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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://frs102.com/members/premium-toolkit/section-9/” type=”big” color=”red”] Return to Section 9 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Example 1: Exercise of dominant influence
Company A owns 60% of the voting rights of Company B. However Company A allows the other investor who owns the remaining 40% to run Company B with little or no input from Company A. In this case although Company A is not getting involved in the financial and operating policies this is irrelevant when assessing control, as the key point is that they have the ability if Company A wanted to prevent the other investor from making decisions.
Example 2: Potential voting rights
Company A owns 40% of the share capital and voting rights of Company B. It also hold 100% preference shares in Company B which provide a right to a dividend of 5% per annum. These preference shares can be converted at the option of Company A into ordinary shares after 3 years time which would result in the Company obtaining more than 50% of the voting rights (assume 70%).
With regard to the convertible rights here, these cannot be considered by Company A in the control test until after 3 years. So for the first three years assuming Company A does not have the ability to control the composition of the board, Company A would not control Company B and therefore it is not a subsidiary.
However after year 3, even if Company A does not exercise its right to convert at that time, in assessing whether control exists, these exercisable rights should be taken into account and therefore Company B would be a subsidiary of Company A from that date. Note if the option is not exercised after the three years in the consolidated financial statements 60% of the net assets would be allocated to non-controlling interests as that is what the NCI owns at that point in time as the options have not been exercised.
Example 3: Ability to control composition of the board
Company A owns 40% of Company B with the remaining 60% held by another party. However, Company A also holds one golden share which gives Company A the right to control the composition of the board of directors.
In this situation as the board of directors dictate the financial and operating policies of the company since Company A has the ability to appoint or force directors to resign this gives Company A control and therefore Company B is a subsidiary of Company A. In the consolidated financial statements 60% of the net assets would be allocated to non-controlling interests.
Example 4: Agreements with other shareholders
Company A owns 40% of Company B. Company A has also entered into an agreement with other shareholders who own 20% of the shares whereby they agree that they will always vote in line with Company A.
As a result of this agreement Company A effectively has 60% voting rights and therefore has control of Company B. In the consolidated financial statements 60% of the net assets would be allocated to non-controlling interests.
Example 5: Process of consolidation
Section 9 provides minimal guidance on the process of consolidation however the best method for groups to consolidate to:
- obtain the individual financial statements of each subsidiary and aggregate these in a spreadsheet etc. and then add together the profit and loss, balance sheet and cash flow figures on a line by line basis.
- then adjust individual figures in the individual subsidiary financial statements to uniform accounting policies.
- then incorporate goodwill into the consolidation (eliminate the investments and the related share capital of the subsidiaries) and post the relevant journals for depreciation on fair value adjustments on acquisition including to fixed assets and amortisation of goodwill etc. in the consolidated financial statements etc. The journals required to recognise goodwill and derecognise the investment in the subsidiary in the parent company are:
|
|
CU |
CU |
|
Dr Goodwill |
XXX |
|
|
Cr Investment in Subsidiary in the Parent Company Financials |
|
XXX |
|
Dr Ordinary Share Capital/Share Premium |
XXX |
|
|
Dr Profit and Loss Reserves (i.e. profit and loss reserves in existence at date of acquisition) |
XXX |
|
|
Cr Non-Controlling Interest (i.e. fair value of net assets of subsidiary at the date of acquisition * % owned at date of acquisition) |
|
XXX |
The above journals assume there were positive reserves on acquisition.
4. then eliminate intra-group transactions e.g. inter group sales and purchases, unrealised profits included in inventory and property, plant and equipment etc.
Example 6: Eliminating intra group transactions 100% owned – not in inventory at year end
Company A owns a 100% subsidiary, Subsidiary B. During the year Company A sold CU100,000 of goods to Subsidiary B. The cost of the sale for Company A was CU50,000. Subsidiary B has sold these on by the year end. Detailed below are the accounting entries required on consolidation:
|
|
CU |
CU |
|
Dr Sales |
100,000 |
|
|
Cr Cost of Sales |
|
100,000 |
Being journal to derecognise intercompany sales as consolidated financial statements should only show external sales and purchases
There is no deferred tax impact here as there is no impact on the consolidated profit.
If Subsidiary B sold these goods the journal would be the same.
Example 7: Eliminating intra group transactions 100% owned – in inventory at year end
Company A owns a 100% subsidiary, Subsidiary B. During the year Company A sold CU100,000 of goods to Subsidiary B. The cost of the sale for Company A was CU50,000.
At the year-end Subsidiary B still had CU30,000 of this in inventory. Detailed below are the accounting entries required on consolidation:
|
|
CU |
CU |
|
Dr Sales |
100,000 |
|
|
Cr Cost of Sales (i.e. the cost of sales posted in sub accounts ex items in stock excluding the intra-group profit)) |
|
75,000 |
|
Cr Inventory (CU30,000 x (CU50,000/CU100,000) |
|
15,000 |
Being journal to derecognise intercompany sales as consolidated financial statements should only show external sales and purchases and eliminate profit included in inventory
If Subsidiary B sold these goods the journal would be the same.
The deferred tax journal required in the consolidated financial statements is:
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU15,000*10% assuming a deferred tax rate of 10%) |
1,500 |
|
|
Cr Deferred Tax in P&L |
|
1,500 |
Being journal to reflect deferred tax on the above journal.
Example 8: Eliminating intra group transactions not 100% owned – not in inventory at year end
Company A owns a 65% subsidiary, Subsidiary B. During the year Company A sold CU100,000 of goods to Subsidiary B. The cost of the sale for Company A was CU50,000.
At the year-end Subsidiary B had sold this on to a third party. Detailed below are the accounting entries required on consolidation:
|
|
CU |
CU |
|
Dr Sales |
100,000 |
|
|
Cr Cost of Sales |
|
100,000 |
Being journal to derecognise intercompany sales as consolidated financial statements should only show external sales and purchases. This gives the same answer as a 100% controlled entity
Example 9: Eliminating intra group transactions not 100% owned – some in inventory at year end
Company A owns a 65% subsidiary, Subsidiary B. During the year Company A sold CU100,000 of goods to Subsidiary B. The cost of the sale for Company A was CU50,000
At the year-end Subsidiary B still had CU30,000 of this in inventory. Detailed below are the accounting entries required on consolidation.
|
|
CU |
CU |
|
Dr Sales |
100,000 |
|
|
Cr Cost of Sales (i.e. the cost of sales posted in sub accounts ex item in stock excluding the intra-group profit) |
|
75,000 |
|
Cr Inventory (CU30,000*50% profit margin) |
|
15,000 |
Being journal to derecognise intercompany sales as consolidated financial statements should only show external sales and purchases and eliminate profit included in inventory. This gives the same answer as a 100% controlled entity
The deferred tax journal required in the consolidated financial statements is:
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU15,000*10% assuming a deferred tax rate of 10%) |
1,500 |
|
|
Cr Deferred Tax in P&L |
|
1,500 |
Being journal to reflect deferred tax on the above journal.
Example 10: Year-end intra-group balances
Company A was owed CU100,000 from Subsidiary B at the year end. The journals required in the consolidated financial statements to eliminate this are:
|
|
CU |
CU |
|
Dr Amounts Due to Group Company A in Subsidiary B’s Books |
100,000 |
|
|
Cr Amounts Due from Group Subsidiary B in Company A’s Books |
|
100,000 |
Example 11: Intra-group balances – sale of fixed assets within a group
At the start of the year Company A sold a piece of equipment to Subsidiary B for CU100,000 when its net book value was CU60,000 thereby recognising a profit on disposal in Company A’s financial statements of CU40,000. The remaining life at that date was 10 years. Assume the depreciation in that year in Subsidiary B’s books on the fixed asset was CU10,000 (CU100,000/10yrs) and the NBV was CU90,000.
The consolidated journals at the year end to eliminate the intra-group profit recognised are:
|
|
CU |
CU |
|
Dr Profit on Disposal |
40,000 |
|
|
Cr PPE (CU90,000 less NBV that it would have been carried at if there had been no intra-group sale CU60,000/10yrs*9yrs= CU54,000) |
|
36,000 |
|
Cr Depreciation (CU10,000 charged less CU6,000 (CU60,000/10 yrs) which would have been charged if no inter co sale arose) |
|
4,000 |
Being journal to derecognise the profit on disposal and additional depreciation charged
Note the same journal would be posted if Subsidiary B sold it to Company B. In future years the additional depreciation charged of CU4,000 would have to be eliminated i.e. credit depreciation, debit PPE) assuming the above journals are posted to profit and loss reserves year on year.
If a loss was made on disposal the opposite journals would be required. In addition as a loss was made this may indicate an indicator of impairment, so an impairment review may be necessary.
Example 13: Uniform accounting policies
Group A has an accounting policy of expensing development costs however Subsidiary B has a policy of capitalising development costs that meet the capitalisation requirements. Therefore in the consolidated financial statements the amount of development expenditure capitalised in Subsidiary B in the year has to be derecognised and posted to the profit and loss and any depreciation recognised has to be reversed.
Example 14: Business combination achieved in stages
Company A acquired 5% of Company B for CU50,000 at the start of year 1. At the end of year 2 Company A acquired a further 30% for CU100,000 giving significant influence. At the end of year 3 a further 50% was acquired for CU110,000. At the time of the 50% acquisition the fair value of the net assets was CU200,000 which equaled the net asset value. The carrying amount of the associate holding on the consolidated balance sheet at the end of year 3 was CU170,000 being the net assets of Company B at that time (difference between CU150,000 cost and the CU170,000 is the profit share for the 3 years).
In this example we have ignored any profit earned since acquisition as an associate or amortisation on deemed goodwill when significant influence was acquired.
Goodwill is Calculated in Accordance 19.11A as follows:
|
Cost of Acquisition of first 5% of Company B |
CU50,000 |
|
Cost of Acquisition of second 30% of Company B |
CU100,000 |
|
Cost of Acquisition of third 50% of Company B |
CU110,000 |
|
Total Cost of Investment on Acquiring Control |
CU260,000 |
|
Total portion of the fair value of Company B acquired on obtaining control at the end of year 3 (CU200,000*(50%+30%+5%) |
(CU170,000) |
|
Total goodwill to be recognised |
CU90,000 |
The journal required on acquisition of control at the end of year 3 is:
|
|
CU |
CU |
|
Dr Goodwill |
90,000 |
|
|
Dr Net Asset of Company B |
200,000 |
|
|
Cr Associate Investment in Company B in Consolidated Balance Sheet |
|
170,000 |
|
Cr Bank |
|
110,000 |
|
Dr Other Comprehensive Income |
20,000* |
|
|
Cr Non-Controlling Interest in Equity (CU200,000*15%) |
|
30,000 |
*this difference is the difference between the previous cash paid prior to obtaining control of CU150,000 and the share of the net assets at the date control is obtained of CU170,000. As it is not a profit or loss it is posted to OCI.
Example 15: Acquiring a further controlling interest
Parent A previously owned 55% of Company B which was consolidated in the financial statements. At the time of acquisition of the 55% its fair value of net assets was CU500,000 which was equal to book value. The purchase cost was CU300,000. The goodwill recognised was CU25,000 (CU500,000*55%=CU275,000-CU300,000). During the year the company acquired a further 25% from the non-controlling interest for CU220,000. The fair value of the net assets of Company B at the date of acquisition of the additional 25% was CU800,000 (the NBV of the net assets was CU700,000). The carrying amount of the 45% non-controlling interest in the consolidated financial statements was CU250,000 at the date of purchase of the 25% interest.
The journals posted in the parent individual TB would be:
|
|
CU |
CU |
|
Dr Investment in Subsidiary |
220,000 |
|
|
Cr Bank |
|
220,000 |
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Equity -Profit and Loss Reserves (CU220,000-CU138,889) |
81,111 |
|
|
Dr Equity-Non Controlling Interest (CU250,000/45 being original amount owned by the MI *25 being the amount disposed of) |
138,889 |
|
|
Cr Investment in Subsidiary |
|
220,000 |
Being journal to reflect the acquisition as an equity transaction
Example 16: Acquiring a further controlling interest
Parent A previously owned 55% of Company B which was consolidated in the financial statements. During the year the company acquired the remaining 45% from the non-controlling interest for CU1,300,000. The non-controlling interest shown in the financial statements prior to the acquisition was CU1,000,000. The journals posted in the parent individual TB would be:
|
|
CU |
CU |
|
Dr Investment in Subsidiary |
1,300,000 |
|
|
Cr Bank |
|
1,300,000 |
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Equity -Profit and Loss Reserves (CU1,300,000 – CU1,000,000) |
300,000 |
|
|
Dr Equity-Non Controlling Interest |
1,000,000 |
|
|
Cr Investment in Subsidiary |
|
1,300,000 |
Being journal to reflect this as an equity transaction
Example 17: Disposing of controlling interest but controlling interest retained
Parent A previously owned 100% of Company B which was consolidated in the financial statements. During the year the company disposed of 25% to a third party for CU300,000. The original cost of the investment in the individual entity accounts was CU1,300,000. The net assets of the subsidiary at the date of disposal was CU800,000 plus goodwill of CU50,000 in the consolidated accounts.
The journals posted in the parent individual TB would be:
|
|
CU |
CU |
|
Dr Loss on Disposal |
25,000 |
|
|
Dr Bank |
300,000 |
|
|
Cr Investment in Subsidiary (CU1,300,000*25%) |
|
325,000 |
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Investment in Subsidiary |
300,000 |
|
|
Cr Equity -Profit and Loss Reserves (CU300,000-CU212,500) |
|
87,500 |
|
Cr Equity-Non Controlling Interest (CU850,000*25%) |
|
212,500 |
Being journal to reflect disposal as an equity transaction assuming usual goodwill journals were posted
Example 18: Disposal of a subsidiary where control is lost
Parent A previously owned 100% of Company B. During the year the company sold 80% of the interest to a third party for CU100,000.
The original cost of the investment when acquired in the Parent entity financial statements was CU50,000.
Assume the net assets of the subsidiary including goodwill in the consolidated financial statements at the date of disposal was CU80,000.
The journals required in the consolidated financial statements are:
|
|
CU |
CU |
|
Cr Net Assets of Subsidiary inc Goodwill in Consolidated Accounts |
|
80,000 |
|
Dr Bank |
100,000 |
|
|
(CU80,000*20%) Cr Profit on Disposal of Subsidiary in P&L |
|
36,000* |
*profit on disposal = net assets at disposal of CU80,000*80% disposed= CU64,000 less proceeds on sale of CU100,000 = profit of CU36,000
If the 100% interest was disposed of here the full CU16,000 would have been posted to the profit and loss on disposal
Example 18A: Adoption of fair value through profit and loss on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in subsidiaries through the profit and loss. The subsidiary was acquired at the start of year 1 and original cost was CU100,000. The fair value of the investment at 31 December 2015 and 31 December 2016 was CU95,000 and CU125,000 respectively. Assume a deferred tax rate of 10% (assuming the investment is held for future dividends that will be taxable on receipt). The adjustments required to reflect the fair value policy and the related deferred tax are:
Journals required in the 31 December 2015 year
|
|
CU |
CU |
|
Dr Fair Value on Movement in Subsidiaries in P&L |
5,000 |
|
|
Cr Investments in Subsidiaries (CU100,000-CU95,000) |
|
5,000 |
Being journal to reflect fall in value at 31 December 2015
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
500 |
|
|
Cr Deferred Tax in P&L ((CU5,000)*10%) |
|
500 |
Being journal to reflect deferred tax on the downward valuation. The movement of CU95,000 to CU100,000 is recognised on the basis that the entity believes there will be taxable profits to utilise this in the future.
Journals required in the 31 December 2016 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Fair Value on Movement in subsidiaries in P&L |
|
30,000 |
Being journal to reflect uplift in value from 2015 to 2016
|
|
CU |
CU |
|
Dr Deferred Tax in P&L ((CU125,000-CU95,000)*10%) |
3,000 |
|
|
Cr Deferred Tax Liability |
|
3,000 |
Being journal to reflect deferred tax on the uplift.
Example 18B: Adoption of fair value through other comprehensive income on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in subsidiaries through other comprehensive income. Previously the entity had adopted a cost policy. The subsidiary was acquired at the start of year 1 and original cost was CU100,000. The fair value of the investment at 31 December 2015 and 31 December 2016 and 31 December 2017 was CU120,000 and CU95,000 and CU125,000 respectively. Assume a deferred tax rate of 10%. The adjustments required to reflect the fair value policy and the related deferred tax are:
Journals required in the 31 December 2015 year
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU120,000-CU100,000) |
20,000 |
|
|
Cr Revaluation Reserve |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve (CU20,000*10%) |
2,000 |
|
|
Cr Deferred Tax Liability |
|
2,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2016 year
|
|
CU |
CU |
|
Dr Fair Value Movement in Profit and Loss |
5,000 |
|
|
Dr Fair Value Movement in Subsidiaries in OCI/Revaluation reserve |
20,000 |
|
|
Cr Investments in Subsidiaries (CU120,000-CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2016. The CU5,000 is posted to the profit and loss as there is nothing left in the revaluation reserve after the CU20,000 has been debited in line with Section 17.
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
2,000 |
|
|
Cr Deferred Tax in Revaluation Reserve (CU20,000*10%) |
|
2,000 |
Being journal to reverse deferred tax recognised at 1 January 2016 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU500 would be recognised ((CU100,000-CU95,000)*10%)
Journals required in the 31 December 2017
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Profit and Loss Fair Value Movement |
|
5,000 |
|
Cr Fair Value Movement in Subsidiaries in P&L |
|
25,000 |
Being journal to reflect uplift in value on from 2016 to 2017. CU5,000 credit to profit and loss as CU5,000 had previously been debited to the profit and loss for the downward valuation
|
|
CU |
CU |
|
Dr Deferred Tax in P&L ((CU125,000-CU100,000)*10%) |
2,500 |
|
|
Cr Deferred Tax Liability |
|
2,500 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2016 as per narrative above as the asset was not deemed recoverable.
Example 19: Adoption of fair value through profit and loss on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in subsidiaries through the profit and loss. Assume 1 January 2014 is the date of transition. The carrying value under old GAAP was CU100,000 at 1 January 2014 and 31 December 2014 & 2015 which represented the original cost. The fair value of the investment at 1 January 2014, 31 December 2014 and 31 December 2015 was CU120,000, CU95,000 and CU125,000 respectively. Assume a deferred tax rate of 20% (being the capital gains tax rate as it will be settled through sale for the purposes of this example). The adjustments required on transition to reflect the fair value policy and the related deferred tax are:
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU120,000-CU100,000) |
20,000 |
|
|
Cr Profit and Loss Reserves |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Deferred Tax in P&L (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves etc.
|
|
CU |
CU |
|
Dr Fair Value Movement in Subsidiaries in P&L |
25,000 |
|
|
Cr Investments in Subsidiaries (CU120,000-CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,000 |
|
|
Cr Deferred Tax in P&L (CU20,000*20%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU500 would be recognised ((CU100,000-CU95,000)*10%)
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Fair Value Movement in Subsidiaries in P&L |
|
30,000 |
Being journal to reflect uplift in value from 2014 to 2015
|
|
CU |
CU |
|
Dr Deferred Tax in P&L ((CU125,000-CU100,000)*20%) |
5,000 |
|
|
Cr Deferred Tax Liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2014 as per the narrative above as the asset was not deemed recoverable.
Note if the investment were to be settled or realised through receipt of future dividends, the tax rate on the receipt of the dividend should be used in the above example.
Example 20: Adoption of fair value through other comprehensive income on transition
If we take example 19 above and assume Company A in its individual financial statements has adopted a policy of fair valuing investments in associates through other comprehensive income this time. The journals required would be as follows.
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU120,000-CU100,000) |
20,000 |
|
|
Cr Revaluation Reserve |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Fair Value Movement in Profit and Loss |
5,000 |
|
|
Dr Fair Value Movement in Subsidiaries in OCI/Revaluation Reserve |
20,000 |
|
|
Cr Investments in Subsidiaries (CU120,000-CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014. The CU5,000 is posted to the profit and loss as there is nothing left in the revaluation reserve after the CU20,000 has been debited in line with Section 17
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,000 |
|
|
Cr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU1,000 would be recognised ((CU100,000-CU95,000)*20%)
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 |
|
|
Cr Profit and Loss Fair Value Movement |
|
5,000 |
|
Cr Fair Value Movement in Subsidiaries in Revaluation Reserve/OCI |
|
25,000 |
Being journal to reflect uplift in value from 2014 to 2015. CU5,000 credit to profit and loss as CU5,000 had previously been debited to the profit and loss for the downward valuation.
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve/OCI ((CU125,000-CU100,000)*20%) |
5,000 |
|
|
Cr Deferred Tax Liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2014 as per narrative above as the asset was not deemed recoverable.
Note if the investment were to be settled or realised through receipt of future dividends the tax rate on the receipt of the dividend should be used for the deferred tax rate in the above example.
Example 21: Acquisition not resulting in a change of control after date of transition
Prior to 1 January 2014, Parent A owned 55% of Company B which was consolidated in the financial statements. On 2 January 2014 the parent acquired the remaining 45% from the non-controlling party for CU1,300,000. The date of transition to FRS 102 is 1 January 2014. In the 2014 financial statements under old GAAP the parent calculated the goodwill acquired as a result of this transaction and reflected the additional fair value of assets and liabilities acquired at that date. Under old GAAP as a result of this transaction goodwill of CU200,000 was recognised and PPE uplift of CU100,000 was booked. The useful life of the PPE and goodwill is 10 years, hence the NBV of this goodwill and PPE was CU180,000 and CU90,000 at 31 December 2014. The NBV of this goodwill and PPE was CU160,000 and CU80,000 at 31 December 2015.
The transition journals required to show the correct treatment under FRS 102 in 31 December 2014 accounts are:
|
|
CU |
CU |
|
Dr Equity-Profit and Loss Reserves |
300,000 |
|
|
Cr Goodwill |
|
200,000 |
|
Cr Fixed Assets – PPE |
|
100,000 |
Being journal to reverse old GAAP posing
|
|
CU |
CU |
|
Dr Goodwill – Balance Sheet |
20,000 |
|
|
Cr Goodwill Amortisation P&L (CU200,000/10yrs) |
|
20,000 |
|
Dr Fixed Assets PPE |
10,000 |
|
|
Cr Depreciation P&L (CU100,000/10yrs) |
|
10,000 |
Being journal to reverse depreciation and amortisation charged for 2014 under old GAAP
An adjustment will also be required in 31 December 2015 financial statements to reverse any amortisation/depreciation charged on the additional goodwill/PPE revaluation if the consolidated accounts have already been produced. The journals will be the same as the above.
Example 22: Disposal resulting in no change in control in the subsidiary after date of transition
Parent A previously owned 100% of Company B which was consolidated in the financial statements for the year ended 31 December 2014. During the year the company disposed of 25% to a third party for CU300,000. The original cost of the investment in the individual entity accounts was CU1,300,000. The net assets of the subsidiary at the date of disposal was CU800,000 plus goodwill of CU50,000 in the consolidated accounts. Assume there were no fair value adjustments as the fair value of the net assets at the original date of acquisition were equal to the entity’s net assets.
The journals required to account for this transaction in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Profit on Disposal of 25% of Subsidiary in P&L |
87,500 |
|
|
Cr Equity -Profit and Loss Reserves ((CU850,000*25%) =CU212,500-CU300,000) |
|
87,500 |
Being journal to reflect disposal as an equity transaction and not show the profit on disposal in the consolidated financial statements
Example 23 – Extract from the Accounting policy notes in the consolidated financial statements (excluding negative goodwill)
Basis of consolidation
The Group financial statements reflect the consolidation of the results, assets and liabilities of the parent undertaking, the Company and all of its subsidiaries, together with the Group’s share of profits/losses of associates and joint ventures. Where a subsidiary, associate or joint venture is acquired or disposed of during the financial year, the Group financial statements include the attributable results from, or to, the effective date when control passes, or, in the case of associates, when significant influence is lost.
Subsidiary undertakings
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are capitalised with the cost of the investment. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised as negative goodwill on the balance sheet and amortised through the profit and loss account in the period in which the non-monetary assets are recovered.
Associates and joint ventures
Associates are those entities in which the Group has significant influence over, but not control of, the financial and operating policies. Joint ventures are those entities over which the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic, financial and operating decisions. Investments in associates and joint ventures are accounted for using the equity method of accounting.
Under the equity method of accounting, the Group’s share of the post-acquisition profits or losses of its associates and joint ventures is recognised in the income statement. The income statement reflects, in profit before tax, the Group’s share of profit after tax of its associates and joint ventures in accordance with Section 14 of FRS102, ‘Investments in Associates’ and Section 15 of FRS 102, ‘Interests in Joint Ventures’. The Group’s interest in their net assets is included as investments in associates and joint ventures in the Group Statement of Financial Position at an amount representing the Group’s share of the fair value of the identifiable net assets at acquisition plus the Group’s share of post acquisition retained income and expenses. The Group’s investment in associates and joint ventures includes goodwill on acquisition. The amounts included in the financial statements in respect of the post acquisition income and expenses of associates and joint ventures are taken from their latest financial statements prepared up to their respective year ends together with management accounts for the intervening periods to the Group’s year end. The fair value of any investment retained in a former subsidiary is regarded as a cost on initial recognition of an investment in an associate or joint venture. Where necessary, the accounting policies of associates and joint ventures have been changed to ensure consistency with the policies adopted by the Group.
Transactions eliminated on consolidation
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the Group financial statements. Unrealised gains and income and expenses arising from transactions with associates and joint ventures are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that they do not provide evidence of impairment.
Business combinations and goodwill
All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of acquisitions that have occurred since XXXXX (INSERT DATE OF TRANSITION WHERE SECTION 35.10(A) EXEMPTION IS CLAIMED), goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, i.e. original cost less accumulated amortisation from the date of acquisition up to XXXXX, which represents the amount recorded under UK and Irish GAAP. Goodwill is now stated at cost or deemed cost less any accumulated amortisation and impairment losses. In respect of associates and joint ventures, the carrying amount of goodwill is included in the carrying amount of the investment.
Goodwill
Positive goodwill acquired on each business combination is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful life of 10 years. Goodwill acquired in a business combination is, from the date of acquisition, allocated to each cash generating unit that is expected to benefit from the synergies of the combination. If an investment is disposed of any unamortised goodwill is subsumed within goodwill in the profit and loss on sale on discontinuance. Useful life is determined by reference to the period over which the values of the underlying businesses are expected to exceed the values of their identifiable net assets.
Goodwill is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable.
Negative goodwill represents the fair value of net assets on acquisition in excess of the fair value of consideration. Negative goodwill is capitalised and amortised through the profit and loss account in the period in which the non-monetary assets are recovered. In the case of fixed assets acquired, this is the period over which they are depreciated and in the case of stocks it is the period over which they are sold or otherwise realised.
Impairment
The carrying amounts of the Group’s/Company’s assets, other than inventories (which are carried at the lower of cost and net realisable value), deferred tax assets (which are recognised based on recoverability), investment properties (which are carried at fair value), and those financial instruments, which are carried at fair value, are reviewed to determine whether there is an indication of impairment when an event or transaction indicates that there may be. If any such indication exists, an impairment test is carried out and the asset is written down to its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Value in use is defined as the present value of the future pre-tax and interest cash flows obtainable as a result of the asset’s continued use. The pre-tax and interest cash flows are discounted using a pre-tax discount rate that represents the current market risk free rate and the risks inherent in the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. An impairment loss is recognised in the profit and loss account, unless the asset has been revalued when the amount is recognised in other comprehensive income to the extent of any previously recognised revaluation. Thereafter any excess is recognised in profit or loss.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis.
An impairment loss, other than in the case of goodwill, is reversed if there has been a change in the estimates used to determine the recoverable amount. If an impairment loss is subsequently reversed, the carrying amount of the asset (or asset’s cash generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the revised carrying amount does not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior periods. A reversal of an impairment loss is recognised in the profit and loss account.
Intangible assets
Intangible assets acquired as part of a business combination are initially recognised at fair value being their deemed cost as at the date of acquisition. These generally include brand and customer related intangible assets. Computer software that is not an integral part of an item of computer hardware is also classified as an intangible asset. Where intangible assets are separately acquired, they are capitalised at cost. Cost comprises purchase price and other directly attributable costs.
Intangible assets with finite lives are amortised over the period of their expected useful lives in equal annual instalments, as follows;
| Brands 5 to 10 years | |
| Customer related | 5 to 20 years |
| Supplier agreements | 4 to 10 years |
| Computer related | 3 to 7 years |
Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and impairment losses incurred.
Contingent acquisition consideration
Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with Section 21. Any adjustments to the estimated contingent consideration are accounted for as an adjustment to goodwill as a current period adjustment as it reflects a change in estimate and the adjusted goodwill is amortised from that date. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity. To the extent that contingent acquisition consideration is payable after more than one year from the date of acquisition, it is discounted at an appropriate loan interest rate and, accordingly, carried at net present value on the Balance Sheet. An appropriate interest charge, at a constant rate on the carrying amount adjusted to reflect market conditions, is reflected in the Profit and Loss over the earn-out period, increasing the carrying amount so that the obligation will reflect its settlement at the time of maturity.
Example 24 – Extract from notes to the financial statements – Business combination and financial asset note in the consolidated financial statements
Business combinations
On the XX December 20X4 the company acquired 70% of the voting rights of XYZ Limited for a total consideration of CU1,000,000. XYZ manufactures agricultural equipment. The useful life of the goodwill acquired is 10 years which is consistent with industry norms and the business acquired.
(i) The net assets of the company at that date were as follows:
|
|
Book Value on Acquisition |
Fair Value Adjustments |
Fair Value on Acquisition |
|
|
CU |
CU |
CU |
|
|
|
|
|
|
Investments |
XXXXX |
– |
XXXXX |
|
Tangible fixed assets |
XXXXX |
(XXXXX) |
XXXXX |
|
Stock |
XXXXX |
– |
XXXXX |
|
Cash at bank and in hand |
XXXXX |
– |
XXXXX |
|
Debtors |
XXXXX |
– |
XXXXX |
|
Creditors |
(XXXX) |
– |
(XXXX) |
|
Provisions |
(XXXX) |
– |
(XXXX) |
|
|
XXXXX |
(XXXXX) |
XXXXX |
|
Provisional fair value attributable to non-controlling interest |
|
(XXXXX) |
|
|
Provisional fair value attributable to group (70%) |
|
|
2,010,000 |
|
Consideration for acquisition (see (ii) below) |
|
|
(1,000,000) |
|
Directly attributable acquisition costs |
|
|
(10,000) |
|
Positive Goodwill |
|
|
(1,000,000) |
(ii) The split of the consideration for the acquisition is as follows:
|
Cash |
|
|
XXXXX |
|
Equity instruments |
|
|
XXXXX |
|
Debt instruments |
|
|
XXXXX |
|
Total consideration |
|
|
1,000,000 |
|
Financial assets Investments in associates |
2015 CU |
2014 CU |
|
|
|
|
|
|
|
At 1 January |
XXXX |
XXXX |
|
|
Share of profits after tax |
XXX |
XXX |
|
|
Dividends received |
(XXX) |
(XXX) |
|
|
Loss on dilution of investment |
(XX) |
(XX) |
|
|
Arising on acquisition |
XX |
XX |
|
|
Share of other comprehensive (expense)/income |
(XXX) |
(XXX) |
|
|
At 31 December |
XXXX |
XXXX |
|
|
Financial assets Investments in joint venture |
2015 CU |
2014 CU |
|
|
|
|
|
At 1 January |
XXXX |
XXXX |
|
Share of profits after tax |
XXX |
XXX |
|
Dividends received |
(XXX) |
(XXX) |
|
Loss on dilution of investment |
(XX) |
(XX) |
|
Arising on acquisition |
XX |
XX |
|
Share of other comprehensive (expense)/income |
(XXX) |
(XXX) |
|
At 31 December |
XXXX |
XXXX |
Financial assets note for the parent company in the consolidated financial statements
|
|
|
CU |
CU |
CU |
|
Cost |
|
|
|
|
|
At 1 January 2015 |
|
XXX |
XXX |
XXX |
|
Additions |
|
XXX |
XXX |
XXX |
|
Fair value adjustments |
|
XXX |
– |
XXX |
|
Disposals |
|
– |
– |
(XXX) |
|
At 31 December 2015 |
|
XXX |
XXX |
XXX |
|
|
|
|
|
|
|
Amounts provided: |
|
|
|
|
|
At 1 January 2015 |
|
XXX |
XXX |
XXX |
|
Additional provision |
|
– |
– |
XX |
|
At 31 December 2015 |
|
XXX |
XXX |
XXX |
|
|
|
|
|
|
|
Carrying amount |
|
|
|
|
|
At 31 December 2015 |
|
XXXX |
XXXX |
XXXX |
|
At 31 December 2014 |
|
XXXX |
XXXX |
XXXX |
a) Investment in Subsidiary undertakings are stated at cost less impairment. Investments in joint ventures are measured at fair value based on the quoted share prices. Other investments are held at cost less impairment. The fair value of the associate interest cannot be determined as there is no published price quotations.
b) Details of investments in which the parent Company holds 20% or more of the nominal value of any class of share capital are as follows:
|
Name and Registered Office |
Nature of Business |
Nature of Shares Held |
% of Share Class Held |
|
|
|
|
|
|
Subsidiary undertakings |
|
|
|
|
(i) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
100% |
|
This investment has been fully provided against.
|
|
||
|
(ii) XXXX Limited Address 1, Address 2 |
Patent holding company |
Ordinary share capital |
100% |
|
Associate |
|
|
|
|
(iii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
25% |
|
Joint Venture |
|
|
|
|
(iv) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
50% |
Example 25 – Extract from notes to the financial statements – contingent consideration note
|
Deferred consideration |
2015 CU |
2014 CU |
|
|
|
|
|
At 1 January |
XXX |
– |
|
Charge for year |
– |
XXXX |
|
Utilised in the year |
(XXX) |
– |
|
Provision carried at 31 December |
100,000 |
90,000 |
|
|
|
|
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Split as follows: |
|
|
|
Amounts falling due within one year (note 10) |
40,000 |
45,000 |
|
Amounts falling due after one year (note 11) |
60,000 |
45,000 |
|
|
100,000 |
90,000 |
Deferred consideration of CUXXX is payable upon the achievement of certain minimum targets arising in respect of an asset/SHARE purchase agreement entered into by the company in XXXXX. This provision represents the minimum amount which is reasonably expected to be paid under the terms of the asset/SHARE purchase agreement. The provision is not discounted due to materiality.
Example 26: Extract from the consolidated profit and loss account showing split between controlling and non-controlling interest
|
|
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Turnover |
XXXXX |
XXXXX |
|
|
|
|
|
Cost of sales |
(XXXX) |
(XXXX) |
|
|
|
|
|
Gross profit |
XXXX |
XXXX |
|
|
|
|
|
Operating expenses |
(XXX) |
(XXX) |
|
|
|
|
|
Other operating income |
XXX |
XXX |
|
|
|
|
|
Group operating profit |
XXX |
XXX |
|
|
|
|
|
Share of profit in associates |
XXX |
XXX |
|
Share of profit in joint venture |
XXX |
XXX |
|
|
|
|
|
Profit before interest and taxation |
XXXX |
XXXX |
|
|
|
|
|
Interest receivable |
XXX |
XXX |
|
|
|
|
|
Interest payable |
(XXX) |
(XXX) |
|
|
|
|
|
Profit before taxation |
XXXX |
XXXX |
|
|
|
|
|
Tax on profit on ordinary activities |
(XXX) |
(XXX) |
|
|
|
|
|
Profit after taxation |
XXX |
XXX |
|
Profit for the financial year attributable to: Non-controlling interests |
XXXX |
XXXX |
|
|
|
|
|
Owners of the parent company |
XXX |
XXX |
|
|
XXXX |
XXXX |
Example 27: Extract from the Changes in Equity showing the movement on the cash flow hedge reserve in line with Section 9 and Section 12 disclosure requirements
|
|
Equity Share Capital |
Revaluation Reserve |
Other Reserve |
Retained Earnings |
Cash flow hedge Reserve |
Total contribution to the parent |
Non-controlling Interest |
Total Equity |
|
|||||||
|
|
CU |
CU |
CU |
CU |
CU |
CU |
CU |
CU |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balance at 1 January 2014 |
100,000 |
225,000 |
115,375 |
115,375 |
1,000 |
331,375 |
100,000 |
441,375 |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Changes in ownership interests in subsidiaries which do not result in a loss of control |
|
|
|
|
|
|
(100,000) |
– |
||||||||
|
Profit for the year |
|
10,000 |
|
83,818 |
|
91,818 |
2,000 |
93,818 |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balance at 31 December 2014 |
100,000 |
225,000 |
0 |
209,193 |
1,000 |
|
2,000 |
535,193 |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balance at 1 January 2015 |
100,000 |
225,000 |
0 |
209,193 |
1,000 |
0 |
0 |
535,193 |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Equity Shares issued net of issue costs |
20,000 |
|
|
|
|
|
|
30,000 |
||||||||
|
Profit for the year |
|
|
|
1,005,772 |
|
1,005,772 |
10,000 |
1,005,772 |
||||||||
|
Equity dividends paid (see note XX) |
|
|
|
(9,900) |
|
(9,900) |
(100) |
(10,000) |
||||||||
|
Capitalisation of shares |
|
|
1,000 |
(1,000) |
– |
|
|
– |
||||||||
|
Other Comprehensive Income |
|
|
(15,000) |
|
(15,000) |
(15,000) |
|
(15,000) |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balance at 31 December 2015 |
109,000 |
225,000 |
(14,000) |
1,214,965 |
(15,000) |
XXXX |
10,100 |
1,554,965 |
||||||||
Example 28 : Extract from accounting policy notes to the financial statements for the parent entity financial statements and for an entity that holds a subsidiary, associate or joint venture interest but is not required to prepare consolidated financial statements
NOTE: the below is to be included where the parent company is exempt from consolidation due to its immediate parent company (which is in the eea) preparing consolidated financial statements
Consolidated accounts
The company has not prepared consolidated accounts for the period as, being a wholly owned subsidiary of the ultimate parent company, XXXXXX Limited, it is exempted from doing so under Section 9 of FRS 102 which is accommodated under Section 400 of the Companies Act 2006.
NOTE: the below is to be included where the parent company is exempt from consolidation due to its ultimate parent company (which is in or outside the eea) preparing consolidated financial statements
Consolidated accounts
The company has not prepared consolidated accounts for the period as, being a wholly owned subsidiary of the ultimate parent company, XXXXXX Limited, it is exempted from doing so under Section 9 of FRS 102 which is accommodated under Section 401 of the Companies Act 2006.
NOTE: the below is to be included where the parent company is exempt from consolidation due to the group being considered a small company under company law
Consolidation
The company and its subsidiaries combined meet the size exemption criteria for a group and the company is therefore exempt from the requirement to prepare consolidated financial statements by virtue of Section 479 of the Companies Act 2006. Consequently, these financial statements deal with the results of the company as a single entity.
Financial assets
Financial assets in subsidiaries and other financial fixed assets are stated at cost less provision for any diminution in value.
AND/OR
The company has adopted a policy of measuring investments in financial assets which can be reliably measured at their fair value, with changes in the fair value recognised in the profit and loss.
AND/OR
Financial assets which can be reliably measured are measured at their fair value, with changes in the fair value recognised in other comprehensive income and the revaluation reserve.
Dividend income
Dividend income from subsidiaries is recognised when the Company’s right to receive payment has been established.
Goodwill
Positive goodwill acquired on each business combination is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful life of 10 years. Goodwill acquired in a business combination is, from the date of acquisition, allocated to each cash generating unit that is expected to benefit from the synergies of the combination. If an investment is disposed of any unamortised goodwill is subsumed within goodwill in the profit and loss on sale on discontinuance. Useful life is determined by reference to the period over which the values of the underlying businesses are expected to exceed the values of their identifiable net assets.
Goodwill is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable.
Negative goodwill represents the fair value of net assets on acquisition in excess of the fair value of consideration. Negative goodwill is capitalised and amortised through the profit and loss account in the period in which the non-monetary assets are recovered. In the case of fixed assets acquired, this is the period over which they are depreciated and in the case of stocks it is the period over which they are sold or otherwise realised.
i) Intangible assets
Intangible assets acquired as part of a business combination are initially recognised at fair value being their deemed cost as at the date of acquisition. These generally include brand and customer related intangible assets. Computer software that is not an integral part of an item of computer hardware is also classified as an intangible asset. Where intangible assets are separately acquired, they are capitalised at cost. Cost comprises purchase price and other directly attributable costs.
Intangible assets with finite lives are amortised over the period of their expected useful lives in equal annual instalments, as follows;
| Brands 5 to 10 years | |
| Customer related | 5 to 20 years |
| Supplier agreements | 4 to 10 years |
| Computer related | 3 to 7 years |
Subsequent to initial recognition, intangible assets are stated at cost less accumulated amortisation and impairment losses incurred.
(vi) Contingent acquisition consideration
Any contingent consideration to be transferred by the group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with Section 21. Any adjustments to the estimated contingent consideration are accounted for as an adjustment to goodwill as a current period adjustment as it reflects a change in estimate and the adjusted goodwill is amortised from that date. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity. To the extent that contingent acquisition consideration is payable after more than one year from the date of acquisition, it is discounted at an appropriate loan interest rate and, accordingly, carried at net present value on the Balance Sheet. An appropriate interest charge, at a constant rate on the carrying amount adjusted to reflect market conditions, is reflected in the Profit and Loss over the earnout period, increasing the carrying amount so that the obligation will reflect its settlement at the time of maturity.
Example 29 – Extract from notes to the financial statements for the for an entity that holds intangibles/goodwill
|
Intangible assets |
|
|
|
CU |
|
Cost |
|
|
At 1 January and 31 December |
300,000 |
|
|
|
|
Amortisation |
|
|
At 1 January |
100,000 |
|
Amortised to profit and loss account |
75,000 |
|
At 31 December |
175,000 |
|
|
|
|
Net book amount |
|
|
At 31 December 2015 |
115,000 |
|
|
|
|
At 31 December 2014 |
200,000 |
The intangible asset represents the purchased goodwill arising in respect of an asset purchase agreement with XXXXXXXX Limited. This amount represents the minimum amount which the directors consider is reasonably expected to be paid, and includes both the initial consideration paid and a deferred consideration element which is payable upon the achievement of certain minimum targets (see note X).
Example 30 – Extract from notes to the financial statements for the for an entity that holds an associate/subsidiary/joint venture/other interest but is not required to prepare consolidated financial statements – Financial asset note
|
Financial assets |
|
Subsidiary Undertakings |
Joint Venture and associates |
Other investments |
Total |
|
|
|
CU |
CU |
CU |
CU |
|
Cost |
|
|
|
|
|
|
At 1 January 2015 |
|
XXX |
XXX |
XXX |
XXX |
|
Additions |
|
XXX |
XXX |
XXX |
XXX |
|
Fair value adjustments |
|
XXX |
– |
XXX |
|
|
Disposals |
|
– |
(XXX) |
– |
(XXX) |
|
At 31 December 2015 |
|
XXX |
XXX |
XXX |
XXX |
|
|
|
|
|
|
|
|
Amounts provided: |
|
|
|
|
|
|
At 1 January 2015 |
|
XXX |
– |
XXX |
XXX |
|
Additional provision |
|
XXX |
– |
– |
XXX |
|
At 31 December 2015 |
|
XXX |
XXX |
XXX |
XXX |
|
|
|
|
|
|
|
|
Carrying amount |
|
|
|
|
|
|
At 31 December 2015 |
|
XXXX |
XXXX |
XXXX |
XXXX |
|
|
|
|
|
|
|
|
At 31 December 2014 |
|
XXXX |
XXXX |
XXXX |
XXXX |
a) Investment in Subsidiary undertakings are stated at cost less impairment. Other investments are held at cost less impairment as they cannot be measured reliably under the rules in section 1 of FRS102.
Investments in joint ventures are measured at fair value based on valuation models which make the most of external market data such that the fair value represents the estimated value that could be obtained in an arm’s length transaction under normal business conditions. The discounted cash flows use a discount rate of 10%. The valuation used a multiple of earnings which is consistent with industry norms.
(b) Details of investments in which the parent Company holds 20% or more of the nominal value of any class of share capital are as follows:
|
Name and Registered Office |
Nature of Business |
Nature of Shares Held |
% of Share Class Held |
Net Assets/ (Liabilities) |
Results for year |
|
|
|
|
|
CU |
CU |
|
Subsidiary undertakings |
|
|
|
|
|
|
(v) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
100% |
XXXX |
XXXX |
|
This investment has been fully provided against.
|
|
|
|
||
|
(vi) XXXX Limited Address 1, Address 2 |
Patent holding company |
Ordinary share capital |
100% |
XXX |
XXXX |
|
Associate |
|
|
|
|
|
|
(vii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
25% |
XXXX |
XXXX |
|
Joint Venture |
|
|
|
|
|
|
(viii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
50% |
XXXX |
XXXX |
Extract from the profit and loss account for an entity which is not a parent that holds an investment in a subsidiary, associate/joint venture or an entity that is a parent but consolidated financial statements are not required to be prepared where income is received from an associate/joint venture/subsidiary
|
|
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Turnover |
– |
– |
|
|
|
|
|
Cost of sales |
(XXX) |
(XXX) |
|
|
|
|
|
Gross profit |
– |
– |
|
|
|
|
|
Administrative expenses |
(XXX) |
– |
|
|
|
|
|
Operating loss |
(XXX) |
– |
|
|
|
|
|
Income from shares in group undertakings |
XXXX |
– |
|
|
|
|
|
Income from participating interests |
XXXX |
– |
|
|
|
|
|
Income from other financial assets |
XXXX |
– |
|
|
|
|
|
Interest payable |
(XXX) |
(XXX) |
|
|
|
|
|
Profit/(loss) for the financial year |
86,442 |
(22) |
Example 31 – Extract from the Accounting policy notes in the consolidated financial statements – negative goodwill
|
Intangible fixed assets |
|
|
|
CU |
|
|
|
|
Negative goodwill |
|
|
Cost |
|
|
At 1 January |
– |
|
Arising during period (see (i) below) |
1,000,000 |
|
At 31 December |
1,000,000 |
|
|
|
|
Amortisation |
|
|
At 1 January |
– |
|
Amortised for the period |
(10,000) |
|
At 31 December |
(10,000) |
|
|
|
|
Net book value |
|
|
At 31 December 2014 |
– |
|
At 31 December 2015 |
990,000 |
(i) Negative goodwill arose on the change in controlling interest in XYZ Limited. On XX January XXXX XYZ Limited entered into an agreement to buy back and cancel 1,000 ordinary shares from the former shareholder for CU2,000,000. As a result XYZ Limited’s percentage shareholding increased from 20% to 60% making XYZ Limited a subsidiary of Parent Limited from that date. Negative goodwill has been allocated toward the cost of inventory and is being released over the period in which the inventory is utilised.
(iI) The net assets of the company at that date were as follows:
|
|
Book Value on Acquisition |
Fair Value Adjustments |
Fair Value on Acquisition |
|
|
CU |
CU |
CU |
|
|
|
|
|
|
Investments |
XXXXX |
– |
XXXXX |
|
Tangible fixed assets |
XXXXX |
(XXXXX) |
XXXXX |
|
Stock |
XXXXX |
– |
XXXXX |
|
Cash at bank and in hand |
XXXXX |
– |
XXXXX |
|
Debtors |
XXXXX |
– |
XXXXX |
|
Creditors |
(XXXX) |
– |
(XXXX) |
|
Provisions |
(XXXX) |
– |
(XXXX) |
|
|
XXXXX |
(XXXXXX) |
XXXXX |
|
Provisional fair value attributable to non-controlling interest |
|
(XXXXX) |
|
|
Provisional fair value attributable to group (70%) |
|
|
1,210,000 |
|
Original investment |
|
|
(100,000) |
|
Acquisition costs |
|
|
(10,000) |
|
Negative goodwill |
|
|
1,000,000 |
Example 32 – Extract from the consolidated Balance Sheet for negative goodwill and also showing non-controlling interest
|
|
2015 |
2014 |
|
|
CU |
CU |
|
Fixed assets |
|
|
|
Tangible assets |
XXXX |
XXXX |
|
Negative goodwill |
(XXXX) |
– |
|
Financial assets |
XXXX |
XXXX |
|
|
XXXXX |
XXXXX |
|
Current assets |
|
|
|
Stocks |
XXXXX |
XXXXX |
|
Debtors |
XXXXX |
XXXXX |
|
Cash at bank and on hand |
XXXXX |
XXXXX |
|
|
XXXXX |
XXXXX |
|
|
|
|
|
Creditors – amounts falling due within one year |
(XXXXX) |
(XXXXX) |
|
|
|
|
|
Net current assets |
XXXXX |
XXXXX |
|
Total assets less current liabilities |
XXXXX |
XXXXX |
|
|
|
|
|
Creditors – amounts falling due after more than one year |
(XXXX) |
(XXXX) |
|
|
|
|
|
Provisions for liabilities |
|
|
|
Capital grants |
(XXXX) |
(XXXX) |
|
Deferred taxation |
(XXXX) |
(XXXX) |
|
Net assets excluding pension liability |
XXXXX |
XXXXX |
|
|
|
|
|
Defined benefit pension liability |
(XXXXX) |
(XXXXX) |
|
Net assets including pension liability |
XXXXXX |
XXXXXX |
|
|
|
|
|
Capital and reserves |
|
|
|
Share capital |
XXXXX |
XXXXX |
|
Profit and loss account |
XXXXX |
XXXXX |
|
Equity attributable to owners of the parent company |
XXXXX |
XXXXX |
|
|
|
|
|
Non-controlling interest |
XXXXX |
XXXXX |
|
|
XXXXX |
XXXXX |
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