consolidated account

8/3/2019 Consolidated Account

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CONSOLIDATEDACCOUNT

Chapter 8 & 9

FRS 3 &127


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Learning outcome

At the end of this topic, students will be able to:

Explain the concept of a subsidiary and the

principles of how they are accounted for


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LEGAL DEFINITION OF SUBSIDIARY

Section 5 of the Companies Act 1965 defines asubsidiary company as one:

a. in which the investor companyi. Controls the composition of the board of directorsof the investee company; orii.Controls more than half the voting power of theinvestee company; oriii. Holds more than half of the issued share capital

(excluding preference shares); orb. Which is a subsidiary of a subsidiary of the investor

company.


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EXCLUSION FROM CONSOLIDATION

Ninth schedule of the Companies Act allows parent companiesfrom excluding certain subsidiaries from being consolidated.

a. It is impracticable, the time and/or expense involvedoutweigh the value of such accounts to the members of thecompany; or

b. The controlling interest in the subsidiary is temporary; orc. The subsidiary is situated outside Malaysia and conditions in

the foreign country are such that the control of the subsidiaryis impaired; or

d. The accounts would be misleading or harmful to any

member of the group; ore. The business of the subsidiary is very different from that of

the parent company.


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GROUP STRUCTURE

1. Vertical Group

H Bhd

S

SS

80%

60%

80% x 60% = 48%


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GROUP STRUCTURE

1. Mixed Group

H Bhd

S SS

75%

40%

25% +

[75% x 40%] = 65%25%


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Method of Accounting FRS 3

All business combination shall be accounted for byapplying the Purchase Method.

Application of Purchase Method Step One : Identifying an acquirer Step two : Measuring the cost of the business

combination; and Step three : Allocating at the acquisition date the cost

of the business combination to the assets acquired andliabilities and contingent liabilities assumed


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Step 1: Identifying the acquirer (FRS3/16-23)

An acquirer shall be identified for all business

combinations.

The acquirer is the combining entity that

obtains control of the other combining entities

or businesses


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Extract of Paragraph 20 FRS 3:

Although sometimes it may be difficult to identify anacquirer, there are usually indications that one exists.For example:

if the fair value of one of the combining entities issignificantly greater than that of the other combiningentity, the entity with the greater fair value is likely to

be the acquirer;

if the business combination is effected through anexchange of voting ordinary equity instruments for cash orother assets, the entity giving up cash or other assets islikely to be the acquirer; and


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Extract of Paragraph 20 FRS 3:

Although sometimes it may be difficult to identify an

acquirer, there are usually indications that one exists.

For example:

if the business combination results in the

management of one of the combining entities being able

to dominate the selection of the management team of the

resulting combined entity, the entity whose management is

able so to dominate is likely to be the acquirer.


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Business combination effected through an exchange of equity

interest, the entity that issues the equity interest is normally

the acquirer

When a new entity is formed to issued equity instruments to

effect a business combination, one of the combining entities

that existed before the combination shall be identified as the

acquirer on the basis of the evidence available


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Step 2: Cost of Business Combination (FRS3/24 - 30)

The acquirer shall measure the cost of a businesscombination as the aggregate of:

the fair values, at the "date of exchange", of assets given,liabilities incurred or assumed, and equity instruments

issued by the acquirer, in exchange for control of theacquiree; plus

any cost directly attributable to the business combination(24)


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The "acquisition date" and "date of exchange"

The "acquisition date" is the date on which the

acquirer effectively obtains control of the acquiree When this is achieved through a single exchange

transaction, the "date of exchange" coincides with the

acquisition date


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The "acquisition date" and "date of exchange"

The "acquisition date" is the date on which the

acquirer effectively obtains control of the acquiree

When this is achieved in stages in stages bysuccessive share purchases , then:

a. the cost of the combination is the aggregate cost of the

individual transactions; and

b. "the date of exchange" is the date of "each exchange

transaction" (i.e. the date that each individual investment is

recognised in the financial statements of the acquirer),

whereas the acquisition date is the date on which the

acquirer obtains control of the acquiree. (25) , the "date of

exchange" coincides with the acquisition date


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The Cost of Business Combination or

investments consists:

Fair value of consideration given

Assets given;

Liabilities incurred or assumed;

Equity instruments issued; plus

Any cost directly attributable to the acquisition


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Step 3: Allocating at the acquisition date, the cost of thebusiness combination to the assets acquired andliabilities and contingent liabilities assumed (IFRS3/36-50)

The acquirer shall, at the acquisition date, allocate the

cost of a business combination by recognizing the

acquiree's identifiable assets, liabilities and contingent

liabilities that satisfy the recognition criteria at fair value

at that date except:

Any difference between the cost of the business combination

and the acquirer's interest in the net fair value of the

identifiable asset, liabilities and contingent liabilities so

recognised shall be accounted for as Goodwill;or

"excess of acquirer's interest in the net fair value of acquiree's

identifiable assets, liabilities and contingent liabilities over cost

[36]


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Goodwill (FRS3/51-57)

The acquirer shall, at the acquisition date:

recognize goodwill acquire in a business combination asan assets; and

initially measure that goodwill at its cost, being the excessof the cost of the business combination over the acquirer'sinterest in the net fair value of the identifiable assets,

liabilities and contingent liabilities [51]


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Goodwill (FRS3/51-57)

After initial recognition:

the acquirer shall measure goodwill acquired in a businesscombination at cost less any accumulated impairment

losses [54]


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PREPARATION OF CONSOLIDATEDBALANCE SHEET

Acquisition 100% or more than 50% 100% fully owned/control less than 100% not fully control share with

minority interest Account cost of control, minority interest.


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PREPARATION OF CONSOLIDATEDBALANCE SHEET

Date of acquisition Pre acquisition reserves

Reserves that already exist in the subsidiary on the datethe shares were acquired by parent.

Treated as non distributable reserves by the holdingcompany. Treated as return of capital for the holding company.

Worked example 2. page 378.


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Given below are the balance sheets of two companies, H and S, as at 1.1.x3.

Ordinary shares @RM1 eachAccumulated profit

Liabilities

HRM000

500,000100,000

20,000

SRM000

200,000150,000

20,000

620,000 370,000

Non current assetsCurrent assets (other than bank)Bank

350,000150,000120,000

100,000100,000170,000

620,000 370,000


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Acquires 100% on 1.1.x3.

How? = new ordinary shares 200,000,000 (MV =RM1.50 each) + cash RM50,000,000.

Cost of investment? = (200,000,000 x RM1.50) +RM50,000,000

= RM350,000,000

Assets acquired? 100% = 100% x 350,000,000 =

RM350,000,000 Goodwill? = Cost = value assets acquired = 0


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New balance sheet of both company after acquisition

Ordinary shares @RM1 eachShare premiumAccumulated profitLiabilities

HRM000

700,000100,000100,00020,000

SRM000

200,000150,00020,000

920,000 370,000

Non current assets

Investment in SCurrent assets (other than bank)Bank

350,000

350,000150,00070,000

100,000

100,000170,000

920,000 370,000


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How to prepare Consolidated Balance sheet.

Cost of investment will be eliminated to theshares and reserve acquired.

all assets and liabilities will be combined.


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HRM000

700,000100,000100,00020,000

SRM000

200,000150,00020,000

CBSRM000

700,000100,000100,00040,000

920,000 370,000 940,000

Non current assetsInvestment in SCurrent assets (other than

bank)Bank

350,000350,000150,00070,000

100,000

100,000170,000

450,000

250,000240,000

920,000 370,000 940,000


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Given below are the balance sheets of two companies, H and S, as at 1.1.x1.

Ordinary shares @RM1 each

Share premiumRetained earningsLiabilities

HRM

600,000200,000200,00040,000

SRM

200,00040,00060,00030,000

1,040,000 330,000

Non current assetsCurrent assets 400,000640,000 170,000160,0001,040,000 330,000


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Acquires 100% on 1.1.x1.

Cost of investment? = RM400,000

Assets acquired? 100% = 100% x 300,000 =RM300,000

Goodwill? = Cost - value assets acquired =RM100,000


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New balance sheet of both company after acquisition


HRM

600,000200,000200,00040,000

SRM

200,00040,00060,00030,000

1,040,000 330,000

Non current assetsInvestment in SCurrent assets

400,000400,000240,000

170,000160,000

1,040,000 330,000


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How to prepare Consolidated Balance sheet.

Cost of investment will be eliminated to theshares and reserve acquired. Any balancewill be the goodwill.

all assets and liabilities will be combined.


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Ordinary shares @RM1 eachShare premiumAccumulated profit

Liabilities

HRM

600,000200,000200,000

40,000

SRM

200,00040,000

60,000

30,000

CBSRM

600,000200,000200,000

70,000

1,040,000 330,000 1,070,000

Non current assetsGoodwillInvestment in SCurrent assets

400,000400,000240,000

170,000

160,000

570,000100,000400,000

920,000 330,000 1,070,000


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Minority Interest: NCI

Accounting treatment:

Option 1: at fair value of the shares held by thenon controlling shareholders

Option 2: equal to proportionate share of the fairvalue of the net assets of the subsidiary.

Method of choosen will determine the amountof goodwill recognised by parent.


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Goodwill disclosed

NCI option 1: full value

NCI option 2: parents share only.

Worked example 5 page 386.


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Post acquisition reserves

Reserves made by subsidiary after its shares areacquired by the holding.

Distributable to parent company.

Illustration page 391. H acquired 75% Ordinary share capital of S on

1.1.x4; (P/L account = RM10,000).

On 31.12.x6; H P/L acc = RM23,000; S P/L acc =RM30,000.


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Consolidated Procedures for the CBS

BS of Parent and Subsidiary are combined line by line by adding

together like items of assets and liabilities.

The carrying amt of Parents investment in the subsidiary and the

Parents share of the equity of the subsidiary on acq date are

eliminated.

The minority interest in the net assets of the subsidiary are

identified and presented as equity.

Intra group balances and transactions are eliminated.

Unrealised profit from intra-group transactions are eliminated in

full.


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Proforma account

Adjustment (Cost of Control)

Non controlling interest (minority interest)

consolidated reserves subsidiary reserves

worked example 7. page 392


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Preference Shares

- not calculated for control/govern thesubsidiary

investment in preference shares debited to cost

of control

nominal values of the shares credited to cost ofcontrol & to minority interest account


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Debenture andRedeemable Preference Share

- not calculated for control/govern the subsidiary

investment in debenture/Redeemable Pref share debitedto cost of control

nominal values of debenture/Redeemable Pref sharecredited to cost of control

- outstanding amt of debenture/Redeemable PrefShare not held by holding company will not treated

as minority interest. Disclosed as liability in theconsolidated balance sheet.

Worked example 9 page 403


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Tutorial Question

9.6 and 9.8

Due date:

Group 3A: 22 Sept 2011 at 10.00am

Group 3B: 23 Sept 2011 at 10.00am


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Fair Value Adjustment

On the date of acquisition to reflect Fair value ofassets

Adjust the asset account

any different (surplus/deficit) will becredited/debited to asset revaluation reserve

treatment same way as other pre-acquisitionreserve

If the assets are depreciable assets groupdepreciation should be based on the fair value.


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Recognition of Unrecognised Assetsof Subsidiary

Acquiree/subsidiary may have assets that ithad not recognised as some assets

Example: internally generated brand

If the assets are separable and identifiable asassets recognised in the ConsolidatedFinancial Statement


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Illustration page 406

acquisition date/revaluation date = 1 Jan x4

Book Value (RM) Fair Value (RM)

Land 100,000 120,000Buildings 200,000 250,000

Brand nil 55,000

Remaining life of building is 25 years.


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Adjustment entries:If S adjust its own account

Record in Book of S

Dt Land RM20,000

Dt Buildings RM50,000Ct Asset revaluation reserve RM70,000

Adjustment entries:


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Adjustment entries:If S adjust its own account

Record in Book of S

Brand:

S cannot recognised in its book Recognised in the consolidated financial statement


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Adjustment entries:If S DOES NOT adjust its own account

Dt Land RM20,000

Dt Buildings RM50,000

Dt Brand RM55,000Ct Asset revaluation reserve RM125,000


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Depreciation adjustment

Depreciation will be = 250/25 =RM10,000 p.a

But S Record as = 200/25 = RM8,000 p.a

Make adjustment entry

Dt P/L of S RM2,000

Ct Accumulated depreciation of building RM2,000


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Example 10: Page 408

Land no depreciation involved

Fair value as at 1 Jan X9 RM120,000

Carrying value as at 31 Dec X9 = 1 Jan X9 RM100,000

Increase in value RM20,000


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Building depreciable asset


Carrying value as at 1 Jan X9 (given) RM320,000

Increase in value RM180,000

Depreciation adjustment:

Recorded in Group 500,000/16 RM31,250

Recorded by S 320,000/16 20,000Adjustment in P/L S (post reserve) 11,250


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Facts are as for Example 10 except that H acquire S on 1 January X8

Land Adjustment (non depreciable) = Same

Building: Depreciation will be calculated for 2 years.


Carrying value as at 1 Jan X8 RM???????

Deprciation 1 Jan x8 31 Dec x9 = 2 years

Annual depreciation x 2 years = (320,000 300,000) x 2 = 40,000 So Carrying value as at 1 Jan X8 = 300,000 = 40,000 = 340,000

Increase in value = 500,000 340,000 = RM160,000


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Building depreciable asset

Depreciation adjustment:

Recorded in Group (500,000/17) x 2 RM58,824

Recorded by S 40,000

Adjustment in P/L S (post reserve) 18,824


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Post Acquisition Fair Value Changes

Treated accordance to FRS 116 Property,Plant and Equipment.


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Asset That were Fair Valued andSubsequently disposed of

Financial Statement Subsidiary: gain or loss on thedisposal will include the fair value change.

Pre acquisition reserve: include the fair value change(asset is no more entity)


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Example 12: page 413

Land ARR = RM500,000

Land disposed The ARR amount will be

transferred to P/L of S (pre acq reserve)

Pre acquisition P/L will be increased be the ARRamount


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Discuss on the White Board


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Time Limit

FRS 3: Changes to the fair value of assets to be madewithin 12 months of the acquisition date.

Initial goodwill will be based on provisional (estimated)amounts.

Adjustments to the goodwill can be made when theactual fair value amounts are known. Must be madewithin 12 months

See chapter 8.


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Deferred Tax Implication

Surplus or Deficit on Fair Value adjustment willbe subjected to Tax

Tax Payable/receivable will affect the amount of

goodwill Fair value surplus will reduce the goodwill

deferred tax liability will increase the amount of

goodwill


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Land: non depreciable asset ARR RM2 million

Deferred tax liability = RM2 million x 10% = RM200,000

Journal entries

Dr Land RM2,000,000

Ct ARR RM1,800,000

Deferred Tax Liability RM200,000


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Plant: depreciable asset ARR RM5 million

Depreciation will increased by RM5m/5 = RM1 million

Increased in expenses Reduced the profit, reduced the income tax

Deferred tax liability will be decreased.

Deferred tax liability = (RM5 million x 10%) (RM1 million x 25%) =RM1,250,000

Journal entries

Dr Land RM5,000,000Ct ARR RM3,750,000

Deferred Tax Liability RM1,250,000

INTRA GROUP BALANCES AND


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INTRA-GROUP BALANCES ANDTRANSACTIONS

May be presented in form of:

Loans

Debtors/creditors

Current accounts

Bill payable/receivable

Interest payable/receivable

Dividends payable/receivable

INTRA GROUP BALANCES AND


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INTRA-GROUP BALANCES ANDTRANSACTIONS

should not disclosed any intra-group

mean to reporting transactions that havetaken place outside the group

avoids double counting of assets andliabilities


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Items in Transit

cash remittance and dispatch of other assets by oneparty but the other party has not received them as at thebalance sheet date.

adjustment made in the account of the holding company.

if items in transit is between two subsidiaries, theadjustment is made in the account of the company inwhich the item is not recorded yet. However the itemswill be eliminated in the CBS


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Items in Transit: Example

Extract Balance sheet of H and S as at 31 Dec 2006H S

Current asset

Loan to S 20,000

Current liabilitiesLoan from H 18,000

Different of RM2,000 will be cash in transit


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Items in Transit: Example

Journal entries

Dt Loan from H 18,000

Cash in transit 2,000

Ct Loan to S 20,000

Extract Consolidated Balance sheet of H and its subsidiary as at 31Dec 2006

Current asset

Debtors XXXX

Cash in transit 2,000

Cash in bank XXXX


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Factoring of Receivables

Receivables due from members within thegroup may be factored.

The amount outstanding to the party outside

the group is liability

The unfactored amount is cancelled.


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Illustration: Page 420

The Parent has lent RM100,000 to the subsidiary.However the subsidiary has remitted RM20,000 at theend of the year which the parent only received at thebeginning of the year.

Journal entries:

Dt Loan from Parent RM80,000

Cash in Transit 20,000Cr Loan to subsidiary RM100,000


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The bills payable of subsidiary of RM25,000 is due to theParent. Parent has factored RM10,000.

Journal entries:Dt Bill payable RM15,000

Cr Bill receivable RM15,000


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Trade receivables of RM17,000 of the parent arereceivables from the subsidiary. They include RM8,000for inventory sent by the parent on 30 Sept x4 which wasnot received by the subsidiary till 11 January x5.

Journal entries:

Dt Trade payables RM9,000

Inventory 8,000Cr Trade receivables RM17,000


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Current Account

Numerous inter company transactions

More convenient to operate one account namedCurrent Account.

Balances in reporting date is cancelled off: inter-company balances

The differences between two account balance:cash in transit


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Bills receivables/payables

Negotiable financial instruments: holder cantransfer to another party

Bills are discounted

Subsidiary does not owe parent on the billsdiscounted.


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Bills Payable of SRM35,000

Bills Receivable of HRM35,000

To H: RM10,000

To others: RM25,000

Group debt: RM6,000

Discounted: RM4,000

From S: RM6,000

From H: RM24,000

Bills receivable and payable of RM6,000 will be cancelled: Intercompany indebtedness.


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Example 15

Class disscussion


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Tutorial Question

9.14 and 9.15

Due date:

Group 3A: 29 Sept 2011 at 10.00am

Group 3B: 30 Sept 2011 at 10.00am

consolidated account

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