F7 & P2
Live-ACCA
This document is an extract (portion) of the entire new book on F7 and P2, which is soon going to be released by Live-ACCA. It is prepared and distributed for students of Live-ACCA and others as well. Students are requested to report to the Live-ACCA authority if they find any error in this document. Email us -
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1. Preparation Consolidated Statement of Financial Position
We have to combine elements of the statement of financial position of parent, subsidiary and associate in order to make a single statement that gives a view of the entire group. Below you will find rules for preparing the consolidated statement of financial position. We have presented rules of consolidation in such a sequence which will be helpful to you in answering exam question.
Steps of Preparing Consolidated Statement of Financial Position: Step 1. Draw the layout of the consolidated statement of financial position. You should keep space of two pages for your statement of financial position before you start your workings. Your layout should be as follows: Name of parent company
Parent’s Group Consolidated Statement of Financial Position as at 31.xx.20xx Details $
$
Step 2. Start doing workings. Leave two pages for the statement before workings. Layout of working is shown later (Jump). From point 3 to 8 are the workings. Step 3. Do Working 1: Determine the group structure by calculating parent control percentage over subsidiary and associate. Example: P acquires 8000000 $1 shares of S and 3000000 $1 shares of A. S and A both have a share capital of 10000000. Draw the group structure ?
P 30%
80%
Answer: Calculation, % of Subsidiary = 8/10 x 100 = 80% % of Associate = 3/10 x 100 = 30%
A S This structure is drawn in the working section of your answer.
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Step 4. Do Working 2: Calculate total consideration (investment) made by the parent in order to purchase subsidiary’s shares. As seen earlier in this chapter (Jump), there are many forms of consideration a parent can make. They are: Cash consideration These were explained earlier in this chapter, Deferred consideration click on (Jump) to go to that section. Contingent consideration Share for share Exchange It is always possible that more than one form of consideration has been made by the parent and in that case we have to add all the consideration together. See the example below. Total consideration in subsidiary is calculated as it is required in the calculation of goodwill of the subsidiary. Example: Pink ltd acquired 8000 shares out of 10000 share capital of Sink ltd. Pink paid initial cash consideration of $1 for every shares acquired. Additionally Pink exchanged 2 shares for every 4 shares acquired in Sink when the market price of Pink share is $3/share. It was also agreed that Pink would pay a further $2m in three years time. Current interest rates are 10% pa. The terms of the business combination further provide for the payment of an additional $2 million after 2 years if the performance of Sink reaches a specified level in the two year period. The directors of Pink estimated that the fair value of the contingent consideration at current reporting date is $1 million. Calculate the total consideration made by parent at reporting date?
Answer: Investment in Sink: Cash consideration ($1 x 8000) Share exchange (8000/4 x 2 x $3) Deffered consideration $3000000 x 1/(1+.1)3 = Contingent consideration Investment in Sink
$ 8000 12000 2253944 1000000 3273944
This calculation is shown in the working section of your answer.
Step 5. Do Working 3 : If there is an associate, carrying the value of “investment in associate” is also calculated. Investment in associate is shown under the non-current asset heading in the consolidated statement of financial position. It is calculated by following method: Formula:
Cost of investment in Associate: $ Cost of investment* xxx (+) Parent’s share of post acquisition profits xxx (-) Impairment of investment in associate xxx (-) PUP** (if Parent is the seller) xxx Carrying value of investment in associatet xxx * Cost of investment can be found in parent’s statement of financial postion under non-current asset www.LiveACCA.com www.LiveACCA.com www.LiveACCA.com heading or will be told directly in the question. **PUP is the short form of “Provision for unrealized profit”
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Step 6. Do Working 4- Adjustments : Here students will perform calculations for intra-group and fair value adjustments studied earlier in this chapter (Jump). Make sub-headings by giving name of your calculation for example, URP (unrealized profit) for intra-group transaction, additional/reduced depriciaiton for fair value, etc. Step 7. Do Working 5 : Calculate subsidiary’s net asset value for both the acquisition date and reporting date. It can be calculated as shown below: Formula:
Subsidiary’s Net Asset Details Acquisition Date Reporting Date Share Capital X Reserves: Share Premium X X Revalutaion reserve X X Retained earning X X General reserve X X Fair value adjustment*: Additional / (Excess) value of nonX/(X) X/(X) current asset (W-4) Revaluation X/(X) Excess/Reduced Depriciation (W-4) X/(X) PUP in goods or non-current asset (X) (if Subsidiary is seller) (W-4) Net Asset A B Post acquisition profit** (A-B) C * Fair value adjustments are made depending on the situation mentioned in the question. Detail explanation is mentioned later (Jump). **Difference between the value of subsidiary’s net asset i.e. (A-B) is the post acquisition profit of subsidiary i.e. C. This figure will be needed for calculating group retained earning and NCI at reporting date.
(W-4) means that this calculation is already done in workings 4.
Step 8. Do Working 6 : Calculate Goodwill: Follow the proforma below for calculating value of goodwill that needs to be recognized at the reporting date. Formula:
Goodwill Calculation Details Cost of Investment (W-2) (+) NCI value @ acquisition* (No. of shares x market price per share) or (NCI % x fair value of S’s net asset) (-) Fair value of Sub’s net asset @ acquisition Goodwill @ acquisition (-) Impairment of goodwill Carrying value of goodwill
Reporting Date xx x
(X) X (x) xx
* We have seen earlier in this chapter that there are two methods of calculating NCI value at the date of
acquisition (fair value method and proportionate method) (Jump). You will be told in the question which method is followed by the company or whichwww.LiveACCA.com method you should use for NCI calculation. www.LiveACCA.com www.LiveACCA.com
(W-2) means that this calculation is already done in workings 2.
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Step 9. Do Working 7 : Calculate NCI value at the reporting date by following the proforma below: Formula:
NCI value @ reporting date: Details
$000 X X X xx
NCI vale at acquisition NCI % of post-acquisition profit* NCI % of goodwill impairment (for fair value method only) NCI value at reporting date * Post-acquisition profit is calculated in the net asset calculation table which is shown later (Jump).
Step 10. Do Working 8 : Calculate Group retained earnings at the reporting date by following the proforma below: Formula:
Group Retained Earning: Details Parent’s full retained earning Less: URP (unrealized profit) for intra-group sale of goods (if sold by parent to Subsidiary) Less: URP (unrealized profit) for intra-group sale of Non-current asset (if sold by parent to subsidiary) Less: Parents’s % of URP due to transaction between parent and associate (for both sale of goods and non-current asset, between parent & associate, who ever is the seller)
Less: Parent % of goodwill impairment Less: Parent % of impairment of investment in associate Less: Unwinding discout on diferred consideration Less: Loss on Parent’s other investment for fair value valuation Add: Gain on Parent’s other investment for fair value valuaion Add: Parent’s % of Subsidiary’s post acquisition profit (calculated in net asset calculation (Jump)) Add: Parent’s % of Associate’s post acquisition profit Group retained earning @ reporting date
$000 X (x) (x) (x) (x) (x) (x) (x) (x) X X XX
Step 11. Other Workings: Beside workings of consolidation, student may need to perform other workings for Lease, constrcution contracts, financial assets and liabilities, tax and deferred tax, asset impairment and etc. Give each working a sequencial number so that a reference can be made in the actual statement. Details of these workings are delt in later chapters. Step 12. Go back to the consolidated statement of financial position layout which you have drawn as per step 1. Now we shall start writing our statement of financial position in the following manner: i. Non-Current assetsFor each tangible non-current asset, add both parent’s and subsidiary’s carrying value which is shown in their respective statement. Also add or deduct any adjusting amount that www.LiveACCA.com
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relates to intra-group sale of non-current asset and non current asset fair value issues. You might have done some workings in Working-4 regarding these adjustment, therefore don’t forget to refer it to your workings by just writing (W-4). Making reference to your workings make easier for the examiner to check your performance. GoodwillWe have calculated the value of goodwill at reportind date in our working 6. Since Goodwill is a non-current asset therefore under non-current asset heading, goodwill is shown by making a reference to your working.
Investment – In the parents statement of financial position, investment figure is shown. It may comprise 3 areas of investment made by parent, they are investment in subsidiary, investment in associate and other investment. Some time separate figures are shown for each investment which makes our task more easier. - Investment in Subsidiary, needs to be eliminated thus not included in consolidation. - Investment in Associate calculation is already done in working 3. It is shown separately from other investment. - Other investment of parent is adjusted for any gain or loss arising by recognising them at their fair value and then added with subsidiriary’s all of the investments. Subsidiary’s investment’s are also adjusted for any gain or loss arising due to fair value recognision). See earlier in this chapter for details (Jump). Entire separate workings can be shown for other investment. Intangible AssetsAll the intangible asset of parent shall be shown in the statement at their carrying value. Any intangible asset of subsidiary shall also be shown in the consolidated statement of financial position at their fair value less accumulated amortisation (i.e. total amortisation from the date of acquisition till reporting date. Example: Parent’s Group Consolidated Statement of Financial Position as at 31.xx.20xx Details $ Non-Current Asset Land & Buidling (2200 + 1200 +200 (W-4) -500 (W-4) Goodwill (W-6) Investment in Associate (W-3) Other Investment (500 + 200) Brand
$
X X X X X xx
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ii.
Current Assets- For each current asset add both parent’s and subsidiary’s amount together and deduct any intra-group transaction ajdustments. If you have done any workings with these regards, then make reference of your working.
iii.
EquityUnder the equity section of consolidated statement of financial position only parent share capital, Share premium and other reserves of parents are shown only. Subsidiary’s share capital, share premium and other other reserves are not included in consolidated statement of financial position. Group retained earningGroup retained earning is calculated in working 8. This group retained earning is shown under equity section after share and share premium. NCIWe have already calculated NCI value at reporting date in working 7. After group retained earning, NCI value is shown in the statement.
iv.
Non-curent Liability: For each non-current liability, both parent’s and subsidiary’s non-current liabilities are added together and shown.
Differed ConsiderationTotal liability for diferred consideration is shown under non-current liability. You may show separate workings for your calculation of deferred consideration and refer to your workings. v.
Current liabilityFor each current liability add both parent’s and subsidiary’s amount together and add/deduct any intra-group transaction ajdustments. If you have done any workings with these regards, then make reference of your working.
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