1

AFA II
Business Combination

Control: 1% to 19% - Cost Method Control: 20% to 50% - Equity Method

Purchase 1000 shares of X Com. @ Tk. 40 at 1.1.15: Association (Significant Influence)
Investment Dr. 40000
Cash/Bank Cr. 40000 Purchase 10,000 shares out of total 40,000 shares
of X Com. @ Tk. 40 (Face value tk. 10) at 1.1.15:
Market price is tk 38 at 30.03.15: Investment in X com. Dr. 400000
Loss on investment Dr. 2000 Cash/Bank Cr. 400000
Investment Cr. 2000
Market price is tk 38 at 31.12.15:
Market price is tk 41 at 30.06.15: No entry
Investment Dr. 3000
Gain on investment Cr. 3000 Profit of X Com. Is tk. 500000 in 2015:
Investment in X com. Dr. 125000
Market price is tk 37 at 31.12.15: Income from Association Cr 125000
Loss on investment Dr. 4000
Investment Cr. 4000 Dividend declared @ 10%:
Bank/Cash/ Dividend Receivable Dr. 20000
Dividend declared @ tk 2 per share at 31.12.15 Investment in X com. Cr 20000
Investment Dr. 2000
Dividend income Cr. 2000 Sales @ tk. 60 per share:
Bank Dr. 600000
Investment in X com. Cr. 505000
Gain on disposable Investment in X
com. (B.F) Cr. 95000

Control: 51% to 100% - Acquisition (Consolidation)

Goodwill: 1. Partial Goodwill Method 2. Full Goodwill Method
Working 1- Group Structure:
A Ltd.

80%
B Ltd. – Subsidiary
Working 2- Fair value of Net Assets of Subsidiary:
At Acquisition Date At Reporting Date
Share Capital *** ***
Retained earnings *** ***
General Reserve -- ***
Fair value adjustment *** ***
Adjustment for Depreciation -- (***)
Unrealized profit (URP) - Upstream (net of -- (***)
tax)
Fair value of contingent liability (***) (***)
*** ***
Post acquisition Profit ***
** Income statement has to be prepared, if retained earnings is not given at reporting date.
Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB
 2

Working 3- Unrealized profit (URP):

Goods in inventory ***
Goods in transit ***
Total Ending inventory (Inter-group) ***

Mark-up 20 %: Cost + Profit- 100 + 20 % = 120%,

20
URP = Total Ending inventory (Inter-group) × 120
Margin 20 %: URP = Total Ending inventory (Inter-group) × 20 %
Working 4- Goodwill:
Cost of investment: NCI as per Question
Cash **
instruction. Proportionate
Share in Parent to Subsidiary (@ price of Acquisition Date) **
interest is considered if
Deferred Consideration (PV of future payment) **
Add: Non-Controlling Interest (NCI) ** fair value of NCI is not
Less: Fair value of Net Assets of Subsidiary at acquisition date ** given, NCI = Fair value
Goodwill at acquisition ** of Net Assets of
Less: Impairment (up to reporting date i.e. previous+current year) ** Subsidiary at acquisition
Goodwill at reporting date ** date × Non-controlling %

Working 5- Non-Controlling Interest (NCI):

Beginning Balance (NCI at acquisition) ***
Add: Share of post acquisition profit ***
Less: Share of Impairment of Goodwill (Impairment× Non-controlling %)****
Less: Decrease in NCI due to further investment by Parent ***
NCI at reporting date ***
* It is not deducted, if proportionality interest is used.

Working 6- Income from Association:

Share of post-investment profit ***
(Retained earnings at reporting date - Retained earnings at acquisition date × controlling %))
Working 7- Group Retained Earnings:
As per book ***
Add: Share of post acquisition profit from Subsidiary ***
Add: Share of post-investment profit (Income from Association) ***
Add (Less): Gain or Loss on disposal ***
Add (Less): Adjustment for further control in Subsidiary ***
Less: Unrealized profit (URP) with closing inventory- Downstream *** Net of tax
*
Less: Unrealized profit (URP) with sales of plant (Net of tax) ***
Less: Share of Impairment of Goodwill (Impairment× controlling %) ***
Add: Inter-company financial expenses ***
Add: Dividend declared by subsidiary to parent ***
Add: Contingent assets (event after the balance sheet date)* ***
Share of post acquisition profit from Association up to acquisition date *** Transfer
Gain/Loss on re-measurement of carrying value & fair value of investment *** from A to S
***
* It is shown in B/S under the head “Other Receivable”. Other Receivable Dr., Retained Earnings Cr.
** Unrecorded / Unrecognized share of dividend receivable from subsidiary will be added with group
retained earnings and share of subsidiary’s will be shown in consolidated B/S under head “Dividend
Payable”.
Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB
 3

Working - Tax expenses:

Tax expenses as per income statement ***
Add: Deferred tax liability for URP with opening inventory ***
Less: Deferred tax asset for URP with closing inventory ***
Less: Deferred tax asset for URP on sales of plant* ***
Total Tax expenses ***

* URP on sales of plant = Net book value after transfer less depreciation - Net book value before
transfer less depreciation

Working – Control to control adjustment:

Gain from deduction of NCI ***
Less: Cash paid ***
Difference ***
Working – Gain or Loss on disposal of control in Subsidiary:
Proceeds (Cash received from disposal) ***
Add: Fair value of remaining interest ***
Less: Carrying value of subsidiary:
Net assets ***
Goodwill ***
Less: NCI *** (***)
Gain (Loss) on disposal ***
Working – Income from Association at current period:
Months as association
Income for the year × × NCI%
12

Consolidated Statement of Comprehensive Income

Sales Revenue (P + S – Inter-company sales of inventory both upstream & downstream)
Less: CGS (P + S – Inter-company sales/purchase of inventory both upstream & downstream –
URP with opening inventory + URP with closing inventory both upstream &
downstream at gross amount + Additional depreciation)
Gross Profit
Management fee revenue (P + S – Inter-company M.F.R)
Profit on sale of plant (P + S – Inter-company Profit on sale of plant)
Gain / Loss on re-measurement
Income from Association at current period
Total Income
Administration expenses (P + S – Inter-company A.E)
Depreciation (P + S – Excess depreciation for inter-company transfer of assets)
Management fee expenses (P + S – Inter-company M.F.E)
Finance cost (P + S – Inter-company F.C + Finance cost on deferred consideration)
Goodwill impairment for current period
Other expenses (P + S – Inter-company)
Profit before tax
Tax expenses (w- )
Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB
 4

Profit for the year

Other comprehensive income:
Gain on revaluation assets
Total Comprehensive Income
Profit for the year attributable to:
Equity holders of the Parent (B.F)
NCI (w- )
Monhs as subsidiary
[NCI = (Subsidiary’s income for the year × 12
– Dep. adj. – Impairment) × NCI%]

Total Comprehensive Income attributable to:

Equity holders of the Parent (B.F)
NCI (Above + Share of other comprehensive income)

Consolidated Statement of Financial Position

Non-current Assets:
PPE (P + S + Fair value increment – Depreciation of fair value increment from
acquisition to reporting date – URP on inter-company sales of PPE at gross amount)
Goodwill (w- )
Investment in Association (Cost of investment in Association + Income from Association, w- )
Other investment (excluding subsidiary & association)
Deferred tax assets (P + S + D.T.A of URP with closing inventory, upstream & downstream)
Total Non-current Assets
Current Assets:
Inventory (P + S + Goods in transit – URP with closing inventory both upstream &
downstream at gross amount, w- )
Receivables (P + S – Inter-company receivables)
Bank & Cash (P + S)
Total Current Assets
Total Assets
Equity:
Share capital (P + Shares exchange between P & S)
Share premium [(Market price – Face value) × Number of Shares exchange]
Revaluation surplus (P + Share of Revaluation surplus of subsidiary)
Retained earnings (w- )
NCI (w- )
Total Equity
Liabilities:
Current:
Overdraft (P + S)
Accounts payables (P + S – Inter-company payables)
Tax payable (P + S)
Deferred consideration (PV of D.C + Financial cost, w- )
Long term:
Debenture (P + S – Inter-company debenture)
Loan notes (P + S – Inter-company loan)
Total Liabilities
Total Equity & Liabilities
Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB
 5

EPS
Considering for determining Weighted Average No. of Shares Outstanding:
Basic EPS:
 Fraction for the year
 Restatement of the shares outstanding before or prior to the stock dividend or stock splits
(Because stock dividend or stock split does not change the shareholders’ total investment, if
only increase number of common shares)
 If a stock dividend on split occurs after the end of the year, but before the financial statements
are issued, Weighted Average no. of Shares Outstanding for the year must be restated.
Comprehensive information also must be adjusted for the stock dividend or split.
Dilutive EPS- Convertible Securities:
 The if-converted method for a convertible bond assumes:
i. The conversion of the convertible securities at the beginning of the year (or on the
time of issuance of the security, if issued during the period)
ii. The elimination of related interest, net of tax.
 If the effect of convertible securities (Interest, net of tax ÷ Shares assumed to be issued) is
greater than basic EPS, it is anti-dilutive.
 The most advantageous conversion rate available to the holder is used. (if conversion can be
made in different dates then highest conversion rate is used)
 Preferred dividend is not subtracted from net income, because it is assumed that the
convertible preferred stocks are converted and are outstanding as common stock for the
purposes of computing diluted EPS.
Dilutive EPS- options or warrants:
Incremental number of shares are added to the Weighted Average no. of Shares Outstanding,
if fair/market price > option or warrant price. It is called treasury stock method.
𝑴. 𝑷−𝑶. 𝑷
Incremental number of shares = 𝑴. 𝑷
× No. of option or warrant

Dilutive EPS- Contingent issue agreement:

In business combinations, the acquirer may promise to issue additional shares in future (referred
to as contingent shares), if certain conditions are met. Sometimes the company issues these
contingent shares as a result of a passage-of-time condition or upon the attainment of a certain
earnings or market price level. If this passage-of-time condition occurs during the current year,
or if the company meets the earnings or market price by the end of the year, the company
considers the contingent shares as outstanding for the computation of diluted earnings per share.
 If share of beginning of the year are not given, it has to be calculated.

 Minority interest including share of loss on discontinued activities, tax rebate on loss on
discontinued operations and income tax are deducted from profit from continuing operations
to determine profit for the year available for the common stock holders.
Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB
 6

Branch Account

Branches

Home Branch Foreign Branch

Dependent Br. Independent Br.

Recording Methods:
1. Debtors system
a. Cost price method
b. Invoice price method
2. Stock & Debtors system
3. Final Accounts system

Branch Account (Cost price method)

Date Particulars Tk. Date Particulars Tk.
Jan 1 Balance b/d: Jan 1 Balance b/d:
Stock Creditors
Debtors Outstanding expenses
Petty cash Bank a/c:
Furniture Cash sales
Prepaid expenses Collection from Debtors
Dec 31 Goods dent to Branch Remittance from Branch
Bank a/c: Goods sent to Branch (Returned)
Rent, rates & Taxes Dec 31
Petty cash (Remittance to Balance c/d:
Branch) Stock
Balance c/d: Debtors
Creditors Petty cash
Outstanding expenses Furniture
General P/L A/c Prepaid expenses
** Credit sales, Abnormal loss, Sales Return, Bad debts, Discount allowed, Depreciation, Petty cash
expense paid by Branch, Shortage & Surplus of stock, profit or loss from sale of fixed assets etc are
ignored while preparing Branch account under this method.

Branch Account (Invoice price method)

Date Particulars Tk. Date Particulars Tk.
Jan 1 Balance b/d: Jan 1 Balance b/d:
Stock Creditors
Debtors Outstanding expenses
Petty cash Bank a/c:
Furniture Cash sales
Prepaid expenses Collection from Debtors
Dec 31 Goods dent to Branch Remittance from Branch
Bank a/c:
Rent, rates & Taxes Dec 31 Goods sent to Branch (Returned)
Petty cash (Remittance to Balance c/d:
Branch) Stock
Balance c/d: Debtors
Creditors Petty cash
Outstanding expenses Furniture
Stock reserve a/c (Loading on closing Prepaid expenses
stock) Abnormal loss a/c

Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB

 7

Goods sent to Branch (Loading on Stock reserve a/c (Loading on

returned goods) opening stock)
Abnormal loss a/c (Loading on Goods sent to Branch (Loading on
Abnormal loss) Goods sent to Branch)
General P/L A/c

% 𝐨𝐟 𝐩𝐫𝐨𝐟𝐢𝐭
* Loading on Invoice Price = 𝟏𝟎𝟎+% 𝐨𝐟 𝐩𝐫𝐨𝐟𝐢𝐭 i.e. 25%: 25/125
* When good are sold above Invoice Price:
Branch Stock A/c Dr. @ Actual selling price - Invoice Price
Branch Adjustment A/c Cr.

* When good are sold under Invoice Price:

Branch Adjustment A/c Dr. @ Invoice Price - Actual selling price
Branch Stock A/c Cr.

Final Accounts system:

 All items of trading and profit & loss A/c are to be converted into cost price.
 Branch A/c will be a personal A/c in nature.
 Branch trading and profit & loss A/c are merely a memorandum A/c.

Memorandum Branch trading and profit & loss A/c

For the year ended--------
Particulars Tk. Particulars Tk.
Opening stock ** Sales:
Goods dent to Branch ** Cash **
Less: Returned to H.O ** ** Credit **
Wages ** Less: Returned inward (**) **
Gross Profit c/d ** Closing stock **
** **

Salaries ** Gross Profit b/d **

Rent **
Branch expenses ** Miscellaneous income **
Bad debts **
Allowance to customers **
General expenses **
Depreciation **
Discount allowed **
Provision of discount **
General Profit & Loss A/c **
**
**

Independent Branch:
 Treatment for goods-in-transit and cash-in-transit is given in the books of Head Office:
Goods-in-transit Dr.
Cash-in-transit Dr.
Branch AccountCr.

 Head office expenses charged to Branch:

Branch AccountDr. Head Office Expenses A/c Dr.
Expenses A/c Cr. Head Office A/c Cr.
Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB
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(In the books of Head Office) (In the books of Branch)

 Depreciation:
 If Branch asset A/c is maintained at Branch:
Depreciation A/c Dr.
Fixed asset A/c Cr.

 If Branch asset A/c is maintained at head Office; both H.O & Branch pass the
required entry for depreciation:
Branch Fixed asset A/c Dr.
Bank A/c Cr. @ paid by H.O
Branch A/c Cr. @ paid by Branch

Branch AccountDr. Depreciation A/c Dr.

Branch Fixed asset A/c Cr. Head Office A/c Cr.
(In the books of Head Office) (In the books of Branch)

 Inter-Branch-Transaction:
Head office: Sending Branch: Receiving Branch:
Receiving Branch A/c Dr. Head office A/c Dr. Good send to H.O Dr.
Sending Branch A/c Cr. Good send to H.O Cr. Head office A/c Cr.

* Remittance is excluded from P/L A/c & B/s.

* Head office A/c or Branch A/c is excluded from P/L A/c & B/s.
* Cash-in-transit is included in B/S.
* Debtors, Creditors, Stock, Cash etc are converted into home currency by B/S date’s the exchange
rate.
* Sales, CGS, expenses are converted into home currency by average exchange rate.
* Head office A/c or Remittance is converted by actual amount received or sent by H.O.
* The balancing figure of Currency Converted Trial Balance is “Difference on exchange” that is
shown in P/L A/c.
* Commission on Branch manager is calculated at foreign currency then it is converted into home
currency.
* Shipments to Branch / Shipments from H.O. is recorded as Credit / Debit, if Periodic Inventory
System is used.
* Inventory / Inventory-H.O is recorded as Credit / Debit, if Perpetual Inventory System is used.

Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB

 9

Insolvency Accounts
Statement of Affairs
Gross Liability Expected Assets Book Estimated
Liability to Rank Value to produce
** Unsecured creditors as per list A ** Properties as per list E:
Cash in hand & at bank ** **
Fully scurried creditors as per list B ** Stock in trade ** **
(-) Estimated value of securities ** Machinery ** **
Surplus ** Trade fixtures, fittings ** **
Transfer to list C ** Furniture ** **
** Life policies ** **
Surplus carried to contra ** Others ** **
--
Partly scurried creditors as per list C ** Book Debts as per list F:
(-) Estimated value of securities ** Good ** **
** Doubtful ** --
Creditors for rent, tax, salaries & wages Bad ** --
etc as per list D ** Estimated to produce **
Deducted as per contra **
-- Bills receivable as per list G: ** **

Surplus from securities in the

hands of fully scurried creditors -- **
(as per contra)
** **

Deducted creditors for **

preferential rent, tax, salaries &
wages etc (as per contra)

Deficiency as explained in list H

** **

List H: Deficiency Accounting

Excess of assets over liabilities (Capital) ** Excess of liabilities over assets **

Net profit arising from carrying on business ** Net loss arising from carrying on business **
Bad debts **
Income or profit from other sources **
Other business expenses than usual (Drawings) **
Deficiency as per statement of Affairs **
Other losses:
Speculation loss **
Realization loss ** **
Surplus as per statement of Affairs **

** If net profit (loss) is not given, opening balance sheet has to be prepared and balancing
figure will be profit (loss).

Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB

 10

Income Tax

 Tax Base < Carrying value of an asset for accounting purpose Taxable Temporary
Difference Deferred Tax Liability
 Tax Base > Carrying value of an asset for accounting purpose Deductible Temporary
Difference Deferred Tax Assets
 Tax Base < Carrying value of a liability for accounting purpose Deductible Temporary
Difference Deferred Tax Assets
 Tax Base > Carrying value of a liability for accounting purpose Taxable Temporary
Difference Deferred Tax Liability

* Unearned Revenue is included in tax Base

𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑎𝑠 𝑝𝑒𝑟 𝑡𝑎𝑥 𝑟𝑒𝑡𝑢𝑟𝑛
* Taxable Income = 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

* Pre-tax financial Income / Income before income tax:

Taxable income **
Add/ (Less): Excess / (Understated) depreciation on tax return **
Add: Tax free interest (Ex. Interest on Municipal Bond) **
Less: Unearned revenue **
Pre-tax financial Income / Income before income tax **

 Income tax payable = Taxable income × Tax Rate

 Ending Deferred Tax Assets = Deductible Temporary Difference × Tax Rate
 Ending Deferred Tax Liability = Taxable Temporary Difference × Tax Rate
 Current Year’s Deferred Tax Assets = Ending Deferred Tax Assets - Beginning
Deferred Tax Assets
 Current Year’s Deferred Tax Liability = Ending Deferred Tax Liability - Beginning
Deferred Tax Liability
 Income tax expense = Income tax payable + Current Year’s Deferred Tax Liability -
Current Year’s Deferred Tax Assets

Journal Entries:
1st year
2nd year
Income tax expense Dr. @ B.F
Income tax expense Dr. @ B.F
Deferred Tax Assets Dr. @ Current Year’s
Deferred Tax Liability Dr.
Income tax payable Cr.
Income tax payable Cr.
Deferred Tax Liability Cr. @ Current Year’s
Deferred Tax Assets Cr.

* Income tax expense section on income Statement:

Income before income tax **
Less: Income tax expense:
Current tax i.e payable **
Deferred Tax **
**
Net Income **

Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB

 11

Deferred Tax (Corporate Reporting)

 Current Tax: Tax payable to tax authority in relation to current trading activities.
 Current tax liabilities (assets) for the current and prior periods are measured at the amount
expected to be paid to (recovered from) the tax authority. Future tax rate is used when the
asset is expected to be recovered or the liability to be paid.
 Current tax is recognized as income or expense and included in P/L a/c.
 Adjustment is made to the opening balance of retained earnings due to either a change in
accounting policy that is applied retrospectively or to the correction of a material error.
 Permanent differences arise when items of revenue or expense is included in accounting
profit but excluded from taxable profit.
 Temporary differences arise when items of revenue or expense is included in both
accounting profit taxable profit but not in same accounting period.
 Tax base of an asset = Carrying Amount – Future tax deductable amount
Or, if economic benefits are not taxable in future then TB = CA
 Tax base of a liability = Carrying Amount – Future tax deductable amount
Or, if revenue received in advanced will not be taxable in future, then tax base for
unearned revenue = CA
 Tax base of an asset or a liability is equal to its earning amount for the following 3 cases:
i. Accrued expenses that have already been deducted.
ii. A loan payable that will have no tax consequences.
iii. Accrued income that will never be taxable.
 CA of asset > TB of asset → Taxable Temporary Difference → Deferred Tax Liability
 CA of liability > TB of liability → Deductable Temporary Difference → Deferred Tax Asset
 When capital allowances are cumulatively greater than accounting depreciation, it is
referred to as “accelerated”.
 Temporary differences with no deferred tax impact:
i. Initial recognition of goodwill
ii. Initial recognition of asset or liability for business combination
 Average rate (in case of progressive tax rate) is expected to calculate deferred tax.
 Deferred tax asset or liability should not be discounted.
 Only the movement in the deferred tax asset or liability on the B/S is recorded;
Tax Charge Dr. DTA Dr.
DTL Cr. Tax Charge Cr.
 DTA should only be recognized to the extent that it is probable that taxable profit will be
available in future against which it can be utilized.
 When can we be sure that sufficient able profit will be available against which a DTD can
be utilized?
i. There is sufficient Taxable Temporary Difference; and
ii. Taxable Temporary Difference and Deductable Temporary Difference relate to the
same entity and same tax authority
iii. Taxable Temporary Difference is expected to reverse either:
 In the same period as Deductable Temporary Difference; or
 In period in which a tax loss arising from deferred tax asset can be utilized.
 At each reporting date an entity should reconsider: (a) the availability of future taxable profits and
(b) whether part or all of any unrecognized DTA should now be recognized.
Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB
 12

 Taxable income =Accounting profit + Accounting Depreciation + Inadmissible expenses

 Taxable profit = Taxable income – Depreciation for tax purpose
 Current tax expense = Taxable profit × Tax rate
 Current tax income = Taxable loss × Tax rate
 Deferred tax expense (income) = Closing DTL – Opening DTL
 Where revaluation is recognized in P/L, then no deferred tax arises. But where revaluation is
recognized as other comprehensive income, then tax base of the asset is not adjusted and deferred
tax arises.
 Retirement benefit costs are not deducted in determining taxable profit until the entity pays. So
tax base in nil and DTA is recognized.

Group Scenarios:
 An upwards fair value adjustment will arise TTD and the resulting DTL is recorded in
consolidated accounts by:
Goodwill (Group share) Dr.
DTL Cr.
 Carrying Amount = (Net asset at reporting date × % of control) + purchased goodwill
 Tax base = Investment in subsidiaries
 Temporary difference = Group share of post acquisition profit
= Change in net asset since acquisition × % of control
 Where a foreign operation’s taxable profit or loss is determined in foreign currency, changes in
the exchange rate give rise to taxable or deductable temporary differences.
 Deferred tax on unrealized profit on inter-group trading is provided at the receiving company’s
tax rate.
 Deferred tax asset arise where asset’s carrying value is reduced to a fair value less than its tax
base.
Deferred Tax Asset Dr.
Goodwill Cr.
 Deferred Tax Asset of a subsidiary may not be included in business combination but may be
realized subsequently. If recognized within 12 months of the acquisition date and resulting
from new information about circumstances existing at the acquisition date, goodwill should
be credit and further amounts; if any, should be recognized in P/L. If recognized outside the
12 months or not resulting from new information about circumstances existing at the
acquisition date, the credit entry should be made to profit or loss.

Prepared by Md. Sahadat Hossen, Lecturer, School of Business Administration, PUB