[et_pb_section admin_label=”Header – All Pages” global_module=”1221″ transparent_background=”off” background_color=”#1e73be” 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″ custom_padding=”||0px|”][et_pb_row global_parent=”1221″ admin_label=”row”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ admin_label=”Post Title” title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”on” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” title_all_caps=”off” use_border_color=”off” border_color=”#ffffff” border_style=”solid” title_font=”|on|||” title_font_size=”35″ custom_padding=”10px|||”] [/et_pb_post_title][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” global_module=”1228″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”0px||0px|” padding_mobile=”on” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row global_parent=”1228″ admin_label=”Row” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” gutter_width=”3″ custom_padding=”0px||0px|” padding_mobile=”off” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ admin_label=”Text” background_layout=”light” text_orientation=”left” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”]
[/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-22/” type=”big” color=”red”] Return to Section 22 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: Redeemable preference shares at option of the holder with mandatory coupon
Company A issued 200,000 10% preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- 10% dividend must be paid annually in arrears i.e. CU20,000 mandatory
- The preference shares are redeemable at their par value at the option of the holder at some time in the future.
Given that Company A has a contractual obligation to pay a dividend yearly and is contractually obliged to redeem the shares, these shares would be classified as debt in Company A’s financial statements. The journals required on issue would be to:
|
|
CU |
CU |
|
Dr Bank |
200,000 |
|
|
Cr Preference Shares Liability |
|
200,000 |
The journal required at the end of each year for the dividend payable is:
|
|
CU |
CU |
|
Dr Interest Expenses with Preference Dividend |
20,000 |
|
|
Cr Bank/Preference Dividend Accrual |
|
20,000 |
Example 2: Non-redeemable preference shares with mandatory coupon at market rate
Company A issued 200,000 10% preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- 10% dividend must be paid annually in arrears i.e. CU20,000 mandatory
- The preference shares are non-redeemeable or redeemable at the option of the issuer (i.e. Company A) at any time
Given that Company A has a contractual obligation to pay/accrue a dividend yearly, these shares would be classified as debt in Company A’s financial statements as the stream of cash flow is into perpetuity. The journals required in this case are the same as example 1.
Example 3: Non-redeemable preference shares with mandatory coupon at non-market rate
Company A issued 200,000 10% preference shares of CU1 each in return for CU200,000. The market coupon rate on such shares should be 12%. The rights attaching to the shares are such that:
- 10% dividend must be paid year on year i.e. CU20,000 mandatory
- The preference shares are non-redeemeable or redeemable at the option of the issuer (i.e. Company A) at any time
In this particular circumstance, there is both a liability and equity component to these shares. This is in effect a compound financial instrument. The liability element being the mandatory dividend payable and equity element being the residual. Therefore a certain element of the proceeds will be shown in equity and liabilities. See section on compound financial instruments below (example 17).
Note if the above example was at market rate but it also contained rights which stated that additional dividends on top of the coupon rate may be paid at the discretion of the board, it would also be a compound instrument and the market rate for an instrument with the additional option would have to be applied so as to ascertain the liability and equity component.
Example 4: Shares redeemeable at the option of the holder
‘Ordinary shares’ that can be converted into debt, based on fair value of the shares at the date of conversion at the option of the holder
Here this is accounted for as a financial liability on the basis that once converted which is at the option of the holder, there is a contractual obligation to redeem for cash, hence the issuer cannot avoid paying in cash.
Example 5: Non redeemable preference shares with discretionary dividend
Company A issued 200,000 preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- Dividend is payable at the discretion of the company
- The preference shares are non-redeemable
Given that company A has no contractual obligation to redeem or pay dividends, this should be classified as equity in the financial statements. The journal required on issue of the shares are:
|
|
CU |
CU |
|
Dr Bank |
200,000 |
|
|
Cr Equity –Preference Share Capital |
|
200,000 |
Where a discretionary dividend is paid on these equity shares the journal required is to:
|
|
CU |
CU |
|
Dr Equity-Profit and Loss Reserves |
XXX |
|
|
Cr Bank |
|
XXX |
If the dividend was approved by the members prior to the year end, then the dividend can be accrued.
Example 6: Redeemable preference shares at option of issuer with discretionary dividend
Company A issued 200,000 preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- Dividend are payable at the discretion of the company
- The preference shares are redeemable at the issuers option at some future date
Given that Company A has no contractual obligation to pay cash, this should be classified as equity in the financial statements. The treatment of any discretionary dividends are posted to equity as in example 5 above. Note even if there was a coupon attached to these preference shares that was only payable at the option of the Company, they would still be classed as equity. Whether the company has a history of paying dividends in the past is irrelevant, it would still be classed as equity as it does not have a contractual obligation to make the dividend payment.
Example 7: Redeemable preference shares at option of issuer with mandatory dividend
Company A issued 200,000 10% preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- 10% dividend must be paid annually in arrears i.e. CU20,000 mandatory
- The preference shares are redeemable at the issuers option at some future date
Here assuming the coupon rate of 10%, is the market rate on issue, as Company A has a contractual obligation to pay/accrue a dividend annually, this would be classified as a financial liability. See example 1 for how this would be accounted for if the rate was a non-market rate.
Example 8: Mandatory redeemable preference shares at fixed amount at a fixed or future date with mandatory dividend
Company A issued 200,000 10% preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- 10% dividend must be paid annually in arrears i.e. CU20,000 mandatory
- The preference shares are redeemable at a fixed or future date
Given that Company A has a contractual obligation to pay/accrue a dividend yearly, these shares would be classified as debt in Company A’s financial statements. The journals required in this case are the same as example 1.
Example 9: Mandatory redeemable preference shares at fixed amount at a fixed or future date with dividend payable at the discretion of the issuer
Company A issued 200,000 preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- Dividend is payable at the discretion of the company
- The preference shares are mandatory redeemable at a fixed or future date
Here this is in fact a compound instrument as it contains both an equity and liability component. The liability component is the present value of the redemption amount and equity component is equal to the proceeds less liability component. Any dividends paid are taken to relate to the equity component. The present value rate that should be used is the rate that would be charged by a bank for period up to the mandatory redemption date on a similar instrument.
For example assume in the above example, it is mandatory redeemable at the end of year 5 and the market rate of interest for a similar loan would be 8%. Then the present value of CU200,000 is CU136,117 (CU200,000/((1.08^5)). Therefore the amount to be recognised as a liability is CU136,117 and the amount to be recognised in equity is CU63,883. The journal required on intial recognition is:
|
|
CU |
CU |
|
Dr Bank |
200,000 |
|
|
Cr Preference Share Liability |
|
136,117 |
|
Cr Equity |
|
63,883 |
The CU136,117 is then amortised at the effective interest rate of 8% over the 5 year period as per below
Therefore the journal that would be posted at end of year 1 would be:
|
|
CU |
CU |
|
Dr Interest Cost |
10,889 |
|
|
Cr Preference Share Liability |
|
10,889 |
If a dividend was declared and paid on these shares of CU10,000 during year 1 for example, the following journal would be posted:
|
|
CU |
CU |
|
Dr Equity-Profit and Loss Reserves |
10,000 |
|
|
Cr Bank |
|
10,000 |
However, where any unpaid dividend is added to the redemption amount and this is included in the share rights, the whole instrument is classed as a liability component i.e. CU200,000 and the dividend accrued increases the liability.
Example 10: Redeemable preference shares at holder’s option at some future date with dividend payable at the discretion of the issuer
Company A issued 200,000 preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- Dividend is payable at the discretion of the company
- The preference shares are redeemable at some future date at the option of the holder
Here this is in fact a compound instrument as it contains both an equity and liability component assuming that it does not meet the definition in 22.4 (i.e. a puttable instrument in an entity which has a very limited life in which case it would all be classed as equity). The liability component is the present value of the redemption amount and equity component is equal to the proceeds less liability component. Any dividends paid are taken to relate to the equity component. The present value rate that should be used is the rate that would be charged by a bank for period up to the mandatory redemption date. See example 9 for further details.
However, where any unpaid dividend is added to the redemption amount and this is included in the share rights, the whole instrument is classed as a liability component i.e. CU200,000.
Example 11: Preference shares with dividends payable at the discretion of the issuer and only redeemable on the liquidation of the company
Company A issued 200,000 preference shares of CU1 each in return for CU200,000. The rights attaching to the shares are such that:
- Dividend is payable at the discretion of the company
- The preference shares are redeemable on the liquidation of the company
Here these shares would be classed as equity as per Section 22.3A(b) on the basis that every share becomes repayable on a liquidation even ordinary shares.
If in this example, the shares were redeemable on the appointment of a receiver or administrator these would then be classified as a financial liability.
Example 12: Preference shares issued which can be redeemed for no set numbers of share in the future
Company A issued preference shares of CU1 each in return for CU200,000. The shares are redeemable after 5 years at the option of the holder into ordinary shares up to the value of CU200,000 at that date. Assume at the end of year five the price per ordinary share is CU10
In this particular case it is evident that a variable number of shares will be issued to the holder on redemption depending on the value of the company at that date i.e. at the end of year five 10,000 shares will have to be issued (CU200,000/CU10=CU10,000) hence there is variability which dictates that these shares are therefore classed as equity.
Example 13: Fixed for fixed arrangement
An example of where this exemption applies also is where a company receives CU10,000 from another entity/person in return for the company issuing 300 shares in itself in four years time (with no other conditions attached). As the holder will suffer from a loss and benefit from a gain with regard to a fall/uplift in the value of the company, this CU10,000 would be classified as equity on receipt of CU10,000.
Example 13A: Application of Section 22.3(b)(ii)
An example of this type is where a company has entered into a forward contract to issue shares in itself in return for a foreign currency. Hence as the amount of cash is not fixed, it is a financial liability. In addition, as it is not fixed in the company’s functional currency, it is also classed as a financial liability.
Example 14: Accounting treatment on original issue of shares
Company A issued 100,000 ordinary shares of CU1 each for CU200,000 (i.e. at a premium of CU1). The professional fees incurred on the issue of these shares was CU20,000 and the tax rate is 10%. In this instance the holder paid for the shares to be issued and the company then issued the holder with a share certificate. The journals required under the standard detailed above and as required by Company law are:
|
|
CU |
CU |
|
Dr Bank |
200,000 |
|
|
Cr Ordinary Share Capital |
|
100,000 |
|
Cr Share Premium |
|
100,000 |
Being journal to recognise the receipt of cash for the shares and the issuance of share capital at a premium
|
|
CU |
CU |
|
Dr Ordinary Share Capital/Share Premium |
20,000 |
|
|
Cr Bank/Trade Creditors |
|
20,000 |
Being journal required to reflect directly attributable costs of issue
|
|
CU |
CU |
|
Dr Corporation Tax in P&L |
2,000 |
|
|
Cr Ordinary Share Capital/Share Premium (CU20,000 * 10%) |
|
2,000 |
Being journal to reflect tax deduction available on issuance of shares assuming tax is originally charged to the P&L.
Therefore the net amount shown in share capital and share premium is CU182,000 (CU200,000-CU20,000+CU2,000).
Example 15: Accounting treatment on original issue of shares – left as unpaid
If we take example 14 above and assume that the individual did not pay for the share capital initially but the shares were allotted. The company would recognise a receivable for the unpaid share capital. Let us also assume that the company gives the holder 2 years to pay. Assuming the time value of money is material, although the Section does not say how the present value rate should be determined, the best rate to use would be the rate a bank/external party would charge for such a loan. If we assume a market rate is 8%. The present value of CU200,000 at a discount rate of 8% in two years time is CU171,468 (i.e. CU200,000/(1.08^2)). In this case journal 1 in example 14 would be replaced with:
|
|
CU |
CU |
|
Dr Other Debtors |
171,468 |
|
|
Cr Ordinary Share Capital (CU100,000/(1.08^2)) |
|
85,734 |
|
Cr Share Premium (CU100,000/(1.08^2)) |
|
85,734 |
Being journal to recognise the receipt of cash for the shares and the issuance of share capital at a premium
Then the interest of 8% will be released over the two year period to interest cost in the profit and loss. The journal required at the end of year 1 would be:
|
|
CU |
CU |
|
Dr Interest Cost P&L (CU171,468*8%) |
13,712 |
|
|
Cr Other Debtors |
|
13,712 |
Being journal required to build the other debtor balance up to CU200,000 by the end of the 2 year period. The interest charge for year 2 would be CU14,815 (i.e. CU171,468*1.08=CU185,184*8%)
Example 16: Capitalisation/bonus issue
Company A had significant distributable reserves. Prior to the issue the company had 100,000 shares of CU1 each. Profit and loss reserves total CU3,000,000 at the time of the issue. During the year the company decided to capitalise CU500,000 from profit and loss reserves to the appropriation of the said sum as capital to the holders of the 100,000 Ordinary Shares of CU1 in the capital of the Company. The journal required to reflect this transaction in Company A’s books is:
|
|
CU |
CU |
|
Dr Ordinary Share Capital |
500,000 |
|
|
Cr Profit and Loss Reserves |
|
500,000 |
Being journal to reflect capitalisation of shares
Example 17: Accounting treatment for a compound financial instrument (instrument containing both a debt and equity component – bond with a fixed coupon and convertible at the option of the holder into a variable number of shares (Extracted from the appendix of Section 22 of FRS 102)
On 1 January 20X5 an entity issues 500 convertible bonds. The bonds are issued at par with a face value of CU100 per bond and are for a five-year term, with no transaction costs. The total proceeds from the issue are CU50,000. Interest is payable annually in arrears at an annual interest rate of 4 per cent. Each bond is convertible, at the holder’s discretion, into 25 ordinary shares at any time up to maturity. At the time the bonds are issued, the market interest rate for similar debt that does not have the conversion option is 6 per cent.
Here the liability component is the interest liability on the bond and the principal to be repaid. The equity component being the holder’s option to convert the bonds into a fixed number of equity shares.
When the instrument is issued, the liability component must be valued first, and the difference between the total proceeds on issue (which is the fair value of the instrument in its entirety) and the fair value of the liability component is assigned to the equity component. The fair value of the liability component is calculated by determining its present value using the discount rate of 6 per cent. The calculations and journal entries are illustrated below:
|
|
CU |
|
Proceeds from the bond issue (A) |
50.000 |
|
Present value of principal at the end of five years (see calculations in note 1 below) |
37,363 |
|
Present value of interest payable annually in arrears for five years (see calculations in note 1 below) |
8,425 |
|
Present value liability, which is the fair value of liability component (B) (see calculations in note 1 below) |
45,788 |
|
Residual, which is the fair value of the equity component (A) – (B) |
4,212 |
The issuer of the bonds makes the following journal entry at issue on 1 January 20X5:
|
|
CU |
CU |
|
Dr Cash |
50,000 |
|
|
Cr Financial Liability – Convertible Bond |
|
45,788 |
|
Cr Equity |
|
4,212 |
The CU4,212 represents a discount on issue of the bonds, so the entry could also be shown ‘gross’:
|
|
CU |
CU |
|
Dr Cash |
50,000 |
|
|
Dr Financial Liability – Convertible Bond Discount |
4,212 |
|
|
Cr Financial Liability – Convertible Bond |
|
50,000 |
|
Cr Equity |
|
4,212 |
After issue, the issuer will amortise the bond discount according to the following table
|
|
(a) Interest payment |
(b) Total Interest expense = 6% x(e) |
Amortisation of bond discount =(b) – (a) |
(d) Bond discount = (d) – (c) |
(e) Net liability = 50,000 – (d) |
|
CU |
CU |
CU |
CU |
CU |
|
|
1/1/20X5 |
|
|
|
4,212 |
45,788 |
|
31/12/20X5 |
2,000 |
2,747 |
747 |
3,465 |
46,535 |
|
31/12/20X6 |
2,000 |
2,792 |
792 |
2,673 |
47,327 |
|
31/12/20X7 |
2,000 |
2,840 |
840 |
1,833 |
48,167 |
|
31/12/20X8 |
2,000 |
2,890 |
890 |
943 |
49,057 |
|
31/12/20X9 |
2,000 |
2,943 |
943 |
0 |
50,000 |
|
Totals |
10,000 |
14,212 |
4,212 |
|
|
At the end of 20X5, the issuer would make the following journal entry:
|
|
CU |
CU |
|
Dr Interest Expense |
2,747 |
|
|
Cr Bond Discount |
|
747 |
|
Cr Cash |
|
2000 |
Note 1: Calculations
Present value of principal of CU50,000 at 6 per cent
CU50,000/(1.06)^5 = CU37,363
The CU2,000 annual interest payments are an annuity: a cash flow stream with a limited
number (n) of periodic payments (C), receivable at dates 1 to n. To calculate the present value
of this annuity, future payments are discounted by the periodic rate of interest (i) using the following formula:
PV = C/i * [1 – 1/(1+i)n]
Therefore, the present value of the CU2,000 interest payments is (CU2,000/.06) * [1 – [(1/1.06)5]
= CU8,425
This is equivalent to the sum of the present values of the five individual CU2,000 payments, as follows:
|
|
CU |
|
Present value of interest payment at 31 December 20X5 = 2,000/1.06 |
1,887 |
|
Present value of interest payment at 31 December 20X6 = 2,000/1.062 |
1,780 |
|
Present value of interest payment at 31 December 20X7 = 2000/1.063 |
1,679 |
|
Present value of interest payment at 31 December 20X8 = 2000/1.064 |
1,584 |
|
Present value of interest payment at 31 December 20X9 = 2000/1.065 |
1,495 |
|
Total |
8,425 |
Yet another way to calculate this is to use a table of present value of an ordinary annuity in
arrears, five periods, interest rate of 6 per cent per period. (Such tables are easily found on the
Internet.) The present value factor is 4.2124. Multiplying this by the annuity payment of CU2,000 determines the present value of CU8,425.
Example 18: compound instrument where conversion is chosen
If we take example 17, and now assume at the end of 5 years, the convertible bond/preference shares are converted into 12,500 shares (i.e. CU50,000/CU100 per bond * 25 shares per bond). Assume the fair value of the shares issued at that date was CU4.50. The journal entries required to account for this is to:
|
|
CU |
CU |
|
Dr Liability |
50,000 |
|
|
Cr Equity |
|
50,000 |
NOTE: the original component stays in equity but can be transferred within equity. No gain or loss is ever recognised on conversion as no money changes hands.
Example 19: compound instrument where conversion is chosen
If we take example 17 above and assume the conversion option was not taken. The journal required is:
|
|
CU |
CU |
|
Dr Liability |
50,000 |
|
|
Cr Bank |
|
50,000 |
The original equity component remains as equity. It may be transferred within equity for classification purposes.
Example 20: Accounting for transaction costs in acquiring a compound financial instrument
If we take example 17 above and assume transaction costs of CU1,000 were incurred. In accordance with Section 22 these transaction costs should be apportioned between the debt and equity element of the instrument in proportion to the split determined. For example this CU1,000 would be split as follows in example 17:
| Element of cost to be allocated to debt | CU1,000* CU45,788 = CU916 |
| CU50,000 |
| Element of cost to be allocated to equity | CU1,000* CU4,212 = CU84 |
| CU50,000 |
The CU916 is netted against the CU45,788 on initial recognition of the financial liability (CU44,872). The effective rate of interest is then obtained which accumulates the net CU44,872 to CU50,000 by the end of year 5. Through trial and error, the effective rate of interest is 6.466%
The same type of journals that were posted in example 17 would be posted here for the updated figures above.
Example 21: 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 the 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 22: 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 |
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 23: 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 24: 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 25: 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.
An adjustment will also be required in the 2015 TB where a disposal took place during the year and consolidated financial statements have been prepared under old GAAP.
Example 26: Extract of Statement of Changes in Equity from financial statements
Statement of Changes in Equity
For the Year ended 31 December 2015
|
|
Equity Share Capital |
Revaluation Reserve |
Other Reserve |
Retained Earnings |
Cash flow hedge Reserve |
Total attributable 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 |
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
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 27: Extract from accounting policies note
To be included in the financial instruments note
Preference share capital
Redeemable preference shares and the cumulative preference dividend reserve have been classified as liabilities in the balance sheet. The preference dividend is charged in arriving at the interest cost in the profit and loss account. (include the following where applicable) However no dividends will be paid on the cumulative preference shares until the company has positive profit and loss reserves.
Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Example 28: Extract from notes to the financial statements – liability
NOTE: in the example below the cumulative preference dividend reserve is separated as this dividend was not paid
|
Creditors – amounts falling due within one year |
2015 |
2014 |
|
|
CU |
CU |
|
11% redeemable cumulative “A” preference share capital of CU1 each (see (i) below) |
XXXXX |
XXXXX |
|
Redeemable cumulative “B” preference share capital of CU1 each (see (i) below) |
XXXXX |
XXXXX |
|
Convertible loan notes (iii) below) |
XXXXX |
XXXXX |
|
Cumulative preference dividend reserve (see (ii) below) |
XXXXX |
XXXXX |
|
|
XXXXXX |
XXXXXX |
- These shares are classified as liabilities in accordance with Section 22 (Liabilities and Equity). The rights attaching to these shares are detailed in the share capital note (note X)
- Provision for a dividend in respect of the preference shares has been transferred to this reserve. This reserve is classified as a liability, in accordance with Section 22 (Liabilities and Equity).
- The convertible loan notes were issued on XXXXXX. Interest accrues annual in arrears and is payable at a rate of 5%, These are convertible at the option of the holder into equity shares in two years time. The undiscounted value is CUXXXX.
Example 29: Extract from notes to the financial statements – share capital
|
8 Called up ordinary share capital |
2015 |
2014 |
|
|
CU |
CU |
|
Authorised ordinary share capital |
|
|
|
1,000,000 ordinary shares of CU1 each |
XXXX |
XXXXX |
|
|
|
|
|
100,000 “A” ordinary shares of CU1 each |
XXXX |
XXXXX |
|
|
|
|
|
Issued and fully paid ordinary share capital |
|
|
|
492,000 ordinary shares of CU1 each |
XXXX |
XXXX |
|
7,000 “A” ordinary shares of CU1 each |
XXXX |
XXXX |
|
Shares presented as equity |
XXXXX |
XXXXX |
On 1 April a further 20,000 shares were issued at CU1.50 each.
|
Preference share capital |
2015 |
2014 |
|
|
CU |
CU |
|
Authorised preference share capital |
|
|
|
2,250 redeemable convertible “A” preference shares of CU1 each |
XXXXX |
XXXXX |
|
300 11% redeemable cumulative “B” preference shares of CU1 each |
XXXXX |
XXXXX |
|
100 redeemable cumulative “C” preference shares of CU1 each |
XXXXX |
XXXXX |
|
600 3% cumulative redeemable convertible “D” shares of CU1 each |
XXXXX |
XXXXX |
|
|
XXXXX |
XXXXX |
|
Issued and fully paid preference share capital |
|
|
|
2,250 redeemable convertible “A” preference shares of CU1 each |
XXXXX |
XXXXX |
|
300 11% redeemable cumulative “B” preference shares of CU1 each |
XXXXX |
XXXXX |
|
Shares presented as liabilities |
XXXXX |
XXXXX |
The redeemable “A” and “B” preference shares are classified as liabilities in accordance with Section 22 (Liabilities and Equity). The rights attaching to each class of preference shares are as follows:
(a) 11% Redeemable cumulative “B” preference share capital
The holders of these shares shall be entitled to attend all general meetings of the company but not to vote. The holders are entitled to payment of their dividend in preference to all shareholders with the exception of the “D” shareholders.
The company was due to redeem these shares at par between XXXXX and XXXXX at a rate of 75,000 shares per annum. All arrears of cumulative dividends are to be paid at the time of redemption. At XX/XX/XX, these shares had not been redeemed.
The holders in the event of a winding up will be entitled to repayment of capital at par and dividends due in priority to the payment of other share classes.
(b) Redeemable cumulative “C” preference share capital
The holders of these shares shall be entitled to attend all general meetings of the company but not to vote.
The shares were entitled to be redeemed at par in equal tranches of 50,000 shares annually on the 1st of June each year commencing XX/XX/XX. At XX/XX/15 these shares had not been redeemed.
In the event of a winding up, the “C” shareholders will rank behind the “D” shareholders but in priority to all others in the right to repayment.
Example 30: Extract from notes to the financial statements – dividends on equity shares
|
Dividends |
2015 |
2014 |
|
|
CU |
CU |
|
Dividend paid on ordinary shares of CU100 per share (2014:CU100) |
XXXX |
XXXX |
The dividend payable on the preference shares of CUXXXX (2013: CUXXXX) is included within interest payable and similar charges. The cumulative dividend payable on the preference shares which are classified as financial liabilities is CUXXX which has accumulated since 20XX.
During the year the company distributed a property to its director.
Example 31: Extract from notes to the financial statements – disclosure of preference dividend/convertible loan in interest payable
|
Interest payable |
2015 |
2014 |
|
|
CU |
CU |
|
Interest payable on convertible bonds/loan |
XXXX |
XXXX |
|
Interest payable on bank loans and overdrafts repayable within five years |
XXXX |
XXXX |
|
Preference dividend payable |
XXXX |
XXXX |
|
|
XXXXX |
XXXXX |
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