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IFRS 3 (Revised)- Groups of Entities (D-1.4)

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Consolidated financial statements


Objective:

IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements, treating the parent and its subsidiaries as a single economic entity. The economic entity approach views all equity providers, including non-controlling interests (NCI), as group shareholders.

Key Treatments:

  1. Partial Disposal with Retained Control:

    • No gain or loss is recognized.
    • Treated as an equity adjustment.

  2. Purchase of NCI:

    • Treated as a treasury transaction.
    • Adjustments are made within equity.

  3. Partial Disposal with Loss of Control:

    • Gain or loss is recognized for the part disposed of.
    • Holding gain is recognized for the retained interest (fair value vs. carrying amount).
    • Gains are reflected in the statement of comprehensive income.

  4. IAS 28 Amendments:

    • Extends similar treatment to associates and joint ventures.

Step acquisition:
A step up its interest in B, moving from a 20% to a 70% holding as of 1 January 2008. The full goodwill method is applied to calculate goodwill.

Details:

  • Previous Investment:

    • Initial 20% interest acquired for $20m.
    • The fair value of this interest at the acquisition date: is $24m.

  • New Investment:

    • 50% interest acquired for $60m.

  • NCI Fair Value:

    • The fair value of NCI: is $40m.

  • Identifiable Net Assets:

    • Fair value: $110m.

Goodwill Calculation:

  1. Total Consideration:

    • A's share (70%): $60m (new purchase) + $24m (revalued old holding) = $84m.
    • NCI: $40m.

  2. Fair Value of Net Assets:

    • $110m.

  3. Goodwill:

    • Total consideration ($84m + $40m) - Fair value of net assets ($110m) = $14m.

Thus, goodwill is $14m under the full goodwill method.



Acquisition of Part of NCI:

Scenario: 

Rage initially acquired a 70% interest in Pin and later purchased an additional 10% from the NCI. The full goodwill method is used.

Initial Acquisition (1 January 2008):

  • Purchase Consideration (70%): $360m (cash).
  • Fair Value of Identifiable Net Assets: $480m.
  • Fair Value of NCI (30%): $210m.

Goodwill Calculation:

  1. Total Consideration:

    • Rage’s share (70%): $360m.
    • NCI (30%): $210m.
    • Total: $570m.

  2. Goodwill:

    • Total consideration ($570m) - Fair value of net assets ($480m) = $90m.

Subsequent Acquisition (31 December 2008):

  • Additional Interest Acquired: 10% from NCI.
  • Cash Consideration Paid: $85m.
  • Carrying Amount of Net Assets (31 Dec 2008): $535m.
  • Carrying Amount of 10% Interest:
    • 10% of $535m = $53.5m.

Effect on Equity:

  • Difference: $85m (cash paid) - $53.5m (carrying value) = $31.5m.
  • Adjustment:
    • The $31.5m is recognized as a decrease in equity attributable to the parent.

Key Points:

  • Goodwill at initial acquisition: $90m.
  • Subsequent NCI acquisition results in a direct equity adjustment, not goodwill.
  • Total cash paid for an additional 10% interest: $85m.
  • Impact on equity: $31.5m reduction.




Acquisition and Disposal of Interest in a Subsidiary

1. Acquisition of Further Interest:

  • Net Assets Increase: Pin's net assets increased by $55m during the year.
  • Impact on NCI: Non-Controlling Interest (NCI) increased by 30% of $55m, which equals $16.5m.
  • Treasury Transaction: Rage acquired an additional 10% interest, treated as a treasury transaction (no goodwill adjustment).

Calculation:

  • Pin NCI, 1 January 2008: $210m

  • Share of Increase in Net Assets: $16.5m

  • Net Assets at 31 December 2008: $226.5m

  • Transfer to Equity (10/30 of $226.5m): $(75.5)m

  • Adjusted NCI at 31 December 2008: $151m

  • Fair Value of Consideration Paid: $85m

  • Charge to NCI: $(75.5)m

  • Negative Movement in Equity: $9.5m

Conclusion: The additional 10% interest was purchased at a premium, resulting in a $9.5m charge to equity.

2. Disposal of Part of Holding to NCI:

  • Transaction Details: Rage sold 10% of its interest in Pin to the NCI for $65m.
  • Net Assets at Disposal Date (31 December 2008): $535m
  • Goodwill Included in Disposal: $90m

Calculation:

  • Transfer to NCI (10% of $535m + $90m goodwill): $(62.5)m
  • Fair Value of Consideration Received: $65m
  • Positive Movement in Equity: $2.5m

Conclusion: Rage effectively sold 10% of the carrying amount of net assets and goodwill for $2.5m more than their carrying value, resulting in a $2.5m equity gain.



Disposal of Controlling Interest While Retaining an Associate Holding

When a parent loses control of a subsidiary, IFRS 10 requires specific adjustments to ensure proper accounting treatment. These adjustments ensure that the loss of control and recognition of any remaining interest are accurately reflected.

Key Points:

  1. Derecognise Assets and Liabilities:

    • Remove the carrying amounts of the subsidiary's assets, liabilities, and goodwill from the books.
    • Derecognise the Non-Controlling Interest (NCI).

  2. Recognize Fair Value of Consideration:

    • Account for the fair value of the payment or assets received as consideration for the disposal.

  3. Distribution to Owners:

    • Recognize any distribution of shares or assets given to owners as part of the transaction.

  4. Fair Value of Residual Interest:

    • Record the fair value of any retained interest in the former subsidiary as an investment (e.g., associate or financial asset).

  5. Reclassification of OCI Amounts:

    • Transfer all amounts related to the subsidiary’s assets and liabilities previously recognized in Other Comprehensive Income (OCI) to profit or loss as if the assets were directly disposed of.

  6. Residual Interest Adjustment:

    • Recognize the fair value of any retained interest after loss of control.

These steps ensure that the disposal's impact on the financial statements is fully captured and the remaining investment is correctly reclassified.



Disposal of Controlling Interest

Transaction Overview:

  • Acquisition: On 1 January 2008, Rage acquired 90% of Machine for $80m.
    • Fair Value of Net Assets (at acquisition): $74m
    • NCI Fair Value: $6m
    • Goodwill: $12m ($80 + $6 - $74)
  • Disposal: On 31 December 2008, Rage sold 65% of Machine's equity for $65m.
    • Net Assets at Disposal Date: $83m (including $6m profit in profit or loss and $3m in OCI).
    • Remaining 25% Interest: Classified as an associate under IAS 28 and fair valued at $25m.

Gain on Disposal Calculation:

  1. Proceeds and Residual Interest:

    • Fair Value of Sale Proceeds: $65m
    • Fair Value of Residual Interest: $25m
    • NCI Adjusted for Net Assets: $6.9m
    • Gain in OCI: $3m
    • Total Consideration: $99.9m

  2. Derecognised Amounts:

    • Net Assets: $(83)m
    • Goodwill: $(12)m
    • Total Derecognised: $(95)m

  3. Gain on Disposal:

    • Total Consideration: $99.9m
    • Less Derecognised Amounts: $(95)m
    • Gain Recognised in Profit or Loss: $4.9m

Key Outcome:
After disposal, Rage retains a 25% interest in Machine, which is fairly valued at $25m and accounted for as an associate.

Exam Tip:
Understanding IFRS 3 (Business Combinations) and IFRS 10 (Consolidated Financial Statements) principles is crucial for SBR. Candidates should be able to calculate disposal gains and explain the principles behind:

  • Goodwill recognition,
  • NCI adjustments,
  • Reclassification to OCI and profit or loss.

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