Group Statements 2023

Mastering Group
Financial Statements
(Volume 1)
Edition: 18th Edition
Publication date: 2022
About this Publication:
Mastering Group Financial Statements Volume 1 is part of a two-volume set which provides
accounting students and practitioners with an invaluable practical guide to the often-complex
world of group accounting. The publication gives detailed explanations and numerous practical
worked examples, to provide readers with a comprehensive overview of the principles and
concepts of International Financial Reporting Standards (IFRS) that underlie group accounting. It
therefore serves as a roadmap for preparing group financial statements in varying scenarios in
accordance with IFRS.
Volume 1 deals with the principles of control in IFRS 10, addresses the key disclosure
requirements of group financial statements, explains the basic concepts of business
combinations, and covers in detail the principles and procedures for consolidating subsidiaries.
Along with technical group accounting guidance, this text offers practical group accounting exam
techniques, intended to minimise the time students spend answering questions and maximise
the marks earned. The comprehensive selection of self-assessment questions at the end of each
chapter, and online case study questions and solutions, allow students to test their
understanding of the subject matter and to sharpen their exam technique.
Extensive lecturer support material is available to prescribing institutions, in the form of:
A large question bank, with solutions, covering second to fourth-year (Honours) level, to be used
effectively as:
test and exam questions
tutorial questions
additional classroom examples.
PowerPoint® slides.
Solutions to end of chapter self-assessment questions.
Student and lecturer support and supplementary material is available
a
Key Benefits
Self-assessment questions at the end of each chapter to master exam techniques
Free online access to group financial statement questions
A comprehensive set of solutions and value-added comments designed specifically to hone exam
technique and time management skills
Of Interest and Benefit to:
Undergraduate and post-graduate financial accounting students at universities, universities of

technology and private HE institutions.
#
FAC3704/1/2011
98616838
3B2
ACN STYL
CONTENTS
Page
INTRODUCTION AND OVERVIEW OF THE MODULE (iv)

STUDY UNIT 1
BUSINESS COMBINATIONS 1
STUDY UNIT 2
CONSOLIDATION AFTER THE DATE OF ACQUISITION 30
STUDY UNIT 3
COMPLEX GROUPS 70
STUDY UNIT 4
ACCOUNTING FOR INVESTMENTS IN ASSOCIATES 104
STUDY UNIT 5
ACCOUNTING FOR INTERESTS IN JOINT VENTURES 116
STUDY UNIT 6
CHANGES IN OWNERSHIP 117
STUDY UNIT 7
CONSOLIDATED STATEMENT OF CASH FLOWS 145
FAC3704/1/2011 (iii)
INTRODUCTION AND OVERVIEW
OF MODULE
A. PURPOSE OF YOUR STUDY

Welcome to the FAC3704 module Ð Group Financial Reporting. The purpose of this module is
to provide you with knowledge and skills to enable you to prepare a set of financial statements
for an entity or group of entities with specific reference to the requirements of the Companies
Act (as relates to widely held companies) and Standards of Generally Accepted Accounting
Practice (GAAP) as contained in the statements set out by the South African Institute of
Chartered Accountants.
B. MEANING OF WORDS
In this module we require you to understand the meaning of certain words to enable you to
interpret assessment criteria, to understand what various questions in the textbooks require
you to do, and to interpret assignment and examination questions.
To indicate the length, scope and format of answers to study activities and questions, we have
deliberately built limits or restrictions into the questions by using action verbs. These action
verbs give you an indication of how to tackle the given problem and what style of writing is
called for.
An analysis of the action verbs contained in a question will enable you to:
. Plan the answer systematically and organise your thoughts systematically, and
. Ensure that you comply with the lecturer's requirements.
You will also save yourself time and trouble by eliminating irrelevant material that falls outside
the scope of the answer.
For the purpose of this module the following meanings will be attached to the following action
words:
Account for Record
Advice Give advice to, express an expert opinion
Allocate Assign, apportion
Apply Use in a practical manner; use as relevant or suitable
Calculate Figure out; determine by a mathematical procedure
Compare Place side by side in order to observe similarities, relationships and
differences
Complete Finish; supply whatever is missing
Criticise Evaluate
Define Describe accurately; establish the exact meaning; explain the inherent
meaning; make clear
(iv)
Describe Give an account of the respective particulars or essential characteristics;
give an accurate account
Determine Establish, reach a conclusion or decision
Disclose Reveal; show
Discuss Examine; explain, examine by means of argument
Distinguish Determine; differentiate; tell the difference
Draft Prepare a provisional outline
Examine Inspect; investigate
Explain Make clear or comprehensible; explain the meaning in detail
Identify/recognise Establish through consideration; recognise; pick out
Illustrate Use an example to explain something
List Note/specify matters or objects that are related to one another
Motivate Supply a reason or facts for substantiation of a point
Name/mention/state Specify by name; give names, characteristics, items, elements or facts
Prepare Make ready; finish, get something ready on the basis of previous study
Present Make known; demonstrate (in writing)
Produce Construct
Record To put into writing; set down for reference and preservation
Summarise Condense; state the crux of the matter
C. MASTERY OF THE STUDY MATERIAL

This is a comprehensive module which requires careful and dedicated study. The student must
become totally proficient in the field of accounting which cannot be achieved in a short period of
time. A student must be diligent and thorough to be able to master this module.
This study guide has been devised to guide you through your studies for this module. You
should bear in mind that you prescribed textbooks are the primary sources of information that
you must study. These are supplemented in the study guide where necessary with further
information, explanations, examples and questions, which are aimed at making the study
content of the module more easily understandable. The study guide also indicates the level of
mastery at which you are required to master the various study units included in the study
content. Utilise the study guide to work through the prescribed textbooks for a maximum
advantage in your study approach.
You will be required to complete a series of assignments for this module. Details pertaining to
the completion and submission of assignments are contained in Tutorial letter 101.
D. PRESCRIBED BOOKS AND CALCULATORS

The study guide is based on the following prescribed book:
1. Group Statements (Volumes 1 and 2) (Latest edition) by Binnekade, C.S., and

Koppeschaar, Z.R. Lexisnexis, Durban. This work is referred to in this study guide as
Group Statements.
Students are required to use a non-programmable financial calculator for this module.
E. REVISION OF STUDY MATERIAL OF THE PREVIOUS

YEAR
The following topics which have been fully dealt with in Accounting II, (FAC2602) must be
revised. We may examine you on these topics without specifically dealing with them again:
FAC3704/1/2011 (v)
. Those sections of the Companies Act (as relates to widely held companies) which refer to
consolidated financial statements.
. Those sections of the Accounting II (FAC2602) study material which dealt with consolidated
financial statements
F. ABBREVIATIONS USED IN THE STUDY MATERIAL

Students are allowed to use these abbreviations for examination purposes.
SCI Statement of comprehensive income

SFP Statement of financial position
SOCIE Statement of changes in equity
SCF Statement of cash flows
NCI Non-controlling interest
SC Share capital
RE Retained earnings
FV Fair value
CA Carrying amount
CGT Capital Gains Tax
PREFS Preference shares
DEP Depreciation
REV Revaluation
P/L Profit or loss section of the statement of comprehensive income
OCI Other comprehensive income section of the statement of comprehensive income
G. TAXATION
Since 1 March 2008 the SA Normal tax rate for companies is 28%. However, for practical
reasons a tax rate of 30% is regularly used in the study material for FAC3704.
Please note: The questions will state the tax rate in the additional information thus the student
must use the tax rate given in the question to prepare their solutions.
H. NON-CONTROLLING INTEREST
. Non-controlling interest in an acquiree can be measured at its proportionate share of the
acquiree's identifiable net assets at acquisition date (also known as the partial goodwill
method);
or
. Non-controlling interest in an acquiree can be measured at its fair value as at date of
acquisition (also known as the full goodwill method).
(vi)
STUDY UNIT
1
Business combinations
Learning outcome 1
After studying this study unit, you should be able to:
& Prepare group financial statements as at the date of acquisition according to the
requirements of Generally Accepted Accounting Practice.
OVERVIEW OF THE STUDY UNIT

The study unit consists of the following sections: Page
1.1 Introduction 1
1.2 At acquisition Ð IFRS 3 (AC 140) Business Combinations 5
1.3 Disclosure 24
1.4 Assessment criteria 29
S t u d y
STUDY: Group Statements (Volume 1): Chapter 1, 2 and 3
1.1 Introduction
S t u d y
Group Statements (Volume 1): Chapter 2 Ð section 2.15
1.1.1 Standards covered in this module

Three of the standards that specifically apply to this module are IAS 1 (AC 101) Presentation
of Financial Statements, IFRS 3 (AC 140) Ð Business Combinations and IAS 27 (AC 132)
Consolidated and Separate Financial Statements. It is important to understand the
difference between the last two standards as well as the objective of each standard which will
in turn assist you in the preparation of consolidated financial statements.
IFRS 3 (AC 140) Ð Business Combinations was issued on 10 January 2008 by the
International Accounting Standards Board (IASB), which replaces IFRS 3 (AC 140) as issued
in 2004. IAS 27 (AC 132) Ð Consolidated and Separate Financial Statements was also
revised to bring into account all the relevant changes. The amendments are applicable to
annual reporting periods beginning on or after 1 July 2009. Earlier application will be permitted
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FAC3704/1
but only as far back as an annual reporting period that begins on or after 30 June 2007. IFRS 3
(AC 140) is to be applied prospectively to business combinations for which the acquisition date
is on or after the beginning of the annual period in which the standard is adopted.
Comments
IFRS 3 (AC 140) deals with the accounting treatment and initial determination of the value
attached to the subsidiary being acquired on the date of acquisition. This standard
deals with the methods of accounting for business combinations and their effects on
consolidation, including goodwill (or gain on bargain purchase) arising on a business
combination.
IAS 27 (AC 132) deals with the consolidation procedures and accounting treatment after
the date of acquisition. This standard deals with the preparation and presentation of
consolidated financial statements for a group of entities under the control of a parent. This
statement also deals with the accounting for investments in subsidiaries, jointly controlled
entities and associates in the separate financial statements of the parent, venturer or
investor.
In addition a further three standards are applicable to this module and they are:
IAS 28 (AC 110) Ð Investments in Associates (Please refer study unit 4);
IAS 31 (AC 119) Ð Interests in Joint Ventures (Please refer study unit 5); and
IAS 7 (AC 118) Ð Statement of Cash Flows (Please refer study unit 7).
1.1.2 Topics covered in 2nd year accounting (FAC2602)

In FAC3704 we will build on certain topics that were covered in FAC2602. The following topics
have been covered and should be revised:
Group Statements Ð Volume 1

Chapter
Topic
1 A group of entities and its financial statements Ð theory and background
3 Consolidation at acquisition date
4 Consolidation after acquisition date
5 Intragroup transactions (Excluding effect of tax Ð The tax effect on intragroup

transactions will be dealt with in this module)
8 Interim acquisition of an interest in a subsidiary
THE CONTENT OF THE AFOREMENTIONED CHAPTERS IS `ÀSSUMED KNOWL-

EDGE'' AND EVEN THOUGH THEY MAY NOT BE DEALT SPECIFICALLY WITH IN
THIS MODULE THE TOPICS ARE STILL EXAMINABLE.
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FAC3704/1
1.1.3 Theory
S t u d y
Group Statements (Volume 1): Chapter 1
The acquisition of a shareholding in another entity can result in one of the following:
. Where the investor (the entity which acquired the shareholding in another entity) exercises
some form of control over the investee, the investor is the parent of the investee, which is
called its subsidiary.
. The investee is an associate of the investor if the investor exercises significant influence
over the investee.
. If two or more entities hold shares in an investee and have joint control of the investee in
terms of a contractual arrangement, the investor is in a joint venture with the other investor.
The objective of consolidated financial statements or group statements is to provide

information regarding the financial position, the performance and the changes in the financial
position of a group of entities to the users of the financial statements of those entities.
1.1.3.1 Definitions
Consolidated financial statements are the financial statements of a group presented as those
of a single economic entity.
A parent is an entity that has one or more subsidiaries.
A subsidiary is an entity, including an unincorporated entity such as partnership, that is

controlled by another entity (known as parent).
A group of companies comprises a parent and all of its subsidiaries.
Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
Control is presumed to exist when the parent acquires more than half of the voting rights of the
enterprise. Even when more than one half of the voting rights is not acquired, control may be
evidenced by (IAS 27 (AC 132).13):
. power over more than one half of the voting rights by virtue of an agreement with other
investors; or
. the power to govern the financial and operating policies of the other enterprise under a
statute or an agreement; or
. the power to appoint or remove the majority of the members of the board of directors and
control of the entity is by the board of directors; or
. the power to cast the majority of votes at a meeting of the board of directors and control of
the entity is by the board of directors.
1.1.3.2 Presentation of consolidated financial statements as required in terms of

Generally Accepted Accounting Practice
Consolidation of subsidiaries
A parent is required to present consolidated financial statements in which it consolidates its
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FAC3704/1
investments in subsidiaries (IAS 27 (AC 132).9), except in the following situations listed below.
A parent need not present consolidated financial statements only if all of the following four
conditions are met (IAS 27 (AC 132).10):
. the parent is itself 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;
. the parent's debt or equity instruments are not traded in a public market;
. the parent 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
. the ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with IFRS.
The consolidated financial statements are the financial statements of a group and include all of
the parent's subsidiaries (IAS 27 (AC 132).12), both domestic and foreign, presented as those
of a single economic entity. There is no exception for a subsidiary whose business is of a
different nature from the parents nor is there an exception for a subsidiary for which control is
intended to be temporary.
Once an investment ceases to fall within the definition of a subsidiary, it should be accounted
for as an associate under IAS 28 (AC 110), or as a joint venture under IAS 31 (AC 119), or as
an investment under IAS 39 (AC 133), as appropriate (IAS 27 (AC 132).31).
1.1.3.3 Accounting for investments

Two main kinds of investments in the shares of another entity are distinguished namely:
. simple share investments
. significant share investments, which give the investor entity an influence over or control of
the affairs of the investee entity.
When accounting for significant share investments, it is necessary to determine the degree of
influence exercised by the investor over the investee's financial and operating policies, as this
determines the appropriate accounting method. It is also essential to determine the ownership
interest, as this determines the degree to which the investor shares in the equity of the
investee.
The different bases of accounting for investments can be set out as follows:
Degree of influence: Applicable to: Accounting method:

Control Subsidiary Consolidation (IAS 27 (AC 132))
Joint control Joint venture Proportionate consolidations or equity method
(IAS 31 (AC 119)) (under revision)
Significant influence Associate Equity method or cost method (IAS 28 (AC 110))
No influence Investments Cost or fair value (IAS 39 (AC 133))
In order to determine the degree of influence, it is necessary to understand the definitions of

control, joint control and significant influence as contained in section 1.1.3.1.
Once you have determined the degree of influence you must ensure that you are familiar with
the specific accounting method that must be used to account for the group structure. The
following is a synopsis of the accounting methods available:
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FAC3704/1
Subsidiaries
Subsidiaries are accounted for by means of consolidation. The consolidation of subsidiaries
and consolidated financial statements will be discussed later in this chapter.
Associates
An investment in an associate should be accounted for as an investment in consolidated
financial statements under the equity method, except when the investment is acquired and held
with a view to its disposal in the near future, in which case it should be accounted for under the
cost method. The accounting treatment of investments in associates is set out in IAS 28
(AC 110) and will be discussed in Study unit 3.
Joint ventures
The benchmark accounting treatment that should be used to account for joint ventures in the
consolidated financial statements is proportionate consolidation (IAS 31 (AC 119)). In terms of
exposure draft ED 229 joint arrangements the accounting for joint ventures may in the future
change from proportionate consolidation to the equity method. Joint ventures is discussed in
Study unit 4.
Simple share investments

Simple (or portfolio) share investments are accounted for by using the cost price or fair value
method (IAS 39 (AC 133)). The cost price or fair value of the investment is accounted for and
disclosed in the consolidated statement of financial position and the dividend received by the
investor is accounted for and disclosed in the statement of comprehensive income.
1.1.3.4 Separate financial statements

Separate financial statements are those presented by a parent, an investor in an associate or a
venturer in a jointly controlled entity, in which 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 (IAS 27 (AC 132).4).
1.2 At acquisition
IFRS 3 (AC 140) Ð Business Combinations
S t u d y
Group Statements (volume 1): Chapter 2 (excluding sections 2.11±2.14)
1.2.1 Definitions (IFRS 3 (AC 140) Ð Appendix A)

Acquiree The business or businesses that the acquirer obtains control of in a
business combination.
Acquirer The entity that obtains control of the acquiree.
Acquisition date The date on which the acquirer obtains control of the acquiree.
Business An integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in the
form of dividends, lower costs or other economic benefits directly to
investors or other owners, members or participants.
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FAC3704/1
Business combination A transaction or other event in which an acquirer obtains control of
one or more businesses.
Control The power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities.
Fair value The amount for which as asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm's length
transaction
Goodwill An asset representing the future economic benefits arising from
other assets acquired in a business combination that are not
individually identified and separately recognised.
Identifiable An asset is identifiable if it either:
is separable, i.e. capable of being separated or divided from the
entity and sold, transferred, licensed, rented or exchanged, either
individually or together with a related contract, identifiable asset or
liability, regardless of whether the entity intends to do so;
or
arises from contractual or other legal rights, regardless of whether
those rights are transferable or separable from the entity or from
other rights and obligations.
Non-controlling interest The equity in a subsidiary not attributable, directly or indirectly, to a
parent.
Owners For the purpose of IFRS 3 (AC 140), `òwners'' is used broadly to
include holders of equity interests of investor-owned entities and
owners or members of, or participants in, mutual entities.
1.2.2 Objective (IFRS 3 (AC 140).1)

This standard deals with the principles and requirements on how the acquirer should:
. recognise and measure the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree;
. recognise and measure the goodwill acquired in the business combination or gain from a
bargain purchase; and
. determine what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
1.2.3 Scope (IFRS 3 (AC 140).2)
S t u d y
Group Statements (Volume 1): Chapter 2 Ð sections 2.01±2.02
IFRS 3 (AC 140) applies to transactions or events that meet the definition of a business
combination. IFRS 3 (AC 140) does not apply to the following:
. formation of a joint venture,
. the acquisition of an asset (or a group of assets) that does not constitute a business,
. a combination of entities or businesses under common control.
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FAC3704/1
1.2.4 Identifying a business combination
S t u d y
Take note of the process to be followed on acquiring a business combination. Refer to the
schematic summary on p. 34 of Group Statements (Volume 1) for this process.
Apply the definition of a business combination to identify whether a transaction or other events
result in a business combination. If the assets acquired are not a business, then the entity shall
account for the transaction or other event as an asset acquisition (IFRS 3 (AC 140).3).
Comments
A business is an integrated set of activities and assets capable of being conducted and
managed for the purpose of providing a return.
A business combination is a transaction or other event in which the acquirer obtains

control of one or more businesses
1.2.5 The acquisition method (IFRS 3(AC140).4)
S t u d y
The following table summarises the steps that are taken in applying the acquisition method to
the accounting for business combinations:
Step
1 Identify the acquirer
2 Determine the acquisition date
3 Identify the consideration transferred
4 Measure the consideration transferred
5 Identify and measure the identifiable assets acquired and liabilities assumed
6 Measure the non-controlling interest
7 Determine the amount of goodwill or the gain on a bargain purchase
8 Account for any measurement period adjustments
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FAC3704/1
Comments
It is important that you realise that the abovementioned process only happens once, i.e.
on the date that control is acquired. This process is in terms of IFRS 3 (AC 140). The
subsequent consolidation of subsidiaries after the acquisition date is prescribed by IAS 27
(AC 132).
Step 1 Identifying the acquirer
S t u d y
For each business combination, one of the combining entities shall be identified as the
acquirer. The entity that obtains control of the acquiree is thus the acquirer.
Comments
The relationship between the combining entities determines which entity obtains control.
IAS 27 (AC 132).4 defines control as the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities.
If the acquirer cannot be clearly identified additional factors should considered, such as:
Ð examining the form of consideration transferred,
Ð the relative size of the combining entities,
Ð relative voting rights,
Ð composition of the board of directors or senior management.
Step 2 Determining the acquisition date
S t u d y
The acquisition date is the date on which the acquirer obtains control of the acquiree.
In general terms the acquisition date is the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of the acquiree (the ``closing
date'' of the transaction).
Control can be obtained on a date that is earlier or later than the ``closing date''. Examples of
such situations are:
. A written agreement provides that the acquirer obtains control of the acquiree on a date
before the closing date.
. Certain suspensive legal conditions must be met (e.g.: completion of a due diligence
review).
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FAC3704/1
Comments
It is only from the acquisition date that the results of the subsidiary are included in the
consolidated financial statements of the group (IAS 27 (AC 132).26).
The acquisition date is also the date on which the fair values of the assets acquired and
liabilities assumed, non-controlling interest and goodwill are measured.
Step 3 Identify the consideration transferred

If a parent obtains an equity interest in a subsidiary the parent can settle the purchase price in
different ways. The most common way is to settle it by means of cash only. Even though this is
the most common way, we must remember that it is definitely not the only way to settle the
purchase price.
The agreement can state that the purchase price may be settled either by a transfer of cash,
transfer of assets, taking over of liabilities, shares issued by the acquirer (this would result in a
crossholding and crossholdings are not examinable in FAC3704) or already issued shares of
the parent, obtained from the parent's non-controlling interest. Furthermore it is important to
note that the purchase price can be settled in a combination of the aforementioned options.
Step 4 Measure the consideration transferred

The consideration transferred is measured at fair value at the acquisition date. Cash payments
do not present measurement difficulties however the measurement of other forms of
consideration may require judgment and it may be necessary to obtain independent valuations.
For illustrative purposes the examples explaining this concept have been compiled to settle the
purchase price with a combination of options.
Let's look at a few different scenarios on this concept:
(a) Considerations only consist of cash:
E x a m p l e 1.1
Information provided:
Assume the H Limited group uses the partial goodwill method to account for goodwill and non-
controlling interest.
H Limited obtained an 80% equity interest in the share capital of S Limited on 1 January 20.9
and paid R140 000 cash to settle the purchase price.
At acquisition date the equity of S Limited consisted of the following:
R
Share capital (100 000 shares) 100 000
Retained earnings 50 000
If the purchase price of the interest in a subsidiary is settled by only transferring cash from the
parent to the subsidiary, the following journals are recorded:
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FAC3704/1
Journals in the separate accounting records of H Limited:
Dr Cr
R R
Investment in S Limited 140 000
Bank (cash) 140 000
Pro forma consolidation journals for the H Limited group:

Dr Cr
R R
Share capital 100 000
Goodwill ((140 000 + 30 000) (100 000 + 50 000)) 20 000
Non-controlling interest ((100 000 + 50 000) x 20%) 30 000
(b) Consideration consists of a combination of cash and non-current assets:
E x a m p l e 1.2
Assume the same information as provided in example 1.1, except that H Limited paid
R100 000 in cash and transferred a vehicle with a carrying amount of R40 000 (equal to
market value), and an original cost of R60 000, to S Limited to settle the payment for
the purchase price of R140 000.
If the purchase price of the interest in a subsidiary is settled with both cash being transferred
from the parent to the subsidiary as well as a vehicle, the following journals are recorded:
Dr Cr
R R
Bank (cash) 100 000
Vehicle (at cost)* 60 000
Accumulated depreciation ± vehicles (60 000 7 40 000)* 20 000
*The carrying amount of the vehicle needs to be derecognised from H Limited's records.

Dr Cr
R R
Goodwill ((140 000 + 30 000) ± (100 000 + 50 000)) 20 000
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FAC3704/1
Comments
1. Remember that the asset is transferred to the subsidiary at the market value thereof.
2. Note that there is no difference between the at acquisition date pro-forma consolidation
journals between examples 1.1 and 1.2. The only difference is in the separate records
of H Limited and S Limited. H Limited has to derecognise the vehicle transferred to
S Limited, since H Limited no longer owns the vehicle. S Limited will recognise
(market value) and depreciate it over its remaining economic useful life.
(c) Consideration consists out of a combination between cash and an investment in

equity shares:
E x a m p l e 1.3
Assume the same information provided as in example 1.1, except that H Limited paid
R100 000 cash and transferred 10 000 ordinary equity shares in S Limited, with a market
value of R4 per share, to S Limited to settle the purchase price of R140 000 for the
acquisition of 20 000 newly issued ordinary shares of S Limited. The non-controlling interest
took up 5 000 shares of the new issue.
The payment of the cash and the transfer of the shares (transfer of asset) in S Limited will be
recorded as follows:
Journals in the separate accounting records of H Limited.

Dr Cr
R R
Bank (cash) 100 000
Investment in S Limited (10 000 shares) 40 000
Journals in the separate accounting records of S Limited.

Dr Cr
R R
Bank (100 000 + 35 000(5 000 x (140 000/20 000))) 135 000
Investment in S Limited (10 000 x 4,00) 40 000
Share capital (100 000 + 40 000)+ (5 000 x (140 000/20 000)) 175 000
Pro forma consolidation journals for the H Limited group.

Dr Cr
R R
Goodwill ((140 000 + 30 000) (100 000 + 50 000)) 20 000
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FAC3704/1
E x a m p l e 1.4
Assume the same information provided as in example 1.1, except that H Limited paid
R100 000 cash and issued 10 000 of its own ordinary equity shares, with a market value
of R4 per share, to the non-controlling shareholders of S Limited to settle the purchase
price of R140 000.
The payment of the cash and the transfer of the shares (transfer of asset) in H Limited will be
recorded as follows:

Dr Cr
R R
Bank (cash) 100 000
Journals in the separate accounting records of S Limited:
There is no separate journal entry in S Limited's own records, since H Limited acquired its
interest directly from the non-controlling interest. Thus, the shares in H Limited are the
investment of the different parties making up the non-controlling interest of S Limited and not
S Limited itself.
Dr Cr
R R
Goodwill ((140 000 + 30 000) ± (100 000 + 50 000)) 20 000
Comments
If H Limited had issued its own shares to S Limited as settlement of the purchase price of
its investment in S Limited, S Limited would have had an investment in H Limited that
would need to be eliminated on consolidation. For consolidation purposes the H Limited
group is seen as one legal entity and thus cannot have an investment in itself. This type of
investment of H Limited in S Limited and S Limited in H Limited is referred to as
crossholdings and is not examinable for FAC3704.
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FAC3704/1
Step 5 Recognising and measuring the identifiable assets acquired
and liabilities assumed
S t u d y
IFRS 3 (IAS 140).18 requires that the identifiable assets acquired and liabilities assumed be
measured at their acquisition date fair values. This is applicable even if the business
combination is achieved in stages or if less than 100% of the equity interest is held at the
acquisition date.
As of the acquisition date, the acquirer shall recognise (separately from goodwill):
. the identifiable assets acquired,
. the liabilities assumed and
. any non-controlling interest in the acquiree.
The following conditions must be met before the identifiable assets acquired and liabilities
assumed can be recognised in a business combination:
. The identifiable assets acquired and liabilities assumed must meet the definitions of assets
and liabilities as in the Framework for Preparation and Presentation of Financial
Statements.
. The identifiable assets acquired and liabilities assumed must be part of what the acquirer
and the acquiree exchanged in the business combination rather than a result of separate
transactions.
Comments
The following are not liabilities at the acquisition date as there is no present obligation to
pay them:
. Costs that the acquirer expects but is not obliged to incur in the future.
. Cost to terminate the employment of or relocate an acquiree's employees.
. Costs incurred due to the acquisition such as restructuring the acquiree.
These costs are only recognised after the date of acquisition, when an obligation arises to
pay them.
(i) Exceptions to the recognition and measurement principle:

Exception: Item:
Recognition principle Ð Contingent liabilities
Measurement principle Ð Reacquired rights
Ð Share-based payment awards
Ð Assets held for sale
Recognition and measurement principle Ð Income taxes
Ð Employee benefits
Ð Indemnification assets
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FAC3704/1
(ii) Adjustments at date of acquisition:
S t u d y
(a) Revaluation in the records of the subsidiary

If a subsidiary revalues its net assets at the acquisition date to fair value and recognises the
revalued amounts in its own records at acquisition date then no adjustments are required on
consolidation since the assets of the subsidiary are already recognised at fair values in the
records of the investee (subsidiary) and will thus be included as such in the consolidated
financial statements.
(b) Revaluation not recorded in the records of the subsidiary

If a subsidiary revalues its net assets at the acquisition date to fair value and does not
recognise the revalued amounts in its own records at acquisition date, then an adjustment is
required for consolidation purposes to recognise the revalued assets of the subsidiary. A pro
forma journal entry has to be passed on consolidation to bring the revaluation into account.
Ð Non-depreciable asset
If a non-depreciable asset has been revalued (e.g. land) to its fair value which is higher than
its carrying amount then a revaluation surplus will be included in the calculation of the
purchase price of the subsidiary. A part of the revaluation surplus will be allocated to the
non-controlling interest.
If the asset that has been revalued is a non-depreciable asset there will be tax implications
and deferred tax will need to be calculated. (Refer to sub-section (d) for a discussion of the
tax implications of the revaluation.)
Ð Depreciable asset
If a depreciable asset has been revalued (e.g. plant and equipment) to its fair value which is
higher than its carrying amount then a revaluation surplus will be included in the
calculation of the purchase price of the subsidiary. The depreciation for the group must be
calculated on the revalued amount. A part of the revaluation surplus as well as a part of the
depreciation of the group will be allocated to the non-controlling interest.
If the asset that has been revalued is a depreciable asset then there will be tax implications
and deferred tax will need to be calculated. (Refer to sub-section (d) for a discussion of the
tax implications of the revaluation.)
(c) Available-for-sale financial assets
S t u d y
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FAC3704/1
When a parent acquires an investment in a subsidiary, the investment can be treated in three
ways:
(a) the investment can be classified as an available-for-sale financial asset;
(b) the investment can be designated as a financial asset or financial liability at fair value
through profit or loss; or
(c) if the fair value of the investment cannot be reliably measured, the investment will be
carried at cost (which is not common because in most cases it will be possible to determine
the fair value of the investment).
UNISA will specify which one of the three treatment options apply in the information supplied in
the additional information questions.
(Refer to sub-section (d) for a discussion of the tax implications of an available-for-sale

financial asset.)
I l l u s tr a t i o n
On 1 January 20.8 X Limited purchased an 80% interest in Y Limited for R15 000. At
31 December 20.8 the fair value of the investment was considered to be R25 000. The tax rate
is 30%.
Fair value adjustments on available-for-sale financial assets (i.e. Investment in Y Limited) are
recognised in equity through the statement of changes in equity.
The re-measurement (mark-to-mark reserve) would have been recorded in the accounting
records of X Limited as follows:
31 December 20.8
Dr Cr
R R
Investment in Y Limited (25 000 ± 15 000) 10 000
Mark-to-market reserve (10 000 ± 1 500) 8 500
Deferred tax (10 000 x 15%) 1 500
Comments
Available-for-sale financial asset:

On consolidation a pro forma journal entry to reverse the effect of the above journal entry
would need to be processed. The pro forma journal entry would be:
Dr: Mark-to-market reserve Ð R8 500
Dr: Deferred tax Ð R1 500
Cr: Investment in Y Limited Ð R10 000
Reversal of mark-to-market reserve on consolidation.
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FAC3704/1
(d) Tax implications on intragroup transactions
Ð Implications of capital gains tax

Capital gains tax has an impact on the preparation of consolidated annual financial statements
as there may have been assets which were revalued as part of the acquisition of a subsidiary.
The effect of the revaluation must be accounted for in the consolidation process.
Capital gains tax on property, plant and equipment is payable on capital profit after 1 October
2001. It forms part of current tax.
The proceeds up until the asset's cost price is taxed at the current tax rate of 28%.
50% of the proceeds above the cost price (or base cost) of the asset (capital gain) is taxed at
28%. Therefore the effective tax payable on the capital gain is 50% x 28% = 14%.
(For FAC3704 purposes the base cost is considered to be equal to the original cost
price of the asset.)
E x a m p l e 1.5
Blue Limited sold a motor vehicle for R600 000.

The tax base of the motor vehicle at date of sale was R400 000.
The motor vehicle originally cost R500 000. Assume a tax rate of 30%.
R R
Profit on sale of motor vehicle 600 000 ± 400 000 = 200 000
Calculation of capital gains tax:
Selling price Ð Cost price 600 000 ± 500 000 = 100 000 6 50% 630% 15 000
Cost price Ð tax base 500 000 ± 400 000 = 100 000 6 30% 30 000
45 000
Ð Capital gains tax on property, plant and equipment

Should an asset be revalued then the carrying amount of the asset is increased and deferred
tax should be provided for on the revalued amount.
Ð Deffered tax on the revaluation of property, plant and equipment

If the asset that has been revalued is a non-depreciable asset then there will be tax
implications and deferred tax will need to be raised on the revaluation surplus that will reflect
the tax consequences of selling the asset (e.g. land), as the carrying amount of the asset can
only be recovered by the sale of the asset.
Should a revaluation surplus arise on the revaluation of a depreciable asset (buildings, plant
and equipment) then deferred tax is provided for on the revaluation surplus. The difference
between the carrying amount of a revalued asset and its tax base is a temporary difference
even if the entity has no intention of selling the asset (IAS 12 (AC 102).20). If the entity has no
intention to sell the asset then the revalued carrying amount reflects the value of economic
benefits that the entity expects to recover through the use of the asset. In this case the deferred
tax must be provided for at the tax rate applicable to taxable income. Currently the tax rate
amounts to 28% on taxable income.
The basis of raising deferred tax assets and deferred tax liabilities should be to reflect the tax
consequences of the manner in which the entity expects to recoup or recover the carrying
16
FAC3704/1
amount of its assets or liabilities at the reporting date (IAS 12 (AC 102).51). Therefore, if it is the
entity's intention to sell a depreciable asset in the near future, then the provision for deferred
tax on the revaluation surplus up to base cost is provided for at 28% (recovered through the
generation of income) and the deferred tax on the portion above base cost would be provided
for at 14% (50% x 28%), as this portion of the taxable gain would only be realised through
selling the asset.
Summary:
The provision for deferred tax on the revaluation of property, plant and equipment is as
follows:
(1) If land is revalued, deferred tax should be provided for on the total surplus above base
cost at 14% (50% x 28%), irrespective of whether or not there is any intention to dispose
of the land, as the carrying amount of the land (a non-depreciable asset) can only be
recovered by means of a sale. This would be the case even if there is no present
intention to sell the land.
(2) Where no decision has been made to sell a depreciable asset, deferred tax should
be provided for at 28% on the total revaluation surplus (including the amount in excess
of historical cost). This is done because the carrying amount of the asset will be realised
through the use of the asset.
(3) If a decision has been made to sell a depreciable asset, deferred tax should be
provided for as follows: on the revaluation surplus up to the original cost at 28% and on
the excess above original cost at 14% (50% x 28%).
(4) Deferred tax relating to the revaluation should be charged directly to equity.
Ð Capital gains tax on available-for-sale financial assets

The re-measurement of available-for-sale financial assets (mark-to-market reserve) also has a
capital gains tax implication. The 50% of the potential capital gain above cost (assumed to be
original cost price) will be taxable at the current tax rate. Therefore deferred tax should be
provided for on the fair value adjustment above cost price at 14% (50% x 28%).
Step 6 Measure the non-controlling interest
S t u d y
Each identifiable asset and liability is measured at its acquisition-date fair value. Any non-
controlling interest in the acquiree is measured at:
. fair value (``full goodwill method'') or
. as the non-controlling interest's proportionate share of the acquiree's net identifiable assets
(``partial goodwill method'').
Work through Example 2.11 of Group Statements thoroughly
Please refer to the examples that follow for the calculation of goodwill which illustrate the
above.
17
FAC3704/1
Comments
The acquirer can elect, on a transaction-by-transaction basis to measure any non-

controlling interest at the acquisition date using either of the above mentioned methods. In
other words the method chosen is not an accounting policy.
The parent controls the economic resources of the subsidiary. Therefore the full carrying
amounts of the assets and liabilities of the subsidiary are included in the consolidated
statement of financial position. The portion of the net assets of the subsidiary owned by
the non-controlling shareholders is shown as a single line item between equity and
liabilities in the consolidated statement of financial position and is described as Non-
Because of its control over the subsidiary, the parent plays a dominant role in the
operations of the subsidiary. Therefore the subsidiary's revenue and expenses are
included in full in the consolidated statement of comprehensive income.
The profit or loss for the year is split between the amount attributable to owners of the
parent and the amount attributable to the non-controlling interest. It is shown as follows:
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR

ENDED ....
R
TOTAL COMPREHENSIVE INCOME FOR THE YEAR xx xxx
Total comprehensive income attributable to:
Owners of the parent xxx
Non-controlling interest xxx
xx xxx
Step 7: Recognising and measuring goodwill or gain on bargain

purchase (IFRS 3 (IAS 140).32 -.36)
S t u d y
. Goodwill or gain on bargain purchase

Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately
recognised.
Gain on bargain purchase

If an acquirer makes a gain on a bargain purchase, before such a gain is recognised IFRS 3
(AC 140).36 requires the following:
18
FAC3704/1
The acquirer shall reassess whether it has correctly identified all of the assets acquired and all
of the liabilities assumed and shall recognise any additional assets or liabilities that are
identified in that review.
The acquirer shall review the procedures used to measure the amounts that IFRS 3 (AC 140)
requires to be recognised at the acquisition date for all the following:
. the identifiable assets acquired and liabilities assumed;
. the non-controlling interest in the acquiree, if any;
. for a business combination achieved in stages, the acquirer's previously held equity interest
in the acquiree; and
. the consideration transferred.
The objective of the review is to ensure that the measurements appropriately reflect
consideration of all available information as of the acquisition date.
Goodwill or gain on bargain purchase is measured as the difference between (A) and (B)
(A) The sum of:

Ð the fair value of the consideration transferred;
Ð the recognised amount of any non-controlling interest in the acquiree; and
Ð if the business combination is achieved in stages, the fair value of any previously held
equity interest in the acquire.
AND
(B) The recognised amount (usually fair value) of the identifiable assets acquired and
liabilities assumed.
If the difference in a positive amount (debit), goodwill is recognised. If the difference is a

negative (credit), then a gain from a bargain purchase is recognised.
Comments
Goodwill is recognised as a non-current asset in the Statement of Financial Position.
Gain on bargain purchase is recognised as a gain (income) in the profit or loss section
of the Statement of Comprehensive Income in the year in which the acquisition took
place after the reassessment of fair value.
E x a m p l e 1.6
A Limited acquired an 80% interest in B Limited on 1 January 20.8 for R1 100 000. On this date
the share capital of B Limited was R200 000 consisting of 200 000 ordinary shares and the
retained earnings amounted to R800 000. The fair value of the net assets of B Limited
amounted to R1 000 000 on 1 January 20.8.
The market value of the shares of B Limited on 1 January 20.8 amounted to R7 per share.
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FAC3704/1
P a r ti a l go o d w i l l m e t h o d
Non-controlling interest in the acquiree measured as the non-controlling interest's

proportionate share of the acquiree's net identifiable assets.
Analysis of owners' equity of B Limited
100% 80% 20%

Total At Since NCI
R R R R
At acquisition
Share capital 200 000 160 000 40 000
Retained earnings 800 000 640 000 160 000
1 000 000 800 000 200 000
Equity represented by goodwill 300 000 300 000 Ð
Consideration and NCI 1 300 000 1 100 000 200 000
Comments
The fair value of the net assets of B Limited amounts to R1 000 000. The non-controlling
interest is measured using the partial goodwill method thus the non-controlling interest
amounts to R200 000 (R1 000 000 x 20% = R200 000).
Full goodwill method
Non-controlling interest in the acquiree measured at fair value
100% 80% 20%

Total At Since NCI
R R R R
At acquisition
Share capital 200 000 160 000 40 000
1 000 000 800 000 200 000a
Equity represented by goodwill
Ð Parent and NCI 380 000 300 000 80 0002
Consideration and NCI at fair value3 1 380 000 1 100 000 280 0001
1
200 000 (SC) 6 20% 6 R7 = 280 000
2
280 0001 ± 200 000a = 80 000
3
1 100 000 + 280 000 = 1 380 000
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FAC3704/1
Comments
The non-controlling interest is measured at fair value, thus the non-controlling interest
should be R280 000 (R7 6 200 000 6 20%).
The goodwill will thus be R380 000.

R1 100 000 (investment) + R280 000 (NCI) ± R1 000 000 (net asset value) = R380 000
E x a m p l e 1.7
A Limited acquired a 60% interest in B Limited on 1 January 20.8 for R1 000 000. On this date
the share capital of B Limited was R500 000 consisting of 500 000 ordinary shares and the
retained earnings amounted to R700 000.
The fair value of the net assets of B Limited amounted to R1 500 000 on 1 January 20.8.
The fair value of the non-controlling interest is R650 000 based on the market price of the
shares not obtained.
P a r ti a l go o d w i l l m e t h o d
100% 60% 40%

Total At Since NCI
R R R R
At acquisition
Share capital 500 000 300 000 200 000
Revaluation surplus 300 0001 180 000 120 000
1 500 000 900 000 600 000
Equity reprensented by goodwill 100 000 100 000 Ð
1
1 500 000(FV) ± 500 000(SC) ± 700 000(RE) = 300 000
2
1 000 000 + 600 000 = 1 600 000
Pro forma consolidation journal

Dr Cr
R R
J1 Share capital 500 000
Revaluation surplus 300 0001
Non-controlling interest (SFP) 600 000
Investment in B Limited 1 000 000
Goodwill 100 000
Elimination of owners' equity in B Limited at acquisition
1
1 500 000(FV) ± 500 000(SC) ± 700 000(RE) = 300 000
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FAC3704/1
Comments
The fair value of the net assets of B Limited amounts to R1 500 000. The non-controlling
interest is measured using the partial goodwill method thus the non-controlling interest
amounts to R600 000 (R1 500 000 x 40% = R600 000). This represents the non-
controlling interest's proportionate share of the acquiree's net identifiable assets.
Full goodwill method
100% 60% 40%

Total At Since NCI
R R R R
At acquisition
Share capital 500 000 300 000 200 000
1 500 000 900 000 600 0004
Ð Parent and NCI 150 000 100 000 50 0003
Consideration and NCI at fair value 1 650 0005 1 000 000 650 0002
1
1 500 000(FV) ± 500 000(SC) ± 700 000(RE) = 300 000
2
650 000 (given)
3
650 0002 ± 600 0004 = 50 000
5
1 000 000 + 650 000 = 1 650 000
Dr Cr
R R
Non-controlling interest (SFP) (given) 650 000
Investment in B Limited 1 000 000
Goodwill 150 0002
Elimination of owners' equity in B Limited at acquisition
1
1 500 000(FV) ± 500 000(SC) ± 700 000(RE) = 300 000
2
100 000 + 50 000 = 150 000
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FAC3704/1
Comments
The non-controlling interest is measured at fair value, thus the non-controlling interest
should be R650 000 (given).
The goodwill will thus be R150 000.

R1 000 000 (investment) + R650 000 (NCI) ± R1 500 000 (net asset value) = R150 000
Step 8: Account for any measurement period adjustments
S t u d y
E x a m p l e 1.8
Aden Limited paid R2 300 000 to acquire a 75% interest in Baden Limited on 1 April 20.1.
The information relating to Baden Limited's assets on 1 April 20.1 is as follows:
Plant
Carrying amount R1 500 000
Fair value R2 000 000
Remaining useful life 10 years
Depreciation policy Straight-line method
The remaining net assets of Baden Limited had a fair value of R1 000 000 on that date.
Aden Limited decided to obtain an independent appraisal of the fair value of the plant. The
appraisal was only finalised on 31 August 20.1. The results of the independent appraisal
determined the fair value of the plant to be R1 800 000. The difference in the fair values was
related to circumstances that existed on the date of acquisition of Baden Limited.
The non-controlling interest is measured at its proportionate share of Baden Limited's
identifiable net assets.
The company's financial year end is 30 June 20.1.
The consolidation journal entries to account for the plant of Baden Limited in the consolidated
financial statements for the year ended 30 June 20.1 will be as follows:
Pro forma consolidation journals (30 June 20.1).
Dr Cr
R R
J1 Plant (2 000 000 ± 1 500 000) 500 000
Revaluation surplus ± Plant 500 000
J2 Equity ± Baden Limited (1 000 000 + 2 000 000) 3 000 000
Non-controlling interest (3 000 000 x 25%) 750 000
Investment in Baden Limited 2 300 000
Goodwill 50 000
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FAC3704/1
Dr Cr
R R
J3 Depreciation (500 000 6 10% 6 3¤12 ) 12 500
Accumulated depreciation 12 500
Since the independent appraisal was finalised within 12 months of the acquisition date the
amount that was used for the plant will be retrospectively corrected in 20.2 financial
statements.
Pro forma consolidation journals (30 June 20.2)

Dr Cr
R R
J1 Plant (1 800 000 ± 1 500 000) 300 000
Revaluation surplus ± Plant 300 000
J2 Equity ± Baden Limited (1 000 000 + 1 800 000) 2 800 000
Non-controlling interest (2 800 000 x 25%) 700 000
Investment in Baden Limited 2 300 000
Goodwill 200 000
J3 Retained earnings (300 000 6 10% 6 3¤12 ) 7 500
J4 Depreciation for 20.2 (300 000 6 10%) 30 000
Comments
A complete set of pro forma consolidation journals is prepared each financial year end.
When the journals are prepared for the 20.2 financial year end the final amount for the fair
value of the plant (R1 800 000) is used instead of the provisional amount that was
available at date of acquisition (R2 000 000).
1.3 Disclosure
IFRS 3 (AC 140) Ð Business Combinations
The acquirer shall disclose information that enables users of financial statements to evaluate
the nature and financial effect of a business combination that occurs either:
Ð during the current reporting period; or
Ð after the end of the reporting period but before the financial statements are authorised for
issue (IFRS 3 (AC 140).59).
To meet the above objective the acquirer shall disclose the following information for each
business combination that occurs during the reporting period:
(a) the name and a description of the acquiree.
(b) the acquisition date.
(c) the percentage of voting equity interests acquired.
(d) the primary reasons for the business combination and a description of how the acquirer
obtained control of the acquiree.
(e) a qualitative description of the factors that make up the goodwill recognised, such as:
24
FAC3704/1
Ð expected synergies from combining operations of the acquiree and the acquirer;
Ð intangible assets that do not qualify for separate recognition or
Ð other factors.
(f) the acquisition-date fair value of the total consideration transferred and the acquisition-date
fair value of each major class of consideration, such as:
Ð cash;
Ð other tangible or intangible assets, including a business or subsidiary of the acquirer;
Ð liabilities incurred, for example, a liability for contingent consideration; and
Ð equity interests of the acquirer, including the number of instruments or interests issued
or issuable and the method of determining the fair value of those instruments or
interests.
(g) for contingent consideration arrangements and indemnification assets:

Ð the amount recognised as of the acquisition date;
Ð a description of the arrangement and the basis for determining the amount of the
payment; and
Ð an estimate of the range of outcomes (undiscounted) or, if a range cannot be
estimated, that fact and the reasons why a range cannot be estimated. If the maximum
amount of the payment is unlimited, the acquirer shall disclose that fact.
(h) for acquired receivables:

Ð the fair value of the receivables
Ð the gross contractual amounts receivable; and
Ð the best estimate at the acquisition date of the contractual cash flows not expected to
be collected.
The disclosures shall be provided by major class of receivable, such as loans, direct
finance leases and any other class of receivables.
(i) the amounts recognised as of the acquisition date for each major class of assets acquired
and liabilities assumed.
(j) for each contingent liability information required in IAS 37 (AC 130) Provisions, Contingent
Liabilities and Contingent Assets. If a contingent liability is not recognised because its fair
value cannot be measured reliably, the acquirer shall disclose the information required by
IAS 37 (AC 130).86 and the reasons why the liability cannot be measured reliably.
(k) the total amount of goodwill that is expected to be deductible for tax purposes.
(l) for transactions that are recognised separately from the acquisition of assets and
assumption of liabilities in the business combination, the following disclosure in required:
Ð a description of each transaction;
Ð how the acquirer accounted for each transaction;
Ð the amounts recognised for each transaction and the line item in the financial
statements in which each amount is recognised; and
Ð if the transaction is the effective settlement of a pre-existing relationship, the method
used to determine the settlement amount.
(m) the disclosure of separately recognised transactions required by (l) shall include the
amount of acquisition-related costs and, separately, the amount of those costs recognised
as an expense and the line item or items in the statement of comprehensive income in
which those expenses are recognised. The amount of any issue costs not recognised as
an expense and how they were recognised shall also be disclosed.
(n) in a bargain purchase:
Ð the amount of any gain recognised; and
25
FAC3704/1
Ð line item in the statement of comprehensive income in which the gain is recognised;
and
Ð a description of the reasons why the transaction resulted in a gain.
(o) for each business combination in which the acquirer holds less than 100 per cent of the
equity interests in the acquiree at the acquisition date:
Ð the amount of the non-controlling interest in the acquiree recognised at the acquisition
date and the measurement basis for that amount; and
Ð for each non-controlling interest in an acquiree measured at fair value, the valuation
techniques and key model inputs used for determining that value.
(p) in a business combination achieved in stages:

Ð the acquisition-date fair value of the equity interest in the acquiree held by the acquirer
immediately before the acquisition date; and
Ð the amount of any gain or loss recognised as a result of remeasuring to fair value the
equity interest in the acquiree held by the acquirer before the business combination;
and
Ð the line item in the statement of comprehensive income in which that gain or loss is
recognised.
(q) the following information:

Ð the amounts of revenue and profit or loss of the acquiree since the acquisition date
included in the consolidated statement of comprehensive income for the reporting
period; and
Ð the revenue and profit or loss of the combined entity for the current reporting period as
though the acquisition date for all business combinations that occurred during the year
had been as of the beginning of the annual reporting period.
If disclosure of any of the information required is impracticable, the acquirer shall disclose that
fact and explain why the disclosure is impracticable. IFRS 3 (AC 140) uses the term
ìmpracticable' with the same meaning as in IAS 8 (AC 103) Accounting Policies, Changes in
Accounting Estimates and Errors.
For individually immaterial business combinations occurring during the reporting period that
are material collectively, the acquirer shall disclose in aggregate the information required by
paragraphs (e)±(q).
If the acquisition date of a business combination is after the end of the reporting period but
before the financial statements are authorised for issue, the acquirer shall disclose the
information required by paragraph (a)±(q) unless the initial accounting for the business
combination is incomplete at the time the financial statements are authorised for issue. In that
situation, the acquirer shall describe which disclosures could not be made and the reasons why
they cannot be made.
The acquirer shall disclose information that enables users of its financial statements to
evaluate the financial effects of adjustments recognised in the current reporting period that
relate to business combinations that occurred in the period or previous reporting periods
(IFRS 3 (AC 140).61).
To meet the above objective the acquirer shall disclose the following information for each
material business combination or in the aggregate for individually immaterial business
combinations that are material collectively:
(a) if the initial accounting for a business combination is incomplete for particular assets,
26
FAC3704/1
liabilities, non-controlling interests or items of consideration and the amounts recognised in
the financial statements for the business combination thus have been determined only
provisionally:
Ð the reasons why the initial accounting for the business combination is incomplete;
Ð the assets, liabilities, equity interests or items of consideration for which the initial
accounting is incomplete; and
Ð the nature and amount of any measurement period adjustments recognised during the
reporting period in accordance with IFRS 3 (IAS 40).49.
(b) for each reporting period after the acquisition date until the entity collects, sells or
otherwise loses the right to a contingent consideration asset, or until the entity settles a
contingent consideration liability or the liability is cancelled or expires:
Ð any changes in the recognised amounts, including any differences arising upon
settlement;
Ð any changes in the range of outcomes (undiscounted) and the reasons for those
changes; and
Ð the valuation techniques and key model inputs used to measure contingent
consideration.
(c) for contingent liabilities recognised in a business combination, the acquirer shall disclose
the information required in terms of IAS 37 (AC130).85±.85 for each class of provision.
(d) a reconciliation of the carrying amount of goodwill at the beginning and end of the
reporting period showing separately:
Ð the gross amount and accumulated impairment losses at the beginning of the
reporting period.
Ð additional goodwill recognised during the reporting period, except goodwill included in
a disposal group that, on acquisition, meets the criteria to be classified as held for sale
in accordance with IFRS 5 (AC 142) Non-current Assets Held for Sale and
Discontinued Operations.
Ð adjustments resulting from the subsequent recognition of deferred tax assets during
the reporting period.
Ð goodwill included in a disposal group classified as held for sale in accordance with
IFRS 5 (AC 142) and goodwill derecognised during the reporting period without having
previously been included in a disposal group classified as held for sale.
Ð impairment losses recognised during the reporting period in accordance with
IAS 36 (AC 128). (IAS 36 (AC128) requires disclosure of information about the
recoverable amount and impairment of goodwill in addition to this requirement.)
Ð net exchange rate differences arising during the reporting period in accordance with
IAS 21 (AC 112) The Effects of Changes in Foreign Exchange Rates.
Ð any other changes in the carrying amount during the reporting period.
Ð the gross amount and accumulated impairment losses at the end of the reporting
period.
(e) the amount and an explanation of any gain or loss recognised in the current reporting
period that both:
Ð relates to the identifiable assets acquired or liabilities assumed in a business
combination that was effected in the current or previous reporting period; and
Ð is of such a size, nature or incidence that disclosure is relevant to understanding the
combined entity's financial statements.
If the specific disclosures required by IFRS 3 (AC 140) and other IFRS's do not meet the
objectives set out above, the acquirer shall disclose whatever additional information is
necessary to meet those objectives.
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FAC3704/1
IAS 27 (AC 132) Ð Consolidated and Separate Financial Statements
The following disclosures shall be made in consolidated financial statements:
(a) the nature of the relationship between the parent and a subsidiary when the parent does
not own, directly or indirectly through subsidiaries, more than half of the voting power;
(b) the reasons why the ownership, directly or indirectly through subsidiaries, of more than half
of the voting or potential voting power of an investee does not constitute control;
(c) the end of the reporting period of the financial statements of a subsidiary when such
financial statements are used to prepare consolidated financial statements and are as of a
date or for a period that is different from that of the parent's financial statements, as well as
the reason for using a different date or period;
(d) the nature and extent of any significant restrictions (e.g. resulting from borrowing
arrangements or regulatory requirements) on the ability of subsidiaries to transfer funds to
the parent in the form of cash dividends or to repay loans or advances;
(e) a schedule that shows the effects of any changes in a parent's ownership interest in a
subsidiary that do not result in a loss of control on the equity attributable to owners of the
parent; and
(f) if control of a subsidiary is lost, the parent shall disclose the gain or loss, if any, recognised
and:
Ð the portion of that gain or loss attributable to recognising any investment retained in
the former subsidiary at its fair value at the date when control is lost; and
Ð the line item(s) in the statement of comprehensive income in which the gain or loss is
recognised (if not presented separately in the statement of comprehensive income).
When separate financial statements are prepared for a parent that elects not to prepare
consolidated financial statements, those separate financial statements shall disclose:
(a) the fact that the financial statements are separate financial statements; that the exemption
from consolidation has been used; the name and country of incorporation or residence of
the entity whose consolidated financial statements that comply with International Financial
Reporting Standards have been produced for public use; and the address where those
consolidated financial statements are obtainable;
(b) a list of significant investments in subsidiaries, jointly controlled entities and associates,
including the name, country of incorporation or residence, proportion of ownership interest
and, if different, proportion of voting power held; and
(c) a description of the method used to account for the investments listed under (b).
When a parent (other than a parent that elects not to prepare consolidated financial
statements), venturer with an interest in a jointly controlled entity or an investor in an associate
prepares separate financial statements, those separate financial statements shall disclose:
(a) the fact that the statements are separate financial statements and the reasons why those
statements are prepared if not required by law;
(b) a list of significant investments in subsidiaries, jointly controlled entities and associates,
including the name, country of incorporation or residence, proportion of ownership interest
and, if different, proportion of voting power held; and
(c) a description of the method used to account for the investments listed under (b);
Further more it shall identify that the financial statements are prepared in accordance with
this Standard or IAS 28 (AC 110) and IAS 31 (AC 119) to which they relate.
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1.4 Assessment criteria
After having studied this study unit you should be able to:
. Describe a group of companies.

. Distinguish between a subsidiary, an associate and a joint venture.
. Define and interpret control, significant influence and joint control.
. Distinguish between the accounting treatment of a subsidiary, an associate, a joint
venture and an investment.
. Apply and account for the measurement criteria of identifiable assets acquired and
liabillities assumed (including contingent liabillities) at their acquisition dates fair
values, in terms of IFRS 3 (AC 140).
. Account for the non-controlling interests according to IFRS 3 (AC 140).
. Account for the consideration at acquisition as well as any acquisition costs in terms
of IFRS 3 (AC 140).
. Account for goodwill/gain on bargain purchase according to IFRS 27 (AC 140).
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STUDY UNIT
2
Consolidations after the date of acquisition
Learning outcome 2
& Prepare group financial statements after the date of acquisition according to the
requirements of Generally Accepted Accounting Practice.

2.1 Introduction 30
2.2 Since acquisition Ð Application of IAS 27 (AC 140) Consolidated and Separate
Financial Statements 31
2.3 Impairment of goodwill 45
2.4 Losses incurred by a subsidiary 52
2.5 Revision example 61
S t u d y
Group Statements (Volume 1): Chapter 6 Ð sections 6.01 and 6.02
2.1 Introduction
In principle the consolidated statements of a group are nothing more than the combined
statements of all the companies in the group. Certain adjustments have to be made, however,
before we can speak of consolidated statements. The principles, procedures, and the
adjustments that are needed in order to prepare and present the consolidated financial
statements for a group of companies will be discussed in this study unit.
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2.2 Since acquisition Ð Application of IAS 27 (AC 132)
Consolidated and Separate Financial Statements
2.2.1 Objective
IAS 27 (AC 132) deals with:
. the circumstances in which an entity must consolidate the financial statements of another
entity (being a subsidiary);
. the accounting for changes in ownership interests in a subsidiary;
. the accounting for the loss of control of a subsidiary; and
. the information that an entity must disclose to enable users of the financial statements to
evaluate the nature of the relationship between the entity and its subsidiaries.
2.2.2 Consolidation procedures

The consolidation procedures that should be applied in preparing the consolidated financial
statements are set out in IAS 27 (AC 132).18 to .31. The consolidation procedures are as
follows:
(i) The financial statements of the parent entity and its subsidiaries are combined on a
line-by-line basis by adding together like items of assets, liabilities, equity income and
expenses.
(ii) The following steps must be taken to ensure that the consolidated financial statements
present financial information about the group as that of a single entity:
. The carrying amount of the parent's investment in each subsidiary and the parent's
portion of equity of each subsidiary must be eliminated;
. The resultant goodwill must be treated according to IFRS 3 (AC 140);
. Non-controlling interests in the profit or loss of consolidated subsidiaries for the
reporting period must be identified; and
. Non-controlling interests in the net assets of consolidated subsidiaries must be
identified separately from the parent's ownership interests in them.
(iii) Non-controlling interests in the net assets consist of:
. the amount of those non-controlling interests at the date of acquisition calculated in

accordance with IFRS 3 (AC 140); and
. the non-controlling interest's share of changes in equity since the date of the
combination.
(iv) Intragroup balances and transactions, including income, expenses and dividends
should be eliminated in full. Profits and losses resulting from intragroup transactions that
are recognised in assets, such as inventory and property, plant and equipment, should
be eliminated in full. Temporary differences (tax implications) that arise from the
elimination of unrealised profits and losses resulting from intragroup transactions must
be dealt with in accordance with IAS 12 (AC 102).
(v) Taxes payable by the parent entity or its subsidiaries on distribution to the parent entity
of the profits retained in subsidiaries must be accounted for in accordance with
IAS 12 (AC 102).
(vi) Consolidated financial statements should be prepared using uniform accounting
policies for like transactions and other events in similar circumstances
(IAS 27 (AC 132).24).
(vii) The results of operations of a subsidiary are included in the consolidated financial
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statements from the acquisition date as defined by IFRS 3 (AC 140). This is the date on
which control of the acquired subsidiary is effectively transferred to the buyer
(IAS 27 (AC 132).26).
(viii) The results of operations of a subsidiary disposed of are included in the consolidated
statement of comprehensive income until the date of disposal, which is the date on
which the parent entity ceases to have control of the subsidiary.
(ix) The financial statements for of the parent and its subsidiaries used in preparing the
consolidated financial statements should all be prepared as of the same reporting date,
unless it is impracticable to do so (IAS 27 (AC 132).22).
(x) If it is impracticable for a particular subsidiary to prepare its financial statements as of the
same date as its parent, adjustments must be made for the effects of significant
transactions or events that occur between the dates of the subsidiary's and the parent's
financial statements. In no case may the difference be more than three months
(IAS 27 (AC 132).23).
(xi) Non-controlling interests should be presented in the consolidated statement of financial
position within equity, but separate from the parent's owners' equity (IAS 27
(AC 132).27).
(xii) Non-controlling interests in the profit or loss of the group should also be separately
presented (IAS 27 (AC 132).28) 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
interests having a deficit balance.
(xiii) Consolidated financial statements report to the owners of the parent and therefore will
only reflect the parent's share capital in the consolidated statement of financial position.
Only the parent's dividends will be presented in the consolidated statement of changes
in equity. The dividends that have been paid to/are payable to the non-controlling interest
is shown in the non-controlling interest's column of the consolidated statement of
changes in equity as a reduction of the amount attributable to the non-controlling
interest.
Comments
IAS 27 (AC 132) does not deal with the methods of accounting for business combinations
and their effects of consolidation, including goodwill arising on a business combination.
This is dealt with in IFRS 3 (AC 140) Ð Business Combinations.
2.2.3 Simple group

Consolidations can be schematically represented as follows:
A Limited's financial
statements (Parent)
Consolidated financial
Adjustments statements of A Limited
!
Group
B Limited's financial
statements (Subsidiary)
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FAC3704/1
A Limited drafts its financial statements from its financial records, as does B Limited. Once the
individual statements have been completed the information from these separate financial
statements is used to make the necessary consolidation adjustments. Only then can
consolidated statements be compiled. Note that the original financial statements of A Limited
and B Limited are never amended during the consolidation process. Use is made of pro forma
consolidation journal entries to effect the consolidation adjustments.
This process repeats itself year after year and the adjustments have to be made afresh every
year.
The basic consolidation procedures can be summarised as follows:
. Elimination of common items;

. Elimination of intragroup items; and
. Consolidation of the remaining items.
2.2.3.1 The elimination of common items

One of the first adjustments which should be made in consolidated statements is the
elimination of the investment in the parent's books and the owners' equity section in the
subsidiary's books as at the date of acquisition.
The following example illustrates the elimination of the investment in the parent's books at date
of acquisition:
E x a m p l e 2.1
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.8
A Limited B Limited
R R
ASSETS
Investment in B Limited: 10 000 ordinary shares Ð at fair 10 000 Ð
value
Cash and cash equivalents 10 000 10 000
20 000 10 000
EQUITY AND LIABILITIES
Share capital Ð 20 000 ordinary shares 20 000 Ð
Ð 10 000 ordinary shares Ð 10 000
REQUIRED:
Draft the consolidated statement of financial position for the A Limited Group at
30 June 20.8. Assume that A Limited acquired its interest on that date. B Limited was
incorporated on 30 June 20.8.
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S o l u t i o n 2.1
Dr Cr
R R
J1 Share capital of B Limited 10 000
Investment in B Limited 10 000
Elimination of owners' equity of B Limited at acquisition
The consolidated statement of financial position would now be drafted as follows:
A LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.8
R
ASSETS
Cash and cash equivalents (10 000 + 10 000) 20 000
Share capital Ð 20 000 ordinary shares 20 000
The following example illustrates the elimination of the investment in the parent's records a few
years after acquisition:
E x a m p l e 2.2
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.8
A Limited B Limited
R R
ASSETS
Investment in B Limited: 10 000 ordinary shares at fair value 10 000 Ð
Trade and other receivables 12 000 8 000
Total assets 36 000 18 000

Share capital Ð 20 000 ordinary shares 20 000 Ð
Ð 10 000 ordinary shares Ð 10 000
Retained earnings 16 000 8 000
Total equity and liabilities 36 000 18 000
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Additional information
The fair value of the available-for-sale financial assets is equal to the cost price thereof.
A Limited acquired its interest on 30 June 20.6 when B Limited was incorporated.
REQUIRED:
Draft the consolidated statement of financial position of the A Limited Group as at

30 June 20.8.
S o l u t i o n 2.2
Dr Cr
R R
J1 Share capital of B Limited 10 000
Elimination of owners' equity of B Limited at acquisition
The consolidated statement of financial position would now be drafted as follows:
A LIMITED GROUP

R
ASSETS
Current assets
Trade and other receivables (12 000 + 8 000) 20 000
Total assets 44 000

Total equity
Retained earnings (16 000 + 8 000) 24 000
Total equity and liabilities 44 000
On the basis of the above two examples the following conclusions can be made:
. The journal entry for the elimination of the investment and the owners' equity at the date of
acquisition will remain unchanged from one year to the next.
. The share capital in the consolidated statement of financial position is always only that of
the parent.
. Profits made by the subsidiary after the date of acquisition become part of the retained
earnings of the group and are shown as such in the consolidated financial statements.
. Profits made by the subsidiary before the date of acquisition cannot form part of the retained
earnings of the group. The parent pays for such profits.
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. Since the parent obtained its interest in the subsidiary at the date of incorporation (date on
which the entity was established), there could not have been any retained earnings in the
books of B Limited.
The above two examples have been kept simple in order to highlight the at acquisition
procedures for consolidating a subsidiary. IFRS 3 (AC 140) Business Combinations
establishes principles and requirements for how the acquirer (parent) ±
(a) recognises and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree;
(b) recognises and measures the goodwill acquired in the business combination or a gain from
a bargain purchase; and
(c) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
2.2.3.2 The elimination of intragroup items
S t u d y
(Please refer to section 1.2.5.3 (ii) (d) Tax implications on intragroup transactions for an
explanation of the deferred tax implications.)
According to IAS 27 (AC 132).20, profits and losses resulting from intragroup transactions that
are recognised in assets, such as inventory and property, plant and equipment, should be
eliminated in full.
If an entity in a group records an unrealised profit resulting from a transaction with another
entity in the group, this unrealised profit must be excluded in the preparation of the
consolidated financial statements of the group, and the tax expense must be adjusted
accordingly.
In South Africa intragroup profit and any other profit is taxed in the same manner. If unrealised
profit generated between two companies in a group is eliminated upon consolidation, but no
corresponding tax adjustment is made, the consolidated tax expense will be disproportionately
high in relation to the consolidated pre-tax net profit of the group. A tax adjustment must be
made to allocate the tax on the intragroup profit to the same accounting period in which the
unrealised profit is going to realise.
The tax adjustment is done by crediting the income tax expense (decreasing the expense) in
the profit or loss section of the consolidated statements of comprehensive income and debiting
the deferred tax account in the statement of financial position (tax is prepaid, thus create a
``debtor'').
Differing types of intragroup transactions are as follows:
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(a) Bills of exchange
S t u d y
(b) Bank overdrafts and guarantees
S t u d y
A bank overdraft of one entity in a group should only be set off against the favourable bank
balance of another entity in the group if:
bank accounts are at the same bank, and

Ð the entity with the favourable bank balance guarantees the bank overdraft of the other
entity; OR
Ð the bank itself sets off the two amounts in terms of an agreement between the two entities
and the bank.
(c) Movement of assets between entities in the group

If an entity in a group records an unrealised profit resulting from a transaction with another
entity in the group, this unrealised profit must be excluded in the preparation of the
consolidated financial statements of the group, and the tax expense must be adjusted
accordingly.
The following categories of assets resulting of movements of assets between the entities in the
group may result in unrealised profits that need to be adjusted for.
. Inventories
S t u d y
Ð Unrealised profit in closing inventory

If a subsidiary sells inventory to its parent and at year end the parent still has some of this
inventory on hand, the cost of this inventory is too high because it includes profit which has not
been realised with a third party outside the group.
The cost of inventory affects two items in the financial statements, i.e. closing inventory in the
profit or loss section of the statement of comprehensive income (included in cost of sales) and
inventory in the statement of financial position.
Closing inventory in the calculation of cost of sales in the statement of comprehensive income
has a credit balance and must be debited to remove the unrealised profit. Inventory in the
statement of financial position must be credited for the same reason. (Because the
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consolidated statements of comprehensive income often shows just one line item for cost of
sales (and not separate line items for opening inventory, purchases and closing inventory), cost
of sales must be debited with the amount of the unrealised profit.)
Cost of sales increases, which implies that net profit before tax decreases, and consequently
the entity will have to pay less tax. The tax expense must be decreased (credited) with the
amount of the unrealised profit multiplied by the tax rate. The entity paid too much tax and this
has the effect of a prepaid expense. Deferred tax in the statement of financial position must be
debited to reflect this ``prepaid expense''.
Ð Unrealised profit in opening inventory

Assume the same information as discussed above, except that it is now the companies next
financial period. When the consolidation is performed at the end of the year, the consolidation
journals which were recorded during the previous year's consolidation, will not be reflected in
the financial statements. (Remember that consolidation journals are pro forma journals and are
only done in the consolidation working papers, and are not actually processed through the
accounting system.) The current year's opening inventory will not agree with the previous
year's closing inventory because the unrealised profit was eliminated from the closing
inventory of the previous year, but not from the opening inventory of the current year. The
unrealised profit must be eliminated from the opening inventory so that it will agree with the
closing inventory of the previous year. Opening inventory in the statement of comprehensive
income (profit or loss section) shows a debit balance and must be credited with the amount of
the unrealised profit to reduce it. If opening inventory does not appear as a separate line item in
the statement of comprehensive income (profit or loss section), cost of sales will be credited.
The retained earnings at the beginning of the year will be higher than the balance actually used
for consolidation purposes at the end of the previous year. The retained earnings at the
beginning of the year must be debited to decrease it with the amount of the unrealised profit.
The effect of crediting cost of sales is a decrease in an expense, thus profit increases, which
means more tax must be paid. The tax expense in the statement of comprehensive income
(profit or loss section) must thus be debited. The other part of this journal is a credit to retained
earnings at the beginning of the year because the unrealised profit and the tax effect thereon
must be taken into account.
E x a m p l e 2.3
B Limited is a subsidiary of A Limited.
A Limited sold inventory to B Limited at a profit of 25% on the cost of the inventory, during 20.8
and 20.9.
On 31 December 20.8 B Limited had inventory on hand of R300 000, which was bought from
A Limited.
On 31 December 20.9 B Limited had inventory on hand of R200 000, which was bought from
A Limited.
Assume a tax rate of 30%.
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REQUIRED:
Prepare the consolidation pro forma journal entries for the years ended 31 December 20.8
and 20.9.
S o l u t i o n 2.3
The pro forma consolidation journals for the year ended 31 December 20.8 will be as follows:
Dr Cr
31/12/20.8 R R
Cost of sales (SCI) (A) (300 000 6 25/125) 60 000
Inventory (SFP) (B) 60 000
Deferred tax (SFP) (60 000 6 30%) 18 000
Income tax expense (SCI) (A) 18 000
Elimination of unrealised profit in closing inventory of B Limited
Dr Cr
31/12/20.9 R R
Retained earnings Ð beginning of year (A) 60 000
Cost of sales (SCI) (A) 60 000
Retained earnings Ð beginning of year (A) 18 000
Elimination of unrealised profit in opening inventory of B Limited
Dr Cr
31/12/20.9 R R
Cost of sales (SCI) (A) (200 000 6 25/125) 40 000
Inventory (SFP) (B) 40 000
Deferred tax (SFP) (40 000 6 30%) 12 000
Comments
Note that the profit for the year and retained earnings of B Limited are not adjusted
because it is not B Limited that is making the unrealised profit, but A Limited.
Therefore the unrealised profit in the inventory will not be shown in the analysis of
owners' equity of B Limited. The adjustments will only be taken into account in the
consolidated statement of comprehensive income (profit or loss section).
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E x a m p l e 2.4
B Limited is a subsidiary of A Limited.
B Limited sold inventory to A Limited at a profit of 25% on the cost of the inventory, during 20.8
and 20.9.
On 31 December 20.8 A Limited had inventory on hand of R300 000, which was bought from
B Limited.
On 31 December 20.9 A Limited had inventory on hand of R200 000, which was bought from
B Limited.
REQUIRED:
Prepare the pro forma consolidation journal entries for the years ended 31 December 20.8
and 20.9.
S o l u t i o n 2.4
Dr Cr
31/12/20.8 R R
Cost of sales (SCI)(B) (300 000 6 25/125) 60 000
Inventory (SFP)(A) 60 000
Deferred tax (SFP) (60 000 6 30%) 18 000
Income tax expense (SCI)(B) 18 000
Dr Cr
31/12/20.9 R R
Retained earnings Ð beginning of year (B) 60 000
Cost of sales (SCI)(B) 60 000
Elimination of unrealised profit in opening inventory of A Limited
31/12/20.9
Cost of sales (SCI)(B) (200 000 6 25/125) 40 000
Inventory (SFP)(A) 40 000
Deferred tax (SFP) (40 000 6 30%) 12 000
Elimination of unrealised profit in closing inventory of A Limited
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Comments
Note that the profit for the year and retained earnings of B Limited are adjusted because it
is B Limited that is making the unrealised profit and not A Limited.
Therefore the unrealised profit in the inventory will be shown in the analysis of owners'
equity of B Limited. The adjustments will also be taken into account in the consolidated
statement of comprehensive income (profit or loss section).
. Property, plant and equipment
S t u d y
Ð Unrealised profit included in property, plant and equipment

When one entity in a group sells an item of property, plant and equipment to another entity in
the group, the profit made by the selling entity is seen as unrealised from the viewpoint of the
group, for as long as the asset is held within the group. The profit of the group must be
decreased with the amount of the unrealised profit, and the tax expense must be adjusted
accordingly.
The above-mentioned consolidation adjustments will be made every year until the asset is sold
to a party outside the group and the profit is realised from a group viewpoint. The effect of these
adjustments is that the unrealised profit is moved to the accounting period in which the profit is
realised by way of the sale of the asset or the sale of the products or services produced by the
asset (i.e. via the use of the asset), to parties outside the group.
Ð Unrealised profit included in non-depreciable property, plant and equipment
E x a m p l e 2.5
A Limited has held a 100% interest in B Limited since 20.5.
On 2 January 20.6 A Limited sold an office building to B Limited for R20 000.
The cost price of the building for A Limited was R15 000.
B Limited sold the office building on 30 September 20.8 for R23 000 to a party outside the
group.
Both entity's year ends fall on 31 December.
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REQUIRED:
and 20.7.
S o l u t i o n 2.5
Dr Cr
31/12/20.6 R R
Profit on sale of property (A) 5 000
Property, plant and equipment (B) 5 000
Elimination of unrealised intragroup profit included in the property,
plant and equipment of B Limited (20 000 ± 15 000)
Deferred tax (SFP)(A) 1 500

Income tax expense (SCI)(A) 1 500
Tax implication of elimination of unrealised intragroup profit
included in property, plant and equipment of B Limited
(5 000 6 30%)
Dr Cr
31/12/20.7 R R
Retained earnings Ð beginning of year (A) (5 000 ± 1 500) 3 500
Deferred tax (SFP)(A) 1 500
Property, plant and equipment (B) 5 000
Correction to agree opening balances for balances for 20.7 with
closing balances for 20.6
Ð Unrealised profit included in depreciable property, plant and equipment

As explained above, any unrealised profit made on the sale of property, plant and equipment by
one entity in the group to another entity in the group, must be eliminated. The buying entity will
calculate depreciation on the cost price of the asset (which includes unrealised profit). This
excess depreciation must be written back.
Unrealised profit on depreciable property, plant and equipment is realised through the process
of depreciation when the products or services produced by use of the asset is sold to parties
outside the group. This unrealised profit which realises each year, must be included in the
consolidated profit.
E x a m p l e 2.6
A Limited has held an 80% interest in B Limited since 20.5.
On 31 December 20.6 B Limited sold manufacturing machinery to A Limited for R20 000.
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The carrying amount of the machinery in the books of B Limited was R15 000.
Depreciation is provided for at 20% per annum on the straight-line method.
Both entity's year ends fall on 31 December.
REQUIRED:
and 20.7.
S o l u t i o n 2.6
Dr Cr
31/12/20.6 R R
Profit on sale of property (B) 5 000
Property, plant and equipment (A) 5 000
Elimination of unrealised intragroup profit included in property,
plant and equipment of A Limited (20 000 ± 15 000)
Deferred tax (SCI)(B) 1 500

Tax implication of elimination of unrealised intragroup profit
included in property, plant and equipment of A Limited
(5 000 6 30%)
Dr Cr
31/12/20.7 R R
Deferred tax (SFP)(B) 1 500
Correction to agree opening balances for 20.7 with closing
balances for 20.6
Accumulated depreciation (A) 1 000

Depreciation (A) 1 000
Recording of unrealised intragroup profit realised during 20.7
(5 000 6 20%)
Income tax expense (SCI)(A) 300

Deferred tax (SFP)(A) 300
Tax implication of realising of intragroup profit during 20.7
(1 000 6 30%)
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Dr Cr
31/12/20.8 R R
(3 500 ± 1 000 + 300)
Deferred tax (SFP)(B) (1 500 ± 300) 1 200
balances for 20.7

Recording of unrealised intragroup profit realised during
20.8 (5 000 x 20%)

(1 000 x 30%)
Dr Cr
31/12/20.9 R R
(2 800 ± 1 000 + 300)
Deferred tax (SFP) (B) (1 200 ± 300) 900
balances for 20.8

Recording of unrealised intragroup profit realised during 20.9
(5 000 6 20%)

(1 000 x 30%)
(d) Intragroup transactions not subject to tax

If an intragroup transaction contains no unrealised profit element (or unrealised loss element),
and it does not affect the taxable income (or assessed loss) of the companies concerned, the
transaction will not have any tax implications.
If a parent grants an interest-bearing loan to its subsidiary the interest expense of the
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FAC3704/1
subsidiary will contra against the interest income of the parent in the consolidated statement of
comprehensive income. Thus the net effect of the interest transaction is zero, and it will have
no effect on the taxable income or assessed loss of the group.
(e) Dividends of the subsidiary
S t u d y
(f) Debentures within a group
S t u d y
Group Statements (Volume 1): Chapter 6 Ðsection 6.14
2.2.3.3 Consolidation of the remaining items
Once all common items and intragroup items have been eliminated, a consolidated statement
of financial position, a consolidated statement of comprehensive income, a consolidated
statement of changes in equity and a consolidated statement of cash flow can be drawn up.
2.3 Impairment of goodwill

Goodwill arising from a business combination is an intangible asset as defined by IAS 38
(AC 129) (Intangible asset). Goodwill arising from a business combination should be tested
annually for possible impairment according to IAS 36 (AC 128) (Impairment of asset) and not
only when there is an indication of impairment. (IFRS 3.54 ± .55) Business Combinations. This
annual testing usually takes place at the reporting date when the recoverable amount of the
goodwill is determined and compared to the carring amount. In cases where the recoverable
amount of the goodwill is below the carrying amount, the goodwill is impaired (debit) by the
difference between the recoverable amount, the goodwill is impaired (debit) by the difference
between the recoverable amount and the carrying amount. This impairment loss is recorded in
profit and loss as part of `Òther expenses'' and goodwill (asset) is credited with the same
amount.
If no information is given on the impairment of the goodwill, the goodwill will be disclosed under
``Non-current assets'' in the consolidated statement of financial position at the amount that
arose on date of acquisition (debit).
If the goodwill is impaired, the goodwill will be reflected at cost less accumulated impairment
losses in the consolidated statement of financial position.
At third year level you will not be required to determine the impairment loss. This amount will be
given in the question.
The question will specify whether the goodwill has been impaired by an amount or whether it
has been impaired down to an amount.
The student will be required to account for and disclose the impairment loss in the consolidated
annual financial statements.
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(a) Impairment of goodwill when the non-contolling interest is measured using
the partial goodwill method
When applying the partial goodwill method, the goodwill arising from the business combination
is assumed to be goodwill acquired by the parent and attributable to the parent's interest in the
subsidiary's net identifiable assets only. There is no goodwill recognised for the non-controlling
interest in the subsidiary's net identifiable assets at acquisition.
Thus, when the goodwill is impaired at reporting date, the impairment loss is recognised in the
consolidated financial statements as follows:
Dr Cr
R R
Impairment loss (P/L) xxx
Goodwill (SFP) xxx
In the analysis of the owners' equity of the subsidiary the impairment loss will be deducted from
the goodwill figure in the `àt''-column at the bottom of the column.
Work through the following simplified examples:
Example 2.7
Impairment by an amount in the current year

Assume the H Limited Group uses the partial goodwill method to account for goodwill and
non-controlling interest.
and paid R140 000 cash to settle the purchase price.
R
S Limited made a profit for the year ended 31 December 20.9 of R10 000. The goodwill that
arose from the business combination was assumed to be impaired at 31 December 20.9 with
R2 000.
46
FAC3704/1
S o l u t i o n 2.7
(Only the analysis of owner's equity of S Limited is illustrated.)
Analysis of owners' equity of S Limited
100% 80% 20%

Total At Since NCI
R R R R
1 January 20.9
Share capital 100 000 80 000 20 000
150 000 120 000 30 000
Consideration and NCI 170 000 140 000 30 000
Current year
Profit for the year 10 000 8 000 2 000
180 000 20 000 8 000 32 000
Impairment of goodwill (2 000) (2 000)
178 000 18 000
The total goodwill in the consolidated statement of financial position for the H Limited Group as
at 31 December 20.9 will consist of the following:
Non-current assets:
Goodwill (20 000 7 2 000) R18 000
Example 2.8
Impairment to an amount in the current financial year
Information
1. H Limited acquired 80 000 ordinary shares in S Limited on 1 January 20.8 for R140 000.
The owners' equity of S Limited at that date was as follows:
R
On this date the assets and liabilities were considered to be fairly valued and there were no
unaccounted for contingent liabilities.
2. The retained earnings of S Limited amounted to R150 000 at 1 January 20.9.

3. At 31 December 20.9 the goodwill of S Limited had been impaired to R5 000.
4. The profit for the year of S Limited was R30 000.
5. The group applies the partial goodwill method to account for goodwill.
47
FAC3704/1
REQUIRED:
Prepare the following:

(i) The analysis of owners' equity at acquisition.
(ii) The pro forma consolidation journal entries for the year ended 31 December 20.9.
S o l u t i o n 2.8
(i) Analysis of owners' equity of S Limited
Total At Since NCI

R R R R
At acquisition
Share capital 100 000 80 000 20 000
150 000 120 000 30 000
(ii) Pro forma consolidation journal
Dr Cr
R R
Goodwill 20 000
Elimination of owners' equity at acquisition of S Limited
J2 Retained earnings 20 000

Recording of non-controlling shareholders' interest in since
acquisition reserves of S Limited
((150 000 ± 50 000) 6 20%)
J3 Retained earnings Ð beginning of year 15 000

Goodwill 15 000
Recording of impairment of goodwill at 31 December 20.9
(20 000 ± 5 000)
J4 Non-controlling interest (SCI) 6 000

Recording of non-controlling interest in profit after tax of
S Limited (30 000 6 20%)
48
FAC3704/1
There is nothing new about the recognition of an impairment loss of goodwill when using the
partial goodwill method. The changes to IFRS 3 (AC 140) Business Combinations brought in
the full goodwill method where the non-controlling interest is measured at its fair value at
acquisition date and therefore share in the goodwill arising from the business combination at
acquisition.
Please make an in depth study of the following section. You must understand the differences
that arise from recognising an impairment loss of goodwill when either the partial goodwill
method is used or the full goodwill method.
(b) Impairment of goodwill when the non-controlling interest is measured using

the full goodwill method
When applying the full goodwill method, the goodwill arising from the business combination
represents goodwill relating to both the parent's interest in the subsidiary's net identifiable
assets as well as that of the non-controlling interest. Remember that the ratio of the goodwill at
acquisition attributable to both the parent and to the non-controlling interest is not necessarily
equal to the profit sharing ratio. The parent's goodwill is the excess between the consideration
paid for the interest in the subsidiary's net identifiable assets and the proportion of the equity
reserves of the subsidiary as at acquisition date. The goodwill attributable to the non-controlling
interest at acquisition is the excess between the fair value of the non-controlling interest's
shares of the subsidiary and the proportion of the equity reserves of the subsidiary as at date of
acquisition.
The goodwill figure in the consolidated statement of financial position consists of the sum of the
goodwill attributable to the parent and that of the non-controlling interest as at acquisition, as
calculated in the analysis of owner's equity of the subsidiary.
If the group's goodwill appears to be impaired at the reporting date, the impairment loss on
goodwill will be treated as a loss of the subsidiary and will therefore decrease the profit for the
year in which that impairment loss arose. Since the non-controlling interest shares in the
subsidiary's profit for the year according to the profit sharing ratio, the non-controlling interest
will automatically share in the impairment loss in that same profit sharing ratio. This will be the
case regardless of whether that ratio is equal to the ratio in which the goodwill at acquisition is
attributable to them or not.
The analysis of owner's equity of the subsidiary will therefore be affected, but not at the bottom
of the `àt''-column, but within the current year's profit calculation.
The same journal is required when the impairment loss is recognised. The only difference is
that the non-controlling interest in the subsidiary's profit is decreased with the percentage
interest of the non-controlling interest in the recognised impairment loss on goodwill:
Dr Cr
R R
Impairment loss (P/L) xxx
Goodwill (SFP) xxx
Non-controlling interest (SFP) xxx
Non-controlling interest (P/L) xxx
(impairment loss recognised above x NCI% in subsidiary's profit)
49
FAC3704/1
Example 2.9
Impairment by an amount in the current year

Assume the H Limited Group uses the full goodwill method to account for goodwill and non-
and paid R140 000 cash to settle the purchase price. The fair value of the non-controlling
interest was estimated to be R35 000 at acquisition date.
R
S Limited made a profit for the year ended 31 December 20.9 of R10 000. The goodwill that
arose from the business combination was assumed to be impaired at 31 December 20.9 with
R2 000.
Solution 2.9
(Only the analysis of owner's equity of S Limited is illustrated.)

Analysis of owners' equity of S Limited
100% 80% 20%

Total At Since NCI
R R R R
1 January 20.9
Share capital 100 000 80 000 20 000
150 000 120 000 30 000
Equity represented by goodwill 25 000 20 000 5 000
Current year
Given 10 000 8 000 2 000
Impairment of goodwill (2 000) (1 600) (400)
183 000 6 400 36 600
The goodwill in the consolidated statement of financial position for the H Limited Group as at
31 December 20.9 will still consist of the following:
Non-current assets:
Goodwill (25 000 7 2 000) R23 000
It is the non-controlling interest's share in S Limited's profit for the year which is affected by
applying the full goodwill method, since it decreases by R400* or (R2 000(impairment) x
20%(NCI)).
50
FAC3704/1
Example 2.10
Impairment to an amount in the current financial year

Information
1. H Limited acquired 80 000 ordinary shares in S Limited on 1 January 20.8 for R140 000.
The owners' equity of S Limited at that date was as follows:
R
On this date the assets and liabilities were considered to be fairly valued and there were no
unaccounted for contingent liabilities.
2. The retained earnings of S Limited amounted to R150 000 at 1 January 20.9.

3. At 31 December 20.9 the goodwill of S Limited had been impaired to R5 000.
4. The profit for the year of S Limited was R30 000.
5. The group applies the full goodwill method to account for goodwill.
6. The fair value of the non-controlling interest on 1 January 20.8 was R35 000.
REQUIRED:
Prepare the following:

(i) The analysis of owners' equity at acquisition.
(ii) The pro forma consolidation journal entries for the year ended 31 December 20.9.
Solution 2.10
(i) Analysis of owners' equity of S Limited
Total At Since NCI

R R R R
At acquisition
Share capital 100 000 80 000 20 000
150 000 120 000 30 000
Ð Parent and NCI 25 000 20 000 5 0001
Consideration and NCI at fair value 175 000 140 000 35 000
1
balancing amount
51
FAC3704/1
(ii) Pro forma consolidation journals
Dr Cr
R R
Goodwill (20 000 + 5 000) 25 000
NCI (at fair value) (SFP) 35 000
Elimination of owners' equity at acquisition of S Limited

Recording of non-controlling interest in since acquisition
reserves of S Limited
J3 Profit for the year (as part of `òther expenses'') 20 000

Goodwill 20 000
Recording of impairment of goodwill
at 31 December 20.9 (25 000 ± 5 000)

Recording of non-controlling interest in the profit
after tax of S Limited
((30 000 ± 20 000(J3)) 6 20%)
2.4 Losses incurred by a subsidiary

2.4.1 General
The non-controlling interest is the portion of equity (net assets) in a subsidiary not attributable,
either directly or indirectly, to a parent.
Due to the equity nature (i.e proportionate participation in the risks and rewards of the
subsidiary) of the non-controlling interest any losses of a subsidiary will be allocated to the
owners of the parent and the non-controlling interest according to the percentage of interest
held. This may result in the non-controlling interest having a deficit balance.
2.4.2 Accumulated losses (or insolvency) at date of acquisition
S t u d y
52
FAC3704/1
Example 2.11
The following are the abridged trial balances of Vision Limited and Star Limited for the year
ended 31 December 20.0:
Vision Star
Limited Limited
Dr/(Cr) Dr/(Cr)
R R
Investment in Star Limited at fair value 1 000 Ð
Property, plant and equipment at carrying amount 150 000 100 000
Inventories 50 000 25 000
Trade receivables 49 000 30 000
Share capital ± 20 000 ordinary shares (20 000) Ð
± 10 000 ordinary shares Ð (10 000)
(Retained earnings)/Accumulated loss ± 31 December 19.9 (180 000) 40 000
Long-term loan from Vision Limited Ð (80 000)
Trade and other payables (45 000) (35 000)
Profit for the year (5 000) (70 000)
Ð Ð
1. Vision Limited purchased 80% of the share capital of Star Limited on 1 January 19.8 when
Star Limited had an accumulated loss of R100 000 and no other components of equity. The
fair value of the identifiable assets, liabilities and contingent liabilities at the acquisition date
of Star Limited was considered to be equal to the carrying amounts of these items.
2. On 31 December 19.8, due to the poor financial position of Star Limited, Vision Limited
wrote the loan of R80 000 to Star Limited off against retained earnings in its own financial
records.
3. The share capital of both companies has remained unchanged since incorporation of the
companies.
4. Goodwill in Star Limited is considered to be impaired by R41 000 at year end. Adjustments
to the carrying amount of goodwill have no tax effect. The group uses the partial
(proportionate) goodwill method to recognise goodwill.
5. The fair value of the available-for-sale financial assets is equal to the original cost price
thereof.
6. Each share carries one vote.
REQUIRED:
Prepare the following for Vision Limited Group for the year ended 31 December 20.0:
(a) the consolidation journals;

(b) the consolidated statement of changes in equity; and
(c) the consolidated statement of financial position.
Your answer must comply with the requirements of Generally Accepted Accounting
Practice.
Only the note on Goodwill is required and comparative figures are not required.
All calculations are to be done to the nearest R1.
53
FAC3704/1
Solution 2.11
Part (a)
VISION LIMITED GROUP
Pro forma consolidation journals

Dr Cr NCI
R R R
Goodwill 73 000
Non-controlling interest (SFP) 18 000 (18 000)
Investment in Star Limited 1 000
Elimination of owners equity of Star Limited at
acquisition
J2 Loan account ± Star Limited 80 000
Re-instatement of loan made to Star Limited
Non-controlling interest (SFP) 12 000 12 000
Recording of non-controlling interest since acquisition
to beginning of current year
((100 000(J1) ± 40 000) x 20%)
J4 Non-controlling interest (SCI) (70 000 x 20%) 14 000
Recording of non-controlling interest in profit for
the year
J5 Profit for the year 41 000
Goodwill 41 000
Impairment of goodwill
J6 Loan account ± Vision Limited 80 000
Loan account ± Star Limited 80 000
Elimination of intragroup loans
8 000
54
FAC3704/1
Part (b)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.0
Non-
Share Retained controlling Total
capital earnings Total interest equity
R R R R R
Balance at 1 January 20.0 20 000 308 0001 328 000 (6 000) 322 000
Changes in equity for 20.0
Total comprehensive income
for the year 20 0002 20 000 14 0003 34 000
Balance at 31 December 20.0 20 000 328 000 348 000 8 000 356 000
1
180 000 + 80 000(loan) + 48 000(60 000a x 80%) = 308 000
2
5 000 + 70 000 ± 14 000e ± 41 000K = 20 000 or 5 000 + 56 000 (70 000 x 0,8) - 41 000K = 20 000
3
70 000 x 20% = 14 000
Part (c)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.0
ASSETS Notes R
Non-current assets 282 000
Property, plant and equipment (150 000 + 100 000) 250 000
Goodwill (73 000 ± 41 000) 1 32 000
Current assets 154 000
Inventories (50 000 + 25 000) 75 000
Trade receivables (49 000 + 30 000) 79 000
Total assets 436 000
Total equity 356 000
Equity attributable to owners' of the parent 348 000
Non-controlling interest 8 000
Total liabilities 80 000
Non-current liabilities 80 000
Trade and other payables (45 000 + 35 000) 80 000
55
FAC3704/1
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.0
1. Goodwill
R
Carrying amount beginning of year 73 000
Gross carrying amount 73 000
Accumulated impairment losses Ð
Goodwill impaired during the year (41 000)
Carrying amount end of year 32 000
Gross carrying amount 73 000
Accumulated impairment losses (41 000)
Calculations
1. Analysis of owners' equity of Star Limited
100% 80% 20%

Total At Since NCI
R R R R
At acquisition
Share capital 10 000 8 000 2 000
Accumulated loss (100 000) (80 000) (20 000)
(90 000) (72 000) (18 000)
Consideration and NCI (17 000) 1 000 (18 000)
Since acquisition
Retained earnings ((40 000) ±
(100 000)) 60 000 48 000 12 000
43 000 48 000 (6 000)
Current year
113 000 73 000 104 000 8 000
Current year (41 000)
Carrying amount ± 31 December 20.0 32 000
2. Proof of goodwill of Star Limited (IFRS 3 (AC 140).32)

R
Consideration transferred at acquisition date 1 000
Fair value of non-controlling interest ((10 000 7 100 000) x 20%) (18 000)
17 000
Less: Net amount of identifiable assets acquired and liabilities assumed
at acquisition date (10 000 7 100 000) 90 000
Goodwill 73 000
Impairment (given) (41 000)
32 000
56
FAC3704/1
2.4.3 Post-acquisition losses (or insolvency) of subsidiaries
S t u d y
Group Statements (Volume 1): Chapter 6 Ð section 6.12 ± 6.13
Example 2.12
The following are the trial balances of Pritt Limited and Stick Limited for the year ended
28 February 20.9:
Pritt Stick
Limited Limited
Dr/(Cr) Dr/(Cr)
R R
Share capital ± 525 000 ordinary shares (525 000) Ð
± 90 000 ordinary shares Ð (90 000)
Retained earnings ± 1 March 20.8 (497 335) Ð
Accumulated loss ± 1 March 20.8 Ð 86 700
Gross profit (183 525) (195 000)
Other income (54 500) Ð
Other expenses 96 630 31 300
Income tax expense 30 631 45 836
Dividends paid ± 28 February 20.9 80 000 20 000
Loan from Pritt Limited Ð (100 000)
Property, plant and equipment 621 609 162 000
Investment in Stick Limited: ± Ordinary shares at fair value 65 000 Ð
± Loan 100 000 Ð
Available-for-sale financial assets 175 000 Ð
Ð Ð
1. On 1 March 20.6, Pritt Limited acquired a 60% interest in Stick Limited. On the date of
acquisition the equity of Stick Limited consisted of the following items:
R
Share capital ± 90 000 ordinary shares 90 000
On the above acquisition date there were no unidentified assets, liabilities or contingent
liabilities and the fair value of all assets, liabilities and contingent liabilities were confirmed
to be equal to the carrying amounts thereof, unless stated otherwise.
2. During the current year Pritt Limited made a loan to Stick Limited. No repayment dates
have been set and the loans bear interest at 10% per annum. The interest paid and
received has been included in the trial balances of the relevant companies for the year
ended 28 February 20.9.
57
FAC3704/1
3. Pritt Limited charges Stick Limited a management fee of R7 000 per annum. Management
fees paid have been included in `òther expenses''. The management of Pritt Limited
considers it possible to turn Stick Limited into a profitable entity.
4. The fair value of available-for-sale financial assets is equal to the cost price thereof unless
otherwise stated.
5. The SA normal tax rate since 1 March 20.6 is 28%.
6. The value of goodwill was tested for impairment at 28 February 20.9 and it was determined
that the goodwill in Stick Limited had been impaired to R1 000 at the end of the current
year. The group uses the proportionate (partial) method to account for goodwill.
7. In all companies, each share carries one vote.
REQUIRED:
Prepare the consolidated financial statements for the Pritt Limited Group for the year
ended 28 February 20.9.
Practice.
Notes to the consolidated annual financial statements and comparative figures are not
required.
Round off all amounts to the nearest Rand.
Solution 2.12
PRITT LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.9
R
ASSETS
Available-for-sale financial assets 175 000
Goodwill (3 800 ± 2 800) 1 000
Inventories (108 000 + 29 300) 137 300
Total assets 1 145 053
Total equity 1 090 263
Equity attributable to owners of the parent 1 049 797
Current liabilities 54 790
Trade and other payables 54 790
Total equity and liabilities 1 145 053
58
FAC3704/1
PRITT LIMITED GROUP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
28 FEBRUARY 20.9
R
Gross profit (183 525 + 195 000) 378 525
Other income (54 500 7 7 000 (management fee) 7 12 000 (dividend rec) 7
10 000 (interest rec)) 25 500
Other expenses (96 630 + 31 300 7 7 000 (management fee)7 (113 730)
10 000 (interest paid) + 2 800 (impairment))
Profit before tax 290 295
Income tax expense (30 631 + 45 836) (76 467)
PROFIT FOR THE YEAR 213 828
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 213 828
Owners of the parent5 166 682
Non-controlling interest6 47 146
213 828
PRITT LIMITED GROUP

28 FEBRUARY 20.9
Non-
R R R R R
Balance at 1 March 20.8 525 000 438 1151 963 115 1 3202 964 435
Dividends (80 000) (80 000) (8 000) (88 000)
for the year 166 682 166 682 47 146 213 828
Balance at 28 February 20.9 525 000 524 797 1 049 797 40 466 1 090 263
1
497 335 ± 59 220 = 438 115
2
C1a
59
FAC3704/1
Calculations
B1 Analysis of owners' equity of Stick Limited
100% 80% 20%

Total At Since NCI
R R R R
At acquisition
Share capital 90 000 54 000 36 000
Return earnings 12 000 7 200 4 800
102 000 61 200 40 800
Consideration paid and NCI 105 800 65 000 40 800
Since acquisition
Retained earnings (86 700 +
12 000) (98 700) (59 220) (39 480)
7 100 1 320a
Current year
Profit for the year (C2) 117 864 70 718 47 146
Dividends paid (20 000) (12 000) (8 000)
104 964 3 800 (502) 40 466
Current year (3 800 7 1 000) (2 800)
Carrying amount at 28 February 20.9 1 000
B2 Profit for the year

R
Gross profit 195 000
Other expenses (31 300)
Income tax expence (45 836)
117 864
60
FAC3704/1
2.5 Revision example
R e v i s i o n Ex a mp l e 1
The following are the trial balances of Auto Limited and Mobile Limited for the year ended
31 December 20.6:
Auto Mobile
Limited Limited
Dr/(Cr) Dr/(Cr)
R R
Investment in Mobile Limited at fair value
Ð 120 000 ordinary shares 180 000 Ð
Preference dividends paid Ð 8 000
Ordinary dividends paid 15 000 20 000
Long-term loan to Mobile Limited 80 000 Ð
Share capital Ð 300 000 ordinary shares (300 000) Ð
Ð 150 000 ordinary shares Ð (150 000)
Ð 10% 80 000 preference shares Ð (80 000)
Retained earnings Ð 1 January 20.6 (245 560) (164 500)
Profit before tax (446 500) (347 400)
Long-term borrowings (200 000) (80 000)
! Ð Ð
Intragroup loan Ð
!
eliminated on
consolidation
1. Auto Limited acquired 120 000 ordinary shares in Mobile Limited on 1 January 20.4. The
retained earnings of Mobile Limited at this date were R47 000 and there were no other
reserves.
2. On the date of acquisition the land and buildings of Mobile Limited with a carrying amount
of R120 000 were revalued to R140 000. No entries were made in the books of Mobile
Limited relating to the revaluation. (All tax implications relating to the revaluation can be
ignored.)
3. At the above acquisition date there were no unidentified assets, liabilities or contingent
liabilities and the fair values of all assets, liabilities and contingent liabilities were confirmed
to be equal to the carrying amounts thereof, with the exception of the assets mentioned in
additional information 2.
61
FAC3704/1
4. Profit before tax is made up as follows:
Auto Mobile
Limited Limited
Includes dividends received R R
!
Gross profit from Mobile Limited of 419 800 328 000
Other income R16 000 (20 000 6 80%) 67 200 53 200
Other expenses to be eliminated on (32 500) (22 600)
Finance costs consolidation (8 000) (11 200)
446 500 347 400
!
Includes intragroup
!
profit of R40 000 Intragroup interest
(140 000 ± 100 000) to of R11 200
be eliminated on (80 000 6 14%) to
consolidation be eliminated on
(point 6) consolidation
5. On 1 January 20.6 a long-term loan of R80 000 was made by Auto Limited to Mobile
Limited and is repayable in full on 1 January 20.10. Interest is calculated at 14% per annum
and has been paid to Auto Limited for the current year.
6. Mobile Limited purchased a machine from Auto Limited for R140 000 on 1 July 20.6. The
carrying amount of the machine on 1 July 20.6 was R100 000. The machine was originally
purchased by Auto Limited on 1 July 20.3 for R250 000. Both companies depreciate
machinery at 20% per annum using the straight-line method which is in line with the wear
and tear allowance used by the South African Revenue Service. The useful life of the
machine has remained unchanged.
7. In all companies, each share carries one vote.
8. The fair value of available-for-sale financial assets is equal to the cost price thereof, unless
otherwise stated.
9. At the end of the current year goodwill was assessed for impairment and it was found that
goodwill was not impaired. The group uses the partial goodwill method to recognise
goodwill.
REQUIRED:
Prepare the consolidated annual financial statements of the Auto Limited Group for the
year ended 31 December 20.6.
Practice.
Tax implications can be ignored

No notes or comparative amounts are required.
Show all calculations.
Round off all calculations to the nearest Rand.
62
FAC3704/1
Suggested solution 1
AUTO LIMITED GROUP
ASSETS
Property, plant and equipment 987 000
(535 000 + 462 000 (B1) ± 40 000 (unrealised profit) + 10 000 (B1) + 20 000)
Goodwill 6 400a
!
Cash and cash equivalents (260 320 + 302 000) The revaluation of 562 320
R20 000 (140 000
± 120 000) must be
added as the
EQUITY AND LIABILITIES revaluation was not
Total equity recorded in the 1 277 129
books of Mobile
Limited
Non-controlling interest (110 631f+ 80 000(pref. shares)) 190 631
Long-term borrowings (200 000 + 80 000 ± 80 000) 200 000
63
FAC3704/1
AUTO LIMITED GROUP

31 DECEMBER 20.6
R
Gross profit (419 800 + 328 000) 747 800
Other income (67 200 + 53 200 ± 16 000(div) ± 40 000(B1) ± 11 200(interest)) 53 200
Other expenses (32 500 + 22 600 ± 10 000(1)(dep)) (45 100)
Finance costs (8 000 + 11 200 ± 11 200) (8 000)
Owners of the parent (balancing) 461 938
Non-controlling interest (47 731c + 8 000(pref dividends)) 55 731
517 669
AUTO LIMITED GROUP

31 DECEMBER 20.6
Non-
R R R R R
Balance at 1 January 20.6 300 000 339 5601 639 560 146 9002 786 460
Profit for the year/Total compre-
hensive income for the year 461 938 461 938 55 731 517 669
Dividends paid (15 000) (15 000) (12 000)3 (27 000)
Balance at 31 December 20.6 300 000 786 498 1 086 498 190 6314 1 277 129
1
245 560 + 94 000b = 339 560
2
66 900g + 80 000(pref) = 146 900
3
4 000e + 8 000(pref div) = 12 000
4
Check: 110 631f + 80 000(pref shares) = 190 631
Calculations
B1. Gain on sale of machinery (Auto Limited to Mobile Limited)
R
Selling price 140 000
Carrying amount (100 000)
40 000
Excess depreciation (40 000/2 years x 6/12) 10 000
64
FAC3704/1
Comments
Auto Limited (parent) sold a machine to Mobile Limited (subsidiary) thus the intragroup
profit of R40 000 (calculation 1) will be eliminated in the statement of financial position
(property, plant and equipment) and the statement of comprehensive income (other
income). The parent made the profit thus there is no effect on the non-controlling interest.
The remaining useful life of the machine is calculated as follows:

R
1 July 20.3 Cost price 250 000
31 December 20.3 Depreciation (250 000 x 20% x 6/12) (25 000) 6 months
31 December 20.4 Depreciation (250 000 x 20%) (50 000) 1 year
31 December 20.5 Depreciation (250 000 x 20%) (50 000) 1 year
30 June 20.6 Depreciation (250 000 x 20% x 6/12) (25 000) 6 months
Carrying amount on date of sale 100 000 3 years
The useful life of the machine is 5 years (100/20 = 5 years).

3 years have already been written off before the asset was sold, therefore the remaining
useful life of the machine is 2 years. The intragroup profit is thus realised over 2 years
through depreciation. The asset was sold on 1 July 20.6 thus the excess depreciation is
calculated pro rata for half the year (refer to calculation 1).
Comments
Percentage interest that Auto Limited has in:

Mobile Limited: 120 000/150 000 = 80%
Structure of group:
Auto Limited
80% 1 January 20.4
!
Mobile Limited
The acquisition took place on 1 January 20.4 thus when the analysis of Mobile Limited is
prepared there will be ``since acquisition'' reserves as the group is being consolidated on
31 December 20.6.
65
FAC3704/1
Disclosed in SOCIE
under the RETAINED
EARNINGS COLUMN
in opening retained
earnings Disclosed in SCI
! after TOTAL
COMPREHENSIVE
INCOME FOR THE
Disclosed in SFP as YEAR
!
NON-CURRENT
ASSET !
2. Analysis of owners equity of Mobile Limited

Total Auto Limited NCI
100% 80% 20%
At Since
R R R R
At acquisition
Share capital 150 000 120 000 30 000
Revaluation surplus (140 000 ± 120 000) 20 000 16 000 4 000
217 000 173 600 43 400
Equity represented by goodwill 6 400 6 400a Ð
Consideration and NCIl 223 400 180 000 43 400
Since acquisition
Retained earnings (164 500 ± 47 000) 117 500 94 000b 23 500
66 900g
Current year
Profit for the year 238 654 190 923 47 731c
Profit for the year (347 400 ±100 746) 246 654
Income attributable to preference shareholders (8 000)
Dividends paid (20 000) (16 000) (4 000)e
559 554 268 923 110 631f
Intragroup !
!
transaction ±
eliminated in SCI Disclosed in
from `òther SFP
income'' under EQUITY AND
LIABILITIES
!
Disclosed in (with regards to

SOCIE as ordinary shares)
dividends paid
under NON-
CONTROLLING
INTEREST column
66
FAC3704/1
4. Pro forma consolidation journals
Dr Cr NCI
R R R
At acquisition
J1 Property, plant and equipment 20 000
Recording of land and buildings of Mobile Limited
revalued to fair value at acquisition
(140 000 ± 120 000)

Investment in Mobile Limited 180 000
Goodwill 6 400
Elimination of owners' equity of Mobile Limited at
acquisition
Since acquisition
J3 Retained earnings ± beginning of the year 23 500
Recording of non-controlling interest in retained
earnings of Mobile Limited
((165 400 ± 47 000) 6 20%)
66 900g
Current year
Non-controlling interest (SFP) 47 731 47 731c
Recording of non-controlling interest in profit after
tax of Mobile Limited
((347 400 ± 100 746 ± 8 000(pref div)) 6 20%)
J5 Other income 16 000

Non-controlling interest (SFP) 4 000 (4 000)e
Dividends paid 20 000
Elimination of intragroup ordinary dividend and
recording of non-controlling interest therein
110 631f
Preference share capital
J6 Preference share capital 80 000
Elimination of preference owners' equity of Mobile
Limited at acquisition
J7 Non-controlling interest (SCI) 8 000 (8 000)d

Preference dividend paid 8 000
Elimination of intragroup preference dividend and
recording of non-controlling interest therein
Non-controlling interest ± Statement of Financial Position 190 631
67
FAC3704/1
Comments
FAC3704/1
Students struggle to understand consolidation journals. The analysis can be used as guidance on how to prepare consolidation journals.
If the subsidiary revalues its net assets at the acquisition date to fair value and does not recognise the revalued amounts in its own records,
then for consolidation purposes an adjustment is required to recognise the revalued assets of the subsidiary. A pro forma journal entry has to
68
be passed on consolidation to bring the revaluation into account. (Refer to journal 1.)
Analysis of owners' equity of Mobile Limited
Auto Limited
100% 80% 20%
Total At Since NCI
R R R R
At acquisition
Share capital 150 000 120 000 30 000
!
Revaluation surplus (140 000 ± 120 000) 20 000 16 000 4 000 Journal 2
217 000 173 600 43 400

Since acquisition
!
Journal 3
66 900g
Current year
!
Profit for the year 238 654 190 923 47 731c Journal 4
Profit for the year (347 400 ± 100 746) 246 654
Income attributable to preference owners (8 000)
!
Dividends paid (20 000) (16 000) (4 000)e Journal 5

f
559 554 268 923 110 631
. Apply the consolidation procedures in IAS 27 (AC 132).

. Eliminate intragroup balances and intragroup transactions and resulting unrealised
profits.
. Provide for deferred tax on unrealised intragroup profits.
. Prepare the pro forma consolidation journal entries for a group.
. Account for the accumulated losses of a subsidiary and insolvent subsidiaries.
. Account for any impairment of goodwill.
. Prepare the consolidated statement of comprehensive income, statement of
changes in equity and statement of financial position of a group.
69
FAC3704/1
STUDY UNIT
3
Complex groups
Learning outcome 3

identify different group formats in order to apply the relevant consolidation procedures for
the preparation of consolidated annual financial statements of a complex group.

This study unit consists of the following sections: Page
3.1 Composition of a group of entities 70
3.2 Horizontal groups 72
3.3 Vertical groups 77
3.4 Mixed groups 96
S t u d y
3.1 Composition of a group of entities
S t u d y
Group Statements (Volume 1): Chapter 8 (8.01±8.04)
A parent together with its subsidiaries and sub-subsidiaries, if there are any, form a group of
entities. The following describes the different possible compositions of a group of entities:
Simple group
A simple group is a group consisting of a parent and a single subsidiary.
Complex group
A complex group is a group consisting of a parent and more than one subsidiary. There are
three types of complex groups, namely horizontal, vertical and mixed groups.
70
FAC3704/1
Horizontal group (single level structures)
A horizontal group is a group consisting of a parent which holds a direct interest in several
other entities (subsidiaries).
The group can be schematically illustrated as follows:
A Limited
(parent)
!
!
B Limited C Limited
(subsidiary) (subsidiary)
Vertical group (multiple level structures)

A vertical group is a group consisting of a parent which holds a direct interest in a subsidiary
which in turn holds a direct interest in its own subsidiary. The parent thus holds an indirect
interest in the bottom subsidiary. The group can be schematically illustrated as follows:
A Limited A Limited
(parent) (parent)
! !
!
B Limited B Limited C Limited

(subsidiary) (subsidiary) (subsidiary)
! ! !
C Limited D Limited E Limited
(sub-subsidiary) (sub-subsidiary) (sub-subsidiary)
Mixed group
A mixed group is a group consisting of a horizontal and vertical group. The group can be
schematically illustrated as follows:
A Limited
(parent)
!
!
B Limited C Limited
(Subsidiary of A Limited (Subsidiary of A Limited
!
and parent of C Limited) and B Limited)
71
FAC3704/1
3.2 Horizontal groups
E x a m p l e 3.1
The following are the abridged trial balances of A Limited, B Limited and C Limited at
31 December 20.3:
A Limited B Limited C Limited

R R R
Credits
Share capital
Ð 100 000 ordinary shares 100 000 Ð Ð
Ð 80 000 ordinary shares Ð 80 000 Ð
Ð 30 000 ordinary shares Ð Ð 60 000
Retained earnings ± beginning of year 200 000 150 000 110 000
Profit before tax 345 000 220 000 95 000
645 000 450 000 265 000
Debits
Property, plant and equipment 266 500 284 000 136 500
Investment in B Limited at fair value 110 000 Ð Ð
Investment in C Limited at fair value 100 000 Ð Ð
Trade and other receivables 35 000 60 000 65 000
Income tax expense 103 500 66 000 28 500
Dividends paid 30 000 40 000 35 000
645 000 450 000 265 000
1. A Limited purchased 60 000 shares in B Limited on 1 January 20.0 when B Limited's
retained earnings amounted to R60 000. On 1 January 20.1 A Limited acquired 27 000
shares in C Limited, when the retained earnings of C Limited amounted to R40 000. On
both acquisition dates the fair values of the identifiable assets, liabilities and contingent
liabilities were considered to be equal to the carrying amounts of these items.
3. The group uses the partial goodwill method to recognise goodwill. (The non-controlling
interest is measured at its proportionate interest in the net identifiable assets of the
acquirer.) Goodwill was not considered to be impaired at year end.
4. The fair value of available-for-sale financial assets is equal to the cost price thereof. All fair
value adjustments are recognised in equity.
REQUIRED:
Prepare the consolidated annual financial statement of the A Limited Group for year ended
31 December 20.3. Your answer must comply with the requirements of Generally
Accepted Accounting Practice.
No notes are required.
Ignore comparative figures.
72
FAC3704/1
S o l u t i o n 3.1
A LIMITED GROUP
ASSETS
Property, plant and equipment (266 500 + 284 000 + 136 500) 687 000
Goodwill (5 000a + 10 000g) 15 000
Trade and other receivables (35 000 + 60 000 + 65 000) 160 000
Equity attributable to owners of the parent 755 850
Non-controlling interest (86 000f + 20 150m) 106 150
A LIMITED GROUP

31 DECEMBER 20.3
R
Profit before tax (345 000 + 220 000 + 95 000 ± 30 000(div) ± 31 500(div)) 598 500
Income tax expense (103 500 + 66 000 + 28 500) (198 000)
Total comprehensive income attrbutable to:
Owners of the parent 355 350
Non-controlling interest (38 500d + 6 650j) 45 150
400 500
73
FAC3704/1
A LIMITED GROUP

31 DECEMBER 20.3
Non-
R R R R R
Dividends paid (30 000) (30 000) (13 500)3 (43 500)
Profit for the year/Total
comprehensive income for
355 350 355 350 45 150 400 500
the year
1
200 000 + 67 500b + 63 000h = 330 500 or 200 000 + ((110 000 ± 40 000) ± 7 000 (J6)) +
((150 000 ± 60 000) ± 22 500 (J2)) = 330 500
2
57 500c + 17 000i = 74 500
3
10 000e + 3 500k = 13 500
4
Check: 86 000f + 20 150m = 106 150
Calculations
C1 Analysis of owners' equity of B Limited
100% 75% 25%

Total At Since NCI
R R R R
At acquisition
Share capital 80 000 60 000 20 000
140 000 105 000 35 000
Since acquisition
57 500c
Current year
Profit for the year (220 000 ± 66 000) 154 000 115 500 38 500d
Dividends paid (40 000) (30 000) (10 000)e
349 000 5 000 153 000 86 000f
74
FAC3704/1
C2 Analysis of owners' equity of C Limited
100% 90% 10%

Total At Since NCI
R R R R
At acquisition
Share capital 60 000 54 000 6 000
100 000 90 000 10 000
Equity represented by goodwill 10 000 10 000g Ð
Since acquisition
17 000i
Current year
Profit for the year (95 000 ± 28 500) 66 500 59 850 6 650j
Dividends paid (35 000) (31 500) (3 500)k
211 500 (10 000) 91 350 20 150m
Comments
Percentage interest that A Limited has in:

B Limited: 60 000/80 000 = 75%
C Limited: 27 000/(60 000/R2) = 90%
Structure of group:
A
Limited
1 January 20.0 1 January 20.1

75% 90%
!
!
B C
Limited Limited
From the above it is clear that A Limited has a direct interest in B Limited and a direct
interest in C Limited thus the group is a horizontal group.
An analysis will be prepared for B Limited and C Limited. An analysis is prepared for each
subsidiary individually as the group is a horizontal group and there is no direct relationship
between B Limited and C Limited.
75
FAC3704/1
C3 Pro forma consolidation journals
Dr Cr NCI
R R R
Goodwill 5 000a
Elimination of owners' equity in B Limited
at acquisition

Recording of the non-controlling interest in
retained earnings of B Limited
[(150 000 ± 60 000) 6 25%]
57 500c

Non-controlling interest (SFP) 38 500 38 500d
the year of B Limited [(220 000 ± 66 000) 6 25%]
J4 Profit before tax (other income) 30 000

Elimination of intragroup dividend and recording
portion of non-controlling interest therein
86 000f

Goodwill 10 000g
Investment in C Limited 100 000
Elimination of owners' equity in C Limited at
acquisition

earnings of C Limited [(110 000 ± 40 000) x 10%]
17 000i
Non-controlling interest (SFP) 6 650 6 650j
the period of C Limited [(95 000 ± 28 500) 6 10%]

Non-controlling interest (SFP) 3 500 (3 500)k
Elimination of intragroup dividend and portion of
non-controlling interest therein.
20 150m
76
FAC3704/1
3.3 Vertical groups
Important:
Note that the effective holding method explained in Group Statements is not used in this
module. You do not need to study the effective holding method for FAC3704.
A Limited
70% (31 July 20.5)
!
B Limited
65% (1 January 20.3)
!
C Limited
Comments
A vertical group is always consolidated from bottom to the top.

The owners' equity of C Limited will always be analysed before the owners' equity of
B Limited. The date of acquisition of an interest in a subsidiary is therefore very
important. If B Limited purchased its interest in C Limited on 1 January 20.3 and
A Limited purchased its interest in B Limited on 31 July 20.5, C Limited will only become a
subsidiary of A Limited on 31 July 20.5, the date the group was formed. In simple terms
we will only take into account profits of the sub-subsidiary ``C Limited'' from 31 July 20.5
(the date the group was formed.)
E x a m p l e 3.2
The following are the abridged trial balances of A Limited, B Limited and C Limited at
31 December 20.3:
A Limited B Limited C Limited
R R R
Credits
Share capital Ð 200 000 ordinary shares 200 000 Ð Ð
Retained earnings Ð beginning of year 300 000 190 000 210 000
Long-term liability 70 000 Ð 95 000
820 000 530 000 665 000
Debits
Investment in B Limited at fair value 165 000 Ð Ð
Investment in C Limited at fair value Ð 232 000 Ð
Dividends paid 30 000 40 000 35 000
820 000 530 000 665 000
77
FAC3704/1
1. A Limited purchased 98 000 shares in B Limited on 1 January 20.0 when B Limited's
retained earnings amounted to R90 000. The fair values of the identifiable assets, liabilities
and contingent liabilities at the acquisition date of B Limited were considered to be equal to
the carrying amounts of these items.
2. B Limited acquired 127 500 shares in C Limited on 1 January 20.1, when C Limited's
retained earnings amounted to R120 000. The fair values of the identifiable assets,
liabilities and contingent liabilities at the acquisition date of C Limited were considered to
be equal to the carrying amounts of these items.
interest is recognised at its proportionate share of the acquirer's net identifiable assets.)
Goodwill was not considered to be impaired at year end.
5. The fair value of available-for-sale financial assets is equal to the cost price thereof.
REQUIRED:
Prepare the consolidated annual financial statement of the A Limited Group for year ended
31 December 20.3. Your answer must comply with the requirements of Generally
Ignore the implication of secondary tax on companies.
S o l u t i o n 3.2
A LIMITED GROUP
ASSETS
Goodwill (4 000g + 1 750o (2 500a 6 70%)) 5 750
78
FAC3704/1
R

Non-controlling interest (70 800f + 179 760n) 250 560
Long-term borrowings (70 000 + 95 000) 165 000
A LIMITED GROUP

31 DECEMBER 20.3
R
Profit before tax (C3) 602 250
Non-controlling interest (42 000k + 28 560l + 22 050d) 92 610
404 250
A LIMITED GROUP

31 DECEMBER 20.3
Non-
R R R R R
Profit for the year/Total com-
prehensive income for the year 311 640 311 640 92 610 404 250
Dividends paid (30 000) (30 000) (17 250)3 (47 250)
Balance at 31 December 20.3 200 000 705 190 905 190 250 5604 1 155 750
1
300 000 + 70 000h + 53 550i = 423 550 or 300 000 + ((190 000 ± 90 000) ± 30 000 (J6)) +
(210 000 ± 120 000 ± 13 500 (J2) ± 22 950 (J7)) = 423 550
2
54 000c + 121 200j = 175 200
3
5 250e + 12 000m = 17 250
79
FAC3704/1
Calculations
100% 85% 15%

Total At Since NCI
R R R R
At acquisition
Share capital 150 000 127 500 22 500
Retained earnings Ð 01/01/20.1 120 000 102 000 18 000
270 000 229 500 40 500
Since acquisition
54 000c
Current year
Profit for the year (210 000 ± 63 000) 147 000 124 950 22 050d
Dividends paid (35 000) (29 750) (5 250)e
474 500 171 700 70 800f
100% 70% 30%

Total At Since NCI
R R R R
At acquisition
Share capital 140 000 98 000 42 000
230 000 161 000 69 000
Equity represented by goodwill 4 000 4 000g Ð
Since acquisition
Retained earnings (190 000 ± 90 000) 100 000 70 000h 30 000
C Limited: Retained earnings 76 500 53 550i 22 950
Goodwill (2 500)a (1 750)o (750)
408 000 121 200i
Current year
Profit for the year Ð B Limited
(200 000 ± 60 000) 140 000 98 000 42 000k
Profit for the year Ð C Limited 95 200 66 640 28 560l
(124 950 ± 29 750)
Dividends paid (40 000) (28 000) (12 000)m
603 200 260 190 179 760n
80
FAC3704/1
C3 Profit before tax
R
Profit before tax ± A Limited 250 000
Intragroup dividends received from B Limited (40 000 6 70%) (28 000)
Profit before tax ± B Limited 200 000
Intragroup dividends received from C Limited (35 000 6 85%) (29 750)
Profit before tax ± C Limited 210 000
Profit before tax ± Group 602 250
Comments

B Limited: 98 000/140 000 = 70%
C Limited: 127 500/150 000 = 85%
Structure of group:
A Limited
1 January 20.0
! 70%
B Limited
1 January 20.1
! 85%
C Limited
A Limited acquired its interest in B Limited before B Limited acquired its interest in
C Limited. The group therefore was formed on the date (1 January 20.0) that A Limited
acquired its interest in B Limited.
From the above it is clear that A Limited has a direct interest in B Limited and an indirect
interest in C Limited (due to B Limited having a direct interest in C Limited) thus the group
is a vertical group.
An analysis will first be prepared for C Limited and then for B Limited due to the group
being a vertical group.
Dr Cr NCI
R R R
Goodwill 2 500a
acquisition
81
FAC3704/1
Dr Cr NCI
R R R
earnings of C Limited
[(210 000 ± 120 000) 6 15%]
54 000c
Non-controlling interest (SFP) 22 050 22 050d
earnings of C Limited
[(210 000 ± 120 000) 6 15%]
J4 Profit before tax 29 750

of portion of non-controlling interest therein
70 800f

Goodwill 4 000g
Elimination of owners' equity in B Limited at
acquisition

earnings of B Limited
[(190 000 ± 90 000) 6 30%]

Recording of non-controlling interest of B Limited
in retained earnings of C Limited
[(210 000 ± 120 000) 6 85% 6 30%]
J8 Non-controlling interest (SFP) 750 (750)

Goodwill 750
in goodwill of C Limited (2 500 6 30%)
121 200j
Non-controlling interest (SFP) 42 000 42 000k
the year of B Limited [(200 000 ± 60 000 6 30%]
82
FAC3704/1
Dr Cr NCI
R R R
Non-controlling interest (SFP) 28 560 28 560l
in profit for the year of C Limited.
[(210 000 ± 63 000 ± 35 000) 6 85% 6 30%]

Non-controlling interest (SFP) 12 000 (12 000)m
Elimination of intragroup dividend and recording of
portion of non-controlling interest therein.
179 760n
E x a m p l e 3.3
Use the same information as in example 2, but change the following:
1. A Limited purchased 98 000 shares in B Limited on 1 January 20.3. B Limited acquired
127 500 shares in C Limited on 1 January 20.1, when C Limited's retained earnings were
R120 000.
2. Assume that the fair values of the identifiable assets, liabilities and contingent liabilities at
the time of both acquisitions have been reassessed and were considered to be
reasonable.
REQUIRED:
Prepare the consolidated annual financial statements of the A Limited Group for the year
ended 31 December 20.3. Your answer must comply with the requirements of Generally
S o l u t i o n 3.3
A LIMITED GROUP
R
ASSETS
83
FAC3704/1
R

Non-controlling interest (70 800e + 179 760j) 250 560
A LIMITED GROUP

31 DECEMBER 20.3
R
Profit before tax (C3) 720 050
Non-controlling interest (42 000g + 28 560h + 22 050c) 92 610
522 050
A LIMITED GROUP

31 DECEMBER 20.3
Non-
R R R R R
Balance at 1 January 20.3 200 000 300 000 500 000 500 000
Non-controlling interest in
respect of investment acquired 175 2001 175 200
Profit for the year/Total compre-
429 440 429 440 92 610 522 050
hensive income for the year
2
Dividends paid (30 000) (30 000) (17 250) (47 250)
Balance at 31 December 20.3 200 000 699 440 899 440 250 560 1 150 000
1
54 000b + 121 200k = 175 200
2
5 250d + 12 000i = 17 250
84
FAC3704/1
Calculations
100% 85% 15%

Total At Since NCI
R R R R
At acquisition
Share capital 150 000 127 500 22 500
360 000 306 000 54 000b
Equity represented by gain on bargain purchase (74 000) (74 000)a Ð
Current year
Profit for the year (210 000 ± 63 000) 147 000 124 950 22 050c
Dividends paid (35 000) (29 750) (5 250)d
398 000 95 200 70 800e
100% 70% 30%

Total At Since NCI
R R R R
At acquisition
Share capital 140 000 98 000 42 000
Gain on bargain purchase ± C Limited (C1) 74 000a 51 800 22 200
404 000 282 800 121 200k
Equity represented by gain on bargain purchase (117 800) (117 800)f Ð
Current year
Profit for the year:
Ð B Limited (200 000 ± 60 000) 140 000 98 000 42 000g
Ð C Limited (124 950 ± 29 750) 95 200 66 640 28 560h
Dividends paid (40 000) (28 000) (12 000)i
481 400 136 640 179 760j
C3 Profit before tax
R
Profit before tax ± A Limited 250 000
Intragroup dividends received from B Limited (40 000 6 70%) (28 000)
Profit before tax ± B Limited 200 000
Intragroup dividends received from C Limited (35 000 6 85%) (29 750)
Profit before tax ± C Limited 210 000
Recognition of gain on bargain purchase (C2) (refer to comments) 117 800f
Profit before tax ± Group 602 250
85
FAC3704/1
Comments

B Limited: 98 000/140 000 = 70%
C Limited: 127 500/150 000 = 85%
Structure of group:
A Limited
1 January 20.3
70%
!
B Limited
1 January 20.1
85%
!
C Limited
A Limited acquired its interest in B Limited after B Limited acquired its interest in
C Limited. The group therefore was formed on the date that A Limited acquired its interest
in B Limited (1 January 20.3).
From the above it is clear that A Limited has a direct interest in B Limited and an indirect
interest in C Limited (due to B Limited having a direct interest in C Limited) thus the group
is a vertical group.
An analysis will first be prepared for C Limited and then for B Limited due to the group
being a vertical group.

A Limited acquired its interest in B Limited after B Limited acquired its interest in C Limited
thus the gain on bargain purchase (R74 000) of C Limited will be included in the at
acquisition reserves of B Limited. The gain on bargain purchase (R117 400) of B Limited
will be included in the consolidated profit for the year (`òther income'') in the
statement of comprehensive income as the acquisition took place in the current year.
86
FAC3704/1
Dr Cr NCI
R R R
Non-controlling interest (SFP) 54 000 54 000b
Gain on bargain purchase 74 000a
acquisition

the year of C Limited
[(210 000 ± 63 000) 6 15%]

Non-controlling interest (SFP) 5 250 (5 250)d
portion of non-controlling interest therein.
70 800e
Gain on bargain purchase ± C Limited 74 000a
Gain on bargain purchase 117 800f
Elimination of owners' equity in B Limited at
acquisition

Non-controlling interest (SFP) 42 000 42 000g
the year of B Limited ((200 000 ± 60 000) 6 30%)

Non-controlling interest (SFP) 28 560 28 560h
in profit for the year of C Limited
((210 000 ± 63 000 ± 35 000) 685% 630%)

Non-controlling interest (SFP) 12 000 (12 000)i
portion of non-controlling interest therein
179 760j
87
FAC3704/1
E x a m p l e 3.4
The following balances were taken from the accounting records of Left Limited, Right Limited
and Centre Limited at 30 June 20.5:
Left Right Centre

Limited Limited Limited
Dr/(Cr) Dr/(Cr) Dr/(Cr)
R R R
Profit for the year (450 000) (900 000) (720 000)
Inventories 900 000 460 000 700 000
Trade receivables 724 857 697 714 603 571
Cash and cash equivalents 1 033 000 Ð 412 000
Investment in Right Limited Ð 60 000 ordinary
shares at fair value 1 800 000 Ð Ð
Investment in Centre Limited Ð 40 000 ordinary
shares at fair value Ð 1 600 000 Ð
Land 1 419 000 2 400 000 1 000 000
Plant at cost 1 228 000 1 420 000 618 000
Provisional tax payments 412 000 196 000 158 000
Retained earnings Ð 1 July 20.4 (6 000 000) (4 805 000) (2 113 000)
Deferred tax (48 000) (62 000) (24 000)
Provision for tax (192 857) (385 714) (308 571)
Share capital Ð 100 000 ordinary shares (100 000) Ð Ð
Share capital Ð 50 000 ordinary shares Ð Ð (50 000)
Share capital Ð 75 000 ordinary shares Ð (150 000) Ð
Accumulated depreciation Ð plant (221 040) (170 400) (37 080)
Trade and other payables (504 960) (280 600) (238 920)
Short-term borrowings (bank overdraft) Ð (20 000) Ð
Ð Ð Ð
1. On 1 July 20.2 Left Limited purchased 60 000 ordinary shares in Right Limited for
R1 800 000. On the same day Right Limited purchased 40 000 ordinary shares in Centre
Limited and paid R1 600 000 for the investment.
2. On 1 July 20.2 the following information was applicable:
Right Centre
Limited Limited
R R
3. On 1 July 20.2 Right Limited valued Centre Limited's land at R1 600 000. The revaluation
was not recorded in the books of Centre Limited. The fair values of the remaining assets,
liabilities and contingent liabilities of Right Limited and Centre Limited on 1 July 20.2 were
considered to be equal to the carrying amounts of these items.
4. During the current year Left Limited sold inventories to Centre Limited at a profit of 50% on
cost price. On 30 June 20.5 Centre Limited had inventories on hand that were purchased
from Left Limited of R300 000.
5. During the current year Centre Limited sold inventories to Right Limited at a profit of 331/3%
on cost price. On 30 June 20.5 Right Limited had inventories on hand that were purchased
from Centre Limited of R100 000.
6. Included in the trade receivables of Left Limited is a loan to Centre Limited of R15 000. The
loan is included in the trade and other payables of Centre Limited.
88
FAC3704/1
8. The goodwill that arose on the acquisition of Right Limited was considered to be impaired
by R200 000 at year end.
9. Assume a tax rate of 30%.
REQUIRED:
Prepare the consolidated annual financial statements of Left Limited Group for the year
ended 30 June 20.5. Your answer must comply with the requirements of Generally
S o l u t i o n 3.4
LEFT LIMITED GROUP
R
ASSETS
Non-current assets 8 690 080
Property, plant and equipment (C8) 8 256 480
Goodwill (633 600g ± 200 000m) 433 600
Current assets 5 391 142
Inventories (900 000 + 460 000 + 700 000 ± 100 000(C4) ± 25 000(C4)) 1 935 000
Trade receivables (724 857 + 697 714 + 603 571 ± 15 000 (loan)) 2 011 142
Cash and cah equivalents (1 033 000 + 412 000) 1 445 000
89
FAC3704/1
R

Retained earnings 10 577 920
Non-controlling interest (675 100f + 1 391 080l) 2 066 180
Total liabilities 1 337 122
Deferred tax (C6) 186 500
Current liabilities 1 150 622
Short-term borrowings 20 000
Trade and other payables (504 960 + 280 600 + 238 920 ± 15 000 (loan)) 1 009 480
Current tax payable (C7) 121 142
LEFT LIMITED GROUP

30 JUNE 20.5
R
PROFIT BEFORE TAX (C5) 1 782 500
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 782 500
Owners of the parent 1 349 600
Non-controlling interest (180 000i + 112 400k + 140 500e) 432 900
1 782 500
LEFT LIMITED GROUP

30 JUNE 20.5
Non-
R R R R R
Balance at 1 July 20.4 100 000 9 228 3201 9 328 320 1 633 2802 10 961 600
the year 1 349 600 1 349 600 432 900 1 782 500
Balance at 30 June 20.5 100 000 10 577 920 10 677 920 2 066 180 12 744 100
1
6 000 000 + 3 228 320h = 9 228 320 or 6 000 000 + (2 133 000 ± 1 200 000 ± 182 000(J3)) + (4 805 000 ±
1 500 000 ± 661 000(J8)) ± 146 080(J9) = 9 228 320
2
534 600d + 1 098 680i = 1 633 280
90
FAC3704/1
Calculations
C1 Analysis of owners' equity of Centre Limited
100% 80% 20%

Total At Since NCI
R R R R
At acquisition
Share capital 50 000 40 000 10 000
Retained earnings 1 200 000 960 000 240 000
Revaluation surplus (600 000(C2) ± 90 000(C2)) 510 000 408 000 102 000
1 760 000 1 408 000 352 000
Since acquisition
Retained earnings (2 113 000 ± 1 200 000) 913 000 730 400b 182 600
2 865 000 534 600d
Current year
Profit for the year 702 500 562 000c 140 500e
Profit for the year (given) 720 000
Unrealisd profit (100 000 6 331/3/1331/3) (25 000)
Tax effect (25 000 6 30%) 7 500
3 567 500 1 292 400 675 100f
C2 Revaluation of land
R
Fair value 1 600 000

Carrying amount (1 000 000)
Deferred tax (600 000 6 50% 6 30%) 90 000
Comments
Revaluation not recorded in the records of the subsidiary

Land of Centre Limited was revalued at acquisition however the revaluation was not
recorded in the books of Centre Limited. An adjustment is required for consolidation
purposes to recognise the revalued assets of the subsidiary (i.e. the revaluation is
included in the analysis). A pro forma journal entry has to be passed on consolidation to
bring the revaluation into account (refer J3).
Deferred tax on revaluation

If land is revalued, deferred tax should be provided for on the total surplus above original
cost at 15% (50% 6 30%), irrespective of whether or not there is any intention to dispose
of the land, as the carrying amount of the land (a non-depreciable asset) can only be
recovered by means of sale.
91
FAC3704/1
C3 Analysis of owners' equity of Right Limited
100% 80% 20%

Total At Since NCI
R R R R
At acquisition
Share capital 150 000 120 000 30 000
Retained earnings 1 500 000 1 200 000 300 000
Goodwill Ð Centre Limited (C1) (192 000)a (153 600) (38 400)
1 458 000 1 166 400 291 600
Goodwill 633 600 633 600g Ð
Since acquisition
Retained earnings 4 035 400 3 228 320h 807 080
± Right Limited (4 805 000 ± 1 500 000 3 305 000
± Centre Limited (C1) 730 400b
Current year 1 098 680j

Profit for the year 1 462 000 1 169 600 292 400
± Right Limited (given) 900 000 180 000i
± Centre Limited (C1) 562 000c 112 400k
7 589 000 (633 600) 4 397 920 1 391 080l
Current year (given) 200 000m
Carrying amount Ð 30/06/20.5 (433 600)
Comments
Percentage interest that Left Limited has in:

Right Limited: 60 000/(150 000/2) = 80%
Centre Limited: 40 000/50 000 = 80%
Structure of group:
Left Limited
1 July 20.2
80%
!
Right Limited
1 July 20.2
80%
!
Centre Limited
Left Limited acquired its interest in Right Limited on the same date that Right Limited
acquired its interest in Centre Limited. The group therefore was formed on the date that
Left Limited acquired its interest in Right Limited (1 July 20.2).
From the above it is clear that Left Limited has a direct interest in Right Limited and an
indirect interest in Centre Limited (due to Right Limited having a direct interest in Centre
92
FAC3704/1
Limited) thus the group is a vertical group.
An analysis will first be prepared for Centre Limited and then for Right Limited due to the
group being a vertical group.
C4 Unrealised profit included in inventories

R
Inventories purchased by Centre Limited from Left Limited:

Unrealised profit in closing inventory (300 000 6 50/150) 100 000
Deferred tax (100 000 6 30%) 30 000
Inventories purchased by Right Limited from Centre Limited:
Unrealised profit in closing inventory (100 000 6 331/3 / 1331/3) 25 000
Deferred tax (25 000 6 30%) 7 500
C5 Profit for the year

R
Profit for the year:

± Left Limited 450 000
± Right Limited 900 000
± Centre Limited 720 000
Unrealised profit in closing inventory (300 000 6 50/150) (100 000)
Tax effect on unrealised profit (100 000 6 30%) 30 000
Unrealised profit in closing inventory (100 000 6 331/3 / 1331/3)) (25 000)
Tax effect on unrealised profit (25 000 6 30%) 7 500
Goodwill impaired (200 000)
Consolidated profit 1 782 500
C6 Deferred tax
R
Deferred tax (given):
Revaluation of land (C2) 90 000
Deferred tax on unrealised intragroup profit:
± Centre Limited (C4) (30 000)
± Right Limited (C4) (7 500)
186 500
93
FAC3704/1
C7 Tax payable
R
Provision for income tax expense:
Provisional tax payments:
± Left Limited (412 000)
± Right Limited (196 000)
± Centre Limited (158 000)
121 142
C8 Property, plant and equipment

Property Plant Total
R R R
Carrying amount at end of year 5 419 000 2 837 480 8 256 480
Cost 5 419 0001 3 266 0002 8 685 000
Accumulated depreciation Ð (428 520)3 (428 520)
1
1 419 000 + 2 400 000 + 1 000 000 + 600 000(2) = 5 419 000
2
1 228 000 + 1 420 000 + 618 000 = 3 266 000
3
221 040 + 170 400 + 37 080 = 428 520
Comments
Unrealised profits included in inventories

Sale of inventories from Left Limited to Centre Limited
Left Limited sold inventories to Centre Limited (parent to subsidiary). Left Limited made
the intragroup profit thus cost of sales of Left Limited is debited which will decrease the
group profit. Centre Limited purchased the inventories from Left Limited thus the
unrealised profit is included in the closing inventories of Centre Limited at year end.
Inventories are decreased with the unrealised profit to eliminate the unrealised intragroup
profit.
Left Limited (parent) is making the profit thus the unrealised profit in the inventories will
not be shown in the analysis of owners' equity of Centre Limited. In other words the
non-controlling interest will not be affected. The adjustments will be taken into account in
the consolidated statement of comprehensive income (profits) and consolidated
statement of financial position (inventories).
Sale of inventories from Centre Limited to Right Limited

Centre Limited sold inventories to Right Limited (subsidiary to parent). Centre Limited
made the intragroup profit. Cost of sales of Centre Limited is thus debited which will
decrease the group profit. Right Limited purchased the inventories from Centre Limited
thus the unrealised profit is included in the closing inventories of Right Limited at year
end. The inventories are decreased with the unrealised profit to eliminate the unrealised
intragroup profit.
Centre Limited (subsidiary) is making the profit thus the unrealised profit in the inventories
will be shown in the analysis of owners' equity of Centre Limited. In other words, the
non-controlling interest will also be adjusted. The adjustments will also be taken into
account in the consolidated statement of comprehensive income (profits or loss, part) and
consolidated statement of financial position (inventories).
94
FAC3704/1
Dr Cr NCI
R R R
Revaluation surplus
(600 000 ± (600 000 6 15%)) 510 000
Goodwill 192 000a
Investment in Centre Limited 1 600 000
Elimination of owners' equity in Centre Limited
at acquisition
J2 Land (1 600 000 ± 1 000 000) 600 000

Deferred tax (SFP) (600 000 6 15%) 90 000
Revaluation of land of Centre Limited at
acquisition

earnings since acquisition of Centre Limited
[(2 113 000 ± 1 200 000) 6 20%]
534 600d
J4 Profit for the year (Cost of sales) (C4) 25 000
Inventory (SFP) 25 000
Elimination of unrealised profit in closing
inventory of Right Limited
J5 Deferred tax (SFP) (C4) 7 500

Profit for the year (Income tax expense) 7 500
Tax implication of elimination of intragroup profit
in closing inventory

Non-controlling interest (SFP) 140 500 140 500e
the year of Centre Limited
[(720 000 ± 25 000 + 7 500) 6 20%]
675 100f
Goodwill 633 600g
Goodwill ± Centre Limited 192 000
Investment in Right Limited 800 000
Elimination of owners' equity in Right Limited at
acquisition

earnings since acquisition of Right Limited
[(4 805 000 ± 1 500 000) 6 20%]
95
FAC3704/1
Dr Cr NCI
R R R
earnings since acquisition of Centre Limited
((2 113 000 ± 1 200 000) x 80% x 20%)
1 098 680j
Non-controlling interest (SFP) 180 000 180 000i
the year of Right Limited

the year of Centre Limited for the current year
J12 Profit for the year 200 000

Goodwill 200 000m
J13 Profit for the year (Cost of sales) 100 000

Inventory (SFP) (300 000 x 50/150) 100 000
Elimination of intragroup profit in closing
inventory of Centre Limited
J14 Deferred tax (SFP) (100 000 x 30%) 30 000

Profit for the year (Income tax expense) 30 000
Tax implication of elimination of intragroup
profit in closing inventory
J15 Trade and other payables (Centre Limited) 15 000

Trade receivables (Left Limited) 15 000
Elimination of intragroup loan
1 391 080l
3.4 Mixed groups
S t u d y
Group Statements (Volume 1): Section 8.10 and example 8.7 (pages 392±397)
E x a m p l e 3.5
The following represents the abridged annual financial statements of Utah Limited,
Ohio Limited and the Maine Limited Group:
96
FAC3704/1
STATEMENTS OF FINANCIAL POSITION AS AT 31 AUGUST 20.8
Utah Ohio Maine

R R R
ASSETS
Non-current assets 981 000 337 500 778 400
Investments
Ð 80 000 Ordinary shares in Maine Limited at fair value 270 000 Ð Ð
Ð 30 000 Ordinary shares in Ohio Limited at fair value 170 000 Ð Ð
Current assets 494 000 305 000 283 000
Inventories 100 000 85 000 180 000
Total assets 475 000 642 500 1 061 400

Total equity 750 000 527 500 788 400
Equity attributable to owners of the parent 750 000 527 500 668 400
Share capital Ð 200 000 ordinary shares 200 000 Ð Ð
Non-controlling interest Ð Ð 120 000
Total liabilities 725 000 115 000 273 000
Non-current liabilities 600 000 50 000 250 000
Long-term borrowings 600 000 50 000 250 000
Current liabilities 125 000 65 000 23 000
Trade and other payables 125 000 65 000 23 000
Total equity and liabilities 1 475 000 642 500 1 061 400
STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 AUGUST 20.8
Utah Ohio Maine

R R R
Income tax expense (150 000) (112 500) (201 600)
PROFIT FOR THE YEAR 350 000 262 500 470 400
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 350 000 262 500 470 400
Owners of the parent 350 000 262 500 398 400
Non-controlling interest Ð Ð 72 000
350 000 262 500 470 400
97
FAC3704/1
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 20.8
Retained earnings
Utah Ohio Maine
R R R
Balance at 1 September 20.7 240 000 240 000 200 000
Dividends paid (40 000) (25 000) (30 000)
Profit for the year/Total comprehensive income for
the year 350 000 262 500 398 400
Balance at 31 August 20.8 550 000 477 500 568 400
1. Utah Limited acquired its interest in Maine Limited on 1 September 20.7. The fair value of
the identifiable assets, liabilities and contingent liabilities at the acquisition date of Maine
Limited were considered to be equal to the carrying amount of these items.
2. Utah Limited acquired its interest in Ohio Limited on 1 September 20.7. The identifiable
assets, liabilities and contingent liabilities at the acquisition date of Ohio Limited were
considered to be fairly reflected except for the following items:
Fair Carrying
value amount
R R
Administration building 200 800 180 000
Assume that the fair values of the above items have been reassessed and are considered
to be reasonable.
The goodwill that arose on the acquisition of Maine Limited was considered to be impaired
by R20 000 at the end of the current year.
6. The normal company tax rate is 30%.
REQUIRED:
Prepare the consolidated annual financial statements of Utah Limited Group for the year
ended 31 August 20.8. Your answer must comply with the requirements of Generally
98
FAC3704/1
S o l u t i o n 3.5
UTAH LIMITED GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20.8
ASSETS
Property, plant and equipment (541 000 + 337 500 + 778 400 + 20 800(C3)/(J5) 1 677 700
Goodwill (30 000a ± 20 000f) 10 000
Current assets 1 082 000
Trade receivables (394 000 + 220 000 + 103 000) 717 000
Inventories (100 000 + 85 000 + 180 000) 365 000

Share capital ± 200 000 ordinary shares 200 000
Non-controlling interest (120 000(given) + 133 680e + 218 072k) 471 752
Total liabilities 1 116 120
Long-term borrowings (600 000 + 50 000 + 250 000) 900 000
Deferred tax (3 720 ± 600) 3 120
Trade and other payables (125 000 + 65 000 + 23 000) 213 000
99
FAC3704/1
UTAH LIMITED GROUP

31 AUGUST 20.8
Profit before tax1 1 509 800

Income tax expense2 (467 820)
PROFIT FOR THE YEAR 1 041 980
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 041 980
Non-controlling interest3 260 152
1 041 980
1
500 000 (60% x 25 000(div)) ± (80% x 30 000(div)) + 375 000 + 12 400(3) + 672 000 ± 20 000f +
9 400g = 1 509 800
2
150 000 + 112 500 = 3 720(B3) + 201 600 = 467 820
3
72 000(given) + 79 680c + 108 472i = 260 152
Comments
The gain on bargain purchase (R9 400) that arose on the acquisition of Ohio Limited is
included in ``profit before tax'' due to the acquisition of Ohio Limited by Utah Limited taking
place in the current year (1 September 20.7).
UTAH LIMITED GROUP
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 20.8
Non-
R R R R R
Balance at 1 September 200 000 240 000 440 000 Ð 440 000
20.7
Acquisition of subsidiaries 227 6001 227 600
Dividends paid (40 000) (40 000) (16 000)2 (56 000)
the year 781 828 781 828 260 152 1 041 980
Balance at 31 August 20.8 200 000 981 828 1 181 828 471 752 1 653 580
1 60 000b + 119 600h + (120 000(given (SFP)) ± 72 000 (given (SCI))) = 227 600
2 10 000 j + 6 000d = 16 000
100
FAC3704/1
Calculations
C1 Analysis of owners' equity of Maine Limited
100% 80% 20%

Total At Since NCI
R R R R
At acquisition
Share capital 100 000 80 000 20 000
300 000 240 000 60 000b
Current year
Profit for the year (given (SCI)) 398 400 318 720 79 680c
Dividends paid (30 000) (24 000) (6 000)d
698 400 (30 000) 294 720 133 680e
Current year (given) 20 000f
Carrying amount Ð 31 August 20.8 (10 000)
C2 Analysis of owners' equity of Ohio Limited
100% 60% 40%

Total At Since NCI
R R R R
At acquisition
Share capital 50 000 30 000 20 000
Retained earnings (240 000 ± 8 680(C3)) 231 320 138 792 92 528
Revaluation surplus (C3) 17 680 10 608 7 072
299 000 179 400 119 600h
Equity represented by gain on bargain purchase (9 400) (9 400)g Ð
Current year
Profit for the year (262 500 + (8 680(C3)) 271 180 162 708 108 472i
Dividends paid (25 000) (15 000) (10 000)j
535 780 147 708 218 072k
C3 Calculation of effect of fair value adjustments at acquisition
Carrying Fair Re- Tax After tax

amount value valuation effect revalua-
R R R R tion
R
Administration building 180 000 200 800 20 800 (3 120)1 17 680

Inventories 70 000 57 600 (12 400) 3 7202 (8 680)
1
20 800 6 50% 6 30% = 3 120
2
12 400 6 30% = 3 720
101
FAC3704/1
Comments
Percentage interest that Utah Limited has in:

Ohio Limited: 30 000/50 000 = 60%
Maine Limited Group: 80 000/100 000 = 80%
Structure of group:
Utah
Limited
1 September 20.7 1 September 20.7

60% 80%
!
!
Ohio Maine Limited

Limited Group
From the above it is clear that Utah Limited has a direct interest in Ohio Limited and a
direct interest in the Maine Limited Group thus the group is a horizontal group.
An analysis will be prepared for Ohio Limited and the Maine Limited Group. An analysis is
prepared for each subsidiary individually as the group is a horizontal group and there is no
direct relationship between Ohio Limited and the Maine Limited Group.
Dr Cr NCI
R R R
Goodwill 30 000a
Investment in Maine Limited 270 000
Elimination of owners' equity in Maine Limited
at acquisition by H Limited

the year of Maine Limited
(398 400 x 20% = 79 680)

Non-controlling interest (SFP) 6 000 (6 000)d
of portion of non-controlling interest therein of
Maine Limited
133 680e
102
FAC3704/1
Dr Cr NCI
R R R

Goodwill 20 000f
Impairment of goodwill of Maine Limited

Deferred tax 600
Inventories 12 400
Recording of fair value adjustments at
acquisition (3)

Retained earnings (240 000 7 8 680) 231 320
Non-controlling interest (SFP) 119 600 119 600h
Investment in Ohio Limited 170 000
Gain on bargain purchase (profit before tax) 9 400g
Elimination of owners' equity in Ohio Limited
at acquisition

Non-controlling interest (SFP) 108 472 108 472i
Recording of non-controlling interest in profit
for the year of Ohio Limited
((262 500 + 8 680(3)) 6 40% = 108 472)

Non-controlling interest (SFP) 10 000 (10 000)j
portion of non-controlling interest therein of
Ohio Limited
218 072k

. describe and identify the different types of complex groups.

. compile the consolidation working papers of the different types of complex groups.
. consolidate from the consolidation working papers the information contained in the
financial statements of the different companies in the complex group.
. prepare and present the consolidated annual financial statements of a complex
group.
103
FAC3704/1
STUDY UNIT
4
Accounting for investments in associates
(IAS 28 (AC 110))
))
Learning outcome 4
& Explain associates in terms of IAS 28 (AC 110).
& Apply consolidation procedures in order to prepare consolidated annual financial

statements when a parent holds a direct or indirect interest in an associate and the results
of the associate are accounted for according to the equity method.

4.1 Basic concepts 104

4.2 Accounting for investments in associates in the separate financial statements
of the investor 105
4.3 Accounting for investments in associates in the consolidated financial
statements of the investor 105
4.4 Application of the equity method 105
4.5 Summary 114
S t u d y
4.1 Basic concepts
S t u d y
Group Statements (Volume 2): Chapter 9 ± sections 9.01±9.02
104
FAC3704/1
4.2 Accounting for investments in associates in the separate
financial statements of the investor
S t u d y
Group Statements (Volume 2): Chapter 9 Ð page 4
4.3 Accounting for investments in associates in the

consolidated financial statements of the investor
S t u d y
4.4 Application of the equity method
S t u d y
4.4.1 Theory
The equity method is an accounting method whereby the investment is initially recognised at
cost and thereafter adjusted for any post-acquisition changes in the investee's (associates) net
assets (or as net assets are equal to equity, the equity of the investee).
The increase/decrease in equity consists of the following:
. Retained earnings/(Accumulated loss) since acquisition to the beginning of the current
period;
. Profit or loss for the current period; and
. Gains or losses included in other comprehensive income for the current period.
The recognition of an investor's share of the losses of the associate (investee) will decrease
the carrying amount of the investment in the associate.
When the investor's share of the losses equals (or exceeds) its interest in the associate, the
investor will discontinue recognising any further share of losses. Should the investee once
again make profits such profits will only be recognised after the share of profits equals the
losses not recognised.
Any dividends received from the associate will be accounted for as a reduction in the carrying
amount of the investment in the associate.
4.4.2 Intragroup transactions

The broad concepts underlying the consolidation procedures applied in the acquisition of a
subsidiary are adopted in accounting for the acquisition of an investment in an associate. (IAS
28(AC 110).20)
When an associate is accounted for using the equity method, unrealised profits and losses
resulting from transactions between an investor (or its consolidated subsidiaries) and
associates should be eliminated only to the extent of the investor's interest in the associate,
or recognised in the investor's financial statements only to the extent of unrelated investors'
interest in the associate. (IAS 28(AC 110).22)
105
FAC3704/1
When an investor contributes or sells assets to an associate, recognition of any portion of a
gain or loss from the transaction should reflect the substance of the transaction. While the
assets are retained by the associate, and provided the investor has transferred the significant
risks and rewards of ownership, the investor should recognise only that portion of the gain that
is attributable to the interests of the other investors in the associate.
Example 4.1
Investor sells to associate
A Limited has a 25% interest in B Limited and has significant influence over B Limited. A
Limited sold inventory to B Limited at a profit. At year end B Limited still had inventory on hand
amounting to R100 000. A Ltd sells inventory to B Ltd at a profit mark-up of 20% on selling
price. Assume a SA normal tax rate of 30%.
REQUIRED:
Prepare the pro forma consolidation journal entries for the above transaction.
S o l u t i o n 4.1
Dr Cr
R R
J1 Gross profit (A Limited) (20 000(100 000 6 20¤100 ) 25%) 5 000
Investment in B Limited (SFP) 5 000
Elimination of the unrealised profit in inventory of A Limited
OR
Revenue (100 000 6 25%) 25 000
Cost of sales (100 000 6 80¤100 ) 6 25% 20 000
Investment in B limited (100 000 6 20¤100 6 25%) 5 000
J2 Deferred tax (SFP) (5 000 6 30%) 1 500
Deferred tax (SCI) 1 500
Tax implication of elimination of investor's share of
unrealised profit.
The net assets of B Limited include the unrealised profit in the carrying amount of inventory,
therefore the carrying amount of the investment is adjusted.
Example 4.2
Associate sells to investor
A Limited has a 25% interest in B Limited and has significant influence over B Limited. B
Limited sold inventory to A Limited at a profit of R20 000. At year end A Limited still had this
inventory on hand. Assume a SA normal tax rate of 30%.
REQUIRED:
Prepare the pro forma consolidation journal entries for the above transaction.
106
FAC3704/1
S o l u t i o n 4.2
Option 1 Dr Cr
R R
J1 Share of profit of associate (SCI) (20 000 6 25% 6 70%) 3 500
Investment in B Limited (SFP) 3 500
Option 2
J1 Share of profit of associate (SCI) (20 000 6 25%) 5 000
Inventories (SFP) 5 000
J2 Deferred tax (SFP) (5 000 6 30%) 1 500
Share of profit of associate (SCI) 1 500
Tax implication of elimination of investor's share of
unrealised profit of A Limited.
Unisa follows option 2 and this is also the method applied in Group Statements.
Note: A Limited recognises its 25% interest in B Limited's profit for the period and therefore
only R3 500 (25% 6 R20 000 6 70%) is shown as a reduction of the attributable profit
of the associate and included in A Limited's Statement of Comprehensive Income.
If B Limited's income statement had shown a profit for the period of R100 000, the portion
attributable to A Limited would have been calculated as follows:
Total A
Limited
(25%)
R R
Administration building 100 000 25 000
Inventories (57 600) (3 000)
86 000 21 500
4.4.3 Goodwill and excess of fair value above cost on acquisition

If any goodwill arises as a result of acquiring an investment in an associate, the goodwill is
included in the carrying amount of the investment. Amortisation of goodwill is not permitted and
is therefore not included in determining the investor's share of profit in the associate (IAS 28
(AC 110). 23(a)).
Any excess of the fair values of the identifiable assets, liabilities and contingent liabilities
acquired above the cost of the investment in the associate is excluded from the carrying
amount of the investment and is instead included as income in the determination of the
investor's share of profit in the associate in the period in which the investment is acquired (IAS
28 (AC 110). 23 (b)).
Goodwill included in the carrying amount of an investment in an associate is not separately

recognised, thus it is not tested for impairment separately. Instead the entire carrying amount
of the investment is tested for impairment in terms of IAS 36 Impairment of Assets (IAS 28
(AC 110). 33).
107
FAC3704/1
Example 4.3
On 1 July 20.3 Pretty Limited acquired a 30% interest in the 10 000 R1 equity shares of Lucky
Limited for R24 000 when the retained earnings of Lucky Limited were R61 000.
On this date the land of Lucky Limited was revalued above the original carrying amount by
R5 000. Pretty Limited had significant influence over Lucky Limited since 1 July 20.3.
The financial year end of Pretty Limited is 30 June.
REQUIRED:
Calculate the goodwill at acquisition of the investment in Lucky Limited.
S o l u t i o n 4.3

Revaluation of land 5 000
Net asset value on 1 July 20.3 76 000
30% interest (76 000 6 30%) 22 800
Cost price of investment (24 000)
Goodwill 1 200
The journal entry for recording the investment in Lucky Limited on acquisition in the records of
Pretty Limited in accordance with the equity method will be as follows:
Option 1 Dr Cr
R R
Investment in Lucky Limited (net asset value) 22 800
Investment in Lucky Limited (goodwill) 1 200
Bank 24 000
Recording of the investment in Lucky Limited
108
FAC3704/1
4.4.4 Example of equity method
Work through the following example dealing with the application of the equity method:
Example 4.4
The following represents the trial balances of Stereo Limited and Sound Limited for the year
ended 30 June 20.9:
Stereo Sound
Limited Limited
Dr/(Cr) Dr/(Cr)
R R
Share capital (130 000 ordinary shares) (162 500) Ð
Share capital (18 000 ordinary shares) Ð (36 000)
(Retained earnings)/Accumulated loss ± 30 June 20.8 (122 500) 14 500
Gross profit (72 200) (32 000)
Gain on expropriation of land (tax effect ± Rnil) Ð (5 500)
Dividends received (11 500) Ð
Property, plant and equipment at carrying amount 323 600 28 000
Dividends paid 12 500 12 000
Investment in Sound Limited at fair value 15 400 Ð
Ð Ð
1. Stereo Limited acquired 8 100 ordinary shares for R15 400 in Sound Limited, an unlisted
company in the motor industry, on 1 July 20.6 when the retained earnings of Sound Limited
amounted to R8 000. Stereo Limited exercises significant influence over management and
financial policies of Sound Limited.
2. During the current financial year Stereo Limited bought inventory from Sound Limited at
cost plus 20%. At year end on 30 June 20.9, Stereo Limited had inventory amounting to
R5 700 on hand that was bought from Sound Limited during the year.
3. At acquisition date no unidentified assets, liabilities or contingent liabilities existed and the
fair values of all assets, liabilities and contingent liabilities were confirmed to be equal to
the carrying amounts thereof.
4. The SA normal tax rate has been 29% since 20.6.
5. The directors' valuation of the investment in Sound Limited is R16 000.
6. The fair value of available-for-sale financial assets is equal to the original cost price
thereof.
109
FAC3704/1
REQUIRED:
(a) Discuss the appropriate accounting treatment of goodwill which arises as a result of
the acquisition of an investment in an associate.
(b) Discuss the appropriate accounting treatment if an excess of fair value above the
cost price of the investment arises as a result of the acquisition of an investment in
an associate.
(c) Discuss the appropriate accounting treatment of unrealised profits or losses resulting
from intercompany transactions between an investor and an associate.
(d) Prepare the consolidated annual financial statements of Stereo Limited for the year
ended 30 June 20.9.
Only the following note is required:
Ð Investment in associate
Practice.
Comparative figures are not required.
S o l u t i o n 4.4
Part (a)
If any goodwill arises as a result of acquiring an investment in an associate, the goodwill is
included in the carrying amount of the investment. Amortisation of goodwill is not permitted
and is therefore not included in determining the investor's share of profit in the associate.
Goodwill included in the carrying amount of an investment in an associate is not separately

recognised, thus it is not tested for impairment separately. Instead the entire carrying amount
of the investment is tested for impairment.
Part (b)
Any excess of the fair value of the identifiable assets, liabilities and contingent liabilities
acquired above the cost of the investment in the associate is excluded from the carrying
amount of the investment and is instead included as income in the determination of the
investor's share of profit in the associate in the period in which the investment is acquired.
Part (c)
Unrealised profits or losses should be eliminated only to the extent of the investor's interest in
the associate or recognised in the investor's financial statements only to the extent of unrelated
investors' interest in the associate.
110
FAC3704/1
Part (d)
STEREO LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.9
ASSETS Notes R
Investment in associate 17 505
Deferred tax (5 700 6 20/120 6 45% 6 29%) 2 124
Inventories (21 900 7 428(5 700 x 20/120 x 45%)) 21 472
STEREO LIMITED
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.9
R
Gross profit 72 200
Other income (11 500 7 5 400(12 000 x 45%)(div)) 6 100
Share of profit of associate 12 926
Income tax expense (20 600)
STEREO LIMITED
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.9
Share Retained
capital earnings Total
R R R
Balance at 1 July 20.8 162 500 116 7751 279 275
Total comprehensive income for the year 70 626 70 626
Dividends paid (12 500) (12 500)
Balance at 30 June 20.9 162 500 174 901 337 401
1
122 500 7 5 725a = 116 775
111
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STEREO LIMITED
NOTES FOR THE YEAR ENDED 30 JUNE 20.9
1. Investment in associate
Stereo Limited has a 45% interest in an unlisted company, Sound Limited. Sound Limited
is in the motor industry
R
Carrying amount of investment in associate:
Cost of investment 15 400
Cumulative post-acquisition reserve (±5 725a + 13 230c 7 5 400(div)) 2 105
17 505
Summarised financial information of Sound Limited:

R
Total assets (28 000 + 18 100) 46 100
Revenue (not supplied in question) XXX
The directors' valuation of the investment in Sound Limited is R16 000.
Calculations
C1 Analysis of owners' equity of Sound Limited
100% 45% Carrying

Total At Since amount
R R R R
At acquisition
Share capital 36 000 16 200
44 000 19 800
Investment in Sound Limited (15 400) 15 400
Excess of fair value over cost 4 400
Since acquisition (5 725)a (5 725)
Accumulated loss (14 500 + 8 000) (22 500) (10 125)
Excess of fair value over cost 4 400
Current year 28 725 12 926
Profit for the year
(32 000 ± 8 100 + 5 500) 29 400 13 230 13 230c
Unrealised profit in inventory
(5 700 x 20/120 x 71%) (675) (304)
Dividends paid (12 000) (5 400) (5 400)
38 225) (1 801) 17 505
112
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2. Pro forma consolidation journals
Dr Cr
R R
J1 Retained earnings ± beginning of year ((14 500 + 8 000) x 45%) 10 125

Share of profit of associate ((32 000 ± 8 100 + 5 500 ± 12 000) x 45%) 7 830
Investment in associate 2 295
Recording of profit of Sound Limited
J2 Investment in associate 4 400

Retained earnings ± beginning of year 4 400
Recognition of excess of fair value above cost at acquisition
(19 800 ((36 000 + 8 000) x 45%) 7 15 400)
J3 Share of profit of associate 428

Inventories 428
Elimination of unrealised profit in closing inventories of Stereo Limited
(5 700 x 20/120 x 45%)
J4 Deferred tax (SFP) 124
Share of profit of associate (428 x 29%) 124
Tax implication of unrealised profit in closing inventories of
Stereo Limited
Comments
The excess of fair value above cost at acquisition is excluded from the carrying amount of
the investment and it is included as income in the determination of the investor's share of
the associate's profit/loss in the period in which the investment is acquired
113
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4.5 Summary
Percentage interest
An investment is classified as an investment in an associate if the investor has significant influence
over the financial and operating policy decisions (20% or more). Significant influence is the power to
participate in the financial and operating policy decisions of an economic activity but is not control or
joint control over those policies.
!
Method of accounting: Equity method
This method is applied as follows:
Ð Investment initially recognised at cost.
Ð Adjusted thereafter for post acquisition changes in the investor's share of the net assets of the
investment.
Ð Profit/loss of investor includes the investor's share of profit/loss of investee.
!
Important considerations
! !
Goodwill Intragroup transactions
Goodwill is included as part of the carrying Profits or losses resulting from `ùpstream''
amount of the investment in the associate and is and ``downstream'' transactions between an
not separately identified. investor and an associate must be eliminated
to the extent of the investor's interest in the
associate.
A gain on bargain purchase is excluded from the
carrying amount of the investment in the
associate, instead it is included in the share of
profit in the associate in the period the invest-
ment is acquired.
Impairment
!
Because the goodwill (debit ± excess of cost of the investment above the fair value of the
assets and liabilities, and contingent liabilities at acquisition) is included as part of the
carrying amount of the investment in the associate it is not tested for impairment.
The entire carrying amount of the investment in the associate is tested for impairment in
terms of IAS 36 (AC128).
114
FAC3704/1
. define an associate in terms of IAS 28 (AC 110).

. describe the two methods to account for an investment in associate in terms of
IAS 28 (AC 110).
. differentiate between an associate, subsidiary and a joint venture.
. record and disclose an investment in an investee according to the equity method in
the financial statements of the investor.
. prepare and present the consolidated annual financial statements of an investor
when the investment in an associate is accounted for according to the equity
method.
. in the case of intragroup transactions, calculate the percentage of unrealised profit/
loss in inventories or property, plant and equipment sold.
. record the pro forma journals for the elimination of the intragroup profit/loss.
. record the pro forma journals in respect of the tax implications on the elimination of
the intragroup profit/loss.
. prepare and present consolidated annual financial statements of an investor when
the investment in an associate is accounted for according to the equity method and
when the intragroup profit/loss between the investor and the associate is eliminated.
115
FAC3704/1
STUDY UNIT
5
Accounting for interests in joint ventures
(IAS 31 (AC 119))
))
There is currently an exposure draft issued that may change the accounting treatment of
interests in joint ventures, namely ED 229 Joint arrangements. In terms of ED 229, it is
suggested that the proportionate consolidation method is scrapped and that all interests in joint
ventures be accounted for only according to the equity method. ED 229 has not yet been
approved and therefore the proportionate consolidation method is still being used.
Once the accounting statement is issued examples that deal with this section of the work will
be forwarded to students.
116
FAC3704/1
STUDY UNIT
6
Changes in ownership
Learning outcome 6

& Apply consolidation procedures in order to prepare the consolidated annual financial
statements for a group where there has been a change in ownership.

The study unit consists of the following sections: Pages
6.1 Introduction 117

6.2 Piecemeal acquisition of interests in investees 119
6.3 Sale of interest in an investee 125
6.4 Changes resulting from the issue of additional shares by investees 132
S t u d y
6.1 Introduction
S t u d y
A company investing in another company exercises a certain degree of ownership (control)

over the acquired company's financial and operating policies. The principles of IFRS 3
(AC 140) should be applied at the acquisition date, i.e. the date that control is obtained.
A change in status implies that either there was control over a company which no longer
exists after the change in ownership (i.e. decrease in degree of control) or that there was no
control before the change in ownership and thereafter there is control (i.e. increase in the
degree of control).
117
FAC3704/1
6.1.1 Occurrences of changes in ownership
Changes in ownership can occur in many different ways, including the following:
(a) Increase of interest (thus increase in degree of control) by means of the

following:
. Additional shares are bought in a step acquisition whereby an investment in the acquired
company becomes an investment exercising significant influence or to gain control over the
acquired company (in stages). (Resulting in a change in status)
. Additional equity shares in the acquired company are bought from the other investors or
from a share issue of the acquired company. This will increase the already existing degree
of control or significant influence. (Not resulting in a change in status)
. The investing company exercises its allocated rights of the rights issue of the acquired
company and thereby increases their interest. This will occur if the ratio of their exercised
rights is greater than the ratio of the exercised rights of the other investors. (This could result
in a change in status, depending on the ratio in which shares are eventually taken up.)
Comments
Bear in mind that a right issue of the acquired company will not always result in an
increase in the degree of control. If the non-controlling shareholders take up more rights
than the acquiring company then the interest of the acquiring company will decrease.
(b) Decrease of interest by means of the following:

. Shares in a subsidiary are sold to either become an ordinary IAS 39 (AC 133) investment, or
an associate (resulting in a change in status i.e. loss of control).
. Shares in a subsidiary are sold, but the acquired company still remains a subsidiary but the
parent has a smaller interest in the subsidiary's net identifiable assets and liabilities (not
resulting in a change in status i.e. parent is still the controlling party).
. The investing company partially exercises its allocated rights of the rights issue of the
acquired company and thereby decreases its interest. This will occur if the ratio of their
exercised rights is smaller than the ratio of the exercised rights of the other investors (i.e.
the non-controlling interest exercise some or all of their rights) (may or may not result in a
change in status, depending on the ratio in which the shares are eventually taken up).
(c) No change in the degree of control:

This is the result when both the parent and the non-controlling interest take up either all of their
rights in a subsidiary's rights issue in the original ratio that they accrued to the investors or
when neither of the parties exercise the rights that accrued to them.
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FAC3704/1
6.2 Piecemeal acquisition of interests in investees
S t u d y
Different scenarios where there is an increase in the degree of control:
Firstly, we look at scenarios where there will be a change in status between the before and
after degree of ownership.
(a) Examples of scenarios where there was a change in status (no control
changed to having control):
. Associate becomes a subsidiary
!!
. Investment becomes a subsidiary
In these cases:
(i) Apply the steps of the acquisition process (Refer study unit 1.) and
(ii) on the acquisition date (the date when control is obtained over the investee), recognise
the previously held interest at its fair value through profit and loss. If there was any fair
value adjustments recognised through equity relating to the investment before the
acquisition date, they will be reclassified from equity to profit and loss.
Comments
Goodwill or gain on bargain purchase is recognised only on the acquisition date i.e. the
date when control is obtained and not again on any date thereafter should additional
interests in the subsidiary be acquired.
b) In the following examples there is a change in the degree of control, but not a
change in status:
. Investment becomes associate
!!
. Associate becomes greater associate
In these cases we must apply the requirements of IAS 28 (AC 110). There are no
requirements in terms of IAS 28 (AC 110) to fair value any previously held interest on the date
on which significant influence is obtained over the associates operating and financing
activities.
On every date an interest in an investee is obtained, goodwill or gain on bargain purchase will
be calculated and appropriately recognised in the consolidated financial statements
Comments
This differs from the case of a subsidiary when goodwill or gain on bargain purchase is
only recognised at acquisition date i.e. the date on which control is obtained.
119
FAC3704/1
(c) A change in the degree of control, but not in status and control has already
been obtained:
. Subsidiary becomes greater subsidiary
!
In this case it is important to firstly realise that there is no change in status, the subsidiary
remains a subsidiary, only with a greater interest and that the following needs to be done:
(i) The carrying amounts of the controlling and non-controlling interest, including any
goodwill attributable to the non-controlling interest (if applicable) needs to be adjusted with
the difference in the interest held in the net assets of the subsidiary before and after the
change in ownership.
(ii) Furthermore, the difference between the non-controlling interest's adjustment amount (as
discussed above) and the consideration transferred by the parent for the additional
interest, must be recognised directly in equity against the retained earnings, instead of
recognising any additional goodwill or gain on bargain purchase.
Comments
Goodwill or gain on bargain purchase is recognised only on the acquisition date i.e.
when control is obtained and not again on any date thereafter should additional
interests in the subsidiary be acquired.
Example 6.1
(Increase in holding, no change in status, with revaluation of property, plant and

equipment)
The abridged trial balances of Bon Limited and its subsidiary, Aqua Limited, for the year ended
31 December 20.3, are as follows:
Bon Aqua
Limited Limited
R R
Credits
Share capital (60 000 ordinary shares);
(40 000 ordinary shares) 300 000 200 000
(Retained earnings) ± 1 January 20.3 500 000 150 000
Profit before tax 190 000 240 000
Long-term borrowings 270 000 175 000
Trade and other payables 13 900 20 000
1 273 900 785 000
Debits
Investment in Aqua Limited at fair value 268 900 Ð
Dividends paid ± 31 December 20.3 50 000 30 000
1 273 900 785 000
120
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1. On 1 January 20.1 Bon Limited acquired 60% of the equity of Aqua Limited and paid
R190 000 for the investment. The share capital has remained unchanged since that
date and there were no other reserves other than retained earnings of R75 000 on date
of acquisition. At this acquisition date no unidentified assets, liabilities or contingent
liabilities existed and the fair value of all assets, liabilities and contingent liabilities was
confirmed to be equal to the carrying amounts thereof, except for a vacant piece of
land that was revalued by R60 000 (cost R40 000) for purposes of this acquisition.
Aqua Limited did not process any revaluation in their records.
2. On 30 June 20.2 Aqua Limited sold the piece of land for R110 000.
3. On 1 October 20.3 Bon Limited acquired an additional 6 000 ordinary shares in Aqua
Limited. On this date there was no change in the fair value of assets, liabilities or
contingent liabilities as was determined on 1 January 20.1. The profit of Aqua Limited other
than the effect of the intercompany transaction (refer point 5.) has been earned evenly
throughout the year.
4. The cost price of the investment in the subsidiary is considered to be equivalent to the fair
value thereof.
5. On 2 October 20.3 Aqua Limited sold machinery with a carrying amount of R80 000 to Bon
Limited for R120 000. The depreciation policy of the group is to depreciate machinery over
the expected useful life of 5 years on the straight-line method. Machinery is depreciated at
the same rate as is allowed for tax purposes.
6. Assume that each share carries one vote.
7. The SA normal tax rate is 29%. You may assume the tax rate has been 29% since
1 January 20.1.
8. The companies uses is the partial goodwill method to account for non-controlling interest.
The value of goodwill was tested for impairment at the end of 20.3 and it was found to be
unimpaired.
REQUIRED:
(a) Explain what is meant by the ``several acquisition dates'' method of accounting for the
acquisition of an interest in a subsidiary.
(b) Prepare the following for the Bon Limited Group for the year ended 31 December 20.3:
(i) Consolidated statement of financial position.

(ii) Consolidated statement of comprehensive income; and
(iii) Consolidated statement of changes in equity.
Practice.
The notes to the consolidated annual financial statements and comparative figures are not
required.
121
FAC3704/1
S o l u t i o n 6.1
(a) The ``several acquisition dates'' method entails the determination of the difference between
the purchase price and carrying amount of the investment for each separate block of
shares purchased, including acquisitions before control was acquired.
(b) (i) BON LIMITED GROUP
ASSETS R
Property, plant and equipment
(823 000 + 651 000 7 40 000 (machinery) + 2 000(C2)) 1 436 000
Deferred tax (11 600(40 000 x 29%) 7 580(C2)) 11 020
Other components of equity (10 425)
Non-controlling interest 115 855h
(b) (ii) BON LIMITED GROUP

31 DECEMBER 20.3
R
(190 000 + 240 000 7 22 500 (interco div) 7 40 000 (machinery)
+ 2 000(C2))
Income tax expense (55 100 + 69 600 7 11 600 (40 000 x 29%) + 580 (C2)) (113 680)

Non-controlling interest (42 600a + 9 230b) 51 830
255 820
122
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(b) (iii) BON LIMITED GROUP
31 DECEMBER 20.3
Change in Non-
Share Retained Control controlling Total
capital earnings (bleading) Total interest equity
R R R R R R
Balance at 1 January 20.3 300 000 520 0001 820 000 140 000i 960 000
for the year 203 990 203 990 51 830 255 820
Equity sold to parent (68 475)e (68 475)
Purchase additional interest (10 425) (10 425) (10 425)
Dividend paid (50 000) (50 000) (7 500)e (57 500)
Balance at 31 December 20.0 300 000 673 990 (10 425) 963 565 115 855 1 079 420
1
500 000 + 14 220c + 5 780d = 520 000 or 500 000 + (150 000 7 75 000 7 51 300 7 9 480 (J4)) + 5 780d = 520 000
Calculations
C1 Analysis of owners' equity of Aqua Limited
100% 60% ± 75% 40% ± 25%

Total At Since NCI
R R R R
At acquisition
Share capital 200 000 120 000 80 000
(60 000 7 8 700 (60 000 x 50% x 29%))
326 300 195 780 130 520
d
Equity represented by gain on bargain purchase (5 780) (5 780) Ð
Consideration and non-controlling interest 320 520 190 000 130 520
Since acquisition
Gain on bargain purchase 5 780 5 780 Ð
Retained earnings (150 000 7 75 000 7 51 300) 23 700 14 220c 9 480
350 000 20 000 140 000i
Current year
Profit for the year (C2) 106 500 63 900 42 600a
456 500 83 900 182 600
Purchase of 6 000 shares (450 720 + 5 780) x 15%) 68 475 (68 475)e
Investment in Aqua Limited (Purchase of additional
interest) (268 900 7 190 000) (78 900)
Change in ownership (10 425)g
Profit for the year (C2) 36 920 27 690 9 230b
Dividends paid (30 000) (22 500) (7 500)f
463 420 89 090 115 855h
123
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C2 profit for the year
Total 9 months 3 months
R R R
Profit before tax (240 000 7 40 000 (interco)) 200 000 150 000 50 000
Income tax expense (69 600 7 11 600 (58 000) (43 500) (14 500)
(40 000 x 29%))
142 000 106 500 35 500
Realisation of intercompany profit (40 000/5 x 3/12) 2 000
Tax effect of realisation of intercompany profit (2 000 x 29%) (580)
36 920

Dr Cr NCI
R R R
Deferred tax (60 000 x 50% x 29%) 8 700
Revaluation of fixed property at date of acquisition
Retained earings 75 000
Investment in Aqua Limited 190 000
Retained earnings (Gain on bargain purchase) 5 780d
Elimination of original investment in Aqua Limited
Deferred tax 8 700
Sale of fixed property revalued at acquisition
(reversal of J1)
Recording of non-controlling interest in retained earn-
ings since acquisition to beginning of current year
((150 000 7 75 000 7 51 300) x 40%)
140 000i
Non-controlling interest (SFP) 42 600 42 600a
Recording of non-controlling interest in profit for the
year for 9 months to 30/09/20.3 (106 500(2) x 40%)
182 600
J6 Non-controlling interest (SFP) (182 600 x 15%/40%) 68 475 (68 475)e
Retained earnings (change in control) 10 425
Investment in Aqua Limited (268 900 7 190 000) 78 900
Elimination of additional investment in Aqua Limited
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FAC3704/1
Recording of non-controlling interest in profit for the
3 month period to 31/12/20.3 (36 920(C2) x 25%)
J8 Dividend received 22 500
Non-controlling interest (SFP) (30 000 6 25%) 7 500 (7 500)f
Dividend paid 30 000
Elimination of intercompany dividends and recording of
non-controlling interest in dividends paid
115 855h
6.3 Sale of interests in an investee

S t u d y
Similarly, as for increases in the degree of control, there are different scenarios for decreases in
the degree of control. A decrease in the degree of control mostly occurs when a company
disposes of a part of or all of its investment in the investee.
NB: There can be a decrease in the degree of control without any change in status (control
retained before and after the change in ownership) or with a change in status (control lost
after the change in ownership). Further consequences on these scenarios are listed
below.
6.3.1 Example of loss in control (change in status)

A parent can lose control of a subsidiary in a number of ways.
Examples of events that may result in a loss of control include:

. parent sells all or part of its ownership interest in its subsidiary such that it loses control; or
. subsidiary issues shares to a third party, thereby reducing the parents' ownership interest in
the subsidiary so that it no longer has control of the subsidiary. (Refer section 6.4.)
This results in:
Ð a subsidiary becoming an investment
!!
Ð a subsidiary becoming an associate
A few steps need to be taken when a parent disposes of its interest or part of its interest in the
subsidiary resulting in a loss of control, either by becoming an associate after the disposal or
resulting in an investment in an investee in terms of IAS 39 (AC 133) after the disposal.
125
FAC3704/1
These steps include the following as starting points:
Step 1
The carrying amounts of the assets and liabilities of the subsidiary need to be
derecognised. Any goodwill that arose at acquisition date will also need to be adjusted for the
decrease in interest.
NB: The new goodwill figure will be calculated by subtracting the cost of the remaining
investment's shares from the capitalised equity (profits and reserves) associated with
those remaining shares retained as an investment in the investee.
Step 2
The carrying amount of the non-controlling needs to be derecognised as well, since the
parent no longer has control as a result of the change in ownership. If the full goodwill method
is used then this amount would include the goodwill allocated to the non-controlling interest.
Refer to example 6.4.
Step 3
The consideration received must be recognised at the fair value thereof. Refer to example 6.4.
Step 4
Any investment retained in the former subsidiary (if applicable) must be measured at the fair
value thereof on the date control was lost (disposal date) and the difference (fair value
adjustment) must be accounted for in the parent's profit and loss as a resulting gain/loss. Refer
to example 6.4.
Step 5
The gain/loss (Refer to example 6.4) resulting from the loss in control consists of 2 parts:
(1) A fair value adjustment for the remaining investment held in the investee after the change
in ownership (refer comment below); and
(2) a gain/loss on the investment disposed of.
The capital gain/loss on the disposal of the shares for the group's purposes can also be
calculated as follows:
Subtract the portion of the equity reserves `àt'' acquisition and the portion of the ``since''
acquisition equity reserves lost with the disposal, from the proceeds received from the
disposal of the interest.
Refer to example 11.9(a) in Group Statements (Volume 2) for the application of these
principles. The example deals with the partial disposal of an interest in a subsidary which
results in a change in status and the subsidiary becoming an associate. The non-controlling
interest is measured at the proportionate share of the acquiree's net assets.
126
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Comments
1. The journal entry that is normally processed at reporting date for fair value
adjustments on available-for sale financial assets is as follows:
The investment in S Limited is shown in the financial records of the parent at

R400 000. At the reporting date the fair value of the investment is considered to be
R450 000. The fair value adjustment is as follows:
Dr Cr
R R
Investment in S Limited (450 000 7 400 000) 50 000
Mark-to-market-reserve (50 000 6 86%) 43 000
Deferred tax (50 000 614%) 7 000
(tax at capital gains tax rate of 28% 650% of taxable gain)
2. In terms of IAS 27(AC 132):34(d) any investment retained in a subsidiary must be

measured at the fair value thereof on the date control was lost (disposal date) and
the resulting fair value adjustment must be accounted for in the consolidated profit
and loss for the year. This fair value adjustment therefore forms part of the total
consolidated gain or loss on the disposal of the investment.
Example 6.2
The following are the financial statements of Pan Limited and San Limited:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9

Pan San
Limited Limited
R R
ASSETS
Non-current assets 1 221 250 780 000
Investment in San Limited at fair value 290 000 Ð
Current assets 247 000 280 000
Inventory, trade receivables and bank 247 000 280 000
Total assets 1 468 250 1 060 000
Equity and liabilities
Total equity 1 401 000 1 034 000
Share capital (350 000 ordinary shares and
300 000 ordinary shares) 350 000 300 000
Mark-to-market reserve 104 275 Ð
Total liabilities 67 250 26 000
Deferred tax 16 975 Ð
Trade payables 50 275 26 000
Total equity and liabilities 1 468 250 1 060 000
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INCOME INFORMATION FOR THE YEAR ENDED 31 DECEMBER 20.9
R R
Profit before tax 928 750 700 000
Income tax expense (242 025) (196 000)
Profit for the year 686 725 504 000
Retained earnings:
Opening balance 1 January 20.9 260 000 230 000
Profit for the year 686 725 504 000
Closing balance 31 December 20.9 946 725 734 000
1. On 1 January 20.9 Pan Limited acquired an 80% interest in San Limited. Pan Limited paid
R450 000 for the investment. All the assets and liabilities were fairly valued on the date of
acquisition. The equity of San Limited on the date of acquisition was as follows:
R
Share capital (300 000 ordinary shares) 300 000
530 000
2. Pan Limited measures available-for-sale financial assets (investments in subsidiaries) at

cost in its separate financial statements. Pan Limited elected to measure the non-
controlling interest at their proportionate share of the identifiable net assets at the
acquisition date.
3. On 30 April 20.9 Pan Limited disposed of a 50% interest in San Limited for R410 000. From
30 April 20.9 onwards Pan Limited has exercised significant influence over the operating
and financial policies of San Limited. The fair value of the remaining 30% interest on
30 April 20.9 was R260 000. The fair value at 31 December 20.9 was R290 000.
4. Included in the profit before tax of Pan Limited is the gain on disposal of the shares in San
Limited of R128 750 (calculated as (410 000 ± (450 000 x 50/80)). The tax effect of
R18 025 of this transaction has been included in income tax expense (calculated as
R128 750 x 14%).
S o l u t i o n 6.2
(a) Calculations
C1 Calculation of goodwill
R
Consideration transferred 450 000
556 000
Fair value of net assets (530 000)
Goodwill 26 000
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C2 Consolidation gain or loss on disposal
Proceeds (as per information given) 410 000
Less: Consolidated net asset value ((724 000 7 26 000) 6 50%) (349 000)
Goodwill realised (26 000 6 50/80) (16 250)
44 750
OR
R
Proceeds 410 000
Less: Cost (281 250)
Gain in separate financial statements 128 750
Less: Since acquisition reserves (84 000)
Consolidated gain on sale of investment 44 750
C3 Restatement of carrying amount of investment to fair value at

date of sale R
Fair value (given) 260 000
Less: Consolidated carrying amount
Net asset value at date of sale ((724 000 7 26 000) 6 30%) (209 400)
Goodwill (26 000 6 30/80) (9 750)
Fair value adjustment 40 850
The total consolidated gain on the disposal of the 50% interest in San Limited is R87 550
(44 750 + 40 850).
This amount can also be proved by applying IFRS 3 (AC 140).34 R
If parent loses control of subsidiary the following steps are applied (Step 1 to Step 5)
Step 1 Derecognise assets and liabilities (including goodwill) on date control
is lost (724 000)
Step 2 Derecognise carrying amount of non-controlling interest 139 600
Step 3 Recognise fair value of consideration received 410 000
Step 4 Recognise any investment retained in former subsidiary at fair value 260 000
85 600
Step 5 Gain or loss on disposal to profit or loss 44 750
Reclassify mark-to-market reserve or revaluation surplus to profit
or loss 40 850
129
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4. Analysis of the owners' equity San Limited
100% 80% 30% 20% 30%

Carrying
Total At Since NCI amount
Subsidiary R R R R R
Share capital 300 000 240 000 60 000

530 000 424 000 106 000
Equity represented by
goodwill 26 000 26 000 Ð
Consideration paid and
non-controlling interest 556 000 450 000 106 000
Current year
Profit for the year before sale
(504 000 6 4/12) 168 000 134 400 33 600
724 000 134 400 139 600
Sale of Investment in San
Limited (450 000 6 50/80)
(134 400 6 50/80) (504 850) (281 250) (84 000) (139 600)
219 150 168 750 50 400 Ð 219 150

Associate
Profit for the year after sale
(504 000 x 8/12) 336 000 100 800 Ð 100 800
100 800 Ð 319 950
(b) Financial statements
PAN LIMITED GROUP

ASSETS R
Investment in associate ± at carrying amount (319 950 + 40 850)
360 800
Trade and other receivables 247 000
Total equity and liabilities
1 539 050
130
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PAN LIMITED GROUP
31 DECEMBER 20.9
R
Gross profit (800 000 + 233 333) 1 033 333
Other income (128 750 ± 128 750) Ð
Gain on disposal of subsidiary 44 750
Fair value adjustment 40 850
Profit before tax 1 219 733

912 375
PAN LIMITED GROUP

31 DECEMBER 20.9
Non-
R R R R R
for the year Ð 878 775 878 775 33 600 912 375
Loss of control in subsidiary Ð Ð Ð (139 600) (139 600)
Balance at 31 December 20.9 350 000 1 138 775 1 488 775 Ð 1 488 775
6.3.2 Example of a decrease in degree of control (no change in status):

. Subsidiary becomes smaller subsidiary
!
Ð Similar principles are applicable when a part of the interest in a subsidiary is disposed of
with no loss in control occurring, except for the goodwill.
Ð The goodwill figure will not be adjusted to account for the part of the interest that was
disposed of.
Ð None of the other assets or liabilities of the subsidiary will be adjusted nor derecognised
in such a case where control has not been lost.
Ð Transactions which result in a change in the parent's degree of control in a subsidiary
that do not result in a loss of control should be accounted for as equity transactions
(IAS 27 (AC 132):30)).
The only adjustments to be taken into account would be the adjustments to the carrying
amounts of the parent and the non-controlling interest in the net assets of the subsidiary.
131
FAC3704/1
The difference between the fair value of the consideration received and the adjustment to
the non-controlling interests carrying amount, should be recognised directly in equity in
the section attributable to the parent.
Refer to example 11.8 in Group Statements (Volume 2).
6.4 Changes resulting from the issue of additional shares by

investees
S t u d y
Example 6.3
(Increase in holding, change in status, an associate becomes a subsidiary)

The following are the trial balances of Syrup Limited and Lemon Limited for the year ended
31 December 20.7:
Syrup Lemon
Limited Limited
R R
Credits
Share capital (240 000 ordinary shares and 250 000 ordinary
shares) 240 000 256 000
Retained earnings ± 1 January 20.7 140 000 190 000
Gross profit 110 000 36 000
Deferred tax 30 000 24 000
Long-term loan 60 000 80 000
620 000 607 000
Debits
Interest expense 5 600 9 000
Dividends paid ± 31 December 20.7 50 000 Ð
Investment in Lemon Limited at fair value 200 000 Ð
Bank 17 030 150 600
620 000 607 000
1. On 1 January 20.5 Syrup Limited acquired 80 000 (40%) shares in Lemon Limited for
R144 000. The acquisition of the shares resulted in Syrup Limited exercising significant
influence over the financial and operating policies of Lemon Limited. Lemon Limited had
share capital of R200 000 and retained earnings of R180 000 at that date. The net
identifiable assets were deemed to be fairly valued on this date.
On 1 March 20.7 Lemon Limited had a rights issue of 50 000 shares at R1,12. The rights
issue was taken up in full by Syrup Limited on 1 May 20.7.
132
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2. During June 20.7, Lemon Limited sold inventories to Syrup Limited at a profit of 25% on
selling price. At the end of the year, Syrup Limited had inventories of R20 000 on hand that
were purchased from Lemon Limited.
3. In both companies, each share carries one vote.
4. Assume a SA Normal tax rate of 29% for the current year and all preceding years.
5. The income and expenses of Lemon Limited have accrued evenly during the year.
6. At every date of exchange, the identifiable assets and liabilities of Lemon Limited were
regarded as fair in terms of IFRS 3 (AC 140).
7. The acquisition date fair value of Syrup Limited's previously-held equity interest is equal to
its proportionate share of the net equity of Lemon Limited at the acquisition date.
stated otherwise.
9. At the end of the current year goodwill was assessed for impairment and it was not
considered to be impaired.
REQUIRED: Part (a)
Prepare the following for the Syrup Limited Group for the year ended 31 December 20.7:
Ð the consolidated statement of financial position

Ð the consolidated statement of comprehensive income
Ð the consolidated statement of changes in equity
Practice.
Assume it is the accounting policy of Syrup Limited to measure the non-controlling
interest using the partial goodwill method in terms of IFRS 3(AC 140).19.
required.
All calculations must be done to the nearest Rand.
REQUIRED: Part (b)
Prepare the following for the Syrup Limited Group for the year ended 31 December 20.7:
Ð the consolidated statement of financial position

Ð the consolidated statement of comprehensive income
Ð the consolidated statement of changes in equity
Practice.
Assume it is the accounting policy of Syrup Limited to measure the non-controlling
interest using the full goodwill method in terms of IFRS 3(AC 140).19.
The market value of Lemon Limited's shares was R1.95 on 1 May 20.7.
The fair value of the previously held 40% interest was R158 080 on 1 May 20.7.
required.
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S o l u t i o n 6.3 Part (a)
SYRUP LIMITED GROUP

ASSETS R
Inventories (42 000 + 85 000 ± (5 000(20 000 x 25/100)) 122 000
Non-controlling interest 219 864g
Deferred tax (30 000 + 24 000 ± 1 450(5 000 x 29%)) 52 550
SYRUP LIMITED GROUP

31 DECEMBER 20.7
R
Gross profit (110 000 + 24 000(36 000 x 8/12) ± 5 000(20 000 x 25/100)) 129 000
Other income (gain on bargain purchase) 20 544e
Finance costs (5 600 + 6 000(9 000 x 8/12)) (11 600)
Share of profit from associate 2 080c
Income tax expense (21 370 + 7 600(11 400 x 8/12) ± 1 450(5 000 x 29%)) (27 520)

112 504
134
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SYRYP LIMITED GROUP
31 DECEMBER 20.7
Non-
R R R R R
Balance at 1 January 20.7 240 000 152 000 (1) 392 000 Ð 392 000
Non-controlling interest of subsidiary
when still an associate 216 576d 216 576
Dividends (50 000) (50 000) (50 000)
for the year 109 216 109 216 3 288f 112 504
1
140 000 + 4 000b + 8 000a = 152 000
135
FAC3704/1
Calculations
C1 Analysis of owners' equity of Lemon Limited
Syryp Limited
1 60% ± 48%
100% 40% ± 52%
Total At Since NCI

R R R R
At first exchange: 1 January 20.5
Share capital 200 000 80 000 120 000
380 000 152 000 228 000
Equity represented by gain on bargain purchase (8 000) (8 000)a Ð
Consideration paid and non-controlling interest 372 000 144 000 228 000
Since first exhange

To beginning of current year:
Retained earnings (190 000 7 180 000) 10 000 4 000b 6 000
Current year
Profit for the period: 01/01/20.7 to 30/04/20.7
(15 6002 x 4/12) 5 200 2 080c 3 120
395 200 14 080 237 120
Acquisition date: 1 May 20.7
Share capital (rights issue)3 56 000 29 1203 26 8803
Transfer from non-controlling interest4
(395 200 6 12%) 47 4244 (47 424)4
451 200 76 544 216 576d
Equity represented by gain on bargain purchase (20 544) (20 544)e Ð
Consideration paid and non-controlling interest 430 656 56 000 216 576
Profit for the year: 01/05/20.7 to 31/12/20.7 6 850 3 562 3 288f
Profit for the period (15 600(1) x 8/12) 10 400
Unrealised profit in inventories (20 000 x 25/100) (5 000)
Tax effect (5 000 x 29%) 1 450
5
458 050 38 186 219 864g
1
130 000 (80 000((250 000 7 50 000) x 40%) + 50 000) 7 250 000 = 52%
2
36 000 7 9 000 7 11 400 = 15 600
3
(56 000 6 52%) = 29 120; 56 000 6 48% = 26 880
4
237 120 6 12/60 = 47 424
5
458 050 6 48% = 219 864
136
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Part (b)
SYRUP LIMITED GROUP

ASSETS R
Goodwill 17 424
Inventories (42 000 + 85 000 ± 5 000 (20 000 x 25/100)) 122 000
Non-controlling interest 237 288h
Deferred tax (30 000 + 24 000 7 1 450(5 000 x 29%)) 52 550
SYRUP LIMITED GROUP

31 DECEMBER 20.7
R
Gross profit (110 000 + 24 000(36 000 x 8/12) 7 5 000(20 000 x 25/100)) 129 000
Other income (gain on bargain purchase) 20 544e
Finance costs (5 600 + 6 000(9 000 6 8/12)) (11 600)
Share of profit from associate 2 080c
Income tax expense (21 370 + 7 600(11 400 6 8/12) 7 1 450(5 000 6 29%)) (27 520)
112 504
137
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SYRYP LIMITED GROUP
31 DECEMBER 20.7
Non-
R R R R R
Balance at 1 January 20.7 240 000 152 0001 392 000 Ð 392 000
Subsidiary becomes associate Ð Ð Ð 234 000g 234 000
Dividends Ð (50 000) (50 000) Ð (50 000)
Total comprehensive income for the
year Ð 109 216 109 216 3 288f 112 504
h
1
140 000 + 4 000b + 8 000a = 152 000
138
FAC3704/1
Calculations
C1 Analysis of owners' equity of Lemon Limited
Syrup Limited
100% 1 60% ± 48%
40% ± 52%
Total At Since NCI
At first exchange: 1 January 20.5
Share capital 200 000 80 000 120 000
380 000 152 000 228 000
Equity represented by gain on bargain purchase (8 000) (8 000)a
Consideration paid and non-controlling interest 372 000 144 000
Since first exhange

To beginning of current year:
Retained earnings (190 000 7 180 000) 10 000 4 000b 6 000
a Ð
Gain on bargain purchase 8 000 8 000
Current year
Profit for the period: 01/01/20.7 to 30/04/20.7
(15 6002 x 4/12) 5 200 2 080c 3 120
395 200 14 080 237 120
Acquisition date: 1 May 20.7
Share capital (rights issue)3 56 000 29 1203 26 8803
Transfer from non-controlling interest4 47 4244 (47 424)4
Net asset value 451 200 76 544 216 576d
Equity represented by gain on bargain purchase (20 544) (20 544)e Ð
(Parent) and goodwill (NCI) 17 424 Ð 17 424
Consideration paid and non-controlling interest5 448 080 56 000 5
234 000g
Profit for the year: 01/05/20.7 to 31/12/20.7 6 850 3 562 3 288f
Profit for the period (15 600(1) x 8/12) 10 400
Unrealised profit in inventories (20 000 x 25/100) (5 000)
Tax effect (5 000 x 29%) 1 450
Gain on bargain purchase 20 544 20 544
6
475 474 38 186 237 288h
1
130 000 (80 000((250 000 7 50 000) x 40%) + 50 000) 7 250 000 = 52%
2
36 000 7 9 000 7 11 400 = 15 600
3
(56 000 6 52%) = 29 120; = 56 000 6 48% = 26 880
4
237 120 6 12/60 = 47 424
5
250 000 7 130 000 (80 000 + 50 000) = 120 000 shares; 120 000 6 1,95 = 234 000
6
458 050 (475 474 7 17 424) 6 48% = 219 864 + 17 424 = 237 288
139
FAC3704/1
Comments
Even though the non-controlling interest is measured using the full goodwill method, the
``non-controlling interest'' are the ``controlling parties'' at 1 January 20.5, thus the goodwill
(gain on bargain purchase) attributable to them will not be recognised at 1 January 20.5,
since goodwill (gain on bargain purchase) is only recognised once the parent obtains
control on the acquisition date (1 May 20.7).
Example 6.4
(Increase in holding, no change in status, and an associate)
The following trial balances have been extracted from the financial records of the relevant
companies for the year ended 31 December 20.8:
Retained earnings
Gibbs Pollock Adams
R R R
Investment in Pollock Limited at fair value
± 80 000 ordinary shares 209 250 Ð Ð
Investment in Adams Limited at fair value
± 30 000 ordinary shares Ð 60 000 Ð
Dividends paid ± 30 April 20.8 Ð 20 000 Ð
Dividends paid ± 30 December 20.8 Ð Ð 10 000
Trade receivables 53 159 35 610 46 700
Cash and cash equivalents 12 500 22 890 76 200
Share capital ± 300 000 ordinary shares (300 000) Ð Ð
Share capital ± 150 000 ordinary shares Ð (175 000) Ð
Share capital ± 100 000 ordinary shares Ð Ð (100 000)
Retained earnings ± 1 January 20.8 (293 900) (151 500) (22 000)
Profit before dividend income (287 900) (96 000) (140 000)
Dividends received (16 000) (3 000) Ð
Long-term liability Ð Ð (91 000)
Trade and other payables (53 600) (43 340) (44 100)
Ð Ð Ð
1. Gibbs Limited acquired 80 000 ordinary shares in Pollock Limited on 1 January 20.3 On
this date Pollock Limited's share capital was R100 000 (100 000 shares) and the retained
earnings was R55 000.
2. Pollock Limited acquired 30 000 ordinary shares in Adams Limited on 1 October 20.8.
Pollock Limited exercises significant influence over the financial and operating policies of
Adams Limited. The profit for the current year was earned evenly throughout the year.
3. At both the above acquisition dates there were no unidentified assets, liabilities or
contingent liabilities and the fair values of all assets, liabilities and contingent liabilities
were confirmed to be equal to the carrying amounts thereof.
140
FAC3704/1
4. On 1 May 20.8 Pollock Limited had a rights issue of 1 ordinary share for every 2 shares
held at R1,50 per share. The parent took up 47 500 of the shares and the non-controlling
shareholders took up the balance.
otherwise stated.
6. The SA Normal tax rate is 29% and for all the entities, each share carries one vote.
7. It is the accounting policy of the group to measure non-controlling interest using the partial
goodwill method.
8. At the end of the current year goodwill was assessed for impairment and it was not
considered to be impaired.
REQUIRED:
(a) Prepare the consolidated financial statements of the Gibbs Limited Group for the
year ended 31 December 20.8.
(b) Prepare the pro forma consolidation journals for the Gibbs Limited Group for the year
ended 31 December 20.8.
Journal narrations are required.

Notes to the financial statements are not required.
Practice.
S o l u t i o n 6.4
(a)
GIBBS LIMITED GROUP
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.8
ASSETS R
Goodwill 14 000
Investment in associate 7 carrying amount 64 455
Other components of equity 5 211
141
FAC3704/1
GIBBS LIMITED GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.8
R
Gross profit (287 900 + 96 000) 383 900

Non-controlling interest (6 816 + 1 118 + 4 544) 12 478
280 024
GIBBS LIMITED GROUP

EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE
YEAR ENDED 31 DECEMBER 20.8
Non-
Share Retained Change in controlling Total
capital earnings ownership Total interest equity
R R R R R R
Balance at 1 January 20.8 300 000 371 1001 Ð 671 100 50 300 721 400
Rights issue 5 211 5 211 (1 461) 3 750
Dividends paid (4 000) (4 000)
for the year 267 546 267 546 12 478 280 024
Balance at
300 000 638 646 5 211 943 857 57 317 1 001 174
31 December 20.8
1
293 900 + 77 200 = 371 100
(b)
Pro forma consolidation journals
Dr Cr NCI
R R R
Goodwill 14 000
Investment in Pollock Limited (2) 138 000
Non-controlling interest (SFP) ((100 000 + 55 000) x 20%) 31 000 31 000
Elimination of owners' equity at acquisition of Pollock Limited
J2 Retained earnings ± beginning of the year 19 300
((151 500 ± 55 000) x 20%)
Recording of non-controlling interest since acquisition to
beginning of current year
Balance c/f 50 300
142
FAC3704/1
J3 Non-controlling interest (SCI) ((96 000 ± 27 840) x 20% x 4/12) 4 544
Recording of non-controlling interest in profit from 1 January
to 30 April 20.8
J4 Dividend received (other income) (20 000 x 80%) 16 000
Non-controlling interest (SFP) (20 000 x 20%) 4 000 (4 000)
Dividend paid 20 000
Elimination of intercompany dividends and recording of
non-controlling interest in dividends paid
50 844
J5 Share capital (175 000 ± 100 000) 75 000
Non-controlling interest (SFP) 1 461 (1 461)
Change in ownership 5 211
Investment in Pollock Limited (2) 71 250
Elimination of owners' equity at second acquisition of shares
in Pollock Limited
J6 Non-controlling interest (SCI) (6 816 + 1 118) *7 934
Recording of non-controlling interest in profit from 1 May to
31 December 20.8
J7 Investment in Adams Limited - associate 7 455
Share of profit of associate ((140 000 ± 40 600) x 3/12 x 30%) 7 455
Recording of interest in profit of associate for current year
Non-controlling interest Ð statement of Financial position 157 317
* ((96 000 ± 27 840) x 8/12 x 15%) + ((140 000 ± 40 600) x 3/12 x 30% x 15%)
Calculations
C1 Gibbs Limited's interest in Pollock Limited
To 30 April 20.8 (80 000/100 000) 80%
Since 1 May 20.8 (80 000 + 47 500/150 000) 85%
C2 Analysis of owners' equity of Adams Limited (not required ± only provided for
eduacation purposes)
100% 30% 30%

Total At Since CA
R R R R
At acquisition
196 550 58 965 Ð
Investment in Adams Limited (60 000) 60 000
Goodwill (1 035)
Current year
Profit for the year (3 months) 24 850 7 455 7 455
Dividends paid ± 30 December 2008 (10 000) (3 000) (3 000)
211 400 (1 035) 4 455 64 455
143
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C3 Analysis of owners' equity of Pollock Limited
100% 80% ± 85% 20% ± 15%

Total At Since NCI
R R R R
At acquisition
Share capital 100 000 80 000 20 000
155 000 124 000 31 000
Consideration paid and NCI 169 000 138 0001 31 000
Since acquisition
Retained earnings (151 500 ± 55 000) 96 500 77 200 19 300
265 500 77 200 50 300
Current year
Profit for the year ((96 000 ± 27 840) x 4/12) 22 720 18 176c 4 544
Dividends paid (20 000) (16 000) (4 000)
268 220 79 376 50 844
Rights issue
Share capital (100 000/2 x 1) 75 000 63 750 11 2502
Transfer from non-controlling interest 12 711 (12 711)3
343 220 76 461 49 383
Investment in Pollock Limited (47 500 x 1.50) (71 250)
Change in ownership 5 211
Profit for the year (68 160 x 8/12) 45 440 38 624 6 816
Profit for the year ± associate 7 455 6 337 1 118
396 115 124 337 57 317
1
(209 250 ± (47 500 x 1.50)) = 138 000
2
75 000 x 15% = 11 250
3
329 220(343 220 ± 14 000) x 15% = 49 383; 62 094 7 49 383 = 12 711

. describe the various methods by which a change in ownership can be effected.

. calculate the change in interest for every method.
. allocate and record the changed interest.
. prepare and present consolidated annual financial statements when there is
changes in ownership.
. describe the various ways in which changes can result from the issue of additional
shares by a subsidiary.
. calculate the changes of interest resulting from the issue of additional shares by a
subsidiary.
. prepare and present consolidated annual financial statements after the issue of
additional shares by a subsidiary has taken place.
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STUDY UNIT
7
Consolidated statement of cash flows
(IAS 7 (AC 118))
))
Learning outcome 7

& Prepare a consolidated statement of cash flows in terms of the requirements of Generally

The study unit consists of the following sections: page
7.1 Introduction and basic aspects 145
7.2 Elements of the statement of cash flows 146
7.3 Change of interest in subsidiaries 151
7.4 Sundry aspects 169
S t u d y
Group Statements (Volume 2): Ð Chapter 13
7.1 Introduction and basic aspects

S t u d y
Group Statements (Volume 2): Chapter 13 Ð section 13.01±13.05
If a consolidated set of financial statements is prepared for a group of companies this would
include a consolidated statement of cash flows. The cash flows would only be those that are
external to the group. The basic approach that is followed is that the consolidated statement of
cash flows is prepared from the consolidated statement of financial position, the consolidated
statement of changes in equity and the consolidated statement of comprehensive income. By
doing so the statement of cash flows is prepared for a group as a single entry as the intragroup
transactions have already been eliminated.
145
FAC3704/1
7.2 Elements of the statement of cash flows
S t u d y
The objective of the statement of cash flows is to provide useful information in respect of the
changes that have taken place in the financial resources (cash flows) of the entity between the
beginning and end of the financial year. The statement provides detail of any cash generated
by the operations of the entity, the cash that has been used by the entity in its operations and
what portion of the cash was used to finance the operations of the entity as well as the portion
used to invest in the entity to ensure the continued operations of the entity.
Cash flow information is needed in order to inform the users of the financial statements about
the liquidity and solvency of the entity.
Work through the following example which highlights the different sections of the statement of
cash flows.
PART A Cash flows from operating activities
PART B Cash flows from investing activities
PART C Cash flows from financing activities
PART D Cash and cash equivalents
Illustrative example
Information for PARTS A to D
VENTURE LIMITED
20.8 20.7
ASSETS R R
Non-current assets 400 000 380 000
Available-for-sale-financial asset 10 000 10 000
Total assets 607 600 513 140
Total equity 369 256 264 400
Equity attributable to owners of the parent 314 256 224 400
Non-controlling interest 55 000 40 000
Non-current liabilities 195 000 185 000
Current liabilities 43 344 63 740
Short-term portion of long-term borrowings 30 000 20 000
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VENTURE LIMITED
31 DECEMBER 20.8
Non-
R R R R R
Shares issued 45 000 Ð 45 000 Ð 45 000
Capitalisation issue 20 000 (20 000) Ð Ð Ð
Dividends paid Ð (10 000) (10 000) (2 000) (12 000)
year Ð 54 856 54 856 17 000 71 856
VENTURE LIMITED
31 DECEMBER 20.8
R
Revenue 297 600
Gross of sales (153 400)
Gross profit 144 200
Other income 19 000
Finance costs (18 100)

71 856
1. Property, plant and equipment consists of the following items:
20.8 20.7
R R
Machinery 390 000 370 000
Cost 620 000 590 000
Accumulated depreciation (230 000) (220 000)
2. During the current year, Venture Limited replaced an existing machine with a new machine
to meet the current production demands. The machine which was replaced had a carrying
amount of R75 000 and was sold for R93 000.
3. Included in `Òther income'' for the current year is a gain on sale of machinery and
investment income of R1 000.
147
FAC3704/1
4. `Òther expenses'' includes depreciation of R40 000. The depreciation for the machinery
that was replaced per additional information 2 is included in the amount.
5. Included in trade and other payables is R4 400 due to the South African Revenue Service
for the year ended 31 December 20.8 (20.7: R5 200).
6. Except for the given information no other non-cash flow item existed which could influence
the statement of cash flows.
PART A Cash flows from operating activities

The operating activities are the principal revenue producing activities of the entity. The cash
generated from (or used for) operating activities is normally the cash flows derived from the
activities of the entity (the cash that arises from the entities main purpose) and is the effect of
transactions that determine profit or loss.
Cash generated from (or used for) operations is calculated in one of two ways, namely:
. The direct method, or
. The indirect method.
The disclosure for the two methods of calculating cash generated by operations differs in the
statement of cash flows.
An illustration of the ``Cash flows from operating activities'' section of the statement of
cash flows according to the DIRECT METHOD:
R
Cash flows from operating activities 6 300
Cash receipts from customers (C1) 272 240
Cash paid to suppliers and employees (C2) (208 096)
Cash generated from operations 64 144
Investment income (given) 1 000
Interest paid (given) (18 100)
Taxes paid (5 200 + 27 944 ± 4 400) (28 744)
Dividends paid (10 000 + 2 000) (12 000)
Calculations
C1 Cash receipts from customers

R
Revenue per statement of comprehensive income 297 600
Increase in trade receivables (25 360)
Opening balance 42 040
Closing balance (67 400)
272 240
148
FAC3704/1
C2 Cash paid to suppliers and employees
R
Cost of sales (153 400)

Increase in inventories (19 800)
Decrease in trade and other payables (29 596)
Opening balance (43 740 ± 5 200) (38 540)
Closing balance (13 344 ± 4 400) 8 944
Expenses paid in cash (5 300)
Other expenses per statement of comprehensive income (45 300)
Non-cash item - depreciation 40 000
(208 096)
An illustration of the ``Cash flows from operating activities'' section of the statement of
cash flows according to the INDIRECT METHOD:
R
Adjustments:
Depreciation 40 000
Gain on disposal of equipment (19 000 ± 1 000) (18 000)
Investment income (1 000)
Finance costs 18 100
Net changes in working capital (C3) (74 756)
Taxes paid (5 200 + 27 944 ± 4 400) (28 744)
Dividends paid (10 000 + 2 000) (12 000)
Calculations
C3 Net changes in working capital
R
Increase in inventories (56 300(cb) ± 36 500(ob)) (19 800)
Increase in trade receivables (67 400(cb) ± 42 040(ob)) (25 360)
Decrease in trade and other payables (8 944(cb) ± 38 540(ob)) (29 596)
(74 756)
Comments
It is important to study the format of the cash flow statement so that you can calculate the
outflows and inflows of cash for the financial period. Make sure you are able to calculate
cash receipts from customers and cash paid to suppliers and employees. You will also be
penalised if the outflow or inflow is incorrectly indicated.
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FAC3704/1
PART B Cash flows from investing activities
Investing activities are activities that relate to the acquisition and disposal of long-term assets
and other investments (those which are not part of cash equivalents). This section includes the
entities expenditure on items which form the infrastructure of the entity which places the entity
in a position to be able to generate income.
In order for the expenditure to be recognised under cash flows from investing activities the
expenditure must have resulted in the recognition of an asset in the statement of financial
position.
Examples of investing activities are:
Purchase of property, plant and equipment,
Disposal of property, plant and equipment,
Disposal of intangible assets,
Acquisition of intangible assets, and
Acquiring or disposing of equity or debt instruments of other entities.
It is important for the user of the financial statements to be able to determine whether the
investment by the entities is in order to Ð
. Maintain the operating capacity of the entity, or
. Increase (expand) the operating activity of the entity.
For this reason investing cash flows are split in the statement of cash flows between
expenditure which is to REPLACE property, plant and equipment in order to maintain
operations and expenditure for the purchasing of new property, plant and equipment and
thereby EXPAND operations.
Illustration of the ``Cash flows from investing activities'' section of the statement of
cash flows:
R
Cash flows from investing activities (42 000)

Replacement of machinery (C4) (135 000)
Sale of property, plant and equipment (given) 93 000
C4 Machinery
R
(20 000)
Depreciation for the year (40 000)
Disposal of asset ± carrying amount (75 000)
Cash purchases of machinery (135 000)
PART C Cash flows from financing activities
Financing activities are the activities that relate to the funding of the infrastructure of the entity.
The transactions will result in a change in the size and composition of the debt and capital
funding of the entity.
The cash flows from financing section of the statement of cash flows is divided into the major
classes of gross cash receipts and gross cash payments arising from the financing activities.
150
FAC3704/1
Examples of financing activities are:
Proceeds from issuing shares,
Proceeds from issuing debentures, loans, notes, bonds and mortgages,
Repayment of long-term borrowings, and
Payments by a lessee of the liability portion of finance lease.
Illustration of the ``Cash flows from financing activities section of the statement of cash
flows:
R
Cash flows from financing activities 65 000
Long-term loans raised ((195 000 + 30 000) ± (185 000 + 20 000)) 20 000
Issue of shares 45 000
PART D Cash and cash equivalents

The results of the sections-cash flows from operations, cash flows from investing activities and
cash flows from financing activities are aggregated into a single line Ð
``Net increase or decrease in cash and cash equivalents''.

This amount is used to reconcile the cash and cash equivalents at the beginning of the year
(balance as per the statement of financial position previous year) with the cash and cash
equivalents at the end of the year (balance as per the statement of financial position for the
current year).
Illustration of the ``Cash flows from financing activities section of the statement of cash
flows:
R
Net increase in cash and cash equivalents 29 300
Cash and cash equivalents at beginning of period 54 600
Cash and cash equivalents at end of period 83 900
7.3 Change of interests in subsidiaries
S t u d y
Group Statements (Volume 2): Chapter 13 Ð sections 13.11 and 13.15
When control in a subsidiary is obtained or lost, the resultant cash flows are reflected as a
single line item in the consolidated statement of cash flows as part of investing activities. This
implies that the consideration paid for a subsidiary or the proceeds received from the sale of
the subsidiary are treated in the same manner as the purchase or sale of other investments.
In terms of IAS 7 (AC 118).40 the details of the assets and liabilities of the subsidiary acquired
or disposed of must be disclosed in a note to the statement of cash flows.
Refer to Examples 7.1 and 7.3 for the information required in a note for the acquisition of a
subsidiary and Examples 7.2 and 7.3 for the information required in a note for the disposal of a
subsidiary.
151
FAC3704/1
Work through the following examples which deal with the stated changes in interests in
subsidiaries:
7.1 Acquisition of a subsidiary,
7.2 Disposal of a subsidiary, and
7.3 Acquisition and disposal of a subsidiary.
Example 7.1
The following is an extract from the annual financial statements of the Mentco Group of
companies for the year ended 31 December 20.7:
MENTCO LIMITED GROUP

20.7 20.6
R R
ASSETS
Non-current assets 1 220 400 499 400
Investment property 620 000 155 000
Goodwill 9 600 Ð
Total assets 1 377 260 749 250
Total equity 650 440 480 200
Non-controlling interest 74 600 Ð
Total equity and liabilities 1 377 260 749 250
152
FAC3704/1
31 DECEMBER 20.7
Non-
R R R R R
Balance at 1 January 20.7 100 000 380 200 480 200 Ð 480 200
Issue of share capital 45 000 Ð 45 000 Ð 45 000
Obtaining control of subsidiary Ð Ð Ð 37 600 37 600
Capitalisation issue 20 000 (20 000) Ð Ð Ð
Dividends Ð (20 000) (20 000) (8 000) (28 000)
year Ð 70 640 70 640 45 000 115 640
1. On 1 December 20.7 Mentco Limited paid R400 000 to purchase a piece of land to be held
as investment property. The transaction was financed by means of a mortgage bond.
2. Included in property, plant and equipment are the following items:
20.7 20.6
R R
Land and buildings 340 000 285 000
The building is not depreciated. Any purchases made
were to expand the business of the company.
Machinery 250 800 59 400
Machinery with a carrying amount of R45 000 was sold
during the current year. The accumulated depreciation of
the machinery at the date of sale was R13 000. A
machine was purchased to replace the abovementioned
machine at a cost of R75 000 and the remaining
purchases were made to expand the operations of the
company.
590 800 344 400
3. Mentco Limited acquired an 80% interest in Webco Limited on 1 January 20.7. The fair
values of the identifiable assets and liabilities of Webco Limited on 1 January 20.7 were as
follows:
R
Machinery ± carrying amount 154 000

Trade receivables 30 000
Cash and cash equivalents 4 000
153
FAC3704/1
4. The following items are extracted from the consolidated statement of comprehensive
income of the Mentco Limited Group for the year ended 31 December 20.7:
Dr/(Cr)
R
Revenue (340 000)
Cost of sales 146 800
Other expenses 60 000
Depreciation 14 000
Sundry expenses 46 000
Dividends received (22 500)
Interest paid 18 000
Fair value adjustment ± Investment property (15 000)
Gain on sale of machinery (12 500)
Income tax expense 49 560
5. Included in trade and other payables is an amount of R5 000 (20.6: R13 000) being
dividends payable to ordinary shareholders. The Mentco Group owed the SA Revenue
Service R22 000 on 31 December 20.7 (20.6: R8 000). These amounts are also included in
trade and other payables.
REQUIRED:
Part (a)
Calculate the following amounts that will be disclosed in the consolidated statement of
cash flow of the Mentco Limited Group for the year ended 31 December 20.7:
Ð Cash generated from operations
Ð Income taxes paid
Part (b)
Prepare the consolidated statement of cash flow of the Mentco Limited Group for the year
ended 31 December 20.7.
Part (c)
Prepare the note to the consolidated statement of cash flows for the acquisition of a
subsidiary.
Practice.
All calculations must be done to the nearest Rand
154
FAC3704/1
S o l u t i o n 7.1
Part (a)
. Cash generated from operations

R
OR R
Profit for the year 115 640
Income tax expense 49 560
Interest paid 18 000
Depreciation 14 000
Fair value adjustment (15 000)
Gain on sale of machinery (12 500)
Dividends received (22 500)
147 200
Trade and other payables (C3) (32 030)
Inventories 42 000
212 610
OR R
Revenue 340 000
Sundry expenses (46 000)
147 200
Trade and other payables (32 030)
Inventories 42 000
212 610
Calculations
R
Sales 340 000

(Increase)/Decrease in trade receivables 55 440
Subsidiary acquired 30 000
395 440
155
FAC3704/1
R

Cash expenses (46 000)
Increase/(Decrease) in trade and other payables (32 030)
Opening balance (68 700)
Closing balance 36 670
(Increase)/Decrease in inventory 42 000
(182 830)
C3 Trade and other payables

R
Balance per statement of financial position 89 700

Dividend paid to ordinary shareholders (13 000)
SA Revenue Service (8 000)
68 700
. Income taxes paid

R
Balance at beginning of year 8 000
Per statement of comprehensive income 49 560
Adjusted for deferred tax (1 900)
Deferred tax ± closing balance (6 400)
Deferred tax ± opening balance 4 500
Unpaid amounts at end of year (22 000)
33 660
156
FAC3704/1
Part (b)
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 20.7
R

Cash receipts from customers (Part (a)C1) 395 440
Cash paid to suppliers and employees (Part (a)C2) (182 830)
Taxes paid (Part (a)C4) (33 660)
Dividends paid (13 000 + 20 000 + 8 000 ± 5 000) (36 000)
Proceeds on sale of machinery (C2) 57 500
Acquisition of subsidiary (C4) (156 000)
Purchases of property, plant and equipment (201 400)
Additions to investment property (C3) (50 000)
Additions to land and buildings (340 000 ± 285 000) (55 000)
Additions to machinery (C1) (21 400)
Replacement of machinery (75 000)
Long-term loans raised (C5) 81 900
Issue of shares (165 000 ± 100 000 ± 20 000) 45 000
Net increase in cash and cash equivalents (25 550)
Calculations
C1 Purchase of machinery
R
Opening balance ± carrying amount 59 400
Depreciation ± machinery (14 000)
Carrying amount of machinery sold (45 000)
Carrying amount of machinery acquired from subsidiary 154 000
Closing balance ± carrying amount (250 800)
Purchase of machinery (96 400)
Purchase of machinery 96 000
Machinery purchased to maintain operations ± given (75 000)
Machinery purchased to expand operations 21 400
C2 Proceeds on sale of machinery

R
Carrying amount 45 000
Gain on sale ± given 12 500
Proceeds on sale of machinery 57 500
157
FAC3704/1
C3 Investment property
Closing balance ± carrying amount 620 000

Fair value adjustment (15 000)
Property financed by mortgage bond (400 000)
Opening balance ± carrying amount (155 000)
Purchase of investment property for cash 50 000
C4 Acquisition of subsidiary
R
Machinery ± carrying amount 154 000
Cash and cash receivables 4 000
188 000
Non-controlling interest ± given (37 600)
Goodwill 9 600
160 000
Cash and cash equivalents (4 000)
Consideration 156 000
C5 Long-term loans raised

R
Closing balance ± carrying amount (561 750 + 95 000) 656 750
Property financed by mortgage bond (400 000)
Opening balance ± carrying amount (123 850 + 51 000) (174 850)
Long-term loans raised 81 900
158
FAC3704/1
Example 7.2
The following represents an extract from the consolidated financial statements of the Water
Limited Group:
WATER LIMITED GROUP

20.5 20.4
R R
ASSETS
Property, plant and equipment at fair value 150 000 120 000
Goodwill 2 000 4 300
Total assets 347 090 304 100
Total equity 307 055 271 500
Other components of equity (Revaluation surplus) 12 825 Ð
Deferred tax 2 175 Ð
Current tax payable 16 860 5 600
159
FAC3704/1
WATER LIMITED GROUP
31 DECEMBER 20.5
R
Revenue 96 000
Gross profit 41 700
Other income (includes interest received of R2 900) 54 900
Finance costs (5 890)
Other comprehensive income
Total profit for the year attributable to:

60 280

73 105
WATER LIMITED GROUP

31 DECEMBER 20.5
Revalua- Non-
Share tion Retained controlling Total
capital surplus earnings Total interest equity
R R R R R R
Balance at 1 January 20.5 50 000 Ð 165 000 215 000 56 500 271 500
for the year Ð 12 825 47 480 60 305 12 800 73 105
Disposal of subsidiary Ð Ð Ð Ð (29 550) (29 550)
Dividends paid Ð Ð (8 000) (8 000) Ð (8 000)
Balance at
31 December 20.5 50 000 12 825 204 480 267 305 39 750 307 055
160
FAC3704/1
1. On 30 June 20.5 Water Limited sold its shareholding of 70% in Filter Limited and made a
profit of R52 000. The gain of R52 000 is included in other income. The net assets and
liabilities of Filter Limited on 30 June 20.5 consisted of the following:
R
Property, plant and equipment at fair value 80 000
Inventories 15 000
98 500
2. The value of the goodwill of the investment in Filter Limited was R1 900 on 30 June 20.5.
The company applies the partial(proportionate) goodwill method to account for goodwill.
3. No other subsidiaries were sold or purchased during the year.
4. Property, plant and equipment only consists of property. Property is not depreciated and
any purchases of property were made to maintain current operations.
5. The revaluation surplus arose as a result of a property of the parent being revalued during
the current year.
6. Except for the given information no other non-cash flow items existed which could
influence the consolidated cash flow statement.
7. The SA Normal tax rate is 29%.
REQUIRED:
(a) Prepare the consolidated statement of cash flows according to the DIRECT method
for the Water Limited Group for the year ended 31 December 20.5.
(b) Prepare the following note to the consolidated statement of cash flows of the Water
Limited Group for the year ended 31 December 20.5:
Ð Disposal of subsidiary.
(c) Prepare the ``Cash flows from operating activities'' section of the consolidated
statement of cash flows according to the INDIRECT method for the Water Limited
Group for the year ended 31 December 20.5.
Practice.
All calculations must be done to the nearest Rand
161
FAC3704/1
S o l u t i o n 7.2
(a) Statement of cash flows according to the direct method

WATER LIMITED GROUP
31 DECEMBER 20.5
Notes R

Interest received 2 900
Interest paid (5 890)
Divedends paid (8 000)
Taxes paid ((C6) or (5 600 ± 16 860 + 26 030)) (14 770)
Cash flows from investing activities 25 850
Additions to property (C7) (95 000)
Disposal of subsidiary 1 120 850
Cash flows from financing activities (7 500)
Repayment of long-term borrowings (C8) (7 500)
Net increase in cash and cash equivalents
(40 840 + 25 850 ± 7 500) 59 190
(b) Notes to the consolidated statement of cash flows

WATER LIMITED GROUP
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED
31 DECEMBER 20.5
1. Disposal of subsidiary
During the year the group disposed of its 70% interest in Filter Limited. The fair value of assets
and liabilities on that date were as follows:
R
Inventories 15 000
Net assets disposed of 98 500
Non-controlling interest (98 500 x 30%) (29 550)
Goodwill 1 900
Gain on sale of subsidiary 52 000
Total disposal received in cash 122 850
Less: Cash and cash equivalents of subsidiary (2 000)
Net cash inflow 120 850
162
FAC3704/1
Calculations
R
Revenue (given) 96 000
Decrease in trade receivables (C2) 10 000
106 000
C2
Trade receivables
R R
Opening balance 82 000 Disposal of subsibsiary 6 000
Net decrease 10 000
82 000 82 000
C3 Cash paid to suppliers and employees:

R
Cost of sales (given) (54 300)
Other expenses (given) (4 400)
Impairment of goodwill ((C9) or (4 300 ± 1 900 ± 2 000)) 400
Decrease in inventories (C4) 12 900
Decrease in trade and other payables (C5) 6 000
(39 400)
C4
Inventories
R R
Net decrease 12 900
63 500 63 500
C5
Trade and other payables
R R
Disposal of subsidiary 4 500 Opening balance 7 000
Closing balance 8 500 Net increase 6 000
13 000 13 000
C6
Taxes paid
R R
Taxes paid 14 770 Opening balance 5 600
Closing balance 16 860 SCI 26 000
31 630 31 630
163
FAC3704/1
C7
Property, plant and equipment
R R
Revaluation (12 825 + 2 175) 15 000
Additions 95 000 Closing balance 150 600
230 000 230 000
C8
Long-term borrowings
R R
Bank (net decrease) 7 500 Opening balance 20 000
Closing balance (10 000 + 2 500) 12 500 (15 000 + 5 000)
20 000 20 000
C9
Goodwill
R R
Opening balance 4 300 Impairment of goodwill 400
Goodwill realised 1 900
4 300 4 300
(c) Indirect method

WATER LIMITED GROUP
CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED
31 DECEMBER 20.5
R

Adjusted for:
Gain on disposal of subsidiary (52 000)
Investment income (2 900)
Impairment of goodwill ((Part b) C9) 400
Finance costs 5 890
Net changes in working capital (C1) 28 900
Interest received 2 900
Interest paid (5 890)
Dividends paid (8 000)
Taxes paid ((Part b) C6) or (5 600 ± 16 860 + 26 030)) (14 770)
C1 Net changes in working capital R
Decrease in inventories ((Part b) C4) 12 900
Decrease in trade receivables ((Part b) C2) 10 000
Increase in trade and other payables ((Part b) C5) 6 900
Net cash inflow 28 900
164
FAC3704/1
Example 7.3
The following is an extract from the abridged consolidated annual financial statements of the
Diet Limited Group:
DIET LIMITED GROUP

20.7 20.6
R R
ASSETS
Property, plant and equipment at fair value 109 694 93 940
Goodwill 3 800 Ð
Total assets 127 844 110 750
Total equity 98 164 86 500
South African Revenue Service 3 550 11 000
DIET LIMITED GROUP

30 JUNE 20.7
R
Revenue 87 000
Gross profit 52 000
Other income 2 263
165
FAC3704/1
Total comprehensive income attributable to: R
20 067
DIET LIMITED GROUP

30 JUNE 20.7
Non-
R R R R R
Balance at 1 July 20.6 40 000 36 000 76 000 10 500 86 500

Total comprehensive income for
the year 17 567 17 567 2 500 20 067
Dividends paid (6 000) (6 000) (1 700) (7 700)
Acquisition of subsidiary 1 800 1 800
Disposal of subsidiary (2 503) (2 503)
Balance at 30 June 20.7 40 000 47 567 87 567 10 597 98 164
1. The following items were included in the calculation of profit before tax:
R
Gain on disposal of interest in subsidiary (Weight Limited) 1 493
Interest received 770
Depreciation 12 000
2. On 1 July 20.5 Diet Limited acquired a 75% interest in the issued share capital of Weight
Limited. On that date the owners' interest of Weight Limited was as follows:
R
Share capital ± 10 000 Ordinary shares 10 000

3. On 28 February 20.7 Diet Limited sold its entire interest in Weight Limited for R9 000. The
fair value of assets and liabilities of Weight Limited on 28 February 20.7 were as follows:
R
Inventories 10 200
Trade and other payables 990
Cash and cash equivalents 800
4. On 1 September 20.6 Diet Limited acquired 14 000 ordinary shares in Atkins Limited for
R8 000. On that date the owners' interest of Atkins Limited was as follows:
R
Share capital ± 20 000 Ordinary shares 20 000
166
FAC3704/1
The fair values of the identifiable assets, liabilities and contingent liabilities of Atkins
Limited on 1 September 20.6 were as follows:
R

5. Trade receivables include prepaid expenses of R600 for the current year (20.6: R350).
6. Property, plant and equipment was purchased to expand operations.
7. The goodwill of Atkins Limited was not considered to be impaired at year end.
8. The SA Normal tax rate is 29%.
REQUIRED:
(a) Prepare the consolidated statement of cash flows for the Diet Limited Group for the
year ended 30 June 20.7 using the DIRECT METHOD
(b) Prepare the following notes to the consolidated cash flow statement of the Diet
Limited Group for the year ended 30 June 20.7:
Ð Acquisition of subsidiary
Ð Disposal of subsidiary
Practice.
S o l u t i o n 7.3
DIET LIMITED GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 20.7
Notes R

Net cash from operating activities 43 950
Interest received 770
Taxes paid (C3) (12 866)
Dividends paid to owners of the parent (given) (6 000)
Dividends paid to non-controlling interest (given) (1 700)
Additions to property, plant and equipment (C4) (24 654)
Acquisition of subsidiary 2 (8 000)
Proceeds on sale of subsidiary 3 8 200
Net decrease in cash and cash equivalents (300)
Cash and cash equivalents at beginning of year 4 000
Cash and cash equivalents at end of year 3 700
167
FAC3704/1
DIET LIMITED GROUP
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED
30 JUNE 20.7
1. Obtaining control of subsidiary

During the period, Diet Limited acquired a 70% interest in Atkins Limited. The fair value of
assets acquired and liabilities assumed were as follows:
Property, plant and equipment (3 100)

Trade receivables (2 900)
(6 000)
Non-controlling interest (6 000 x 30%) 1 800
Goodwill (3 800)
Cash paid to obtain control net of cash acquired (8 000)
2. Disposal of subsidiary
During the period, Diet Limited disposed of its entire interest in Weight Limited. The fair value
of the assets and liabilities at the date of sale were as follows:
R
Inventories 10 200
Trade and other payables (990)
Cash and cash equivalents 800
Total net asset value 10 010
Non-controlling interest (10 010 x 25%) (2 503)
Gain (Profit) on disposal of shares 1 493
Total consideration received (Proceeds from sale of shares) 9 000
Cash and cash equivalents disposed of (800)
Calculations
Revenue 87 000
Trade receivables: 2 450
Ð opening balance (3 800 ± 350) 3 450
Ð closing balance (4 500 ± 600) (3 900)
Ð subsidiary acquired 2 900
89 450
168
FAC3704/1
R
Cost of sales 35 000

Increase in prepaid expenses (600 ± 350) 250
Inventories 7 340
Ð Opening balance (9 010)
Ð Closing balance 6 150
Ð Subsidiary sold 10 200
Ð Opening balance 9 700
Ð Closing balance (19 800)
Ð Subsidiary sold (990)
Other expenses paid in cash 26 000
Non-cash item ± Depreciation (12 000)
45 500
C3 Taxes paid
R
South African Revenue Service ± Opening balance (11 000)
South African Revenue Service ± Closing balance 3 550
Tax per statement of comprehensive income (8 196)
Deferred tax ± Opening balance (3 550)
Deferred tax ± Closing balance 6 330
12 866
C4 Property, plant and equipment

R

Depreciation ± current year (12 000)
Subsidiary acquired 3 100
24 654
7.4 Sundry aspects
S t u d y
Group Statements (Volume 2): Chapter 15.16 Ð section 15.18
7.4.1 Investment in associates

Where an associate is equity accounted in the consolidated financial statements of the group,
any profits received in cash by the investor will be reflected as dividends received in the
statement of cash flows. Because the accumulated equity profits of the associate in the
consolidated statement of comprehensive income does not represent a flow of cash, it is
excluded from the consolidated statement of cash flows. Loans made to or by the associate
during the financial year will be reflected in the statement of cash flows classified as either
investing or financing activities.
169
FAC3704/1
An investment made during the year in an associate should be disclosed as cash flow from an
investing activity. An additional investment in an existing associate (so long as there is no
change in status i.e. the associate does not become a subsidiary) will also be disclosed as an
investing activity.
Work through Example 7.4 whereby the investor has an investment in an associate.
Example 7.4
The following are the consolidated financial statements of the North Limited Group of
companies:
NORTH LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.6
20.6 20.5
R R
ASSETS
Investment in associate ± at carrying amount 38 850 18 000
Loan to associate 18 000 Ð
Available-for-sale financial assets 20 000 60 000
Total assets 548 950 341 700
Total equity 268 300 135 000
Long-term loan 160 000 90 000
Short-term portion of long-term loan 42 400 10 300
170
FAC3704/1
NORTH LIMITED GROUP
28 FEBRUARY 20.6
R
Revenue 185 500
Gross profit 97 500
Other income 12 180
Finance costs (990)
NORTH LIMITED GROUP

28 FEBRUARY 20.6
Share Retained
capital earnings Total
R R R
Balance at 1 March 20.5 55 000 80 000 135 000
Issue of shares 65 000 Ð 65 000
Total comprehensive income for the year Ð 73 300 73 300
Dividends paid Ð (5 000) (5 000)
Balance at 28 February 20.6 120 000 148 300 268 300
1. North Limited acquired an investment in an associate, West Limited on 1 January 20.5.

North Limited granted a loan to West Limited on 1 July 20.5. West Limited has made
repayments of R17 000 on the loan. Interest of R990 was charged on the loan.
2. Property, plant and equipment consists of land and machinery and the details are as
follows:
Cost Accumulated Carrying
depreciation amount
R R R
Balance at 28 February 20.6
Land 160 000 Ð 160 000
Machinery 391 500 175 000 216 500
Balance at 28 February 20.5 376 500
Land 54 000 Ð 54 000
Machinery 365 500 210 500 155 000
209 000
3. Land at a cost of R54 000 was sold during the year. Land is not depreciated. A larger stand
was purchased to expand operations.
171
FAC3704/1
4. Machinery with a cost of R114 000 was purchased and available for use on 1 July 20.5.
This machine replaced on the same date a machine that had a carrying amount of
R22 000. The machine that was replaced was 5 years old.
5. Machinery is depreciated at 15% per annum on the straight-line basis. The depreciation
other than the depreciation on the machines acquired and sold amounted to R14 700.
6. Other income includes a gain on the sale of land of R5 000. A gain was also made on the
sale of the machine. The group did not receive other investment income other than the
dividend from its associate West Limited.
REQUIRED:
Prepare the consolidated statement of cash flows for the North Limited Group for the year
ended 28 February 20.6 using the DIRECT METHOD.
Practice.
S o l u t i o n 7.4
NORTH LIMITED GROUP

28 FEBRUARY 20.6
R
Investment Income (C4) 1 800
Interest paid (990)
Dividends paid (5 000)
Taxes paid (C3) (20 240)
Disposal of available-for-sale financial assets (20 000(cb) ± 60 000(ob)) 40 000
Acquisition of machine to maintain operations (given) (114 000)
Proceeds from sale of machine (22 000 + 7 180(12 180 ± 5 000)) 29 180
Additions to property to expand operations
(160 000(cb) ± 54 000(ob) + 54 000) (160 000)
Proceeds from sale of land (54 000 + 5 000) 59 000
Advances received on long-term borrowings (C6) 102 100
Issue of shares (120 000(cb) ± 55 000(ob)) 65 000
Repayment of loan by associate (C7)(given) 17 000
Advances to associate (C7) (35 000)
172
FAC3704/1
Calculations
R
Revenue (given) 185 500
Decrease in trade receivables (18 100(cb) ± 23 400(ob)) 5 300
190 800
C2 Cash paid to suppliers and employees R

Cost of sales (given) (88 000)
Other expenses (given) (42 000)
Increase in inventories (24 000(cb) ± 19 000(ob)) (5 000)
Decrease in trade and other payables (78 250(cb) ± 106 400(ob)) (28 150)
Depreciation (C5) 30 500
(132 650)
C3
Taxes paid
R R
Deferred tax opening balance 1 300 SCI 16 040
Taxes paid 20 240 Deferred tax ± closing balance 5 500
21 540 21 540
C4
Dividend received from associate
R R
Opening balance 18 000 Dividend (balancing amount) 1 800
SCI 22 650 Closing balance 38 850
40 650 40 650
C5 Depreciation
R
Depreciation for machine bought (114 000 x 15% x 8/12) 11 400
Depreciation for machine sold (88 000 x 15% x 4/12) 4 400
(carrying amount = (100 ± amount written off of 15% x 5yrs)
= 100 ± 75
= 25
= 22 000/.25
Cost = 88 000
Depreciation for other machinery ± given 14 700
30 500
C6
Long-term borrowings
R R
Opening balance (90 000 + 10 300) 100 300
Closing balance (160 000 + 42 400) 202 400 Loan advanced 102 100
202 400 202 400
173
FAC3704/1
C7
Loan to associate
R R
Opening balance Ð Repayments (given) 17 000
Loan advanced 35 000 Closing balance 18 000
35 000 35 000
7.4.2 Investment in jointly controlled entities

There is currently an exposure draft issued that may change the accounting treatment of
interests in joint ventures, namely ED 229 Joint arrangements. In terms of ED 229, it is
suggested that the proportionate consolidation method is scrapped and that all interests in joint
ventures be accounted for according to the equity method. ED 229 has not yet been approved
and therefore the proportionate consolidation method is still being used.
Once the accounting statement is issued examples that deal with this section of the work will
be forwarded to students.

. prepare a consolidated statement of cash flows when a parent purchases a

subsidiary in the current year.
. prepare a consolidated statement of cash flows when a parent sells a subsidiary in
the current year.
. prepare a consolidated statement of cash flows when a parent holds shares in an
associate.
. prepare a consolidated statement of cash flows when a parent invests in a jointly
controlled entity.
174
FAC3704/1

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Mastering Group

About this Publication:

Undergraduate and post-graduate financial accounting students at universities, universities of

INTRODUCTION AND OVERVIEW OF THE MODULE (iv)

A. PURPOSE OF YOUR STUDY

C. MASTERY OF THE STUDY MATERIAL

D. PRESCRIBED BOOKS AND CALCULATORS

1. Group Statements (Volumes 1 and 2) (Latest edition) by Binnekade, C.S., and

E. REVISION OF STUDY MATERIAL OF THE PREVIOUS

F. ABBREVIATIONS USED IN THE STUDY MATERIAL

SCI Statement of comprehensive income

After studying this study unit, you should be able to:

OVERVIEW OF THE STUDY UNIT

STUDY: Group Statements (Volume 1): Chapter 1, 2 and 3

Group Statements (Volume 1): Chapter 2 Ð section 2.15

1.1.1 Standards covered in this module

1.1.2 Topics covered in 2nd year accounting (FAC2602)

Group Statements Ð Volume 1

3 Consolidation at acquisition date

4 Consolidation after acquisition date

5 Intragroup transactions (Excluding effect of tax Ð The tax effect on intragroup

8 Interim acquisition of an interest in a subsidiary

THE CONTENT OF THE AFOREMENTIONED CHAPTERS IS ``ASSUMED KNOWL-

Group Statements (Volume 1): Chapter 1

The objective of consolidated financial statements or group statements is to provide

A parent is an entity that has one or more subsidiaries.

A subsidiary is an entity, including an unincorporated entity such as partnership, that is

A group of companies comprises a parent and all of its subsidiaries.

1.1.3.2 Presentation of consolidated financial statements as required in terms of

1.1.3.3 Accounting for investments

Degree of influence: Applicable to: Accounting method:

In order to determine the degree of influence, it is necessary to understand the definitions of

Simple share investments

1.1.3.4 Separate financial statements

IFRS 3 (AC 140) Ð Business Combinations

Group Statements (volume 1): Chapter 2 (excluding sections 2.11±2.14)

1.2.1 Definitions (IFRS 3 (AC 140) Ð Appendix A)

1.2.2 Objective (IFRS 3 (AC 140).1)

1.2.3 Scope (IFRS 3 (AC 140).2)

Group Statements (Volume 1): Chapter 2 Ð sections 2.01±2.02

Group Statements (Volume 1): Chapter 2 Ð section 2.03

A business combination is a transaction or other event in which the acquirer obtains

1.2.5 The acquisition method (IFRS 3(AC140).4)

Group Statements (Volume 1): Chapter 2 Ð sections 2.04±2.10

Step 1 Identifying the acquirer

Group Statements (Volume 1): Chapter 2 Ð section 2.04

Step 2 Determining the acquisition date

Group Statements (Volume 1): Chapter 2 Ð section 2.05

Step 3 Identify the consideration transferred

Step 4 Measure the consideration transferred

(a) Considerations only consist of cash:

Pro forma consolidation journals for the H Limited group:

(b) Consideration consists of a combination of cash and non-current assets:

Pro forma consolidation journals for the H Limited group:

(c) Consideration consists out of a combination between cash and an investment in

Journals in the separate accounting records of H Limited.

Journals in the separate accounting records of S Limited.

Pro forma consolidation journals for the H Limited group.

Journals in the separate accounting records of H Limited: