives economic benefits directly by transferring its
land and undertaking the entire development activities of the shopping complex and
receiving dividend distribution from its 20% equity stake in the Trust. Furthermore,
it bears the residual or ownership risk in that at the end of year 20, the initial capital
provided by the bankers must be returned in their entirety (a form of guarantee for
return of capital) even if the market value of the shopping complex were to fall
substantially below the capital provided by the bankers.
7.3
576
7.3.5 Requirement for Group Accounts

In general, when a group exists, the Standard requires that the parent
must, in addition to its own separate financial statements, prepare a set of
group financial statements comprising itself and all its subsidiaries. Note
that the parents separate financial statements would normally record its
investments in subsidiaries based on the cost principle, and hence would
only account for dividends received and receivable from its subsidiaries.
This cost basis of accounting for subsidiaries is not an appropriate measure
of the groups performance and financial position because the dividends
recognised may bear little relationship to the performance of the subsidiaries.
Furthermore, it does not indicate the extent of financial resources (assets and
liabilities) controlled by the parent. Thus, without presenting group accounts,
it can be argued that the parents separate financial statements would not
reflect a true and fair view of the operations and financial position of a parent
and its subsidiaries.
The objective of the group financial statements is designed for shareholders
of the parent in particular and the users of accounts in general. Shareholders
and users are usually concerned with and need to be informed about the
performance, financial position and changes in financial position of the group
as a whole. Thus, group financial statements are presented to reflect financial
information of the group as a whole, as if the group is a single entity although
separate legal entities exist for entities within the group.
7.3.6 Basic Concepts of Group Accounts

Group accounts are usually prepared in the form of consolidated financial
statements which treat the parent and its subsidiaries as a single economic
unit. Consolidation is basically a method of accounting under which the
information contained in the separate financial statements of a parent and
its subsidiaries is presented as though for a single entity. The consolidated
financial statements record the results and assets and liabilities of the
entities which comprise a group, aggregated on the basis that those entities
all form part of a single economic unit.
The views of consolidation differ and these can affect the way certain
items are treated in the consolidated accounts. One such view is based on
the proprietary concept which stresses on ownership interest rather than
control. This concept assumes that the shareholders of the parent are the
only relevant users and that they are interested solely in the equity shares
that they owned. Accordingly, only the proportionate interest of the parent
in the assets, liabilities, revenues and expenses of partly-owned subsidiaries
would be added to the consolidated accounts (proportionate consolidation).
7.3
577
An opposing view to consolidation is based on the entity concept which

stresses on common control regardless of ownership. This concept, though
focussing on the group itself as being a single entity, does not make a
distinction between the different shareholders in the entities that comprise
a group. Interest of shareholders of the parent is not separately identified.
Controlling and non-controlling shareholders are all treated as shareholders
within the groups economic entity.
In practice, consolidated financial statements are prepared on the basis
of a combination of the two concepts. The proprietary concept alone does not
provide sufficient relevant information for the parents shareholders as it
undermines the economic resources controlled by the group. On the other
hand, the entity concept alone does not make a distinction between interests
of the shareholders of the parent and the non-controlling shareholders of
the subsidiaries in the group. Such a distinction is generally considered as
important to the group parents investors as they need information not only
on the group as a whole, but also on the distinction between what they own
and what others own.
In its deliberation on this subject of consolidation, the IASB considered
the following bases for consolidation:
(a) the controlling entity model, where the consolidated financial statements
comprise the controlling entity and other entities under its control;
(b) the common control model, where the combined financial statements
comprise entities under the control of the same controlling entity or
body; and
(c) the risks and rewards model, where two entities are included in the
consolidated financial statements when the activities of one entity affect
the wealth of the residual shareholders (or residual claimants) of the
other entity.
The IASB rejected the risks and rewards model as a basis for consolidation
on the grounds that it is not conceptually robust. The IASB observed that
there are occasions when the combined financial statements and therefore the
application of the common control model, would provide useful information to
users of financial statements. However, it concluded that the IFRS should use
the controlling entity model as the primary basis of consolidation.
MFRS 10 defines consolidated financial statements as the financial
statements of a group in which the assets, liabilities, equity, income and
expenses and cash flows of the parent and its subsidiaries are presented as
those of a single economic entity. In other words, the net assets and results
of all entities that comprise a group are first aggregated using the entity
concept, on the basis that those entities all from part of a single economic
entity. The results and net assets aggregated are then allocated to interests
7.3
578
of non-controlling shareholders leaving the balances as attributable to the

shareholders or owners of the parent entity (the proprietary concept is
applied within the entity concept to separate the results and net assets).
7.4 Consolidation Procedures

The Standard explains that in preparing consolidated financial statements,
an entity combines the financial statements of the parent and its subsidiaries,
line by line by adding together the items of assets, liabilities, equity, income
and expenses. In order that the consolidated financial statements present
financial information about the group as that of a single economic entity, the
following steps are then taken:
(a) the carrying amount of the parents investment in each subsidiary and
the parents portion of the equity of each subsidiary are eliminated (see
MFRS 3, which describes the treatment for the resultant goodwill);
(b) non-controlling interests in the profit or loss and other comprehensive
income of consolidated subsidiaries for the reporting period are identified;
and
(c) non-controlling interests in the net assets of consolidated subsidiaries
are identified separately from the parents ownership interests in them.
Non-controlling interests in the net assets consist of:
(i) the amount of those non-controlling interests at the date of the
original combination calculated in accordance with MFRS 3; and
(ii) the non-controlling interests share of changes in equity since the
date of the combination.
The profit or loss, other comprehensive income and the net assets
allocated to the parent and non-controlling interests shall be based on the
present ownership interests and do not reflect possible exercise or conversion
of potential voting rights. For example, assume that the present ownership
interests of the parent and non-controlling interests are 60% and 40%
respectively. The exercise or conversion of potential ordinary shares would
change their ownership interests to 80% and 20% respectively. The allocation
of the current period profit, other comprehensive income and net assets
should be based on the present 60% and 40% ownership interests.
The Standard further requires that non-controlling interests shall be
presented in the consolidated statement of financial position within equity,
separately from the equity of the owners of the parent. As non-controlling
interests represent equity not held by the parent, they would include
ordinary equity shares, preference shares that are classified as equity and
other components of equity (such as share option reserves) not attributable
to the parent.
7.4
579
7.4.1 Other Intragroup Balances

Apart from the investment in equity shares of a subsidiary, other intragroup
balances may include investment in preference shares, intragroup bond
holdings, intragroup loans and advances, intragroup group current accounts
(such as amount due from or due to a subsidiary), intragroup dividend
receivable and payable, and intragroup bills receivable and bills payable.
In accordance with the concept that all entities in a group are a single
economic entity, all intragroup balances must be eliminated on consolidation.
The elimination of intragroup loans and advances, current accounts and
dividend is usually a straightforward procedure of reversing entries at the
consolidation level. In practice, the intragroup current accounts often to not
agree, either due to items in transit and/or errors in recording. In principle,
the current accounts should be adjusted for these items and/or errors before
they are eliminated on consolidation.
If a partly-owned subsidiary has declared a dividend, the parents share
of that dividend is eliminated in the consolidated statement of financial
position. The portion of that dividend payable to non-controlling interest is
not eliminated but included in other payables.
If a parent has provided a financial guarantee to a lender for a loan taken
by its subsidiary, the financial guarantee is disclosed as a contingent liability
in its separate financial statements. On consolidation, this contingent liability
must be eliminated as the loan taken by the subsidiary would be included in
the consolidated statement of financial position.
7.4.1.1 Preference Shares in a Subsidiary

A subsidiary may have issued redeemable preference shares or nonredeemable preference shares that are classified as financial liabilities. To
the extent that the preference shares are held by the parent, they shall be
eliminated with the parents investment on consolidation as they represent
intragroup balances. The balance of the preference shares not held by the
parent shall remain as financial liabilities in the consolidated statement of
financial position.
If a subsidiary has preference shares that are classified as equity,
the extent of the preference shares not held by the parent is classified as
non-controlling interests. The Standard clarifies that if a subsidiary has
outstanding cumulative preference shares that are classified as equity and
are held by non-controlling interests, the parent computes its share of profit
or loss after adjusting for the dividends on such shares, whether or not
dividends have been declared.
7.4
580
Example 5
On 1 January 20x1, Happy Bhd acquired 75% of the ordinary shares and 30% of
the preference shares of Lucky Bhd. The preference shares are classified as equity
and they carry a cumulative preference dividend of 10% per year. The payment
of dividend is discretionary and conditional on the company achieving sufficient
profits in each year. However, dividends on ordinary shares can only be paid after
all arrears of preference dividends have been paid.
For the year ended 31 December 20x4, Lucky Bhd reported a profit after tax of
RM70 million. Its equity consists of the following components:

RM000
Cumulative preference shares of RM1 each
100,000
Ordinary shares of RM1 each
200,000
Retained profits brought forward
80,000
Profit after tax for the year 20x4
70,000
450,000
Required
(a)
Compute the amount of profit for the year that shall be allocated to noncontrolling interests; and
(b)
Determine the amount of non-controlling interest that shall be shown in the

financial position.
Solution 5
(a)
Allocation of profit for the year
Profit after tax
Noncontrolling
Interest
Parent
RM000
RM000
RM000
70,000
(10,000)
7,000
3,000
Profit after preference dividend
60,000
15,000
45,000
Allocation of profit
70,000
22,000
48,000
10% preference dividend
7.4
Total
(b)
581
Non-controlling interest in financial position

Total
Noncontrolling
Interest
Parent
RM000
RM000
RM000
Preference shares
100,000
70,000
30,000
Ordinary shares
200,000
50,000
150,000
80,000
20,000
60,000
Profit for the year
70,000
22,000
48,000
450,000
162,000
288,000
7.4.1.2 Intragroup Bond Holdings

Whilst the Companies Act, 1965 prohibits reciprocal shareholdings
between a parent company and its subsidiary companies, there is no such
equivalent restriction on intragroup bond holdings. Thus, companies in a
group may hold bonds of the parent or any of its subsidiaries. Also, a company
may retire its own bonds by purchasing them in the open market.
Bonds, which are commonly called loan stocks or debentures in Malaysia,
are debt instruments, which the issuer must recognise as a long-term
financial liability in its financial position. The financial liability is normally
carried at the amortised cost basis in accordance with MFRS 139, Financial
Instruments: Recognition and Measurement. The liability instrument gives
rise to interest expense, which may consist of the coupon interest rate plus
accretion of bond discount, and less amortisation of bond premium. Under the
amortised cost basis, the effective interest expense recognised would be equal
to the effective market interest rate prevailing at the time of the bond issue
(i.e. a historical interest rate)
When an entity purchases a bond of its affiliate (which can be any other
entity in the group), the entity needs to account for the bond as an investment.
The investment in bond is a financial asset, which in accordance with MFRS
139, shall be classified as either: (i) held-to-maturity (HTM) investment,
(ii) available-for-sale (AFS) investment, or (iii) investment at fair value
through profit or loss. When classified as a HTM investment, the bond would
be measured at amortised cost using effective interest basis, wherein the
initial cost of the investment is adjusted for amortisation of bond premium
or accretion of bond discount. Its interest income may thus consist of coupon
interest rate plus accretion of bond discount, and less amortisation of bond
premium, to provide an effective yield based on the market interest rate
7.4
582
prevailing at the time the investment was made (i.e. a historical interest
rate). If the bond is classified as an AFS investment, the interest income
shall continue to be based on the effective interest but changes in market
or fair value of the bond shall be taken directly to equity (for example, fair
value reserve). Similarly, if the bond is classified as at fair value through
profit or loss, the interest income is also based on interest received, but
the changes in market or fair value are recognised as gains or losses in the
income statement.
The basic principle of eliminating all intragroup balances and transactions
remains the same for intragroup bond holdings. On consolidation, an
adjustment is required to eliminate the purchasers investment in bond
account with the issuers bond liability account, leaving only bonds held by
third parties as bond liability in the consolidated financial position. Similarly,
an adjustment is required to eliminate the purchasers interest income
with the issuers interest expense, with the resulting net interest expense
attributable to bonds held by third parties being reflected in the consolidated
income statement.
Inter-company Bonds Purchased as at the Date of the Issue
Where the intragroup bonds are purchased directly from the issuer at the
date of the issue, there is usually no complication in the elimination process
if both the issuer and the purchaser apply the amortised cost basis. This is
because the purchase price of the investment in bond will be equal to the
issue price of the bond liability. No difference will arise in the elimination
process as at the date of the issue and subsequently, because the intragroup
bond accounts will offset each other exactly. Conceptually then, the portion
of the bond purchased by any company within the group as at the date of
the issue, reduces the extent of the bond liability of the consolidated entity.
For example, if a parent issues a RM50 million bond, and out of this amount,
RM20 million is purchased by its subsidiaries, effectively then, the group has
raised a bond liability of only RM30 million.
Thus, in the case where the bonds are purchased at the date of the issue,
the price paid by the purchaser for the bonds will be equal to the fair value
of the bond of the issuer. On consolidation, the investment in bonds of the
purchaser will cancel out the fair value of the bonds of the issuer, and no
difference on consolidation will arise. Similarly, the interest expense (coupon
interest plus accretion of discount minus amortisation of premium) of the
issuer should cancel out the interest income of the purchaser.
7.4
583
Example 6
P Bhd owns a 75% interest in the equity capital of S Bhd. On 1 January 20x7,
S Bhd issued a RM100,000,000 unsecured bond that carries a coupon interest rate
of 6% per annum. The bond was issued at RM848.50 per unit of RM1,000 nominal
value. The effective market interest rate for similar risk class bonds at issue date
was 10%. Interest is payable annually on 31 December. The bond is fully redeemable
at its nominal value after five years.
P Bhd acquired 40% of the total bond issue of S Bhd. Both P Bhd and S Bhd use
the amortised cost method to carry the bond in the accounts.
Required
For the financial year ended 31 December 20x7:
(i) Explain how S Bhd should account for the bond issue and the interest expense;
(ii) Explain how P Bhd should account for its investment in the bond of S Bhd;
and
(iii) Explain the consolidation adjustments required at the P Bhd group level.
Solution 6
(i) On 1 January 20x7, S Bhd should record the issuance of the bond as follows:

RM
Dr Bank account
84,850,000
Dr Bond discount contra to bond account
15,150,000
Cr Bond account nominal value

100,000,000
On 31 December 20x7, S Bhd should recognise the interest expense, as follows:

RM
Dr Interest expense 10% x 84,850,000
RM
RM
8,485,000
Cr Bank account coupon interest
6,000,000
Cr Bond discount - amortisation
2,485,000
At 31 December 20x7, the carrying value of the bond liability in the accounts
of S Bhd would be = RM100,000,000 RM12,665,000 = RM87,335,000.
(ii) On 1 January 20x7, P Bhd should record its investment in the bond of S Bhd
as follows:

RM
Dr HTM investment in bond of S Bhd
33,940,000
Cr Bank account (40m x .8485)

RM
33,940,000
On 31 December 20x7, P Bhd should recognise the interest income as follows:

RM
Dr Bank account - coupon interest 6% x 40m

Dr HTM investment in bond of S Bhd - accretion
Cr Effective interest income (10% x 33,940,000)
RM
2,400,000
994,000
3,394,000
7.4
584
At 31 December 20x7, the carrying value of P Bhds HTM investment in bond

is thus = RM33,940,000 + 994,000 = RM34,934,000.
(iii) On consolidation of P Bhd and S Bhd, the following adjustments are required
to eliminate the intergroup bond holding in the financial position and the
intergroup income and expense:

RM
Dr Bond account of S Bhd
40,000,000
Cr Bond discount of S Bhd
5,066,000
Cr HTM investment in Bond of S Bhd

34,934,000
The net carrying amount of the bond liability as at 31 December 20x7 in the
consolidated financial position will be RM52,401,000 (i.e. nominal value of
RM60,000,000 less bond discount of RM7,599,000).

RM
Dr Effective interest income of P Bhd

Cr Effective interest expense

RM
RM
3,394,000
3,394,000
The net interest expense in the consolidated profit and loss account will be
RM5,091,000 (i.e. coupon interest expense of RM3,600,000 plus amortisation
of bond discount of RM1,491,000).
Note that when transaction costs are involved, the intragroup bond
accounts may not offset each other exactly. Based on FRS 139, transaction
costs are included in the initial measurement of a financial asset or a
financial liability (except when a financial instrument is measured at fair
value through profit or loss, in which case, the transaction costs shall be
expensed). To the issuer, the transaction costs would include underwriting
fees and other charges incurred in the issue. Inclusion of the transaction costs
thus reduces the carrying amount of the liability on its initial measurement.
To the purchaser, transaction costs are mostly commissions paid to brokers.
Inclusion of the transaction costs thus increases the carrying amount of the
asset on initial measurement. For example, an intragroup bond floated in
the market at RM10,000,000 is carried in the issuers book at RM9,800,000
net of underwriting fee. The same bond is carried in the purchasers book at
RM10,080,000 inclusive of dealers or brokers commissions. When eliminating
the intragroup bond on consolidation, a debit difference of RM280,000 would
arise. From the viewpoint of the consolidated entity, such intragroup bond
does not exist. Accordingly, the debit difference shall be expensed in the
consolidated income statement.
If the purchaser of an intragroup bond treats it as an AFS investment,
the change in fair value of the bond that is taken to other comprehensive
income in its individual accounts shall be reversed on consolidation. For
example, an intragroup bond in the issuers books is carried at amortised
cost of RM9,500,000. In the books of the purchaser, the bond is treated as an
7.4
585
AFS investment and carried at fair value of RM10,100,000 with RM600,000

credited to other comprehensive income and retained in a fair value reserve.
On consolidation, the fair value change recognised in the other comprehensive
income shall be reversed before the intragroup bond is eliminated. Similarly,
if the purchaser of an intragroup bond treats it as at fair value through profit
or loss, the change in fair value that is recognised as gain or loss in its income
statement shall be reversed on consolidation.
Inter-company Bonds Purchased from Market After Issue Date
In the case where the intragroup bonds are purchased in the open
market from third parties after their issuance date, the purchase price of
the bonds may differ from the carrying amount of the bond liability account
because market interest rate could have changed since the issuance date.
For example, if the market interest rate goes up after the date of the issue,
the market value of the bond would decrease. Conversely, a decrease in
market interest rate would have the opposite effect on the market price of
the bond. Thus, when the investment account and the bond liability account
are compared, a difference will arise in the elimination process depending
upon the price paid for the bond and the carrying amount of the bold liability.
A debit difference will arise in the elimination process if the price paid for
the bond is more than its corresponding carrying amount in the books of
the issuer, and conversely, a credit difference will result in the elimination
process if the price paid for the bond is less than its corresponding carrying
amount.
For example, assume that an issuers bond has a carrying value of RM900
per unit of RM1,000 nominal value. If an affiliated company purchased the
bond in the open market at a price of RM950 per unit, then on consolidation a
debit difference of RM50 per unit will arise when the cost of investment in bond
is cancelled with the corresponding carrying value of the bond. Conversely, if
the affiliated company had purchased the bond at a market price of RM800
per unit, a credit difference of RM100 per unit will arise in the consolidation
adjustment. The issue centres on the appropriate accounting treatment for
the debit or credit difference arising in the elimination process.
When an affiliates bonds are purchased in the open market, the bonds
are viewed as having been constructively retired from the viewpoint of the
consolidated entity. Thus, the accounting for this constructive retirement
of the bonds is the same as the accounting treatment accorded if an entity
were to buy back its own bonds in the open market. MFRS 132, Financial
Instruments: Presentation, requires that any gain or loss arising from an
instrument classified as a financial liability should be reported as a gain or
loss in the income statement. Note that the term constructive is used, which
means that the intragroup bonds are viewed as having been retired from the
7.4
586
viewpoint of the consolidated entity only, but legally the total bonds are still
outstanding insofar as the issuer is concerned.
Whilst there is a general agreement on the recognition of the gain or loss
on a constructive retirement of intragroup bonds in the consolidated income
statement, there is no general consensus on how the gain or loss should be
allocated between the majority (parent) and non-controlling interests. Past
practices in the USA suggested at least four alternative treatments: (1) that
the entire gain or loss is assigned to the purchasing company; (2) that the
entire gain or loss is assigned to the parent company, (3) that the gain or
loss is allocated ratably between the purchasing company and the issuing
company; and (4) that the entire gain or loss is assigned to the issuing
company.
Assigning the entire gain or loss to the purchasing company appears
to be inconsistent with the principle that a gain or loss cannot arise when
the investment is first acquired. In other words, the purchasing company
records the investment in bonds at its fair value at the date of purchase,
and thus no gain or loss can possibly arise in its accounts at that date.
Accordingly, the consolidation adjustment should not result in the gain or
loss being allocated entirely to the purchasing company. For example, if the
purchasing company is a parent, allocating the entire gain to the parent
would result in the non-controlling interest ? in the subsidiary? not having
a share of that gain. Conversely, if the purchasing company is a partlyowned subsidiary, allocating the entire gain to the subsidiary would result
in the non-controlling interest in that subsidiary having a share of that
gain. This would over-state the non-controlling interests share of net assets
in that subsidiary.
Assigning the entire gain or loss to the parent company (regardless of
whether it is the issuer or the purchaser of the intragroup bonds) is often
argued on the grounds of practical expediency although this treatment is
not supported with any theoretical merits. Allocating the gain or loss ratably
between the purchasing company and the issuing company is supported, on
the grounds that it is consistent with the allocation of unrealised profits or
losses to parent and non-controlling interests arising on other intragroup
transactions. The practical difficulty of this treatment is in deciding on
the ratable allocation, such as, should it be allocated equally or should
it be based on the ownership interests of the parent and non-controlling
shareholders.
Assigning the entire gain or loss to the issuing company is based on the
notion that a constructive retirement of a bond from the groups viewpoint
is similar, in substance, to an actual retirement of the bond. Thus, if the
issuing company were to actually retire its bond by a repurchase in the open
7.4
587
market, the entire gain or loss would have been recognised in its income
statement. The current thinking on fair value accounting for financial
instruments would appear to lend further support to this treatment. If all
financial assets and liabilities, including bonds, are carried at their fair
values, any changes in fair values would be recognised as gains or losses in
income. Thus, the issuing entity would recognise any change in the market
value of its bond in the income statement. Since its bond is marked to market
value, any purchase by its affiliate would also be at the market value, and
thus no further gain or loss will arise on the constructive retirement in the
consolidation adjustment. The author considers this treatment to be the
most appropriate in the light of the current developments in accounting for
financial instruments.
When the gain or loss is attributed to the issuing entity, in the calculation
of the non-controlling interests share of profit for a period, the gain or loss is
attributable to them only if the subsidiary is the issuing entity. In this case,
a ratable portion of the gain or loss recognised at the group level shall be
included in the calculation of the non-controlling interests share of profit. In
the case when the bond is issued by the parent, the gain or loss is attributed
to the parent only (as if the parent itself had repurchased the bond or had
fair valued the bond), and thus not included in the calculation of the noncontrolling interests share of profit.
Example 7
Papa Bhd acquired a 60% interest in the equity capital of Mama Bhd on 1
January 20x1 for a consideration of RM20,000,000. At acquisition date, the retained
profits of Mama Bhd were RM10,000,000.
On 1 January 20x4, Mama Bhd issued RM20,000,000 6% unsecured 5-year bond
at a discount and received a net proceed of RM16,970,000. The market interest rate
at the time of issue was 10%. The bond is carried at the amortised cost basis using
the effective interest rate of 10% in its accounts.
On 1 January 20x6, Papa Bhd purchased 50% of Mama Bhds outstanding bond
in the open market at a market price of RM7,757,600. On this date, the carrying
value of the total bond in the accounts of Mama Bhd was RM18,013,600. On this
date, the market interest rate of Mama Bhds bond was quoted at 16%. Papa Bhd
accounts for the bond as HTM investment and carries the bond at the amortised
cost method using the effective interest rate of 16%.
The summarised accounts of the two companies for the year ended 31 December
20x6 are as follows:
7.4
588
Statements of Comprehensive Income & Retained Profits

Papa Bhd
RM000
Operating profit
Add: Bond interest receivable
Accretion of bond discount
Less: Bond interest payable
Amortisation of bond discount
Mama Bhd
RM000
10,600
8,600
600
1,241
(1,200)
(601)
Profit before taxation
12,441
6,799
Taxation
(3,961)
(2,299)
Profit after taxation and retained
8,480
4,500

Retained profits carried forward
11,520
20,000
17,500
22,000
Statements of Financial Position

Papa Bhd
RM000
Mama Bhd
RM000
Share capital of RM1 each
40,000
20,000
Retained profits
20,000
22,000
20,000
8% unsecured bonds - nominal value

- bond discount
(1,385)
60,000
60,615
20,000
8,999
31,001
60,000
60,615
60,615
Investment in Mama Bhd:

12,000,000 shares of Mama Bhd, at cost
10,000,000 units of Mama Bhds bond Cost adjusted for accretion of bond discount
Sundry net assets
Required
(a) As at the date of the purchase of the intragroup bond by Papa Bhd, calculate
the gain or loss on constructive retirement of the bond.
(b) Prepare the consolidated accounts of Papa Bhd for the financial year of 20x6.
7.4
589
Solution 7
(a) Constructive gain or loss:

RM000
Cost of investment in bond
7,757.6
Share of carrying value of bond at 1 January 20x6

50% x 18,013,600
9,006.8
Credit difference being gain on constructive retirement
1,249.2
(b)
Papa Bhd
Consolidated Statement of Comprehensive Income & Retained Profits
For the year ended 31 December 20x6
PapaBhd
RM000
Operating profit
Gain on constructive
retirementof Mama
Bhds bond
Interest income
receivable
Accretion of bond
discount
Mama Bhd Adjustments

RM000
RM000
Group
RM000
10,600
8,600
19,200
1,249
1,249
600
(600)
1,241
(1,241)
Interest expense payable
(1,200)
600
(600)
Amortisation of bond
discount
(601)
301
(300)
12,441
8,048
Less: Taxation
(3,961)
(2,299)
8,480
5,749
(940)
13,289
(2,300)
376
(1,924)
8,480
3,449
(564)
11,365
Retained profits brought

forward
11,520
4,500
16,020
Retained profits carried

forward
20,000
7,949
(564)
27,385
Profit after taxation

Non-controlling interest
Retained profit for the
year
(940)
19,549
(6,260)
7.4
590
Consolidated Statement of Financial Position

As at 31 December 20x6

RM000
Share capital of RM each
40,000
Retained profits
27,385
67,385
18,257
Non-controlling interest 40% (42,000 + 1,249 - 940) + 1,333

8% Unsecured bond Nominal value
Unamortised bond discount
10,000
(693)
9,307
94,949
Goodwill on combination (20,000/.60 - 30,000)
3,333
Sundry net assets (31,001 + 60,615)
91,616
94,949
7.4.2 Intragroup Transactions and Unrealised Profits

Many types of intragroup transactions can arise in a group. The more
common types are as follows:
(i) sale of inventories between entities in a group;
(ii) sale or transfer of property, plant and equipment;
(iii) intragroup loans that give rise to interest income and interest expense;
and
(iv) management fees charged by the parent.
In accordance with the view that a group of companies is a single
economic entity, the effects of all such intragroup transactions in a group
must be eliminated as the group cannot possibly trade and make profits
from itself. The Standard requires that intragroup balances, transactions,
income and expenses shall be eliminated in full. Consequently, unrealised
profits and losses resulting from intragroup transactions that are included
in the carrying amount of assets, such as inventories and property, plant
and equipment, are eliminated in full. Intragroup losses may indicate
an impairment that requires recognition in the consolidated financial
statements.
The Standards requirement for full elimination reflects that fact that
an intragroup transaction is a control issue, i.e., the transaction can be
made without reference to any external third party. The non-controlling
shareholders are treated as internal to the group for the purpose of the
elimination of unrealised profits or losses, and it is thus not sufficient to
7.4
591
adjust only for that portion of the transaction that relates to the controlling
interest. Adjustments for the whole transaction and the full amount of any
unrealised profit or loss shall be made and allocated suitably between the
controlling interest and the non-controlling interest.
Note that legally, the profits or losses are realised in the accounts of
the selling company and are therefore subject to tax. Thus, when the full
unrealised profits or losses are eliminated on consolidation, their related
tax effects must also be recognised and carried forward until the profits
or losses are realised. The Standard requires that temporary differences
that arise from the elimination of unrealised profits or losses resulting
from intragroup transactions be dealt with in accordance with MFRS 112,
Income Taxes.
Intragroup Sale of Inventories
The consolidation adjustments to eliminate intragroup sales and
unrealised profits are as follows:
Dr Sales (of seller)
Cr Purchases (of buyer)
to eliminate intragroup sales.
Dr Closing inventories in the trading account
Cr Closing inventories in the financial position
to eliminate the unrealised profit in closing inventories carried forward.
Dr Deferred taxation in the financial position
Cr Taxation expense in the income statement
to account for the tax effect of the profit deferred.
In general, it is presumed that the profits eliminated on consolidation

are realised on the first-in-first-out basis, unless the inventories are carried
on the specific identification costing method. In other words, any unrealised
profit in the current year is assumed to be fully realised in the following year,
unless evidence indicates otherwise. The consolidation adjustment to account
for this subsequent realisation is as follows:
Dr Opening retained profits
Dr Taxation expense
Cr Opening inventories in the trading account
to reinstate unrealised profit brought forward and to account for its
subsequent realisation.
7.4
592
Example 8
P Bhd is a parent company with a few subsidiaries. The following intragroup sales
were recorded for the financial years ended 31 December 20x6 and 20x7 respectively:
(i)
Year 20x6: Intragroup sales at invoice prices amounted to RM2,000,000 of

which RM800,000 remained in the closing inventories of the buying companies.
(ii) Year 20x7: Intragroup sales at invoice prices amounted to RM3,200,000 of which
RM1,200,000 remained in the closing inventories of the buying companies.
The profit element on intragroup sales to the selling companies was at 20% of
the invoice prices. Income tax rate was at 25% for both financial years.
Required
Show the consolidation adjustments to eliminate the intragroup transactions
and unrealised profits for both financial years 20x6 and 20x7.
Solution 8
Year 20x6:
(i) Dr Sales (of sellers)
RM2,000,000
Cr Purchases (of buyers)
RM2,000,000

(ii) Dr Closing inventories in the trading account RM160,000
RM160,000
to eliminate unrealised profit in closing inventories carried forward.

(iii) Dr Deferred tax liability in the financial position RM40,000
RM40,000
to account for the related tax effect of the profit eliminated.

Year 20x7:
(i) Dr Opening retained profits
RM120,000
Dr Taxation expense
RM40,000
Cr Opening inventories in the trading account
RM160,000
to reinstate opening retained profits and to account for the

realisation of the profit deferred in the prior year.
(ii) Dr Sales (of sellers)
RM3,200,000
Cr Purchases (of buyers)
RM3,200,000

(iii) Dr Closing inventories in the trading account RM240,000
RM240,000
to eliminate unrealised profit in closing profit carried forward.

(iv) Dr Deferred tax liability in the financial position RM60,000
RM60,000
to account for the related tax effect of the profit eliminated.
7.4
593
7.4.2.1 Effects of the Elimination on Non-Controlling Interests

In the Example above, we have specifically ignored the directions of the
intragroup sales by not identifying the selling companies or the buying
companies. This is because the consolidation adjustments for eliminating
intragroup sales and unrealised profits are the same regardless of the
directions of the intragroup sales.
In allocating the groups profits and net assets to non-controlling interests,
the resulting unrealised profits or losses shall be allocated to non-controlling
interests based on their respective interests in the subsidiaries that have
recorded the unrealised profits or losses. Thus, it is only in the calculation of
the non-controlling interests share of profit and net assets that the directions
of the intragroup sales matter and should be identified correctly.
When the sales are downstream (i.e. sales by a parent to its subsidiaries),
the profits are recorded by the parent. The amounts of the subsidiaries profits
are not affected by the elimination of the unrealised profits. Accordingly, no
adjustment shall be made in the calculation of non-controlling interests
share of profit and net assets in the consolidated accounts.
When the sales are upstream (i.e. sales by subsidiaries to their parent)
or horizontal (i.e. sales amongst subsidiaries in a group), the profits are
recorded by the selling subsidiaries. Accordingly, when the full unrealised
profits are eliminated on consolidation, the non-controlling interests shall
be allocated for their share of the unrealised profits. In other words, the noncontrolling interests share of profits in the consolidated accounts shall be
based on the subsidiaries profits that have been realised in transactions with
parties external to the group.
Thus, in both upstream and horizontal sales, the non-controlling interests
share of profits shall becalculated as follows:
NCIs percent
holding in the
selling subsidiary
Subsidiarys profit after tax

+ Unrealised profit brought forward
Unrealised profit carried forward
Example 9
On 1 January 20x6, H Bhd acquired a 60% interest in the equity capital of S Bhd
for a cash consideration of RM12,000,000. On this date the retained profits of S Bhd
were RM6,000,000. The net assets of S Bhd at the acquisition date were stated in
the accounts at their fair value of RM14,000,000. Based on an income approach, the
fair value of S Bhd as a whole was measured at RM20,000,000 at the acquisition
date.
7.4
594
Sales
Cost of sales:
Opening inventories
Purchases
Closing inventories
Gross profit
Expenses
Tax expense
H Bhd
RM000
24,000
S Bhd
RM000
12,000
(8,000)
(18,000)
10,000
(16,000)
8,000
(2,000)
6,000
(1,800)
4,200
10,800
15,000
(5,000)
(9,000)
6,000
(8,000)
4,000
(1,000)
3,000
(900)
2,100
8,900
11,000
H Bhd
RM000
22,000
15,000
14,000
51,000
21,000
12,000
S Bhd
RM000
8,000
11,000
8,000
27,000
17,000
10,000
8,000
51,000
6,000
4,000
27,000

Retained profits
Total liabilities
Property, plant and equipment
Investment in S Bhd
Current assets:
Inventories
Other current assets
Additional information:
(a)
During the year ended 31 December 20x7, S Bhd sold goods to H Bhd for
invoices totalling RM3,000,000. Of these sales, RM800,000 remained in
the closing inventories of B Bhd at 31 December 20x7. The corresponding
intragroup sales and closing inventories for the 20x6 financial year were
RM2,000,000 and RM500,000 respectively. The profit margin to S Bhd was
25% on selling prices.
(b)
The group carries goodwill on combination at cost less accumulated impairment

losses. Income tax rate is 30% for both financial years. Non-controlling interest
is measured at acquisition-date fair value.
7.4
595
Required
(i) Show the consolidation adjustments and eliminations required to prepare the
consolidated accounts for the 20x7 financial year; and
(ii) Using a consolidated worksheet, derived the group accounts for the 20x7
financial year.
Solution 9
(i)
Consolidation adjustments and eliminations:

RM000
(a) Dr Goodwill on combination (20,000 14,000)
RM000
6,000
Cr Revaluation reserve
6,000
to recognise goodwill on combination.

(b) Dr Share capital of S Bhd
4,800
Dr Revaluation reserve goodwill
3,600
Dr Pre-acquisition profits
3,600
Cr Investment in S Bhd
12,000
to eliminate cost of investment.

(c) Dr Share capital of S Bhd
3,200
Dr Revaluation reserve - goodwill
2,400
Dr Retained profits brought forward
3,560
Cr Non-controlling interest in financial position
9,160
to allocate opening net assets and goodwill to NCI.

(d) Dr Retained profits brought forward
52.5
Dr Non-controlling interest in financial position
35.0
Dr Tax expense
37.5
Cr Opening inventories in profit or loss
125
to restate unrealised profit in opening inventories.

(e) Dr Sales
3,000
Cr Purchases
3,000
to eliminate intragroup sales for the year.

(f) Dr Closing inventories in financial position
Dr Deferred tax in financial position
200
60
Cr Closing inventories in profit or loss
200
Cr Tax expense in profit or loss
60
to eliminate unrealised profit in closing inventories.

(g) Dr Non-controlling interest in profit or loss
819
819
to allocate profit to NCI (2,100 + 87.5 140) x 40%.
7.4
596
(ii) Consolidation worksheet
Sales
Cost of sales
Opening inventories
Purchases
Closing inventories
Gross profit
Expenses
Tax expense
Profit attributable to
owners
Retained profits b/forward
H Bhd
S Bhd
RM000
24,000
RM000
12,000
(8,000)
(18,000)
10,000
(16,000)
8,000
(2,000)
6,000
(1,800)
4,200
(5,000)
(9,000)
6,000
(8,000)
4,000
(1,000)
3,000
(900)
2,100
Consol. Adjustments
(Dr)
Cr
RM000
(3,000)e
RM000
RM000
33,000
125d
3,000e
(12,875)
(24,000)
15,800
(21,705)
11,925
(3,000)
8,925
(2,677.5)
6,247.5
(819)
(200)f
(37.5)d
60f
(819)g
4,200
10,800
2,100
8,900
H Group
5,428.5
12,487.5
(3,600)b
(3,560)c
(52.5)d
Retained profits c/forward

Share capital
Revaluation reserve
15,000
22,000
11,000
8,000
(4,800)b
(3,200)c
(3,600)b
6,000a
(2,400)c
(35)d
9,160c
9,944
17,916
22,000
819g
Total liabilities
Total Equity and
Liabilities
Property, plant and
equipment
Goodwill on combination
Investment in S Bhd
Inventories
Other current assets
Total Assets
7.4
14,000
8,000
51,000
27,000
(21,000)
(12,000)
(10,000)
(8,000)
(51,000)
(60)f
(17,000)
(6,000)a
(6,000)
(4,000)
(27,000 (31,364)
21,940
71,800
12,000b
200f
31,364
(38,000)
(6,000)
(15,800)
(12,000)
(71,800)
597
Workings:
(i) Proof of non-controlling interest:

Net assets of S Bhd
RM000
19,000
6,000
Unrealised profits carried forward
(140)

Non-controlling interest at 40%
24,860
9,944
(ii) Proof of consolidated retained profits:

Parents retained profits
Share of post-acquisition profits of S Bhd 60% x 5,000
Share of unrealised profits carried forward

RM000
15,000
3,000
(84)
17,916
7.4.2.2 Intragroup Sale or Transfer of Property, Plant and Equipment

The principle of full elimination of intragroup transactions and unrealised
profits or losses is also applicable in an intragroup sale or transfer of property,
plant and equipment. In the year of the sale or transfer, an adjustment is
required to eliminate the gain or loss on the transfer and to restate the
carrying amount of the item of property, plant and equipment to cost or book
value. For example, if the transfer of an item of property, plant and equipment
results in a profit to the transferor, the consolidation adjustment would be as
follows:
Dr Gain on sale of property, plant and equipment
Cr Property, plant and equipment, at cost
After the sale, the purchasing company will calculate depreciation on the
basis of its purchased price. The depreciation recorded by the purchasing
company will be excessive from the groups viewpoint and accordingly must
be corrected on consolidation.
From the groups viewpoint, the intragroup profit or loss is considered to
be realised as a consequence of the use of the property, plant and equipment
in the generation of revenue. As usage of a property, plant and equipment is
measured by depreciation, the recognition of the realisation of the intragroup
profit or loss is accomplished through the depreciation adjustments over the
remaining useful life of the property, plant and equipment transferred.
As in the case of intragroup sale of inventories, the direction of the
transfer of a property, plant and equipment matters only in the calculation of
the non-controlling interests share of profit and net assets. In the case of a
7.4
598
downstream transfer (i.e. sale or transfer by the parent to its subsidiary),

no modification in the calculation of non-controlling interests share of profits
and net assets shall be made. However, in the case of an upstream transfer
(i.e. sale or transfer by the subsidiary to its parent) or a horizontal transfer
(i.e. sale or transfer by one subsidiary to a fellow subsidiary in the group),
modifications are required in the calculation of non-controlling interests. The
non-controlling interests share of profit in the selling subsidiary shall be as
follows:
In the year of sale or transfer:
NCIs percent
holding in the
selling subsidiary

Full unrealised profit
+ Depreciation adjustment
In the subsequent years and over the remaining useful life:

NCIs percent
holding in the
selling subsidiary

+ Depreciation adjustment
Example 10
On 1 January 20x1, Anak Bhd transferred machinery with a net book value of
RM400,000 to its parent company, Bapa Bhd. The transfer price was RM800,000
and the machine had a remaining useful life of 4 years as at the date of the transfer.
Depreciation is calculated on the straight line method.
Bapa Bhd holds a 75% equity interest in Anak Bhd. Assume that Anak Bhds
profit after tax for each year in the 20x120x4 period is RM1,000,000. Income tax
rate is25%.
Required
(a) Show the consolidation adjustments required in respect of the above intragroup
transfer of property, plant and equipment; and
(b) Calculate the non-controlling interests share of profit in each year.
Solution 10
(a)
Consolidation adjustments:

RM
Year 20x1: Dr Gain on sale of property,

plant and equipment
400,000

7.4
RM
400,000
to eliminate gain on sale of property, plant and equipment
and to restate carrying amount of property, plant and equipment.
599
Dr Deferred tax asset in the

financial position
to recognise deferred tax asset of unrealised profit
Dr Accumulated depreciation in the

financial position
100,000
Cr Deferred tax income in profit or loss
100,000
100,000
Cr Depreciation expense in profit or loss

to correct for the depreciation over-provided.
Dr Deferred tax expense
to account for the reversal of deferred tax asset.
25,000
Cr Deferred tax asset in the financial position

Year 20x2: Dr Opening retained profits


financial position

financial position
75,000
100,000
to restate opening balances relating to transfer of
property, plant and equipment.

financial position
to correct for depreciation over-provided.
400,000
100,000
Cr Depreciation expense in the income statement
100,000
25,000
25,000


financial position

financial position
150,000
50,000
200,000


financial position
400,000
100,000

25,000
225,000
100,000
100,000
7.4
600
25,000

25,000
75,000

financial position

financial position
25,000
300,000


financial position
400,000
100,000

25,000

100,000
25,000
Note that by the end of 20x4, the machine would be fully depreciated and the
intragroup profit would be fully realised. In year 20x5 and subsequent years,
if the machine continues to be in use, then the opening adjustment would be
as follows:
financial position
RM400,000
RM400,000
Summary of Adjustments
Year
Unrealised
RM
RM
RM
RM
Unrealised
profit c/
forward
RM
(400)
100
100
(25)
(225)
20x2
100
(25)
(150)
20x3
100
(25)
(75)
20x4
100
400
(25)
(100)
profit
20x1
(400)
7.4
Tax effect Depreciation

Adjustment
100
Tax effect
(b)
601
Non-controlling interests share of profit:

20x1
RM000
Less: Unrealised profit
Non-controlling interest at 25%
20x3
RM000
20x4
RM000
1,000
1,000
1,000
1,000
(300)
Add: Depreciation adjustment

Adjusted profit after tax
20x2
RM000
75
75
75
75
775
1,075
1,075
1,075
193.75
268.76
268.75
268.75
7.4.2.3 Other Intragroup Transactions

Other intragroup transactions may include interest on loans and
advances, intragroup rental charges, and management and other fees
charged by the parent company. These intragroup profit and loss items must
also be eliminated on consolidation by reversing the entries made by the
respective companies to the transactions. The consolidation adjustments can
be summarised as follows:
Dr Interest income of the lending affiliate
Cr Interest expense of the borrowing affiliate
to eliminate intragroup interest income and interest expense.
Dr Rental income of the owner
Cr Rental expense of the tenant
to eliminate intragroup rental income and expense.
Dr Management (or any other) fee income
Cr Management (or any other) fee expense
to eliminate intragroup management (or any other) fee income and expense.
Note that if these transactions give rise to receivables and payables in

the financial positions of the companies in the group, the receivables and
payables shall also be eliminated on consolidation as they are effectively
intragroup balances.
Also note that in the consolidation adjustments above, the issue of
unrealised profit does not arise. In other words, they are realised transactions
and thus the adjustments have no net effect on the groups profit or loss
(because elimination of an income item is matched by an elimination of
the corresponding expense item). Thus, irrespective of the directions of the
transactions, non-controlling interest shall not be adjusted for the effects of
such eliminations.
7.4
602
7.4.2.4 Intragroup Dividends

Dividends paid or payable by a subsidiary are received or receivable by
its parent. From the groups viewpoint, there is no change in the amount of
groups profit, because such intragroup dividends merely represent shifting
of profits from one location (the paying subsidiary) to another location (the
receiving parent) but all within the boundary of the single economic entity.
Thus, on consolidation, dividend income received/receivable by the parent
shall be eliminated against dividends paid/declared by the subsidiary in
the consolidated retained profits. Similarly, any dividend receivable by the
parent shall be cancelled against the dividend payable of the subsidiary in
the consolidated statement of financial position.
Note that in the consolidated statement of financial position, the dividend
payable reflected under current liabilities shall strictly be the dividend payable
of the parent which, when approved in a shareholders general meeting, are
legally payable to the shareholders of the parent. Thus, any dividend payable
of the subsidiary that is attributable to non-controlling interests, which is
not eliminated, is normally classified under other payables. The consolidation
adjustments are as follows:
Dr Dividend income of the parent
Cr Dividend paid/payable of the subsidiary
to eliminate intragroup dividend in profit or loss.
Dr Non-controlling interest in the financial position
Cr Dividend paid/payable of the subsidiary
to charge non-controlling interests for their share of the subsidiarys
dividends.
Dr Dividend payable in the subsidiarys financial position
Cr Dividends receivable in the parents financial position
Cr Other payables non-controlling interests share of dividend payable
to eliminate intragroup dividend in the financial position.
7.4.2.5Dividend Income in the Separate Financial Statements of

the Parent
When a parent receives dividends from its subsidiaries, the issue that
arises is whether the entire amount received can be recognised as income
in profit or loss (as a return on investment), or a portion thereof should be
regarded as return of investment (credited to the cost of investment).
On a year to year basis, the identification of dividend as to income or
return of investment to the parent shall not normally pose a problem. Most
dividends paid or declared by subsidiaries would be regarded as income by
the parent, unless in the rare circumstance where the amount of the dividend
7.4
603
paid or declared by a subsidiary is so large that it utilises part, or all, of the

pre-acquisition profits (in which case, the portion which relates to the preacquisition profit shall be regarded as a return of investment).
The identification of dividend as to income or return of investment
can be an accounting issue in the year when the acquisition takes place.
This issue can become complicated when there are both interim and final
dividends paid and declared respectively by the subsidiary. If dividends are
paid or declared by the subsidiary after the acquisition date, in principle,
the dividends received by the parent should be analysed and split into their
respective pre-acquisition and post-acquisition portions in the separate
financial statements of the parent, with the pre-acquisition portion deducted
against the cost of investment, and the post-acquisition portion recognised in
profit or loss. However, in practice, it is often difficult and arbitrary to split
up the dividends into income and return of investment. Furthermore, it may
be argued that the entire dividends received have been declared out of postacquisition profits of the subsidiary, so long as they are sufficient to cover the
dividends paid.
In May 2008, the IASB issued an amendment to IAS 27 to address this issue.
The amendment deleted reference to the cost method and the requirement
that the dividend received by the parent be analysed into the pre-acquisition
and post-acquisition portions, has been removed. It prescribes that an entity
shall recognise a dividend from a subsidiary, joint venture or an associate in
profit or loss in its separate financial statements when its right to receive the
dividend is established [IAS 27.12].
7.4.2.6 Dividend Received and Impairment Test

Concerns were expressed that removing the definition of the cost method
in MFRS 127 and treating all dividend received as income could lead to
the investment in a subsidiary being overstated in the separate financial
statements of the parent. To overcome this potential conflict, a consequential
amendment was made to MFRS 136, Impairment of Assets, on the specific
indicators of impairment for the investment when a dividend is recognised.
Thus, impairment test in this regard is only required for an investment
in a subsidiary, joint venture or an associate, when an investor recognises a
dividend from the investment and evidence is available that:
(a) the carrying amount of the investment in the separate financial
statements exceeds the carrying amounts in the consolidated financial
statements of the investees net assets, including associated goodwill; or
(b) the dividend exceeds the total comprehensive income of the subsidiary,
joint venture or associate in the period the dividend is declared [MFRS
136.12(h)].
7.4
604
Example 11
On 1 January 20x1, Hati Bhd acquired a 100% interest in the equity capital of
Sagu Bhd paying a consideration of RM400 million. On the acquisition date, the net
assets of Sagu Bhd, stated at their fair value, were RM300 million (consisting of
share capital of RM100m and retained profits of RM200 million).
For the current year ended 31 December 20x1, the total comprehensive income of
Sagu Bhd was RM100 million (consisting of profit of RM40 million and revaluation
surplus of RM60 million). Sagu Bhd declared and paid a dividend of RM200 million
to its parent.
Required
Explain the accounting requirements in the above case.
Solution 11
In the separate financial statements of Hati Bhd, the cost of investment in Sagu
Bhd is recorded at RM400 million. A goodwill on combination of RM100 million
arises on consolidation.
Hati Bhd shall recognise the RM200 million dividend as income when it has
been appropriately authorised i.e. when its right to receive dividend has been
established, such as when the dividend is approved in a shareholders meeting.
The payment of dividend by the subsidiary triggers an indication of impairment
of the investment (either the carrying amount of investment being higher than
the carrying amounts of the net assets and goodwill in the consolidated financial
statements, or the total dividend being higher than the total comprehensive income
for the year). Thus, Hati Bhd shall perform an impairment test as follows:
RMm
Carrying amount of investment in separate financial
statements
Carrying amounts in the consolidated financial statements:
RMm
400
Net assets:
Share capital
100
Pre-acquisition profits
200
Total comprehensive income for the year
100
Dividends paid
(200)
200
Goodwill on combination (400 300)
100
300
Impairment loss in profit or loss
7.4
100
605
In its separate financial statements, Hati Bhd shall recognise an impairment

loss of RM100 million in profit or loss and reduce the cost of investment in Sagu
Bhd by the same amount.
In the consolidated financial statements, the dividend paid is RM100 million
more than the total comprehensive income for the year. This shall be treated as
being paid out of the pre-acquisition profit. Thus, on consolidation, the goodwill
remains the same as shown by the analysis below:
RMm
Original cost of investment
400
(100)
Less: Impairment loss
300
Revised carrying amount

Dividends paid
(200)
Net assets:
Share capital
100
Balance in pre-acquisition profits (200 100)
100
Adjusted net assets
200
100
Example 12 (A Comprehensive Case)

On 1 January 20x1, Harta Bhd acquired a 75% interest in the equity capital of
Setia Bhd for a cash consideration of RM10 million. On this date, the net assets of
Setia Bhd were stated in the accounts at fair value of RM12 million and the balance
in the retained profits was RM2 million. On this date, the fair value of Setia Bhd as
a whole was RM13 million.
20x4 were as follows:
Revenue
Cost of sales
Gross profit
Dividend income
Interest income
Rental income
Management fee
Expenses
Harta Bhd
RM000
25,000
(15,000)
10,000
1,575
160
120
60
(5,400)
Setia Bhd
RM000
18,000
(9,200)
8,800
(4,200)
7.4
606

Taxation
Dividend payable
Retained profit for the year
6,515
(1,482)
5,033
(2,500)
2,533
6,227
8,760
4,600
(1,380)
3,220
(2,100)
1,120
5,360
6,480
Harta Bhd
RM000
20,000
8,760
2,000
(3,135)
(2,200)
(2,500)
38,595
Setia Bhd
RM000
10,000
6,480
2,000
1,000
(2,420)
(1,600)
(2,100)
25,600

Retained profits
Loan from Harta Bhd
Deferred taxes
Trade payables
Taxation
Dividend payable
Investment in Setia Bhd, at cost
Loan to Setia Bhd
Inventories
Trade receivables
Dividend receivable
Bank account
18,580
10,000
2,000
4,300
2,000
1,575
140
38,595
17,970
3,500
2,500
1,630
25,600
(a)
During the year ended 31 December 20x4, Harta Bhd sold goods to Setia Bhd
for invoices totalling RM2,000,000. Of this amount, RM500,000 remained in
the closing inventories of Setia Bhd at year end. The corresponding closing
stock amount in the prior year was RM800,000. The profit margin to Harta
Bhd was 20% on selling price.
(b)
In the prior year 20x3, Setia Bhd completed the construction of a warehouse
at a cost of RM1,000,000 for the use of Harta Bhd. The transfer price was
RM2,000,000 and this amount was recorded as a property, plant and equipment
by Harta Bhd. The warehouse was depreciated at 10% per annum straight line
basis in accordance with the groups policy, charging a full years depreciation
in the year of purchase.
7.4
607
(c)
Harta Bhd provided a loan of RM2 million to Setia Bhd at an interest rate of 8%
per annum. Harta Bhd also let out one of its buildings to Setia Bhd charging a
monthly rental of RM10,000. Also, Harta Bhd provided management services
to Setia Bhd and the agreed management fee was RM60,000 per annum.
(d)
Assume an income tax rate of 25%. Non-controlling interest is measured at

acquisition-date fair value.
Required
(i) Calculate the goodwill on combination and show the allocation of goodwill to
parent and non-controlling interest
(ii) Show the consolidation adjustments required to prepare the group accounts of
Harta Bhd.
(iii) Using a consolidation worksheet, derive the group accounts of Harta Bhd.
Solution 12
(i)
Goodwill on consolidation:

RM000
Aggregate of:
Consideration transferred
Non-controlling interest at fair value (25% x 13,000)
10,000
3,250
13,250
Fair value of identifiable net assets
12,000
1,250
Allocated to:
Parent (10,000 75% x 12,000)

1,000
250
1,250
(ii) Consolidation adjustments:

RM000
RM000
Permanent adjustment
(a) Dr Goodwill on combination
1,250
1,250

(b) Dr Share capital of Setia Bhd
7,500
1,000
1,500
Cr Investment in Setia Bhd
10,000
7.4
608
Opening adjustments
(c) Dr Share capital of Setia Bhd
2,500
250
1,340
4,090
to restate NCIs share of opening net assets and goodwill.

(d) Dr Retained profits brought forward
120
40
Cr Cost of sales
160
to restate unrealised profit in opening inventories.

(e) Dr Retained profits brought forward
506
169
Dr Deferred taxes in financial position
225
Dr Accumulated depreciation of PPE
100
1,000
to restate opening balances relating to transfer of warehouse.

Current year adjustments

(f) Dr Revenue of Harta Bhd
2,000
Cr Cost of sales of Setia Bhd
2,000

(g) Dr Cost of sales of Setia Bhd
100
Cr Inventories in financial position
100
Dr Deferred taxes in financial position
25
Cr Deferred tax income in profit or loss
25
to eliminate unrealised profit in closing inventories.

(h) Dr Accumulated depreciation in financial position
100
Cr Depreciation expense
100
25
Cr Deferred taxes in financial position
25
to correct for the depreciation over-provided.

(i) Dr Non-controlling interest in profit or loss
824
Cr Dividend payable in equity
525
299
to allocate current year profit to NCI.

(j) Dr Dividend income of parent
Cr Dividend payable in equity
1,575
1,575
to eliminate intragroup dividend.
7.4
(k) Dr Dividend payable in financial position
609
2,100
Cr Dividend receivable of parent
1,575
Cr Other payables
525
to eliminate intragroup balances.

(l) Dr Interest income
160
Dr Rental income
120
Dr Management fee
60
Cr Expenses of subsidiary
340
to eliminate intragroup income and expenses.

(m) Dr Loan from Harta
2,000
Cr Loan to Setia
2,000
to eliminate intragroup loan.

(iii) Consolidation Worksheet:
Harta Bhd Setia Bhd
Revenue
Cost of sales
RM000
25,000
(15,000)
RM000
18,000
(9,200)
(Dr)
RM000
(2,000)f
(100)g
Cr
Group
RM000
160d
RM000
41,000
(22,140)
2,000f
Gross profit
Dividend income
Interest income
Rental income
Management fee
Expenses
10,000
1,575
160
120
60
(5,400)
8,800
(4,200)
Profit before tax

Tax expense
6,515
(1,482)
4,600
(1,380)
5,033
3,220
(824)i
6,227
5,360
(1,500)b
(1,575)j
(160)l
(120)l
(60)l
100h
18,860
(9,160)
340l
(40)d
25g
9,700
(2,902)
(25)h
Profit after tax
Non-controlling
interest
Attributable to owners
Retained profits b/
forward
6,798
(824)
5,974
8,121
(1,340)c
(120)d
(506)e
Dividend payable
(2,500)
(2,100)
525i
(2,500)
1,575j
7.4
610
Retained profits c/
forward
Share capital
8,760
20,000
6,480
10,000
(7,500)b
11,595
20,000
Revaluation
(2,500)c
(1,000)b
1,250a
Non-controlling
interest
(250)c
(169)e
4,090c
4,220
299i
Loan from Harta

Deferred taxes
2,000
2,000
1,000
Trade payables
Other payables
Taxation
Dividend payable
Total Equity and
Liabilities
3,135
2,200
2,500
2,420
1,600
2,100
38,595
25,600
(18,580)
(17,970)
(2,000)m
(225)e
25h
2,775
(25)g
Property, plant and

equipment
Goodwill on
combination
Investment in Setia
Loan to Setia
Inventories
Trade receivables
Dividend receivable
Bank
Total Assets
(10,000)
(2,000)
(4,300)
(2,000)
(1,575)
(140)
(38,595)
(3,500)
(2,500)
(1,630)
(25,600)
525k
(2,100)k
5,555
525
3,800
2,500
50,970
(100)e
1,000e
(100)h
(1,250)a
(1,250)
10,000b
2,000m
100g
1,575k
(25,589)
(35,750)
25,589
(7,700)
(4,500)
(1,770)
(50,970)
Proof of Non-controlling Interest:

RM000
Sundry net assets
16,480
Less: Unrealised profit on upstream transfer (1,000 200) x .75

Adjusted net assets
Non-controlling interests share of net assets 25%
Goodwill allocated to non-controlling interest
Closing non-controlling interest in financial position
7.4
(600)
15,880
3,970
250
4,220
611
7.4.3 Subsidiary that has a Different Reporting Date

MFRS 10 generally requires that the financial statements of the parent
and its subsidiaries used in the preparation of the consolidated financial
statements shall have the same reporting date. When the end of the reporting
period of a parent is different from that of a subsidiary, the subsidiary
prepares, for consolidation purposes, additional financial statements as of the
same date as the financial statements of the parent unless it is impracticable
to do so [MFRS 10.B92].
If impracticable to do so, the MFRS permits consolidation of a subsidiarys
financial statements with a different reporting date, provided that the
difference between reporting dates of the parent and any of its subsidiaries
shall be no more than 3 months. For example, if the financial year ended of a
parent is 31 December 20x6, it may consolidate the accounts of a subsidiary
with a financial year ended 30 September 20x6 or with a financial year
ended 31 March 20x7 or any financial year ended in between those dates.
However, the Standard requires that appropriate adjustments shall be
made for the effects of significant transactions or events that occur between
those dates, and the date of the parents financial statements [see MFRS
10.B93].
In practice, one way of consolidating the financial statements of a
subsidiary with a different reporting date is to adjust the subsidiarys
financial statements (for purpose of the consolidation only) so that its
revised financial statements have a financial year that coincides with the
year end of the parent. For this purpose, management accounts for the period
of the difference in dates may be required to make those adjustments. The
alternative way is to consolidate the subsidiarys accounts as they stand, and
adjust only for the effects of significant events or transactions that occurred
in the period of the difference in dates. Irrespective of which way the financial
statements of the subsidiary are to be consolidated, it is important that the
length of the reporting period and any difference in reporting dates shall be
the same from period to period.
Example 13
Ajex Bhd prepares its financial statements to 31 December each year. Baja Bhd
prepares its financial statements to 30 September each year.
On 1 January 20x7, Ajex Bhd acquired a 100% interest in the equity capital
of Baja Bhd. Ajex Bhd is in the process of preparing its consolidated financial
statements for the year ended 31 December 20x7 and the summarised individual
financial statements are as follows:
7.4
612
Statement of Comprehensive Income and Retained Profits

Ajex Bhd
Baja Bhd
Year ended 31/12/20x7 Year ended 30/09/20x7
RM000
RM000
20,000
12,000
Taxation
(6,000)
(3,600)
14,000
8,400

26,000
40,000
12,600
21,000

Ajex Bhd
As at 31/12/20x7
Share capital of RM1.00 each
Retained profits
Investment in Baja Bhd
Sundry net assets
Baja Bhd
As at 30/09/20x7
RM000
RM000
100,000
40,000
40,000
21,000
140,000
61,000
60,000
80,000
140,000
61,000
61,000
The profits of Baja Bhd accrued evenly in the financial year ended 30 September
20x7. The management accounts of Baja Bhd showed a profit before tax of
RM4,500,000 for the first quarter of its 20x8 financial year.
Required
(a) Explain how the financial statements of Baja Bhd may be consolidated for the
financial year ended 31 December 20x7 and prepare the consolidated financial
statements for the 20x7 financial year; and
(b) Suppose the profit for the first quarter of Bajas 20x8 financial year included
an exceptional gain of RM2,000,000 on sale of a property, prepare the
consolidated financial statements of Ajex Bhd for the year ended 31 December
20x7, by adjusting for the effects of significant items.
7.4
613
Solution 13
(a) The first way to consolidate the financial statements of Baja Bhd is to adjust
its financial statements (for consolidation only) so that its year end coincides
with the year end of Ajex Bhd. In this case, the profit for the first quarter of
its 20x7 financial year (i.e. the 1 October 20x6 - 31 December 20x6 period)
shall be deducted while the profit of the first quarter of its 20x8 financial year
(i.e. the 1 October 20x7 - 31 December 20x7 period) shall be added. For the
financial position, however, the assets and liabilities at 30 September 20x7
shall be adjusted individually for their movements to 31 December 20x7 so
that their net increase is equal to the net profit of the first quarter of the 20x8
financial year. In practice, the financial position as at 31 December 20x7 based
on management accounts may also be used for this purpose.

RM000
RM000

Ajex Bhd
20,000
Baja Bhd [12,000 3,000 + 4,500]
13,500
33,500
Less: Taxation
Ajex Bhd
6,000
Baja Bhd [3,600 900 + 1,350]
4,050
10,050
23,450
26,000
49,450


RM000
RM000
100,000
Retained profits
49,450
149,450
5,300
Goodwill arising on consolidation (W.1)

Sundry net assets (80,000 + 61,000)
Increase in net asset of Baja to 31.12.20x7
141,000
3,150
144,150
149,450
7.4
614
W.1. Goodwill on combination

RM000
Investment in Baja
Net assets acquired:
Share capital
40,000
12,600
Pre-acquisition profit (8,400/4)
60,000
2,100
RM000

54,700

5,300
The other way is to consolidate the financial statements of Baja Bhd as they
stand. The results of Baja Bhd would be included in the consolidated statement
of comprehensive income with effect from 1 January 20x7 to 30 September
20x7. The effects would be as follows:

RM000
Profit before taxation [20,000 + 12,000 3,000]

Less: Taxation [6,000 + 3,600 900]
29,000
8,700
20,300
26,000
46,300


RM000
100,000
Retained profits

46,300
146,300
5,300
Sundry net assets [80,000 + 61,000]
141,000
146,300
(b) Using the first way, the effect of any significant item would have been included
in the adjustment and therefore consolidated in the group accounts. Under the
second way, the accounts shall be adjusted for the exceptional gain arising on
the sale of the property as follows:
7.4
615
Consolidated Statement of Comprehensive Income and Retained Profits


RM000
Profit before taxation [20,000 + 12,000 3,000]

Gain on sale of property
Less: Taxation [6,000 + 3,600 900]
28,000
2,000
30,000
8,700
22,300
26,000
48,300


RM000
RM000
100,000
Retained profits
48,300
148,300
Goodwill arising on consolidation
5,300
Sundry net assets [80,000 + 41,000]

Increase in net asset of exceptional gain
141,000
2,000
143,000
148,300
7.4.4 Uniform Accounting Policies

In general, Standard requires that consolidated financial statements shall
be prepared using uniform accounting policies for like transactions and other
events in similar circumstances [MFRS 10.19]. Thus, all entities in the group
shall ideally use the same accounting policies for like transactions and other
events. For example, on the measurement of property, plant and equipment, if
the group uses the revaluation model, then all entities in the group shall use
the same revaluation model to measure their property, plant and equipment.
Sometimes due to statutory or other regulatory requirements, a subsidiary
may have to adopt an accounting policy (or policies) that is (are) different
from those used by other entities in the group. In such cases and for the
purpose of consolidation, appropriate adjustments shall be made to the
financial statements of the subsidiary to align its policies to those used in the
consolidated financial statements [see MFRS 10.B87]. For example, a foreign
subsidiary may have used the cost model to measure its biological assets
because the jurisdiction in which it operates has not adopted MFRS 141,
7.4
616
Agriculture. If the parent and its other subsidiaries all use the fair value
model for biological assets in accordance with MFRS 141, the biological
assets of that foreign subsidiary shall be adjusted from the cost model to the
fair value model before they can be included in the consolidated financial
statements of the parent.
7.5 Allocating Losses to Non-controlling Interest

Unlike the previous FRS 127(2005) which did not allow a debit noncontrolling interest, MFRS 10 requires that profit or loss and each component
of other comprehensive income are attributed to the owners of the parent and
to the non-controlling interests. If the parent and the non-controlling interest
have entered into an arrangement that determines the attribution of profit
or loss and other comprehensive income, the attribution shall be based on
the terms of the arrangement. The effect of this requirement is that the total
comprehensive income is attributed to the owners of the parent and to the
non-controlling interests even if this results in the non-controlling interest
having a deficit balance.
Note that as long as the parent still controls the subsidiary, it must
continue to consolidate the losses of the subsidiary, even if the losses exceed
the capital, or the subsidiary has negative net assets. In the case when a
loss-making subsidiary is technically insolvent, the losses applicable to noncontrolling interest in the subsidiary would exceed the non-controlling interest
in the equity of the subsidiary. The previous FRS 127(2005) required that in
such cases, the excess, and any further losses applicable to the minority, are
allocated against the majority interest except to the extent that the minority
has a binding obligation and is able to make an additional investment to
cover the losses. The previous FRS 127 generally did not permit a debit noncontrolling interest in the statement of financial position. However, MFRS 10
requires that the full loss shall be allocated to non-controlling interest even if
it results in a deficit to non-controlling interest. The revised Standard clarifies
that allocation of losses to both the controlling and non-controlling interests
is to reflect their participation proportionally in the risks and rewards of
their respective investments in the subsidiary.
Note that this change in treatment is a consequence of treating noncontrolling interests as a component of equity of the group. Carrying a debit
non-controlling interests does not imply that there is a legal obligation on
the part of the non-controlling interests to make good their share of losses. If
there are guarantees or other support arrangements from the controlling and
non-controlling interests, they shall be accounted for separately.
7.5
617
Example 14
Abu Bhd acquired an 80% equity interest in Bakar Bhd and a 75% equity interest
in Cumi Bhd when the accumulated losses of Bakar Bhd were RM2,000,000 and the
retained profits of Cumi Bhd were RM1,000,000. On the acquisition date, the net
assets of Bakar Bhd and Cumi Bhd were valued at RM8,000,000 and RM11,000,000
respectively. However, based on an income approach, the fair values of Bakar Bhd
and Cumi Bhd were measured independently at RM10,000,000 and RM15,000,000
respectively.
The summarised accounts for the three companies for the year ended 31
December 20x8 are as follows:
as at 31 December 20x8
Sundry net assets/(liabilities)

Investments, at costs
8,000,000 shares in Bakar
7,500,000 shares in Cumi
Retained profits / (losses)
Abu Bhd
RM000
20,100
Bakar Bhd
RM000
14,000
8,000
11,250
39,350
20,000
19,350
39,350
14,000
10,000
4,000
14,000
Cumi Bhd
RM000
(5,000)
(5,000)
10,000
(15,000)
(5,000)

for the year ended 31 December 20x8
Operating profit / (loss)

Taxation
Profit / (loss) after tax
Dividends
Retained profit / (loss) for the year
Retained profits / (losses) brought forward
Retained profits / (losses) carried forward
Abu Bhd
RM000
8,000
(2,000)
6,000
(1,000)
5,000
14,350
19,350
Bakar Bhd
RM000
2,000
(800)
1,200
1,200
2,800
4,000
Cumi Bhd
RM000
(12,000)
(12,000)
(12,000)
(3,000)
(15,000)
Abu Bhd carries goodwill on acquisition at cost less accumulated impairment

losses. Each of the subsidiary forms a gash-generating unit for the purpose of
impairment testing. Goodwill on acquisition has been allocated to each cashgenerating unit at the acquisition date. In the prior years, no impairment loss
was recognised as the recoverable amounts of the subsidiaries then exceeded their
respectively carrying amounts.
7.5
618
In the current year, it considers the losses in Cumi Bhd to be permanent and
performs an impairment test. An external party had made an offer and is willing to
pay RM1 to acquire the entire share capital of Cumi Bhd. Based on managements
budgeted cash flows, the value in use is determined at nil amount.
Non-controlling interest is measured at acquisition-date fair value.
Required
(a)
Determine the goodwill on combination and allocate the goodwill to the noncontrolling interest and the parent;
(b)
Calculate the impairment loss required in the separate and consolidated

financial statements; and
(c)
Using a consolidation worksheet, derive the group accounts of Abu Bhd and its
subsidiaries for the year ended 31 December 20x8.
Solution 14
(a)

Bakar
Cumi
RM000
RM000
8,000
11,250
Non-controlling interest at fair value
2,000
3,750
Aggregate of:
Fair value as a whole
10,000
15,000
8,000
11,000
2,000
4,000
1,600
3,000
Allocated to:
Parent

(b)
Impairment loss
Company
Group
RM000
RM000
11,250
4,000
11,250
4,000
Recoverable amount
Impairment loss required
7.5
1,000
4,000

Carrying amount of investment/goodwill
400
2,000
In the separate financial statements of the Parent, the impairment loss

relates to the write-off of the investment whilst in the consolidated financial
statements, the impairment loss relates to the write-off of the goodwill on
combination.
(c)
619
Consolidation Worksheet:
Abu
Bakar
Cumi
Consol.
adjustments
(Dr)
(Cr)
Group
RM000 RM000 RM000 RM000 RM000 RM000

Profit/(loss) before tax
8,000
2,000 (12,000)
(2,000)
(11,250)
(4,000)j 11,250i (4,000)
Impairment loss
Profit/(loss) before tax
(3,250) 2,000 (12,000)
(6,000)
(2,000)
(800)
(2,800)
Taxation
Profit/(loss) after tax
(5,250) 1,200 (12,000)
(8,800)
(240)d 3,000h 3,760

Non-controlling interests
1,000k
Profit to owners of parent (5,250)
Retained profits b/f
14,350
Dividends paid
Retained profits c/f
Share capital
1,200 (12,000)
2,800 (3,000)
(560)c
(750)f
(1,000)
8,100
4,000 (15,000)
20,000 10,000 10,000 (8,000)b
(5,040)
1,600b 15,190
750g
(1,000)
9,150
20,000
(2,000)c
(7,500)f
(2,500)g
(1,600)b
Revaluation
2,000a
(400)c
(3,000)f
4,000e
(1,000)g
2,960c
240d
(3,000)h
(1,000)k
Total equity
28,100
14,000
Sundry net assets

(20,100) (14,000)
Investment in Bakar
Investment in Cumi
Total net assets
(8,000)
(28,100) (14,000)
(5,000)
5,000
(2,000)a
3,200
2,750g
(1,250)
31,100
(29,100)
(2,000)
(4,000)e 4,000j
8,000b
(11,250)f 11,250f
5,000 (52,800) 52,800 (31.100)
7.5
620
The consolidation adjustments are as follows:

RM000
RM000
For Bakar Bhd:

2,000
2,000
to recognise goodwill on combination..

(b) Dr Share capital of Bakar
8,000
1,600
Cr Pre-acquisition loss
1,600
Cr Investment in Bakar
8,000

(c) Dr Share capital of Bakar
2,000
400
560
Cr Non-controlling interest
2,960
to opening net assets and goodwill to NCI.

(d) Dr Non-controlling interest in profit or loss
240
240
to allocate profit to NCI.

For Cumi Bhd
(e) Dr Goodwill on combination
4,000
4,000

(f) Dr Share capital of Cumi
7,500
3,000
Dr Pre-acquisition profits of Cumi
750
Cr Investment in Cumi
11,250

(g) Dr Share capital of Cumi
2,500
1,000
Cr Retained losses brought forward
750
2,750
to restate opening NCIs share of net assets and goodwill.

(h) Dr Non-controlling interest in financial position
Cr Non-controlling interest in profit or loss
3,000
3,000
to allocate current year loss to NCI.
7.5
(i) Dr Investment in Cumi Bhd
621
11,250
Cr Impairment loss of Parent
11,250
to restate investment and reverse

parents impairment loss.
(j) Dr Goodwill impairment loss in profit or loss
4,000
Cr Goodwill on combination
4,000
to recognise goodwill impairment loss.

(k) Dr Non-controlling interest in financial position
1,000
Cr Non-controlling interest in profit or loss
1,000
to allocate goodwill write-off to NCI.

he consolidated financial statements are
T
presented as follows:
Statement of Comprehensive Income

RM000
Operating loss before impairment of goodwill
(2,000)
Goodwill impairment loss
(4,000)
Loss before taxation
(6,000)
Less: Tax expense
(2,800)
Loss for the year
(8,800)
Attributable to:
Owners of the parent
(5,040)
(3,760)
(8,800)
Movements in Retained Profits and Non-controlling Interests:

Retained Non-controlling
Profits
Interests
RM000
RM000
Balance at 1 January 20x8
15,190
5,710
Loss for the year
(5,040)
(3,760)
Dividends paid
Balance at 31 December 20x8
(1,000)
9,150
1,950
7.5
622


RM000
2,000
Sundry net assets
29,100
31,100
20,000
Retained profits
9,150
Equity attributable to owners of the parent
29,150
1,950
31,100
Workings
1. Proof of Non-Controlling Interest:

Bakar
Cumi
RM000
RM000
Sundry net assets / (liabilities)
14,000
Total net assets & goodwill
(5,000)
2,000
16,000
(5,000)
20%
NCIs share or net assets / (liabilities)
3,200
25%
(1,250)
2. Proof of Consolidated Retained Profits

Group
RM000
Parents separate profit
8,100
Share of post-acquisition profits in Bakar 80% x 6,000
4,800
Share of post-acquisition losses in Cumi 75% x (16,000)
(12,000)
Add: Impairment loss in separate financial statements of parent
11,250
Less: Share of goodwill written off
(3,000)
Consolidated retained profits
9,150
When losses of an insolvent subsidiary are consolidated in full, any

subsequent disposal of that subsidiary would result in a reversal or
deconsolidation of those losses. Therefore, a gain would arise on disposal even
if the subsidiary were sold for a nil consideration.
7.5
623
Example 15
On 1 January 20x6, A Bhd and B Bhd establish C Bhd. A Bhds stake in C Bhd
is 60% and has control of the latter.
C Bhd reports losses since its incorporation. In order for C Bhd to continue
its operations, A Bhd and B Bhd have entered into an agreement with bankers to
guarantee all losses of C Bhd, where B Bhd would inject further cash into C Bhd for
up to 20% of any net deficit in the shareholders equity and the balance made good
by A Bhd.
The draft summarised financial statements of A Bhd and C Bhd for the current
financial year ended 31 December 20x9 are as follows:
Statements of Comprehensive Income and Retained Profits
Profit / (loss) before tax

Taxation
Profit / (loss) after tax
Retained profits / (losses) brought forward
Recoverable from shareholders
Retained profits / (losses) carried forward
A Bhd
RMm
200
(52)
148
152
300
C Bhd
RMm
(100)
(100)
(150)
150
(100)
A Bhd
RMm
500
300
120
920
60
860
920
C Bhd
RMm
100
(100)
150
(150)

Retained profit / (losses)
Payable to Cumi Bhd
Investment in Cumi Bhd, at cost
Recoverable from shareholders
Sundry net assets / (liabilities)
(a)
The accounts of A Bhd have not recognised any impairment loss on the
investment in C Bhd.
(b)
The bankers have demanded that A Bhd and B Bhd should immediately inject
cash into C Bhd to clear the deficit in shareholders equity.
Required
(a)
Prepare the consolidated financial statements of A Bhd for the financial year
ended 31 December 20x9;
7.5
624
(b)
Suppose on 31 December 20x9, A Bhd and B Bhd sell their stakes in C Bhd
for RM1 each to a third party (the RM1 consideration is for the purpose of
legalising the agreement of sale). The agreement provides that both A Bhd
and B Bhd would not have to make good their share of the net deficit in C
Bhd. Calculate the gain or loss on disposal and prepare the primary financial
statements of A Bhd.
Solution 15
(a)
Consolidated Statement of Comprehensive Income

Profit before tax (200 100)
Taxation
Profit after tax
Attributable to:
Non-controlling interest 40% x (100)
Shareholders of the parent company

RMm
100
(52)
48
(40)
88
48
Movements in Retained Profits and Non-controlling Interest
Balance brought forward [152 60% (150)]

Profit / (loss) for the year
Balance before contribution
Contribution by shareholders (ratio of 8:2)
Dilution on contribution
Balance carried forward
profits
interest
RMm
RMm
62
(20)
88
(40)
150
(60)
120
30
(30)
30
240


Retained profits (300 60% x 100)

Non-controlling interests 40% x nil
Total equity
Amount recoverable from non-controlling interest
Sundry net assets (860 150)

7.5
RMm
500
240
740
740
30
710
740
625
(c) Gain or loss on disposal

RMm
Consideration receivable
Share of sundry net liabilities 90% x 150m
(90)
Gain on disposal
90
Alternative calculation:
RMm
Consideration receivable
Carrying value of investment
(60)
Impairment loss in separate financial statements
(60)
Post-acquisition losses deconsolidated: (60% x 250)
150
Gain on disposal in primary financial statements
90
Primary Statement of Comprehensive Income

RMm
Profit before tax (200 100)
100
Gain on deconsolidation of subsidiary disposed

90
190
Taxation
(52)
Profit after tax
138
Attributable to:
(40)
Shareholders of the parent company
178
138
Movements in Retained Profits and Non-controlling Interest
Balance brought forward

Profit / (loss) for the year
Deconsolidation of subsidiary disposed
Balance carried forward
profits
interest
RMm
RMm
62
(20)
178
(40)
240
(60)
120
60
360
Primary Statement of Financial Position

RMm
500
Retained profits (300 + 120 60)
360
860
Sundry net assets
860
7.5
626
7.6 The Separate Financial Statements of a Parent

The revised MFRS 127, Separate Financial Statements, deals only with the
accounting requirements in the separate financial statements of a parent or
an investor for its investments in subsidiaries, joint ventures and associates.
Separate financial statements are those presented by a parent (i.e. an
investor with control of a subsidiary), or investor with joint control of, or
significant influence over, an investee, in which the investment is accounted
for at cost or in accordance with MFRS 9, Financial Instruments (i.e. the
investments are accounted for on the basis of the direct equity interest rather
than on the basis of the reported results and net assets of the investees). The
Standard does not mandate which entity shall produce separate financial
statements. Thus, the presentation of separate financial statements is either
required by law or regulation (mandatory), or by election (voluntary). In many
jurisdictions, a parent company is required by law to produce its separate
financial statements (company accounts) in addition to its consolidated
financial statements (group accounts)
When an entity prepares separate financial statements it shall account for
investments in subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with MFRS 9 [MFRS 127.10].
The same accounting shall be applied for each category of investment. For
example, if the cost basis is applied to a subsidiary, then all investments in
subsidiaries shall be measured on the same cost basis. Investments accounted
for at cost shall be accounted for in accordance with MFRS 5 Non-current
Assets Held for Sale and Discontinued Operations, when they are classified as
held for sale (or included in a disposal group that is classified as held for sale).
The measurement of investments accounted for in accordance with MFRS 9
is not changed in such circumstances [MFRS 127.10]. The implication of this
requirement is that if a subsidiary, measured at cost, is classified as held for
sale, it must be tested for impairment loss under MFRS 5. For example, if
the cost carrying amount of the investment is RM10 million and the parent
expects to sell the investment for RM8 million (its fair value less costs to sell),
an impairment loss of RM2 million is recognised in profit or loss when the
investment is classified as held for sale (even though the disposal is not yet
complete). Had the investment been measured at fair value, the impairment
loss of RM2 million would have been recognised in profit or loss by the changes
in the fair value measurement.
If an entity elects to account for those investments in accordance with
MFRS 9, Financial Instruments, the investments shall be measured at
fair value through profit or loss (the option of fair value through other
7.6
627
comprehensive income is no longer relevant as the category of available-forsale financial assets has been removed in MFRS 9).
The revised MFRS 128 permits certain types of entities, such as mutual
funds and venture capital entities, to account for their investments in joint
ventures and associates at fair value rather than based on share of profits.
If any such entities elect this fair value option, the investments in joint
ventures and associates that are accounted for in accordance with MFRS 9 in
the consolidated financial statements shall be accounted for in the same way
in the investors separate financial statements [MFRS 127.11].
7.6.1Valuation of Subsidiaries in the Separate Financial

Statements of the Parent
If investments in subsidiaries are accounted for in accordance with MFRS
9, they shall be measured at fair value with changes in fair value recognised
in profit or loss. Under MFRS 13, Fair Value Measurement, the fair value of
investments shall be based on the market prices of the investments if they
are available. Otherwise, the fair value may be determined using a valuation
technique, such as the P/E ratio valuation method or the discounted cash
flow (DCF) method. If the fair value measurement principle is applied to
investments in subsidiaries, it could potentially lead to the reserves in the
separate financial statements of the parent being larger than the group
reserves. For example, when the market price of an investment in a subsidiary
is greater than the carrying value per ordinary share, the retained profits
in the separate financial statements would be more than the consolidated
retained profits at the group level.
Example 16
P Bhd paid RM1,000,000 to acquire a wholly owned subsidiary, S Bhd on
1 January 20x1. The net assets of S Bhd on acquisition date were RM1,000,000
(consisting of share capital of RM500,000 and retained profits of RM500,000).
As at 31 December 20x5, the retained profits of S Bhd were RM1,500,000. P Bhd
accounts for the investment in S Bhd at fair value through profit or loss. As at 31
December 20x5, the fair value of its investment in the subsidiary was determined
using the P/E ratio valuation method at RM3,000,000.
On 1 January 20x6, S Bhd paid a dividend of RM1,000,000 to the parent company.
Required
(a) Explain how the fair value shall be incorporated in the separate financial
statements of P Bhd and show the journal entry required; and
(b) Show the journal entry required in the financial statements of P Bhd in respect
of the dividend paid by S Bhd.
7.6
628
Solution 16
(a) The fair value of S Bhd at the valuation date was RM3,000,000. Upon valuing
the investment, a gain of RM2,000,000 arose. Thus, P Bhd shall account for
the fair value gain as follows:
Dr Investment in subsidiary
RM2,000,000
Cr Fair value gain in profit or loss
RM2,000,000
to incorporate fair value gain of investment in a subsidiary.

The carrying amount of the investment after incorporating the fair value gain
would be RM3,000,000, which is RM1,000,000 higher than the net tangible
assets of the subsidiary. Note that the corresponding post-acquisition profits
consolidated in the group accounts are RM1,000,000, which is lower than the
gain recognised in the separate financial statements of the parent.
(b) On receipt of the dividend from the subsidiary, the following journal entry
shall be made:
Dr Cash account
Cr Dividend income in profit or loss
RM1,000,000
RM1,000,000
to record dividend received as income.
When the investment in a subsidiary is carried at fair value in the parents

accounts, the resulting fair value gain and the corresponding increase in the
carrying amount of investment shall be reversed upon consolidation, so that
there is no effect at the group level. If, however, the fair value gain had been
utilised by the parent for bonus issue of shares, there has in effect been a
permanent freezing of the subsidiarys post-acquisition profits. Accordingly,
the reversal of the increase in the carrying value of the investment shall be
made against the post-acquisition profits of the subsidiary.
As in past practices of using revaluation reserve for bonus shares, it
appears that there is no legal restriction on the use of fair value gain for
bonus shares. However, the author cautions the use of this fair value gain
for bonus shares as it may potentially lead to a deficit in the post-acquisition
reserve at the group level.
Example 17
Assume the same case facts as in the Example above. The financial positions as
at 31 December 20x5 are as follows:
7.6
629
P Bhd
RM000
2,000
2,000
2,000
6,000
3,000
3,000
5,000
Share capital
Retained profits
(i) Fair value gain
(ii) Other profits
Investment in S Bhd, at fair value
Sundry net assets
S Bhd
RM000
500
1,500
2,000
2,000
2,000
Required
(i) Show the consolidation adjustments required and prepare the consolidated
financial statements of P Bhd for the 20x5 financial year;
(ii) Prepare the consolidated financial statements immediately after the payment
of dividend on 1 January 20x6; and
(iii) Suppose P Bhd had on 31 December 20x5 issued bonus shares by capitalising
all the fair value gain, show the consolidation adjustments and prepare the
consolidated financial statements of P Bhd for the 20x5 financial year.
Solution 17

RM000
(a) Dr Fair value reserve
2,000
Cr Investment in subsidiary
to reverse fair value gain on consolidation.
500
500
to eliminate cost of investment against net assets acquired.
Share capital
Fair value gain
Other retained profits
Investment in S Bhd
Sundry net assets
P Bhd
S Bhd
RM000
2,000
2,000
2,000
6,000
(3,000)
RM000
500
1,500
2,000
(3,000)
(6,000)
(2,000)
2,000
Consolidation
adjustments
(Dr)
Cr
(500)b
(2,000)a
(500)b
2,000(a)
1,000(b)
(3,000)
3,000
RM000
2,000
1,000
Group
RM000
2,000
3,000
5,000
(5,000)
5,000
7.6
630
(ii) Consolidated financial position on 1 January 20x6
Share capital
Fair value gain
Other retained profits
Investment in subsidiary
Sundry net assets
P Bhd
S Bhd
RM000
2,000
2,000
3,000
7,000
(3,000)
(4,000)
(7,000)
RM000
500
500
1,000
(1,000)
(1,000)
Consolidation
adjustments
(Dr)
Cr
(500)
(2,000)
(500)
Group
RM000
2,000
3,000
5,000
3,000
(3,000)
3,000
(5,000)
(5,000)
Note that there is no consequential effect of the dividend payment by S Bhd to P

Bhd as the group retained profits remain at RM3,000,000.

RM000
Dr Share capital of S Bhd
RM000
500
500
Dr Fair value reserve of parent
2,000
3,000
to eliminate cost of investment against net assets acquired.

(iii) Fair value reserve capitalised as bonus shares
Share capital
Retained profits
Investment in S Bhd
Sundry net assets
7.6
P Bhd
S Bhd
RM000
4,000
2,000
RM000
500
1,500
6,000
(3,000)
2,000
(3,000)
(6,000)
(2,000)
(2,000)
Consolidation
adjustments
(Dr)
Cr
(500)a
(500)a
(2,000)b
1,000(a)
2,000(b)
(3,000)
3,000
Group
RM000
4,000
1,000
5,000
(5,000)
5,000
Note that in this case, RM2,000,000 post-acquisition profits are deemed

capitalised for the bonus issue of shares.
631

RM000
(a) Dr Share capital of S Bhd
500
Dr Pre-acquisition profit
500
RM000
1,000
to eliminate the original cost of investment.

(b) Dr Post-acquisition profits
2,000
2,000
to eliminate balance of cost of investment.
7.6.2When the New Holding Company is the Parent of the

Entity
A limited guidance is provided in MFRS 127 on the measurement of
the cost of investment in a subsidiary when a parent (the original parent)
reorganises its group structure by establishing a new entity to be its parent
(the new parent). The Standard clarifies that when a parent reorganises the
structure of its group, by establishing a new entity as its parent in a manner
that satisfies the following criteria:
(a) the new parent obtains control of the original parent by issuing equity
instruments in exchange for existing equity instruments of the original
parent;
(b) the assets and liabilities of the new group and the original group are the
same immediately before and after the reorganisation; and
(c) the owners of the original parent before the reorganisation have the same
absolute and relative interests in the net assets of the original group
and the new group immediately before, and after, the reorganisation
and the new parent accounts for its investment in the original parent under
the cost method in its separate financial statements, the new parent shall
measure cost at the carrying amount of its share of the equity items in
the separate financial statements of the original parent, at the date of the
reorganization [MFRS 127.13].
Similarly, a stand-alone entity that is not a parent might establish a
new entity as its parent in a manner that satisfies the criteria above. The
requirements in MFRS 127.13 apply equally to such reorganisations [MFRS
127.14].
The requirement to measure the cost of investment at net assets value (i.e.
based on the share of the equity items), rather than at fair value is to prevent
recognition of an inherent goodwill of the original parent or the stand-alone
entity.
7.6
632
For example, a stand-alone entity has a net assets value of RM100 million
(share capital of RM40 million and reserves of RM60 million). The fair value
of the entity based on the P/E ratio method of valuation is RM200 million.
The entity establishes a new holding company to be its parent. The new
parent issues equity shares to the original owners of the stand-alone entity
in exchange for existing equity shares of the stand-alone entity.
The analysis below shows the difference on consolidation if the new parent
records the cost of investment at: (i) net asset value and (ii) at fair value:
Cost of investment
Share of net assets:
Share capital
Pre-acquisition reserve
(i) At NAV
RMm
100
(ii) Fair Value

RMm
200
(40)
(60)
(40)
(60)
100
Notice that if the fair value basis of measurement were to be allowed,

it would have resulted in recognising a goodwill on combination of RM100
million. This would have been an equivalent of capitalising the inherent
goodwill of the stand-alone entity.
Example 18
On 1 January 20x1, Q Bhd acquired a 75% equity interest R Bhd for a
consideration of RM225 million. On this date the net assets of R Bhd, measured at
fair value, were RM200 million. The fair value of R Bhd on the acquisition date was
RM300 million.
The summarised statements of financial position of Q Bhd, R Bhd and the Q
Group at 31 December 20x5 are as follows:
Share capital
Retained profits
Investment in R Bhd, at cost
Sundry net assets
7.6
Q Bhd
RMm
300
500
800
225
575
800
R Bhd
RMm
100
400
500
500
500
Q Group
RMm
300
725
150
1,175
100
1,075
1,175
633
On 1 January 20x6, Q Bhd reorganises its group structure by establishing a

new holding company, P Bhd, as its parent. For this reorganisation, P Bhd, issues
its equity shares to the original shareholders of Q Bhd in exchange for the existing
equity shares of Q Bhd.
P Bhd accounts for its investment in Q Bhd under the cost method in accordance
with FRS 127. The fair value of Q Bhds ordinary shares, based on its quoted market
price on 1 January 20x6, is RM5 per share (total fair value of RM1.5 billion). P Bhd
assumes the listing status of Q Bhd after the reorganisation.
Required
(a)
Explain how P Bhd shall account for its investment in Q Bhd in its separate
financial statements; and
(b)
Prepare the consolidated financial position of the new P Group immediately

after the reorganisation.
Solution 18
(a)
In this group reorganisation, P Bhd is the new holding company formed to

be the parent of the Q Group. In substance, there has been no change to the
ownership structure or the assets and liabilities immediately before and after
the reorganisation. Thus, in accordance with MFRS 127.13, P Bhd shall record
its investment in Q Bhd based on the carrying amount of its share of the
equity items shown in the separate financial statements of Q Bhd i.e. at its
net assets value of RM800 million. Consequently no additional goodwill would
arise in this group reorganisation.
Note that if P Bhd had recorded its investment in Q Bhd based on the fair
value of the ordinary shares of Q Bhd, it would have resulted in an additional
goodwill of RM700 million in this group reorganisation. This would not have
reflected fairly the substance of the group reorganisation (it would have
been the equivalent of recognising an inherent goodwill, which is against the
current MFRSs).
(b)
P Group - Consolidated Statement of Financial Position (Immediately After)

P Bhd
RMm
800
Q Bhd
RMm
300
R Bhd
RMm
100
Retained profits
500
400
Revaluation
800
800
Share capital
(Dr)
RMm
(300)a
(75)c
(25)d
(500)a
(75)c
(100)d
(75)c
(25)d
NCI
500
(Cr) P Group
RMm
RMm
800
225
100b
150
150
1,175
7.6
634
Investment in Q
Investment in R
Goodwill
Sundry net assets
(800)
(225)
(800)
(575)
(800)
800a
225c
(100)b
(500)
(500)
(1,275)
1,275
(100)
(1,075)
(1,175)
The consolidation adjustments are as follows:

RMm
(a) Dr Share capital of Q Bhd
300
Dr Retained profits of Q Bhd (pre-acquisition)
500
RMm
Cr Investment in Q Bhd
800
to eliminate investment in Q Bhd.

(b) Dr Goodwill on combination
100
Cr Revaluation reserve goodwill
100

(c) Dr Share capital of R Bhd
75
Dr Pre-acquisition of R Bhd
75
75
Cr Investment in R Bhd
225
to eliminate investment in R Bhd.

(d) Dr Share capital of R Bhd
Dr Retained profits of R Bhd
25
100
25
Cr NCI in financial position
150
to allocate net assets to NCI.
7.6.3When the New Holding Company is an Intermediate

Parent of the Group
Some group reorganisations may involve a parent (ultimate parent)
establishing a new subsidiary as the holding company (intermediate parent)
of other subsidiaries in the group. Although the guidance in MFRS 127.13
relates to reorganisations that establish a new ultimate parent, the same
accounting requirements apply when an intermediate parent is established.
In the Basis for Conclusion to the Amendment of IAS 27 issued in May
2008, the IASB clarifies that the requirements IAS 27.13 apply to the
following types of reorganisations when they satisfied the criteria specified
in the amendment:
(a) reorganisations in which the new parent does not acquire all of the
equity instruments of the original parent. For example, a new parent
7.6
635
might issue equity instruments in exchange for ordinary shares of the

original parent, but not acquire the preference shares of the original
parent. In addition, a new parent might obtain control of the original
parent, but not acquire all of the ordinary shares of the original parent.
(b) the establishment of an intermediate parent within a group, as well as
the establishment of a new ultimate parent of a group.
(c) reorganisations in which an entity that is not a parent establishes a new
entity as its parent. (IAS 27.BC66N)
The IASB further clarifies that the amendment focuses on the measurement
of one asset the new parents investment in the original parent, in the new
parents separate financial statements. It does not apply to the measurement
of any other assets or liabilities in the separate financial statements of
either the original parent or the new parent, or in the consolidated financial
statements (IAS 27.BC66O).
Thus, the requirements apply only when the criteria in those paragraphs
are satisfied. They do not apply to other types of reorganisations or for other
business combinations under common control.
Example 19
P Bhd acquired a 75% interest in the equity capital of T Bhd on 1 January 20x3
for a consideration of RM15,000,000. On this date, the net assets of T Bhd were
stated in the accounts at their fair value. The share capital and retained profits of T
Bhd on this date were RM8,000,000 and RM4,000,000 respectively.
The statements of financial position of the two companies as at 31 December

Retained profits
Investment in T Bhd, at cost
Sundry net assets
P Bhd
RM000
40,000
30,000
70,000
15,000
55,000
50,000
T Bhd
RM000
8,000
10,000
18,000
18,000
18,000
On 31 December 20x7, P Bhd formed a new company, S Bhd to take over T Bhd.
For this take-over, T Bhd was valued independently at RM30,000,000. S Bhd issued
18,000,000 shares of RM1 each to the existing shareholders of T Bhd in proportion
to their respective ownership interests. This group reorganisation has not been
reflected in the statements of financial position above.
7.6
636
Required
Prepare the consolidated statement of financial position of P Bhd as at 31
December 20x7 after the completion of the group reorganisation.
Solution 19
The original goodwill on combination is calculated as follows:

RM000
15,000
NCI at acquisition-date fair value (15,000/.75) x 25%
5,000
Aggregate
20,000
Fair value of identifiable net assets (8,000 + 4,000)
12,000
8,000
After the reorganisation, the effective ownerships of the parent and the NCI
would be as follows:
Parent direct
indirect 75% x 100%
NCI direct
indirect 25% x 100%
S Bhd
75%
T Bhd
75%
25%
100%
25%
100%
The parents and NCIs ownership interests in T Bhd remain unchanged at 75%
and 25% respectively (albeit indirectly).
In the separate financial statements of S Bhd, it shall measure the cost of
investment at the net asset value of RM18,000,000 rather than at fair value.
However, in the separate financial statements of P Bhd, it records the consideration
received, i.e., the investment in S Bhd, at fair value of RM22,500,000, derecognises
its investment in T Bhd and recognise a gain on disposal of RM7,500,000
In the group accounts of S Bhd (the sub-group), it may consolidate the accounts
of T Bhd using the normal consolidation procedures and the elimination would be
as follows:

18,000
Net assets acquired
18,000
7.6
RM000
nil
637
If the stage-by-stage method is applied, the second stage consolidation procedures

would be as follows:
Share capital
P Bhd
S Group
(Dr)
Cr
P Group
RM000
40,000
RM000
18,000
RM000
(13,500)c
RM000
RM000
40,000
4,500c
34,500
(4,500)d
Retained profits
30,000
Gain on disposal
7,500
Revaluation reserve
(7,500)b
(6,000)c
8,000a
6,500d
6,500
(2,000)d
NCI
77,500
Investment in S Bhd
18,000
81,000
(22,500)
7,500b
15,000c
Goodwill
Sundry net assets
(55,000)
(77,500)
(18,000)
(18,000)
(8,000)a
(8,000)
(41,500)
(73,000)
(81,000)
41,500
The consolidation adjustments are:

RM000
RM000
8,000
8,000
to recognise the original goodwill on combination.

(b) Dr Parents gain on disposal
7,500
7,500
to eliminate parents gain on disposal

13,500
6,000
Cr Retained profits of T Bhd
4,500
15,000
to eliminate investment in S Bhd and

restore the groups retained profits.
(d) Dr Share capital of S Bhd
4,500
Dr Revaluation reserve
2,000
6,500
to allocate net assets and goodwill to NCI.
7.6
638
If the one-stage method is applied, the consolidation procedures would be as

follows:
Share capital
P Bhd
S Bhd
T Bhd
(Dr)
Cr
P Group
RM000
40,000
RM000
18,000
RM000
8,000
RM000
(6,000)b
RM000
RM000
40,000
(2,000)c
(13,500)d
Revaluation
(4,500)e
(2,000)c
8,000a
Retained profits
30,000
(6,000)d
(7,500)b
4,500d
34,500
Gain on disposal
NCI
7,500
(2,500)c
(7,500)d
(4,500)b
6,500c
6,500
10,000
4,500e
Investment in S
Investment in T
Goodwill
Sundry net assets
77,500
18,000
(22,500)
(18,000)
18,000
22,500d
18,000b
(8,000)a
(55,000)
(18,000)
(77,500) (18,000) (18,000)
(64,000)
64,000
81,000
(8,000)
(73,000)
(81,000)

RM000
RM000
8,000
Cr Revaluation reserve goodwill
8,000

(b) Dr Share capital of T Bhd
6,000
Dr Retained profits of T Bhd
7,500
Dr NCI in financial position
4,500
Cr Investment in T Bhd
18,000
to eliminate investment in T Bhd

(c) Dr Share capital of T Bhd
2,000
Dr Retained profits of T Bhd
2,500
2,000
6,500
7.6
(d) Dr Share capital of S Bhd
639
13,500
6,000
Dr Parents gain on disposal
7,500
Cr Retained profits of T Bhd
4,500
22,500
to eliminate investment in T Bhd.

(e) Dr Share capital of S Bhd
4,500
4,500
to allocate net assets to NCI
7.6.4When a Parent accounts for its Investments in

Subsidiaries at Fair Value
The requirements of MFRS 127.13 to use the net assets value to measure
the cost of investment in a subsidiary apply only if the new parent uses the
cost method in its separate financial statements. They do not apply if the
new parent uses the fair value method and account for its investments in
subsidiaries at fair value, in accordance with MFRS 9, Financial Instruments.
Thus, if the fair value method is applied, the new parent records the cost of
investment in the original parent at its fair value initially, and subsequently
accounts for the changes in fair value of the investment through profit or loss
in accordance with MFRS 9.
MFRS 127 does not deal with the consequential treatment at the
consolidation level when the fair value method is applied in a group
reorganisation. As mentioned earlier, when the new parent records the
investment in the original parent at its fair value, it would create an additional
goodwill at the consolidation level. The issue is whether or not this additional
goodwill can be recognised.
In the authors view, this would tantamount to recognising an inherent
goodwill in a group reorganisation. Thus, to avoid capitalising an inherent
goodwill at the group level, the fair value measurement recognised in the
separate financial statements of the new parent is reversed to book value on
consolidation, in the same manner as fair value changes of the investment in
the separate financial statements are reversed on consolidation.
7.7 Complex Group Structures

7.7.1 Indirect Interests
Where the parents interest in a subsidiary is held indirectly via one or
more other subsidiaries, an indirect subsidiary is said to exist, insofar as
7.7
640
the parent is concerned. The following structures illustrate such indirect

interests.
H Bhd
H Bhd
60%
80%
S Bhd
60%
P Bhd
Q Bhd
60%
30%
T Bhd
Parents interest-direct
indirect 60%x 60%
NCI direct
indirect 40%x 60%
30%
R Bhd
S Bhd
60%
40%
100%
T Bhd
36%
40%
24%
100%
Parents interest direct

indirect 80x30+60x30
NCI direct
indirect 20x30+40x30
P Bhd Q Bhd R Bhd

80% 60%
42%
20% 40% 40%
18%
100% 100% 100%
The consolidation principles are the same regardless of whether the

interest in a subsidiary is held directly by the parent, or indirectly, through
one or more subsidiaries. The consolidated financial statements would
present revenue, expenses, assets, liabilities and equity of all companies in a
group as a single entity.
However, the amount recognised for goodwill on combination in the
parents group accounts would depend on its policy for measuring noncontrolling interests at the acquisition date. If non-controlling interests are
measured at their acquisition-date fair value, the goodwill on combination
would include a portion attributable to non-controlling interest. The goodwill
as a whole is recognised for each subsidiary, regardless of whether it is a
direct subsidiary or an indirect subsidiary.
If non-controlling interests are measured based on their proportionate
share of net assets at the acquisition date, then the goodwill on combination
shall reflect only the parents effective ownership interest in the indirect
subsidiary so that no goodwill will be attributable to non-controlling interest,
whether directly or indirectly. Thus, the goodwill that shall be recognised
in the parents group accounts shall relate only to the extent of its effective
ownership in each subsidiary, so as to reflect its purchase, directly or indirectly,
in each subsidiary.
7.7
641
In practice, where a sub-group exists in a group structure, more than one

set of group accounts must be prepared if the immediate parent is not wholly
owned by the ultimate parent. Insofar as the consolidation of the ultimate
parents group accounts is concerned, it can be accomplished either by:
(i) the stage by stage (commonly called multiple stage) consolidation
method; or
(ii) the one stage (commonly called the short cut technique) consolidation
method.
Under the multiple-stage method, the sub-group accounts at the lowest
tier of the vertical group structure are prepared first, and subsequently,
the consolidation is repeated by progressing stage by stage upward until it
reaches the highest tier of the ultimate parents group accounts. If goodwill
on combination is attributed to non-controlling interests, the goodwill in
the consolidated accounts of a sub-group will be added on to the goodwill
at the ultimate group level without any further adjustment. However, if no
goodwill is attributed to non-controlling interests, then at each subsequent
consolidation stage, any goodwill attributable to the indirect non-controlling
interest is excluded by debiting the non-controlling interest in the consolidated
financial position and crediting the goodwill account.
Under the one-stage method, consolidation adjustments are made by
reference to the ultimate parents effective ownership interests in the
indirect subsidiaries. In matching the cost of investment with the ultimate
parents effective share of net assets in each indirect subsidiary, the portion
of the cost that is attributable to minorities in the immediate parent is
excluded and charged to the non-controlling interest account. This exclusion
of the portion of cost of investment attributable to non-controlling interest
is necessary, if the goodwill on consolidation is to reflect only the ultimate
parents proportionate share.
Example 20
Ultimate Bhd acquired a 60% interest in the equity capital of Immediate Bhd
on 1 January 20x1 when the net assets of the latter, stated at their fair value, were
RM300 million (consisting of share capital of RM200 million and pre-acquisition
profits of RM100 million). On 1 January 20x2, Immediate Bhd acquired a 75%
interest in the equity capital of Subsist Bhd and the net assets of the latter, stated
at their fair value were RM300 million (consisting of share capital of RM100 million
and pre-acquisition profits of RM200 million).
The draft accounts of the three companies for the year ended 31
7.7
642
Share capital of RM 1 each

Retained profits
Ultimate
Bhd
Immediate
Bhd
Subsist
Bhd
RMm
400
RMm
200
RMm
100
200
300
300
600
500
400
Sundry net assets
300
200
400
Investment in Immediate Bhd
300
Investment in Subsist Bhd
600
300
500
400
Statement of Comprehensive Income & Retained Profits
Ultimate
Bhd
Immediate
Bhd
Subsist
Bhd
RMm
180
RMm
170
RMm
180
Taxation
(80)
(70)
(80)
Profit after taxation and retained
100
100
100

100
200
200
300
200
300
Goodwill on acquisition is carried at cost less accumulated impairment losses.

Required
(a)
If non-controlling interests are measured at acquisition-date fair value,

prepare the consolidated financial statements of Ultimate Bhd using the:
(i)
two-stage method; and
(ii) one-stage method.

(b)
If non-controlling interests are measured based on their proportionate share

of net assets at the acquisition date, prepare the consolidated financial
statements of Ultimate Bhd using the:
(i)
two-stage method; and
(ii) one-stage method

Solution 20
(a) Non-controlling interests measured at acquisition-date fair value:

7.7
The goodwill on combination is determined as follows:
643
RMm
(i)
Immediate Bhd and Subsist Bhd
Non-controlling interest (300/.75) x 25%
300
100
400
300
100
(ii) Ultimate Bhd and Immediate Bhd

Non-controlling interest (300/.60) x 40%
300
200
500
300
200
Total goodwill on combination
300
Two-stage Consolidation
Stage 1
Profit before tax

Tax expense
Profit after tax
Non-controlling
interest
Retained profits b/
forward
Retained profits c/
forward
Share capital
Revaluation reserve
Immediate
Subsist
(Dr)
RMm
170
(70)
100
RMm
180
(80)
100
RMm
100
200
100
200
Cr Immediate
group
RMm
RMm
350
(150)
200
(25) d
(25)
175
(150) b
(50) c
300
200
300
100
(75) b
(25) c
(75) b
200
375
100 a
200
(25) c
Non-controlling
interest
Total equity
100 c
500
400
25 d
125
700
7.7
644
Sundry net assets

Goodwill on
combination
Investment in Subsist
Total net assets

(200)
(400)
(300)
(500)
(600)
(100) a
(400)
(525)
(100)
300 b
525
(700)

RMm
RMm
100
100

(b) Dr Share capital of Subsist Bhd
75
75
150
Cr Investment in Subsist Bhd
300

(c) Dr Share capital of Subsist Bhd
25
25
50
100
to recognise NCI at acquisition-date fair value.

25
25

Stage 2
Profit before tax

Tax expense
Profit after tax
Non-controlling
interest
Retained profits b/
forward
Retained profits c/
forward
7.7
Ultimate Immediate
group
RMm
RMm
180
350
(80)
(150)
100
200
100
100
(25)
175
200
(Dr)
Cr
RMm
RMm
(70) d
(60) b
Ultimate
group
RMm
530
(230)
300
(95)
205
160
(80) c
200
375
365
Share capital
400
200
(120) b
(120) b
645
400
(80) c
Revaluation reserve
200 a
240 c
435
(80) c
Non-controlling
interest
Sundry net assets
70 d
600
700
(300)
(600)
Goodwill on
combination
Investment in
Immediate
125
(300)
(600)
1,200
(900)
(100)
(200) a
(700)
(810)
(300)
300 b
(810)
(1,200)

RMm
RMm
200
200

(b) Dr Share capital of Immediate
120
120
60
Cr Investment in Immediate
300

(c) Dr Share capital of Immediate
80
80
80
240

(d) Dr Non-controlling interest in profit of loss
70
70
to allocate current year profit to NCI (40% x 175)
7.7
646
One-stage Consolidation
The effective ownership:

indirect .60 x 75%
Non-controlling interest direct
indirect .40 x 75%
Immediate
60%
40%
100%
Subsist
45%
25%
30%
100%
Consolidation Worksheet
Ultimate Immediate Subsist
Profit before tax

Tax expense
Profit after tax
Non-controlling
interest
Attributable to
owners
Retained profits b/
forward
Retained profits c/
forward
Share capital
Revaluation reserve
Non-controlling
interest
Total equity
7.7
RMm
180
(80)
100
RMm
170
(70)
100
RMm
180
(80)
100
100
100
100
200
100
200
200
400
300
200
300
100
600
500
400
(Dr)
RMm
(40) d
(55) h
Cr Ultimate
Group
RMm
RMm
530
(230)
300
(95)
205
160
(60) b
(80) c
(90) f
(110) g
(120) b
(80) c
(45) f
(55) g
(120) b
(80) c
(45) f
(55) g
(120) f
365
400
200 a
100 e
240 c
40 d
220 g
55 h
435
1,200
Sundry net assets

Goodwill on
combination
(300)
(200)
Investment in
Immediate
Total net assets
(300)
(600)
Proof of NCI:
Owners equity
Less: Investment in Subsist
Sundry net assets
Net assets and goodwill
NCI %
NCIs share

647
(400)
(200) a
(100) e
300 b
(300)
(500)
(400) (1,455)
300 f
1,455
Immediate
RMm
500
(300)
200
200
400
40%
160
Subsist
RMm
400
400
100
500
55%
275
(900)
(300)
(1,200)
Total NCI
RMm
435
The consolidation adjustments:

RMm
RMm
200
200

120
120
60
300

80
80
80
240

40
40

100
100
7.7
648
(f) Dr Share capital of Subsist
45
45
90
Dr Non-controlling interest in

financial position (40% x 300)
120
Cr Investment in Subsist
300

(g) Dr Share capital of Subsist
55
55
110
220

(h) Dr Non-controlling interest in profit or loss
55
55

(b) Non-controlling Interests Measured based on Proportionate Share of
Net Assets

The goodwill on combination is determined as follows:

(i)
Immediate Bhd and Subsist Bhd:
RMm
Aggregate of:
Non-controlling interest 25% x 300
375
300
Goodwill on combination parent only
300
75
75
(ii) Ultimate Bhd and Immediate Bhd:
7.7
Aggregate of:
300
Non-controlling interest 40% x 300
120
420
300
Goodwill on combination parent
120
Part of the goodwill on combination in the sub-group belongs to the noncontrolling interest in Immediate Bhd. Therefore, the goodwill that should be
recognised in the Ultimate group accounts is calculated as follows:
649
RMm
Goodwill on combination of Immediate
120
Parents share of goodwill on combination of Subsist 60% x 75

(i)
45
165
Stage 1
Profit before tax

Tax expense
Profit after tax
Non-controlling
interest
Retained profits b/
forward
Retained profits c/
forward
Share capital
Revaluation
Non-controlling
interest
Total equity
Sundry net assets
Goodwill on
combination
Total net assets

Immediate
Subsist
(Dr)
RMm
170
(70)
100
RMm
180
(80)
100
RMm
100
200
100
200
Cr Immediate
group
RMm
RMm
350
(150)
200
(25) d
(25)
175
200
(150) b
(50) c
300
200
300
100
375
200
500
400
675
(200)
(400)
(600)
(75) b
(25) c
(75) b
75 a
75 c
100
25 d
(300)
(500)
(400)
(75) a
(475)
(75)
300 b
475
(675)
RMm
RMm

75
75

(b) Dr Share capital of Subsist
75
75
7.7
650
150
300

(c) Dr Share capital of Subsist
25
50
75
to allocate acquisition-date net assets to NCI.

25
25

Stage 2
Profit before tax

Tax expense
Profit after tax
Non-controlling
interest
Retained profits b/
forward
Retained profits c/
forward
Share capital
Revaluation reserve
Non-controlling
interest
Total equity
Sundry net assets
Goodwill on
combination
Investment in
Immediate
Total net assets
7.7
Ultimate Immediate
group
RMm
RMm
180
350
(80)
(150)
100
200
100
100
(25)
175
200
(Dr)
Cr
RMm
RMm
(70) e
Ultimate
group
RMm
530
(230)
300
(95)
205
160
(60) b
(80) c
200
400
375
200
(120) b
100
(80) c
(120) b
(30) d
600
675
(300)
(600)
365
400
120 a
160 c
300
70 e
(300)
(600)
1,065
(900)
(75)
(120) a
30 d
(165)
(675)
(680)
300 b
680
(1,065)
651

RMm
RMm
120
120

120
120
60
300

80
80
160
to allocate opening net assets to NCI.

(d) Dr Non-controlling interest in financial position
30
Cr Goodwill on combination
30
to eliminate goodwill of sub-group attributable to NCI.

(e) Dr Non-controlling interest in profit or loss
70
70

(ii) One-stage Consolidation
Ultimate Immediate
Profit before tax

Tax expense
Profit after tax
Non-controlling
interest
Attributable to
owners
Retained profits
b/forward
Retained profits
c/forward
Subsist
(DR)
RMm
RMm
180
(80)
100
RMm
170
(70)
100
RMm
180
(80)
100
100
100
100
200
100
200
200
300
300
(40) d
(55) h
(60) b
(80) c
(90) f
(110)g
Cr Ultimate
group
RMm
RMm
530
(230)
300
(95)
205
160
365
7.7
652
Share capital
200
100
Revaluation
reserve
Non-controlling
interest
600
500
400
1,065
(300)
(200)
(400)
(900)
Investment in
Immediate
(300)
Investment in
Subsist
Total net assets
(600)
(300)
(500)
(400)
Total equity
Sundry net
assets
Goodwill on
combination
Proof of NCI:
Immediate
RMm
Owners equity
Less: Investment in Subsist
Sundry net assets
NCI %
NCIs share of sundry net assets

500
(300)
200
40%
80
(120) b
(80) c
(45) f
(55) g
(120) b
(45) f
400
400
(120) f
120 a
45 e
160 c
40 d
165 g
55 h
300
(120) a
(45) e
(165)
300 b
(1,185)
300 f
1,185
(1,065)
Subsist
RMm
Total NCI
RMm
400
400
55%
220
300

RMm

RMm
120
120
7.7
653
120
120
60
300

80
80
160
to allocate opening net assets to NCI.

40
40

45
45

(f) Dr Share capital of Subsist
45
45
90
120
300

(g) Dr Share capital of Subsist
55
110
165
to allocate acquisition-date net assets to NCI.

(h) Dr Non-controlling interest in profit or loss
55
55
7.7
654
7.7.2 Direct and Indirect Interests in a Subsidiary

A parent and its subsidiary may both hold shares in another subsidiary.
Examples of such interests are shown in the group structures below.
Group Structure A
Group Structure B
P Bhd
75%
P Bhd
15%
60%
60%
Q Bhd
30%
indirect 75 x 60
NCI direct
indirect 25 x 60
S Bhd
R Bhd
Q Bhd
Parents interest - direct
30%
T Bhd
R Bhd
75%
15%
45%
25%
25%
15%
100%
100%

indirect 60 x 30
NCI direct
indirect 40 x 30
S Bhd
T Bhd
60%
30%
18%
40%
40%
12%
100%
100%
In applying MFRS 3, the critical criterion for the consolidation of the group
structures above is the control criterion that determines when an acquisition
occurs. For example, in the Group Structure A above, if Q Bhd with its 60%
ownership already controls R Bhd at the acquisition date, the additional 15%
direct investment made by P Bhd in R Bhd on a later date shall be treated as
an equity transaction in accordance with MFRS 3. Conversely, if P Bhds 15%
direct investment in R Bhd was purchased on an earlier date (and treated
as an AFS investment), a remeasurement of the investment to fair value is
required and changes in fair value, including those previously recognised in
other comprehensive income, shall be reclassified to profit or loss on the date
when Q Bhd acquires R Bhd.
In the Group Structure B above, a step-acquisition occurs if P Bhds 30%
stake and S Bhds 30% stake in T Bhd are purchased on different dates. In
this case, it is necessary to fair value the carrying amount of the earlier 30%
purchased stake on the date when an acquisition occurs (i.e. the date the
later 30% purchased stake occurs). In accordance with MFRS 3, a change in
the fair value is recognised in profit or loss on that date when the acquisition
occurs.
7.7
655
The consolidation technique for direct and indirect interests is exactly the
same as the technique used for consolidating indirect interest in a subsidiary.
The important point to consider is whether or not goodwill on combination
is attributable to non-controlling interest, and this is an issue of accounting
policy choice.
Example 21
On 1 January 20x1, X Bhd acquired a 60% interest in the equity capital of Y Bhd
paying a consideration of RM8 million, which reflected 60% of the fair value of Y
Bhd. On this date, the pre-acquisition profits of Y Bhd were RM2 million.
On the same date, X Bhd purchased a 30% interest in the equity capital of Z
Bhd, paying a consideration of RM4.7 million. The pre-acquisition profits of Z Bhd
on that date were RM4 million. X Bhd was represented on the Board of Directors of
Z Bhd and treated the investment as an associate.
On 1 January 20x2 of the current financial year, Y Bhd acquired a 40% interest
in the equity capital of Z Bhd, paying a consideration of RM7.4 million. The retained
profits of Z Bhd on that date were RM6,000,000. On that date, the X Group assumed
control of Z Bhd. The fair value of the ordinary shares of Z Bhd on acquisition date
was determined at RM1.85 per share
The draft financial positions of the three companies as at 31 December 20x2
were as follows:
X Bhd
Y Bhd
Z Bhd
RM000
RM000
RM000
20,000
10,000
10,000
Retained profits
10,000
5,000
8,000
30,000
15,000
18,000
Investment in Y Bhd
8,000
Investment in Z Bhd
4,700
7,400
17,300
30,000
7,600
15,000
18,000
18,000
Sundry net assets
Required
(a)
Calculate the goodwill on combination
(b)
Using a consolidation worksheet, derived the consolidated statement of

financial position of X Bhd as at 31 December 20x2.
7.7
656
Solution 21
(a)
Goodwill on combination:
(i)
Acquisition of Y Bhd
Aggregate of:
Non-controlling interest at acquisition-date

fair value (8,000/.60) x 40%
Fair value of Y Bhd as a whole
13,333
12,000
1,333
Allocated to parent (60%)
800
Allocated to non-controlling interest (40%)
RM000
8,000
5,333
533
1,333
(ii) Acquisition of Z Bhd
7.7
Aggregate of:
7,400

fair value (3,000 x RM1.85)
5,550
Fair value of previously held stake (3,000 x RM1.85)
5,550
Fair value of Z Bhd as a whole
18,500
16,000
2,500
Allocated to parent (54%)
1,350
Allocated to non-controlling interest (44%)
1,150
2,500
Gain on remeasurement of previously held stake:

Cost of investment in Z Bhd
RM000
Share of post-acquisition profit (6,000 4,000) x 30%
Carrying amount at date of control
5,300
Fair value of previously held stake
5,550
Gain on remeasurement
4,700
600
250
657
Consolidation Worksheet:
Share capital
X Bhd
Y Bhd
RM000
20,000
RM000
10,000
Z Bhd
(Dr)
RM000 RM000
10,000 (6,000) b
Cr X Group
RM000
RM000
20,000
(4,000) c
(5,400) g
Retained profits
10,000
5,000
(4,600) h
8,000 (1,200) b
600 e
(2,000) c
250 f
13,730
(3,240) g
Revaluation reserve
(3,680) h
(800) b
1,333 a
2,500 d
6,533 c
13,003
(533) c
(1,350) g
Non-controlling
interest
30,000
15,000
Investment in Y Bhd
Investment in Z Bhd
(8,000)
(4,700)
(7,400)
Sundry net assets

Total Net Assets
(1,150) h
(2,960) g
9,430 h
Total Equity
Goodwill on
combination
18,000
46,733
8,000 b
(600) e 12,950 g
(250) f
(1,333) a
(3,833)
(2,500) d
(17,300)
(7,600) (18,000)
(30,000) (15,000) (18,000) (41,596)
(42,900)
41,596 (46,733)
Proof of NCI:
Owners equity
Less: Investment in Z ltd
Sundry net assets
Total sundry net assets and goodwill
Effective NCI%
NCI share
Y Bhd
RM000
15,000
(7,400)
7,600
1,333
8,933
40%
3,573
Z Bhd
Total NCI
RM000
RM000
18,000
18,000
2,500
20,500
46%
9,430
13,003
7.7
658

RM000
RM000
1,333
1,333

(b) Dr Share capital of Y Bhd
6,000
800
1,200
Cr Investment in Y Bhd
8,000

(c) Dr Share capital of Y Bhd
Dr Retained profits
4,000
533
2,000
Cr Non-controlling interest
6,533

(d) Dr Goodwill on combination
2,500
2,500

(e) Dr Investment in Z Bhd
600
Cr Retained profits b/forward
600
to restate opening retained profits of former associate.

(f) Dr Investment in Z Bhd
250
Cr Gain on remeasurement
250
to recognise gain on remeasurement of previously held stake.

(g) Dr Share capital of Z Bhd (54% x 10,000)
5,400
1,350
Dr Pre-acquisition profit (54% x 6,000)
3,240
Dr Non-controlling interest in

financial position (40% x 7,400)
2,960
Cr Investments in Z Bhd
12,950

(h) Dr Share capital of Z Bhd (46% x 10,000)
4,600
1,150
Dr Retained profits
3,680
9,430
7.7
659
Example 22
U Bhd acquired a 75% interest in the equity capital of M Bhd on 1 January 20x1
for a consideration of RM53,500,000. On this date the share premium and retained
profits of M Bhd were RM10,000,000 and RM8,000,000 respectively.
On the same day, M Bhd acquired a 60% interest in the equity capital of S Bhd
for a consideration of RM23,600,000. The share premium and retained profits of S
Bhd on this date were RM5,000,000 and RM6,000,000 respectively.
On 1 January 20x2, the beginning of the current year ended 31 December 20x2,
U Bhd acquired a 20% interest in the equity capital of S Bhd for a consideration of
RM8,080,000.
The summarised accounts of the three companies for the current year ended 31
Statements of Comprehensive Income
Revenue
Expenses
Taxation
U Bhd
M Bhd
S Bhd
RM000
80,000
(60,000)
20,000
(6,000)
14,000
36,000
50,000
RM000
60,000
(48,000)
12,000
(3,600)
8,400
14,600
23,000
RM000
40,000
(32,000)
8,000
(2,400)
5,600
10,400
16,000

Share premium account
Retained profits
Long-term loans
Current liabilities
Investment, at cost:
30,000,000 shares of M Bhd
4,000,000 shares of S Bhd
12,000,000 shares of S Bhd
Current assets
U Bhd
M Bhd
S Bhd
RM000
80,000
40,000
50,000
40,000
(39,000)
249,000
118,420
RM000
40,000
10,000
23,000
20,000
(30,000)
123,000
54,400
RM000
20,000
5,000
16,000
15,000
(11,000)
67,000
41,000
53,500
8,080
69,000
249,000
23,600
45,000
123,000
26,000
67,000
7.7
660
At the acquisition dates of M Bhd and S Bhd, their net assets were stated in
the accounts at fair values. There were no intragroup transactions during the year
ended 31 December 20x2. At the respective acquisition dates, the considerations
paid by the parents are based on the fair values of the subsidiaries as a whole. Noncontrolling interests are measured at acquisition-date fair value.
Required
(a)
Using the two-stage method, firstly, prepare the consolidated accounts of

sub-group M Bhd and then prepare the consolidated accounts of the ultimate
group U Bhd.
(b)
Using the one-stage method, prepare the consolidated accounts of the ultimate
group U Bhd.
Solution 22
(a)
7.7
(i)
M Bhd and S Bhd:
23,600
Non-controlling interest at acquisition date

fair value (23,600/.6) x 40%
15,733
Fair value of S Bhd as a whole
39,333
Fair value of identifiable net assets (20,000 + 5,000 + 6,000)
31,000
8,333
Allocated to Parent (60%)
5,000
Allocated to non-controlling interest
3,333
8,333
(ii)
U Bhd and M Bhd:
53,500

fair value (53,500/.75) x 25%
17,833
Fair value of M Bhd as a whole
71,833
Fair value of identifiable net assets (40,000 +10,000 + 8,000)
58,000
13,333
Allocated to Parent (75%)
10,000
Non-controlling interest (25%)
RM000
RM000
3,333
13,333
661
(iii) Change in stake as equity transaction:

Net assets of S Bhd on

1 January 20x2 (20,000 + 5,000 + 10,400)
Goodwill on combination W(i)
Total net assets and goodwill
Purchase of 20% additional stake
Increase in share of net assets and goodwill
Cost of additional 20% stake
Accretion of net asset and goodwill adjusted to equity
RM000
35,400
8,333
43,733
20%
8,747
8,080
667
Stage 1 M Bhd and S Bhd
M Bhd
RM000
60,000
(48,000)
12,000
(3,600)
8,400
S Bhd
RM000
40,000
(32,000)
8,000
(2,400)
5,600
8,400
14,600
5,600
10,400

Share capital
23,000
40,000
16,000
20,000
Share premium
10,000
5,000
Revenue
Expenses
Profit before tax
Tax expense
Profit after tax
(Dr)
RM000
(2,240) d
Revaluation reserve
(3,600) b
(4,160) c
(12,000 b
(8,000) c
(3,000) b
(2,000) c
(5,000) b
(3,333) c
Long-term loans
Current liabilities
Total Equity & Liabilities
Property, plant &
equipment
Investment in S Bhd
Current assets
Total Assets
20,000
30,000
123,000
15,000
11,000
67,000
(54,400)
(41,000)
(26,000)
(67,000)
29,000
40,000
10,000
8,333 a
17,493 c
2,240 d
19,733
35,000
41,000
174,733
(8,333) a
(23,600)
(45,000)
(123,000)
Cr M Group
RM000 RM000
100,000
(80,000)
20,000
(6,000)
14,000
(2,240)
11,760
17,240
(51,667)
(95,400)
(8,333)
23,600 b
(71,000)
51,667 (174,733)
7.7
662

RM000
RM000
8,333
8,333

12,000
Dr Share premium of S Bhd
3,000
5,000
3,600
23,600

8,000
2,000
3,333
4,160
17,493

2,240
2,240

Stage 2 U Bhd and M Group
U Bhd M Group
(Dr)
RM000
Revenue
RM000 RM000
80,000 100,000
Expenses
(60,000)
(80,000)
(140,000)
20,000
20,000
40,000
Profit before tax
Cr U Group
RM000
RM000
180,000
Tax expense
(6,000)
(6,000)
(12,000)
Profit after tax
14,000
14,000
28,000
(2,240) (1,820) e
(4,060)
14,000
11,760
36,000
17,240
23,940
(6,000) b
42,930
(4,310) c
Accretion on change in stake
7.7
667 d
50,000
29,000
667
67,537
663
Share capital
80,000
40,000 (30,000) b
80,000
Share premium
40,000
10,000
(10,000) c
(7,500) b
40,000
(2,500) c
(10,000) b 13,333 a
Revaluation reserve
19,733
(3,333) c
(8,747) d
20,143 c
32,950
1,820 e
Long-term loans
40,000
35,000
75,000
Current liabilities
39,000
41,000
80,000
249,000 174,733
375,487
Total Equity & Liabilities
Property, plant & equipment (118,420) (95,400)
(213,820)
(8,333) (13,333) a
(21,667)
Investment in M Bhd
(53,500)
53,500 b
Investment in S Bhd
(8,080)
8,080 d
Current assets
(69,000) (71,000)
(140,000)
(249,000) (174,733) (97,543)
97,543 (357,487)
Total Assets


RM000
13,333
RM000
13,333

(b) Dr Share capital of M Bhd
Dr Share premium of M Bhd
30,000
7,500
10,000
6,000
Cr Investment in M Bhd
53,500

(c) Dr Share capital of M Bhd
10,000
2,500
3,333
4,310
20,143

(d) Dr Non-controlling interest in financial position
Cr Accretion on change in stake
8,747
667
8,080
to recognise accretion on change in stake.
7.7
664
(e) Dr Non-controlling interest in profit or loss
1,820
1,820
to allocate balance of current year profit to NCI.

[calculated at 25% x 11,760 x 2,240 = 1,820]
One-stage Consolidation
Revenue
Expenses
Profit before
tax
Tax expense
Profit after tax
Non-controlling
interest
Attributable to
owners
Retained profit
b/f
U Bhd
M Bhd
S Bhd
(Dr)
Cr
U Group
RM000
80,000
(60,000)
RM000
60,000
(48,000)
RM000
40,000
(32,000)
RM000
RM000
RM000
180,000
(140,000)
20,000
(6,000)
14,000
12,000
(3,600)
8,400
8,000
(2,400)
5,600
40,000
(12,000)
28,000
(4,060)
(2,100) d
(1,960) i
14,000
36,000
8,400
14,600
5,600
10,400
23,940
42,930
(6,000) b
(3,650) c
(2,700) f
(5,720) g
Change in
stake
Retained
profits c/f
Share capital
667 h
50,000
80,000
23,000
40,000
16,000
20,000 (30,000) b
667
67,537
80.000
(10,000) c
(9,000) f
Share premium
40,000
10,000
(11,000) g
5,000 (7,500) b
40,000
(2,500) c
(2,250) f
Revaluation
(2,750) g
(10,000) b
13,333 a
8,333 e
(3,333) c
(3,750) f
(4,583) g
7.7
Non-controlling
interest
Long-term
loans
Current
liabilities
Total Equity &
Liabilities
Prop, plant &
equipment
Goodwill on
comb.
Investment in
M Bhd
Investment in
S Bhd
Current assets
Total Assets
(5,900) f
(8,747) h
665
19,483 c
2,100 d
24,053 g
1,960 i
32,950
40,000
20,000
15,000
75,000
39,000
30,000
11,000
80,000
249,000
123,000
67,000
375,847
(118,420)
(54,400)
(41,000)
(213,820)
(21,667)
(13,333) a
(8,333) e
(53,500)
(8,080)
53,500 b
23,600 f
8,080 h
(23,600)
(69,000) (45,000)
(249,000) (123,000)
(26,000)
(67,000) (155,110)
(140,000)
155,110 (375,487)
Proof of NCI
Owners equity
Less: Investment in S Bhd
Sundry net assets
Net assets and goodwill
Effective NCI %
NCIs share

M Bhd
RM000
73,000
(23,600)
49,400
13,333
62,733
25%
15,683
S Bhd Total NCI

RM000
RM000
41,000
41,000
8,333
49,333
35%
17,267
32,950

RM000
RM000
13,333
13,333

(b) Dr Share capital of M Bhd
Cr Investment in M Bhd
30,000
7,500
10,000
6,000
53,500
7.7
666
(c) Dr Share capital of M Bhd
10,000
2,500
3,333
3,650
19,483

2,100
2,100

8,333
8,333

(f) Dr Share capital of S Bhd (45% x 20,000)
9,000
Dr Share premium of S Bhd (45% x 5,000)
2,250
Dr Revaluation reserve goodwill (5,000x75%)
3,750
Dr Pre-acquisition profit (45% x 6,000)
2,700
Dr NCI in financial position 25% x 23,600
5,900
23,600

(g) Dr Share capital of S Bhd
11,000
2,750
4,583
5,720
24,053

(h) Dr Non-controlling interest in financial position
8,747
Cr Accretion on change in stake
667
8,080
to recognise accretion on change in stake.

(i) Dr Non-controlling interest in profit or loss
1,960
1,960
7.7

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Financial Accounting and

TAN LIONG TONG

Dip. Agriculture, B.S. Agribusiness, MBA, CA, CPA

Financial Instruments Recognition

Categories of Financial Assets...................................................... 12

Categories of Financial Liabilities................................................ 29

Accounting for Derivative Instruments........................................ 34

Financial Instruments Measurement

Fair Value Measurement Considerations................................... 120

Gains and Losses on Remeasurement........................................ 134

Impairment of Financial Assets.................................................. 144

MFRS 9, Financial Instruments Classification and

Hedging and Hedge Accounting................................. 173

Introduction to Hedging and Hedge Accounting........................ 175

Identification of a Hedge............................................................. 176

Financial Accounting and Reporting in Malaysia, Volume 2

Conditions for the Specified Hedge

Fair Value Hedge Accounting...................................................... 181

Cash Flow Hedge Accounting..................................................... 193

Accounting for Hedges of Net Investments................................ 228

Assessing Hedge Effectiveness................................................... 235

MFRS 132, Financial Instruments: Presentation...................... 253

Presentation of Liabilities and Equity....................................... 253

Classification of Compound Instruments by the Issuer............ 261

Accounting for Free Warrants with Rights Issue....................... 278

Treasury Shares.......................................................................... 279

Interest, Dividends, Losses and Gains....................................... 280

Offsetting a Financial Asset and a Financial Liability............. 289

MFRS 7, Financial Instruments: Disclosures............................ 292

Classes of Financial Instruments and Level of Disclosure....... 293

Other Disclosures........................................................................ 303

Nature and Extent of Risks Arising from

Financial Instruments Presentation

Earnings Per Share....................................................... 327

The Measurement and Presentation Standards........................ 329

Basic Principles........................................................................... 333

Basic Earnings Per Share........................................................... 334

Changes in Capital Structure..................................................... 342

Diluted Earnings Per Share........................................................ 360

Sundry Issues in EPS Calculation.............................................. 383

Some Limitations of EPS Information....................................... 392

CCH Asia Pte Limited

Business Combinations................................................ 393

Identifying a Business................................................................. 397

Identifying a Business Combination.......................................... 400

Application of the Acquisition Method....................................... 404

Business Combination Achieved in Stages................................ 475

Business Combination Achieved Without

Business Combination Achieved by Contract Alone.................. 500

Measurement Period................................................................... 502

Determining What is Part of the Business

Subsequent Measurement and Accounting................................ 514

Tax Effects Arising in a Business Combination......................... 515

Disclosure Requirements............................................................ 520

Reverse Acquisition Accounting.................................................. 528

Consolidated and Separate

Background to the Standards on Consolidation........................ 555

Application of MFRS 10.............................................................. 565

Financial Accounting and Reporting in Malaysia, Volume 2

Financial Accounting and Reporting in Malaysia, Volume 2

Financial Accounting and Reporting in Malaysia, Volume 2

Financial Accounting and Reporting in Malaysia, Volume 2

Chapter 7: Consolidated and Separate Financial Statements