IFRS 3 and IFRS 10: Consolidated statement of financial position
Control, goodwill (partial and full methods), NCI, group retained earnings and intragroup eliminations, using the five standard workings.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: When a parent controls a subsidiary, it prepares consolidated accounts that show the group as if it were one single company.
The key idea: add the parent’s and subsidiary’s assets and liabilities line by line (100%), cancel the parent’s investment against the subsidiary’s equity at acquisition, show the difference as goodwill, and show the outside owners’ share as non-controlling interest (NCI).
Example. Prague pays £60,000 for 80% of Susan. Susan’s net assets at acquisition are £50,000 and the NCI is valued at £12,500. Goodwill = 60,000 + 12,500 − 50,000 = £22,500.
Key words
- Control (IFRS 10)
- An investor controls an investee if it has all three: power over it, exposure or rights to variable returns, and the ability to use its power to affect those returns.Example: Owning 80% of the voting shares normally gives control.
- Acquisition method (IFRS 3)
- The method for every business combination: identify the acquirer and acquisition date, measure net assets at fair value, and recognise goodwill and NCI.Example: Parent buys 80% of Susan on 1 January 20X8.
- Goodwill
- Consideration + NCI − fair value of net assets at acquisition. If negative, a bargain purchase gain goes to profit or loss after reassessment.Example: 800 + 120 − 600 = 320.
- Non-controlling interest (NCI)
- The part of a subsidiary’s equity not owned by the parent. Measured at acquisition either at its share of net assets (partial goodwill) or at fair value (full goodwill).Example: The 20% of Susan held by other shareholders.
- Unrealised profit (PURP)
- Profit on goods or assets sold within the group and still held by the group at the year end. It must be eliminated.Example: A parent sells goods to its subsidiary at a profit, and they are still in the subsidiary’s inventory.
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The four standards
IFRS 3 Business Combinations, IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, and IAS 28 Investments in Associates and Joint Ventures (see IAS 28).
Control (IFRS 10)
An investor controls an investee if, and only if, it has all three:
- Power: existing rights to direct the relevant activities (those that significantly affect the investee’s returns).
- Exposure, or rights, to variable returns from its involvement.
- The ability to use its power to affect the amount of its returns.
A parent must use uniform accounting policies across the group. It need not prepare consolidated accounts only if it meets all the exemption conditions (for example, it is itself a subsidiary whose other owners don’t object, its shares aren’t publicly traded, and its own parent publishes IFRS consolidated accounts).
The acquisition method (IFRS 3)
- Identify the acquirer.
- Determine the acquisition date (when control is obtained).
- Recognise and measure the identifiable assets, liabilities and contingent liabilities at fair value, and the NCI.
- Recognise goodwill or a gain on a bargain purchase.
The consideration is measured at fair value. Acquisition-related costs (legal, advisory, valuation fees, the costs of an acquisitions department) are expensed, not added to the cost.
Measuring NCI: two methods
| Method | NCI at acquisition | Effect |
|---|---|---|
| Proportionate share of net assets (partial goodwill) | NCI % × fair value of net assets | Goodwill is the parent’s only. Any goodwill impairment hits the parent 100%. |
| Fair value (full goodwill) | Fair value of the NCI shares | Goodwill includes the NCI’s share. Impairment is split between parent and NCI. |
The choice is made transaction by transaction. The NCI’s fair value is not necessarily proportionate to what the parent paid, because the parent pays a control premium.
The five workings
| Working | What to do |
|---|---|
| W1 Group structure | Parent % and NCI %. |
| W2 Net assets of subsidiary | Share capital + share premium + retained earnings + fair value adjustments, at acquisition and at the reporting date. Deduct extra depreciation on fair value adjustments and unrealised profit if the subsidiary is the seller. Reporting date − acquisition = post-acquisition profits. |
| W3 Goodwill | Cost of investment + NCI at acquisition − net assets at acquisition (W2) − impairment. |
| W4 NCI | NCI at acquisition + NCI % × post-acquisition profits − NCI share of goodwill impairment (fair value method only). |
| W5 Group retained earnings | Parent’s retained earnings (100%) + parent % × post-acquisition profits − unrealised profit if the parent is the seller − parent’s share of goodwill impairment (100% under the partial method). |
On the face of the consolidated SoFP: add assets and liabilities 100%; take share capital and share premium of the parent only; replace the investment with goodwill; show group retained earnings and NCI.
Intragroup transactions: eliminate in full
- Intragroup balances (for example a loan or receivable between parent and subsidiary): cancel the asset against the liability.
- Unrealised profit in inventory: reduce inventory. If the parent sold, reduce group retained earnings (W5). If the subsidiary sold, reduce its net assets at the reporting date (W2), so NCI shares the adjustment.
- Transfers of non-current assets: remove the unrealised profit from PPE, and add back the extra depreciation charged on it. Same rule on who the seller is.
Workshop example. A subsidiary sells a building to its parent for 1,100. Its carrying amount was 1,000, with 20 years left and a residual value of 500. Unrealised profit = 100. The parent depreciates (1,100 − 500) ÷ 20 = 30, but the group would charge (1,000 − 500) ÷ 20 = 25, so the excess depreciation is 5. The subsidiary is the seller: deduct 100 and add back 5 in W2 and in PPE.
Watch it explained
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Worked example
Prague (from the workshop). On 1 January 20X8 Prague bought 16,000 of Susan’s 20,000 £1 shares for £60,000, when Susan’s retained earnings were £20,000. Prague uses the fair value method; the NCI’s fair value at acquisition was £12,500. No impairment, no fair value adjustments, no intragroup trading. At 31 December 20X8:
| Prague £ | Susan £ | |
|---|---|---|
| PPE | 85,000 | 18,000 |
| Investment in Susan | 60,000 | — |
| Current assets | 160,000 | 84,000 |
| Share capital (£1) | 65,000 | 20,000 |
| Share premium | 35,000 | 10,000 |
| Retained earnings | 70,000 | 25,000 |
| Current liabilities | 135,000 | 47,000 |
W1: Prague owns 16,000 ÷ 20,000 = 80%; NCI 20%.
| W2 Net assets of Susan | At acquisition | At reporting date |
|---|---|---|
| Share capital | 20,000 | 20,000 |
| Share premium | 10,000 | 10,000 |
| Retained earnings | 20,000 | 25,000 |
| Total | 50,000 | 55,000 |
Post-acquisition profits = 55,000 − 50,000 = 5,000.
| Working | £ |
|---|---|
| W3 Goodwill: 60,000 + 12,500 − 50,000 | 22,500 |
| W4 NCI: 12,500 + 20% × 5,000 | 13,500 |
| W5 Group retained earnings: 70,000 + 80% × 5,000 | 74,000 |
| Consolidated SoFP of Prague group | £ |
|---|---|
| Goodwill | 22,500 |
| PPE (85,000 + 18,000) | 103,000 |
| Current assets (160,000 + 84,000) | 244,000 |
| Total assets | 369,500 |
| Share capital (Prague only) | 65,000 |
| Share premium (Prague only) | 35,000 |
| Retained earnings | 74,000 |
| Non-controlling interest | 13,500 |
| Current liabilities (135,000 + 47,000) | 182,000 |
| Total equity and liabilities | 369,500 |
Goodwill under the two NCI methods (workshop): P pays 800 for 80% of S; S’s net assets are 600; the NCI’s fair value is 185. Partial: 800 + (20% × 600 = 120) − 600 = 320. Full: 800 + 185 − 600 = 385.
Practice questions
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