ADVANCED FI

ACC 423:

OUTLINE:

1: Review of Company Accounts

2: Legal and Regulatory Framework of Group Accounts\
3: Consolidated Statement of Financial Position
4: Consolidated Income Statement
5: Associated Companies
6: Multiple Subsidiary and Vertical Structure
ACC 423: ADVANCED FINANCIAL ACCOUNTING

1: REVIEW OF COMPANY ACCOUNTS

 Elements of Financial statements
International Financial Reporting Standards (IFRS) set out the conceptual
framework for financial Reporting in private business enterprises and public sector
business enterprises. The conceptual framework form the basis for the preparation
of General Purpose Financial Statement (GPFS)
Classification of elements of financial statements as stipulated in the
conceptual framework.
The elements of financial statements consist of the following:
 Assets
 Liabilities
 Equity
 Revenue and
 Expenses
Assets
These are future economic benefits controlled by an entity as a result of past
transactions or other past events. They are recognized in the Statement of Financial
Position (SFP) when and only when:
(i) It is likely that the outflow of future economic benefits related thereto would
arise and
(ii) The value of the assets can be reliably measured
Liabilities
These are the present obligation to pay arising from past transactions (or other
past events) and are expected to result in outflow of future economic benefits.
They are recognized in the SFP
when:
i. It is likely that the outflow of future economic benefits related thereto would
arise and
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ii. The amount of the liability can be reliably measured
Equity
This is the residual interest in the assets of the entity after deducting liabilities.
It is about the sum of share capital and reserves.
Revenue
Revenue is defined as the gross inflow of economic benefits (cash, receivables,
other assets) during the report period arising from the ordinary operating activities
of an entity when those inflows result in increases in equity other than increases
relating to contributions from equity participants. Revenue is measured at the fair
value of the consideration received or receivable.
Revenue is recognized in the income statement when:
 It is probable that any future economic benefits associated with the item of
revenue will flow to the entity and
 The amount of revenue can be measured with reliability
Expenses
These are consumption of future economic benefits in the form of reductions
in assets or increase in liabilities of the entity, other than those relating to
distributions to owners that result in a decrease in equity. Expenses are recognized
in the income statement when:
(i) It is probable that the consumption or loss of future economic benefits
has/or would occur and
(ii) The consumption or loss of future economic benefits can be reliably
measured.
Components of Financial Statements
The Framework is concerned with 'general purpose' financial statements (i.e. a
normal set of annual statements), but it can be applied to other types of accounts. A
complete set of financial statements includes:
(a) A statement of financial position
(b) A statement of comprehensive income
(c) A statement of changes in Equity

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(d) A statement of cash flows
(e) Notes, other statements and explanatory material
(f) Statement of accounting policies
Supplementary information may be included, but some items are not included
in the financial statements themselves, namely, commentaries and reports by the
directors, the chairman, management etc.
Note that before the adoption of International Reporting Standard in Nigeria,
the standards that guided the preparation of accounts were Statement of
Accounting Standards (SAS) issued by the then Nigeria Accounting Standard
Board. Complete set of financial statements prescribed by SAS includes:
(a) Balance sheet
(b) Profit and loss account
(c) Cash flow statement
(d) Notes to the accounts
(e) Statement of accounting policies
(f) Value added statement
(g) Directors Report

Qualitative Characteristics of Financial Statements

In order for the financial statements to be useful to the stakeholders of a
business they must embody certain qualitative characteristics. They are defined as
follows:
The fundamental qualitative characteristics:
Relevance – financial information is regarded as relevant if it is capable of
influencing the decisions of users. Information is relevant to users if it can be used
to assist in evaluating past, present, or future events or in confirming, or correcting,
past evaluations. In order to be relevant, information must be timely.
Faithful representation – this means that financial information must be complete,
neutral and free from error. For information to represent faithful transactions and

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other events, it should be presented in accordance with the substance of the
transactions and other events, and not merely their legal form.
The enhancing qualitative characteristics:
Comparability – it should be possible to compare an entity over time and with
similar information about other entities. Information in financial statements is
comparable when users are able to identify similarities and differences between
that information and information in other reports.
An important implication of the characteristic of comparability is that users
need to be informed of the policies employed in the preparation of financial
statements, changes to those policies, and the effects of those changes. Because
users wish to compare the performance of an entity over time, it is important that
financial statements show corresponding information for preceding periods.
Verifiability – if information can be verified (e.g. through an audit) this provides
assurance to the users that it is both credible and reliable.
Timeliness – information should be provided to users within a timescale suitable
for their decision making purposes.
Understandability – information should be understandable to those that might
want to review and use it. This can be facilitated through appropriate classification,
characterization and presentation of information. Information is understandable
when users might reasonably be expected to comprehend its meaning. For this
purpose, users are assumed to have reasonable knowledge of the entity’s activities
and the environments in which it operates and to be willing to study the
information. Information about complex matters should not be excluded from the
financial statements merely on the grounds of possible difficulties for certain users
to understand.
Materiality -The relevance of information is affected by its nature and materiality.
Information is material if its omission or misstatement could influence the
decisions of users or assessments made on the financial statements. Materiality
depends on the nature or size of the item or error, judged in the particular
circumstances of its omission or misstatement. Thus, materiality provides a
threshold or cut-off point rather than being a primary qualitative characteristic that
information must have if it is to be useful
Format of the Statement of Financial Position is as follows:

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The example given by IAS 1 (revised) is as follows.
20X7 20X6
Assets N000 N000
Non-current assets
Property, plant and equipment 350,700 360,020

Goodwill 80,800 91,200

Other intangible assets 227,470 227,470
Investments in associates 100,150 110,770
Available-for-sale financial assets 142,500 156,000

901,620 945,460
Current assets Inventories 135,230 132,500
Trade receivables 91,600 110,800
Other current assets 25,650 12,540
Cash and cash equivalents 312,400 322,900
564,880 578,740
Total assets 1,466,500 1,524,200
Equity and liabilities
Equity attributable to owners of the parent
Share capital 650,000 600,000
Retained earnings 243,500 161,700
Other components of equity 10,200 21,200
903,700 782,900
Non-controlling interest 70,050 48,600
Total equity 973,750 831,500
Non-current liabilities
Long-term borrowings 120,000 160,000

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Deferred tax 28,800 26,040
Long-term provisions 28,850 52,240
Total non-current liabilities 117,650 238,280
Current liabilities
Trade and other payables 115,100 187,620
Short-term borrowings 150,000 200,000
Current portion of long-term borrowings 10,000 20,000
Current tax payable 35,000 42,000
Short-term provisions 5,000 4,800
Total current liabilities 315,100 454,420
Total liabilities 492,750 692,700
Total equity and liabilities 1,466,500 1,524,200

IAS 1 (revised) specifies various items which must appear on the face of
the statement of financial position as a minimum disclosure.
(a) Property, plant and equipment
(b) Investment property
(c) Intangible assets
(d) Financial assets
(e) Investments accounted for using the equity method
(f) Biological assets (outside the scope of the syllabus)
(g) Inventories
(h) Trade and other receivables
(i) Cash and cash equivalents
(j) Assets classified as held for sale under IFRS 5
(k) Trade and other payables
(l) Provisions

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(m) Financial liabilities
(n) Current tax liabilities and assets as in IAS 12
(o) Deferred tax liabilities and assets
(p) Liabilities included in disposal groups under IFRS 5
(q) Non-controlling interests Issued capital and reserves
Any other line items, headings or sub-totals should be shown on the face of
the statement of financial position when it is necessary for an understanding of the
entity's financial position. Whether additional items are presented separately
depends on judgments based on the assessment of the following factors.
(a) Nature and liquidity of assets and their materiality. Thus goodwill and assets arising
from development expenditure will be presented separately, as will monetary/non-
monetary assets and current/non-current assets.

(b) Function within the entity. Operating and financial assets, inventories,
receivables and cash and cash equivalents are therefore shown separately.
(c) Amounts, nature and timing of liabilities. Interest-bearing and non-interest-
bearing liabilities and provisions will be shown separately, classified as current or
non-current as appropriate.
The standard also requires separate presentation where different measurement
bases are used for assets and liabilities which differ in nature or function.
According to IAS 16, for example, it is permitted to carry certain items of property,
plant and equipment at cost or at a revalued amount.
STATEMENTS OF FINANCIAL POSITION
Statement of Financial Position is a Statement that shows Assets, Liabilities and
Net Assets / Equity of the enterprise. Both Assets and Liabilities are categorized as
Current and Non-Current.
1. CURRENT ASSETS
Current Assets are assets that can either be converted to cash or used to pay
current liabilities within a short period of time (3months). Typical current assets
include:
i. Cash & Its Equivalent:
 Cash at Bank- Money deposited in the bank, demand deposits and interest
bearing bank accounts such as time deposits or certificates of deposits held
by the bank.

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  Cash in Hand- This account includes currency, coins, cheques, money
orders, bankers’ drafts not on deposit with a bank. This account also
includes petty cash.
ii. Account Receivables
 Amounts due from private persons, firms or corporations for goods and
services furnished by the enterprise. It also includes revenue receivables and
short term loans / advances to employees etc.
iii. Inventories include
 Materials and supplies on hand for future consumption
 Goods held for resale, rather than for use in operations. This includes land
and building intended for sale and not for use.
iv. Prepayments
These are payments made, which benefits are not yet taken by the organization
(payments made in advance)
v. Other Current Asset
Assets, not previously classified that become due within one year.
2. NON-CURRENT ASSETS
Non-Current Assets are Assets that become due or can be converted to cash in
over a year. These include:
(i) Property, Plant & Equipment (ii) Investment Property (iii) Intangible assets
(iv) Investments (Long Term) (v) Long Term Loans Granted
i. PROPERTY, PLANT AND EQUIPMENT (PPE)
PPE are tangible assets that are held by the enterprise for use in the production
or supply of goods or services, for rental to others, or for administrative purposes;
and are expected to be used during more than one reporting period. IAS 16 clearly
provides definition, Measurement and Recognition of PPE. The Standard
prescribes the principles for initial recognition and subsequent accounting
(determination of carrying amount and the depreciation charges and impairment
losses for property, plant and equipment so that users of financial statements can
discern information about the Polytechnic’s investment in its property, plant and
equipment and the changes in such investment. An item of property, plant and
equipment should be recognized as an asset when:
 It is probable that future economic benefits or service potential associated
with the asset will flow to the entity
 The cost or fair value of the asset to the enterprise can be measured reliably.
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 A class of property, plant and equipment is a grouping of assets of a similar
nature or function in the Polytechnic’s operations. The following are examples of
separate classes:
(a). Land (b). Operational buildings (c). Roads (d). Machinery (e). Electricity
Transmission Network (f). Ships (g). Aircraft (h). Specialist military equipment (i).
Motor vehicles (j). Furniture and fixtures (k). Office equipment (l). Oil rigs
a. Land: A fixed asset account, which reflects the acquisition cost of land owned
by the Polytechnic. If land is purchased, this account includes the purchase price
and costs such as legal fees, filling and excavation costs and the likes, which are
incurred to put the land in condition for its intended use. If land is acquired by gift,
the account reflects its appraised value at the time of acquisition.
b. Operational Building: A fixed asset account, which reflects the acquisition cost
of permanent structures used to house persons and property owned by the
enterprise. If buildings are purchased or constructed, this account includes the
purchase or contract price of all permanent buildings and fixtures attached to and
forming a permanent part of such buildings. If buildings are acquired by gift, the
account reflects their appraised value at the time of acquisition.
c. Infrastructure: The acquisition cost of permanent improvements, other than
buildings which add value to the land. These improvements consist of capital
expenditure such as roads, bridges, streets, sidewalks, curbs, these assets are
normally immovable and of value to the enterprise. Therefore, it is the enterprise’s
option whether such assets are recorded in the general fixed assets.
d. Equipment and Furniture: Equipment, Furniture, Fixtures and other tangible
property of a non-consumable nature with a normal expected life of one year or
more.
e. Property under Capital Leases: property acquired under a lease agreement that
meets the requirements of capitalization.
f. INVESTMENT PROPERTY
g. Investment property is land or buildings held (whether by the owner or under a
finance lease) to earn rentals or for capital appreciation or both, rather than for:
h. Use in the production or supply of goods or services or for administrative
purposes;
i. Sale in the ordinary course of operations.

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j. IAS 40prescribes the accounting treatment for investment property and related
disclosures.
k. INTANGIBLE ASSETS
l. Intangible Assets that have no physical existence and the value are limited by
rights and anticipative benefits that possession confers upon the owner (patent,
copyright, etc.)
m. INVESTMENT – NON – CURRENT
n. Securities, including repurchase and reverse repurchase agreements held for the
production of income in the form of interest and dividends e.g. bonds. These
accounts do not include certificates of deposits or other interest bearing bank
accounts.
o. Gutters, drainage systems and outdoor lighting systems.
LONG TERM LOAN GRANTED
Loans granted by the enterprise to be repaid within a long period of time.
3. CURRENT LIABILITIES
Current Liabilities are Liabilities in existence at the date of the (balance sheet)
Statement of Financial Position which is due for repayment with in shortest
possible time. They include the following:
i. Deposits ii. Unremitted Deductions iii. Account Payables iv. Short Term Loans.
v. Current Portion of Borrowings.
i. Deposits: A Liability incurred for deposits received. They also represent funds
held by the Polytechnic on behalf of third party or outsiders e.g. Retention Fees.
They are treated as part of current liabilities because owners can demand for
payment at any point in time.
ii. Unremitted Deductions: These are deductions made from payment by the
Polytechnic but not remitted at the end of the reporting period. They include
PAYE, WHT VAT, Union Dues, NHF, etc.
iii. Account Payables: Account Payables include:
 Liabilities due to private persons, firms or corporation for goods and
services received by the enterprise, but not including amounts due to other
funds of the Polytechnic.
 Judgments debts to be paid by the enterprise as a result of court decisions,
including damages awarded for private property taken for public use.
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  Annuities due and payable to retired employees in a public employees’
retirement system.  Amounts due on contracts for assets, goods and services
received by the Polytechnic.
 Current portion of borrowings
 In the enterprise funds, the current portion would be used to record only that
portion that was payable with current, available resources; the long-term
portion would be recorded in the long term debt account group.
 NON CURRENT LIABILITIES
 Non-Current Liabilities include Long Term Debts and borrowings.

Format of Income Statement

STATEMENT OF PROFIT OR LOSS
Statement of Profit or Loss is one of the Principal Statements included in
GPFS. The Statement shows income accrued to the enterprise from all sources and
Expenses incurred during the period. IAS 1 prescribes minimum requirements to
be disclosed at the face of the Statement.
IAS 1 (revised) allows income and expense items to be presented either:
(a) in a single statement of comprehensive income (Statement of Profit or Loss); or
(b) in two statements: a separate income statement (Statement of Profit or Loss)
and statement of other comprehensive income.

XYZ GROUP – STATEMENT OF COMPREHENSIVE INCOME (STATEMENT OF

PROFIT OR LOSS) FOR THE YEAR ENDED 31 DECEMBER 20X7
20X7 20X6
N’000 N’000
Revenue 390,000 355,000
Cost of sales (245,000) (230,000)
Gross profit 145,000 125,000
Other income 20,667 11,300
Distribution costs (9,000) (8,700)
Administrative expenses (20,000) (21,000)
Other expenses (2,100) (1,200)
Finance costs (8,000) (7,500)
Share of profit of associates 35,100 30,100
Profit before tax 161,667 128,000
Income tax expense (40,417) (32,000)
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Profit for the year from continuing operations 121,250 96,000
Loss for the year from discontinued operations _______ (30,500)
Profit for the year 121,250 65,500
Other comprehensive income:
* Exchange differences on translating foreign operations 5,334 10,667
Available-for-sale financial assets (24,000) 26,667
*Cash flow hedges (667) (4,000)
Gains on property revaluation 993 3,367
*Actuarial gains (losses) on defined benefit pension plans (667) 1,333
Share of other comprehensive income of associates 400 (700)

Separate Income Statement

In other national published accounting standards it’s referred to as the Profit

and Loss Account.
The standard distinguishes the function of expense (‘by function’) and nature of
expense (‘by nature’) formats. The ‘by function’ format is also referred to as the
cost of sales method. The standard states that it “requires a choice between
classifications based on that which most fairly presents the elements of the
enterprise’s performance”
IAS offers two possible formats for the income statement section or separate
income statement-by function or by nature. Classification by function is more
common.

Format of separate income statements

Illustrating the classification of expenses by function
XYZ GROUP STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31
DECEMBER 20X8

20X8 20X7
N000
N000 Revenue X X

Cost of sales (X) (X)

Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)

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Finance costs (X) (X)
Share of profit of associates X X
Profit before tax X X
Income tax expense (X) (X)
Profit for the year X X
Attributable to: Owners of the parent X X
Non-controlling interest X X

Illustrating the classification of expenses by nature

XYZ GROUP STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31

DECEMBER 20X8

20X8 20X7
N000 N000
Revenue X X
Other operating income X X
Changes in inventories of finished goods and work in progress (X) X
Work performed by the entity and capitalized X X
Raw material and consumables used (X) (X)
Employee benefits expense (X) (X)
Depreciation and amortization expense (X) (X)
Impairment of property, plant and equipment (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Share of profit of associates X X
Profit before tax X X
Income tax expense (X) (X)
Profit for the year X X

Attributed to:

Owners of the parent X X

Non-controlling interest X X
X X

Note: The usual method of presentation is expenses by function

The following example illustrates these two differing formats.

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Illustration 1

The following is an extract of balances in the accounts of South Feeds and

Fertilizers a limited company at 31 December 2010.

Nm
Cost of sales 7.2
Sales revenue 18.2
Distribution costs 2.6
Loan note interest 2.8
Admin expenses 4.2

An analysis of the costs other than interest; ieN14m showed the following:

Nm
Raw materials and consumables 4.2
Increase in inventories finished goods and work in progress (0.4)
Depreciation 3.6
Staff costs 5.8
Other operating expenses 0.8
_14m_____

The provision for income tax expense had been agreed at N0.4m. From this
information we can now produce income statements in both formats.

‘By Function’ Format

South Feeds and Fertilizers Statement of Profit or Loss for Year Ended 31
December 2010

Nm Nm
Revenue 18.2
Cost of sales 7.2
Gross profit 11.0

Distribution costs 2.6

Administration expenses 4.2
6.8
Profit from operations 4.2
Interest payable 2.8
Profit before tax 1.4

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Income tax expense 0.4
Net profit for period 1.0

‘By Nature’ Format

Nm Nm
Revenue 18.2
Increase in inventories of finished goods and work in
progress 0.4
18.6
Raw materials and consumables 4.2
Staff costs 5.8
Depreciation 3.6
Other operating expenses 0.8
14.4
Profit from operations 4.2
Interest payable 2.8
Profit before tax 1.4
Income tax expense 0.4
Net profit for period 1.0
2: LEGAL AND REGULATORY FRAMEWORK OF GROUP ACCOUNTS

 Law and accounting standards that regulate the operations of Group

Accounts

The regulatory documents for the preparing of group accounts are as follows:

(a) The Companies and Allied Matters Act Cap.C20 LFN 2004, later called the
Act;
(b) IAS 27 Consolidated and Separate Financial Statements
(c) IAS 28 Investment in Associates
(d) IAS 31 Interests in Joint Ventures
(e) IFRS 3 Business Combinations
(f) IFRS 10 Consolidated Financial Statements. IFRS 10 replaces the portion of
IAS Consolidated and Separate Financial Statements that addresses the accounting
for consolidated financial statements.
g) IFRS 11 Joint Arrangements, IFRS 11 replaces IAS 31 Interests in Joint
Ventures and SIC-13 Jointlycontrolled Entities—Non-monetary Contributions by
Venturers.
(h) SIC-12 Consolidation — Special Purpose Entities
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(i) IFRS 12 Disclosure of Interests in other Entities. IFRS 12 includes all of the
disclosures that were previously in IAS 27 related to consolidated financial
statements, as well as all of the disclosures that were previously included in IAS 31
and IAS 28 Investment in Associates.

Group Financial Statements

A group is defined as a parent company and its subsidiaries, group financial

statements are the financial statements of the parent company and its subsidiaries
combined to form a set of consolidated financial statements.

Consolidated financial statements are the financial statements of a group presented

as those of a single enterprise. In accordance with the Act, the group’s financial
statements shall consist of three statements, as follows:

(a) Consolidated statement of financial position dealing with the state of affairs of
the company and all the subsidiaries of the company;
(b) Consolidated income statement/ comprehensive income statement of the
company and its subsidiaries; and
(c) Consolidated statement of cash flows of the company and its subsidiaries.
(d) Consolidated statement of changes in equity of the company and its
subsidiaries.
(e) Notes to the consolidated statement of financial position.

Parent/Holding Company and Subsidiaries

A holding company is one that has one or more subsidiaries. A subsidiary is an

enterprise that is controlled by another enterprise known as the parent. Under
Section 338 of the Act, a company (say company A) shall be deemed to be the
subsidiary of another company (say company B) if:

(a) The company (company B) is a member of it and controls the composition of

its board of directors; or
(b) Holds more than half the nominal value of its equity share capital; or
(c) The first mentioned company (company A) is a subsidiary of any company
which is a subsidiary of company B.

For the purpose of the Act, the composition of the board of directors of a
company shall be deemed to be controlled by another company if that other

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company has the power to remove all or a majority of the directors without the
consent or concurrence of another party.

IFRS 10 establishes a single control model that applies to all entities (including
‘special purpose entities,’ or ‘structured entities’ or ‘variable interest entities’. The
changes introduced by IFRS 10 will require management to exercise significant
judgment to determine which entities are controlled, and therefore are required to
be consolidated by a parent, compared with the requirements that were in IAS 27.
Therefore, IFRS 10 may change which entities are within a group. These changes
were made by the IASB, in part, in response to the financial crisis, when there was
heavy criticism of accounting rules that permitted certain entities to remain off-
balance sheet.

Generally, control is also presumed to exist when the parent has:

1. Power over more than half the voting right by virtue of agreement with other
investors.
2. Power to govern the financial and operating policies of the enterprise under
a statute or agreement.
4. Power to appoint or remove the majority of the members of the board of
directors. 4. Power to cast the majority of votes at a meeting of board of
directors or equivalent governing body and control of the entity is by that
board or body.

Illustration 1

Green Co owns the following investments in other companies:

Equity shares held Non-equity shares held

Violet Co 80% Nil
Amber Co 25% 80%
Black Co 45% 25%

Green Co also has appointed five of the seven directors of Black Co. Which of the
following investments are accounted for as subsidiaries in the consolidated
accounts of Green Co Group?

A Violet only
B Amber only
C Violet and Black
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D All of them

Answer

Let’s consider each of the investments in turn to determine if control exists and
therefore, if they should be accounted for as a subsidiary. Violet Co – by looking at
the equity shares, Green Co has more than 50% of the voting shares – i.e. an 80%
equity holding. This gives them control and, therefore,
Violet Co is a subsidiary. Amber Co – you must remember to look at the equity
shares, as despite having the majority of the non-equity shares, these do not give
voting power. As Green Co only has 25% of the equity shares, they do not have
control and, therefore, Amber Co is not a subsidiary.
Black Co – by looking at the percentage of equity shares, you may incorrectly
conclude that Black Co is not a subsidiary, as Green Co has less than half of the
voting rights. However, by looking at the fact that Green Co has appointed five of
the seven directors, effectively they have control over the decision making in the
company. This control should make you conclude that Black Co is a subsidiary.

Therefore the correct answer is C.

Methods of preparing consolidated accounts

Before IFRS 3, there were two main methods of preparing consolidated

statements, the purchase method and the pooling of interests method. The former
method was the more common and was used in all cases where one company was
seen as acquiring another. IFRS 3 now allows only the purchase method. The
purchase method has the following features:

(i) Assets and liabilities of the subsidiaries are measured at fair market value at
the date of acquisition;
(ii) Shares purchased and issued in settlement of the purchase are valued by the
parent company at fair value.
(iii) The profits of the subsidiary are divided into pre-acquisition and post-
acquisition periods. Only the post-acquisition profits are consolidated.
(iii) Goodwill arises on consolidation when the fair value of the consideration
is different from the fair value of the net asset acquired.

Requirements of IFRS 3 in relation to Acquisition Method

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(i) All business combinations must be accounted for using acquisition method.

(ii) Identify the acquirer – one of the combining entities must be identified as the
acquirer.
(iii) Determine the acquisition date – this is generally the date on which the
acquirer obtains control of the ‘acquiree’ and this would usually be the closing date
or sometimes a date earlier or later than the closing date.
(iv) Determine the acquisition date – this is generally the date on which the
acquirer obtains control of the ‘acquiree’ and this would usually be the closing date
or sometimes a date earlier or later than the closing date.
(v) Recognise and measure the identifiable assets acquired and the liabilities
assumed at fair value on the acquisition date.
(vi)NCI in an ‘acquiree’ should be measured at fair value or at the NCI’s
proportionate share of the ‘acquiree’s’ identifiable net assets at acquisition.
(vii)Recognise and measure goodwill or gain from a bargain purchase and test
goodwill for impairment periodically.

Exemption of Subsidiaries from Consolidation

Under the Companies and Allied Matters Act (CAP C20 LFR 2004):
(a) Under Section 336(2) of the Act, group accounts need not be prepared where
the parent company itself is at the end of its financial year, a wholly owned
subsidiary of another company incorporated in Nigeria. However, w here the
ultimate parent company is incorporated overseas; the group accounts should be
prepared.
(b) Under Section 336(3) of the Act, a subsidiary may be omitted from the group
accounts if:
(i) it is impracticable or would be of no real value to members because of the
insignificant amount involved;
(ii) it would involve expenses or delay out of proportion to its value to members of
the company;
(iii) the result would be misleading or harmful to the business of the company or
any of its subsidiaries. For instance, it may be harmful to consolidate the result of a
subsidiary with operating losses, poor liquidity position and massive borrowing; or
(iv) the business of the parent company and that of the subsidiary are so
different that they cannot reasonably be treated as a single undertaking.

Under IFRS 10
Consolidated Financial Statements, a parent entity is allowed not to present or
prepare consolidated financial statements if certain conditions prevail.
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 (i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of
another entity and all its other owners, including those not otherwise
entitled to vote, have been informed about, and do not object to, the
parent not presenting consolidated financial statements;
(ii) its debt or equity instruments are not traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market,
including local and regional markets);
(iii) it did not file, nor is it in the process of filing, its financial statements
with a securities commission or other regulatory organization for the
purpose of issuing any class of instruments in a public market; and its
ultimate or any intermediate parent produces consolidated financial
statements that are available for public use and comply with IFRSs.

Explanation of Concepts under Group Accounts

(a) Equity share capital

This comprises any equity share capital which carries the right to participate
beyond a specified amount in either a capital or revenue distribution. Therefore, it
includes all share capital other than non-participating preference shares. In the
absence of information to the contrary, ordinary shares are summed to be equity
while preference shares are not.
b) Equity method of accounting
This is a method of accounting where the investment in a company is shown
in the consolidated statement of financial position at:
(i) the cost of the investment; plus
(ii) the investing company or group’s share of the post-acquisition retained profits
and reserves of the company; less
(iii) any amount written off in respect of (i) and (ii) above. The investing company
should account separately in the profit and loss account for its share of the profit
before tax, taxation and extraordinary items of the acquired company.

This method is usually applied to associated companies.

(c) Related company
The Act defines a related company as anybody corporate (other than that
which is a group company in relation to that company) in which that company
holds on a long-term basis, a qualifying capital interest for the purpose of securing
a contribution to that company’s own activities by exercising control or influence
arising from that interest.
(d) Associated companies

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 This is an enterprise in which the investor has significant influence and which
is neither a subsidiary nor a joint venture of the investor. Significant influence is
the power to participate in the financial and operating policy decisions of the
investee but does not have control over those policies. A holding of 20 percent but
less than 50% of the equity voting rights is regarded as the ability to exercise
significant influence (though not in all circumstances).
(e) Fellow subsidiaries
A body corporate is treated as a fellow subsidiary of another body
corporate, if both are subsidiaries of the same company, but neither is the other’s
subsidiary.
(f) Cost of control account
It is described as an account opened to record the purchase of a business so as
to determine whether the business is being purchased ‘at a profit or at a loss’. In
other words, it is a goodwill account. A debit balance on the Cost of Control
Account is regarded as a loss on purchase because the cost of shares acquired is
greater than the net assets acquired while a Credit balance on the Cost of Control is
regarded as a gain (i.e. Negative Goodwill). In the cost of control account, the cost
of investment is cancelled against the net assets are acquired to determine
goodwill.
(g) Goodwill on consolidation
Goodwill is the difference between the price paid by the parent company and
the fair value of the subsidiary’s net assets at the date of acquisition. Included in
the definition of net assets are identifiable assets, liabilities and contingent
liabilities of the subsidiaries.
IFRS 3 business combinations states the positive purchased goodwill must be
capitalized upon consolidation and reviewed for impaired at least annually under
IAS 36 impairment of assets. The impairment goes through the consolidated
income statement. Negative goodwill is investigated and is taken to the
consolidated income statement immediately as a credit. Negative goodwill is also
known as “bargain purchase”
The new revised IFRS 3 method of calculating goodwill now gives the parent
company a choice between 2 methods of calculating goodwill and dealing with
NCI:
(i) NCI’s share of net assets - this is the old method (also known as the partial
goodwill). Here, the goodwill is calculated in the traditional way. The NCI are
basically ignored in the goodwill calculation and just the parent’s share is shown.
(ii) Fair value – this is the new method (also known as the full goodwill). Both the
parent’s and the NCI’s goodwill is established and shown in the consolidated
financial statements.
(h) Fair value of net assets
21
 The fair value of an asset and a liability is defined as the amount for which an
asset could be exchanged or a liability settled between knowledgeable, willing
parties in an arm’s length (IFRS 3). If additional evidence of the fair values of
acquired assets and liabilities becomes available after the acquisition, the
consolidated financial statements should be adjusted to reflect this development.
(i) Non -controlling interest (Formerly called Minority interest)
When the parent company owns less than 100% equity shares in the
subsidiary, say 70%, the remaining 30% is attributable to the non-controlling
interest (NCI). Non-controlling interest is “the equity in a subsidiary not
attributable, directly or indirectly, to a parent.”
(j) Pre-acquisition and post-acquisition profits
The profits of a subsidiary company are distinguished between pre-
acquisition and post-acquisition for the purpose of preparing consolidated
accounts.
Pre-acquisition reserves are the accumulated reserves earned by the subsidiary
prior to its acquisition by the parent company. They are credited to cost of control
account as part of the process required to arrive at goodwill arising on
consolidation.
Post-acquisition reserves are the accumulated retained profits since the date of
acquisition. The proportion of these reserves earned by the parent company is
credited to the consolidated accounts. To the extent that post-acquisition profits
earned by the subsidiary are transferred to the parent company by way of
dividends, the amount to be aggregated when consolidation takes place will be
reduced correspondingly.
(l) Other reserves of a subsidiary
Other reserves of a subsidiary may include share premium account,
revaluation surplus on fixed assets and other reserves. The principle of dividing
them between pre-acquisition and post-acquisition reserves will apply.

In Conclusion, Knowledge of the theoretical background for consolidation of

financial statements and the regulatory documents is very necessary for the
preparation and presentation of consolidated financial statements.

3: CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The main objective of consolidated statements of financial position is to

provide information about the group’s financial position to the equity shareholders
of the parent company. The consolidated statement of financial position is prepared
by aggregating on a line-by-line basis all the assets and liabilities of the parent
company with those of its subsidiary. The result is a statement of financial position
22
containing the assets and liabilities of the two entities as if they were owned by a
‘single economic entity’.

 Consolidation Procedures
The process of consolidating financial statements can be broken down into the
following steps:

 Step 1 Determine group structure

 Step 2 Layout the pro-forma
 Step 3 Consider the adjustments
 Step 4 the carrying amount of the holding company’s investment as well as
its share of the net assets of the subsidiary are eliminated;
 Step 5 balances and transactions between the holding and subsidiary are
eliminated in full
 Step 6 Calculate goodwill
 Step 7 Calculate non-controlling interest (NCI) for subsidiary
 Step 8 Combine the financial statements

Group structure
The simplest are those in which a parent company has only a direct interest in the
shares of its subsidiary companies. For example:

100% 80% 75% 90%

S1 S2 S3 S4

S1 Co is a wholly owned subsidiary of P Co. S2 Co, S3 Co and S4 Co are partly

owned subsidiaries; a proportion of the shares in these companies is held by
outside investors.
Often a parent will have indirect holdings in its subsidiary companies. This can
lead to more complex group structures.

51%

23
 S

51%

SS

P Co owns 51% of the equity shares in S Co, which is therefore its subsidiary.
S Co in its turn owns 51% of the equity shares in SS Co. SS Co is therefore a
subsidiary of S Co and consequently a subsidiary of P Co. SS Co would describe S
Co as its parent (or holding) company and P Co as its ultimate parent company.

Cancellation and part cancellation

The preparation of a consolidated statement of financial position, in a very

simple form, consists of two procedures.

(i) Take the individual accounts of the parent company and each subsidiary and
cancel out items which appear as an asset in one company and a liability in
another.
(ii) Add together all the unconcealed assets and liabilities throughout the group.

Items requiring cancellation may include the following.

(a) The asset 'shares in subsidiary companies' which appears in the parent
company's accounts will be matched with the liability 'share capital' in the
subsidiaries' accounts.
There may be intra-group trading within the group; as receivable in account of
one company and payable in the accounts of another company, but not at the same
amounts. This is applicable to dividend (dividend receivable and dividend
payable), interest (interest receivable and interest payable), trade (trade payable
and trade receivable), and bill (bill receivable and bills payable)

(b) The parent company may have acquired shares in the subsidiary at a price
greater or less than their par value. The asset will appear in the parent company's
accounts at cost, while the liability will appear in the subsidiary's accounts at par
value. This raises the issue of goodwill, which is dealt with later in this chapter.

(c) Even if the parent company acquired shares at par value, it may not have
acquired all the shares of the subsidiary (so the subsidiary may be only partly
owned). This raises the issue of non-controlling interests,
24
(d) The inter-company trading balances may be out of step because of goods or
cash in transit.

(e) One company may have issued loan stock of which a proportion only is taken
up by the other company.

Pre and post-acquisition profits

When a subsidiary is acquired, it will already have accumulated profits, these

are known as pre-acquisition profits. These profits are not part of the group, and
therefore are not shown in the consolidated reserves. All the profits earned after the
subsidiary was acquired will belong to the group, but only to the extent of the share
ownership. These are known as post acquisition retained reserves (PARR).

Therefore the pre-acquisition profits are included in the goodwill

calculation, and the share of post-acquisition profits is shown in the consolidated
reserves. Post-acquisition profits are easily established as profits at the balance
sheet less profits at date of acquisition.
Pre-acquisition reserves are all reserves whether capital or revenue in nature,
existing on the date of acquisition of the interest of the parent company in the
subsidiary company. If a subsidiary has already been trading before it is acquired
by a parent company, it will already have reserves (share premium account, capital
redemption reserve, revaluation reserve, income statement etc) in its statement of
financial position. The reserves which are built up before the date of acquisition
are known collectively as pre- acquisition profits.

Post-acquisition reserves on the other hand, refer to all reserves that are generated
after the acquisition date. These are not capital investment (in fact, they represent a
return on the investment in subsidiary).In this context, post-acquisition profits
include any increase in reserves owned by the share after the date of acquisition.
This includes, not just profits in the subsidiaries’ income statement, but also
increase in other reserves such as the revaluation reserve (i.e. when a subsidiary’s
fixed assets are revalued). The group’s share of post-acquisition profits should be
included in the group’s reserves in the consolidated statement of financial position.

Non-Controlling Interest

The Non-controlling interest in a subsidiary consists of shareholders who are

not part of the parent company and they are totally unaffected by any distinction
25
between pre- and post- acquisition profits. In other words, the Non-controlling
interest (in a subsidiary’s ordinary shares) in the consolidated statement of
financial position will be the appropriate percentage of the subsidiary’s net assets.

Goodwill

When a premium is paid above the fair value of the net assets acquired over a
subsidiary, it results in goodwill. IFRS 3 business combinations states the positive
purchased goodwill must be capitalised upon consolidation and reviewed for
impaired at least annually under IAS 36 impairment of assets. The impairment
goes through the consolidated income statement.

Negative goodwill is investigated and is taken to the consolidated income

statement immediately as a credit. Negative goodwill is also known as “bargain
purchase”.

The new revised IFRS 3 method of calculating goodwill now gives the parent
company a choice between 2 methods of calculating goodwill and dealing with
NCI:
(i) NCI’s share of net assets - this is the old method (also known as the partial
goodwill). Here the goodwill is calculated in the traditional way. The NCI are
basically ignored in the goodwill calculation and just the parent’s share is shown.

(ii) Fair value – this is the new method (also known as the full goodwill). Both the
parent’s and the NCI’s goodwill is established and shown in the consolidated
financial statements.

Illustration

Extracts from the Statement of Financial Position of Holiva Plc and Long Gear Plc
as at 31/12/2010 are as follows:
Holiva Plc Long Gear Plc
N’000 N’000
Share Capital
Ordinary share at N1.00 each 180,000 60,000
Accumulated Reserves 48, 00024, 000 228, 00084, 000

The entire share capital of Long Gear Plc was acquired when the
accumulated reserves was N18 million. Cost of acquisition was N88 million.

26
Required:

Calculate the goodwill

SOLUTION

Net Assets N’000

Ordinary Share Capital 50,000
Pre-Acquisition Reserves 18,000
68,000
Cost 88,000
Goodwill 20,000

Calculate the consolidated share capital and reserves for the group accounts:

N
Share capital (The parent company only) 16,000
Retained earnings (The parent company only) 27,000
43,000

Note that:
In Note 1 the investment in the subsidiary (N15,000) has been set off against
the parent company’s share of the subsidiary’s share capital and reserves
(N14,000) and these cancelled inter-company balances do not, therefore, appear in
the consolidated accounts.

In Note 2 the total of the net assets in the group account is the same as the net
assets in the individual statement of financial position but the Tulip plc investment
in Rose plc’s accounts has been replaced by the net assets of Tulip plc of N14,000
plus the previously unrecorded N1,000 goodwill.

In Note 3 the consolidated statement of financial position only includes the share
capital and retained earnings 39 of the parent company, because the subsidiary’s
share capital and retained earnings have been used in the calculation of goodwill.

Consolidation Schedule

The adjustments are often set out in a schedule format as follows:

27
 Rose plc Tulip plc Adjustments Group
N N N
ASSETS
Non-current assets 20,000 11,000 31,000
Goodwill — — 1,000 1,000
Investment in Tulip 15,000 — (10,000) —
(4,000)
(1,000)
Net current assets 8,000 3,000 11,000
Net assets 43,000 14,000 43,000
Share capital 6,000 10,000 (10,000) 16,000
Retained earnings 27,000 4,000 (4,000) 27,000
43,000 14,000 43,000

Supported by the same notes (Notes 1–3) shown above.

Note i.
Only the assets and liabilities of each entity are aggregated. The share capital
and retained earnings are not aggregated. The share capital and retained earnings of
the subsidiary do not appear on the consolidated statement of financial position.

Non-controlling interests

It was mentioned earlier that the total assets and liabilities of subsidiary
companies are included in the consolidated statement of financial position, even in
the case of subsidiaries which are only partly owned. A proportion of the net assets
of such subsidiaries, in fact, belongs to investors from outside the group (non-
controlling interests).
IFRS 3 allows two alternative ways of calculating non-controlling interest in the
group statement of financial position. Non-controlling interest can be valued at:

(a) Its proportionate share of the fair value of the subsidiary's net assets; or
(b) Full (or fair) value (usually based on the market value of the shares held by the
non-controlling interest).
The exam question will tell you which method to use. If you are required to
use the 'full (or fair) value' method, then you will be given the share price, told
what the fair value of the non-controlling interest is or given the goodwill
attributable to the non-controlling interest.

Illustration
28
Abba Plc. acquired 75% of the shares in Bello Plc. for N68,000 on 1 January 2011
when, Bello Plc. had retained earnings of N15,000.

The market price of Bello Plc.’s shares before the date of acquisition was N1.60.
Abba Plc. values non-controlling interest at fair value. Goodwill is not impaired.

The statement of financial position of Bello Plc. at 31 December 2011 is as

follows:
N’000
Property, Plant & Equipment 50
Current Assets 35
85
Ordinary share capital of N1.00 each 50
Retained earnings 25
Current liabilities 10
85
Calculate the amount of non-controlling interest.

SOLUTION
Non-controlling Interest (NCI) fair value 25%
(50,000 shares x N1.60) 20,000
25% (N25,000 – N15,000) 2,500
22,500

Preference Shares

Preference shares are non-equity shares. The parent company may own all or
part of the total preference shares issued by the subsidiary. There may be goodwill
associated with the preference shares, which is just the difference between the
value of the preference shares and the price paid.

If the preference shares are not 100% owned by the parent company, there
will be NCI. The preference share owned by the parent company will be cancelled
upon consolidation, and the remaining preference shares will be shown under NCI
as non-equity NCI.

29
It is important to note that the ownership in preference shares does not determine
the group structure; this is only with ordinary equity shares (which give voting
rights). Preference shares do not give

Forms of consideration

The consideration paid by the parent for the shares in the subsidiary can take
different forms and this will affect the calculation of goodwill. Examples of
various forms are given below:

Contingent consideration
IFRS 3 requires the acquisition-date fair value of contingent consideration to be
recognised as part of the consideration for the ‘acquiree’.

The acquirer may be required to pay contingent consideration in the form of

equity or of a debt instrument or cash. A debt instrument should be presented as
under IAS 32. Contingent consideration can also be an asset, if the consideration
has already been transferred and the acquirer has the right to return of some of it, if
certain considerations are met.

Note: The previous version of IFRS 3 only required contingent consideration to be

recognised if it was probable that it would become payable. IFRS 3 revised
dispenses with this requirement – all contingent consideration is now recognised. It
is possible that the fair value of the contingent consideration may change after the
acquisition date. If this is due to additional information obtained that affects the
position at acquisition date goodwill should be re-measured. If the change is due to
events after the acquisition date (such as a higher earnings target has been met, so
more is payable) it should be accounted for under IAS 39 if the consideration is in
the form of a financial instrument (such as loan notes) or under IAS 37 as an
increase in a provision if it is cash. Any equity instrument is not re-measured.

Deferred consideration

An agreement may be made that part of the consideration for the combination will
be paid at a future date. This consideration will therefore be discounted to its
present value using the acquiring entity's cost of capital.

The parent acquired 75% of the subsidiary's 80m N1 shares on 1 Jan 2016. It paid
N3.50 per share and agreed to pay a further N108m on 1 Jan 2018. The parent
company's cost of capital is 8%.
30
In the financial statements for the year to 31 December 2016 the cost of the
combination will be as follows:

80m shares × 75% ×N3.50 210

Deferred consideration: 100
N108m × 1/1.08 310

Total consideration
At 31 December 20X7, the cost of the combination will be unchanged but N8M
will be charged to finance costs, being the unwinding of the discount on the
deferred consideration.

Share exchange
The parent has acquired 12,000 N1 shares in the subsidiary by issuing 5 of its own
N1 shares for every 4 shares in the subsidiary. The market value of the parent
company's shares is N6.

Cost of the combination:

N
12,000 × 5/4 ×N6 90,000

Note that this is credited to the share capital and share premium of the parent
company as follows:

DR CR
Investment in subsidiary 90,000
Share capital (N12,000× 5/4) 15,000
Share premium (N12,000× 5/4 × 5) 75,000

Fair value adjustment calculations

Until now we have calculated goodwill as the difference between the

consideration transferred and the book value of net assets acquired by the group. If
this calculation is to comply with the definition above we must ensure that the
book value of the subsidiary's net assets is the same as their fair value.

There are two possible ways of achieving this.

(a) The subsidiary company might incorporate any necessary revaluations in its
own books of account. In this case, we can proceed directly to the consolidation,
31
taking asset values and reserves figures straight from the subsidiary company's
statement of financial position.
(b) The revaluations may be made as a consolidation adjustment without being
incorporated in the subsidiary company's books. In this case, we must make the
necessary adjustments to the subsidiary's statement of financial position as a
working. Only then can we proceed to the consolidation.

Note. Remember that when depreciating assets are revalued there may be a
corresponding alteration in the amount of depreciation charged and accumulated.

REFERENCES

Adebayo, P.A. (2011). Financial Accounting and Reporting Standards for Students
and Professionals, Abuja: Rainbow Graphic Printers and Publishers

Bello, S. O. & Barnabas, S. A. (2017).Advanced Financial Accounting, Bida, 9ICE

LINK Production

Federal Government of Nigeria (2004) Companies and Allied Matters Act CAP
C20 LFR 2004

Hennie V. G. (2010). International Financial Reporting Standards: A practical

Guide, 5th ed. International Bank for Reconstruction and Development and the
World Bank, Washington D C

32
International Accounting Standards Board, International Financial Reporting
Standard Board” (2005), Standards IFRSs, London

International Accounting Standards Board, International Financial Reporting

Standard Board” (Series), Standards IFRSs, London, IFRS 3, IFRS 10, IFRS 11
and IFRS 12

33