F2 The Consolidated SOFP

Debit investment (non-current asset) at cost, credit cash (or other consideration given)

When the investment gives the investor enough influence or control over the investee company.

To reduce competition,
Diversify into new markets,
Bring expertise in-house
Benefit from synergies and intercompany transactions.

"Commercial substance over strict legal form"

IFRS 10 focuses on the concept of control to determine whether an entity is a subsidiary and should be consolidated.

1) Power over the investee, to direct activities and affect investee's returns
2) Exposure or rights to variable returns,
3) Ability to use power to affect those returns.

No. While it usually indicates control, IFRS 10 requires a principles-based assessment considering all factors, not just shareholding.

Yes. Control can exist with less than 50% if there are contractual arrangements or other rights that give you power over the investee.

If the government, an administrator, or a liquidator imposes restrictions or takes over, you may lose control despite majority shareholding.

Always reflect the substance of the transaction over its legal form and consider all circumstances affecting power and control.

Circumstances can change, affecting whether control exists, so regular reassessment ensures accurate and comparable financial statements.

It means that the parent and subsidiary are consolidated and presented as if they were one single economic entity, even though they are legally separate companies.

To show the group as a single economic entity, reflecting the substance of control rather than just the legal form.

Goodwill appears as a separate figure in the non-current asset section of the consolidated statement of financial position.

NCI represents the portion of net assets in a subsidiary attributable to minority shareholders who do not have control.

As a separate line item within the equity section of the consolidated statement of financial position.

To specify how to account when one entity gains control over another, including the preparation of group accounts in addition to individual company accounts. focus on acquisition

Consolidation involves adding 100% of the assets and liabilities of the subsidiary to the parent, line by line, to show control, and reflecting ownership through the non-controlling interest (NCI).

The investment in the subsidiary is cancelled against the subsidiary’s net assets at acquisition (share capital and retained earnings at acquisition).

The fair value method and the proportionate share of net assets method.

NCI is shown in the equity section, representing the portion of the subsidiary not owned by the parent.

Purchase goodwill is the excess of the cost of investment (plus NCI) over the fair value of net assets acquired. It is recognized as an intangible asset and reviewed annually for impairment.

Negative goodwill arises when the cost of investment (plus NCI) is less than the fair value of net assets acquired. It is credited immediately to the profit and loss account.

No, internally generated goodwill is never recognized.

Internally generated goodwill refers to the value that a company believes it has created through its own operations, reputation, customer relationships, or brand strength, rather than through the acquisition of another business. Under IFRS 3 and accounting standards, internally generated goodwill is never recognized as an asset in the financial statements. Only goodwill arising from the purchase of another company (purchase goodwill) is recognized. This prevents companies from artificially inflating their balance sheets by estimating and recording their own perceived value.

Only the parent’s share capital is shown; the subsidiary’s share capital is cancelled.

All of the parent’s retained earnings plus the parent’s share of the subsidiary’s post-acquisition profits.

Profits earned by the subsidiary since the date of acquisition.

It is recorded against retained earnings in group reserves if not recognized in the year of acquisition.

To show control; ownership is reflected separately through the NCI.

Establish the group structure—determine if the parent has control, the date of acquisition, and the percentage of shares held.

To determine the profit generated by the subsidiary since the parent gained control, which is then split between the parent and NCI.

All of the parent’s retained earnings plus the parent’s share of the subsidiary’s post-acquisition profit, minus any impairment (depending on the method).

NCI is the equity in a subsidiary not attributable, directly or indirectly, to the parent company.

NCI can be measured at fair value or at the NCI’s proportionate share of the subsidiary’s net identifiable assets.

NCI is valued using the market value of the subsidiary’s shares at the date of acquisition or other valuation techniques if not traded.

NCI is valued by calculating their share of the fair value of the subsidiary’s net assets at acquisition.

The method chosen impacts the amount of goodwill recognized; fair value usually results in higher goodwill than the proportionate method.

Because the NCI is valued higher under the fair value method, increasing the total goodwill recognized.

IFRS 3 requires that acquired net assets must be measured at fair value at the date of acquisition.

Intangible assets must be valued at fair value, which is equivalent to their current carrying value as per IAS 38.

The fair value of PPE should generally be the market value; if market evidence is lacking, depreciated replacement cost may be used.

Fair value for traded financial assets and securities is determined by the quoted market price. For non-marketable securities, fair value is estimated using comparable securities.

Work in progress is valued at the selling price minus completion costs, disposal costs, and any profit margin included in the selling price.

The valuation should reflect the selling price less any disposal costs associated with those goods.

The present value of expected future cash flows from receivables must be calculated. Discounting is not necessary for short-term receivables but is required for longer-term ones.

Payables are recorded at the fair value of the amounts expected to be paid, discounted to present value if applicable.

Fair value estimates should be approved at the date of acquisition and verified with the first post-acquisition financial statements produced by the group.

Lay out the pro forma SFP, including non-current assets, current assets, share capital, retained earnings, NCI, and current liabilities. Do not include the investment in the subsidiary; it will be replaced by goodwill.

Increase the relevant asset (e.g., PPE) by the fair value uplift and credit the reserves. Recognize any contingent liabilities by increasing liabilities and debiting reserves.

Add the contingent liability to current liabilities and reduce the subsidiary’s net assets by the same amount at acquisition.

NCI = NCI percentage × subsidiary’s net assets at acquisition (after fair value adjustments).

Negative goodwill is recognized immediately as an income in the profit and loss account, indicating a bargain purchase.

Goodwill impairment decreases the asset value on the statement of financial position and reflects an expense on the profit and loss account.

100% of the parent’s and subsidiary’s assets and liabilities are added line by line, except for the investment in the subsidiary.

Goodwill, calculated at acquisition.

Adjust the subsidiary’s net assets at both acquisition and reporting dates for fair value changes, and account for extra depreciation or liability as needed.

The difference in the subsidiary’s net assets between acquisition and reporting date.

Only the parent’s share capital.

The cost of the investment to be recorded

Debit Investment, Credit Cash

Debit Investment (fair value), Credit Share Capital (nominal value), Credit Share Premium (excess over nominal value).

Debit Investment, Credit Liability (at present value of the obligation).

It is dependent on meeting certain conditions or clauses, and is measured at fair value based on the likelihood and amount involved.

Set up a new equity line called "shares not yet issued" within equity.

They must be expensed immediately in the profit and loss account, not included in the cost of acquisition.

Intergroup balances must be eliminated so that only balances with the outside world are shown

1. Ensure the balances agree (reconcile differences, e.g., cash in transit). 2. Cancel or contra the balances.

Cash in transit occurs when payment has been made by one group company but not yet received by the other at the reporting date, causing a mismatch in balances.

Debit bank (increase cash) and credit receivables (reduce receivable).

Because loans between group companies do not represent transactions with the outside world and must be removed to reflect the group as a single entity.

Provision for Unrealised Profit

Profit included in inventory when goods are sold between group companies but not yet sold to an external party by year end.

Only when the goods transferred between group companies are still in inventory at the year end.

No, because the profit is now realized.

Credit inventory (to reduce it) and debit retained earnings, which reduces group profit.

This is because we are reducing the value of the inventory in the subs accounts and reducing the profit in the parents accounts as we are removing the profit charged within the group

If the parent is the seller, the adjustment goes to the parent’s retained earnings (W5); if the subsidiary is the seller, the adjustment is shared between the parent and non-controlling interest (W4)

Total assets must equal total equity and liabilities.

It is an increase in the carrying value of a subsidiary’s PPE to reflect its fair value at the date of acquisition.

The uplift is added to the net assets at acquisition and at the reporting date in the net assets working. W2

Divide the uplift amount by the asset’s remaining useful life at acquisition to get annual extra depreciation.

Reduce the carrying value of PPE (CSOFP) and reduce retained earnings of sub (W2) by the accumulated extra depreciation. ie times the annual calulated extra depreciation by number of years since acquisition

The uplift increases net assets at acquisition, which reduces calculated goodwill.

NCI’s share of net assets at acquisition and post-acquisition includes their share of the fair value uplift and related depreciation.

Consolidaated PPE

Investments in associate

Inventories

Trade and other receivables

Consolidated cash and cash equivelents

Impairment Treatment: If goodwill is impaired (i.e., its value has decreased), the impairment loss is shared between the parent and the NCI in proportion to their ownership interests.
The impairment is credited to goodwill (reducing its carrying value).
The parent’s share of the impairment is debited to the group’s retained earnings (working five).
The NCI’s share of the impairment is debited to the NCI (working four).
Rationale: This is because, under the fair value method, the NCI is recognized at its full fair value, which includes its share of goodwill. Therefore, both the parent and NCI share in any impairment loss.
Summary: Under the fair value method, impairment of goodwill is split between the parent and the NCI, reducing both their respective equity interests in the consolidated financial statements.

Impairment Treatment: If goodwill is impaired, the entire impairment loss is allocated to the parent only.
The impairment is credited to goodwill (reducing its carrying value).
The full amount of the impairment is debited to the group’s retained earnings (working five).
No portion of the impairment is allocated to the NCI.
Rationale: Under the proportionate method, the NCI is recognized only for its share of the subsidiary’s net assets, not including any goodwill. Therefore, the NCI does not share in any impairment of goodwill.
Summary: Under the proportionate method, all impairment of goodwill is borne by the parent, with no impact on the NCI.

Focus: After the acquisition — ongoing control and consolidation.

Purpose

IFRS 10 sets out principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities.

It is an arrangement where two or more parties have joint control over an activity, requiring unanimous consent for decisions.

Joint ventures and joint operations.

A joint arrangement where parties have joint control through a separate entity (can be a company or unincorporated business).

Using the equity method, similar to associates.

A joint arrangement where parties have joint control over assets and obligations, without a separate entity.

Each party recognizes its share of assets, liabilities, revenue, and expenses directly and takes a proportion of the sale proceeds (line by line)

Oil companies sharing control over a pipeline, each using its own assets and incurring its own expenses.

IAS 27 covers how parent companies should account for investments in subsidiaries, associates, or joint ventures in their separate financial statements.

Investments can be measured at either cost or fair value (with gains/losses through OCI).

Always use the original cost of investment, regardless of any fair value adjustments made in the parent’s separate accounts.

Reverse any fair value adjustments and use the original cost for goodwill calculation.

Using the original cost ensures goodwill remains consistent and is not affected by ongoing fair value changes in the parent’s separate accounts.

Reverse the gain or loss that occurred after aquisition