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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”]Consolidation procedures
Extract from FRS102: Section 9.14
9.13 The consolidated financial statements present financial information about the group as a single economic entity. In preparing consolidated financial statements, an entity shall:
(a) combine the financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses;
(b) eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary;
(c) measure and present non-controlling interest in the profit or loss of consolidated subsidiaries for the reporting period separately from the interest of the owners of the parent; and
(d) measure and present non-controlling interest in the net assets of consolidated subsidiaries separately from the parent shareholders’ equity in them. Non-controlling interest in the net assets consists of:
(i) the amount of the non-controlling interest’s share in the net amount of the identifiable assets, liabilities and contingent liabilities recognised and measured in accordance with Section 19 Business Combinations and Goodwill at the date of the original combination; and
(ii) the non-controlling interest’s share of changes in equity since the date of the combination.
9.14 The proportions of profit or loss and changes in equity allocated to the owners of the parent and to the non-controlling interest are determined on the basis of existing ownership interests and do not reflect the possible exercise or conversion of options or convertible instruments.
OmniPro comment
Example 5: Process of consolidation
Section 9 provides minimal guidance on the process of consolidation however the best method for groups to consolidate to:
(1) 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.
(2) then adjust individual figures in the individual subsidiary financial statements to uniform accounting policies.
(3) 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.
Where assessing the net assets to be attributed to non-controlling interest, it is based on the percentage of shares held, any exercisable shares not exercised are ignored.
Intragroup balances and transactions
Extract from FRS102: Section 9.15
9.15 Intragroup balances and transactions, including:
- income, expenses and dividends, are eliminated in full.
- Profits and losses resulting from intragroup transactions that are recognised in assets, such as inventory and property, plant and equipment, are eliminated in full.
- Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements (see Section 27 Impairment of Assets).
- Section 29 Income Tax applies to timing differences that arise from the elimination of profits and losses resulting from intragroup transactions.
OmniPro comment
Deferred tax
Where profits/losses are eliminated on consolidation, this has a deferred tax effect under Section 29-Income taxes as they have been taxed/got a tax deduction in the subsidiary’s tax return but in the consolidated financial statements they have not been posted to the profit and loss thus creating a timing difference. The deferred tax rate to be used will usually be the average rate of tax of the parent company.
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.
Where sales are made between subsidiaries which are not consolidated, then elimination of intra-group sales, purchases balances etc. does not need to be done.
Uniform reporting date and reporting period
Extract from FRS102: Section 9.16
9.16 The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same reporting date, and for the same reporting period, unless it is impracticable to do so. Where the reporting date and reporting period of a subsidiary are not the same as the parent’s reporting date and reporting period, the consolidated financial statements must be made up:
(a) from the financial statements of the subsidiary as of its last reporting date before the parent’s reporting date, adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements, provided that reporting date is no more than three months before that of the parent;
OR
(b) from interim financial statements prepared by the subsidiary as at the parent’s reporting date.
OmniPro comment
Section 9.16 makes it clear that a subsidiaries year end which is included in the consolidation cannot be a year-end that is more than 3 months earlier than the parents year end. Where this is the case, adjustments will have to be made for significant transactions between the subsidiary year end date and the Parent’s year end date.
Example 12: Uniform year end
Parent A has a year-end date of 31 December. Subsidiary A has a year end of 30 September. In this case, the accounts for the year ended 31 August for Subsidiary A cannot be included in the consolidation as they are more than 3 months from the Parents year end.
In this case Subsidiary A will have to prepare accounted to 31 December.
Uniform accounting policies
Extract from FRS102: Section 9.17
9.17 Consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events and conditions in similar circumstances. If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements.
OmniPro comment
See below application of the guidance in Section 9.17
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.
Acquisition and disposal of subsidiaries
Extract from FRS102: Section 9.18-9.19D
9.18 The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date, except when a business combination is accounted for by using the merger accounting method under Section 19 or, for certain public benefit entity combinations, Section 34 Specialised Activities. The income and expenses of a subsidiary are included in the consolidated financial statements until the date on which the parent ceases to control the subsidiary. A parent may cease to control a subsidiary with or without a change in absolute or relative ownership levels. This could occur, for example, when a subsidiary becomes subject to the control of a government, court, administrator or regulator.
Disposal – where control is lost
9.18A Where a parent ceases to control a subsidiary, a gain or loss is recognised in the consolidated statement of comprehensive income (or in the income statement if presented) calculated as the difference between:
(a) the proceeds from the disposal (or the event that resulted in the loss of control);
AND
(b) the proportion of the carrying amount of the subsidiary’s net assets, including any related goodwill, disposed of (or lost) as at the date of disposal (or date control is lost).
The cumulative amount of any exchange differences that relate to a foreign subsidiary recognised in equity in accordance with Section 30 Foreign Currency Translation is not recognised in profit or loss as part of the gain or loss on disposal of the subsidiary and shall be transferred directly to retained earnings.
9.18B The gain or loss arising on the disposal shall also include those amounts that have been recognised in other comprehensive income in relation to that subsidiary, where those amounts are required to be reclassified to profit or loss upon disposal in accordance with other sections of this FRS. Amounts that are not required to be reclassified to profit or loss upon disposal of the related assets or liabilities in accordance with other sections of this FRS shall be transferred directly to retained earnings.
9.19 If an entity ceases to be a subsidiary but the investor (former parent) continues to hold:
(a) an investment that is not an associate (see paragraph 9.19(b)) or a jointly controlled entity (see paragraph 9.19(c)), that investment shall be accounted for as a financial asset in accordance with Section 11 Basic Financial Instruments or Section 12 Other Financial Instruments Issues from the date the entity ceases to be a subsidiary;
(b) an associate, that associate shall be accounted for in accordance with Section 14 Investments in Associates; or
(c) a jointly controlled entity, that jointly controlled entity shall be accounted for in accordance with Section 15 Investments in Joint Ventures.
The carrying amount of the net assets (and goodwill) attributable to the investment at the date that the entity ceases to be a subsidiary shall be regarded as the cost on initial measurement of the financial asset, investment in associate or jointly controlled entity, as appropriate. In applying the equity method to investments in associate or jointly controlled entities as required in sub-paragraphs (b) and (c) above, paragraph 14.8(c) shall not be applied.
Disposal – where control is retained
9.19A Where a parent reduces its holding in a subsidiary and control is retained, it shall be accounted for as a transaction between equity holders and the resulting change in non-controlling interest shall be accounted for in accordance with paragraph 22.19. No gain or loss shall be recognised at the date of disposal.
Acquisition – Control achieved in stages
9.19B Where a parent acquires control of a subsidiary in stages, the transaction shall be accounted for in accordance with paragraphs 19.11A and 19.14 applied at the date control is achieved.
Acquisition – Increasing a controlling interest in a subsidiary
9.19C Where a parent increases its controlling interest in a subsidiary, the identifiable assets and liabilities and a provision for contingent liabilities of the subsidiary shall not be revalued to fair value and no additional goodwill shall be recognised at the date the controlling interest is increased.
9.19D The transaction shall be accounted for as a transaction between equity holders and the resulting change in non-controlling interest shall be accounted for in accordance with paragraph 22.19.
OmniPro comment
Accounting for an acquisition where control is achieved in one transaction
Section 19 –Business combinations and goodwill deals with the requirement to determine the goodwill and fair value of assets and liabilities at the date of acquisition. See Section 19 of this website for further details.
The journals usually required on consolidation where a 100% interest was obtained would be:
|
|
CU |
CU |
|
Dr Goodwill |
XXX |
|
|
Dr Fair Value of Net Asset of Company B |
XXX |
|
|
Cr Investment in the Individual Entity Financial Statements |
|
XXX |
The journals usually required on consolidation where a 100% interest was not obtained would be (assuming positive net assets and goodwill):
|
|
CU |
CU |
|
Dr Goodwill |
XXX |
|
|
Dr Net Asset of Company B |
XXX |
|
|
Cr Investment in the Individual Entity Financial Statements |
|
XXX |
|
Cr Non-Controlling Interest in Equity (carrying value of net asset –note fair value*XX% of non-controlling interest retained) |
|
XXX |
Where consolidation is performed in excel and the results of each subsidiary added to come to the consolidated numbers (i.e. the P&L, balance sheet etc.) then below journal would be required:
|
|
CU |
CU |
|
Dr Goodwill |
XXX |
|
|
Dr Ordinary Share Capital of Company B |
XXX |
|
|
Dr Profit and Loss Reserves |
XXX |
|
|
Cr Investment in the Individual Entity Financial Statements |
|
XXX |
|
Cr Non-Controlling Interest in Equity (carrying value of net asset –note fair value*XX% of non-controlling interest retained) |
|
XXX |
Accounting for an acquisition where control is achieved in stages
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.
Acquisitions where controlling interest is increased
Under Section 9, an increase in a controlling interest is accounted for as an equity transaction and no goodwill is recognised. Transaction costs associated with the acquisition should also be posted against equity.
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
Disposals where controlling interest is still retained
Under Section 9.19A, where a disposal results in the controlling interest still being retained, this is treated as an equity transaction. No gain or loss is recognised on disposal. Transaction costs associated with the disposal should also be posted against equity. The carrying amount of the non-controlling interest is adjusted to reflect the change in the parent’s interest in the subsidiary’s net assets. Any difference between the amount by which the non-controlling interest is so adjusted and the fair value of the consideration paid or received, if any should be recognised in equity. See illustration below
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
Disposal of a subsidiary where control is lost fully
Instances indicating control is lost are:
- sale of the parent of all or part of its investment such that it owns less than 50% of the voting rights
- a power of veto is given to a third party
- another party gets access to appoint and remove directors from the board
- an agreement is entered into with the non-controlling party such that joint control exists
- insolvency
See application of the above guidance in the example below.
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
Non-controlling interest in subsidiaries
Extract from FRS102: Section 9.20-9.22
9.20 An entity shall present non-controlling interest in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.
9.21 An entity shall disclose non-controlling interest in the profit or loss of the group separately in the statement of comprehensive income (or income statement, if presented).
9.22 Profit or loss and each component of other comprehensive income shall be attributed to the owners of the parent and to non-controlling interest. Total comprehensive income shall be attributed to the owners of the parent and to non-controlling interest even if this results in non-controlling interest having a deficit balance.
OmniPro comment
Section 19.20 to 19.22 makes it clear that in the statement of comprehensive income, including other comprehensive, the profit and others transactions (e.g dividends) posted to Other Comprehensive Income should show the element attributable to the parent and the element relating to the non-controlling interest. See example of this in the disclosure section.
The journals usually required on consolidation where a less than 100% interest was obtained would be:
|
|
CU |
CU |
|
Dr Goodwill |
XXX |
|
|
Dr Fair Value of Net Asset of Company B/OSC and reserves |
XXX |
|
|
Cr Investment in the Individual Entity Financial Statements |
|
XXX |
The journals usually required on consolidation where a 100% interest was not obtained would be (assuming positive net assets and goodwill):
|
|
CU |
CU |
|
Dr Goodwill |
XXX |
|
|
Dr Fair Value of Net Asset of Company B (100%)/OSC and reserves |
XXX |
|
|
Cr Investment in the Individual Entity Financial Statements |
|
XXX |
|
Cr Non-Controlling Interest in Equity (carrying value of net asset –note fair value*XX% of non-controlling interest retained) |
|
XXX |
Transferring a business within a group
OmniPro comment
Where a business is transferred from one group company to another, merger accounting can be used as detailed in Section 19 also known as predecessor accounting. The company can also use acquisition accounting however if this is used then a fair value exercise will need to be performed.
Intermediate payment arrangements
Extract from FRS102: Section 9.33-9.38
9.33 Intermediate payment arrangements may take a variety of forms:
(a) The intermediary is usually established by a sponsoring entity and constituted as a trust, although other arrangements are possible.
(b) The relationship between the sponsoring entity and the intermediary may take different forms. For example, when the intermediary is constituted as a trust, the sponsoring entity will not have a right to direct the intermediary’s activities. However, in these and other cases the sponsoring entity may give advice to the intermediary or may be relied on by the intermediary to provide the information it needs to carry out its activities. Sometimes, the way the intermediary has been set up gives it little discretion in the broad nature of its activities.
(c) The arrangements are most commonly used to pay employees, although they are sometimes used to compensate suppliers of goods and services other than employee services. Sometimes the sponsoring entity’s employees and other suppliers are not the only beneficiaries of the arrangement. Other beneficiaries may include past employees and their dependents, and the intermediary may be entitled to make charitable donations.
(d) The precise identity of the persons or entities that will receive payments from the intermediary, and the amounts that they will receive, are not usually agreed at the outset.
(e) The sponsoring entity often has the right to appoint or veto the appointment of the intermediary’s trustees (or its directors or the equivalent).
(f) The payments made to the intermediary and the payments made by the intermediary are often cash payments but may involve other transfers of value.
Examples of intermediate payment arrangements are employee share ownership plans (ESOPs) and employee benefit trusts that are used to facilitate employee shareholdings under remuneration schemes. In a typical employee benefit trust arrangement for share-based payments, an entity makes payments to a trust or guarantees borrowing by the trust, and the trust uses its funds to accumulate assets to pay the entity’s employees for services the employees have rendered to the entity.
Although the trustees of an intermediary must act at all times in accordance with the interests of the beneficiaries of the intermediary, most intermediaries (particularly those established as a means of remunerating employees) are specifically designed so as to serve the purposes of the sponsoring entity, and to ensure that there will be minimal risk of any conflict arising between the duties of the trustees of the intermediary and the interest of the sponsoring entity, such that there is nothing to encumber implementation of the wishes of the sponsoring entity in practice. Where this is the case, the sponsoring entity has de facto control.
Accounting for intermediate payment arrangements
9.34 When a sponsoring entity makes payments (or transfers assets) to an intermediary, there is a rebuttable presumption that the entity has exchanged one asset for another and that the payment itself does not represent an immediate expense. To rebut this presumption at the time the payment is made to the intermediary, the entity must demonstrate:
(a) it will not obtain future economic benefit from the amounts transferred; or
(b) it does not have control of the right or other access to the future economic benefit it is expected to receive.
9.35 Where a payment to an intermediary is an exchange by the sponsoring entity of one asset for another, any assets that the intermediary acquires in a subsequent exchange transaction will also be under the control of the entity. Accordingly, assets and liabilities of the intermediary shall be accounted for by the sponsoring entity as an extension of its own business and recognised in its own individual financial statements. An asset will cease to be recognised as an asset of the sponsoring entity when, for example, the asset of the intermediary vests unconditionally with identified beneficiaries.
9.36 A sponsoring entity may distribute its own equity instruments, or other equity instruments, to an intermediary in order to facilitate employee shareholdings under a remuneration scheme. Where this is the case and the sponsoring entity has control, or de facto control, of the assets and liabilities of the intermediary, the commercial effect is that the sponsoring entity is, for all practical purposes, in the same position as if it had purchased the shares directly.
9.37 Where an intermediary holds the sponsoring entity’s equity instruments, the sponsoring entity shall account for the equity instruments as if it had purchased them directly. The sponsoring entity shall account for the assets and liabilities of the intermediary in its individual financial statements as follows:
(a) The consideration paid for the equity instruments of the sponsoring entity shall be deducted from equity until such time that the equity instruments vest unconditionally with employees.
(b) Consideration paid or received for the purchase or sale of the sponsoring entity’s own equity instruments shall be shown as separate amounts in the statement of changes in equity.
(c) Other assets and liabilities of the intermediary shall be recognised as assets and liabilities of the sponsoring entity.
(d) No gain or loss shall be recognised in profit or loss or other comprehensive income on the purchase, sale, issue or cancellation of the entity’s own equity instruments.
(e) Finance costs and any administration expenses shall be recognised on an accruals basis rather than as funding payments are made to the intermediary.
(f) Any dividend income arising on the sponsoring entity’s own equity instruments shall be excluded from profit or loss and deducted from the aggregate of dividends paid.
OmniPro comment
It is unlikely that many entities may come across these in practice as a result this has not been dealt with further. It has been included for information purposes. It usually applies to employee share ownership schemes.
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