TTT

Notes

Section C
1. Consolidation question combined with ratio question – Consolidation will not
be prepare SOFP or SOPL, it will be calculate Goodwill, Calculate gain or loss
on disposal of subsidiary, functional currency under IAS 21 . How it is
combined with ratio question ?? There will be ratios of a subsidiary recently
acquired or recently disposed and you are expected to :
a. Calculate ratios for the group with and without the subsdiairy
b. Comment on i) performance of the group without the subsidiary and with
the subsidiary ii) evaluate whether the group’s decision to dispose or
purchase the new subsidiary was a appropriate decision ? was it at
appropriate price ? was it a good decision to buy or sell this subsidiary ?

Do try question on Pirlo and samba question the from June 2019 exam

Focus areas
1. Ratios and commenting skills – converting quantitative data to qualitative
comments ( cannot say increase or decrease, must say has it improved,
become better or worse or deteriorating) . Must focus on the why behind the
movements, what is the possible reasons for the changes. Must comment on :
a. Operational efficiency
b. Asset management
c. Profitability
d. Liquidity- short term and long term
e. Solvency
f. Financial risk exposure
g. Non-financial matters like strategic takeover of key employees

2. Key Standards :
IAS 36 – impairment –
IAS 37 – provision
IAS 23 – Borrowing cost
IAS 40 – investment Property
IAS 16 – PPE
Ias 20 – Government grant
IFRS 15 – Revenue recognition
IFRS 16 – Leasing
IFRS 9 – Financial instrument
IAS 12 – Income tax
IAS 7 – Cash flow ( mcq only)
IFRs 3 /10 – Business combination
IAS 28 – Associates (Equity accounting )
IFRS 11 (not in the syllabus) – Joint arrangements
IAS 33 – EPS
IAS 41 – Biological assets –
 IAS 21 – Individual companies (Foreign operations/Group are not included )
IAS 10 – Subsequent events

3. Conceptual Framework

Advice on exam techniques
1. Start with mcq ( 1 mcq = 2 marks, 1 mark = 1.95 mins ) move on to next
question when time is finished for that question
2. For MCQ, use elimination method, meaning ensure all other three options are
wrong before you confirm one answer.
3. In section C, do the ratio question first, there are easy marks there.
4. In single entity question, not all workings can be shown, some can be inside
the bracket. Please remember workings are not given marks but when you
get 48 or 49, then they look for workings to make it 50.
5. Not all calculations need to be in spreadsheet formula, some can be
calculated using calculator ( you only have 40 mins for the single entity
question)
6. To get guarantee pass, you need to do atleast 10 past year papers, from the
past 5 years. Mock exam result must be minimum 70.

School#MJPH

IFRS 9 – Slides

IFRS 3 /10 /IAS 28

Summary of consolidation principles
1. Consolidate as if the subsidiary is a wholly owned subsidiary
Company A has 60% in Company B and Company B has 80% in company C

Company A asset – 4000
Co. B asset – 6000
Co. C asset – 8000

What is company A’s percentage of shares in Company C ? 60%*80% =48%

What is the total asset of the group ? 18,000
Asset = Economic resource, controlled , potential benefits
Year end is 31 December 2018
Co A : revenue 10,000
Co. B Revenue 6,000
Co. C Revenue 7000
B was taken over in 1 July 2018
C was taken over in 1 September 2018
What is the revenue of the group ? 10,000+6,000*6/12+7000*4/12

 2. Only Parent’s equity is recorded in consolidated SOFP
Co A equity share capital 10,000
Co B equity 4,000
Co A invested 4,000 in Company

Company A issued shares of $4,000 with the nominal value of us$3,000
What is the new share capital of company A after the acquisition ?
Share capital 10,000+ 3,000
Share premium 1000

3 . Inter company balances need to be eliminated.
Co A – Receivable from B : 1000
Co B – Payable to A : 800

Eliminate the inter co balance : ??
Reconcile first before elimination
Reason for not reconciled balances :
1. Goods in transit or Cash in transit
2. Error
Reconciliation journal entry : DR Cash 200
CR Receivable or CR Payable 200
Elimination journal entry : DR Payable 800
CR Receivable 800 (assuming the receivable was
credited by 200)

3. Eliminate the unrealised profits from : inter co transfer of goods
Inter co transfer of assets
Journal entry to eliminate unrealised profits (URP)
Co A selling to Co B , goods worth 1500, cost is 1000, company B sold to third party
60%, 40% is still in warehouse
What is the urp ?
Profit = 500
Unrealised = 500*40% = 200
DR Cost of goods sold 200
CR inventory 200

Co A Revenue 10,000
COGS 4,000

Co A Revenue 8000
COGS 3,000

What is the group’s revenue, Group Cogs and group gross profit ?
Group Revenue : 10,000+8,000-1500=16,500
Group COGS : 4,000+3,000-1500 + 200=5,700
Group G.p = 10,800
Co. A’s PPE with a CV of 10,000 sold to Company B at 15,000. What is the impact ?
Co. A recorded a profit on disposal of 5,000 , which needs to be eliminated
Co. B’s depreciation is overstated by 5,000* depreciation rate 10% = US$500

4. Goodwill ( What we invest – what we get )
a. FV of consideration transferred (A)
i) Cash
ii) Shares Granted – Number of shares granted * Market price of
parent’s shares
iii) Deferred consideration – PV of future payment
iv) Contigent consideration - PV of future payment
v) Land (asset)
vi) Issuing loan bond

Less : (B)
b. FV of net asset of subsidiary at date of acquisition
i) share capital
ii) Retained earning
iii) Share premium
iv) FV adjustments – PPE / Intangible asset like CRM/ Customer
databased
v) Less Deferred tax liabilities on the FV adjustments

Add : FV of NCI ( c )
Number of shares of NCI * Market price of subsidiary shares


Goodwill at the date of acquisition
Impairment during the year ( )
Goodwill at the year end
5. Group Retained earning/ Revaluation Reserves (Post acquisition )

Parents Subsidiary
A. Retained at Year End
Less Retained at Date of acquisiton
Post Acquisition Retained earning XXXX xxxx

B. Consolidation adjustments
i) URP XXX XXX
ii) Excess depreciation from FV adjustments
at the date of acquisition XXX
iii) Goodwill impairment XXX
iv) Finance cost on the deferred consideration (unwinding)
xxx
---------- ----------
A B

C . Group Share of Subsidiary’s post acquisition RE
B* Parent’s %

Total Group Retained earning XXXX

6. NCI (SOFP)
a. NCI at date of acquisition
Plus
b. NCI’s share of post acquistion RE
c. NCI’s share of post acquisition RR
Total NCI at year end

NCI (SOPL)
Subsidiary stand alone profit
+/- Consolidation adjustment that affect subsidiary ONLY e.g urp, excess
depreciation , gw impairment
= A
A* NCI%

Associates (IAS 28)
SOPL
Gross Profit
Operational Expense
Operating profit ( PBIT)
Share of associate’s post tax profit
Finance cost
PBT
Tax
Profit for the year
OCI
Share of Associate’s OCI

SOFP
Investment in Associate
Cost of investment
Plus : share of associate’ s post investment RE
Plus : Share of associate’s post investment RR
Less : dividents received
Less : URP for downstream transactions ( URP = Profit * % of goods in
warehouse*% of ownership)
Less : impairment

Disposal of subsidary
At invidiual level : Disposal proceeds – cost of investment – tax on the disposal gain

At Group level
Disposal proceeds
Less : Group’s share net asset at date of disposal (less NCI’s portion )
Less : Goodwill at the date of disposal


IFRS 16 Leasing
Impact is on Lessee , Lessor will still use IAS 17 where there is distinction between
finance lease and operating lease

Lease definition – Identify a lease – distinguish it with service contract
a. Specific asset
b. There is no substitution rights
What if parent lease asset to subisidary ?? Lease asset or PPE ? – PPE because from
group’s perspective the asset is being used.

Initial Measurement of RTU Asset
A. IM of lease liablities
B. Advance payments
C. Direct cost
D. Dismantiling cost ( DR RTU , CR Provision )

Initial measurement of lease liablities
PV of Lease payment over the probable lease term

Subsequent measurement of RTU Asset
Depreciation of RTU asset – RTU will be depreciated over lease term or useful life of
asset ? whichever is shorter

Subsequent measurement of Lease liablity
Payment in arrears :
b/d +Interest expense(10%) – payment = Closing balance
Year 1 : 50,000+5,000-8,000=47,000
Year 2 : 47,000+4,700-8,000= 43,700
What is the finance cost for year 1 ?=$5,000
What is the current liablity in year 1 ? = 47,000-43,700= $3,300
What is the non- current liablity in year 1 ? = $43,700

Payment in advance
b/d-payment+interest = closing balance
Year 1 : 50,000-8,000+4,200=46,200
Year 2 : 46,200-8,000+3820=42,020

What is the finance cost in year 1 : 4,200
What is the current liablity in year 1 : 8,000
What is the non current liability in year 1 : 46,200-8,000=38,200
Sale and leaseback
If the sale is legit, meaning IFRS 15 criteria is met, meaning majority of control is
transferred ( e.g remaining life of asset is 25 years, leaseback for 2 years, meaning
23/25 years, meaning 92 percent of control is transferred) , then the leasback is
recorded as Right to use asset, how to calculate the value of the RTU ?
CV of the asset * (PV of the lease liablity/ FV of the asset ) ( indicates percentage of
asset’s control retained)
e.g CV of building is 600,000
sold for $750,000 (FV of the asset)
Lease back for 2 years
Pv of lease liablity is 150,000
What is the RTU ? 600,000* (150,000/750,000)
20% retained
=600,000*20% retained = $120,000 is RTU

What is the gain on disposal of this building ?
Gain = 750,000-600,000=150,000*80% transferred =120,000

Situation A: What if the building was sold for 800,000? Remember that the FV of the
building is 750,000.
There is no impact on RTU or the gain on disposal. Any amount this is sold above the
FV is considered as a loan / financial liablity of $50,000

Journal for situation A
Cash DR 800,000
RTU DR 120,000
Lease liablity – 150,000
Buidling CV - 600,000
Gain on dispoal- 120,000
Loan – 50,000

Situation B: What if the building was sold for 700,000? Remember the FV of the
building is 750,000
The difference is considered as prepayment for the lease liabilities

Journal for situation B
Cash DR 700,000
Prepayment DR 50,000
RTU DR 120,000
Lease liability – 150,000
Building CV – 600,000
Gain on disposal- 120,000

If IFRS 15 criteria is not met, means the sale is not legit, then the whole sale
proceeds are classified as financial liablities and the asset is recognised back
in the books because it is only collaterised with the lessor.