FINANCIAL REPORTING

LECTURE NOTE

ON

CONSOLIDATED FINANCIAL
STATEMENT

FOR

ICAN-SKILL LEVEL

Taiwo Ewedairo FCA, FCTI, CFIP, ACCA-IFRdip, MSc

08069201515, 09010640068

2022

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FINANCIAL REPORTING

GROUP ACCOUNTS

Outline:

 Introduction to group accounts

 Purpose of group accounts
 Relevant IFRS for preparing group accounts
 Exemptions from preparing group accounts
 Group accounting year end
 Group accounting policies
 Tutorial notes
 Introducing group statement of financial position
 Procedures involved in preparing group statement of financial position
 Treatment of goodwill in group accounts
 Treatment of post-acquisition profit in group accounts
 Treatment of pre-acquisition in group accounts
 Determining the date of acquisition in group accounts
 Treatment of cost of investment in group accounts
 Treatment of professional on acquisition of subsidiary by parent
 Treatment of fair value adjustment of subsidiary’s net assets
 Treatment of inter-company transactions
 Treatment of provision for unrealized profit (PURP) on inventory in group statement
of financial position
 Explaining mark-up and margin
 Treatment of provision for unrealized profit (PURP) on inter-company transfer of
property, plant and equipment in group accounts
 Introducing mid-year acquisitions in group accounts
 Treatment of dividends paid by subsidiary
 Introducing group statement of profit or loss and other comprehensive income
 Treatment of intra-group purchases and sales in group accounts
 Treatment of intra-group interest received and interest paid in group accounts
 Treatment of intra-group dividend in the group profit or loss statement
 Treatment of unrealised profit in the group statement of profit or loss
 Treatment of fair value adjustment and extra depreciation in group profit or loss
 Treatment of goodwill and impairment in the group profit or loss
 Treatment of non-controlling interest in the group statement of profit or loss
 Introducing mid-year acquisition to group statement of profit or loss
 Introducing group other comprehensive income
 Introducing group statement of changes in equity
 Introducing Associates
 Explaining equity accounting principles
 Tutorial notes
 Questions

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FINANCIAL REPORTING

INTRODUCTION TO GROUP ACCOUNTS

The ordinary shareholders of an entity are generally referred to as risk bearers and
owners of the entity. Both individual and corporate entities invest in equity instruments of
business entities to obtain benefit (e.g. dividends) from them. For instance, if an entity
has 10,000,000 N1 ordinary shares and SOROSOKE PLC invested in it as follows:

i. 3,000,000 ordinary shares. This is 30% investment (3,000,000/10,000,000 X 100%];

or
ii. 6,500,000 ordinary shares. This is 65% investment (6,500,000/ 10,000,000 X 100%];
or
iii. 1,850,000 ordinary shares. This is 15% investment (1,500,000/10,000,000 X 100%]

The point I am making out of the above scenario is that purchasing or investing in
ordinary shares of an entity by another entity can be categorised into three:

a. Between 0 – 20% - This is a case of Ordinary investment

b. Between 20 – 50% - This is a case of Associate
c. Above 50% - This is a case of Subsidiary

Now, where an entity invests in more than 50% of another entity, the implications are:

i. It gives the first company (investor) control of the second company (investee).
ii. It gives the first company (i.e. parent company, P) enough voting power to
appoint all the directors of the second company (The subsidiary company, S),
Why? Because of control
iii. The parent entity is in effect, now able to manage the Subsidiary as if it is merely a
department of the Parent company, rather than a separate entity
iv. Legally, Parent (P) is an entity and Subsidiary (S) is an entity, meaning P and S
remain distinct, but in accounting and in economic substance, both (P and S)
can be regarded as a single unit (i.e. a group).

Thus, the word control is important to establish parent-subsidiary relationship. The IFRS
recognises this state of undertakings and requires that a parent company should
produce consolidated financial statements to show the position and results of the whole
group as if they are one entity.

The key principle underlying group accounts is the need to reflect the economic
substance of the parent-subsidiary relationship.

P P is an individual legal entity.

S is an individual legal entity.

Controls Group But, because P control S,

they form a single entity – group

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FINANCIAL REPORTING

PURPSOE OF GROUP ACCOUNTS

i. To present financial information about a parent undertaking and its subsidiary

undertakings as if they are a single economic unit.
ii. To show the economic resources controlled by the group i.e. both parent and its
subsidiaries.
iii. To show the obligations of the group i.e. both parent and its subsidiaries.
iv. To show the results the group achieves with its resources
v. To comply with IFRSs requirements
vi. To comply with the statutory framework of the country.

By now you may be thinking that, consolidating the results (i.e. profit or loss) and net
assets of group members so as to display the group’s affair as those of a single
economic entity conflicts the strict legal view, where legally, each company is an
artificial person, distinct from its owner. But applying the single economic unit concept is
a good example of the accounting convention of showing economic substance over
legal form [substance over form]. Please remember this when you are asked to give
examples of substance over form application in examination.

The best way to prepare the financial statement of group is to imagine that all
transactions of the group had been carried out by a single equivalent company and to
prepare:

• Group statement of financial position (P + S)

• Group statement of profit or loss and other comprehensive income (P + S)
• Group statement of changes in equity (P + S)
• Group statement of cash flows (P + S)
• Group accounting policies and explanatory notes to accounts.

THE RELEVANT IFRSs FOR GROUP ACCOUNTS

IAS 27 Separate Financial statement

IAS 28 Investment in associates and Joint ventures

IFRS 3 Business combination

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint arrangements

IFRS 12 Disclosure of Interest in other entities

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FINANCIAL REPORTING

Quiz: How is group financial statement generated?

Answer:

Each company in the group prepares its own annual financial statements in the usual
way. From the individual company’s financial statements the parent now generates
group financial statements.

IFRS 10 consolidated financial statement uses the following definitions:

Parents – an entity that controls one or more entities

Subsidiary – is an entity that is controlled by another entity (known as the parent)

Control of an investee – an investor controls an investee when the investor is exposed, or

has right to variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee.

Therefore, consolidated financial statement should be prepared once the parent has
control over the subsidiary (for examination purpose control is established with a degree
above 50% voting right).

Control is the sole basis for consolidation as explained in IFRS 10 and comprises the
following three elements

• the investor has power over the investee, and

• the investor is exposed, or has rights, to variable returns from its involvement with
the investee, and
• the investor has the ability to affect those returns through its power over the
investee

Consolidated financial statements present the assets, liabilities, equity, income, expenses
and cash flows of the parent and its subsidiaries as if they were a single economic entity.

IFRS 10 identifies a range of circumstances that may need to be considered when

determining whether or not an investor has power over an investee, such as:

• exercise of the majority of voting rights in an investee

• contractual arrangements between the investor and other parties
• holding less than 50% of the voting shares, with all other equity interests held by a
numerically large, dispersed and unconnected group
• holding potential voting rights (such as convertible loans) that are currently
capable of being exercised
• the nature of the investor's relationship with other parties that may enable that
investor to exercise control over an investee.

It is therefore possible to own less than 50% of the ordinary shares of another entity and
to still exercise control over it. For ICAN examination purpose, controls start from above
50%.

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FINANCIAL REPORTING

EXEMPTION FROM PREPARATION OF GROUP FINANCIAL STATEMENT

IFRS 10 permits a parent company not to present group financial statements provided:

1. It is a wholly – owned or partially – owned subsidiary where owners of the non –

controlling interest do not object to the non - preparation.

If company P acquires 80% interest in S, and S acquires 60% in Z

P – Ultimate parent entity

80%

S – Intermediate parent entity

60%

Z - Sub – subsidiary of P

You will agree with me that company S is a parent to company Z, but company S does
not own itself. It is partially owned by P (if company P had acquired 100% interest is
company S, then we can say company S is wholly owned by P), therefore any parent
company who is also owned by another parent company cannot present consolidated
financial statement as stated above.

2. The parent’s debt or equity instruments are not currently traded in a domestic or
foreign market e.g. Nigerian stock Exchange Market.

3. The parent 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 i.e. the company is not in the process of ensuring that any of its debt or
equities instruments are traded on a domestic or foreign market and

4. The ultimate parent company produces consolidated financial statements that

comply with IFRS and which are available to the public.

Where this is the case, i.e. where exemption from the preparation of financial statements
occurs, IAS 27seperate financial statements requires that the following disclosures are
made:

i. The fact that consolidated financial statements have not been presented;
ii. A list of significant investment [subsidiaries, joint ventures and associates, etc.]
including:
a. The name of those investees.
b. The principal place of business (and country of incorporation, if different) of
those investees.

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FINANCIAL REPORTING

c. Its proportion of the ownership interest (and its proportion of the voting
rights, if different i.e. its % of shareholdings) held in those investees; and
iii. The bases on which those investments listed above have been accounted for
in its separate financial statements.

Other reasons, though not permitted by IFRS, where directors of a company may not or
may seek to exclude a subsidiary from consolidation include;

i. Where the subsidiary undertakes dissimilar or different activities and / or operates

in different locations, thus being distinctive from other members of the group.
ii. Where the subsidiary has accumulated losses or has significant liabilities which the
directors would prefer to exclude from the group accounts to improve the overall
reported financial performance and position of the group.
iii. Where in the opinion of the directors, they seek to exclude a subsidiary from
consolidation in order to disguise its true size and extent.
iv. Where the directors seek to exclude a subsidiary from consolidation because of
poor financial position of the subsidiary.
v. Where there exists a long-term restriction affecting the subsidiary from transferring
fund to the parent company.

Now, if on acquisition a subsidiary is acquired exclusively with a view to sale and meets
the criteria to be classified as ‘’held for sale’’ in accordance with IFRS 5, then it is
accounted for under IFRS 5 (i.e. as current asset held at lower of carrying amount and
fair value less cost to sell. Please refer to IFRS 5 for details). The effect is that parent’s
interest will be presented separately as a single figure on the face of the consolidated
statement of financial position, rather being consolidated like any other subsidiary. So it is
still consolidated, but in a different way.

GROUP ACCOUNTING YEAR END

Entities in the group are always encouraged to use same accounting year end to ease
the preparation of group accounts. However, some companies within the group may
have an accounting date different from the parent accounting date. This is called non –
coterminous year ends. The effect of this in practice is that such companies will prepare
accounts to its accounting year end but for the purpose of consolidation, such
company will often prepare financial statements up to the group accounting date.

For the purpose of consolidation, IFRS 10 states that where the reporting date for a
parent is different from that of a subsidiary the subsidiary should prepare additional
financial information as of the same date as the financial statements of the parent
unless it is impracticable to do so.

Where it is impracticable to do so, IFRS 10 allows the use of subsidiary financial

statements made up to date of not more than three months earlier or later than the
parents reporting date with due adjustment for significant transactions or other events
between the dates.

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FINANCIAL REPORTING

GROUP ACCOUNTING POLICIES

Consistent accounting Policies is encouraged for companies within the group but if
a member of the group uses accounting policies different from those adopted in the
preparation of group financial statements for like transaction and events in similar
circumstances, appropriate adjustment are made to that group member’s financial
statements in preparing the consolidated financial statements to ensure conformity
with the group’s accounting policies.

NOTE

i. In acquiring a subsidiary, the parent company pay a consideration for acquiring

investment in the subsidiary such consideration is called COST OF ACQUISITION
OR COST OF INVESTMENT OR COST OF CONTROL. This is measured at fair value of
the consideration given to the investee company.
ii. The date the parent company acquires a subsidiary is known as date of
acquisition
iii. Since the subsidiary company has been trading as a company before acquisition
by parent company. The retained profit in the books of subsidiary on the date of
acquisition is called pre - acquisition profit and it’s exclusively belong to the
subsidiary as at that date, the parent cannot share from it because it did not
work for the profit neither it was a shareholder of the subsidiary before that date
of acquisition.
iv. Any profit made by subsidiary from the date of an acquisition till accounting year
end is called post acquisition profit and parent company has its own share based
on its % of interest.
v. The cost of acquisition or investment could take any or of the following forms:
• Cash
• Share – for – share exchange
• Deferred consideration
• Contingent consideration
• Interest bearing loan notes

Test your understanding 1.

Peter owns 100% of the share capital of the following companies. The directors are
unsure of whether the investments should be consolidated.

In which of the following circumstances would the investment NOT be consolidated?

A. Peter has decided to sell its investment in Dominant as it is loss-making; the
directors believe its exclusion from consolidation would assist users in predicting
the group’s future profits
B. Beta is a bank and its activity is so different from the engineering activities of the
rest of the group that it would be meaningless to consolidate it
C. Channel is located in a country where local accounting standards are
compulsory and these are not compatible with IFRS used by the rest of the group
D. Gomez is located in a country where a military coup has taken place and Peter
has lost control of the investment for the foreseeable future

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FINANCIAL REPORTING

Answer D

Test your understanding 2.

Apropos have a number of relationships with other companies.

In which of the following relationships is apropos necessarily the parent company?
i. Folly has 50,000 non-voting and 100,000 voting equity shares in issue with each
share receiving the same dividend. Apropos owns all of Folly’s non-voting
shares and 40,000 of its voting shares
ii. Kappa has 1 million equity shares in issue of which Apropos owns 40%.
Apropos also owns #800,000 out of #1 million 8% convertible loan notes issued
by Kappa. These loan notes may be converted on the basis of 40 equity
shares for each #100 of loan note, or they may be redeemed in cash at the
option of the holder
iii. Apropos owns 49% of the equity shares in Polly and 52% of its non-redeemable
preference shares. As a result of these investments, Apropos receives variable
returns from Polly and has the ability to affect these returns through its power
over Polly
A. (i) only
B. (i) and (ii) only
C. (ii) and (iii) only
D. All three

Answer C

INTRODUCING GROUP STATEMENT OF FINANCIAL POSITION

So far, we have discussed:

i. That a subsidiary is a company that is controlled by parent

ii. That a parent company is the company that is doing the controlling
iii. That the parent and the subsidiary together therefore form a group
iv. That the idea of preparing consolidated accounts is to aggregate the
accounts of the parents and the subsidiary as if the group were a single entity.
v. That the acquisition of interest (ordinary shares) above 50% establishes parent-
subsidiary relationship i.e. control. However, there are instances where less
than 50% interest say 47% can still establishes control, but for examination
purpose control is taken as above 50%.

Now let us consider the preparation of a group statement of financial position. A

statement of financial position shows the assets, liabilities and equity of an entity. So, the
basic principle of a consolidated statement of financial position is that, it shows the
financial position of the group at a moment in time. It is like a picture showing at the
reporting date a snap shot of the groups resources controlled in terms of assets, liabilities
and equity.

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FINANCIAL REPORTING

In preparing group statement of financial position:

i. In the individual statement of financial position of the parent, an amount

for investment in subsidiary will be shown under the non – current asset. This
investment is replaced by the net asset of subsidiary.
ii. The net assets of subsidiary are the ordinary share capital and reserves of
the subsidiary.

IFRS 10 Consolidated Financial Statement states that in preparing the consolidated

financial statement, the financial statements of a parent and its subsidiaries are
combined on a line-by-line basis by adding together like items of assets, liabilities,
income and expenses.

PROCEDURES INVOLVED IN PREPARING GROUP STATEMENT OF FINANCIAL POPSITION

The financial statement of both parent and subsidiaries are prepared in a usual manner,
submitted to the parent for the purpose of consolidation as if all is one entity. So in
examination question or any standard group account question, what you will see is that,
you will be provided with the statement of financial position of the parent and that of
subsidiary, with adequate additional information on various adjustments, from which you
will be required to prepare group statement of financial position as at a particular date.
What you need to do is to calculate certain figures for the purpose of preparing the
group statement of financial position. The old way of performing this task is to prepare a
consolidation schedule, where the necessary figures and adjustment are done for
inclusion in the group statement of financial position. However, the consolidation
schedule is not encouraged again. Therefore, to perform these tasks now follow the
standard workings below:

Workings

1. Establish the group structure

Date of Acquisition This indicates that P own 75% of the ordinary

(E.g. 1/1/2004) 75% shares of S as at 1/1/04

The remaining 25% of S is own by NCI – Non

controlling Interest. It was called minority interest
before.

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FINANCIAL REPORTING

2. Net assets of the subsidiary

@ Acquisition date @ Reporting date

=N=’000 =N=’000

Share capital XX XX

Reserves: Share Premium XX XX

Retained Earnings XX XX

Other reserves XX XX

(A) XXX (B) XXX

B – A = Post acquisition profit. The post-acquisition profit is shared between the parent
and NCI based on the degree of interest as establish in 1 above.

Do you still remember the basic accounting equation?

Assets – Liabilities = Equity --------------------------------------------------------------- equation 1

Equity = Ordinary Share Capital +Reserves

Substitute for equity in equation 1, therefore,

Assets – Liabilities = ordinary shares capital + reserves ----------------------------- equation 2

If, Assets – liabilities = Net Assets

Substitute for asset – liabilities in equation 2,

Therefore,

Net assets = ordinary shares capital + reserves and that is what working 2 above is all
about

3. Goodwill

=N=’000

Cost of Parent’s Investment XX

NCI value of acquisition (See note below) XX

XX

Less: Fair value of net assets @ acquisition (W2) (XX)

Goodwill on acquisition XX

Impairment (XX)

Carrying goodwill XXX

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FINANCIAL REPORTING

Note: There are 2 methods for valuing NCI @ acquisition

i. If fair value method (Full Method) is adopted,

NCI value = fair value of NCI’s holding at acquisition. This is mostly given in exam.
Where it is not given, then calculate it i.e. number of shares NCI owns X subsidiary
share price (market price))
ii. If proportion of net – assets method is adopted,
NCI value = NCI% X FV of net assets at acquisition from W2.

4. Non – Controlling Interest (NCI)

=N=’000

NCI value at acquisition (in W3) XX

NCI share of S’s post-acquisition reserve (derived from W2) XX

NCI share of impairment (only where fair value method is used (XX)

XXX

5. Group Retained Earnings

=N=’000

P’s retained earnings (100% parent’s retained earnings) XX

P’s % of the subsidiary’s post-acquisition profits XX

P’s share of impairment (XX)

XXX

Now let us prepare the group statement of financial position, where the assets and
liabilities are cross – cast and only the equity of the parent is shown. Equity of subsidiary is
not shown again; don’t forget it has been used up in W2 to ascertain the net assets for
the calculation of goodwill in W3.

The NCI figure calculated in W4 is shown as part of equity in the group statement of
financial position. The group retained earnings (W5) is reported as part of equity in the
group statement of financial position.

Goodwill on acquisition from W3 is included as an intangible noncurrent asset in the

group statement of financial position.

Let me quickly remind you again that there is a concept in accounting known as
“substance over form”. Substance over form means that when preparing accounts it is
assumed that we are striving to reflect the true economic reality of events and
transactions i.e. to account for the truth rather than reflect the strict legal condition.

The preparation of group accounts is often cited as an example of substance over form.
You see, strictly the parent company and the subsidiary company are two separate

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FINANCIAL REPORTING

legal entities but we prepare the group accounts as if they were a single entity to reflect
the fact that the parent company is in sole control. Because the parent controls the
subsidiary’s assets and liabilities it is appropriate to fully cross cast them to ensure that the
shareholders of the parent company can appreciate the total resources that are
controlled, even if the parent does not hold 100% of the shares in the subsidiary (control
is sufficient for consolidation).

Preparing a statement of financial position for the group is a bit like preparing one for a
marriage! It may be useful to aggregate the assets and liabilities of a husband and wife
in a single statement but legally the husband and wife have separate legal personalities.

The parent company is not responsible for the liabilities of its subsidiary company, yes,
because the parent is simply a shareholder in the subsidiary, which is a limited liability
company. To that extent the preparation of the group accounts could appear
misleading to a casual user as the group accounts aggregate all the assets and liabilities
of the parent and its subsidiary companies together. For example a lender to a highly
geared and potentially insolvent subsidiary company needs to be reviewing the
individual company’s financial statements to assess the likelihood of recovering its
money, rather than the overall group accounts.

ILLUSTRATION 1

The statement of financial position of P and S are given below. P acquired 100% interest
in S as at today. Prepare the group statement of financial position of P as at today.

ASSETS P S
N (m) N
(m)

Non – current Assets:

PPE 9 15

Investment in S 15 -

24 15

Current Assets:

Inventory 2 1

Receivables 3 5

Cash at bank 1 1

30 22

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FINANCIAL REPORTING

EQUITY & LIABILITIES

Equity: ordinary shares (#1) 8 15

Retained earnings 12 0

20 15

Non-current liabilities 5 2

Current liabilities 5 5

30 22

Solution

Even though I know you are not likely to be given this kind of cheap question in
examination, let me use it to work through our 5 standard workings.

P’s Group

Consolidated Statement of Financial Position as at Today

Non- current assets: N (m)

PPE (9 + 15) 24

Goodwill (W3) NIL

24

Current assets:

Inventory (2 +1) 3

Receivables (3 + 5) 8

Cash at bank (1 + 1) 2
Total assets 37

Equity: ordinary shares of #1 8

Retained earnings (W5) 12

20

Non – controlling interest (W4) Nil

Non – current liabilities (5 + 2) 7

Current liabilities (5 + 5) 10

Total equity and liabilities 37

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FINANCIAL REPORTING

Workings

1. Establish the group structure

As at today 100%

Therefore, NCI = Nil

2. Net assets of the S

@ Acquisition date @ Reporting date

=N=’m =N=’m

Ordinary share capital 15 15

Retained Earnings Nil Nil

15 15

15 15

The total at the reporting date less the total at the acquisition date will give the post-
acquisition profit, which shared between P and S in the ratio of their degree of interest. In
this case post acquisition profit is ZERO (15 – 15 = 0)

3. Goodwill

=N=’m

Cost of Parent’s Investment 15

NCI value of acquisition Nil

15

Less: Fair value of net assets @ acquisition (W2) (15)

Goodwill on acquisition Nil

Impairment on Goodwill (Nil)

Carrying goodwill Nil

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FINANCIAL REPORTING

4. Non – Controlling Interest (NCI)

=N=’m

NCI value at acquisition (in W3) Nil

NCI share of S’s post-acquisition reserve (derived from W2) Nil

NCI share of impairment (only where fair value method is used) (Nil)

Nil

5. Group Retained Earnings

=N=’000

P’s retained earnings (100% parent’s retained earnings) 12

P’s % of the subsidiary’s post-acquisition profits Nil

P’s share of impairment (Nil)

12

Treatment of Goodwill

IFRS3 Business Combination (revised) governs the accounting for all forms of business
combinations other than joint venture and a number of unusual arrangements.

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.

Goodwill is an example of intangible asset.

Goodwill may be purchased or non-purchase.

It is not impossible for the value of the subsidiary’s business as a whole to exceed its Net
assets at acquisition. This excess is a premium and it is a positive goodwill of the business
at acquisition. This is treated as an intangible asset in the group statement of financial
position and tested for impairment review annually. Don’t forget that, even though
intangible assets with finite useful life are amortized, but goodwill is an exemption, it is
tested for impairment.

The calculation of goodwill is contained in W3 of the standard working structure.

The goodwill represents assets not shown in the statement of financial position of the
acquired company and is attributable to many factors, such as: good reputation of the
business, strategic location of the business, strong ICT base, its prospects of making future
profits, reflect of a strong loyal customer base and quality skilled workforce.

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FINANCIAL REPORTING

Goodwill is generally calculated as:

Cost of investment XX i.e. The value of subsidiary

Net assets of subsidiary (XX)

Goodwill XXX

Now, where the parent company acquired less than 100% interest it means, the value of
the subsidiary is divided into two:

• The value of the part acquired by the parent

• The value of the part not acquired by parent i.e. the non – controlling interest

Where proportion of nest assets method is used to value NCI, the goodwill arisen is
parent goodwill.

Where the fair value method is used to value NCI, the goodwill arisen is parent and NCI
goodwill.

However, the accounting policy choice of whether goodwill is calculated on a fair value
basis or proportionate basis is made on acquisition by acquisition basis. This means that
within the same corporate group, goodwill may be calculated on a proportionate basis
for some subsidiaries, whilst goodwill for other subsidiaries may be calculated using the
full goodwill method.

As an alternative to W3, we can breakdown the working 3 template into another

template. This new template may be useful when dealing with foreign subsidiaries to
help in allocating exchange differences relating to goodwill between the parent (group)
and NCI respectively. Discussion on foreign subsidiaries is contained in advance group of
corporate reporting.

Here is the W3 template we originally explained under standard workings,

N, 000

Purchase consideration (i.e. fair value paid by parent) XX

NCI Value at acquisition XX

XX

Less: FV of Net assets at acquisition XX

Goodwill at acquisition XX

Impairment to date (XX)

Consolidated goodwill at carrying value XX

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FINANCIAL REPORTING

Alternatively,

N, 000 N, 000

Purchase consideration (i.e. FV paid by parent) XX

FV of Net assets acquired by parent (i.e. group share) XX

Parent goodwill XX

NCI value of acquisition XX

FV of Net assets at acquisition belonging to NCI (XX)

NCI goodwill XX

Goodwill XX

Less: Impairment to date

(XX)

Carrying Goodwill XX

Illustration 2

Ologbo acquired 80% of the ordinary shares of Ekute on 31/12/14 for N1, 092,000. At this
date the net assets of Ekute were N1, 190, 000. How much is the goodwill arising on the
acquisition of Ekute?

i. If the NCI is valued using the proportion of net assets method

ii. If the NCI is valued using the FV method and the FV of the NCI on the
acquisition date is N266,000

Solution

i. Using proportion of net asset method

Goodwill: #
Parent investment value 1,092,000
Add: NCI value at acquisition (20% x 1,190,000) 238,000
Less: Fair value of net asset at acquisition (1,190,000)

Goodwill on acquisition 140,000

ii. Using fair value method

Goodwill: #
Parent investment value 1,092,000
Add: NCI value at acquisition 266,000
Less: Fair value of net asset at acquisition (1,190,000)
Goodwill on acquisition 168,000

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FINANCIAL REPORTING

Treating Positive goodwill

When the consideration paid is more than what is acquired there is positive goodwill.
For instance a cost of acquisition of N100 million paid to acquire Net Assets of
N95million will result in #5,000,000 Positive goodwill and it is treated as follows:

i. Capitalized as an intangible non – current asset

ii. Tested annually for possible impairments
iii. Amortization of goodwill is not allowed by IFRS.

So, whenever you arrive at positive figure in W3, you now know the treatment?

Treating Negative goodwill

Still considering the above example, instead of the parent paying a premium for the net
assets acquired, it acquired it at a discount. Thus, N92million is paid as consideration to
acquire N95million net assets. The goodwill arising is a negative of N3, 000,000. This is
negative goodwill

It is arguably arises because the future prospects of the business are poor. This negative
goodwill is really a discount arising on consolidation.

IFRS 3 does not refer to it as negative goodwill (instead it is referred to as a bargain

purchase), however, this is the commonly used term.

Negative goodwill is therefore seen as a profit. This means it is included in group retained
earnings (W5) as a positive figure.

So, whenever you arrive at negative figure in W3, you now know the treatment? It is
added to the group retained earnings in W5

The following characteristics distinguishes Goodwill from other intangible assets

i. It is a balancing figure: Goodwill itself is between the fair value of the whole
business and the fair value of the separable net assets of the business. It
cannot be valued on its own.
ii. Goodwill cannot be disposed off as a separate asset.
iii. The factors contributing to goodwill cannot be quantified.
iv. The value of goodwill is volatile, i.e. it can only be given a numerical value at
the time of acquisition of the whole business.
v. Goodwill exists in perpetuity unless impaired

Differences between purchased and non-purchased goodwill

 Purchased
i. Arises when one business acquires another as a going concern.
ii. It arises from purchase and consolidation of a subsidiary.
iii. Will be recognized in the financial statements as its value at a particular point
in time is certain

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FINANCIAL REPORTING

 Non – purchased
i. Has no identifiable value
ii. It is not recognized in the financial statement
iii. It’s inherent in the business

Treating Post Acquisition Profits

It is not compulsory for parent to acquire subsidiary at the reporting date. Parent can
acquire any time. Where the date of acquisition is prior to the reporting date then the
profits made by the subsidiary from the date of acquisition to the reporting date are
referred to as the post – acquisition profits. This profit belongs to the owners of subsidiary
(owners of subsidiary are parent and NCI).

If the subsidiary is partly owned by the parent (say 80%) and partly by the NCI (say 20%),
the post-acquisition profits are then attributable to both parent and the NCI in the
proportion to their shareholdings i.e. 80% and 20% respectively.

The parent’s share of the subsidiary’s post – acquisition profits will be added to group
retained earnings in W5 and the NCI’s share will be added to the NCI balance in W4.

Post-acquisition profit is derived by deducting the total of the acquisition date column
from the total of the reporting date column in W2

Treating Pre – Acquisition Profits

These are profits or reserves that exist in the accounts of subsidiary company at the date
of acquisition. Pre-acquisition profits are included in the calculation of Net asset at
acquisition of subsidiary (W2) under acquisition column. Don’t forget that the net asset at
acquisition is used in W3 for the calculation of goodwill.

How do we determine the date of acquisition?

Determining the exact date of acquisition of a subsidiary is very important as it is at this

date that goodwill is determined as well as being the date from which the post-
acquisition profits of the subsidiary start to count.

The date of the acquisition of a subsidiary is the date on which the parent obtains
control of the subsidiary.

In many questions or for examination at this level, this date is simply stated. It is generally
presumed to be the date on which the parent company acquires control of the assets,
assumes responsibility for the liabilities and pays for the shares (though the timing of other
forms of cost of investment like deferred consideration and contingent consideration, is
not relevant).

Also, the parent should consider all the pertinent fact and circumstances, in identifying
the acquisition date e.g. there might be a written agreement which specifies the
acquisition date. Other factors to consider include the date that the parent:

• Commences directing the operation and financial policies of the subsidiary

• Appoints the majority on the board of directors

20
FINANCIAL REPORTING

Treating the cost of investment

The cost of parent’s investment in the subsidiary is also called the cost of control or cost
of acquisition. This cost, as discussed earlier must be at its fair value.

IFRS 13 Fair Value Measurement defines fair value as the amount that would be received
to sell an assets (or paid to transfer a liability) in an orderly transaction between market
participants at the measurement date. In essence, this means that the fair value is the
market value, or in the absence of market then a best estimate.

The consideration given by the parent to acquire the shares in subsidiary may comprise:

❖ Cash
❖ Shares
❖ Deferred consideration
❖ Interest bearing loan notes
❖ Contingent consideration

Cash paid

The fair value of cash paid is equal to the amount of cash

Shares exchange

The parent company may issue shares, instead of cash payments, as consideration for
acquiring the shares in the subsidiary; this is known as a share for share exchange. The
shares being issued are those of the parent company. Shares have a nominal value
(often N1) and where they are issued for consideration in excess of this nominal value,
the excess is taken to share premium account. The fair value of the shares is their market
value.

For instance, a parent company issued 2,300,000 ordinary shares of N1 each to acquire
80% control in a subsidiary. Assuming the current market price of the share issued is N3.
What is the cost of acquisition?

The cost of acquisition is shares of N3 x 2,300,000 shares = N6, 900, 000 but out of this N1 is
nominal value and N2 is share premium:

N1 X 2,300,000 shares = N2, 300, 000 – to share capital account

N2 X 2,300,000 shares = N4, 600, 000 – to share premium account

N6, 900, 000

At the point of preparing the group statement of financial position, the nominal amount
of the share (i.e. N2,300,000 is added to the parent share capital, while the share
premium of N4,600,000 is added to the share premium account and where there is none
in existence, a share premium account is created)

21
FINANCIAL REPORTING

Deferred consideration

In some instances, not all of the purchase consideration is paid at the date of
acquisition, a part payment can be made and part deferred until a later date - deferred
consideration.

The deferred consideration may be either a liability or equity.

Where it is cash that the parent company has an obligation to pay in the future, this is a
liability on the parent company and it will be recorded in the group statement of
financial position until it is derecognised. Let me ask you a simple question, if you are a
business person, would you rather be given N18, 000 in cash now or N18, 000 in cash in
one year’s time? Well, I know that I would prefer to receive the cash now rather wait for
a year. Therefore, any deferred consideration in cash is discounted to its present value
as at date of acquisition to reflect the time value of money. The fair value of deferred
consideration at the date of acquisition is measure at the present value of the futures
cash flow.

In exam, the examiner may give you the present value of the payment based on a
given cost of capital (for example, N1 receivable in 3 years’ time based on a cost of
capital of 10% = N0.75).

You may need to use the interest rate given and apply the discount fraction where r is
the interest rate and n the number of years to settlement

1/ [1+r] ⁿ

Each year the discount is then “unwound”. This increases the deferred liability each year
(to increase to future cash liability) and the discount is treated as a finance cost.

For example, a deferred consideration of #250,000 as at 01/01/2015 date of acquisition

to be paid in 3 years’ time with a cost of capital of 10% will be discounted to its present
value (assume N1 receivable in 3 years’ time based on a cost of capital of 10% = N0.75)
as follows:

01/01/2015 deferred liability (250,000 X 0.75) 187,500

31/12/2015 finance cost (10% of 187,500) 18,750

Deferred liability 206,250

31/12/2016 finance cost (10% of 206,250) 20,625

Deferred liability 226,875

31/12/2017 finance cost 23,125

Deferred liability 250,000

Where it is shares that the parent company will issue in future, this is also deferred
consideration and it is recorded as equity. The fair value of those shares to be issued in
the future is the market value of the shares at the date of acquisition.

22
FINANCIAL REPORTING

Interest bearing loan notes

The parent company may also, as form of consideration for the shares in the
subsidiary, issue interest bearing loan notes i.e. debentures/bond/debt. Assuming
that these loan notes pay interest at the market rate, then the fair value of such loan
notes is their nominal value.

Contingent consideration
Contingent consideration is another form of cost of acquisition as long as it can be
measured reliably.
A contingent consideration is an agreement to settle in the future provided certain
conditions attached to the agreement are met e.g. profits target being met. At the date
of acquisition the fair value of such consideration will be given in exam, even in practice
the value is difficult to determine.

Where the contingent consideration will be paid in cash then a provision for the
contingent liability will be recognized. If that liability is subsequently paid at a different
amount than originally recorded then the difference that arises is recognized as a gain
or loss in the statement of profit or loss. In other words, if it happens that in fact the
contingent liability does not have to be paid at all (for example the profit target is not
achieved), then at that time the liability is derecognized (removed from the accounts)
and a corresponding gain is recorded in the statement of profit or loss.

Where the contingent consideration is to be settled in shares then an equity reserve is

recorded at the value of the shares at the date of acquisition. Regardless of the share
price when the shares are actually issued no gain or loss will arise. If the shares are not
issued then there is no change in the equity of the company

Note: Incidental costs of acquiring a subsidiary such as accounting, valuation; legal and
other professional fees should be expensed as incurred. The issue costs of debt or equity
associated with the acquisition should be recognized in accordance with IFRS9/1AS32.

Illustration 3

Alani acquires 33.6 million N1 shares (75%) of the ordinary shares of Alana by offering a
share-for-share exchange of two shares for every three shares acquired in Alana and a
cash payment of N1 per share payable 3 years later. Alani’s shares have a nominal
value of N1 and current market value of N2. The cost of capital is 10% and N1 receivable
in 3 years can be taken as N0.75.

You are required to:

i. Calculate the cost of investment and show the journals to record it in Alani’s
accounts.
ii. Show how the discount would be unwound.

Solution

i. Cost of investment: N(million)

Share for share exchange [(2/3 x 33.6million) x #2] 44.80
Deferred Liability (N1 x 33.6million shares) x0.75 25.20

23
FINANCIAL REPORTING

70.00
In recording the shares, the N2 market price is split into its nominal and
premium value
Nominal value = N1 x [2/3 x 33.6million] = 22.40million
Share premium = N1 x [2/3 x 33.6million] = 22.4 million

Journal
Dr Cr
N (million) N (million)
Cost of investment 70.00
Ordinary share capital 22.40
Share premium 22.40
Cash 25.20
Being the cost of investment in Alana recorded

ii. Unwinding of the discount N(million)

As at date of acquisition: Deferred Liability 25.20
Finance cost @ 10% 2.52
Deferred liability @ end of year 1 27.72
Finance cost @ 10% 2.772
Deferred liability @ end of year 2 30.492
Finance cost @ 10% 3.0492
Deferred liability @ end of year 3 33.60

The finance cost is shown in the statement of profit or loss, while the deferred
liability at each year end is recognised in the statement of financial position
until it’s paid.

Illustration 4

Agba acquires 60% of Omode’s equity capital in a share-for-share exchange. Omode

has issued equity capital of N1 800,000 shares. The consideration that Agba gives to
acquire Omode is by making a two for one share issue when the share price of each
Agba share is N4.

At the date of acquisition the fair value of the net assets of Omode is N6, 000,000 and
the market value of an Omode share is N7.

You are required to calculate the goodwill arising on acquisition if

i. NCI is valued using the proportion of the net assets method

ii. NCI is valued using the fair value method

Solution

i. Where NCI is valued using the proportion of net assets method N

Goodwill:
Cost of investment [(60% x 800,000shares) x 2/1] x 4
3,840,000

24
FINANCIAL REPORTING

Non-Controlling Interest (40% x 6,000,000) 2,400,000

Nest assets at acquisition (6,000,000)
Goodwill on acquisition 240,000

ii. Where NCI is valued using the fair value method N

Goodwill:
Cost of investment [(60% x 800,000shares) x 2/1] x 4
3,840,000
Non-Controlling Interest (40% x 800,000shares) x 7 2,240,000
Nest assets at acquisition (6,000,000)
Goodwill on acquisition 80,000

Illustration 5

Turbo has made an acquisition of 100% of the equity shares in West, when the net assets
of West were N112, 000. The consideration that Turbo gave for the investment in
subsidiary West Comprised

i. Cash paid N35,635

ii. Shares – Turbo issued 14,000 shares to the shareholders of West, each with a
nominal value of N1 and a market value of N5.60
iii. Deferred consideration - N28, 000 is to be paid one year after the date of
acquisition. The relevant discount is 10% (assume discount factor at 10% rate
and n = 1 to be 0.75)
iv. Contingent consideration – N140, 000 may be paid one year after the date of
acquisition. The fair value of the contingent consideration as at the date of
acquisition is N119,000
v. Solicitor fees associated with the acquisition amounted to N21, 000.

You are required to:

Calculate the goodwill arising on the acquisition of West.

Solution

Calculation of goodwill: N

Cost of investment:

Cash 35,635

Shares Exchange (14,000 x N5.60) 78,400

Deferred Consideration (N28, 000 x 0.75) 21,000

Contingent Consideration 119,000

254,035

25
FINANCIAL REPORTING

Net assets of west at acquisition (112,000)

142,035

Note that the solicitor fees or any other incidental expenses incurred as a result of
acquiring interest in a subsidiary should be expensed in the statement of profit or loss.

Illustration 6

Find below the statement of financial position of Truck and Bus, been prepared at
31/12/08

Truck Bus
N’000 N’000
ASSETS

Non-Current assets:

Property, Plant and Equipment 119,000 25,200

Investment in shares of Bus 84,000 NIL

203,000 25,200

Current asset:

Inventory 168,000 89,600

Receivables 56,000 28,000

427,000 142,800

EQUITY AND LIABILITY

Equity:

Ordinary shares N1 each 91,000 28,000

Share premium 49,000 14,000

Retained earnings 98,000 35,000

238,000 77,000

Current liabilities:

Payable 189,000 65,800

427,000 142,800

Truck acquired 22,400,000 ordinary N1 shares in Bus on 1st January 2008, when Bus’s
retained earnings stood at N28, 000, 000. On this date the fair value of the NCI in Bus
was N17, 500,000

26
FINANCIAL REPORTING

The Truck group uses fair value method to value the NCI.

Required: Prepare the consolidated statement of financial position of West as at

31/12/08.

Solution

TRUCK Group

Consolidated Statement of Financial Position as at 31/12/2008

ASSETS

N’000

Non-Current assets:

Property, Plant and Equipment [119,000 + 25,200] 144,200

Goodwill (from W3) 31,500

175,700

Current asset:

Inventory [168,000 + 89,600] 257,600

Receivables [56,000 + 28,000] 84,000

Total Assets 517,300

EQUITY AND LIABILITY

Equity:

Ordinary shares N1 each 91,000

Share premium 49,000

Retained earnings (from W5) 103,600

243,600

Non-controlling interest (from W4) 18,900

Current liabilities:

Payable [189,000 + 65,800) 254,800

Total Equity + liability 517,300

27
FINANCIAL REPORTING

Workings

1. Establish the group structure

Truck

On 1st January, 2008 22,400,000/28,000,000

i.e. 1 year ago 80%

NCI = 20%

Bus

2. Net Assets of the Subsidiary (Bus)

@acquisition @reporting
N’000 N’000
Ordinary shares of N1 each 28,000 28,000
Share premium 14,000 14,000
Retained Earnings 28,000 35,000

70,000 77,000

Post-acquisition profit = 77,000 – 70,000 = 7,000

To be shared between parent and NCI in 80:20

80% of 7,000 = 5,600

20% of 7,000 = 1,400

3. Goodwill
N’000
Parent’s Investment in subsidiary 84,000
Fair value of Non-controlling interest at acquisition 17,500
Fair value of subsidiary’s net assets at acquisition (from W2) (70,000)
Goodwill on acquisition 31,500

4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 17,500
Share of NCI in Bus’s post acquisition profit (from W2) 1,400
18,900

5. Group Retained Earnings

N’000
Truck’s retained earnings 98,000
Share of Truck in Bus’s post acquisition profit (W2) 5,600
103,600

28
FINANCIAL REPORTING

Illustration 7

Pa acquired 75% of Nun on 1st July, 2007 when the retained earnings of Nun were N8,
120. Pa paid N7, 000 in cash. Pa also issued 2 N1; shares for every 5 acquired in Nun
and agreed to pay a further N2, 800 in 3 years’ time. The market value of pa’s share
at 1/07/07 was N1.80. Pa has only recorded the cash paid in respect of the
investment in Nun. Currently interest rates are 6%.

The pa group uses the fair value method to value NCI. At the date of acquisition the
fair value of the NCI was N8, 050.

The Statement of Financial Positions of Pa and Nun as at 30 June, 2008 are given
below

Pa Nun

=N= =N=

Property, Plant and Equipment 21,000 13,300

Investments 7,000

Current Assets 10, 500 7,000

38, 500 20,300

Ordinary Share capital of N1 8,400 7,000

Share Premium 5,600

Retained earnings 17,500 10,080

22,500 17,080

Non – current liabilities

8% loan notes 1,400 700

Current liabilities 5,600 2,520

29,500 20,300

Required: Prepare the consolidated statement of financial position of Pa group as at

30th June 2008.

Solution

PA Group: Consolidated Statement of Financial Position as at 30th June, 2008

=N=

Property, Plant and Equipment [21,000 + 13,300] 34,300

Goodwill (from W3) 6,060

29
FINANCIAL REPORTING

40,360

Current Assets [10,500 + 7,000] 17,500

57,860

Ordinary Share capital of N1 [8,400 + 2,100 nominal share issued by Pa) 10,500

Share Premium [5,600 + 1,680 premium on share issued by Pa] 7,280

Retained earnings [from W5] 18,829

36,609

Non-controlling Interest [from W4] 8,540

Non – current liabilities

8% loan notes [1,400 + 700] 2,100

Deferred Liability [2,350deferred liability +141 unwinding for year 1] 2,491

Current liabilities [5,600 + 2,520] 8,120

57,860

Workings

1. Establish the group structure

Pa

On 1st July, 2007 75%

i.e. 1 year ago NCI = 25%

Nun

2. Net Assets of the Subsidiary (Nun)

@acquisition @reporting
=N= =N=
Ordinary shares of N1 each 7,000 7,000
Share premium NIL NIL

Retained Earnings 8,120 10,080

15,120 17,080

30
FINANCIAL REPORTING

Post-acquisition profit = 17,080 – 15,120 = 1,960

To be shared between parent and NCI in 75:25

75% of 1,960 = 1,470

25% of 1,960 = 490

3. Goodwill
N’000
Parent’s Investment in subsidiary
Cash 7,000
Share for share exchange [2/5 x (75% x 7,000)] x 1.80 3,780
Deferred consideration [2,800 x 0.8396) 2,350
(Apply the discount formula 1/ [1+r] ⁿ to get 0.8396, r = 6%, n = 3years)

Fair value of Non-controlling interest at acquisition 8,050

Fair value of subsidiary’s net assets at acquisition (from W2) (15,120)
Goodwill on acquisition 6,060

4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 8,050
Share of NCI in Nun’s post acquisition profit (from W2) 490
8,540

5. Group Retained Earnings

N’000
Pa’s retained earnings 17,500

Share of Pa in Nun’s post acquisition profit (W2) 1,470

Finance cost on deferred consideration (6% x 2350) (141)

18,829

Treating professional fees on acquisition

In line with the reviewed IFRS 3 Business Combination, all incidental cost incurred in
connection with the acquisition of subsidiary by the parent company (such as Legal
fees, accountancy fees and other related professional fees incurred by the parent
company as part of the acquisition of the subsidiary) are immediately written off to the
income (statement of profit or loss), unless they are issue costs relating to a share issue
(the associated issue costs on the shares issue is written off to the share premium
account).

Before the revision of IFRS 3, such costs are added to the cost of acquiring the subsidiary,
because they are seen as part of the costs that are directly attributable to acquiring the
subsidiary. However, following the revision of IFRS 3 Business Combinations, such costs,

31
FINANCIAL REPORTING

(i.e. legal fees, other associated professional fees incurred by the parent company as
part of the acquisition of the subsidiary) are no longer to be capitalized (added) as part
of the cost of acquisition or investment. This is because the fair value of the investment is
being considered from the perspective of what the seller receives not what the buyer
paid out.

However, when items of property, plant and equipment are acquired, IAS 16 property,
plant and equipment requires that when measuring the initial cost of these assets their
costs includes all costs necessary to bring the asset into working condition for is intended
use, including installation, carriage, testing any other professional costs that are directly
attributable to bringing the asset to its available for use condition. Arguably the
immediate write off of professional fees on the acquisition of an investment in a
subsidiary is inconsistent with the treatment of such costs in IAS 16.

Treating fair value adjustments of Subsidiary’s net assets acquired

The revised edition of IFRS 3 requires the subsidiary’s net assets to be recorded at their fair
value for the purposes of the goodwill calculation and consolidated financial accounts.

Therefore, when a subsidiary is acquired it is necessary to do a fair value review of the

assets and liabilities that are acquired by the parent and thus fair value adjustments at
the date of acquisition of the subsidiary’s assets and liabilities may be necessary.

The fair value adjustment may increase or decrease the net assets (depending on
whether it is upward or downward review) at acquisition and assuming that the assets
remains with the subsidiary at the year end, it will also increase or decrease the net
assets at the reporting date. The implication of this adjustment on our standard workings
is that, our working 2 (W2) will now look like:

At acquisition at reporting date

N000 N000

Ordinary share capital XX XX

Reserves: retained earnings XX XX

Share premium XX XX

Fair value adjustments XX XX

Fair value depreciation adjustment Nil (XX)

XX XX

If the asset subject to the fair value adjustment is in turn subject to depreciation e.g.
plant, then in addition to increasing both the net assets at acquisition and at the

32
FINANCIAL REPORTING

yearend by the fair value adjustment then the additional depreciation required will
be deducted from the net assets at the reporting date.

By adjusting the W2 for fair value adjustments, it automatically, will ensure the
calculations for goodwill in W3, non-controlling interest in W4 and group retained
profits in W5 are correct.

When preparing the group statement of financial position, the assets and liabilities
that have been subject to fair value adjustments will also have to be updated and
this can be done on the face of the statement of financial position when cross – cast.

Illustration 8

Hafiz acquired 85% of the share capital of Paul 2 years ago, when the reserves of
Paul stood at N175, 000. Hafiz paid initial cash consideration of N1, 400,000.
Additionally Hafiz issued 280,000 shares with a nominal value of N1 and a current
market value of N1.80. It was also agreed that Hafiz would pay a further N700, 000 in
three years’ time. Current interest rates are 10% p.a. the appropriate discount factor
for N1 receivable three years from now is 0.751. The shares and deferred
consideration have not yet been recorded.

The statements of financial position of Hafiz and Paul as at 31st December 2004 are
given below Hafiz Paul

N, 000 N, 000

Noncurrent assets

Property, Plant and Equipment 7,700 2,100

Investment in Paul at cost 1, 400

Current Assets

Inventory 770 140

Receivables 700 280

Cash 280 70

10,850 2,590

Equity

Share capital 2,800 700

Retained earnings 1,960 420

33
FINANCIAL REPORTING

4,760 1,120
Non – current inabilities

Long term loan 4,200 560

Current liabilities

Payables 1,890 910

10,850 2,590

Additional information

1. At acquisition the fair value of Paul’s plant exceeded its book value by N280, 000.
The plant had a remaining useful life of 5 years at this date.
2. For many years Paul has been selling some of its products under the brand name
of “Paul cants’’. At the date of acquisition the directors of Hafiz valued this brand
at N350, 000 with a remaining life of 10 years. The brand is not included in Paul’s
statement of financial position.
3. The consolidated goodwill has been impaired by N361,200
4. The Hafiz Group values the non-controlling interest using the fair value method. At
the date of acquisitions the fair value of the 15% non-controlling interest was
N532,000

Required: prepare the group statement of financial positions as at 31st December

2004.

Solution

HAFIZ Group

Consolidated Statement of Financial Position as at 31st December 2004

N’000

Property, Plant and Equipment [7,700+2,100+280FV plant -112FV depr] 9,968

Goodwill [from W3] 1,095.5

Brand [350FV adj – 70Amortization] 280

11,343.5

Current assets:

Inventory [770 + 140] 910

Receivables [700 + 280] 980

Cash [280 + 70] 350

13,584

34
FINANCIAL REPORTING

Equity:

Ordinary Share capital of N1 [2,800 + 280 nominal share issued by Hafiz) 3,080

Share Premium [224 premium on share issued by Hafiz] 224

Retained earnings [from W5] 1,596.53

4,900.53

Non-controlling Interest [from W4] 487.27

Non – current liabilities

Long term loan [4,200 + 560] 4,760

Current liabilities

Payables [1,890 + 910] 2,800

Deferred liability (from W6) 636.097

13,584

Workings

1. Establish the group structure

Hafiz

Acquired 2 years ago 85%

NCI = 15%

Paul

2. Net Assets of the Subsidiary (Paul)

@acquisition @reporting
N’000 N’000
Ordinary shares of N1 each 700 700
Retained Earnings 175 420
Fair value adjustment on Plant 280 280
Fair value depreciation (280/5years) x 2years --- (112)
Fair value adjustment on Brand (Paul cant) 350 350
Fair value amortization (350/10years) x 2years --- (70)
1,505 1,568

35
FINANCIAL REPORTING

Post-acquisition profit = 1,568 – 1,505 = 63. Shared into 2; 85%: 15%

3. Goodwill
N’000
Parent’s Investment in subsidiary
Cash 1,400
Share for share exchange [280,000 x 1.80] 504
Deferred consideration [700,000 x 0.751) 525.7
Fair value of Non-controlling interest at acquisition 532
Fair value of subsidiary’s net assets at acquisition (from W2) (1,505)
Goodwill on acquisition 1,456.7
Impairment (361.2)
Carrying Goodwill 1,095.5
4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 532
Share of NCI in Paul’s post acquisition profit (15% x 63) 9.45
Share of NCI in the Impairment (15% x 361,200) (54.18)
487.27
5. Group Retained Earnings
N’000
Hafiz’s retained earnings 1,960
Share of Hafiz in Paul’s post acquisition profit (85% x 63) 53.55
Finance cost on deferred consideration (W6) (110)
Share of Hafiz in impairment (85% x 361,200) (307.02)
1,596.53
6. Unwinding of discount
N’000
As at date of acquisition: deferred liability 525.7
Finance cost @ 10% (10% x 525.7) 52.57
Deferred liability @ end of year 1 578.27
Finance cost @ 10% (10% x 578.27) 57.827
Deferred liability @ end of year 2 636.097
Finance cost @ 10% (10% x 636.097) 63.6097
Deferred liability @ end of year 3 (expected to be paid) 700.000

Since the acquisition took place 2 years ago, the relevant finance cost will be
52.57+57.827 = 110

Illustration 9

Kerewanta Plc. acquired 60% of the equity shares of Orijinmi Plc. by means of share
exchange of three shares in Kerewanta Plc. for four shares in Orijinmi Plc. The market
value of the shares of Kerewanta Plc. at the date of acquisition which is 1 April, 2013 was
N10 per share.

36
FINANCIAL REPORTING

Kerewanta Plc. would make deferred cash payment of 70k per acquired share on 1
April, 2014. Kerewanta Plc. cost of capital is 12% per annum. None of the consideration
has been recorded in the books of Kerewanta Plc. The following information was
extracted from the financial statements of the two companies as at 31 March, 2014.
Kerewanta Plc. Orijinmi
Plc.
N’m N’m
Equity shares of N1 each 60,000 20,000
Share premium 15,000 NIL
Retained earnings 1 April, 2013 20,500 11,600
Retained earnings for the year ended 31 March, 2014 9,800 6,700
Property, plant and equipment 50,400 22,900
The following is the additional relevant information:
i. One equipment had a fair value of N360, 000,000 above its carrying amount.
At the date of acquisition of Orijinmi Plc. the asset had a remaining life of four
years. It is the group’s policy to depreciate such asset using the straight line
method.
ii. Orijinmi Plc. had deferred tax liability of N10, 000,000 as at 31 March, 2014
which had not been recorded. The company’s goodwill is not impaired.
iii. Non-controlling interests are to be valued at fair value at the date of
acquisition of Orijinmi Plc. The fair value of the shares of Orijinmi Plc. held by
non-controlling interests at the date of acquisition is N6 per share.
Required:
Calculate the following as at 31 March, 2014:
i. Equity
ii. Non-controlling interests
iii. Consolidated goodwill
iv. Property, plant and equipment (14 Marks)
Question 2b ICAN-MAY 2015 diet

Solution

i. Equity as at 31 March, 2014

N (m)
Share capital of Kerewanta Plc. 69,000
Share premium 96,000
Retained earnings (Wk 1) 33,360
198,360

Working 1: Retained earnings as at 31 March, 2014

N’m
Kerewanta Plc. retained earnings (N20, 500 + N9, 800) 30,300
60% post-acquisition profit (60% x N6, 700) 4,020
Finance cost (12% x N7, 500million) (900)
Deferred tax expense (N10million x 60%) (6)
Additional depreciation (1/4 years x N360million x 60%) (54)
33,360

37
FINANCIAL REPORTING

ii. Non-controlling interests as at 31 March, 2014

N (m)

Added on acquisition at 1 April, 2013 48,000

40% post acquisition on profit (40% x N6, 700) 2,680
Deferred tax expenses (N10million x 40%) (4)
Additional depreciation (1/4 year x N360 x 40%) (36)
50,640

iii. Consolidated Goodwill as at 31 March, 2014

Cost of acquisition: N (m)
Share consideration ¾ x [60% x 20,000] x 10 90,000
Deferred consideration [70kobo x ((60% x 20,000) x (1/1.12))]7,500
97,500
Non- controlling interest 48,000
Cost of business combination 145,500
Net Assets of Orijinmi at acquisition date (see below) (31,960)
Full goodwill 113,540
Fair value of net asset at 1 April, 2013
N (m)
Share capital 20,000
Pre-acquisition reserves 11,600
Fair value adjustments 360
31,960
iv. Property, plant and equipment as at 31 March, 2014
N (m)

Kerewanta Plc. 50,400

Orijinmi Plc. 22,900
Fair value Adjustment 360
Less: Additional depreciation (360million/4 years) (90)
73,570

Illustration 10

Calculate the goodwill on consolidation from the information below: N’000

Parent’s cost of investment in subsidiary 299,700

Net asset at acquisition date (parent) 986,600
Net asset at acquisition date (subsidiary) 345,800
Fair value of non-controlling interest at acquisition date 169,500
Net asset at reporting date (subsidiary) 316,400
Impairment of goodwill 62,200

Parent has 80% interests in subsidiary (3 Marks)

Question 5e ICAN-MAY 2015 diet

38
FINANCIAL REPORTING

Solution
Calculation of goodwill on consolidation
N‘000
Cost of investment in Subsidiary 299,700
Fair value of non-controlling interest 169,500
469,200
Net Asset of subsidiary at acquisition date (345,800)
Goodwill on consolidation 123,400
Impairment (62,200)
61,200

Illustration 11

The trial balance of UDO and its subsidiary, ALOMA plc as at December 31, 2014 are
given below:

UDO Plc ALOMA Plc

DR CR DR CR

N (M) N (M) N (M) N

(M)

Property, Plant & Equipment 260 6,000

Loan to ALOMA plc 4,600 -

Other investments 1,200 -

Current assets 1,600 278

N1 equity shares 400 200

Share premium 1,000 170

Retained earnings 5,800 662

Revaluation surplus 60 -

Loan from UDO Plc -

4,600

Sundry payables 400 646

7,660 7,660 6,278 6,278

UDO Plc on January 1, 2014 acquired 75% of the equity of ALOMA Plc for N1,
300,000,000, when the retained earnings were N600million and share premium
N170million. Neither this transaction nor the loan notes for the same amount obtained to
finance the purchase were recorded in the trial balance above.
There had been no impairment in the value of the goodwill, or a change in share capital
since acquisition.

39
FINANCIAL REPORTING

It is the group policy to value the non-controlling interest at the date of acquisition at fair
value. The fair value of the non-controlling interest in ALOMA Plc at the date of
acquisition was estimated to be N160, 000,000.

Required:
Prepare the consolidated statement of financial position of UDO Group Plc as at
December 31, 2014. Question 5 ICAN-NOV 2015 diet (15 Marks)

Solution

UDO PLC GROUP

Consolidation Statement of Financial Position as at December 31, 2014
N’’m
Non-Current Assets:
Property, plant & equipment 6,260.00
Other investments 1,200.00
Goodwill [w3] 490.00
7,950.00
Current Assets 1,878.00
Total assets 9,828.00

Equity:
Equity shares of N1 each 400.00
Share premium 1,000.00
Revaluation surplus 60.00
Retained earnings [w5] 5,846.50
7,306.50
Non-controlling interest [w4] 175.50
Non-current liabilities:
Loan notes 1,300.00
Current liabilities:
Sundry payables 1,046.00
Total equity & liabilities 9,828.00

Workings
1. Establish the group structure
Udo Plc

On 1 January, 2014 75%

(1 year ago) NCI = 25%

Aloma Plc

40
FINANCIAL REPORTING

2. Net Assets of the Subsidiary (Aloma Plc)

@acquisition @reporting
N’M N’M

N1 equity shares 200 200

Share premium 170 170

Retained earnings 600 662

970 1,032

Post-acquisition profit = 1,032 – 970= 62. Shared into 2; 75%: 25%

3. Goodwill
N’M
Parent’s Investment in subsidiary 1,300
Fair value of Non-controlling interest at acquisition 160
Fair value of subsidiary’s net assets at acquisition (from W2) (970)
Goodwill on acquisition 490

4. Non-controlling Interest
N’M
Non-controlling Interest value at acquisition (from W3) 160
Share of NCI in Aloma’s post-acquisition profit (25% x 62) 15.5
175.50
5. Group Retained Earnings
N’M
Udo’s retained earnings 5,800
Share of Udo in Aloma’s post acquisition profit (75% x 62) 46.50

5,846.50

Treating Inter-Company Transactions

It is not uncommon for group companies to trade with each other on credit terms and
this will lead to receivables in one company statement of financial position and
payables in the other company statement of financial position.

These intra-group transactions are recorded in an account called current account i.e.
the parent company has a current account to record its dealings with subsidiary and
also subsidiary maintain a current account to record its dealings with parent company. If
at the end of year, each company owes each other money, which will be represented
in current accounts with the other, these balances are referred to as current account
balances since they will be part of current assets and current liabilities.

It is also not impossible that at the yearend there will be either goods or cash that have
been accounted for by the sending company but not yet accounted for by the
intended recipient because it has not yet received them. These are known as goods in
transit or cash in transit.

41
FINANCIAL REPORTING

Where parent and subsidiary trade with each other on credit this will lead to:

• A receivables (current) account in one company’s statement of financial position

• A payables (current) account in the other company’s statement of financial
position

You will agree with me that, these amounts are Owings within the group and not outside
the group, thus they must not appear in the consolidated statement of financial position.
All intra group balances are cancelled on consolidation.

For instance, consider the situation where the parent has been selling goods to the
subsidiary and at the yearend N26, 000 is still owed. It means, the parent will have the
assets (of a current account) receivable of N26, 000 and the subsidiary will have the
liability (of a current account) payable of N26, 000

Therefore at the point of consolidation: Less from payables N26, 000 when cross
casting

Less from receivable N26, 000 when cross

casting

All things being equal, the two current accounts should be exactly equal and opposite,
but in most instances they are not always exactly equal and opposite, and this will be
because of either goods or cash in transit.

For example where the parent has been selling goods to the subsidiary and the parent
has recorded a receivable from subsidiary of N26, 000; the subsidiary has a payable of
N20, 000 recorded because just prior to the year – end a N6, 000 cheque was sent by
the subsidiary that the parent company at the year – end had not received. Of course
this will be seen as cash in transit for the purpose of consolidation.

In the preparation of group statement of financial position, the N26, 000 intra-group
receivables is deducted from receivables, the N20, 000 intra group payables is
deducted from payables and the difference of N6, 000 is accounted for as cash in
transit under the current assets.

If the goods or cash are in transit between P and S, make the adjusting entry to the
statement of financial position of the recipient:

 For cash in transit: the adjusting entry is

Dr Cash
Cr Receivables
 For goods in transit: the adjusting entry is
Dr Inventory
Cr Payables

This adjustment is for the purpose of consolidation only.

This means that reconciled current account balance amounts are removed from both
receivables and payables in the consolidated statement of financial position.

42
FINANCIAL REPORTING

Illustration 12

Statements of financial position of plant and Machine on 31/03/07 are as follows:

PLANT MACHINE

N’000 N’000

Property, plant and equipment 140 196

Investment in MACHINE at cost 252

Current Assets:

Inventory 42 49

Trade receivables 28 14

Cash 14 7

476 266

Equity and Liabilities

Share capital: Ordinary #1 shares 280 140

Share premium 14 42

Retained earnings 56 28

350 210

Non-current liabilities

10% loan notes 91 Nil

Current liabilities 35 56

476 266

Notes:

1. Plant bought 112,000 shares in machine in 2001 when machine’s reserves

included a share premium of #42,000 and retained earnings/profits of #7,000
2. Plant’s accounts show #8,400 owing to machine; machine accounts show
#11,200 owed by plant. The difference is explained as cash in transit
3. No impairment of goodwill has occurred to date
4. Plant uses the proportion of net assets method to value the non-controlling
interest.

Required: Prepare a Consolidated statement of financial position as at 31/03/2007.

43
FINANCIAL REPORTING

Solution

PLANT GROUP
Consolidation Statement of Financial Position as at March 31, 2007
N’000

Non-current assets

Property, plant and equipment [140+196] 336.00

Goodwill [W3] 100.80

Current Assets

Inventory [42+49] 91.00

Trade receivables [28 + 1 4 - 11.2intra-group receivables] 30.80

Cash [14 + 7 + 2.8 cash in transit] 23.80

582.40

Equity

Share capital: Ordinary #1 share 280

Share premium 14

Retained earnings [W5] 72.8

366.80

Non-controlling interest [W4] 42.00

Non-current liabilities

10% loan notes 91.00

Current liabilities [35 + 56 – 8.4 intra group payables] 82.60

582.40

44
FINANCIAL REPORTING

Workings

1. Establish the group structure

Plant

In year 2001 112,000/140,000 = 80%

(6 years ago) NCI = 20%

Machine

2. Net Assets of the Subsidiary (Machine Plc)

@acquisition @reporting
N’000 N’000

Ordinary shares of N1 140 140

Share premium 42 42

Retained earnings 7 28

189 210

Post-acquisition profit = 210 – 189= 21. Shared into two; 80%: 20%

80% of 21 = 16.8 to W5
20% of 21 = 4.2 to W4

3. Goodwill
N’000
Parent’s Investment in subsidiary 252
Fair value of Non-controlling interest at acquisition (20% of 189w2)37.80
Fair value of subsidiary’s net assets at acquisition (from W2) (189)
Goodwill on acquisition 100.80

4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 37.80
Share of NCI in Machine’s post acquisition profit (W2) 4.20
42.00
5. Group Retained Earnings
N’000
Plant’s retained earnings 56
Share of Plant in Machine’s post acquisition profit (W2) 16.80

72.80

45
FINANCIAL REPORTING

Illustration 13

Parabola acquired 75% of Sebat on 01/07/05 when the balance on Sebat’s retained
earnings was N23, 000 and Parabola paid N70, 000 for its investment in the share capital
of Sebat. At the same time, Parabola invested in 70% of Sebat’s 10% loan note.

The statements of financial position of P and S as at 30/06/08 are given below:

Parabola Sebat

N N

Non – current Assets

Land 90,000 50,000

Plant and equipment 48,000 35,000

Investments 160,000 -

298,000 85,000

Current Assets

Inventory 64,000 18,000

Bank 12,000 3,000

Receivables 28,000 13,000

104,000 34,000

402,000 119,000

Equity

Ordinary share capital of 50k 100,000 20,000

Retained earnings 166,000 63,000

266,000 83,000

Non-current liabilities:

10% loan notes 80,000 10,000

Current liabilities 56,000 26,000

402,000 119,000

Additional information

i. At the reporting date Parabola recorded a payable to S of N8, 000. This did
not agree to the corresponding amount in Sebat’s financial statements of
N10, 000. The difference is explained as cash in transit

46
FINANCIAL REPORTING

ii. At the date of acquisition it was determined that Sebat’s land, carried at cost
of N50, 000 had a fair value of N75, 000. Sebat’s plant was determined to
have a fair value of N10, 000 in excess of its carrying value and had a
remaining life of 5 years at this time. These values had not been recorded by
Sebat.
iii. The Parabola group uses the fair value method to value the non-controlling
interest. For this purpose the subsidiary share price at the date of acquisition
should be used. The subsidiary share price at acquisition was N2.20 per share.
iv. Goodwill has impaired by N2, 000.

Required: Prepare the group statement of financial position of the group as at

30/06/08.

Solution

PARABOLA GROUP
Consolidation Statement of Financial Position as at 30th June, 2008
N

Non-current assets

Land [90,000 + 50,000 + 25,000 fair value adjustment] 165,000

Plant and equipment [48,000 + 35,000 + 10,000 fair value adj – 6,000 deprn] 87,000

Investment [160,000 – 70,000 cost of control – (70% x 10,000loan note)] 83,000

Goodwill [W3] 12,000

347,000

Current Assets

Inventory [64,000 + 18,000] 82,000

Bank [12,000 + 3,000 + 2,000cash in transit] 17,000

Receivables [28,000 + 13,000 – 10,000 intra group receivables] 31,000

477,000

Equity

Share capital: Ordinary 50k share 100,000

Retained earnings [W5] 190,000

290,000

Non-controlling interest [W4] 30,000

Non-current liabilities

47
FINANCIAL REPORTING

10% loan notes [80,000 + (10,000 – (70% x 10,000intra group loan))]83,000

Current liabilities [56,000 + 26,000 – 8,000 intra group payables] 74,000

477,000

Workings

1. Establish the group structure

Parabola

On 01/07/2005 75%

(3 years ago) NCI = 25%

Sebat

2. Net Assets of the Subsidiary (Sebat)

@acquisition @reporting
N N

Ordinary shares of 50k 20,000 20,000

Retained earnings 23,000 63,000

Fair value adjustment on land (75,000-50,000)25,000 25,000

Fair value adjustment on plant 10,000 10,000

Fair value adjustment depreciation (10,000/5) x3 (6,000)

78,000 112,000

Post-acquisition profit = 112,000 – 78,000= 34,000. Shared into two; 75%: 25%

75% of 34,000 =# 25,500 to W5

25% of 34,000 = #8,500 to W4

3. Goodwill
N
Parent’s Investment in subsidiary
70,000
Fair value of Non-controlling interest at acquisition (25% x 40,000shares) x 2.2
22,000
Fair value of subsidiary’s net assets at acquisition (from W2)
(78,000)

48
FINANCIAL REPORTING

Goodwill on acquisition
14,000
Impairment
(2,000)
Goodwill at reporting date
12,000

4. Non-controlling Interest
N
Non-controlling Interest value at acquisition (from W3) 22,000
Share of NCI in Sebat’s post acquisition profit (W2) 8,500
Share of NCI in impairment (25% x 2,000) (500)
30,000
5. Group Retained Earnings
N
Parabola’s retained earnings
166,000
Share of Parabola in Sebat’s post acquisition profit (W2) 25,500
Share of Parabola in impairment (75% x 2,000) (1,500)

190,000

Treating Provision for unrealized profits (Purps)

You will agree with me that, in substance a parent and its subsidiaries (group) is a
single entity and on that basis such an entity cannot make profit from selling to itself.

For example, the parent may have sold goods that it purchased for N16,600 to the
subsidiary for N16,700 and the goods remain in inventory of the subsidiary at the year
– end. The parent company has already recognized N100 profit on the sale in its own
book and the goods are still in subsidiary’s inventory at cost of N16, 700.

Now, if we consider the group context, i.e. the parent and subsidiary as if they were
a single economic entity, then there has been no profit to the group from the
intercompany sale and the cost to the group of the inventory remains at N16, 600.
We cannot make profit by simply selling goods to ourselves. Therefore a
consolidation adjustment is required to both eliminates the unrealized profit of N100
and to reduce the inventory by N100 to bring it back to the original cost of N16,600
when it was first purchased by a group company.

The consolidation adjustment is known as making a ‘’provision for unrealized profits’’

(Purp).

To make the adjustment for the purp, the question to ask is who is the seller? Is it the
parent selling to the subsidiary or the subsidiary selling to the parent company?

Where the parent company is the seller, the parent’s profit needs to be reduced by
the unrealized profit, since the unrealized profit is included in its profit being the seller.

49
FINANCIAL REPORTING

This is achieved by charging the purp against the parent’s profits in group retained
earnings W5.

Where the subsidiary is the seller, then the unrealized profit is in the book of the
subsidiary being the seller, then it is appropriate to reduce the subsidiary’s post
acquisition profits. This is achieved by charging the purp against the subsidiary’s year
end retained earnings in net assets W2

Who is the selling company?

Parent is the selling company Subsidiary is the selling

company

Deduct the purp from the Deduct the purp from the
parent’s retained earnings W5 subsidiary’s retained earnings
at the reporting date in net
assets W2
To make the adjustment in double entry form (i.e. Dr and Cr), see below

• Parent = seller

Dr: Group retained earnings (i.e. deduct the unrealized profit in W5)

Cr: Group inventory

• Subsidiary = seller

Dr: Subsidiary retained earnings (deduct the profit in W2 at reporting date)

Cr: Group inventory)

Note: Try to refresh your understanding of mark- up and margin, as the information in
exam to calculate the purp may be expressed in terms of being a gross profit margin or
a gross profit mark –up.

Let me quickly remind you:

• Mark – up is a profit expressed as % on the cost of sales

• Margin is a profit expressed as % on the sales price.

The implication of this is that, you can only apply mark up on cost to get profit and you
can only apply margin on sales to get profit.

50
FINANCIAL REPORTING

You may be provided, in examination, with mark up and sales amount, you should know
that you cannot apply the mark – up on the sales to get profit, then in this case, convert
mark up to margin, since its margin that goes on sales. Same thing applies when you are
given margin % and cost, as against sales, then convert margin to mark – up and
proceed.

Mark up on cost = correct Mark up on sales = not correct

Margin on sales = correct Margin on cost = not correct

How to convert mark up to margin? How to convert margin to mark up?

Given a mark-up of 25%. What is margin? Given a margin of 20%. What is mark up?
25/100 = mark up = ¼ Margin = 20/100 = 1/5
:. Margin = 25/100+25 = 25/125 = 1/5 :. Mark up = 20/100-20 = 20/80
1/5 as fraction = 20% (i.e. 1/5 x 100%) =1/4 or 25% (i.e. ¼ x 100%)
Note: Converting mark up to margin Note: converting margin to mark up means
means expand the base or denominator reduce the base or denominator by
by adding the numerator subtracting the numerator from
a = numerator denominator.
b = denominator

Illustration 14
a. A Parent Company acquired 60% equity interest in a subsidiary company for
N440million. The market value of the net assets of the subsidiary on acquisition
date was N400million. The parent company estimates that the full 100% interest in
the subsidiary company would have cost N640million.

Required:
Calculate the goodwill at acquisition date where non-controlling interest is measured:
i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full good will method).
5 Marks

b. The statement of financial position of PAPA PLC and MAMA PLC as at December
31, 2015 were as follows:
PAPA PLC MAMA PLC
N’000 N’000
Property plant & equipment 9,000 5,000
Investment in MAMA plc 5,000
Other Assets 2,000 1,500
16,000 6,500
Share capital 500 500
Retained earnings 14,500 5,000
Other liabilities 1,000 1,000
16,000 6,500
PAPA Plc acquired 80% equity interest in MAMA Plc two years ago.

51
FINANCIAL REPORTING

At the date of acquisition MAMA’s retained earnings stood at N3million and the fair
value of its net assets was N5million. This was N1.5million above the carrying amount of
the net assets at this date. The fair value adjustment related to an asset that had a
remaining useful economic life of 10 years as at the date of acquisition.
The goodwill arising on consolidation has not suffered any impairment.
Required:
Prepare consolidated statement of financial position of PAPA plc group as at December
31, 2015, on the assumption that non-controlling interest is valued at fair value. Show all
workings 15marks
Question 2 ICAN-MAY 2016 diet (Total 20 Marks)

Solution

a. Calculation of goodwill with NCI valued at proportion of the net assets of the
subsidiary
Nmiilion

Cost of investment 440

NCI share of subsidiary’s net assets (40% x 400million) 160

Net assets of subsidiary at acquisition (400)

Goodwill 200

Calculation of goodwill with NCI valued at fair value

Nmillion

Cost of investment 440

Fair value of NCI at acquisition (640 - 440million) 200

Net assets of subsidiary at acquisition (400)

Goodwill 240

b. PAPA GROUP
Consolidation Statement of Financial Position as at 31st December, 2015

N’000

Assets

PPE [9,000 + 5,000 + 1,500fair value adjustment – 300depreciation] 15,200

Goodwill 1,000

Other assets [2,000 + 1,500] 3,500

19,700

Equity and Liabilities

52
FINANCIAL REPORTING

Share capital 500

Retained earnings 15,860

16,360

Non-controlling Interest 1,340

Other liabilities [1,000 + 1,000] 2,000

19,700

Workings

1. Establish the group structure

PAPA Plc

80%

(2 years ago) NCI = 20%

MAMA Plc

2. Net Assets of the Subsidiary (MAMA)

@acquisition @reporting
N’000 N’000

Ordinary share capital 500 500

Retained earnings 3,000 5,000

Fair value adjustment 1,500 1,500

Fair value depreciation (1.5million/10) x2 (300)

5,000 6,700

Post-acquisition profit = 6,700 – 5,000= 1,700. Shared into two; 80%: 20%

80% of 1,700 =# 1,360 to W5; 20% of 1,700 = #340 to W4

3. Goodwill
N’000
Parent’s Investment in subsidiary 5,000
Fair value of Non-controlling interest at acquisition (20% x 5,000) 1,000

Fair value of subsidiary’s net assets at acquisition (from W2) (5,000)

Goodwill on acquisition 1,000

53
FINANCIAL REPORTING

Impairment (Nil)
Goodwill at reporting date 1,000

4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 1,000
Share of NCI in MAMA’s post acquisition profit (W2) 340
Share of NCI in impairment (Nil)
1,340

5. Group Retained Earnings

N’000
PAPA’s retained earnings 14,500
Share of PAPA in MAMA’s post acquisition profit (W2) 1,360
Share of PAPA in impairment (Nil)

15,860

Illustration 15

Husband acquired 90% of the equity share capital of Wife, two years ago when the
retained profit of Wife stood at N70, 000. Statements of financial positions as at the year
end of 31/12/03 are as follows:

Husband Wife

Non – current assets: N’000 N’000

PPE 1,400 420

Investment in Sat Cost 476 ___

1,876 420

Current assets

Inventory 1,260 280

Receivables 1,540 350

Bank 140 70

4,816 1,120

Equity:

Share capital 210 70

Retained earnings 2,226 434

2,436 504

54
FINANCIAL REPORTING

Non-current liabilities 1,680 392

Current liabilities 700 224

4,816 1,120

Wife transferred goods to Husband at a transfer price of #252,000 at a mark-up of 50%.

2/3 remained in inventory at the year end. The current account in Husband and Wife
stood at #308,000 on that day. Goodwill has suffered an impairment of #140,000.

The Husband group uses the fair value method to value the non-controlling interest. The
fair value of the non-controlling interest at acquisition was #56,000.

Required: Prepare the consolidated statement of financial position as at 31/12/2003.

Solution

PAPA GROUP

Consolidation Statement of Financial Position as at 31st December, 2005

N’000

Non-current assets

PPE [1,400 + 420] 1,820

Goodwill 252

2,072

Current assets

Inventory [1,260 + 280 – 56PURP] 1,484

Receivables [1,540 + 350 – 308 intra group balance] 1,582

Bank [140 + 70] 210

5,348

Equity

Share capital 210

Retained earnings 2,377.20

2,587.20

Non-controlling interest 72.80

Non-current liabilities [1,680 + 392] 2,072

Current liabilities [700 + 224 – 308 intra group balance] 616

5,348

55
FINANCIAL REPORTING

Workings

1. Establish the group structure

Husband

90%

(2 years ago) NCI = 10%

Wife

2. Net Assets of the Subsidiary (WIFE)

@acquisition @reporting
N’000 N’000

Ordinary share capital 70 70

Retained earnings 70 434

PURP (see below) (56)

140 448

PURP (Where Subsidiary is the seller)

Goods sold to parent = 252,000
Mark up = 50%. Don’t forget, you can’t apply mark up on sales (transfer
price); therefore, it is converted to margin. 50/150 = 1/3
Remaining goods in inventory = 2/3 of 252,000 = 168,000
PURP = 1/3 of 168,000 = 56,000

Post-acquisition profit = 448 – 140 = 308. Shared into two; 90%: 10%

90% of 308=# 277.20 to W5

10% of 308 = #30.80 to W4

3. Goodwill
N’000
Parent’s Investment in subsidiary 476
Fair value of Non-controlling interest at acquisition (20% x 5,000) 56

Fair value of subsidiary’s net assets at acquisition (from W2) (140)

Goodwill on acquisition 392
Impairment (140)
Goodwill at reporting date 252

56
FINANCIAL REPORTING

4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 56
Share of NCI in WIFE’s post acquisition profit (W2) 30.80
Share of NCI in impairment (10% X 140) (14)
72.80
5. Group Retained Earnings
N’000
Husband’s retained earnings 2,226
Share of Husband in Wife’s post acquisition profit (W2) 277.20
Share of Husband in impairment (90% x 140) (126)

2,377.20

Treating PURP on inter-company transfers of Property Plant & Equipment

Like the intra group sales of inventories, the parent company may transfer/sell non-
current assets (e.g. an item of PPE) to subsidiary or subsidiary selling to parent company.
The implication of this is that the seller (either parent or subsidiary) recognizes an initial
profit on the sale. Therefore, the recognized profit needs to be adjusted for, just like
what we did on inventory. The adjustment for the profit is necessary so as to recreate the
situation that would have existed assuming the sale had not occurred.

You will agree with me that, if the sale had not occurred:

• There wouldn’t have been profit on sale

• Depreciation would have been based on the original cost of the assets to the
group.

The PURP on the transfer of non-current asset will reduce as the non-current asset is
depreciated. Therefore it must be recomputed at the end of each period in which the
assets appears in the consolidated statement of financial position.

The easiest way to calculate the adjustment required is to compare the carrying value
of the asset now with carrying value that it would have been held at assuming the sale
never occurred:

Carrying value at reporting date with transfer XX

Carrying value at reporting date without transfer (XX)

Adjustment to be made XX

The calculated amount should be:

i. Deducted when adding across P’s non - current assets + S’s non – current
assets
ii. Deducted in the retained earnings of the seller

57
FINANCIAL REPORTING

Illustration 16

Alpha sold an item of plant to Beta for N102, 000 on 1/1/2011. The plant originally cost P
N170, 000 and had an original useful economic life of 5 years when purchased 3 years
ago. The useful economic life of the asset has not changed as a result of the transfer.

What is the URP on the transaction at the end of the year of transfer (2011)?

Solution

Recall the formula:

Carrying value at reporting date with transfer XX

Carrying value at reporting date without transfer (XX)

Adjustment to be made XX

The URP on the transaction at the end of the year:

Carrying value at 31/12/2011 (reporting date) with transfer 51,000

(102,000 – (102,000/2years))

Carrying value at 31/12/2011 (reporting date) without transfer (34,000)

(170,000 – (170,000/5years x 4years)) ----------

17,000

Treating Mid – Year Acquisition

If you carefully observed all the illustrations we have looked at, the subsidiary has either
been acquired exactly one year ago or more than that. What if the acquisition took
place less than twelve months ago? That is a case of mid-year acquisition and it is a
likely exam question.

The little challenge you may likely face in examination where there has been a mid –
year acquisition is that, the retained earnings of the subsidiary at the acquisition date
may not be given; therefore you may have work it out. Because the retained earnings at
acquisition of subsidiary (i.e. pre – acquisition retained earnings) is very essential as it is
used in W2 net assets.

What the examiner may likely give you is either the subsidiary retained earnings at the
start of the accounting period or the profit for the accounting year, as well as the
subsidiary retained earnings at the reporting date. It is usually the case, unless otherwise
stated, that profits accrue evenly over the accounting period and that no dividends will
have been paid by the subsidiary during the period.

The retained earnings at acquisition can be determined by taking the closing retained
earnings and deducting the pro-rated post –acquisition element of the profit for the
year. Alternatively, the retained earnings at acquisition can be worked out as the

58
FINANCIAL REPORTING

opening retained earnings plus the profit for the period covering beginning of the year
to the date of acquisition.

Treating Dividends paid by the subsidiary

Dividend is a distribution of profit. When a subsidiary company pays dividend to its

shareholders (Subsidiary’s shareholders may be parent and NCI in partially owned
subsidiary and in fully owned subsidiary it is parent company that owns 100% of
subsidiary’s company shares), the dividend paid to parent by the subsidiary is an intra-
group dividend (and don’t forget all intra-group transactions are eliminated on
consolidation) and so far as the group is concerned will be eliminated on consolidation.

IAS 27 separate financial statements (Revised) require all dividends from a subsidiary to
be recognized in the parent company’s statement of profit or loss. There is no need for
the parent company to make a distinction between whether these are paid out of pre –
acquisition or post –acquisition profit. The significance of this is that all dividends received
by the parent company will be regarded as a return on the investment rather than a
return of the investment.

However where very large dividends are paid out, perhaps exceeding the post –
acquisition profits, this depletion of assets requires the parent company to consider
whether the investment needs to be written down i.e. whether there has been an
indicator of impairment and therefore a loss. An indicator of impairment exists if:

i. The dividend exceeds the total comprehensive income of the subsidiary, in

the period the dividends is declared; or
ii. The carrying amount of the investment exceeds the amount of net assets
(including associated goodwill) recognized in the consolidated financial
statements.

ILLUSTRATION 17

You are required to prepare a consolidated statement of financial position as at 30th

November 2010 from the following information.

On 1/05/10 Kokopo bought 55% of Sololá by N1, 292,000 cash. The summarized
statements of financial positions for the two companies as at 30 November 2010 are:

Kokopo Sololá

N N

Non-current assets:

PPE 2,346,000 ,955,000

Investments 1,666,000

59
FINANCIAL REPORTING

Current assets:

Inventory 255,000 289,000

Receivables 323,000 340,000

Cash 34,000 -

4,624,000 2,584,000

Equity:

Share capital 850,000 680,000

Retained earnings 3,213,000 1,173,000

4,063,000 1,853,000

Non-current liabilities:

4% loan notes - 340,000

Current liabilities 561,000 391,000

4,624,000 2,584,000

The following information is relevant

(i) The inventory of Kokopo includes N136,000 of goods purchased for cash from
Sololá at Cost Plus 25%
(ii) On 1/6/10 Kokopo transferred an item of plant to Sololá for #255,000. Its
carrying amount at that date was N170, 000. The asset had a remaining useful
economic life of 5 years.
(iii) The Kokopo group values the NCI using the fair value method. At the date of
acquisition the fair value of the 40% non-controlling interest was N850,000
(iv) An impairment loss of N17,000 is to be charged against goodwill at the year
end
(v) Susan earned a profit of N153,000 in the year ended 30/11/10
(vi) The loan note in Sololá’s books represents monies borrowed from Kokopo
during the year. All of the loan note interest has been accounted for.
(vii) Included in Kokopo’s receivables is N68, 000 relating to inventory sold to Sololá
during the year. Sololá raised a cheque for N42, 500 and sent it to Kokopo on
29/11/10. Kokopo did not receive this cheque until 7th December 2010.

60
FINANCIAL REPORTING

Solution
KOKOPO GROUP

Consolidation Statement of Financial Position as at 30th November 2010

N
Non-current assets:
PPE [2,346,000 + 1,955,000 – 76,500PURP] 4,224,500
Investment [1,666,000 – 1,292,000cost of acquisition – 340,000loan notes]34,000
Goodwill 361,250
4,619,750
Current assets:
Inventory [255,000 + 289,000 – 27,200PURP] 516,800
Receivables [323,000 + 340,000 - 68,000 intra group receivables] 595,000
Cash [34,000 + 42,500 cash in transit] 76,500
5,808,050
Equity:
Share capital 850,000
Retained earnings 3,161,277.50
4,011,277.50
Non-controlling interest 870,272.50

Non-current liabilities:
4% loan notes [34,000 – 34,000 intra group loan notes] NIL

Current liabilities: [561,000 + 391,000 – 25,500 intra group payables] 926,500

5,808,050

Workings

1. Establish the group structure

Kokopo

On 1st May, 2010 55%

(7 months ago) NCI = 45%

Sololá

2. Net Assets of the Subsidiary (Sololá)

@acquisition
@reporting
N N

Ordinary share capital 680,000 680,000

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FINANCIAL REPORTING

Retained earnings (see note below) 1,083,750 1,173,000

PURP (25/125 x 136,000) (27,200)

1,763,750 1,825,800

Note:

I want to believe you still remember these:

i. Retained profit at the beginning + profit for the year = retained profit
at the end
ii. Retained profit at the end – profit for the year = retained profit at the
beginning
iii. Retained profit at the end – retained profit at the beginning = profit
for the year

Now, using equation ii above,

Retained profit at year end, 30/11/2010 = 1,173,000

Profit for the year = (153,000)

Retained profit at the beginning = 1,020,000

If retained profit at the beginning is N1, 020,000, and profit between beginning of the
year to date of acquisition (i.e. 01/12/2009 – 01/05/2010 = 5months) is N63, 750
(153,000/12 x 5months). Therefore, retained profit as at acquisition date is 1,020,000 +
63,750 = N1, 083,750

Post-acquisition profit = 1,825,800 – 1,763,750 = 62,050. Shared into two; 55%: 45%

55% of 62,050 = #34,127.50 to W5

45% of 62,050 = #27,922.50 to W4
3. Goodwill
N
Parent’s Investment in subsidiary 1,292,000
Fair value of Non-controlling interest at acquisition 850,000
Fair value of subsidiary’s net assets at acquisition (from W2)
(1,763,750)
Goodwill on acquisition 378,250
Impairment (17,000)
Goodwill at reporting date 361,250

4. Non-controlling Interest
N
Non-controlling Interest value at acquisition (from W3) 850,000
Share of NCI in Sololá’s post acquisition profit (W2) 27,922.5

62
FINANCIAL REPORTING

Share of NCI in impairment (45% X 17,000) (7,650)

870,272.50
5. Group Retained Earnings
N
Kokopo’s retained earnings 3,213,000
Share of Kokopo in Sololá’s post acquisition profit (W2) 34,127.50
PURP (W6) (76,500)
Share of Kokopo in impairment (55% x 17,000) (9,350)

3,161,277.50

6. PURP
N
Carrying value at reporting date with transfer 229,500

{255,000 – [(255,000/5years) x 6/12]}

Carrying value at reporting date without transfer (153,000)

{170,000 – [(170,000/5years) x 6/12]}

76,500

ILLUSTRATION 18
a. On 1 October 2016, Hypothesis acquired 75% of Layers’ equity shares by means
of a share-for-share exchange of two new shares in Hypothesis for every five
acquired shares in Layers. In addition, Hypothesis issued to the shareholders of
Layers a N100 7% loan note for every 1,000 shares it acquired in Layers. Hypothesis
has not recorded any of the purchase consideration, although it does have other
7% loan notes already in issue.
The market value of Hypothesis’s shares at 1 October 2016 was N2 each.
The statements of financial position of Hypothesis and Layers as at 31 March 2017 are:
Hypothesis Layers
Assets N’000 N’000
Non-current assets:
Property, plant and equipment 663,600 357,000
Financial asset: equity investments (notes (i) and (iv)) 105,000 44,800
––––––– –––––––
768,600 401,800
Current assets:
Inventory (note (ii)) 285,600 117,600
Trade receivables (note (iii)) 207,200 126,000
Bank 29,400 nil
––––––– –––––––
Total assets 1,290,800 645,400
––––––– –––––––

63
FINANCIAL REPORTING

Equity and liabilities

Equity:
Equity shares of N1 each 560,000 280,000
Retained earnings/ (losses) – at 1 April 2016 268,800 (56,000)
– For year ended 31/03/17 103,600 112,000
––––––– –––––––
932,400 336,000
Non-current liabilities:
7% loan notes 112,000 nil
Current liabilities:
Trade payables (note (iii)) 246,400 182,000
Bank overdraft nil 127,400
––––––– –––––––
Total equity and liabilities 1,290,800 645,400
––––––– –––––––

Additional information:
(i) At the date of acquisition, Layers produced a draft statement of profit or
loss which showed it had made a net loss after tax of N28 million at that
date. Hypothesis accepted this figure as the basis for calculating the pre-
and post-acquisition split of Layers’ profit for the year ended 31 March
2017.
Also at the date of acquisition, Hypothesis conducted a fair value exercise
on Layers’ net assets which were equal to their carrying amounts
(including Layers’ financial asset equity investments) with the exception of
an item of plant which had a fair value of N42 million below its carrying
amount. The plant had a remaining economic life of three years at 1
October 2016.
Hypothesis’s policy is to value the non-controlling interest at fair value at
the date of acquisition. For this purpose, a share price for Layers of N1·20
each is representative of the fair value of the shares held by the non-
controlling interest.
(ii) Each month since acquisition, Hypothesis’s sales to Layers were
consistently N64.4million. Hypothesis had marked these up by 15% on cost.
Layers had one month’s supply (N64.4million) of these goods in inventory
at 31 March 2017. Hypothesis’s normal mark-up (to third party customers) is
40%.
(iii) Layers’ current account balance with Hypothesis at 31 March 2017 was
N39.2million, which did not agree with Hypothesis’s equivalent receivable
due to a payment of N12.6 million made by Layers on 29 March 2017,
which was not received by Hypothesis until 5 April 2017.
(iv) The financial asset equity investments of Hypothesis and Layers are carried
at their fair values as at 1 April 2016. As at 31 March 2017, these had fair
values of N99·4 million and N54.6 million respectively.
(v) There was no impairment losses within the group during the year ended 31
March 2017.

64
FINANCIAL REPORTING

Required:
Prepare the consolidated statement of financial position for Paradigm as at 31 March
2017. (25 marks)
b. It is one of the strategies of Hypothesis to buying struggling businesses, reviving
them and then sells them at a profit within a short period of time. Hypothesis is
hoping to do this with Layers.

Required: As an adviser to a prospective purchaser of Layers, explain any concerns you

would raise about basing an investment decision on the information available in
Hypothesis’s consolidated financial statements and Layers’ entity financial statements.
(5 marks)
(30 marks)
Solution

HYPOTHESIS GROUP
Consolidation Statement of Financial Position as at 31st March 2017
N’000
Assets
Non-current assets:
Property, plant and equipment 985,600
(663,600 + 357,000 - 42,000 fair value + 7,000 depreciation)
Goodwill 119,000
Financial asset: equity investments (99,400 + 54,600) 154,000
––––––––
1,258,600
Current assets;
Inventory (285,600 + 117,600 – 8,400 PURP) 394,800
Trade receivables (207,200 + 126,000 – 51,800intra-group (12,600 + 39,200)) 281,400
Bank (29,400 + 12,600 cash in transit) 42,000
------------
Total assets 1,976,800
Equity and liabilities
Equity attributable to owners of the parent:
Equity shares of N1 each (560,000 + 84,000 (w3)) 644,000
Share premium (w 3)) 84,000
Retained earnings (w5) 476,000
-------------
1,204,000
Non-controlling interest (w 4) 123,200
------------
Total equity 1,327,200

Non-current liabilities:
7% loan notes (112,000 + 21,000 additional issued to Layers as part of acquisition cost) 133,000

Current liabilities:
Trade payables (246,400 + 182,000 – 39,200intra-group) 389,200

65
FINANCIAL REPORTING

Bank overdraft 127,400

-------------
Total equity and liabilities 1,976,800

Workings (figures in brackets are in N’000)

1. Establish the group structure

Hypothesis

On 1st October 2016 75%

(6 months ago) NCI = 25%

Layers

2. Net Assets of the Subsidiary (Layer)

@acquisition
@reporting
N’000 N’000

Ordinary share capital 280,000 280,000

Retained earnings (see note below) (84,000) 56,000

Fair value adjustment on plant (42,000) (42,000)

Over depreciation [(42,000/3) x 6/12] 7,000

Gain on financial assets: equity investment 9,800

[54,600 – 44,800] 154,000 310,800

Note:

From additional information (i), since the parent company have accepted the
N28million loss as at the date of acquisition as the basis for calculating the pre
and post-acquisition split of Layers’ profit, therefore retained earnings as at
acquisition date will be:

Retained earnings as at year end, 1st April, 2016 (56,000)

Loss for the period (from 1st April – 1st October 2016) (28,000)

Retained earnings at acquisition date (84,000)

Post-acquisition profit = 310,800 – 154,000 = 156,800. Shared into two; 75%: 25%

75% of 156,800 = #117,600 to W5

66
FINANCIAL REPORTING

25% of 156,800 = #39,200 to W4

3. Goodwill
N’000
Parent’s Investment in subsidiary
-Share [2/5 x (75% of 280,000) x N2] 168,000
-7% loan notes [100/1000 x (75% of 280,000)] 21,000
Fair value of Non-controlling interest at acquisition (1.20 x (25% of 280,000)] 84,000

Fair value of subsidiary’s net assets at acquisition (from W2) 154,000)

Goodwill on acquisition 119,000

The share issue by parent of 2 for 5 in subsidiary is added to the share capital and
premium of the parent in the consolidated statement of financial position and will be
recorded as N84, 000 share capital and N84, 000 share premium as the shares have a
nominal value of N1 each and the issue value was N2 each.

4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 84,000
Share of NCI in Layers post acquisition profit (W2) 39,200
123,200
5. Group Retained Earnings
N’000
Hypothesis’s retained earnings [268,800 + 103,600] 372,400
Share of Hypothesis in Layer’s post acquisition profit (W2) 117,600
PURP (W6) (8,400)
Loss on equity instrument (105,000 – 99,400) (5,600)

476,000

6. PURP (on inventory where parent is the seller) N’000

15/115 x 64,400 8,400

b. The consolidated financial statements of Hypothesis are of little value when trying to
assess the performance and financial position of its subsidiary, Layers. Therefore the main
source of information on which to base any investment decision would be Layers’ own
entity financial statements. However, where a company is part of a group, there is the
potential for the financial statements (of a subsidiary) to have been subject to the
influence of related party transactions. In the case of Layers, there has been a
considerable amount of post-acquisition trading with Hypothesis and, because of the
related party relationship, there is the possibility that this trading is not at arm’s length (i.e.
not at commercial rates). Indeed from the information in the question, Hypothesis sells
goods to Layers at a much lower cost than it does to other third parties. This gives Layers
a benefit which is likely to lead to higher profits (compared to what they would have
been if it had paid the market value for the goods purchased from Paradigm).

67
FINANCIAL REPORTING

The main concern is that any information about the ‘benefits’ Hypothesis may have
passed on to Layers through related party transactions is difficult to obtain from
published sources. It may be that Hypothesis has deliberately ‘flattered’ Layers’ financial
statements specifically in order to obtain a high sale price and a prospective purchaser
would not necessarily be able to determine that this had happened from either the
consolidated or entity financial statements

ILLUSTRATION 19
On 1 July 2016, Zaandam Co acquired 60% of Medea Co.’s equity shares by means of a
share exchange of one new share in Zaandam Co for every two acquired shares in
Medea Co. In addition, Zaandam Co will pay a further N0·54 per acquired share on 30
June 2017. Zaandam Co has not recorded any of the purchase consideration and its
cost of capital is 8% per annum.
The market value of Zaandam Co.’s shares at 1 July 2016 was N3·00 each.
The summarised statements of financial position of the two companies as at 31
December 2017 are:
Zaandam Co Medea
N’000 N’000
Assets
Non-current assets
Property, plant and equipment (note (i)) 127,000 67,500
Financial asset: equity investments (note (iv)) 27,500 10,000
––––––– –––––––
154,500 77,500
––––––– ––––––
–
Current assets
Inventory (note (iii)) 63,500 26,500
Other current assets 48,500 20,000
––––––– –––––––
112,000 46,500
––––––– ––––––
–
Total assets 266,500 24,000
––––––– –––––
––
Equity and liabilities
Equity
Equity shares of N1 each 100,000 45,000
Retained earnings:
Brought forward at 1 January 2016 61,000 43,000
Profit/ (loss) for the year ended 31 March 2016 25,000 (15,000)
––––––– ––––––
–
186,000 73,000
Non-current liabilities:
Deferred tax (note (i)) 25,000 nil

68
FINANCIAL REPORTING

Current liabilities 55,500 51,000

––––––– –––––––
Total equity and liabilities 266,500 24,000
––––––– –––––––
The following information is relevant:
i. At the date of acquisition, Zaandam Co conducted a fair value exercise on
Medea Co.’s net assets which were equal to their carrying amounts (including
Medea Co.’s financial asset equity investments) with the exception of an item
of plant which had a fair value of N12·5 million below its carrying amount. The
plant had a remaining useful life of 30 months at 1 July 2016. The directors of
Zaandam Co are of the opinion that an unrecorded deferred tax asset of N6
million at 1 July 2016, relating to Medea Co.’s losses, can be relieved in the
near future as a result of the acquisition. At 31 December 2016, the directors’
opinion has not changed, nor has the value of the deferred tax asset.
ii. Zaandam Co.’s policy is to value the non-controlling interest at fair value at
the date of acquisition. For this purpose, a share price for Medea Co of N1·50
each is representative of the fair value of the shares held by the non-
controlling interest.
iii. At 31 December 2016, Medea Co held goods in inventory which had been
supplied by Zaandam Co at a mark-up on cost of 35%. These goods had cost
Medea Co N12·15 million
iv. The financial asset equity investments of Zaandam Co and Medea Co are
carried at their fair values at 1 January 2016.
At 31 December 2016, these had fair values of N30·5 million and N9 million
respectively, with the change in Medea Co.’s investments all occurring since
the acquisition on 1 January 2016.
v. There is no impairment to goodwill at 31 December 2016.

Required:
Prepare the following extracts from the consolidated statement of financial position of
Zaandam Co as at 31 December 2016:
i. Goodwill; 6 marks
ii. Retained earnings; 7 marks
iii. Non-controlling interest. 2 marks
(15 marks)

Zaandam Co
Consolidation Statement of Financial Position (Extract) as at 31st December 2016
N’000
i. Goodwill 7,000
ii. Retained earnings 81,710
iii. Non-controlling interest 24,600

69
FINANCIAL REPORTING

Workings (figures in brackets are in N’000)

i. Goodwill in Medea Co
N’000 N’000
Controlling interest:
Share exchange (60% x 45,000 x ½ x 3) 40,500
Deferred consideration (60% x 45,000 x 0·54 x 1/1·08) 13,500
Non-controlling interest (40% x 45,000 x N1·50) 27,000
–––––––
81,000
Net Asset of Medea Co at acquisition:
Equity shares 45,000
Pre-acquisition retained profits/losses:
Profit at 1 January 2016 43,000
Loss 1 January to 30 June 2016 (15,000 x 6/12) (7,500)
Fair value adjustments: plant (12,500)
Deferred tax asset 6,000 (74,000)
––––––– –––––––
Goodwill arising on acquisition 7,000
–––––––
ii. Consolidated retained earnings
N’000
Zaandam Co.’s retained earnings (61,000 +25,000) 86,000
Medea Co.’s post-acquisition losses (6,000 (see below) x 60%) (3,600)
URP in inventory (see below) (3,150)
Finance cost of deferred consideration (13,500 (w (i)) x 8% x 6/12) (540)
Profit on equity investments (30,500 – 27,500) 3,000
–––––––
81,710
–––––––
Net Asset of Medea Co:
@ Acquisition @
reporting
N’000 N’000
Equity shares 45,000 45,000
Pre-acquisition retained profits/losses:
Profit at 1 January 2016 43,000 43,000
Loss 1 January to 30 June 2016 (15,000 x 6/12) (7,500) (15,000)
Fair value adjustments: plant (12,500) (12,500)
Adjustment for over-deprn on fair value of plant (12,500 x 6/30 months) 2,500
Loss on equity investments (10,000 – 9,000) (1,000)
Deferred tax asset 6,000 6,000
--------- --------
74,000 68,000
The post-acquisition loss is (68,000 – 74,000) = 6,000

PURP

70
FINANCIAL REPORTING

Medea Co.’s inventory at 31 December 2016 is N12·15 million, at a mark-up on cost of

35% there would be N3,150,000 of unrealised profit (PURP) (35/135 x 12,150,000) in
inventory.

iii. Non-controlling interest

N’000
Fair value on acquisition (w (i)) 27,000
Post-acquisition losses (6,000 (w (ii) x 40%) (2,400)
––––––
24,600
––––––

ILLUSTRATION 20
On 1 April 2011, P acquired 80% of S’s equity shares by means of an immediate share
exchange and a cash payment of 88 kobo per acquired share, deferred until 1 April
2012. P has recorded the share exchange, but not the cash consideration. P’s cost of
capital is 10% per annum.
The summarised statements of financial position of the two companies as at 31 March
2012 are:
P S
Assets N’000 N’000
Non-current assets
Property, plant and equipment 38,100 28,500
Investments –S 24,000
– Cube at cost (note (iv)) 6,000
– Loan notes (note (ii)) 2,500
– Other equity (note (v)) 2,000 NIL
––––––– –––––––
72,600 28,500
Current assets
Inventory (note (iii)) 13,900 10,400
Trade receivables (note (iii)) 11,400 5,500
Bank (note (iii)) 900 600
––––––– –––––––
Total assets 98,800 45,000
––––––– –––––––
Equity and liabilities
Equity
Equity shares of N1 each 25,000 10,000
Share premium 17,600 nil
Retained earnings – at 1 April 2011 16,200 18,000
– For year ended 31 March 2012 14,000 8,000
––––––– –––––––
72,800 36,000
Non-current liabilities
11% loan notes (note (ii)) 12,000 4,000
Deferred tax 4,500 NIL

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FINANCIAL REPORTING

Current liabilities (note (iii)) 9,500 5,000

––––––– –––––––
Total equity and liabilities 98,800 45,000
––––––– –––––––
Additional information:
i. At the date of acquisition, P conducted a fair value exercise on S’s net assets
which were equal to their carrying amounts with the following exceptions:
 An item of plant had a fair value of N3 million above its carrying
amount. At the date of acquisition it had a remaining life of five
years. Ignore deferred tax relating to this fair value.
 S had an unrecorded deferred tax liability of N1 million, which was
unchanged as at 31 March 2012.
P’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose a share price for S of N3·50 each is representative of
the fair value of the shares held by the non-controlling interest.
ii. Immediately after the acquisition, S issued N4 million of 11% loan notes, N2·5
million of which were bought by P. All interest due on the loan notes as at 31
March 2012 has been paid and received.
iii. P sells goods to S at cost plus 50%. Below is a summary of the recorded
activities for the year ended 31 March 2012 and balances as at 31 March
2012:
P S
N’000 N’000
Sales to S 16,000
Purchases from P 14,500
Included in P’s receivables 4,400
Included in S’s payables 1,700
On 26 March 2012, P sold and despatched goods to S, which S did not record until
they were received on 2 April 2012. S’s inventory was counted on 31 March 2012 and
does not include any goods purchased from P. On 27 March 2012, S remitted to P a
cash payment which was not received by P until 4 April 2012. This payment
accounted for the remaining difference on the current accounts.

iv. P bought 1·5 million shares in Cube on 1 October 2011; this represents a
holding of 30% of Cube’s equity. At 31 March 2012, Cube’s retained profits
had increased by N2 million over their value at 1 October 2011. P uses equity
accounting in its consolidated financial statements for its investment in Cube.
v. The other equity investments of P are carried at their fair values on 1 April
2011. At 31 March 2012, these had increased to N2·8 million.
vi. There was no impairment losses within the group during the year ended 31
March 2012.
Required:
Prepare the consolidated statement of financial position for P as at 31 March 2012.

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FINANCIAL REPORTING

Solution

P GROUP

Consolidation Statement of Financial Position as at 31st March 2012

N’000 N'000

Non-current assets:

P P E(38,100 + 28,500 + 3,000 fair value - 600 depreciation) 69,000

Goodwill 7,400
Investments in Cubes 6,600
Investment in equity investments 2,800
–––––––

85,800
Current assets:
Inventory (13,900 + 10,400 + 1,500goods in transit - 500 URP) 25,300
Trade receivables (11,400 + 5,500 - 4,400 intra group) 12,500
Bank (900 + 600 + 1,200cash in transit) 2,700
––––––––
Total assets 126,300
––––––––
Equity attributable to owners of the parent:
Equity shares of N1 each 25,000
Reserves:
Share premium 17,600
Retained earnings 36,380
––––––––
78,980
Non-controlling interest 8,480
––––––––
Total equity 87,460
Non-current liabilities:
11% loan notes (12,000 + 4,000 - 2,500 intra-group loan) 13,500
Deferred tax (4,500 + 1,000unrecorded deferred tax (W2)) 5,500

Current liabilities:
Deferred consideration (6,400 + 640 unwinding of discount (W5)) 7,040
Other current liabilities (9,500 + 5,000 + 1,500goods in transit - 3,200 intra group)12,800
––––––––
Total equity and liabilities 126,300
-------------

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FINANCIAL REPORTING

Workings (figures in bracket are in N’000)

1. Establish the group structure

P

On 1st April, 2011 80%

(12 months ago) NCI = 20%

2. Net Assets of the Subsidiary (S)

@acquisition
@reporting
N’000 N’000

Ordinary share capital 10,000 10,000

Retained earnings 18,000 26,000

Fair value adjustment on plant 3,000 3,000

Fair value depreciation (3,000/5years) x 1year (600)

Unrecorded deferred tax liability (1,000) (1,000)

30,000 37,400

Post-acquisition profit = 37,400 – 30,000 = 7,400. Shared into two; 80%: 20%

80% of 7,400 = #5,920 to W5

20% of 7,400 = #1,480 to W4

3. Goodwill

N’000
Parent’s Investment in subsidiary
Share for share exchange 24,000
Deferred consideration [(80% x 10,000) x 1/1.1 x 88kobo] 6,400
FV of Non-controlling interest at acquisition (3.50 x (20% of 10,000)] 7,000
Fair value of subsidiary’s net assets at acquisition (from W2) (30,000)
Goodwill on acquisition 7,400

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FINANCIAL REPORTING

4. Non-controlling Interest
N’000
Non-controlling Interest value at acquisition (from W3) 7,000
Share of NCI in S’s post acquisition profit (W2) 1,480
8,480

5. Group Retained Earnings

N’000
P’s retained earnings [16,200 + 14,000] 30,200
Share of P in S’s post acquisition profit (W2) 5,920
PURP (W6) (500)
Share of P in Cube’s post acquisition profit (W7) 600
Finance cost on deferred consideration (6,400 x 10%) (640)
Gain on equity instrument (2,800 – 2,000) 800

36,380

6. PURP (on inventory where parent is the seller)

N’000

Goods-in-transit (GIT) (16,000 – 14,500) 1,500

50/150 x 1,500 500

The goods-in-transit sale of N1·5 million includes unrealised profit (URP)

7. Investment in Cube
Cost of investment 6,000
Share of post-acquisition profit (30% x 2,000) 600
6,600
8. Reconciliation of current accounts
P S
N’000 N’000
Current account balances per question to eliminate 4,400 1,700
Goods-in-transit (GIT) (16,000 – 14,500) 1,500
Cash-in-transit (CIT) (balance required to reconcile) (1,200)
–––––– ––––––
3,200 3,200
–––––– ––––––
The goods-in-transit sale of N1·5 million includes unrealised profit (URP) of N500, 000 (1,500
x 50/150).

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FINANCIAL REPORTING

INTRODUCING GROUP STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME

Before now, the statement of profit or loss was called the income statement and before
then it was called profit and loss account.

The purpose of preparing statement of profit or loss is to show the performance or

financial result of an entity. It is prepared in a manner to show from revenue through
expenses to profit after tax for a reporting period.

In the preparation of consolidated statement of profit or loss, the income and expenses
of the parent and the subsidiary are cross cast in full, line by line, just like what we did in
the group statement of financial position.

Where subsidiary is not wholly owned, meaning there is non-controlling interest, this
means that the subsidiary profit for the year {i.e. profit after tax} will be attributable to
both non-controlling interest and parent. Immediately after the profit for the year line,
show a split of the profit between amounts attributable to the parent’s shareholders and
the non-controlling interest. The essence of this split is to reflect ownership.

Refer to IAS 1 Presentation of Financial Statement for revision of the statement of profit or
loss format.

What the consolidated statement of profit or loss does is to show the profit generated by
all resources shown in the related statement of financial position, i.e. the net assets of the
parent company (P) and its subsidiary (S).

Illustration 21

The statements of profit or loss for Fortune and Wealth for the year ended 31/12/2014 are
shown below. Fortune acquired 70% of the ordinary share capital of Wealth several years
ago.

Fortune Wealth
#, 000 #, 000

Revenue 31,200 10,400

Cost of sales and expenses (28,080) (9,360)

3,120 1,040

Investment income:

Dividend received from Wealth 19.5 Nil

Profit before tax 3,139.5 1,040

Tax (1,495) (494)

Profit for the year 1,644.5 546

Required:

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FINANCIAL REPORTING

Prepare the consolidated statement of profit or loss for the year ended 31 st December
2014.

Solution

FORTUNE GROUP
Consolidated Statement of Profit or Loss for the year ended 31st December, 2014.
N’000

Revenue [31,200 + 10,400] 41,600

Cost of sales and expenses [28,080 + 9,360] 37,440

Operating profit 4,160

Investment income: dividend from Wealth (see note below) ------

Profit before tax 4,160

Tax [1,495 + 494] (1,989)

Profit for the year 2,171

Attributable to:

Group shareholders (balancing figure) 2,007.20

Non-controlling interest (30% of 546) 163.80

2,171

Note: the investment income was eliminated because it is an intra-group income. Don’t
forget the rule for consolidation, i.e. all intra group transactions should be eliminated at
the point of consolidation.

In preparing consolidated statement of profit or loss, two major workings are at least
important

i. Group structure (just like working 1 under the group statement of financial
position)
ii. Calculations of profit attributable to non-controlling interest.
In calculating profit attributable to the non-controlling interest, use the format
below:

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FINANCIAL REPORTING

=N=’000

NCI% X subsidiary’s profit after tax XX

Less:

NCI% x fair value depreciation (XX)

NCI% x PURP {where subsidiary = seller} (XX)

NCI% x impairment {where fair value method of NCI is used} (XX)

X XX

Treating intra-group sales and purchases in consolidated statement of profit or loss

Inter-company sales and purchases between the parent and the subsidiary is part of
intra group transactions and therefore have to be excluded from the group statement
of profit or loss. They are not external income or expenses.

For instance where P sells to S, P records sales and S records purchases {cost of sales}.
This is an intra-group transaction and need to be eliminated by deducting the intra
group sales amount from both group revenue and cost of sales:

• Consolidated revenue = P’s revenue + S’s revenue – intra- group sales

• Consolidated cost of sales = P’s cost of sales + S’s cost of sales – intra-group
sales

Treating intra-group Interest received and Interest paid in consolidated statement of

profit or loss

It is not impossible for parent company to loan its subsidiary money or for subsidiary
company to loan its parent. At the reporting date, there may be loan outstanding
between them; the loan interest paid by one company and received by the other
company must be eliminated from the consolidated statement of profit or loss. It is an
intra-group transaction.

Therefore, inter-company interest is deducted from both group interest receivable

(investment income) and group interest payables (finance costs).

• Group interest receivable = P’s interest income + S’s interest income – intra-group
interest received
• Group interest payable = P’s interest cost + S’s interest cost – intra group interest cost

Treating intra-group Dividend in consolidated statement of profit or loss

The dividend paid by the subsidiary company is meant for its shareholders. In fully own
subsidiary, the subsidiary’s shareholder is parent company but in a partially owned
subsidiary, the shareholders are parent and non-controlling interest. Therefore, payment

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FINANCIAL REPORTING

of dividend to parent by subsidiary is an intra-group transaction need to be cancelled

on consolidation. The effect of this on the consolidated statement of profit or loss is:

• Only dividends paid by parent to its own shareholders will appear on the
consolidated statement of changes in equity.
• Dividend received by parent from subsidiary will be eliminated. It will not show in the
consolidated statement of profit or loss.
• Any dividends income shown in the consolidated statement of profit or loss must arise
from investments other than those in subsidiaries or associates

Treating unrealized profit (URP) in consolidated statement of profit or loss

Inventories are valued at the lower of cost and NRV to the group.

Where goods sold on intra-group basis are still included in the closing inventory, then
adjustment is necessary for URP on the closing inventory remain as a result of intra-group
sales.

The effect of this URP is to reduce the profit, therefore it may be seen as an extra
expense and included in the cost of sales i.e. it is added to cost of sales (by this
adjustment, inventory is returned back to true cost to the group and thereby eliminating
unrealized profit).

So the treatment for unrealised profit, when you are required to prepare consolidated
statement of profit or loss, is to add it to cost of sales.

Illustration 22

Safari acquired 80% of the ordinary shares of Park on 1/1/2014. The following statements
of profit or loss have been produced by the two companies for the year ended
31/12/2009.

Safari Park
#000 #000
Revenue 16,380 6,760
Cost of sales (5,460) (2,730)
Gross profit 10,920 4,030
Distribution cost (2,340) (780)
Administrative expenses (1,560) (1,170)

7,020 2,080

Investment income from Park 468

Profit before taxation 7,488 2,080

Taxation (1,690) (338)

Profit for the year 5,798 1,742

During the year ended 31/12/2014 Safari had sold #1,092,000 worth of goods to Park.
These goods had cost Safari #728,000.

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FINANCIAL REPORTING

On 31/12/2014 Park still had #468,000 worth of these goods in inventories (held at cost to
Park)

Required:

Prepare Safari’s consolidated statement of profit or loss for the year ended 31/12/2014.

Note. Goodwill on consolidation has not been impaired.

Solution

SAFARI GROUP
Consolidated Statement of Profit or Loss for the year ended 31st December, 2014.
N’000

Revenue [16,380 + 6,760 – 1,092intra group sales] 22,048

Cost of sales [5,460 + 2,730 – 1,092intra group sales + 156URP] (7,254)

Gross profit 14,794

Distribution cost [2,340 + 780] (3,120)

Administrative expenses [1,560 + 1,170] (2,730)

Operating profit 8,944

Investment income from Park [468 – 468 intragroup incomes] Nil….

Profit before taxation 8,944

Taxation [1,690 + 338] (2,028)

Profit for the year 6,916

Attributable to:

Group shareholder (balancing figure) 6,567.60

Non-controlling interest (W2) 348.40

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FINANCIAL REPORTING

Workings

1. The degree of Safari’s control in Park is 80%, therefore NCI is 20%

2. Calculation of profit attributable to NCI: N’000

Profit (NCI% of Park’s profit for the year) 20% x 1,742 348.40

3. Unrealized profit (URP) (Naira)

Sales = 1,092,000
Cost = (728,000)
Profit 364,000 profit margin = 364,000/1,092,000 = 1/3 or 33.33%
Remaining inventory at year end is 468,000, therefore URP = 1/3 x 468,000 =
156,000 naira

Treating Provision for Unrealised Profit (PURP) on non- current assets

When non-current assets are sold between group companies (parent to subsidiary and
vice versa) and the selling price is the same with the carrying value in the books of seller
as at the time of the sale, this will require no adjustments. But, if the seller makes a profit
on the sale, meaning if it is sold above the carrying value as at the time of sale, the profit
is unrealised profit.

For instance, P sold an item of property, plant and equipment with carrying value of
#130m to S at #182m. In the book of S, the asset will be recorded at cost of #182m and
depreciated accordingly. Since P and S are seen as a single entity in group context, the
situation is adjusted to ensure that:

- Any profit or loss arising on the sale must be removed from the consolidated
statement of profit or loss
- The depreciation charge must be adjusted so that it is based on the cost of the
assets to the group (i.e. the original cost of the asset to P when it was purchased
and not the cost to S).

Treating Fair value adjustment and extra- depreciation

In consolidation, the net asset of subsidiary as acquisition is stated at fair value. If a

depreciating non-current asset of the subsidiary is revalued, this will give rise to fair value
adjustment and the depreciation charge based on the fair value of the assets is
included in the group statement of profit or loss. This depreciation is an additional
depreciation based on the fair value excess of the assets. Most exam questions require
the depreciation to be included in the cost of sales; meaning it should be added to cost
of sales.

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FINANCIAL REPORTING

Treating Goodwill and the impairment loss

Impairment loss arising in the accounting period will be an additional expense in the
group statement of profit or loss. Do not forget the NCI calculation, where the
impairment loss is on full goodwill (i.e. fair value method of valuing NCI), the NCI will be
charged. This additional expense in respect of the impairment loss arising in the year is
normally treated in similar manner with depreciation {however, follow the examiner
requirements}

Treating Non-controlling interest

The profit attributable to non-controlling interest is recognized in the group statement of

profit loss to reflect ownership. This amount is calculated by adjusting, the share of NCI in
the subsidiary’s profit after tax, with the consolidation adjustment made in respect of
additional depreciation on fair value adjustment, unrealised profit where the subsidiary is
the seller and the impairment loss where fair value method is used.

Illustration 23

Set out below are the draft statements of profit or loss of Haruna and its subsidiary
company Ishola for the year ended 31st December 2015

On 1st January 2014 Haruna purchased 975,000 ordinary shares in Ishola from an issued
share capital of 1,300,000 #1 ordinary shares

Statement of profit or loss for the year ended 31st December 2015.

Haruna Ishola

#000 #000

Revenue 7,800 3,900

Cost of sales (4,680) (1,820)

Gross profit 3,120 2,080

Operating expenses (1,209) (585)

Profit from operations 1,911 1,495

Finance costs NIL (39)

Profit before tax 1,911 1,456

Tax (650) (416)

Profit for the year 1,261 1,040

Relevant information:

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FINANCIAL REPORTING

i. Haruna, values the non-controlling interest using the fair value method.
ii. During the year Ishola sold goods to Haruna for #260,000 making a mark-up of
one third. Only 20% of these goods were sold before the end of the year, the rest
were still in inventory.
iii. On 1st January 2014, a fair value adjustment was made and this has resulted in an
additional depreciation charge for the current year of #195,000. It is the group
policy that all depreciation is charged to cost of sales
iv. Goodwill has been subject to an impairment of #65,000. Impairment is to be
recognized as an operating cost.

Required:

Prepare the group statement of profit or loss for the year ended 31st December 2015

Solution

HARUNA GROUP
Consolidated Statement of Profit or Loss for the year ended 31st December, 2015.
N’000

Revenue [7,800 + 3,900 -260 intra group sales] 11,440

Cost of sales [4,680+1,820–260intra group sales+195 extra depreciation+52Purp] (6,487)

Gross profit 4,953

Operating expenses [1,209 + 585 + 65 impairment] (1,859)

Finance cost (39)

Profit before tax 3,055

Tax [650 + 416] (1,066)

Profit for the year 1,989

Attributable to:

Group shareholder [balancing figure (1,989 – 182) 1,807

Non-controlling interest (as per W2) 182

83
FINANCIAL REPORTING

Workings

1. Haruna bought 975,000shares in Ishola out of 1,300,000shares. This is 75% degree

of control. NCI is 25%
2. Calculate profit attributable to NCI N
NCI’s profit from Ishola (25% x 1,040,000) 260,000
Less: NCI share of impairment (25% x 65,000) (16,250)
NCI share of URP 25% X ((80% X 260,000) X ¼) (13,000)
NCI share of fair value depreciation (25% x 195,000) (48,750)
182,000
3. PURP = 1/3+1 X 80% of 260,000 = N52,000

Illustration 24

From the following information, you are required to prepare the consolidated statement
of profit or loss for the tear ended 31st December 2015 of PAPA

i. Papa paid #19.5million on 31/12/2011 for 80% of Son’s 10,400,000 ordinary shares.
ii. Goodwill impairment at 1/1/2015 amounted to #1,976,000. A further impairment
of #520,000 was found to be necessary at the year end. Impairments are
included within administrative expenses.
iii. Papa made sales to Son, at a selling price of #7,800,000 during the year. Not all of
the goods had been sold externally by the year end. The profit element included
in Son’s closing inventory was #390,000
iv. Fair value depreciation for the current year amounted to #130,000. All
depreciation should be charged to cost of sales.
v. Son paid an interim dividend during the year of #2,600,000
vi. Papa values non-controlling interest using the fair value method.

The Statement of Profit or Loss of Papa and its subsidiary Son for the year ended 31 st
December, 2015

Papa Son
#000 #000

Revenue 41,600 33,280

Cost of sales (28,600) (19,240)

Gross profit 13,000 14,040

Distribution costs (2,080) (1,560)

Administrative expenses (5,200) (1,040)

Profit from operations 5,720 11,440

Investment income 2,080 Nil __

PBT 7,800 11,440

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FINANCIAL REPORTING

Taxation (5,200) (6,240)

Profit for the year 2,600 5,200

PAPA GROUP
Consolidated Statement of Profit or Loss for the year ended 31st December, 2015.
N’000

Revenue [41,600 + 33,280 – 7,800 intra group] 67,080

Cost of sales [28,600+19,240 – 7,800 intra group + 390Purp + 130 depreciation] (40,560)

Gross profit 26,520

Distribution costs [2,080 + 1,560] (3,640)

Administrative expenses [5,200 + 1,040 + 520impairment] (6,760)

Profit from operations 16,120

Investment income (2,080 – 2,080intra group dividend (W4) Nil……

Profit before tax 16,120

Tax [5,200 + 6,240] (11,440)

Profit for the year 4,680

Attributable to:

Group shareholder [balancing figure (4,680 – 910) 3,770

Non-controlling interest (as per W2) 910

Workings

1. Papa bought 80% of Son. NCI is 25%

2. Calculate profit attributable to NCI N’000
NCI’s profit from Son (20% x 5,200,000) 1,040
Less: NCI share of impairment (20% x 520,000) (104)
NCI share of fair value depreciation (20% x 130,000) (26)
910
3. PURP (where parent is the seller) = N390,000
4. Out of the Dividend of N2, 600,000 paid by son, Papa’s share is 80%. 80% of N2,
600,000 is N2, 080,000. This amount represents investment income in the account
of PAPA. Therefore, on consolidation, it is cancelled out being an intra-group
investment income.

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FINANCIAL REPORTING

INTRODUCING MID YEAR ACQUISITION TO PREPRAING GROUPS STATEMENT OF PROFIT OR

LOSS

A parent company consolidates a subsidiary from acquisition date i.e. the date on
which control is obtained. A parent company may acquire interest in subsidiary at any
period including during the year of reporting.

Where a subsidiary is acquired during the reporting period, the subsidiary’s result should
only be consolidated from the date of acquisition. For this to be achieved income and
expenses of the subsidiary will be pro-rated in the year of acquisition and for this
purpose, unless otherwise stated in the question, assume that revenue and expenses
accrue evenly.

After time-appointment of the results of subsidiary, all other adjustment for intra-group
items as earlier discussed are normal.

Illustration 25

Sprinkle bought 70% of Magi on 1/7/16. The following are the statements of profit of
sprinkle and magi for the year ended 31/03/17

Sprinkle Magi
N N

Revenue 405,600 135,200

Cost of sales (231,400) (72,800)

Gross profit 174,200 62,400

Operating expenses (110,500) (41,600)

Profit from operations 63,700 20,800

Investment income 26,000 NIL

Profit before tax 89,700 20,800

Tax (27,300) (6,500)

Profit for the year 62,400 14,300

The following information is available:

i. On 1/7/2016, an item of plant in the book of magi had a fair value of #65,000 in
excess of its carrying value. At this time, the plant had a remaining life of 10 years.
Depreciation is charged to cost of sales.
ii. During the post-acquisition period magi sold goods to sprinkle for #57,200 of this
amount, #6,500 was included in the inventory of sprinkle at the year-end. Magi
earn a 35% margin on its sales.

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FINANCIAL REPORTING

iii. Goodwill amounting to #10,400 arose on the acquisition of magi which had been
measured using the fair value method. Goodwill is to be impaired by 10% at the
year end. Impairment losses should be charged to operating expenses.
iv. Magi paid a dividend of#6,500 on 1/1/2017

Required:

Prepare the consolidated statement of profit or loss for the year ended 31/03/2017.

Solution

SPARKLE GROUP
Consolidated Statement of Profit or Loss for the year ended 31st March, 2017.
N

Revenue [405,600 + (9/12x135, 200) - 57,200 intra group] 449,800

Cost of sales [231,400+(9/12x72, 800)–57,200 intra group+2,275Purp+4,875 dep] (235,950)

Gross profit 213,850

Operating Expenses [110,500 + (9/12x 41,600) + 1,040impairment] (142,740)

Investment income (26,000 – 4,550intra group dividend (W4)) 21,450

Profit before tax 92,560

Tax [27,300 + (9/12x6, 500)] (32,175)

Profit for the year 60,385

Attributable to:

Group shareholder [balancing figure (60,385 – 1,833) 58,552

Non-controlling interest (as per W2) 1,833

Workings

1. Sparkle bought 70% of Magi. NCI is 30%

2. Calculate profit attributable to NCI N
NCI’s profit from Magi (30% x 14,300) 4,290
Less: NCI share of impairment (30% x (10% x 10,400)) (312)
NCI share of PURP (30% x (35% x 6,500)) (682.50)
NCI share of fair value depreciation (30% x (65,000/10yrs x 9/12)) (1,462.50)
1,833
3. PURP (where subsidiary is the seller) is 35% x 6,500 = N2,275
4. Out of the Dividend of N6, 500 paid by Magi, Sparkle’s share is 70%. Therefore,
70% of N6, 500 is N4, 550. This amount represents investment income in the
account of Sparkle. For the purpose of consolidation, it is cancelled out being an
intra-group investment income.
5. Fair value depreciation is 65,000/10 years multiply by 9months = N4,875

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FINANCIAL REPORTING

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

Some items are specifically required to be recognized directly in equity (i.e. in reserves);
these are other comprehensive income items.

IAS 1 allows the presentation of two separate statements, the “statement of profit or loss”
and the “statement of other comprehensive income” or in one combined statement,
imaginatively called the “statement of profit or loss and other comprehensive income”.

Other comprehensive income comprises items of income and expense that is not
recognized in profit or loss statement as required or permitted by other IFRSs. The
components of other comprehensive income include:

i. Gains or losses on the revaluation of non-current assets recognized in

accordance with IAS 16: property, plant and equipment.
ii. The group exchange gains and losses arising from translating the financial
statement of a foreign operation in accordance with IAS 21: the effect of
changed in foreign exchange rates (this is covered in advanced group under
overseas subsidiary )
iii. The re-measurement gains and losses on defined benefit pension plans
recognized in accordance with IAS 19: employee benefits
iv. Gains and losses on re-measuring financial assets classified as fair value through
other comprehensive income in accordance with IFRS9: financial instruments
v. The effective portion of gains and losses on hedging instruments in a cash flow
hedge in accordance with IAS39: financial instruments-recognition and
measurement.

The main purpose of showing the other comprehensive income is to help users
understand that not all gains and losses that companies recognize are included in the
statement of the profit or loss.

XYZ GROUP: Consolidated Statement of profit or loss for the year ended XX/XX/XXXX
#000

Revenue XX

Cost of sales (XX)

Gross profit XX

Distribution cost (XX)

Administration expenses (XX)

Operating profit (XX)

Investment income XX

Financial cost (XX)

Profit before tax XX

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FINANCIAL REPORTING

Tax (XX)

Profit for the year (A) XXX

Other comprehensive income

Revaluation gains etc. XX

Total comprehensive income for the year (B) XXX

Attributable to: parent {balancing figure} XX

NCI {to be worked out} XX

XXX i.e. (A)

Attributable to: parent {balancing figure} XX

NCI {to be worked out} XX

XXX i.e. (B)

Note: the profit for the year attributable to the NCI, and the total comprehensive
income attributable to the NCI are both workings, leaving the attributable profit to the
parent as balancing figures.

Illustration 26

Tolulope is an 80% subsidiary to Ogunyemi that was acquired several years ago.

The statement of profit or loss and other comprehensive for the year ended 31/12/2014 is
given below:

Ogunyemi Tolulope

Statement of profit or loss #M #M

Revenue 500 100

Cost of sales (200) 20)

Gross profit 300 80

Operating cost (150) 45)

Operating profit 150 35

Investment income 150 35

Financial cost (30) (5)

Profit before tax 270 65

Tax (40) 10)

Profit for the year 230 55

89
FINANCIAL REPORTING

Other comprehensive income:

Revaluation gains 1 1

Total comrehensive income for the year 231 56

1. During the year Tolulope has sold to Ogunyemi for #75M.these goods were sold
at mark-up of 50%. At the year-end one fifth of these goods remain unsold by
japan.
2. An impairment review was conducted at the year-end. This reveals that no
goodwill was impaired during the year
3. On the acquisition of Tolulope a fair value adjustment of #5m was made to the
plant of Tolulope. The plant had a remaining useful life of 5 years and is
depreciated on a straight line basis down to a nil residual. The fair value
adjustment had not been incorporated into the accounting records of the
subsidiaries.
4. At acqusition Ogunyemi advanced Tolulope a loan of #50m and charged its
subsidiary an effectivee rate of interest of 10%. both compaines have correctly
acounted for the transaction.
5. All depreciation should be part of cost of sales.

Required: prepare the consolidated statement of profit or loss and other comprehensive
income for the year ended 31st December, 2014.

Solution

OGUNYEMI GROUP
Consolidated Statement of Profit or Loss for the year ended 31st December 2014.
N’M

Revenue [500 + 100 - 75 intra group] 525

Cost of sales [200 + 20 – 75 intra group + 5Purp +1 fair value depreciation] (151)

Gross profit 374

Operating Cost [150 + 45] (195)

Operating profit 179

Investment income [150 – 5 intra group loan interest (10% of 50M)] 145

Finance cost [30 + (5-5 intra group loan interest (10% of 50M)] NIL

Profit before tax 324

Tax [40 + 10] (50)

Profit for the year 274

Other comprehensive income:

Revaluation gains [1 + 1] 2

90
FINANCIAL REPORTING

Total comprehensive income 276

Profit for the year attributable to:

Group shareholder [balancing figure (274 – 9.8)] 264.20

Non-controlling interest (as per W2) 9.80

274

Total comprehensive income for the year attributable to:

Group shareholder [balancing figure (276 – 10)] 266

Non-controlling interest (as per W5) 10

276

Workings (figures in brackets are in N’m)

1. Ogunyemi owns 80% of Tolulope. Therefore, NCI is 20%

2. Calculate profit for the year attributable to NCI
N’M
NCI’s profit from Tolulope (20% x 55)
11
Less: NCI share of PURP (20% x 5 (W3)) (1)
NCI share of fair value depreciation (20% x 1 (W4))
(0.2)

9.80
3. PURP (where subsidiary is the seller) is 50/150 x (1/5 x 75)
5
4. Fair value depreciation is 5m/5years = N1m per year
5. Calculate total comprehensive income for the year attributable to NCI
N’M
Profit for year (W2) 9.8
NCI share of Tolulope’s other comprehensive income (20% x 1) 0.2
10

Illustration 27

On 1 July 2014 Bobo acquired 80% of Baby’s equity shares on the following terms:
 a share exchange of two shares in Bobo for every three shares acquired in Baby;
and
 a cash payment due on 30 June 2015 of N1·54 per share acquired (Bobo’s cost
of capital is 10% per annum).
At the date of acquisition, shares in Bobo and Baby had a stock market value of N3·00
and N2·50 each respectively.
Statements of profit or loss for the year ended 31 March 2015:

91
FINANCIAL REPORTING

Bobo Baby
N’000 N’000
Revenue 24,200 10,800
Cost of sales (17,800) (6,800)
––––– –––––
Gross profit 6,400 4,000
Distribution costs (500) (340)
Administrative expenses (800) (360)
Finance costs (400) (300)
––––– ––––
Profit before tax 4,700 3,000
Income tax expense (1,700) (600)
––––– ––––
Profit for the year 3,000 2,400
––––– ––––
Equity in the separate financial statements of Baby as at 1 April 2014:
N’000
Equity
Equity shares of N1 each 12,000
Retained earnings 13,500
The following information is also relevant:
i. At the date of acquisition, the fair values of Baby’s assets were equal to their
carrying amounts with the exception of an item of plant which had a fair
value of N720, 000 above its carrying amount. The remaining life of the plant
at the date of acquisition was 18 months. Depreciation is charged to cost of
sales.
ii. On 1 April 2014, Baby commenced the construction of a new production
facility, financing this by a bank loan. Baby has followed the local GAAP in
the country where it operates which prohibits the capitalisation of interest.
Bobo has calculated that, in accordance with IAS 23 Borrowing Costs, interest
of N100, 000 (which accrued evenly throughout the year) would have been
capitalised at 31 March 2015. The production facility is still under construction
as at 31 March 2015.
iii. Sales from Bobo to Baby in the post-acquisition period were N3 million at a
mark-up on cost of 20%. Baby had N420, 000 of these goods in inventory as at
31 March 2015.
iv. Bobo’s policy is to value the non-controlling interest at fair value at the date
of acquisition. For this purpose Baby’s share price at that date can be
deemed to be representative of the fair value of the shares held by the non-
controlling interest.
v. On 31 March 2015, Bobo carried out an impairment review which identified
that the goodwill on the acquisition of Baby was impaired by N500, 000.
Impaired goodwill is charged to cost of sales.
Required:
a. Calculate the consolidated goodwill at the date of acquisition of Baby. (6 marks)
b. Prepare extracts from Bobo’s consolidated statement of profit or loss for the year
ended 31 March 2015, for:

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FINANCIAL REPORTING

i. revenue; 1 mark
ii. cost of sales; 3 marks
iii. finance costs; 2½ marks
iv. Profit or loss attributable to the non-controlling interest. 2½ marks
(Total 15 marks)

Solution

a. Bobo: Goodwill on acquisition of Baby as at 1 July 2014

N’000 N’000
Investment at cost:
Shares (12,000 x 80% x 2/3 x N3·00) 19,200
Deferred consideration (12,000 x 80% x N1·54/1·1) 13,440
Non-controlling interest (12,000 x 20% x N2·50) 6,000
–––––––
38,640
Net assets (based on equity) of Baby as at 1 July 2014
Equity shares 12,000
Retained earnings b/f at 1 April 2014 13,500
Earnings 1 April to acquisition:
(2,400 + 100 x 3/12) – see note below 625
Fair value adjustment to plant 720
–––––––
Net assets at date of acquisition 26,845)
–––––––
Consolidated goodwill 11,795
––––––

Note: The profit for the year for Baby would be increased by N100, 000 due to interest
capitalised, in accordance with IAS 23 Borrowing Costs. Alternatively, this could have
been calculated as: 2400 x 3/12 + 25. As the interest to be capitalised has accrued
evenly throughout the year, N25, 000 would relate to pre-acquisition profits and N75, 000
to post-acquisition profits.

b. Bobo: Extracts from consolidated statement of profit or loss for the year ended 31
March 2015
N’000
i. Revenue (24,200 + (10,800 x 9/12) – 3,000 intra-group sales) 29,300
ii. Cost of sales (w (i)) (20,830)
iii. Finance costs (w (ii)) (1,558)
iv. Profit for year attributable to non-controlling interest (1,015 x 20% (w (iii))) 203
Workings in N’000
i. Cost of sales
Bobo 17,800
Baby (6,800 x 9/12) 5,100
Intra-group purchases (3,000)

93
FINANCIAL REPORTING

URP in inventory (420 x 20/120) 70

Impairment of goodwill per question 500
Additional depreciation of plant (720 x 9/18 months) 360
–––––––
20,830
–––––––
ii. Finance costs
Bobo per question 400
Unwinding of deferred consideration (13,440 x 10% x 9/12) 1,008
Baby ((300 – 100 see below) x 9/12) 150
––––––
1,558
––––––
The interest capitalised in accordance with IAS 23 of N100,000 would reduce the finance
costs of Baby for consolidation purposes.
iii. Post-acquisition profit of Baby
Profit + interest capitalised and pro-rated ((2,400 + 100) x 9/12) – note
below 1,875
Impairment of goodwill (per question) (500)
Additional depreciation of plant (w (i)) (360)
––––––
1,015
––––––
Note: This could also have been calculated as (2,400 x 9/12) + 75 (see 1(a) above)

Illustration 28
On 1 July 2013, Paramole acquired 36 million of Sebe’s 60 million N1 equity shares. The
consideration paid for acquiring the 60% interest in Sebe was through a share exchange
of one share in Paramole for every three shares in Sebe. At that date the stock market
prices of Paramole’s and Sphere’s shares were N4 and N2·50 per share respectively.
Also, Paramole will pay N1·54 cash on 30 June 2014 for each share acquired. Paramole’s
finance cost is 10% per annum.
The retained earnings of Sebe brought forward at 1 January 2013 were N48 million.
The brief statements of profit or loss and other comprehensive income for the companies
for the year ended 31 December 2013 are:
Paramole Sebe
N’000 N’000
Revenue 248,000 124,000
Cost of sales (160,000) (60,000)
–––––––– ––––––––
Gross profit 88,000 64,000
Distribution costs (16,000) (8,000)
Administrative expenses (14,400) (10,000)
Investment income (note (iii)) 2,000 640

94
FINANCIAL REPORTING

Finance costs (800) (2,240)

–––––––– ––––––––
Profit before tax 58,800 44,400
Income tax expense (18,000) (12,400)
–––––––– ––––––––
Profit for the year 40,800 32,000
Other comprehensive income
Gain/ (loss) on revaluation of land (notes (i) and (ii)) (880) 1,200
–––––––– ––––––––
Total comprehensive income for the year 39,920 33,200
–––––––– ––––––––
The following information is relevant:
i. A fair value exercise conducted on 1 July 2013 established that the carrying
amounts of Sebe’s net assets were equal to their fair values with the following
exceptions:
a. the fair value of Sebe’s land was N800,000 in excess of its carrying amount
b. an item of plant had a fair value of N2.4 million in excess of its carrying
amount. The plant had a remaining life of two years at the date of
acquisition. Plant depreciation is charged to cost of sales.
c. Paramole placed a value of N2 million on Sebe’s good trading
relationships with its customers. Paramole expected, on average, a
customer relationship to last for a further five years. Amortisation of
intangible assets is charged to administrative expenses.
ii. Paramole’s group policy is to revalue land to market value at the end of each
accounting period. Prior to its acquisition, Sebe’s land had been valued at
historical cost, but it has adopted the group policy since its acquisition. In
addition to the fair value increase in Sebe’s land of N800, 000 (see note (i)), it
had increased by a further N400, 000 since the acquisition.
iii. On 1 July 2013, Paramole also acquired 30% of Oka’s equity shares. Oka’s
profit after tax for the year ended 31 December 2013 was N4 million and
during December 2013 Oka paid a dividend of N2.4 million. Paramole uses
equity accounting in its consolidated financial statements for its investment in
Oka. Sebe did not pay any dividends in the year ended 31 December 2013.
iv. After the acquisition Paramole sold goods to Sebe for N8 million. Sphere had
one fifth of these goods still in inventory at 31 December 2013. In December
2013 Paramole sold goods to Oka for N6 million, all of which were still in
inventory at 31 December 2013. All sales to Sebe and Oka had a mark-up on
cost of 25%.
v. Paramole’s policy is to value the non-controlling interest at the date of
acquisition at its fair value. For this purpose, the share price of Sebe at that
date (1 July 2013) is representative of the fair value of the shares held by the
non-controlling interest.
vi. All items in the above statements of profit or loss and other comprehensive
income are deemed to accrue evenly over the year unless otherwise
indicated.

95
FINANCIAL REPORTING

Required:
a. Calculate the consolidated goodwill as at 1 July 2013. 6 marks
b. Prepare the consolidated statement of profit or loss and other comprehensive
income of Paramole for the year ended 31 December 2013. 19 marks
(Total 25 marks)

Solution

a. Paramole – Consolidated goodwill as at 1 July 2013

N’000 N’000
Controlling interest:
Share exchange (36,000 x 1/3 x N4) 48,000
Deferred consideration (36,000 x N1·54 x 1/1·1) 50,400
Non-controlling interest (24,000 x N2·50) 60,000
––––––––
158,400
Net assets of subsidiary at acquisition (Sebe):
Equity shares 60,000
Pre-acquisition retained profits:
– At 1 January 2013 48,000
– 1 January to 30 June 2013 (32,000 x 6/12)) 16,000
Fair value adjustments: land 800
Plant 2,400
Customer relationships 2,000 (129,200)
–––––––– ––––––––
Goodwill arising on acquisition 29,200.00

b. PARAMOLE GROUP
Consolidated statement of profit or loss and other comprehensive income for the
year ended 31 December 2013

N’000
Revenue (248,000 + (124,000 x 6/12) – 8,000 intra-group sales) 302,000
Cost of sales (w (i)) (183,280)
––––––
Gross profit 118,720
Distribution costs (16,000 + (8,000 x 6/12)) (20,000)
Administrative expenses (14,400 + (10,000 x 6/12) + (2,000/5 years x 6/12)) (19,600)
Investment income: Share of profit from associate (4,000 x 30% x 6/12) 600
Other ((2,000 – 720 dividend from associate) + (640 x 6/12)) 1,600
Finance costs (800 + (2,240 x 6/12) + (50,400 x 10% x 6/12 re deferred consideration)) (4,440)
––––––
Profit before tax 76,880
Income tax expense (18,000 + (12,400 x 6/12)) (24,200)
––––––

96
FINANCIAL REPORTING

Profit for the year 52,680

Other comprehensive income
Loss on revaluation of land (880 – (1,200 – 800) gain for Sebe) (480)
––––––
Total comprehensive income for the year 52,200

Profit attributable to:

Owners of the parent (balancing figure)
46,600
Non-controlling interest (w (ii)) 6,080
––––––
52,680

Total comprehensive income attributable to:

Owners of the parent (balancing figure) 45,960
Non-controlling interest (w (ii)) 6,240
–––––
52,200
–––––

Workings (figures in brackets in N’000)

i. Cost of sales
N’000
Paramole 160,000
Sebe (60,000 x 6/12) 30,000
Intra-group purchases (8,000)
Additional depreciation of plant (2,400/2 years x 6/12) 600
Unrealised profit in inventory:
Sales to Sebe (8,000 x 1/5 x 25/125) 320
Sales to Oka (6,000 x 30% x 25/125) 360
––––––
183,280
––––––

ii. Non-controlling interest in profit for the year:

N’000
Sebe’s post-acquisition profit (32,000 x 6/12) 16,000
Less: Additional depreciation of plant (w (i)) (600)
Additional amortisation of intangible (2,000/5 years x 6/12) (200)
–––––
15,200
@ 40%
= 6,080
–––––

97
FINANCIAL REPORTING

Non-controlling interest in total comprehensive income:

Non-controlling interest in statement of profit or loss (above) 6,080
Other comprehensive income ((1,200 – 800) x 40%) 160
–––––
6,240
-------

Illustration 29

Statement of Financial Position as at 31 December, 2014

Hapu Plc Sege Plc

₦000 ₦000

Assets

Non-Current Assets:

Property, plant and equipment 32,000 25,000

Investments 33,500 ---

65,500 25,000

Current Assets:

Cash at bank and in hand 9,500 2,000

Trade Receivables 20,000 8,000

Inventory 30,000 18,000

125,000 53,000

Equity and Liabilities

Share capital 40,000 10,000

Share Premium 6,500 -----

Retained earnings 55,000 37,000

101,500 47,000

Current Liabilities: 23,500 6,000

125,000 53,000

98
FINANCIAL REPORTING

Statement of profit or loss for the year ended 31st December 2014

Hapu Plc Sege Plc

₦000 ₦000

Revenue 125,000 117,000

Cost of sales (65,000) (53,000)

Gross profit 60,000 53,000

Distribution cost (21,000) (14,000)

Administrative Expenses (14,000) (8,000)

Profit before taxation 25,000 31,000

Income tax expenses (10,000) (9,000)

Profit for the year 15,000 22,000

Statement of changes in equity (extract) for the year ended December 31, 2014

Hapu Plc Sege Plc

Retained earnings 40,000 15,000

Retained profit for the year 15,000 22,000

Retained earnings carried forward 55,000 37,000

You are given the following additional information.

i. Hapu Plc owns 80% of Sege‟s shares. These were purchased in 2011 for
₦20.5million cash, when the balance on Sege‟s retained earnings stood at
₦7million.
ii. Included in the inventory of Sege Plc at December 31, 2014 were goods
purchased from Hapu for ₦3.9million. Hapu aims to earn a profit of 30% on
cost. Total sales from Hapu Plc to Sege Plc were ₦6million.
iii. Hapu Plc and Sege Plc each proposed a dividend before the year end of
₦2million and ₦2.5million respectively. No accounting entries have yet been
made for these.
iv. Hapu Plc has carried out annual impairment tests on goodwill in accordance
with IFRS 3 and IAS 36. There was no impairment of goodwill.
Required
a. Prepare the consolidated statement of profit or loss for the year ended
December 31, 2014.
b. Prepare the consolidated statement of financial position at that date.
(30 marks)
(Question 1 ICAN- Skills level, November 2015 diet)

99
FINANCIAL REPORTING

Solution
a. Hapu Plc
Consolidated statement of profit or loss for the year ended 31st December, 2014
₦000

Revenue [125,000 + 117,000 -6,000 intra-group sales] 236,000

Cost of sales [65,000 + 64,000 – 6,000 intra-group + 900URP] 123,900

Gross profit 112,100

Distribution cost [21,000 + 14,000] (35,000)

Administrative Expenses [14,000 + 8,000] (22,000)

Profit before taxes 55,100

Income taxes [10,000 + 9,000] (19,000)

Profit for the year 36,100

Profit attributable to:

Owners of the Parent (balancing figure) 36,100 – 4,400 31,700
Non-controlling interest (20% x 22,000) 4,400
36,100

Hapu PLC
Consolidated Statement of Financial Position as at December 31, 2014
₦000 ₦000
Assets
Non-Current Assets:
Property Plant and Equipment [32,000 + 25,000] 57,000
Goodwill [W2] 6,900
Investment [33,500 – 20,500] 13,000
76,900
Current Assets:
Inventory [30,000 + 18,000 – 900URP] 47,100
Trade Receivables [20,000 + 8,000] 28,000
Bank and Cash [9,500 + 2,000] 11,500 86,600
163,500

Equity &Liabilities
Equity:
Share Capital 40,000
Share Premium 6,500

100
FINANCIAL REPORTING

Retained Earnings [W5] 78,100

Equity attributable to Owners of the Parent 124,600
Non-Controlling Interest [W4] 9,400

Current Liabilities: [23,500 + 6,000] 29,500

163,500

Workings
1. Net Assets of Sege: ₦000 ₦000
Share Capital 10,000 10,000
Retained Earnings 7,000 37,000
17,000 47,000
Post-Acquisition Profit: 47,000 – 17,000 = 30,000. This is shared between the Parent
(W5) and NCI (W4) in the ratio 80%: 20% respectively.

2. Goodwill on consolidation:
₦000
Cost of investment/consideration 20,500
FV of NCI at acquisition (20% of N17, 000,000) 3,400
23,900
Less Sege Plc Net Asset at acquisition (W2) 17,000
Goodwill 6,900
3. Unrealised Profit (URP)
The 30% on cost simply means mark-up, therefore it is converted to margin
(30/130)
30/130 x N3, 900,000 = N900, 000

4. Non-controlling Interest: ₦000

Fair value of NCI at acquisition date (From W2) 3,400
Share of post-acquisition retained earnings (20% of N30, 000,000) 6,000
9,400

5. Group Retained Earnings ₦000

Hapu’s 100% Retained Earnings 55,000
Hapu’s share of Sege’s post acquisition profit (80% x 30,000) 24,000
Unrealised Profit (W3) – Parent is the seller (900)
78,100

6. The dividends proposed for the year ended December 31, 2014 were Hapu Plc
N2 million and Sege Plc N2.5 million.

101
FINANCIAL REPORTING

Illustration 30
Explain the following:
1. Cost of control
2. Pre-acquisition profit
3. Post-acquisition profit
4. Non-controlling interests

Illustration 31
The financial statements of Orobo, Lepa and Opeke as at December 31, 2018 are as
follows:

Statement of financial position as at December 31, 2018

Orobo Plc Lepa Ltd Opeke

Ltd

Non-current assets: N’000 N’000 N’000

Freehold property 48,750 31,250 12,500

Plant and equipment 19,875 9,375 7,125

Investment 37,500 -- --

106,125 40,625 9,625

Current assets

Inventory 14,375 7,500 6,625

Trade receivables 8,250 7,250 9,250

Bank and cash 1,250 3,000 500

23,875 17,750 16,375

Total assets 130,000 58,375 36,000

Equity and liabilities:

Equity:

Ordinary share capital – N1 each 50,000 25,000 18,750

Retained earnings 36,500 22,125 9,750

86,500 47,125 28,500

Non-current liabilities

12% loan notes 12,500 2,500 -

Current liabilities

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FINANCIAL REPORTING

Trade payables 17,000 8,750 7,500

Bank overdraft 14,000 - -

31,000 8,750 7,500

Total equity and liabilities 130,000 58,375 36,00

Additional information:

i. Orobo Plc acquired 15million ordinary shares in Lepa Limited in January 2013
for N25million when the retained earnings of Lepa Limited were N5million.
ii. At the date of acquisition of Lepa Limited, the fair value of its freehold
property was considered to be N10million greater than its value in Lepa
Limited‟s statement of financial position. Lepa Limited had acquired the
property in January 2013 and the building element (comprising of 50% of the
total value) is depreciated on cost over 40 years.
iii. Orobo Plc acquired 5.625million ordinary shares in Opeke Limited on January
1, 2017 for N12.5million when the retained earnings of OpekeLimited were
N3.75 million.
iv. Lepa Limited manufactures components used by both Orobo Plc and Opeke
Limited. Transfers were made by Lepa Limited at cost plus 25%. Orobo Plc held
N2.5million inventory of these components at December 31, 2018. In the same
period Orobo plc sold goods to Opeke Limited of which Opeke Limited had
N2million in inventory as at December 31, 2018. Orobo plc had marked these
goods up by 25%.
v. The goodwill of Lepa Limited is impaired and should be fully written off. An
impairment loss of N2.3million is to be recognised on the investment in Opeke
Limited.
vi. Non-controlling interest is valued at full fair value, Lepa Limited shares were
trading at N1.60 just prior to the acquisition by Orobo Plc.

Required:

Prepare the consolidated statement of financial position of Orobo group for the year
ended December 31, 2018.

(25 Marks) ICAN SKILLS LEVEL, QUESTION 1 NOVEMBER 2020 DIET

103
FINANCIAL REPORTING

INTRODUCING GROUP STATEMENT OF CHANGES IN EQUITY

The statement of changes in equity is part of an entity’s financial statement. Changes in

an entity’s equity between the beginning and the end of the reporting period reflect the
increase or decrease in its net assets during the period.

You will recall that the main objective of the International Accounting Standards Board
in revising
IAS 1 was to aggregate information in the financial statements on the basis of shared
characteristics. With this in mind, the Board considered it useful to separate changes in
equity (net assets) of an entity during a period arising from transactions with owners in
their capacity as owners from other changes in equity. Consequently, the IASB decided
that all owner changes in equity should be presented in the statement of changes in
equity, separately from non-owner changes in equity
A simple format of:

XYZ Group Statement of Changes in Equity for the year ended 31st December

Share Share Revaluation Retained NCI Total

Capital Premium Reserve Earnings

Equity

# # # # # #

Opening Balance xx xx xx xx xx xx

New Shares xx xx xx

Revaluation gain xx xx xx

Profits for the Year xx xx xx

Dividends (x) (x) (x)

Closing Balance xx xx xx xx xx xx

Note:

The dividend deducted from the retained earnings will be that of the parent company
only. The dividend deducted from the NCI will be the NCI% of the subsidiary’s dividend.

Other items and components of equity including gains and losses on cash flow hedges
or on the translation of foreign operations are shown in the additional columns. Depends
on the items of an entity’s equity, more columns can be created

I know you still remember when we were in secondary school (a long time ago), the
dividends paid by a company used to be deducted in the profit and loss account (the
old name for statement of profit or loss). This possibly confused some users because
dividend is not an expense to be deducted from revenue to derive profit; rather it is an

104
FINANCIAL REPORTING

appropriation of profit. So, treating dividends as a deduction in the profit or loss implied
that the dividend distributed by a company to the shareholders is an expense, which is
not.

The dividend paid by a company is a distribution of profit and not a charge on profit.
Therefore, it has no apartment whatsoever in the statement of profit or loss. The purpose
of profit or loss statement is to recognize income and expenses in order to measure the
profit (or loss) that has been made, from which dividend may be distributed.

In line with IFRS, the dividend paid by an entity is accounted for as movement in
retained earnings i.e. it is reported as part of the statement of changes in equity.

Now, when a subsidiary company makes a distribution of profit i.e. pays a dividend to its
parent this is an inter-company transaction and so far as the group is concerned will be
eliminated on consolidation. I think we have discussed this in the previous chapter?

IAS 27 Separate Financial Statements (Revised) requires all dividends from a subsidiary to
be recognized in the parent company’s statement of profit or loss. There is no need for
the parent company to make a distinction between whether these are paid out of pre-
acquisition or post-acquisition profits. The significance of this is that all dividends received
by the parent company will be regarded as a return on the investment rather than a
return of the investment.

However, where very large dividends are paid out, perhaps exceeding the post-
acquisition profits, this depletion of assets requires the parent company to consider
whether the investment needs to be written down i.e. whether there has been an
indicator of impairment and therefore a loss. An indicator of impairment exists if:

✓ The dividend exceeds the total comprehensive income of the subsidiary, in the
period the dividend is declared; or
✓ The carrying amount of the investment exceeds the amount of net assets
(including associated goodwill) recognized in the consolidated financial
statements.

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FINANCIAL REPORTING

ACCOUNTING FOR ASSOCIATES (IAS28)

P GROUP From the structure drawn, P acquires 70%

interest in S and P also has 30% interest in A.

70% 30% the implication of this is that, since P has more

A than 50% of the share capital in S, S is a

subsidiary company controlled by the P, the
S parent company. Therefore acquisition accounting is
used in consolidating S’s accounts such that goodwill and NCI both normally arises. I
think these are all we have discussed?

Now, the parent have interest in another entity ‘A’ but the level of the parent’s
investment is not up to control level, it ranges between 20% - 50%. Any investment of
such by parent in any entity, such an entity has become the associate company of the
parent or group.

IAS 28 defines an associate as:

An entity over which the investor has significant influence and that is neither a subsidiary
nor an interest in a joint venture [Joint venture is not covered in financial reporting
syllabus, but in corporate reporting. however they are both accounted for using equity
accounting].

The major phrase of the definition is ‘’significant influence’’. Significant influence is

assumed with a shareholding of 20% to 50%.

Where investment in an entity by the investor is less than controlling degree above 50%,
then such investment could either be any of these three (3).

❖ Less than 20% [< 20%]

This is presumed to be called investments. This is a case where the parent has no
control or even significant influence because the holding is less than 20%. This is a
mere investment and is accounted for in accordance with IFRS9 FINANCIAL
INSTRUMENT and requires no consolidation adjustments in the course of preparing
the group accounts.
Note: IFRS9 is not covered in financial Reporting Syllabus but in essence, the
standard requires that such investments are accounted for in the parents and

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FINANCIAL REPORTING

hence also the group’s statement of financial position at FAIR VALUE. The gains
and losses arising will be recognized in the statement of profit or loss, if the
investment is classified as “Fair Value through Profit and Loss” and in other
comprehensive income, if the investment is classified as “Fair Value through Other
Comprehensive Income”. In the statement of profit or loss the dividends
receivable from such investments will be recognized as investment income.

❖ Between 20% and 50% [  20% and <50%]

This is presumed to be an associate. This range of investment did not give rise to
control, but there is significant influence over financial and operating policies.

This is a case of associate and in the group accounts; associates are accounted
for using EQUITY accounting. [Equity accounting to be discussed shortly]

❖ 50%/50%

This is a case of joint ventures {not in this syllabus}. This is a situation of investment
where the parent has agreed to be a joint venture with another investment such
that the parent has joint control with another and each venture has right to net
assets. This type of investment is known as a joint venture. Joint ventures are
presumed where each party hold a 50% interest in the investment

In the group accounts joint venture are accounted for using equity accounting. Joint
ventures are form of joint arrangement, the accounting for which is regulated by IFRS 11
JOINT ARRANGEMENT.

Principles of Equity Accounting

Equity accounting is a method of accounting whereby the investment is initially

recorded at cost and adjusted thereafter for the post acquisition change in the
investor’s share of net assets of the associate.

Where a parent company has investment qualified to be associate, the parent will have
accounted for this investment in associate as a non-current asset investment and the
dividend received by parent would have been recognized in the statement of profit or
loss as investment income. But for the purpose of consolidation, associates are equity
accounted. With equity accounting no goodwill or NCI arises.

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FINANCIAL REPORTING

See below the effect of equity accounting on group statement of profit or loss and
group statement of financial position

➢ The group statement of financial position include:

❖ 100% of the assets and liabilities of the parent and subsidiary company on
a line basis [P+S]
❖ An ‘’investment in associate” line within non-current assets at carrying
value of the equity accounted investment. It is measured as:
❖

(W6). Investment in Associate =N=

Fair value of the parent investment xx

Plus the parent % of the post- acquisition profits xx

Less any impairment loss on the investment (x)

Less the parent % of PURP [Where the associate is the buyer] (x)

Carrying value of Associate investment xxx

[This is the figure that goes into the group statement of financial position as a non-current
Asset.]

(All the three entries in bolds and italics above will be posted to W5 Retained Earnings)
In summary, the investment undertakings of parent in associate is initially recorded at its
cost but carried at its fair value at the end of each accounting year. The fair value may
rise or fall as the case may be from W6 above.

➢ The group statement of profit or loss includes:

❖ 100% of the income and expenses of the parent and subsidiary company on
a line by line basis (P+S)
❖ One line “share of profit of associates profit after tax.

Note: For equity accounting to be used the parent must already be producing
consolidated financial statements [i.e. it must already have at least one subsidiary]
The one line “income from associate or share of profit of associates” is presented in the
group statement of profit or loss immediately before the group profit before tax line and
is measured as:

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FINANCIAL REPORTING

W3. Income from Associate N

Parent’s % of the associate profit for the year xx
Less: Any impairment loss on the parent’s investment in the current year (xx)
Less: The parent’s % of the PURP (if associate is the seller) (xx)
xx
Take note of the following:
i. The income and expenses of the associate are not cross cast in the group
accounts
ii. The assets and liabilities of the associate are not cross cast in the group account
as the investment in associate accounted for using equity is instead recognized.
iii. The equity method of accounting requires that the group statement of profit or
loss does not include dividends from the associate instead includes group share
of the associate’s profit after tax less any impairment of the associate in the year.
iv. If the associate has been acquired during the accounting period then its profit for
the year will be time apportioned to reflect only the post – acquisition element.
v. If the associate has any other comprehensive income recognized in the post –
acquisition period then the appropriate % will be aggregated in the group other
comprehensive income.
vi. You don’t eliminate any sales and purchases between group companies and
associates because is considered to be outside the group and such sales and
purchases are not transaction between two group companies.
vii. Balances [receivables and payables] between group companies and the
associate will remain in the consolidated statement of financial position. These
are not balances between two group companies, as associate is not member of
a group.
viii. Unrealised profit (URP) on trading between group and associate must be
eliminated to the extent of the investor’s interest [i.e. % owned by parent in
associate]:
❖ Where the associate is the seller, it means the profit element is included in the
associate company’s account and the inventory sold by associate is held by
parent. Therefore to remove the URP on inventory remaining at the year-end:

In the group statement of profit or loss, the % of the PURP is deducted from both
retained earnings W5 and from inventory. To put this adjustment in double entry:

Dr Group retained earnings (W5)

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FINANCIAL REPORTING

Cr Group inventory
In the group statement of profit or loss, the % of the URP is deducted from the
income from the associate.
❖ Where the parent is the seller, the profit element is included in the parent
company’s accounts and the associate holds the inventory. To remove the URP
on inventory remaining at the year-end:
i. In the group statement of financial position the % of the URP is deducted
from the selling company’s retained earnings and from the investment in
the associate.
Dr Group retained earnings (W5)
Cr Investment in associate (W6)
ii. In the group statement of profit or loss the % of the URP is added to the
group cost of sales [in effect the group profits are reduced].
ix. In summary, the calculations for an associate (A) can be incorporated into our
standard workings (i.e. W1 to W6) as follows:

W1. Group Structure

P
P owns 70% of the ordinary
shares of S on
1/1/04
70% 30% P also owns 30% of the shares
in
On 1/1/2004 on 1/1/05 A on 1/1/05
S A
NCI = 30% [100% - 70%]

OR
P Group

On 1/1 70%
30% on 1/1/05

S A

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FINANCIAL REPORTING

W2. Net Assets of Subsidiary

@ Date of Acquisition @ reporting date

N N
Share Capital XX XX
Reserves e.g. retained earnings etc. XX XX
FV adjustment on NCA XX XX
FV adjustment depreciation (XX)
XX XX

W3. Goodwill on acquisition of Subsidiary N

Parent holding (investment) at fair value XX

NCI value at acquisition XX
XX
Less: FV of net assets [W2] (XX)
Goodwill at acquisition XX
Impairment (XX)
Carrying goodwill XX

W4. Non – Controlling Interest (NCI)

NCI Value @ acquisition [as in W3] XX

NCI share of subsidiary’s Post acquisition reserves [W2] XX
NCI share of impairment [W3][FV method only] (XX)
XX

W5. Group Retained Earnings N

Parents retained earnings (100%) XX

Group’s % of subsidiary’s post acquisition retained earnings XX
Group % of associate’s post acquisition retained earnings XX
Less: Impairment losses to date [S + A] (W3) (XX)
XXX

W6. Investment in Associate Company

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FINANCIAL REPORTING

Cost of Investment XX
Post – acquisition profit (W5) XX
Less: Impairment on investment (XX)
PURP (Where P = Seller) (XX)
XX

Illustration 31

The following are the summarized accounts of Public, Sektor and Akount for
the year ended 30/06/08
Statement of Financial Position
Public Sektor Akount
NON – CURRENT ASSETS N N N
Tangible 90,000 80,000 60,000
Investment in Sektor 92,000
Investment in Akount 30,000
212,000 80,000 60,000
Current Assets 88,000 50,000 10,000
300,000 130,000 70,000
Share Capital (N 1 shares) 175,000 75,000 40,000
Retained earnings 114,000 51,000 29,000
Equity 289,000 126,000 69,000
Liabilities 11,000 4,000 1,000
300,000 130,000 70,000
Statement of Profit or Loss
Revenue 500,000 200,000 100,000
Operating Costs (400,000) (140,000) (60,000)
Profit before tax 100,000 60,000 40,000
Tax (25,000) (20,000) (14,000)
Profit for the Year 75,000 40,000 26,000

Additional Information:
1. Public acquired 60,000 shares in Sektor 3 years ago when the retained
earnings were #15,000. At the date of acquisition the fair value of Sektor’s

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FINANCIAL REPORTING

non-current assets, which at that time has a remaining useful life of 10

years, exceeded their carrying value by #5,000. The group policy is to
calculate the full goodwill arising on the consolidation of a subsidiary with
the NCI at fair value. At acquisition the fair value of the NCI of Sektor was
#24,000. The impairment review reveals that no impairment losses have
arisen.
2. Public acquired 12,000 shares in Akount one year ago. An impairment
review reveals that the investment in Akount is impaired by #1,700.
Prepare the consolidated statement of profit or loss and the consolidated
statement of financial position for public. (15marks)

Illustration 32

1. Dipsy acquired its shares in Laalaa on 1/1/09 when Laalaa had retained losses of
N56, 000.
2. Dipsy acquired its shares in Po on 1/1/09 when Po had retained earnings of N140,
000.
3. An impairment test at the yearend shows that goodwill for Laalaaa remains
unimpaired but the investment in Po has impaired by N2, 800.
4. The dipsy Group values non - controlling interest using the fair value method. The
fair value on 1/1/09 was N160, 000.

Prepare the CSoFP as at 31/12/09 given the below SoFP of the three companies as at
31/12/09.

Dipsy Laalaa Po
N000 N000 N000
Non-Current Assets
Property, plant & equipment 1,120 980 840
Investments
672,000 shares in Laalaa 644
168,000 shares in Po 224
1,988 980 840
Current Assets:
Inventory 380 640 190
Receivables 190 310 100
Bank 35 58 46

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FINANCIAL REPORTING

605 1,008 336

2,593 1,988 1,176
Equity
N 1 Ordinary shares 1,120 840 560
Retained Earnings 1,232 602 448

2,352 1,442 1,008

Current liabilities
Trade payables 150 480 136
Taxation 91 66 32
241 546 168
2,593 1,988 1,176

Illustration 33

Below are the SoFPs of three entities as at 30th September 2008

P S A

Non – Current Assets: N000 N000 N000

PPE 14,000 7,500 3,000
Investments 10,000 - -
24, 000 7,500 3,000
Current assets 6,000 3,000 1,500
30,000 10,500 4,500
Equity
Share capital (N1 ord. shares) 10,000 1,000 500
Retained Earnings 7,500 5,500 2,500
17,500 6,500 3,000
Non – current liabilities 8,000 1,250 500
Current liabilities 4,500 2,750 1,000
30,000 10,500 4,500
i. P acquired 75% of the equity share capital of S several years ago, paying N5,
000,000 in cash. At this time the balance on S’s retained earnings was
#3,000,000.
ii. P acquired 30 % of the equity share capital of A on 1/10/06, paying N750, 000
in cash. At 1/10/06 the balance on A’s retained earnings was N1.5 million

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FINANCIAL REPORTING

iii. During the year, P sold goods to A N 1 million at a mark-up of 25%. At the year
end, A still held one quarter of these goods in inventory.
iv. As a result of this trading, P was owed N 250,000 by A at the reporting date.
This agrees with the amount included in A’s trade payables
v. At 30 September 2008, it was determined that the investment in the associate
was impaired by N 35,000.
vi. Non-controlling interests are valued using the fair value method. The fair value
of the non-controlling interest at the date of acquisition was #1,600,000.

Required: prepare the CSoFP of the P group as at 30/09/2008 (15 marks)

Illustration 34

Find below the SPorL of the Balarabe’s group and its associated company as at 31/12/08

Balarabe Bala Rabe

N000 N000 N000

Revenue 385 100 60

Cost of sales (185) (60) (20)

Gross profit 200 40 40

Operating Expenses (50) (15) (10)

PBT 150 25 30

Tax (50) (12) (10)

Profit for the year 100 13 20

Additional information:

i. Balarabe acquired 45,000 ordinary shares in Bala a number of years ago. Bala
has 50,000 N1 ordinary shares.
ii. Balarabe acquired 60,000 ordinary shares in Rabe a number of years ago. Rabe
has 200,000 N1 ordinary shares
iii. During the year Rabe sold goods to Balarabe for N28, 000. Balarabe still holds
some of these goods in inventory at the year end. The profit element included in
these remaining goods is N2, 000.
iv. Non-controlling interests are valued using the FV method.
v. Goodwill and the investment in the associate were impaired for the first time
during the year as follows:

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FINANCIAL REPORTING

Rabe N2, 000

Bala N3, 000

Impairment of the subsidiary’s goodwill should be charged to operating expenses.

Required: Prepared the CSPorL for Balarabe including the results of its associated
company.

Illustration 35

Wa acquired 80% of Zo on 1/12/04 paying N4.25 in cash per share. At this date the
balance on Zo’s retained earnings were N87, 000. On 1/3/07, Wa acquired 30% of Bia’s
ordinary shares. The consideration was settled by share exchange of 4 new shares in Wa
for every 3 shares acquired in Bia. The share price of Wa at the date of acquisition was
N5.00. Wa has not yet recorded the acquisition of Bia in his books

The statements of financial position of the three companies as at 30/11/2007 are as

follows:

Wa Zo Bia

Non – Current Assets N000 N000 N000

Property 1,300 850 900

Plant and equipment 450 210 150

Investments 1,825 - -

Current Assets

Inventory 550 230 200

Receivables 300 340 400

Cash 120 50 140

4,545 1,680 1,790

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FINANCIAL REPORTING

Equity

Share capital N 1 1,800 500 250

Share Premium 250 80 -

Retained Earnings 1,145 400 1,200
3,195 980 1,450
Non – Current liabilities
10% loan Notes 500 300 -
Current Liabilities - - -
Trade Payables 520 330 250
Income Tax 330 70 90
4,545 1,680 1,790
The following information is relevant:
i. As at 1st December 2004, Plant in the books of Zo was determined to have a fair
value of #50,000 in excess of its carrying value. The plant had a remaining life of 5
years at this time.
ii. During the post – acquisition period, Zo sold goods to Wa for N 400,000 at a mark
up of 25%. Wa had a quarter of these goods still in inventory at the year end.
iii. In September, Bia sold goods to Wa for N 150,000. These goods had cost Bia
N100,000. Wa had N 90,000 [at cost to Wa] in inventory at the year – end.
iv. As a result of the above inter – company sales, Wa’s books showed N50, 000 and
N20, 000 as owing to Zo and Bia respectively at the year – end. These balances
agreed with the amounts recorded in Zo’s and Bia’s books.
v. Non – controlling interests are measured using the fair value method. The fair
value of the non – controlling interest at the date of acquisition was N368, 000.
Goodwill has impaired by N150, 000 at the reporting date. An impairment review
found the investment in the associate was to be impaired by N15,000 at the year
end.
vi. Bia’s profit after tax for the year is N600, 000.

Required:
Prepare the CSoFP as at 30th November, 2007. (15 marks)

117
FINANCIAL REPORTING

Illustration 36
The summarized statements of financial position of Bacup, Townley and Rishworth as at
31/03/07 are as follows:
Bacup Townley Rishworth
Non – Current Assets: N000 N000 N000
PPE 3,820 4425 500
Development expenditure - 200 -
Investments 1600 - -
5420 4625 500
Current Assets:
Inventory 2,740 1,280 250
Receivables 1,960 980 164
Cash at bank 1260 - 86
5960 2260 500
Total assets 11,380 6,885 1,000
Equity:
Ordinary shares of 25k 4,000 500 200
Reserves:
Share premium 800 125 -
Retained Earnings at 31/3/06 2,300 380 450
Retained for year 1,760 400 150
8,860 1,405 800
Current liabilities
Trade payables 2,120 3,070 142
Bank overdraft - 2260 -
Taxation 400 150 58
2,520 5,580 200
Total equity and liabilities 11,380 6,885 1,000

Relevant information
1. Investments:
Bacup acquired 1.6 million shares in Townley on 1/4/06 paying 75 kobo per share
on 1/10/06 Bacup acquired 40% of the share capital of Rishworth for N400, 000.
2. Group Accounting Policies
Development expenditure: Development expenditure is to be written off as
incurred as it does not meet the criteria for capitalization in IAS 38. The

118
FINANCIAL REPORTING

development expenditure in the statement of financial position of Townley relates

to a project that was commenced on 1/4/05. At the date of acquisition the value
of the capitalized expenditure was N80, 000. No development expenditure of
Townley has yet been amortized.
3. Intra – group trading
The inventory of Bacup includes goods at a transfer price of N200, 000 purchased
from Townley after the acquisition. The inventory of Rishworth includes goods at a
transfer price of N125, 000 purchased from Bacup. All transfers were at cost plus
25%.
The receivable of Bacup include an amount owing from Townley of N250, 000.
This does not agree with the corresponding amount in the books of Townley due
to a cash payment of N50, 000 made on 29/03/07, which had not been received
by Bacup at the year end.
4. It is group policy to value non – controlling interest using the fair value at the date
of acquisition. At the date of acquisition the fair value of the non – controlling
interest was N95, 000.
Required: Prepare a consolidated statement of financial position of the Bacup group
as at 31/03/07 (18 marks)

Illustration 37

The following are the financial statements of sierra, Leone and Freetown.
Statement of Financial Position

Sierra Leone Freetown

Non – current assets: N N N
Tangible 100,000 80,000 60,000
Investments 130,000 - -
Current Assets:
Inventory 22,000 30,000 15,000
Receivables 58,000 10,000 2,000
Cash at bank 40,000 20,000 3,000
350,000 140,000 80,000
Share capital [N1] 100,000 75,000 35,000
Retained Earnings 190,000 50,000 40,000
Revaluation Reserve 10,000 Nil Nil

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FINANCIAL REPORTING

Equity 300,000 125,000 75,000

Liabilities 50,000 15,000 5,000
350,000 140,000 80,000
SPorL and OCI Sierra Leone Freetown
N N N
Revenue 500,000 200,000 150,000
Cost of sale (300,000) (140,000) (110,000)
Gross profit 200,000 60,000 40,000
Operating costs (65,000) (10,000) (10,000)
Operating profit 135,000 50,000 30,000
Interest receivable 25,000 Nil 4,000
Finance cost (Nil) (10,000) (Nil)
Profit before tax 160,000 40,000 34,000
Tax (60,000) (20,000) (19,000)
Profit for the financial year 100,000 20,000 15,000
Other comprehensive income:
Revaluation gains 6,000 Nil Nil
Total comprehensive income
For the year 106,000 20,000 15,000

Additional information
1. One year ago, sierra acquired 60% of the equity interest of Leone. The purchase
consideration was N100, 000. The fair value of the identifiable net assets at that date
was N150, 000 and the retained earnings were N30, 000.There has been no new issue
of Capital by Leone since the date of acquisition and the excess of the fair value of
the net assets is due to an increase in the value of plant with a five years life. It is the
group policy to value the NCI at fair value and the fair value of the NCI of Leone at
acquisition was N63,000. Goodwill has been subject to an impairment review and no
impairment loss arises.
2. one year ago, Sierra acquired 30% of the equity interests of Freetown and achieved
significant influence when the retained earnings were N25, 000. The purchase
consideration was N30, 000.
3. During the year Leone sold goods to Sierra for N10, 000 at a margin of 40%. At the
yearend 80% of these goods had been sold on.
4. During the year Freetown sold goods to Sierra for #15,000 at a mark-up of 1/3. At the
yearend 20% of these goods remain unsold.

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FINANCIAL REPORTING

5. During the year Sierra advanced Leone’s sustainable loans; most of which were
repaid shortly after the year end, but there remained a final balance of N5,000
outstanding which is due to be settled shortly after the year end. Leone’s finance is
the interest that relates to this inter – company loan
Prepare CSoFP and CSPorL & OCL for Sierra. (20 marks)

Illustration 38
UNITARISATON PLC
Unitarisation Plc is a successful Nigerian Company which recently amended its objects
clause in the Memorandum of Association to include “programmes and activities that
will promote National unity and encourage anti-terrorism compliance” as part of its
social responsibilities. The company, therefore, acquired 60% of the equity share capital
of Famous Plc a widely known and successful advertising company to propagate this
mission.

The summarised draft financial statements of the two companies are as follows:
Statement of Profit or Loss and Other Comprehensive Income for the year ended 31
October, 2014.
Unitarisation Famous
Plc. Plc.
N’m N’m
Revenue 51,000) 25,200)
Cost of sales (37,800) (19,200)
Gross profit 13,200) 6,000)
Distribution costs (1,200) (1,200)
Administrative expenses (3,600) (1,920)
Finance costs (180) (240)
Profit before tax 8,220) 2,640)
Income tax Expense (2,820) (840)
Profit for the year 5,400) 1,800)

Statement of Financial Position as at 31 October, 2014

Unitarisation Plc. Famous Plc.
Assets: N’m N’m
Non-current assets:
Property, plant & equipment 24,360 7,560
Current assets 9,600 3,960
Total assets 33,960 11,520

Equity & Liabilities:

Equity shares of N1 each 6,000 2,400
Retained earnings 21,240 3,900
27,240 6,300
Non-current liabilities:

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FINANCIAL REPORTING

12% loan notes 1,800 2,400

Current liabilities 4,920 2,820
Total equity & liabilities 33,960 11,520

Relevant additional information is presented below:

i. The shares of Famous Plc. were acquired on 1 May, 2014 and the issue of
shares was not recorded by Unitarisation Plc.
ii. There is cash in transit of N120, 000,000 due from Unitarisation Plc. to Famous
Plc. arising from intra-group trading.
iii. The non-controlling interests are valued at full fair value by the parent
company. The fair value of the non-controlling interests in Famous Plc. at the
date of acquisition was N3, 540,000,000. There is no goodwill impairment at
the end of the accounting year.
iv. The fair value of Famous Plc. assets were equal to the carrying amounts at the
acquisition date except for one equipment with a fair-value of N1,200,000,000
over its carrying amount which has a five-year remaining life. Straight line
depreciation is adopted. Famous Plc. has not effected the adjustment in the
records.
v. The 60% of share capital of Famous Plc. acquired was settled through share
exchange of two shares in Unitarisation Plc. for three shares in Famous Plc. The
market value of Unitarisation Plc. at the date of acquisition was N6 per share.
vi. In the post-acquisition period, Unitarisation Plc. bought goods from Famous
Plc. amounting to N4, 800,000,000. Famous Plc. had made a mark-up on cost
of 40% on the transaction. As at the year end, Unitarisation Plc. had sold part
of these goods worth N3, 120,000,000.
vii. Famous Plc’s trade receivables at 31 October, 2014 include N360, 000,000 due
from Unitarisation Plc. However, the amount did not agree with the
corresponding balance in Unitarisation Plc’s trade payable ledger.
viii. Assume that profits or losses accrue evenly over the period except otherwise
stated.

Required:
a. Prepare Unitarisation Plc. Consolidated Profit or Loss and Other Comprehensive
Income for the year ended 31 October 2014. (10 Marks)
b. Unitarisation Plc. Consolidated Statement of Financial Position as at 31 October
2014. (10 Marks)
c. Consolidated Statement of Changes in Equity for the year ended 31 October
2014. (6 Marks)
d. In accordance with IFRS 3 on Business Combinations, what is Gain on Bargain
Purchase. (4 Marks)
(Total 30 Marks)
ICAN EXAM, SKILLS LEVEL, MAY 2015, COMPULSORY QUESTION

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FINANCIAL REPORTING

Illustration 39

a. IAS 28 - Investments in Associates and Joint Ventures permits, the application of

equity method when accounting for investments in associates and joint ventures.
Required: Explain briefly the Equity Method and state the circumstances under
which an entity can discontinue the use of equity method under IAS 28. (5 Marks)

b. Agbantara Plc. acquired equity shares from Odinma Plc. and Dangari Limited.
The following are the Statements of Profit or Loss and Other Comprehensive
Income for the year ended 31 December, 2014 for the three companies:
Agbantara Plc. Odinma Plc. Dangari Ltd
N’m N’m N’m
Revenue 4,500 1,350 630
Cost of sales (2,430) (720) (270)
Gross profit 2,070 630 360
Admin expenses (1,350) (180) (135)
Finance income 135 90 -
Finance costs (180) - (90)
Profit before tax 675 540 135
Income tax expenses (225) (135) (45)
Profit for the year 450 405 90

Other comprehensive income:

Gains on property revaluation,
net of tax 180 90 45
Total comprehensive income 630 495 135

The following information is also relevant:

i. Agbantara Plc. acquired 72 million ordinary shares in Odinma Plc. out of its
120,000,000 ordinary shares of N1 each par value for N160, 000,000.
The shares were acquired four years ago when it had N15, 000,000 credit
balance on its retained earnings. During the year, Odinma Plc. Sold goods
costing N38,000,000 to Agbantara Plc. for N45,000,000. These goods were
yet to be sold as at 31 December, 2014.
ii. Agbantara Plc. acquired 35,000,000 ordinary shares in Dangari Limited out
of 100,000,000 ordinary shares. The shares were acquired three years ago
when the company had a credit balance on its retained earnings of
N10,000,000.
iii. Agbantara Plc’s group policy is to measure non-controlling interests (NCI)
at fair value. NCI at acquisition date in Odinma Plc. at fair value was
N48,000,000. Impairment test carried out on the goodwill relating to
Odinma Plc. and investment in Dangari Limited at year end resulted in
N10, 000,000 and N15, 000,000 losses respectively.

123
FINANCIAL REPORTING

You are required to:

Prepare Agbantara Plc. Consolidated Statement of Profit or Loss and Other
comprehensive Income for the year ended 31 December 2014. (10marks)
(Total 15 Marks)

ICAN EXAM, SKILLS LEVEL, MAY 2015, QUESTION 6

Illustration 40

ICAN EXAM, SKILLS LEVEL, NOVEMBER 2015, COMPULSORY QUESTION 30Marks

Illustration 41

ICAN EXAM, SKILLS LEVEL, MAY 2016, QUESTION 2 20Marks

Illustration 42

ICAN EXAM, SKILLS LEVEL, MAY 2016, QUESTION 3 20Marks

Illustration 43

ICAN EXAM, SKILLS LEVEL, NOVEMBER 2016, COMPULSORY QUESTION 30Marks

Illustration 44

The following information will require a provision for unrealised profit adjustment to be
made as a consolidation adjustment.

i. The parent sold goods to the subsidiary for N24m at a mark-up on cost of 20%.
One quarter of these goods remain in the inventory of the subsidiary at the
year-end.

ii. The parent sold goods to the subsidiary for N40m at a margin of 25%. Only one
quarter of these goods remain in inventory of the subsidiary at the year-end.

iii. The parent sold goods to the subsidiary at a profit of N90m, one-third of these
goods were still in the inventory of the subsidiary at the year-end.

iv. The parent sold goods to the subsidiary at a price of N240m. These goods had
cost the parent N180m. During the year the subsidiary had sold N200m (at
cost to the subsidiary) of these goods for N300m.

v. Two years prior to the reporting date the parent transferred to the subsidiary
an item of plant with a carrying value of N8m for consideration of N10m.
When transferred the asset had a remaining useful life of ten years.

Required
Calculate the provisions for unrealised profit required for i to v.

124
FINANCIAL REPORTING

Illustration 45

Spider
The parent company of a group holds a direct interest of 30% in the equity in Spider
which enables the parent to exercise significant influence over the operating and
financial activities of Spider. Accordingly, Spider is an associate and consolidated in the
group accounts using equity accounting.
The parent's original investment in Spider was N200, 000 and since the date of investment
Spider's post-acquisition profits have been N150, 000 of which N50, 000 have been
generated in the current year.
Impairment reviews of the investment have never revealed any impairment loss on the
investment in Spider.
Just prior to the year-end the parent sold goods to Spider for N20, 000 which the parent
had originally purchased for N10, 000. At the year-end all these goods remain unsold
and therefore in the inventory of Spider.

Required
a) Calculate the carrying value of the investment in the associate Spider in the group
statement of financial position.
b) Calculate the income from the associate Spider in the group statement of profit or
loss.

Illustration 46
Fly
On the first day of the current accounting period the parent company of a group
acquired, for N300, 000, a direct interest of 40% in the equity in Fly. This investment
enables the parent to exercise significant influence over the operating and financial
activities of Fly. Accordingly, Spider is an associate and consolidated in the group
accounts using equity accounting.

In the current period Fly has recognised a profit for the year of N50, 000 as well as gains
in other comprehensive income of N40, 000.

At the year-end an impairment review of the investment revealed an impairment loss of

N10, 000 on the investment in Spider.

Required
a. Calculate the carrying value of the investment in the associate Spider in the
group statement of financial position.
b. Calculate the income from the associate Spider in the group statement of profit or
loss and other comprehensive income.

Please ensure you practice all group account questions in the

pathfinder at least the past 10 diets.

I wish you outstanding success.!!!

125