UNIVERSITY OF CAPE COAST COLLEGE OF HUMANITIES AND LEGAL STUDIES ni ‘SCHOOL OF BUSINESS \-77 DEPARTMENT OF ACCOUNTING ‘ACT804D ADVANCED FINANCIAL ACCOUNTING - CHANGE IN GROUP STRUCTURE el Investing in an entity for control may be through purchasing a single block of shares or in a single transaction, which is often the case, There may however be situations where control is achieved through successive share purchases at different dates. The standard IFRS 3 refers to this as Business Combination achieved in Stages (step acquistionipiecemeal acquisition). It may start as an investment of less than 20% which is accounted for by applying the provisions of IFRS 9, Financial Instruments: Recognition and Measurements, Then additional acquisition of let's say 15% will increase the total share holdings to 35%, This then requires the application of IAS 28, Investment in Associates and Joint Venture, Finally, the entity acquires 20% additional shares, bringing the total percentage holding to 55%, At this point, controls triggered (crossing of an accounting boundary), and therefore the entity applies IFRS 3 and IFRS 10 to account for the transaction. The entity's status during the accounting year will determine the ‘accounting treatment in the consolidated statement of profit or loss and other comprehensive income (pro-rate accordingly). The status atthe year end will determine the accounting treatment in the consolidated statement of financial position (no pro-rating). Three scenarios may arise in step acquisition: + Trade investment crossing boundary to Associate (IFRS 9 to IAS 28), * Trade investment crossing boundary to Subsidiary (IFRS 9 to IFRS 3 and IFRS 10). + Investment in associate crossing boundary to Subsidiary (IAS 28 to IFRS 3 and IFRS 10), Accounting for Step Acquisitions-Crossing the 50% Control Boundary Atthe date control is achieved ‘+ Re-measure previously held equity interest to fair value ‘Recognise any resulting gains in statement of prof or loss + Calculate goodwill based on entty accounting policy + Consolidate subsidiary as appropriate (pre and post control issues/consolidation adjustments) + Pay attention to previous acquisition designated as FVTOCT (IFRS 9) Investment to associate (eg 10% to 40%) Where an investment in equity instruments becomes an associate, the investment (measured either at cost or at fair value) is treated as part of the cost ofthe associate Statement of profit or loss and other comprehensive income-Equily account as an associate from the date of significant influence, Statement of financial position-Equity account as an associat. Page 1of 5Investment to subsidiary (eg 10% to 80%) Statement of profit or loss and other comprehensive income ‘© Remeasure the investment to fair value atthe date the parent achieves control ‘= Consolidate as a subsidiary from the date the parent achieves control Statement of financial position * Calculate goodwill atthe date the parent achieves control © Consolidate as a subsidiary a the year end Associate to subsidiary (eg 30% to 80%) Statement of profit or loss and other comprehensive income ‘= Equity account as an associate to the date the parent achieves control ‘+ Remeasure the associate to fair value atthe date the parent obtains control ‘* Consolidate as a subsidiary from the date the parent obtains control Statement of financial position ‘© Calculate goodwill atthe date the parent obtains control ‘© Consolidate as a subsidiary at the year end The substance of the transaction is a sale and acquisition...the previous investment is technically disposed of and a new investment made, The following questions highlights the diferent scenarios that may exist From Simple Trade Investment to Subsidiary (Example 10% to 80%) Question 1 Aholds a 10% investment in B at Gh¢96,000 in accordance with IFRS 9, On 1 Jun, 2020 it acquires a further 50% of B's equity shares at the cost of Gh¥640,000, Non-controlling interest is calculated using FV method, On 1 Jun, 2020 fair values were as follows: © Bis Net Assets ‘Gh¢800,000 © NCI ‘Gh¢400,000 © The original 10% investment Gh¢104,000 Explain, with relevant figures, how this transaction should be accounted for in the books of A. Question 2 Apollos acquired a 15% investment in Jemain for Gh¢400,000 and remained carried at cost in the books of Apollos’ books. This investment now has a fair value of Gh¢ 1,200,000. Apollos has just made a further investment ‘of 40% of the shares in Jemain for Gh¢4,000,000, The net assets of Jemain have now been determined at Gh¢2,400,000 and the fair value of NCI at Gh¢3,200,000, Apollos has a policy of valuing NCI at fair value at the date of acquisition. Calculate the goodwill arising on the acquisition of Jemain. Page 2 of 5Question 3 ‘Arye has owned 90% of the ordinary shares of Flora for many years. Aryee also has a 10% investment in the shares of Bryne, which was held in the consolidated statement of financial position as at 31/12/2019 at Gh¢240,000 in accordance with IFRS 9. On 30 June 2020, Aryee acquired a further 50% of Bryne's equity shares at a cost of Gh¢,600,000, The drafts statements of proft or loss forthe three companies for the year ended 31 December 2020 are presented below: Aryee (Gh#000) | Flora (Gh¢000) | Bryne (Gh¢000) Revenue 5,000 3,000 2,000 Cost of sales (3,000) (700) (1,200) Gross Profit 2,000 2,300 800 Operating Costs (600) (00) (600) Profits from Operations 1,400 1,500 200 Income Tax (280) (300) (40) Profit for the period 1,120 1,200 160 ‘The NCI is calculated using fair value method. On 20 June 2020, fair values were as follows: ‘© Bryne's identifiable net assets © The NClin Bryne ‘© The original 10% investment in Bryne ‘Gh¢2,000,000 Gh¢1,000,000 Gh¢ 260,000 Required: Prepare the consolidated statement of profit or loss for Aryee Group for the year ended 31 December 2020 and Calculate the goodwill arising on the acquisition of Bryne, Question 4 - Step Acquisition (Associate to Subsidiary) You are provided withthe following statements of financial positions as at 31/12/2020, Ash (Gh¢) Ley (Gh¢) Investment 640,000 ‘Sundry Assets. 1,400,000 1,000,000 2,040,000 4,000,000 Equity share capital 800,000 400,000 Retained Earnings 1,000,000 488,000 Liabilities 240,000 142,000 2,040,000 1,000,000 ‘Ash acquired 40% of Ley's shares on 31/42/2045 for Gh¢360,000. At this date the retained earnings of Ley stood at Gh¢304,000, A further 20% of Shares in Ley was acquired by Ash three years later for Gh¢280,000. On this date the FV of the existing holding in Ley was Ghg420,000, Ley's retained eamings were Gh¢400,000 on the second acquisition date, NCIis valued using proportion of net assets method, Prepare consolidated SFP for ASH group as at 31/12/2020. Page 3 of 5Question 5 - Step Acquisition (Simple investment to Associate) On 01/04/2019, Eban Ltd acquired 10% equity investment in Auge Plaines for Gh¢400,000 and the investment was classified as FVTOCI. On 01/07/20, Eban Ltd acquired further 15% of the shares for consideration of Gh¢1,200,000. AF this time the carrying value of the original investment is Gh¢640,000 and the fair value of Gh¢800,000, The profi for the year ended 31/12/20 was Gh¢960,000, During the second haff ofthe year, Auge Plaines sold goods to Eban Ltd for Gh¢60,000 at a mark-up of 1/3. At the end of the year, 20% of these goods remained unsold Required: Calculate the carrying value of the investment at the reporting date and extracts from of the group retained earnings. Question 7-Increase in shareholding (Control maintained) Gad owned 80% equity shares in Maud for many years. Gad is considering acquiring more shares in Maud. The NCI of Maud currently has a carrying value of Gh¢80,000 with the net assets and goodwill of Gh¢500,000 and Gh¢100,000 respectively. Gad is considering the following two situations: 4. To buy 20% of Maud's shares leaving no NCI for Gh¢100,000 2. To buy 5% of Maud's shares for Gh¢16,000, Required: Calculate the adjustments required to NCI and other components of equity. Question 8 - Sale of shares (Control maintained) SEKA Ltd, a parent has 80% shares in ELA Ltd. Currently the net assets of ELA Ltd are Gh¢',200,000, NCI Gh¢320,000 and the goodwill Gh¢880,000. You are given the following scenarios: a) SEKA has sold a quarter of its shares for Gh¢440,000, b) SEKA has sold shares for Gh¢80,000, reducing its holding by 5% to 75%. Calculate the difference arising in both situations that will be taken to equity and pass journal entries to record in both scenarios. Question 9 - Sale of shares (Control maintained) Until 30 Sept 2007, Juno held 90% of Hera. On that date it sold 10% interest in the equity capital for Gh¢150,000. The carrying amount of net assets and goodwill on the date of disposal were Gh¢1,000,000 and Gh¢200,000 respectively. At acquisition the NCI was fair valued Account for the sale of shares in Juno Question 10 - Sale of shares (Full Sale of subsidiary) Rock has held 70% investment in Dog for two years. Goodwill has been calculated using the full goodwill method There have been no goodwill impairment to date. Rock disposes ofall of its shares in Dog. The following information has been provided: Gh¢ Cost of investment 2,000 Dog-FV of Net Asset at acquisition 4,900 Page 4 of 5Dog-FV of NCI at acquisition 800 Sales Proceeds 3,000 Net Assets at Disposal 2,400 Calculate profitoss in Rock’s individual financial statement and in the consolidated financial statements. Page 5 of 5