FAC 4862/4 CONSOLIDATED & SEPARATE FINANCIAL STATEMENTS (IAS 27; IFRS 10 & IFRS 12) LECTURE MATERIAL

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1 FAC 4862/4 CONSOLIDATED & SEPARATE FINANCIAL STATEMENTS (IAS 27; IFRS 10 & IFRS 12) LECTURE MATERIAL COPYRIGHT NOTICE Copyright Prepared by BIANCA NEL CA (SA) These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of 1978, no part of this material may be reprinted or reproduced, in any form whatsoever, either in whole or in part or by any electronic or other means including the making of photocopies thereof, without the express prior written consent of the proprietor, CA Campus. No individual may share any CA Campus content or material with any other person. The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and to report their details to: UNISA The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons from registering as chartered accountants (SA), as such actions constitute a gross transgression of ethical principles, which is a violation of the code of professional conduct of SAICA South African Police Service Any other relevant professional body / organisation, including any employer Any other relevant body / organisation

2 1 FOR USE BY CA CAMPUS STUDENTS ONLY WATCH: WEEK 1: GROUPS PART 1 OUTLINE OF CONSOLIDATED & SEPARATED FS IAS 27: SAICA Levels The whole standard is Level 3 IFRS 10: SAICA Levels The whole standard is Level 3 IFRS 12: SAICA Levels The whole standard is Level 3 NB! Refer to: "Changes in TL - Part 4 (6 Min)" Recording included in Col Campus UNISA TL 102: IAS (b)(c) = Excluded - IFRS 9 - Equity method Notes = Include IAS (b)(c) 1. Overview of standards 2. Separate Financial Statements (IAS 27) 3. Consolidated Financial Statements overview (IFRS 10) 4. Control 5. Consolidation Process 6. Presentation & Disclosure 7. IFRS 12 Revision sheet of IAS 27 & IFRS 10 Questions to expect: Consolidation journals Consolidated Financial Statements Sections of the Consolidated Financial Statements Theory questions (10-20 marks) [CONTROL?] Intergroup transactions Separate Financial Statements (Journals) HAVE YOU READ & REFERENCED YOUR STANDARD?

3 2 FOR USE BY CA CAMPUS STUDENTS ONLY 1. OVERVIEW OF STANDARDS T-ACCOUNTS? WHAT IS SEPARATE FINANCIAL STATEMENTS? WHAT IS CONSOLIDATED FINANCIAL STATEMENTS?

4 3 FOR USE BY CA CAMPUS STUDENTS ONLY WHAT IFRS STANDARDS COVER GROUP ACCOUNTS? IAS 27 Separate Financial Statements IAS 28 Investment in Associates IFRS 3 Business Combinations IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interest in Other Entities A study performed by R Hauswald indicates that majority of Joint arrangements have equal shareholder.. However there can be less than equal - then joint control should be proven. TYPES OF INVESTMENTS SUBSIDIARY ASSOCIATE JOINT ARRANGEMENT OTHER INVESTMENTS CRITERIA SHARE ACCOUNTING THIS LECTURE? IAS 27, IFRS 10 & IFRS 12 [IFRS 12 - Lecture - Part 1 (14 Min)]

5 4 FOR USE BY CA CAMPUS STUDENTS ONLY 2. IAS 27 SEPARATE FINANCIAL STATEMENTS (IAS 27.9) Entity (PARENT) prepares separate financial statements (IFRS). The standard contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements, The standard requires an entity preparing separate financial statements to account for those investments at either: at cost # ; in accordance with IFRS 9 Financial Instruments *; or using the Equity Method - IAS 28 - Investments in Associates and Joint Ventures NB! UNISA TL 102: IAS (b)(c) = Excluded Notes = Include IAS (b)(c) * If classified as Financial Asset = Nature of Investment = lead to classify as equity investments at FV through other Comprehensive Income (IFRS ). # If asset is held for sale = IFRS 5 will apply Dividends: Recognise in separate FS when right to receive is established

6 5 FOR USE BY CA CAMPUS STUDENTS ONLY 3. IFRS 10 CONSOLIDATED FS OVERVIEW CONSOLIDATED FS IFRS 10 DOES CONTROL EXIST? DEFINITIONS 1. Consolidated FS 2. Control 3. Group 4. Non-Controlling interest 5. Parent 6. Separate FS 7. Subsidiary NO Apply other relevant Standards, IFRS 9, IFRS 11 or IAS 28 YES CONSOLIDATE Disclosure - IFRS 12

7 4. CONTROL (IFRS ) [NB! Theory Question] WATCH: WEEK 1: GROUPS PART 2 CONTROL would exist IF AND ONLY IF the investor has ALL of the following: = + + POWER over the investee (IFRS ) ABILITY to use power = return (IFRS ) EXPOSURE to rights or variable returns. (IFRS ) POWER = existing rights that give the current ability to affect relevant activities of investee Voting/potential voting rights Rights to appoint, reassign or remove key management personnel/another entity Rights to direct the investee to transactions for the benefit or investor Other rights "DE FACTO CONTROL" 1. Contractual arrangement with another vote holder 2. Rights from other contractual arrangement 3. Investors' voting rights Selling/purchasing R&D Acquisition/Disposal of PPE Funding

8 4. CONTROL (cont.) VARIABLE RETURNS = Investor must have exposure or rights to variable returns from its involvements in investee Not fixed Have the potential to vary as the results of the investee's performance Both positive and negative => Dividends => Remuneration for servicing investee's assets & liabilities => Fees and exposure to loss from credit support => Synergies CONTROL => Investor must have exposure or rights to use its power to affect its returns => Even when the investor delegates its decision-making powers to an agent PRINCIPLE VS AGENT: - No need to consolidate - AGENT: act on behalf and for the benefit of another party = does not control the investee - A principal's power may be held and exercisable by an agent, but on behalf of the principal - An investor that is an agent does not control an investee when it exercises the decision-making rights delegated to it

9 4. CONTROL (cont.) 3. CURRENT ABILITY TO DIRECT RELEVANT ACTITIES (ASSESSING RIGHTS) In order to assess power, ONLY substantive rights that are NOT protective shall be considered SUBSTANTIVE RIGHTS PROTECTIVE RIGHTS A right is substantive when the holder of that right Rights designed to protect the interest of the has the practical ability to exercise that right party holding those rights without giving that Requires judgement party power over the entity to which those rights related E.g. Franchise agreements Consider the following factors: An investor that only holds protective rights Barriers that prevent the holder from exercising does not have power over an investee, its rights, e.g. laws and regulations neither can they prevent another party from There is a practical mechanism to facilitate having power over an investee multiple parties to collectively exercise their rights The party(s) holding the rights would benefit from the exercise of those rights The rights are exercisable when decision about the relevant activities need to be made MAJORITY VOTING RIGHTS a POWER Relevant activities are directed by a vote Majority of the governing body members are appointed by a vote X POWER Relevant activities are not directed by vote Voting rights are not substantive

10 1 FOR USE BY CA CAMPUS STUDENTS ONLY POWER WITHOUT MAJORITY OWNERSHIP/VOTING RIGTHS ("DE FACTO CONTROL") 1. Contractual arrangement with other vote holder Might ensure that the investor can direct other vote holders on how to vote to enable the investor to make decisions about relevant activities 2. Rights from other contractual arrangements Gives the investor the current ability to direct the relevant activities of the investee Economic dependence of an investee on an investor does not automatically lead to the investor having power 3. Investor's voting rights Investor has the practical ability to direct the relvant actitivies unilaterally after considering all facts and ciscumstances such as: Relative size and dispersion of other vote holders Potential voting rights held by other vote holders, other parties or the invstor Rights from other contractual arrangements Any additional facts or cisumstances POTENTIAL VOTING RIGTHS Only considered if they are substantive (e.g. practical to exercise) Could arise from convertible instruments, options or forward contracts Consider the purpose and the design of the instrument Must be currently exercisable and must take into account the economic reality (financial ability and intention to exercise) DO & WATCH LECTURE EXAMPLES: CONTROL - EXAMPLES 1-9

11 2 FOR USE BY CA CAMPUS STUDENTS ONLY 5. CONSOLIDATION [IFRS 10] WATCH: WEEK 1: GROUPS PART 3 WHAT IS CONSOLIDATED FINANCIAL STATEMENTS? => Financial statements of a group presented as those of a single entity PARENT SEPARATE FS + SUBSIDIARY SEPARATE FS = GROUP CONSOLIDATED FS ACCOUNTING RULES ACCOUNTING RULES 1. ACCOUNTING POLICIES [IFRS 10.19] Same accounting policies IF NOT: 2. DATE OF INCLUSION/EXCLUSION From date: Acquisition (when investor obtains control) To date: Disposal (when investor loses control) 3. DIFFERENT REPORTING DATES Reporting dates should be THE SAME If subsidiary's date is DIFFERENT from parent: Sub may prepare additional FS for consolidation purposes with same reporting date, or If NOT practical then Sub accounts can be used if the gap between the reporting dates is 3 Months Adjustments might be necessary

12 3 FOR USE BY CA CAMPUS STUDENTS ONLY NB! UNISA TL 102: Page 11 [IAS ] = Exclude Investment entity Notes = Include due to ITC Level being Level 3 WHO DOES NOT NEED TO PREPARE CONSOLIDATED FS? Parent that meets ALL conditions: (IFRS 10.31) Parent = postemployment or another long-term employee benefit plan (IAS 19) Parent = Investment entity (IFRS 10.27) 1. Parent = subsidiary 2. Debt/equity not traded publicly 3. Not filed/in process of filing to trade publicly 4. Ultimate parent presents FS ü ü ü Obtain funds from investors => Investment management services Business purpose => to invest funds for returns Measures performance of investments on a fair value basis CHARACTERISTICS: CONSOLIDATION PROCESS STEP 1 ANALYSIS OF OWNERS' EQUITY STEP 2 LINE BY LINE COMBINATION STEP 3 ELIMINATE CARRYING AMOUNT OF INVESTMENT [ELIMINATION JOURNAL] + ALL PROFORMA JOURNALS => CALCULATE NCI / GW [IF ANY] STEP 4 ELIMINATE INTRAGROUP TRANSACTIONS

13 4 FOR USE BY CA CAMPUS STUDENTS ONLY DO & WATCH LECTURE EXAMPLES: BASIC CONSOLIDATION EXAMPLES NON-CONTROLLING INTEREST IFRS 3 = EQUITY IN SUBSIDIARY NOT ATTRIBUTABLE DIRECTLY OR INDIRECTLY TO A PARENT MEASURE: It's proportionate share of fair value of the subsidiary's net assets Fair Value [based on market value of shares held by NCI] => AFFECT GOODWILL GOODWILL IFRS 3 = ASSET REPRESENTING FUTURE ECONOMIC BENEFITS ARISING FROM OTHER ASSETS ACQUIRED IN A BUSINESS COMBINATION THAT ARE NOT INDIVIDUALLY IDENTIFIED AND SEPARATELY RECOGNISED WHEN? FV of Consideration transferred (pd) + NCI in acquiree + Acquisition in stages of FV of previously held interest > NET IDENTIFIABLE ASSETS/LIABILITIES OF SUBSIDIARY ON ACQUISITION DATE IMPAIRMENT OF GOODWILL? IAS 36

14 5 FOR USE BY CA CAMPUS STUDENTS ONLY CONSOLIDATION PROCESS PRINCIPLE EXAMPLE WATCH: WEEK 1: GROUPS PART 4 Parent Ltd obtained control over Subsidiary Ltd on date of incorporation of Subsidiary Ltd for R The statement of financial position for both companies are provided for the year end 31 December Profit after tax for the year end 31 December 2016 included in Retained earnings was R Subsidiary Ltd paid a dividend of R at 31 December The dividend was paid cash and included in Other Income (P/L) of Parent Ltd. Accounting policy: NCI measured at proportionate share Investment in Subsidiary in Parent records at cost. [Ignore any taxes.] Prepare consolidated SFP of Parent Group as at 31 December Analysis of owners equity: Parent Ltd 64k/80k = 80% NCI 20% Total At Since R R R R At acquisition: Share capital 80,000 64,000 16,000 Retained earnings ,000 64,000 16,000 Equity represented by goodwill Consideration paid and NCI 64,000 64,000 16,000 Since period: Retained earnings 40,000 32,000 8,000 [R45k + R10k - R15K = R40K] Current year: Profit for the period 15,000 12,000 3,000 Dividends paid (10,000) (8,000) (2,000) 109,000 36,000 25,000 STEP 1: PREPARE AOE Prop Share = NO GW to NCI If Consideration paid was R = Goodwill = R6 000 Not shared to NCI UNDERSTAND THE JOURNALS!

15 6 FOR USE BY CA CAMPUS STUDENTS ONLY

16 7 FOR USE BY CA CAMPUS STUDENTS ONLY CHANGE IN INFORMATION: Parent Ltd obtained control over Subsidiary Ltd on date of incorporation of Subsidiary Ltd for R At this date the shares traded for R1.25 (fair value). [Ignore any taxes.] Accounting policy: NCI measured at Fair Value Investment in Subsidiary in Parent records at Cost. Prepare the at acquisition journal entry for the period 31 December STEP 1: AOE UNDERSTAND THE JOURNALS!

17 8 FOR USE BY CA CAMPUS STUDENTS ONLY

18 9 FOR USE BY CA CAMPUS STUDENTS ONLY CHANGE IN INFORMATION: Parent Ltd acquired 100% interest in Subsidiary Ltd (and obtained control) for R on 1 January 2016 when Subsidiary Ltd's share capital amounted to R and retained earnings to R Accounting policy: Investment in Subsidiary in Parent records are accounted for at fair value through other comprehensive income (OCI). At 31 December 2016 the fair value of the investment in Subsidiary Ltd amounted to R Prepare the at acquisition journal entry for the period 31 December STEP 1: AOE? Not required = NO Goodwill or NCI UNDERSTAND THE JOURNALS! What will journal entry be if taxed at CGT?

19 10 FOR USE BY CA CAMPUS STUDENTS ONLY 6. PRESENTATION & DISCLOSURE Normal SFP/OCI/P&L/SCE (add group section) WEEK 4: Included in the Additional Information section will be a Group revision lecture on all 3rd year groups knowledge. This includes presentation. * CHANGE IN OWNERSHIP INTEREST (IFRS & 25) Will cover in detail in Learning Unit 7 [Refer to page 10 of TL 102] CONTROL NOT LOST If the control is not lost: = Equity transactions CA of controlling and non-controlling interest must be changed Adjustment to NCI - FV of consideration transferred/received = Equity (owner of the parent) CONTROL LOST The parent must: Derecognise A and L of former subsidiary from consolidated SFP (including Goodwill) Derecognise CA of NCI Recognise investment retained in former subsidiary at FV Amounts recognised in OCI must be - Reclassified to P/L or -Transferred directly to RE Recognise a gain/loss in P/L 7. IFRS 12 WATCH: WEEK 1: IFRS 12 - Lecture - Part 1 (14 Min)

20 REVISION OF IAS 27 & IFRS 10 IAS 27: SEP FS: Parent account for investment either cost equity method 3. IFRS 9 CRITERIA SHARE SUBSIDIARY [IFRS 10] CONTROL 50% + NB! CONTROL GROUP ASSOCIATE [IAS 28] SIGNIFICANT INFLUENCE JOINT ARRANGEMENT [IFRS 11] JOINT CONTROL 20% + JOINT CONTROL IFRS 12 Disclosure of Interest in Other Entities ACCOUNTING CONSOLIDATE EQUITY ACCOUNT DEPENDS OF TYPE OTHER INVESTMENTS = IFRS CONTROL 1. POWER + => Existing rights that give current ability to affect relevant activities 2. ABILITY TO USE + 3. EXPOSURE VARIABLE RETURN => exposure to variable returns from involvement "De Facto Control" ACCOUNTING RULES: 1. Acc policies 2. Incl/Excl dates 3. Reporting dates CONSOLIDATION NOT PREPARE CONSOLIDATED FS: 1. Parent that meets all conditions [IFRS 10.31] Parent=Sub Debt/Equity NOT traded Not in process of filing to trade publicly Ultimate parent presents FS 2. Parent = IAS 19 plan 3. Parent = Investment entity [IFRS 10.27] Funds from investors Business purpose = invest Performance = FV PROCESS: 1. AOE 2. Line by line combination 3. Elimination & Proforma JNL 4. Eliminate Intragroup transactions NCI [IFRS 3] GOODWILL [IFRS 3]