Name: Paidamoyo Chibvongodze

Student Number: N0172690N

Department: Accounting

Course: Financial Accounting 2205

QUESTION: Write a well-researched term paper on the application of IFRS/IAS in the

presentation of Group Consolidated Statements. Provide applicable standards and support
with relevant journal entries.

TABLE OF CONTENTS

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Introduction……………………………………………………………………………..1

Abstract………………………………………………………………………………….2

CHAPTER 1: IAS 28 Investment in Associates and Joint Ventures………………..3

CHAPTER 2: IFRS 3 Business Combinations………………………………………7

CHAPTER 3: IFRS 10 Consolidated Financial Statements………………………..12

CHAPTER 4: IFRS 11 Joint Arrangement…………………………………………15

CHAPTER 5: IFRS 12 Disclosure of interest in other entities…………………….18

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 Introduction

Accounting standards are of prime importance in the accounting field. These standards
include the International Accounting Standards (IAS) and the International Financial
Reporting Standards (IFRS). They have been prepared to meet the needs for the international
financial industry for standardised accounting reporting that can be relied on for uniform
presentation of information. Financial records and reports have to be consistent, comparable,
reliable and transparent at international and domestic levels. In addition, by having these
standards in place, capital markets that are located in different jurisdictions can create the
most efficient capital flows that are beneficial to regulators, organisations, and the market as
a whole.

The IAS were created and issued by the Board of International Accounting Standards
Committee (IASC). These standards were put in place to advice companies how to report
financial events in a financial statement. In 2001, a new set of standards known as the IFRS
were issued by the International Accounting Standards Board (IASB). Many countries have
financial laws requiring all publicly traded companies to prepare financial statements in
compliance with the IAS and IFRS to protect investors, stakeholders and creditors.

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 Abstract

Consolidated Financial Statements are the combined financial statements of a parent

company and its subsidiaries. The parent companies must prepare consolidated financial
statements to report on the financial well-being of both the parent company and all its
subsidiaries. Each subsidiary must prepare its own financial statements including balance
sheet, income statement, statement of cash flows and statement of retained earnings. This
information for each subsidiary is then combined to create consolidated financial reports that
represent the financial position of the parent company.

This research paper shall analyse the use of IAS and IFRS in the preparation of these
consolidated financial statements. These standards include IAS 28 Investment in Associates
and Joint Ventures, IFRS 3 Business Combinations, IFRS10 Consolidated Financial
Statements, IFRS 11 Joint Arrangement, and IFRS 12 Disclosure of interest in other
entities.

However, the accounting standards are always changing and sometimes it may be difficult to
keep up with the changes hence other firms may continue to use outdated standards. It
therefore also became a difficulty in the research as other standards were changed over time
and the information was now covered by a different standard.

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CHAPTER 1

IAS 28 – INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

OBJECTIVE

1. To prescribe the accounting treatment for investments in associates and joint ventures.
2. To set out the requirements for the application of the equity method when accounting
for these kind of investments.

KEY TERMS

a. Associate- is an entity over which an investor has significant influence

b. Joint Venture- is a joint arrangement whereby parties having joint control of the
arrangement have the rights to net assets of the joint arrangement.
c. Joint control- is tis he contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require the unanimous
consent of the parties sharing control

Significant Influence

It is the power to participate in financial and operating policy decisions of the investee.
However, it is not a control/ joint control of those policies. This classification has to be done
properly because accounting treatment and policies depend on it.

Significant influence exists when the investor:

 Holds either directly or indirectly more than 20% of the voting power of the
investee. However, sometimes an investor may hold more than 20% but less
than 50% but can still control the investee.
 Has representation on the board of directors
 Participates in policy making decisions
 Has material transactions with the investee

*Always examine potential voting rights in form of options to buy shares/ convertible
debt instruments.

Equity Method

Once the investor acquires significant influence the equity method is the applied.

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On initial recognition:

a. Investment in an associate/ joint venture is recognised at cost and journalised as

follows:

Dr Cr

Investments (SFP) XXX

Cash/ Bank XXX

To record in an associate/ joint venture

b. Where there is difference between cost and investor’s share on investee’s net fair
value of identifiable assets and liabilities:

Positive difference: means that cost is more than share on net assets, that is, goodwill
exists and it is not recognised separately and included in the cost of an investment but
it is not amortised.

Negative difference: means cost is less than share on net assets. It is recognised as
income in the Profit/Loss in the period when the investment is acquired.

Subsequent Recognition

1. The carrying amount of the investment is increased or decreased by the investor’s

share on investee’s net profit or loss after acquisition date:

Dr Cr

Investment (SFP) XXX

Income from associate (P/L) XXX

To record income from associate

Where a loss exists: Dr Cr

Loss from associate (P/L) XXX

Investment (SFP) XXX

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 To record loss from associate

*Where the losses exceed the carrying amount of the investment investors cannot bring down
the carrying amount to below zero. Investor simply stops bringing in further losses.

2. Distribution of dividends by investee to investor reduces the carrying amount of the

investment:

Dr Cr

Cash/Bank XXX

Investment (SFP) XXX

To record dividends from associate

Procedures to be followed:

 Both investor and investee are to apply uniform accounting policies for similar
transactions.
 Same reporting date shall be used.
 Elimination of investor’s share on trading profit and similar items.

An entity is exempt from applying the equity method if the investment meets one of the
following conditions:
The entity is a parent that is exempt from preparing consolidated financial statements
under IFRS 10 Consolidated Financial Statements or if all of the following four conditions
are met (in which case the entity need not apply the equity method):
 the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the investor not applying the equity
method

 the investor or joint venture’s debt or equity instruments are not traded in a public
market

 the entity did not file its financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a
public market, and

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  the ultimate or any intermediate parent of the parent produces financial statements
available for public use that comply with IFRSs, in which subsidiaries are consolid-
ated or are measured at fair value through profit or loss in accordance with IFRS 10.

When to discontinue use of the Equity method:

Once the investment ceases to be an associate/ joint venture the use of the equity method is
discontinued.

CHAPTER 2

IFRS 3 BUSINESS COMBINATIONS

OBJECTIVE

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  To improve the relevance, reliability and comparability of the information that a
reporting entity provides in its financial statements about business combinations and
its effects.

Key Terms

a) Acquirer- is the entity that obtains control from the acquiree

b) Acquiree- is the business/businesses the acquirer obtains control of in a business
combination
c) Business combination- is a transaction of other event in which an acquirer obtains
control of one or more businesses.
d) Business- An integrated set of activities and assets that is capable of being conducted
and managed for the purpose of providing goods or services to customers, generating
investment income (such as dividends or interest) or generating other income from
ordinary activities
e) Identifiable- An asset is identifiable if it separable, that is, capable of being
separated or divided from the entity and sold, rented or exchanged, either individually
or together with a related contract, regardless of whether the entity intends to do so.It
may arise from contractual or other legal rights.
f) Non-controlling interest- is the equity in a subsidiary not attributable, directly or
indirectly, to a parent.
g) Inputs- economic resources that create outputs when one or more processes are
applied to it, for example, PPE.
h) Processes- system, standard control or convection that when applied to inputs creates
outputs, for example, production.
i) Output- results of processes applied to inputs that provide a return in form of any
economic benefits directly to investors, for example, dividends.
j) Goodwill- is an asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
separately recognized.

Scope of IFRS 3

It applies to transactions or events that meet the definition of a business combination.

Basically two business combinations exist:

1. Direct acquisition of assets and liabilities constituting a business.

A business constitutes the following attributes:

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 INPUTS
PROCESSES OUTPUTS

2. Acquisition of a controlling interest.

Does not apply to:

 Formation of a joint arrangement

 The acquisition of an asset/group of assets that do not constitute a business.

ACQUISITION METHOD

Each business combination will be accounted for using this method. The following steps are
required:

I. Identification of the acquirer

The acquirer is usually the investor who acquires an investment or a

subsidiary. Sometimes, it is not so clear. The most common example is a
merger. When two companies merge together and create just 1 company, the
acquirer is usually the bigger one – with larger fair value or the entity that
initiated the business combination.

II. Determining the acquisition date

Generally, it’s the date on which the acquirer legally transfers the payment for
the investment (consideration) and acquires the assets and assumes the
liabilities of the acquiree. However, this may differ due to different contractual
agreements as this date may be earlier or later than the above described.

III. Recognising and measuring the identifiable assets acquired, liabilities

assumed and any non-controlling interest in the acquiree

An acquirer or investor shall recognize all identifiable assets acquired,

liabilities assumed and non-controlling interests in the acquiree separately
from goodwill. Sometimes, there is some unrecognized assets in an acquiree,
and an investor needs to recognize this asset if it meets the criteria for the

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 recognition. All assets and liabilities are measured at acquisition-date fair
value.

IFRS 3 permits 2 methods of measuring non-controlling interest:

1. Fair value, or

2. The proportionate share in the recognized acquiree’s net assets.

Selection of method for measuring non-controlling interest directly impacts the

amount of goodwill recognized

IV. Recognising and measuring goodwill/gain from a bargain purchase

Goodwill is calculated as follows:

Consideration transferred xx

Non-controlling interest xx

Previously held interest xx

Total FV of the whole acquiree xx

Less Net assets acquired (xx)

Goodwill/ Gain from bargain purchase xxx

The goodwill can be both positive and negative:

 If the goodwill is positive, then you shall recognize it as an intangible asset

and perform annual impairment test;

 If the goodwill is negative, then it is a gain on a bargain purchase. You

should:

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  Review the procedures for recognizing assets and liabilities,
non-controlling interest, previously held interest and
consideration transferred (i.e. check whether they are error-
free);

 Recognize a gain on bargain purchase in profit or loss.

EXAMPLE

On 31 December 2018, Bvongo Ltd acquired all assets of Gelx Ltd and paid $12 000 in cash
on the day. The following assets were acquired:

Fair Value Cost

Investment Property 4 000 5 000
PPE 2 000 1 500
Intangible Assets 1 500 3 000
Current Assets 1 500 2 500
9000 12 000

Required:
Show journal entries to record the transactions
I. Assuming Bvongo Ltd inspected the transaction and that it concluded that it meets
the definition of a business combination in accordance with IFRS 3.
II. Assuming Bvongo Ltd inspected the transaction and that it concluded that it does not
meet the definition of a business combination in accordance with IFRS 3

Solution

i. Business Combination

• Measure at fair value

• Expense acquisition-related cost when incurred
• Recognise goodwill/bargain purchase

Dr Cr

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 Investment Property 4000
PPE 2000
Intangible Assets 1500
Current Assets 1500
Goodwill 1000
Purchase Consideration (cost of assets) 12000

ii. Asset Acquisition

• Measure at cost base.

• No goodwill is recognised
• Add acquisition-related costs to assets acquired

Dr Cr
Investment Property 5000
PPE 1500
Intangible Assets 3000
Current Assets 2500
Bank 12000

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CHAPTER 3

IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS

OBJECTIVE

To establish principles for the presentation and preparation of consolidated financial

statements when an entity controls another entity. [IFRS 10:1]

It requires the parent that controls subsidiaries to present the consolidated financial
statements.

Key terms
Parent- An entity that controls one or more entities
Power- Existing rights that give the current ability to direct the relevant activities.
Relevant activities- Activities of the investee that significantly affect the investee's returns

Control as the basis for consolidation

Basic rule is:

 If the investor controls its investee- investor must consolidate.

 If investor does not control the investee- investor does not consolidate

Control arises when the investor:

 Is exposed to/ has the right to variable returns from its involvement with the investee.
 Has the ability to affect those returns
 Through its power over the investee

Assessing control involves 3 basic elements [IFRS 10.7]:

1) Power over the investee.

2) Ability to use this power must be current, that is, exercisable in the current time.
3) Exposure or rights to variable returns.

CONSOLIDATION PROCEDURE [IFRS 10.B86]

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 1) Combine like items of assets, liabilities, equity, income, expenses and cash flows
of the parent with those of its subsidiaries. [IFRS 10.B86(a)]
2) Offset (eliminate) the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary (IFRS 3 Business
Combinations explains how to account for any related goodwill). [IFRS
10.B86(b)]
3) Eliminate in full intragroup assets and liabilities, equity, income, expenses and
cash flows relating to transactions between entities of the group (profits or losses
resulting from intragroup transactions that are recognised in assets, such as
inventory and fixed assets, are eliminated in full). [IFRS 10.B86(c)]

Accounting requirements
 Presentation of non-controlling interests: in equity, but separately from the equity of
owners of the parent;
 Uniform accounting policies shall be used by both parent and subsidiary;
 The financial statements of the parent and the subsidiary shall have the same reporting
date;
 How to deal when the parent loses its control over subsidiary

EXCEPTIONS

1. A parent does not need to present consolidated financial statements if it meets all of
the following conditions:
o It is a wholly-owned subsidiary or is a partially-owned subsidiary of another
entity and its other owners agree;
o Its debt or equity instruments are not traded in a public market;
o It did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of
issuing any class of instruments in a public market, and
o Its ultimate or any intermediate parent of the parent produces consolidated
financial statements available for public use that comply with IFRSs.
2. Post-employment benefit plans or other long-term employee benefit plans to
which IAS 19 Employee Benefits applies – they don’t need to present consolidated
financial statements;
3. Investment entities are entities that:

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  Obtains funds from one or more investors for the purpose of providing those
investor(s) with investment management services;
 Commits to its investor(s) that its business purpose is to invest funds solely for
returns from capital appreciation, investment income, or both, and
 Measures and evaluates the performance of substantially all of its investments on a
fair value basis.

Characteristics of investment entities according to IFRS 10 are:

 It has more than one investment;

 It has more than one investor;
 It has investors that are not related parties of the entity;
 It has ownership interests in the form of equity or similar interests.

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CHAPTER 4

IFRS 11 JOINT ARRANGEMENT

Objective

To establish principles for financial reporting by entities that have an interest in arrangements
that are jointly controlled.

Joint Control

Is defined by IFRS 11 as the contractually agreed sharing of control of an agreement which

exists only when decisions about the relevant activities require the unanimous consent of the
parties sharing control.

Basic elements of joint control:

1. Contractual arrangement
 Has to be present.
 Often in writing in form of a contract or documented decisions of parties involved.
 Can exist because of law or statutory mechanisms

2. Sharing control
 No single party can decide on its own, that is, all parties considered collectively are
able to direct the relevant decisions of the arrangement.

3. Unanimous consent
 Every party of the joint arrangement must agree/at least does not object to the
decisions and no one can block it.

Classification of joint arrangements

Classification depends upon the rights and obligations arising from the joint arrangement. It
is of prime of importance to classify correctly as the accounting method is different for the
different types.

2 types of joint arrangements exists:

1) Joint Venture- parties that have joint control have the rights to the net assets of
the arrangements.

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 2) Joint Operations- parties that have joint control have rights to the assets and
obligation for liabilities relating to the arrangements.

Accounting for joint arrangements

I. Joint Venture
The equity method is used for accounting the investment according to IAS 28.

II. Joint Operations

The following is recognised in the financial statements:
 Assets including its share of any assets held jointly
 Liabilities including its share of any liabilities incurred
 Revenue from sale of its share of output arising from the joint operation
 Share of the revenue from the sale of output by the joint operation
 Expenses including its share of any expenses incurred jointly

*The above will have to be accounted for in line with the appropriate standard.

When assessing the rights and obligations from the joint arrangements, it’s very important to
look at how the joint arrangement is structured, mainly whether the arrangement
is structured through separate vehicle or not.

Separate vehicle is a separately identifiable financial structure, including separate legal

entities (e.g. company) or some entities recognized by a statute.

Structured through a separate vehicle

When the joint arrangement is structured through separate vehicle, then it can be either
joint venture or joint operation.

For making your conclusion, you should examine further:

 The legal form of joint arrangement;

 The terms of the contractual arrangement; and

 Other facts and circumstances when relevant.

Example:

Imagine companies Sputa Ltd and Harvey Ltd invest their money in the separate legal entity,
(Dimagixon Ltd. Sputa Ltd and Harvey Ltd have 50% share each.

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Is it joint venture or joint operation?

As Sputa Ltd and Harvey Ltd established separate vehicle (Dimagixion), it can be either joint
venture or joint operation.

Now, what rights and obligations do Sputa Ltd and Harvey Ltd have with regard to
Dimagixion?

If there’s no other contractual arrangement and Dimagixon is separated from its owners
(meaning that assets and liabilities in Dimagixion belong to Dimagixion), then Sputa Ltd and
Harvey Ltd have interests in joint venture.

However, if there is some contractual arrangement stating that both Sputa Ltd and Harvey Ltd
have interests in the assets of Dimagixion and they are liable for the liabilities of Dimagixion
in a specified proportion, then it would be joint operation.

CHAPTER 5
IFRS 12 DISCLOSURE OF INTEREST IN OTHER ENTITIES

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OBJECTIVE
To require the disclosure of information that enables users of the financial information to
evaluate: [IFRS 12.1]
 the nature of, and risks associated with, its interests in other entities
 the effects of those interests on its financial position, financial performance and cash
flows.

Where the disclosures required by IFRS 12, together with the disclosures required by other
IFRSs, do not meet the above objective, an entity is required to disclose whatever additional
information is necessary to meet the objective. [IFRS 12:3]

IFRS 12 is required to be applied by an entity that has an interest in: [IFRS 12:5]
 subsidiaries
 joint arrangements (joint operations or joint ventures)
 associates
 unconsolidated structured entities

Significant judgements and assumptions

An entity discloses information about significant judgements and assumptions it has made
(and changes in those judgements and assumptions) in determining: [IFRS 12:7]

 That it controls another entity.

 That it has joint control of an arrangement or significant influence over another
entity.
 The type of joint arrangement (i.e. joint operation or joint venture) when the
arrangement has been structured through a separate vehicle.

Interests in subsidiaries

An entity shall disclose information that enables users of its consolidated financial statements
to: [IFRS 12:10]
 understand the composition of the group
 understand the interest that non-controlling interests have in the group's activities and
cash flows

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  evaluate the nature and extent of significant restrictions on its ability to access or use
assets, and settle liabilities, of the group
 evaluate the nature of, and changes in, the risks associated with its interests in
consolidated structured entities
 evaluate the consequences of changes in its ownership interest in a subsidiary that do
not result in a loss of control
 evaluate the consequences of losing control of a subsidiary during the reporting
period.

Interests in unconsolidated subsidiaries

In accordance with IFRS 10 Consolidated Financial Statements, an investment entity is

required to apply the exception to consolidation and instead account for its investment in a
subsidiary at fair value through profit or loss. [IFRS 10:31].

Where an entity is an investment entity, IFRS 12 requires additional disclosure, including:

the fact the entity is an investment entity [IFRS 12:19A]

 information about significant judgements and assumptions it has made in determining

that it is an investment entity, and specifically where the entity does not have one or
more of the 'typical characteristics' of an investment entity [IFRS 12:9A]
 details of subsidiaries that have not been consolidated (name, place of business,
ownership interests held) [IFRS 12:19B]
 details of the relationship and certain transactions between the investment entity and
the subsidiary (e.g. restrictions on transfer of funds, commitments, support
arrangements, contractual arrangements) [IFRS 12: 19D-19G]
 information where an entity becomes, or ceases to be, an investment entity [IFRS
12:9B]
An entity making these disclosures are not required to provide various other disclosures
required by IFRS 12 [IFRS 12:21A, IFRS 12:25A].

Interests in joint arrangements and associates

An entity shall disclose information that enables users of its financial statements to evaluate:
[IFRS 12:20]

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  the nature, extent and financial effects of its interests in joint arrangements and
associates, including the nature and effects of its contractual relationship with the
other investors with joint control of, or significant influence over, joint arrangements
and associates
 the nature of, and changes in, the risks associated with its interests in joint ventures
and associates.

Interests in unconsolidated structured entities

An entity shall disclose information that enables users of its financial statements to: [IFRS
12:24]
 understand the nature and extent of its interests in unconsolidated structured entities
 evaluate the nature of, and changes in, the risks associated with its interests in
unconsolidated structured entities.

REFERENCES

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1. www.iasplus.com
2. www.ifrsbox.com

3. MANS.K, BOSHOFF.A, GROUP STATEMENTS VOLUME 1, 16 TH EDITION,

DURBAN, LEXIS NEXIS
4. GROUP FINANCIAL REPORTING (2013) PRETORIA
5. Ernst and Young Publication on IFRS

6. KOPPESCHAAR.Z, ROSSOUW.J, (2014) DESCRIPTIVE ACCOUNTING, 19 TH

EDITION, PRETORIA, LEXIS NEXIS
7. Chartered Accountants Academy Study Pack by Anesu Daka

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