Complex groups and changes in structure

Recap on basic rules of consolidation Vertical groups Changes in group structure

o Control to control o Non-control to control o Control to non-control

Consolidation the basics

Parent

Group

Control

Subsidiary

Consolidation process
>50% ownership => control over 100% of subsidiary
o Impact: consolidate 100% of subsidiarys assets, liabilities, income and expenses

Need to reflect two types of owner

o In Consolidated SFP within equity section o In Consolidated SCI analysis of profit and TCI at bottom of statement o In Consolidated SoCE separate column for each type

Recognise goodwill acquired in the subsidiary

Goodwill

Only calculated at one point in time (per subsidiary)

o When control is gained by the parent (the date of acquisition)

Reflects values at the date of acquisition

o Based on fair values

Only subsequent adjustment to value would be deduction of

impairment

Goodwill derecognised when parent loses control of subsidiary

Goodwill calculation
$ Parents investment in subsidiary Value of NCIs investment in subsidiary P% NCI% Reflects value for 100% of shares in subsidiary Fair value of net assets of subsidiary 100% (100%) Goodwill at acquisition 100% X X X (X) X

Vertical groups
P
Control

S
Control

P controls S and S controls Q, therefore P has indirect control of Q and should consolidate it.

Vertical groups
Things to consider:

When did Parent gain control of Q?

o This is the point at which goodwill should be calculated

What is the effective holding?

o The basis for splitting post-acquisition reserves between Parent shareholders and NCI

Additional adjustment the indirect holding adjustment (IHA)

o Calculation = NCI% of direct subsidiary (S) x cost of investment in sub-subsidiary (Q) o Deduct in Goodwill calculation (for Q) and NCI calculation (for S)

Vertical group example - Alpha

Alpha acquired 70% of Betas 1 million $1 equity shares on 1 February 2012 for $4.5 million when Betas retained earnings were $2.3 million. Beta acquired 60% of Charlies 500,000 $1 equity shares on 1 February 2011 for $1.8 million when Charlies retained earnings were $700,000. On 1 February 2012 the retained earnings of Charlie were $900,000. The carrying value of both Betas and Charlies net assets was considered to be the same as their fair value at the dates of acquisition. The retained earnings of Alpha, Beta and Charlie at 31 January 2013, the reporting date, were $6.8 million, $3.5 million and $1.1 million respectively. The group policy is to measure non-controlling interest at fair value at the acquisition date. The fair value of the non-controlling interest in Beta at acquisition was $1.3 million and the non-controlling interest in Charlie, based on Alphas effective holding, was $1.5 million.

Vertical group example Alpha solution

W1 Group structure

Establish date that control gained by Parent (Alpha) and effective holding for calculations

W2 Net assets of subsidiaries

Beta Acquisition $000 Share capital Retained earnings 1,000 2,300 3,300 Reporting date $000 1,000 3,500 4,500 Charlie Acquisition $000 500 Reporting date $000 500 1,100 1,600

Post-acquisition reserves

1,200

Check the date of acquisition carefully, when did the parent (i.e. Alpha) gain control of Charlie? Look back at W1.

W3 Goodwill
Beta Parent (Alpha)s investment in subsidiary Cost of investment IHA: $000 4,500 4,500 Value of NCI Less: NA at acquisition (W2) 1,300 (3,300) 2,500 1,500 Charlie $000 1,800

Remember the basics of the goodwill calculation: Goodwill = Parent (Alpha)s investment + NCI net assets

W4 NCI
Beta $000 Value at acquisition (repeat of figure from W3) Share of post-acquisition reserves: Beta: 30% x 1,200 (W2) Charlie: Less: IHA (repeat of figure from W3) 360 1,300 Charlie $000 1,500

Remember the basic calculation: NCI = value at acquisition (as included in W3) + share (W1) of post-acquisition reserves (W2)

W5 Group retained earnings

$000 Alpha (100% of parent) Parent (Alpha)s share of post-acquisition reserves in subsidiaries: Beta: 70% x 1,200 (W2) Charlie: 840 6,800

All post-acquisition reserves are split between NCI (W4) and parent shareholders (W5), so you can use W4 to help you complete W5.

Changes in group structure

Things to consider:

When has control been gained?

o This is the point at which goodwill should be calculated and the subsidiary should start to be consolidated

Has control subsequently been lost?

o Subsidiary should be derecognised (consolidation ceases) o Gain/loss on disposal calculated

If control has not been lost:

o No change in goodwill o Transfer between two types of owner will affect NCI (W4) and parent reserves (W5) only

Change in group structure example 1 - Delta

Delta acquired 60% of the 1 million $1 equity shares of Epsilon on 1 January 2012 for $8.5 million when Epsilons retained earnings were $9.1 million. The group policy is to measure non-controlling interest at the date of acquisition at its proportionate share of the fair value of the net assets. The carrying value of Epsilons net assets was considered to be the same as their fair value at the date of acquisition. Delta acquired an additional 10% of Epsilons equity share capital on 31 October 2012 for $1.5 million. The retained earnings of Delta and Epsilon at 31 December 2012, the reporting date, were $27.5 million and $10.2 million respectively.

Delta solution
W1 Group structure

Establish when control gained, if control has subsequently been lost or % changed and percentages before and after change in structure

W2 Net assets of subsidiary

Acquisition $000 Share capital Retained earnings 1,000 9,100 10,100 Change in % $000 1,000 Reporting date $000 1,000 10,200 11,200

Post-acquisition reserves

Check the date of acquisition carefully, when did the parent gain control of the subsidiary? Look back at W1. Also need to calculate net assets at date percentage control changes or date control is lost and at the reporting date (if control still exists at this date).

W3 Goodwill
$000 Parents investment in subsidiary Value of NCI: 40% x 10,100 (W2) Less: NA at acquisition (W2) 8,500 4,040 (10,100) Goodwill 2,440

Calculate at date of acquisition, no further amendment (unless impairment has occurred). Not affected by change in % when control exists before and after.

W4 NCI
$000 Value at acquisition (repeat of figure from W3) Share of post-acquisition reserves: 4,040

Think about NCI in chronological order and use W1 to help.

W5 Group reserves
Retained earnings $000 Delta (100% of parent) Parents share of post-acquisition reserves in subsidiary: 27,500 Other components $000

Impact of transfer is in other components of equity. If figure deducted in W4, it is added in W5 (and vice-versa). Figure in other components then netted off against cash effect of transfer.

Change in group structure example 2 - Gamma

Gamma acquired 75,000 of the 100,000 $1 equity shares of Theta on 1 January 2008 for $1.1 million when the balance on Thetas reserves was $900,000. It is group policy to measure non-controlling interest at the date of acquisition at fair value and the fair value of the non-controlling interest in Theta on 1 January 2008 was $350,000. On 1 July 2012, Gamma disposed of 40,000 of the shares in Theta for $950,000. The fair value of the shareholding retained at 1 July 2012 was $800,000. There had been no impairment of goodwill since the date of acquisition. The reserves of Theta at 1 July 2012 were $1.8 million and the profit of Theta for the year ended 31 December 2012 was $600,000.

Gamma solution
W1 Group structure

Establish when control gained, if control has subsequently been lost or % changed and percentages before and after change in structure

W2 Net assets of subsidiary

Acquisition $000 Share capital Reserves 100 900 1,000 Disposal $000 100 1,800 1,900

Post-acquisition reserves

900

Check the date of acquisition carefully, when did the parent gain control of the subsidiary? Look back at W1. Also need to calculate net assets at date percentage control changes or date control is lost and at the reporting date (if control still exists at this date).

W3 Goodwill
$000 Parents investment in subsidiary Value of NCI (fair value method) Less: NA at acquisition (W2) 1,100 350 (1,000) Goodwill at acquisition and disposal 450

Calculate at date of acquisition, no further amendment (unless impairment has occurred). Derecognise when control lost => above figure not included in CSFP (but required for gain/loss on disposal calculation).

W4 NCI
$000 Value at acquisition (repeat of figure from W3) Share of post-acquisition reserves: 25% x 900 350 225 NCI at date of disposal 575

Calculate NCI at date of disposal for gain/loss on disposal calculation. Do not reflect on face of CSFP as not a subsidiary at the year end.

Gain/loss on disposal calculation

$000 Sale proceeds Fair value of remaining holding $000 950 800 Value of all shares held in subsidiary at disposal date Less: carrying value of subsidiary at date of disposal: Net assets (W2) Goodwill (W3) NCI (W4) 1,750

Gain / loss of disposal

Treatment of gain/loss on disposal and subsequent treatment of investment in Theta

Change in group structure example 3 - Omega

Omega acquired 15% of the 2.5 million $1 equity shares in Sigma on 1 August 2011 for $1.2 million. The investment was measured at fair value in Omegas individual financial statements with any associated gains or losses recorded within other comprehensive income. On 1 December 2012, Omega acquired an additional 60% of the equity share capital of Sigma at a cost of $5.2 million. The fair value of the original 15% investment at 1 December 2012 was $1.5 million. The fair value of the net assets acquired was assessed to be the same as their carrying value. It is group policy to value non-controlling interest at fair value at the date of acquisition. The fair value of the noncontrolling interest at 1 December 2012 was $2.7 million. The profit for the year of Sigma was $2.4 million and profits are assumed to accrue evenly throughout the year. The reserves of Sigma at 31 January 2013, the reporting date, were $4 million. The retained earnings of Omega at 31 January 2013, the reporting date, were $25 million and the balance on other components of equity at this date, representing the change in fair value of Omegas investment in Sigma, was $1.1 million.

Omega solution
W1 Group structure

Establish when control gained, if control has subsequently been lost or % changed and percentages before and after change in structure

W2 Net assets of subsidiary

Acquisition $000 Share capital Reserves 2,500 Reporting date $000 2,500 4,000 6,500

Post-acquisition reserves

Check the date of acquisition carefully, when did the parent gain control of the subsidiary? Look back at W1. Also need to calculate net assets at date percentage control changes or date control is lost and at the reporting date (if control still exists at this date).

W3 Goodwill
$000 Parents investment in subsidiary: $000

Value of NCI (fair value method) Less: NA at acquisition (W2)

2,700

Goodwill

Remember the basics of the goodwill calculation: Goodwill = Parent (Omega)s investment + NCI net assets Parents investment must reflect the % of shares held at date of acquisition.

W4 NCI
$000 Value at acquisition (repeat of figure from W3) Share of post-acquisition reserves: 2,700

NCI at reporting date

Remember the basic calculation: NCI = value at acquisition (as included in W3) + share (W1) of post-acquisition reserves (W2). There has been no change in the NCI% since the date of acquisition.

W5 Group reserves
Retained earnings $000 Omega (100% of parent) Parents share of post-acquisition reserves in subsidiary 25,000 Other components $000 1,100

Reverse any gains held in other components of equity relating to the investment (as investment is restated to cost upon consolidation). Then reflect the change in fair value of the original investment up to date it becomes a subsidiary (as updated FV used in goodwill calculation).

Changes in group structure in summary

Additional shares purchased Control to control NCI % decreases => deduct from W4 Parent % increases => add to W5 Net off against cash paid Control gained/lost on 2nd transaction date Calculate goodwill when control gained (i.e. 2nd date) Re-measure previous holding to fair value Shares sold NCI % increases => add to W4 Parent % decreases => deduct from W5 Net off against cash received Derecognise goodwill when control lost (i.e. 2nd date) Re-measure remaining holding to fair value

FV of original holding added to new FV of remaining holding added cost of investment (in goodwill to sale proceeds (in gain on calculation) disposal calculation) Reflect gain/loss on remeasurement in W5 Reflect gain/loss on disposal in W5