BAC 200 – Business Accounting
Contents
LA 11: Chapter 1: Business Combinations ............................................ 2
LA 11: Chapter 2: Wholly-owned subsidiary ........................................ 6
LA 11: Chapter 3: Partially-owned Subsidiary.................................... 11
LA 11: Chapter 4: General Intragroup Transactions ......................... 16
LA 11: Chapter 5: Intragroup Transactions: Inventories ...................19
LA 11: Chapter 6 (Consolidations): Intragroup Transactions: PPE .. 23
LA 12: Investments in Associates and Joint Ventures ....................... 24
LA 13: Events after reporting period (IAS 10) .....................................27
LA 14: Provisions, Contingent liabilities/ assets .................................. 29
LA 15: Chapter 11 (IFRS): Employee Benefits .....................................32
LA 16: Earnings per share (IAS 33) ....................................................... 36
LA 17: Chapter 12 (IFRS): Effects of changes in foreign exchange
rates: Unhedged Transactions ............................................................39
LA 17: Chapter 12 (IFRS): Effects of changes in foreign exchange
rates: Hedged Transactions ................................................................. 43
1
,LA 11: Chapter 1: Business Combinations
1. INTRODUCTION
Investment Reasons
in shares realisation of short‐term capital gains
earn dividend income
gain control over net assets of another entity
Accounting dependent on
expected holding period
- current: intent to dispose < 12 months
- non-current: intent to hold > 12 months
purpose of investment
- active vs
- passive
Types of Minority Minority active Majority
investments passive active
(Business
combo)
Power over Little influence Significant Control
investee (small influence/ joint
ownership %) control
Influence on Minor Considerable Dictate
activities
affecting
returns
Controls Shares Participate in Business of
purchased financial/ investee
operating policy
decisions
Disclosed as Current/ non- Non-current asset Non-current
current asset asset
Business transaction/ other event
combination in which acquirer obtains control of business(es)
Parent Subsidiary
Group
Business P > 50% Business S P&S
Acquirer Acquiree
Business integrated set of activities/ assets
capable of being conducted/ managed
for purpose of providing return
- dividends
- lower costs
- other economic benefits
directly to investors/ other owners/ members/ participants
Operating reduce legal/ operating risk
as separate reduce cost of jurisdiction‐specific corporate/ tax laws
2
,legal entities expand/ diversify
within a reduce cost of divesting assets
group
Obtaining control – acquirer will be in position to govern
financial policies
operating policies
In substance
businesses are combined to form single reporting entity
each business is still a separate legal entity
Terminology IFRS 3 IFRS 10
Acquirer: obtains control Parent: controls entities
Acquiree: is controlled Subsidiary: controlled by entity
Group: acquirer + acquirees Group: parent + subsidiaries
Focuses on date of Addresses period since
acquisition acquisition
2. CONTROL
Definition Investor is exposed/ has rights to
variable returns from involvement with investee
has ability to affect returns
through power over investee
Exposure
Link
to Control
Power between
variability
them
in return
Power Existing rights held by investor
- voting rights
- contractual rights
Entity which holds less than 50% of voting rights may control
investee through contractual rights as power to
- govern policies through statute/ agreement
- hire/ fire majority of BoD
- cast more than 50% votes where BoD controls entity
Returns In order to control investee, investor must have
Exposure/ rights to variable returns from involvement
Returns can be +/ -
Can encompass a broad range of benefits/ detriments
Link Investor must have ability to
between Use its power to
Affect its returns from involvement
3
,3. ACQUISITION METHOD
Requirements 1. Identifying acquirer
2. Determining acquisition date
3. Recognizing/ measuring
- identifiable assets
- liabilities assumed
- non-controlling interests
4. Recognising/ measuring
- Goodwill/
- Gain from bargain purchase
1. Entity
that transfers cash/ other assets/ incurs liability
that issues equity interests
whose relative size is greater than other combining entity
that initiated combination
2. Date that
acquirer obtains control of acquiree
acquiree’s assets/ liabilities will be included in acquirer’s
financial statements
acquirer legally transfers consideration to previous owners
unconditional offer is accepted
acquirer commences direction of policies of acquiree
flow of economic benefits of acquiree changes
majority of BoD of acquiree represents interests of acquirer
competition commission provides clearance for acquisition
3. Recognition criteria
Perspective of combined entity:
meet definition of asset/ liability at acquisition date
be part of business acquired rather than result of separate
transaction
Non-controlling interest
equity in a subsidiary not attributable to a parent
Classification/ designation of identifiable assets/ liabilities
Based on
contractual terms
economic conditions
operating/ accounting policies
pertinent conditions
Measurement
at acquisition-date fair values
4. Consideration transferred
measured at fair value
= fair values of assets transferred + liabilities incurred + equity
interests issued by acquirer
Goodwill:
asset representing future economic benefit
arising from other assets acquired in business combinations
4
, not individually identified/ separately recognized
results in consideration and NCI > net of fair values of
identifiable assets/ liabilities
e.g., equity – asset = consideration
non-current asset in consolidated SOFP
Gain from bargain purchase
=(Assets + liabilities) – (consideration transferred + NCI)
E.g. equity – profit = consideration
4. CONSOLIDATED FINANCIAL STATEMENTS
Definition Financial statements of a group in which
assets/ liabilities/ equity/ income/ expenses/ cash flow
of parent and subsidiaries are presented
as those of a single economic entity
Each entity prepares its own financial statements
keeps its own general ledger/ accounting records
complies with own relevant laws/ regulations
Parent must parent is wholly‐owned subsidiary of another entity/
present partially‐owned subsidiary where the other owners have
consolidated been informed that consolidated FS will not be presented
FS unless and they have not objected
parent’s debt/ equity instruments are not publicly traded
parent doesn’t file FS with regulatory organisation for
purpose of issuing any class of instruments in a public
market
ultimate/ intermediate parent produces consolidated FS.
5
,LA 11: Chapter 2: Wholly-owned subsidiary
1. CONSOLIDATION OF WHOLLY-OWNED SUBSIDIARY
Process 1. Obtain the FS of both
2. Consider reporting dates/ accounting policies
3. Combine/ Add balances/ totals together
4. Consider assets/ liabilities are fairly valued
5. Eliminate P’s investment in S
Dt Share Capital of S
Dt Retained Earnings of S
Ct Investment: S Ltd
6. Recognise the goodwill/ gain from a bargain purchase
Analysis of S ltd Total P Ltd NCI
Equity At Since
(100%)
At acquisition
Share capital X X
Retained earnings X X
Total equity X X
Goodwill/ (GFBP) X/(X) X/(X)
Consideration + NCI X X
Since Acquisition
To beginning of current reporting
period
Retained Earnings* X
Current reporting period
Profit for the Year* X X
Total Equity X X X
* Opening balance S – Consolidation Journal
** Revenue – COS + Other Income – Other Expenses – Finance cost
Consolidate Assets
d statement Investment: S Ltd (Balance – Consolidation Journal) -
of Financial Goodwill X
Position Other assets (P + S) X
Total Assets X
Equity
Equity attributable to owners of parent:
Share capital (P + S – CJ) X
Revaluation Surplus
Retained earnings (P + S – CJ+ GFBP) X
Total Equity X
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 30 000 -
6
, Other assets 52 000 30 000
82 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 37 000 7 500
82 000 30 000
1. Combine balances and totals
2. At-acquisition consolidation journal
Net Asset Value = Equity
Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Investment: S Ltd (was a Dt balance) 30 000
Eliminated P’s investment in S
3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9
4. Analysis of equity – S Ltd
2. AT-ACQUISITION CONSOLILDATION JOURNAL
1. Equity of P provides funds for investment in S
2. Cash transferred to S provides funds for assets S purchases
3. Equity of P represents funding of assets of S
4. If S traded before acquisition – it would’ve generated additional net assets
– P will have to pay for this
3. INTEREST ACQUIRED > NAV = GOODWILL
Why Collection of net assets acquired able to earn higher rate of
return for acquirer
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 35 000 -
Other assets 52 000 30 000
87 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 42 000 7 500
87 000 30 000
1. Combine balances and totals
2. At-acquisition consolidation journal
7
, Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Goodwill 5 000
Investment: S Ltd (was a Dt balance) 35 000
3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9
4. Analysis of equity – S Ltd
4. INTEREST ACQUIRED < NAV = GFBP
Why Seller is acting under compulsion of forced sales
Measurement errors in determining fair value
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 28 000 -
Other assets 52 000 30 000
80 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 35 000 7 500
80 000 30 000
1. Combine balances and totals
2. At-acquisition consolidation journal
Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Gain from bargain purchase 2 000
Investment: S Ltd (was a Dt balance) 28 000
3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9
4. Analysis of equity – S Ltd
5. CONSOLIDATION SUBSEQUENT TO ACQUISITION
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd 35 000 -
Other assets 62 000 30 000
97 000 30 000
Equity
Share capital 45 000 22 500
8
Contents
LA 11: Chapter 1: Business Combinations ............................................ 2
LA 11: Chapter 2: Wholly-owned subsidiary ........................................ 6
LA 11: Chapter 3: Partially-owned Subsidiary.................................... 11
LA 11: Chapter 4: General Intragroup Transactions ......................... 16
LA 11: Chapter 5: Intragroup Transactions: Inventories ...................19
LA 11: Chapter 6 (Consolidations): Intragroup Transactions: PPE .. 23
LA 12: Investments in Associates and Joint Ventures ....................... 24
LA 13: Events after reporting period (IAS 10) .....................................27
LA 14: Provisions, Contingent liabilities/ assets .................................. 29
LA 15: Chapter 11 (IFRS): Employee Benefits .....................................32
LA 16: Earnings per share (IAS 33) ....................................................... 36
LA 17: Chapter 12 (IFRS): Effects of changes in foreign exchange
rates: Unhedged Transactions ............................................................39
LA 17: Chapter 12 (IFRS): Effects of changes in foreign exchange
rates: Hedged Transactions ................................................................. 43
1
,LA 11: Chapter 1: Business Combinations
1. INTRODUCTION
Investment Reasons
in shares realisation of short‐term capital gains
earn dividend income
gain control over net assets of another entity
Accounting dependent on
expected holding period
- current: intent to dispose < 12 months
- non-current: intent to hold > 12 months
purpose of investment
- active vs
- passive
Types of Minority Minority active Majority
investments passive active
(Business
combo)
Power over Little influence Significant Control
investee (small influence/ joint
ownership %) control
Influence on Minor Considerable Dictate
activities
affecting
returns
Controls Shares Participate in Business of
purchased financial/ investee
operating policy
decisions
Disclosed as Current/ non- Non-current asset Non-current
current asset asset
Business transaction/ other event
combination in which acquirer obtains control of business(es)
Parent Subsidiary
Group
Business P > 50% Business S P&S
Acquirer Acquiree
Business integrated set of activities/ assets
capable of being conducted/ managed
for purpose of providing return
- dividends
- lower costs
- other economic benefits
directly to investors/ other owners/ members/ participants
Operating reduce legal/ operating risk
as separate reduce cost of jurisdiction‐specific corporate/ tax laws
2
,legal entities expand/ diversify
within a reduce cost of divesting assets
group
Obtaining control – acquirer will be in position to govern
financial policies
operating policies
In substance
businesses are combined to form single reporting entity
each business is still a separate legal entity
Terminology IFRS 3 IFRS 10
Acquirer: obtains control Parent: controls entities
Acquiree: is controlled Subsidiary: controlled by entity
Group: acquirer + acquirees Group: parent + subsidiaries
Focuses on date of Addresses period since
acquisition acquisition
2. CONTROL
Definition Investor is exposed/ has rights to
variable returns from involvement with investee
has ability to affect returns
through power over investee
Exposure
Link
to Control
Power between
variability
them
in return
Power Existing rights held by investor
- voting rights
- contractual rights
Entity which holds less than 50% of voting rights may control
investee through contractual rights as power to
- govern policies through statute/ agreement
- hire/ fire majority of BoD
- cast more than 50% votes where BoD controls entity
Returns In order to control investee, investor must have
Exposure/ rights to variable returns from involvement
Returns can be +/ -
Can encompass a broad range of benefits/ detriments
Link Investor must have ability to
between Use its power to
Affect its returns from involvement
3
,3. ACQUISITION METHOD
Requirements 1. Identifying acquirer
2. Determining acquisition date
3. Recognizing/ measuring
- identifiable assets
- liabilities assumed
- non-controlling interests
4. Recognising/ measuring
- Goodwill/
- Gain from bargain purchase
1. Entity
that transfers cash/ other assets/ incurs liability
that issues equity interests
whose relative size is greater than other combining entity
that initiated combination
2. Date that
acquirer obtains control of acquiree
acquiree’s assets/ liabilities will be included in acquirer’s
financial statements
acquirer legally transfers consideration to previous owners
unconditional offer is accepted
acquirer commences direction of policies of acquiree
flow of economic benefits of acquiree changes
majority of BoD of acquiree represents interests of acquirer
competition commission provides clearance for acquisition
3. Recognition criteria
Perspective of combined entity:
meet definition of asset/ liability at acquisition date
be part of business acquired rather than result of separate
transaction
Non-controlling interest
equity in a subsidiary not attributable to a parent
Classification/ designation of identifiable assets/ liabilities
Based on
contractual terms
economic conditions
operating/ accounting policies
pertinent conditions
Measurement
at acquisition-date fair values
4. Consideration transferred
measured at fair value
= fair values of assets transferred + liabilities incurred + equity
interests issued by acquirer
Goodwill:
asset representing future economic benefit
arising from other assets acquired in business combinations
4
, not individually identified/ separately recognized
results in consideration and NCI > net of fair values of
identifiable assets/ liabilities
e.g., equity – asset = consideration
non-current asset in consolidated SOFP
Gain from bargain purchase
=(Assets + liabilities) – (consideration transferred + NCI)
E.g. equity – profit = consideration
4. CONSOLIDATED FINANCIAL STATEMENTS
Definition Financial statements of a group in which
assets/ liabilities/ equity/ income/ expenses/ cash flow
of parent and subsidiaries are presented
as those of a single economic entity
Each entity prepares its own financial statements
keeps its own general ledger/ accounting records
complies with own relevant laws/ regulations
Parent must parent is wholly‐owned subsidiary of another entity/
present partially‐owned subsidiary where the other owners have
consolidated been informed that consolidated FS will not be presented
FS unless and they have not objected
parent’s debt/ equity instruments are not publicly traded
parent doesn’t file FS with regulatory organisation for
purpose of issuing any class of instruments in a public
market
ultimate/ intermediate parent produces consolidated FS.
5
,LA 11: Chapter 2: Wholly-owned subsidiary
1. CONSOLIDATION OF WHOLLY-OWNED SUBSIDIARY
Process 1. Obtain the FS of both
2. Consider reporting dates/ accounting policies
3. Combine/ Add balances/ totals together
4. Consider assets/ liabilities are fairly valued
5. Eliminate P’s investment in S
Dt Share Capital of S
Dt Retained Earnings of S
Ct Investment: S Ltd
6. Recognise the goodwill/ gain from a bargain purchase
Analysis of S ltd Total P Ltd NCI
Equity At Since
(100%)
At acquisition
Share capital X X
Retained earnings X X
Total equity X X
Goodwill/ (GFBP) X/(X) X/(X)
Consideration + NCI X X
Since Acquisition
To beginning of current reporting
period
Retained Earnings* X
Current reporting period
Profit for the Year* X X
Total Equity X X X
* Opening balance S – Consolidation Journal
** Revenue – COS + Other Income – Other Expenses – Finance cost
Consolidate Assets
d statement Investment: S Ltd (Balance – Consolidation Journal) -
of Financial Goodwill X
Position Other assets (P + S) X
Total Assets X
Equity
Equity attributable to owners of parent:
Share capital (P + S – CJ) X
Revaluation Surplus
Retained earnings (P + S – CJ+ GFBP) X
Total Equity X
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 30 000 -
6
, Other assets 52 000 30 000
82 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 37 000 7 500
82 000 30 000
1. Combine balances and totals
2. At-acquisition consolidation journal
Net Asset Value = Equity
Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Investment: S Ltd (was a Dt balance) 30 000
Eliminated P’s investment in S
3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9
4. Analysis of equity – S Ltd
2. AT-ACQUISITION CONSOLILDATION JOURNAL
1. Equity of P provides funds for investment in S
2. Cash transferred to S provides funds for assets S purchases
3. Equity of P represents funding of assets of S
4. If S traded before acquisition – it would’ve generated additional net assets
– P will have to pay for this
3. INTEREST ACQUIRED > NAV = GOODWILL
Why Collection of net assets acquired able to earn higher rate of
return for acquirer
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 35 000 -
Other assets 52 000 30 000
87 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 42 000 7 500
87 000 30 000
1. Combine balances and totals
2. At-acquisition consolidation journal
7
, Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Goodwill 5 000
Investment: S Ltd (was a Dt balance) 35 000
3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9
4. Analysis of equity – S Ltd
4. INTEREST ACQUIRED < NAV = GFBP
Why Seller is acting under compulsion of forced sales
Measurement errors in determining fair value
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 28 000 -
Other assets 52 000 30 000
80 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 35 000 7 500
80 000 30 000
1. Combine balances and totals
2. At-acquisition consolidation journal
Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Gain from bargain purchase 2 000
Investment: S Ltd (was a Dt balance) 28 000
3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9
4. Analysis of equity – S Ltd
5. CONSOLIDATION SUBSEQUENT TO ACQUISITION
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd 35 000 -
Other assets 62 000 30 000
97 000 30 000
Equity
Share capital 45 000 22 500
8
