1.

Calculation of goodwill and FV of consideration Intangible asset impairment loss Random musings:
Week 2- Chapter 3 Total FV consideration (include control premium) Take Higher of (1) Value-in-use (2) FV less costs to sell Litigation loss on associate after-tax basis
Investment in subsidiary- Control exists. 2-lvl reporting + FV NCI on acquisition date The Carrying amt minus the higher of the 2 above = impairment loss
1. Investors separate FS- investment carried at cost, in + FV acquirers previously held equity interest in acquiree For subsi, past COS and profit and loss affects NCI and Opening
accordance with IFRS 9 as fin instru or using equity method (line-by- [FV NIA of acquiree DTL effect (tax rate X (FB-BV) of NIA)] RE for current year (re-enactment) as there is no bringing forward
line accounting) = Goodwill of such consol balances!!
2. Consolidated FS- IFRS 10 investment is eliminated and net Goodwill must be after tax effect
assets (total A Total L) are consol with that of parents
consolidation worksheets at end of reporting period 2. Consolidation entries Inventory Impairment loss
(consolidation elimination entries + adjustments to remove effects of Current Year Lower of Carrying Amt, FV and NRV
intragroup trxn and recognize NCI) CJE1: Elimination of investment in subsi Non-financial assets Impairment
E.g. Elimination of Interco sales Dr Sales Cr Cost of sales Dr Share Cap of subsi (100% before acquisition) Lower of Carrying Amt and recoverable amt (higher of FVLCTS and
Business combination need to apply acquisition accounting Dr RE Subsi (eliminate pre-acquisition RE) VIU)
Biz: integrated set of activities or assets capable of generating Dr Goodwill (recognise group asset)
returns to owners & investors & members + capable of being Dr Inventory/fixed assets/intangible assets (Excess of FV over BV)
managed to provide returns to investors Cr Investment in subsi (prevent double-counting of NIA) If impairment occurs for fixed assets, Cr Acc impairment losses
need not always have output e.g. startups, developmental phases Cr NCI
Acquirer has control over biz when: Cr DTL
1. power over acquiree allocates pre-acquisition RE to NCI
2. rights to returns
3. ability to use power to affect (good & Bad) aquiree's returns CJE2: Impairment of Goodwill
IFRS 3- All biz combi need to use acquisition method Dr Impairment of Goodwill (PL) Cr Goodwill
1. Direct acquisition of Net Assets of biz CJE3: Adj of current depn of undervalued assets
- purchase of combi of assets, goodwill, not the voting rights Dr Depreciation Cr Accumulated depreciation
no parent-subsi rs | Goodwill in acquirer FS CJE4: Adj to tax on depn of undervalued assets
legal entity = economic entity | Consolidation not required | Dr DTL Cr Tax expense
No NCI a form of selective acquisition 100% acquisition CJE5: Adj to current COS of undervalued inventory
e.g. hotel, Lenovo buying the Thinkpad Dr COS Cr Inventory
2. Biz become subsidiary of acquirer** CJE6: Adj to tax on COS of undervalued inventory
Acquisition of equity or voting rights of other legal entities. Dr DTL Cr Tax expense
Businesses can be combined by contract alone (common) CJE7: Allocation of income for yr to NCI
Legal entity is not economic entity | Consolidation is required Dr Income to NCI (PL)
Acquirer recognizes goodwill in consolidated FS | NCI of Net assets Cr NCI (BS)
of acquire in consolidated FS of economic entity | Subsequent
cumulative depreciation and amortization has to be repeated at Allocation of income to NCI
each consolidation year-end as long as investment in the subsidiary (1) Net profit after tax
remains (2) Plus minus changes in FV-BV
3. Net assets of combining entities transferred to a newly- Less add. depn of undervalued fixed asset
formed entity Less add. COS of undervalued inventory
Mergers, for tax reasons, larger market share, new identity Add tax on COS
(branding) | Controlling party is deemed to be the acquirer Less tax on excess depreciation
Goodwill and FV of assets are recognized in newly-formed (3) Less goodwill impairment
entitys FS | Consolidation not required as separate legal entities = Adjusted net profit after tax
have ceased to exist | New entity = economic entity | NOT a joint NCI share @ 10%
venture (needs an acquirer)
4. Former owners of combining entity obtain control of Listings approach find NCI balance as at end of yr
combined entity NCI balance at acquisition date
Reverse takeover (RTO)- when former owners of legal entity obtains NCI share of past impairment
control over enlarged economic entity (for listing purposes, to pierce NCI share of past depreciation on under-valued fixed assets
the corporate veil) | legal entity is not economic entity NCI share of tax on past depreciation
Acquisition Method of accounting NCI share of COS of undervalued inventory
1. Identify the acquirer- IFRS 10 Test of control ( who initiated the NCI share of tax on past cost of sales
consolidation, size amongst combining entities, dominance of NCI share of post-acquisition RE
management in combined entity, ability to elect directors, who Share of profit for current year
transferred cash or issued shares as consideration (except in RTO), Dividend received
who holds the largest voting rights in combined entity) = NCI balance at end of period
2. Determine acquisition date date when control is obtained
- when contractual agreement is closed and binding legally Subsequent years CJE until control over subsi is lost
- NOT date of transfer of consideration a) Re-enactment entries
3. Recognise and measure net identifiable assets acquired Elimination of investment on acquisition date
even those previously not recognized by acquiree e.g. contingent Subsequent impairment of goodwill
liabilities (in acquirees books are zero), internally generated brand Dr Opening RE Dr NCI Cr Goodwill
name and customer lists, in-process R&D | NCI recognized in Equity Adjustment of past depn of undervalued fixed assets
Dr Opening RE DR NCI Cr Acc depn (FV-BV X past depn amt)
Acquirees on balance sheet A-L (Book Value) Tax effect
+ unrecognized identifiable A-L (Fair value Book Value) Dr DTL Cr Opening RE Cr NCI
+ Goodwill Adj of past COS for undervalued inventory
4. Recognise and measure goodwill or gain from bargain Dr Opening RE Dr NCI Cr Inventory
purchase residual amt Tax effect
Determining amount of consideration transferred Dr DTL Cr Opening RE Cr NCI
IFRS 3: consideration transferred on acquisition date by acquirer Allocation of Post-acq RE of S to NCI
FV(consideration) = FV(Assets trf) + FV( Liabilities incurred by Dr Opening RE Cr NCI
acquirer to former owners of acquiree) + FV (Equity interests
issued by acquirer) + FV(contingent consideration/(refund)) Current RE of S at end of current period X
Assets- e.g. cash, non-monetary assets (measured at FV, RE of S at acquisition date X
remeasurement gain/loss immediately recognized in P/L) Change in post-acquisition RE X
Liabilities- e.g. deferred settlement of consideration NCI share @ 10% X
- need to include interest expense in each year in P/L on amt owed b) Current Adjustments
Adj of current depreciation of undervalued fixed asset
Equity interests- e.g. share-swap Tax effect of depn
Contingent consideration Allocation of current yr income to NCI
(1) New info arises on probability of event happening, change Dr Income to NCI (PL) Cr NCI (P-BS)
accounted for as change in estimate
(2) Info that existed at acquisition date but was missed or incorrectly Net profit after tax for year
applied, change in FV applied retrospectively as correction of error less: depreciation for undervalued assets
uncertain amts that will increase consideration trf. Contingent Add: tax expense on depreciation
refund leads to indemnification asset = Adjusted net profit after tax
Expected value = [P(contingent event occurring) X NCI share of profit wafter tax
consideration] + [P(contingent event not occurring) X 0] Elimination of div income (cuz div is internal trxn)
Fair Value = PV of expected value (discount rate depends on cost Dr NCI Dr Dividend income P Cr Div declared S
of capital on the entity that is making the promised outflow) Eliminate intercompany Loan
Need to split the payable as gross amt and unamortised discount Dr Loan payable to subsi (P-BS) Cr Loan receivable from Parent (S-BS)
Acquisition-related costs- incurred by acquirer expensed off in
consolidated FS (P/L) , NOT IN CONSIDERATION TRANSFERRED Eliminate rental income between subsi and parent
Dr Rental Income Cr Rental Expense
E.g. legal costs, due diligence costs, stamp duties Listings approach find NCI balance as at end of yr
Reduce share capital received from acquiree NCI balance at acquisition date
Dr Equity (share capital) Cr Cash NCI share of past impairment
Financing of acquisition- not part of consideration transferred, NCI share of past depreciation on under-valued fixed assets
expensed off NCI share of tax on past depreciation
Cost of issuing equity- deducted from equity NCI share of COS of undervalued inventory
Dr Equity Cr Cash (reducing proceed from share issuance) NCI share of tax on past cost of sales
Cost of issuing debt amortized over life of loan to I/S, increase NCI share of post-acquisition RE
effective interest rate. Share of profit for current year
Dr Unamortised debt issuance costs Cr Cash Dividend received
= NCI balance at end of period
** If assets transferred or liabilities assumed by acquirer are NCI Reconciliation
carried in acquirers separate FS, remeasure at FV and (1) BV of NIA at end of period or shareholders book equity
recognize gain/loss in separate FS when trf to former acquiree + (2) Unamortised balance of FV adj at end of period of assets
owners (after taxes) (e.g. 8/10 X 80% X 1mil)
(1) Immediately prior to transfer = Adjusted shareholders equity
Dr Property 2mil Cr Gain on remeasurement (to FV) 2mil X NCI %
(2) On transfer = NCI share of equity Alt 2
Dr Investment 12mil Cr Property 12mil + (3) Goodwill attributable to NCI (less impairment in yr) Alt 1
consideration transferred to existing owners of acquiree (4) Add in intangible asset after taxes if any, if it was previously
But if trf to acquiree, remeasurement gain/loss not unrecognized in the acquire books
recognized as A&L still remain in combined entitys FS = NCI balance at end of period
Intangible assets
Identifiable non-monetary asset without physical substance. Either:
(1) Separable or (2) Arise from contractual or legal rights Final year after fully depreciated
E.g. i) Opportunity gains arising from operating lease- contractual Past depreciation of undervalued fixed asset
legal criterion is met ii) customer & subscriber list from acquiree- Dr Opening RE Dr RE Cr Acc depn (FV excess over BV)
separable criterion is met
Recognise separately from goodwill as their FV are reliably
measurable
Goodwill
Pmt for anticipated benefits that are not capable of being individually
identified and separately recognized (non-separable and not legally
recognized on its own) Consolidation entry (to be re-enacted each year) to credit NCI at
E.g. Assembled workforce of the acquiree | potential contracts acquisition-date amt
Contingent liabilities and provision Alternative 1 FV Basis
Recognised in biz combi if: Present obligation arising from past Dr Share Cap of subsi
event + FV reliably measurable. Dr RE on date of acquisition
E.g. Lawsuits are only contingent liabilities if judgement is known, Dr Other equity of subsi on date of acquisition
even though settlement amount is unclear- FV is reliable. Present Dr Goodwill (NCI + acquirer share)
obligation from past event. Dr NIA (excess of FV over BV)
But if judgement is not out, i.e. occurrence or non-occurrence of one Dr/Cr DTA/DTL
or more future uncertain events not wholly within control of Cr NIA (excess of BV over FV)
acquiree is not recognized by acquirer Cr Investment in subsi
If something is not contingent liability, captured as goodwill, Cr NCI (FV)
reducing it NCI goodwill = FV NCI (NCI % X FV NIA)
Indemnification assets in assets
Contractual guarantee from former owners to indemnify acquirer in Alternative 2 NCI as proportion of NIA
the worst case scenario of subsequent loss from a contingency Dr Share Cap of subsi
asset or liability. Measured at fair value, incorporating effects of Dr RE on date of acquisition
uncertainties in outcomes of indemnification assets, need not do Dr Other equity of subsi on date of acquisition
separate valuation allowance. Remeasured at the end of each Dr Goodwill (acquirer share only)
reporting period. Derecognised when acquirer receives proceeds or Dr NIA (excess of FV over BV)
loses right to the asset. Dr/Cr DTA/DTL
- If new info arises on current date after date of acquisition- change Cr NIA (excess of BV over FV)
in estimate Cr Investment in subsi
- Time value of money is recognized, interest expense and interest Cr NCI ( NCI% X FV of NIA)
income will be recognized on the provision and indemnification
asset.
Always have a corresponding contingent liability. Allocation of Current Profit after tax to NCI
E.g. Indemnification asset & Provision for license fee Dr Income to NCI (I/S)
Deferred tax on acquisition Cr NCI (B/S)
Same for OCI
Classification & designation of identifiable assets/liabilities acquired NCI always after-tax basis.
determined by info, conditions and policies of acquirer at acquisition Shown below Profit after Tax Line in I/S
date e.g. acquiree may classify a building as fixed asset but acquirer Without this attribution, RE of Grp w overstated and
might want to rent it out, designate it as investment property on NCI understated
acquisition ** rmb to multiply by tax rate to find DTA DTL!!
Identifiable asset: FV > BV = DTL | FV < BV = DTA Subsequent years after acquisition
Identifiable liability: FV > BV = DTA | FV < BV = DTL Elimination of investment in subsi (re-enacted each yr)
DTL reduces FV of Identifiable net assets Dr Share Cap of subsi (eliminate intragrp shares issued to parent @ BV)
recognize on date of acquisition at FV and are FV adj to DTA or Dr RE Subsi (eliminate pre-acquisition RE)
DTL already in existence in FS of acquiree. Dr Goodwill (recognise group asset)
Goodwill asset no Deferred taxes as goodwill is residual Dr Inventory/fixed assets/intangible assets (adjust to FV)
Non-Controlling Interests originated from incorporation date of Cr Investment in subsi (prevent double-counting of NIA)
acquiree Cr NCI
Record NCI as equity in acquirer books- outside interests share in Cr DTL
the net assets of acquirer (as A&L or acquiree are consolidated in allocates pre-acquisition RE to NCI
full in acquirer books and not proportionately with the A&L of
acquirer) ** If something relates to the current yr, it is an expense. If it is a re-
enactment, or related to the past, use Opening RE and NCI. Allocate to
On acquisition date, NCI measured at: NCI its share.
(1) Fair Value - % X FV of acquiree (as a whole)
Need reliable measure of FV of NCI. Usually mkt share price or Subsequent impairment of goodwill (from previous yr)
valuation technique. Excludes control premium paid by acquirer to Dr Opening RE Dr NCI Cr Goodwill
obtain control. Includes NCIs share of goodwill in acquiree.
or (2) Proportionate share of FV of INA - % X FV of INA 2. Analytical check on NCI
Excludes NCI share of goodwill in acquiree Listings approach find NCI balance as at end of yr
** usually use alternative 1 NCI balance at acquisition date
NCI share of past impairment
In consolidated FS on acquisition date: NCI share of past depreciation on under-valued fixed assets
Assets (BV of acquirer assets + FV acquiree INA + Goodwill) NCI share of tax on past depreciation
- Liabilities (BV acquirer liabilities + FV acquiree identifiable liab) NCI share of COS of undervalued inventory
= Equity (acquirer equity + NCI interests in acquiree) NCI share of tax on past cost of sales
NCI share of post-acquisition RE
Goodwill in assets of acquirer | Residual amt Share of profit for current year
premium paid for synergies | Values depend on alternative in Dividend received
calculating NCI | expectation of future economic benefits, integral to = NCI balance at end of period
entity as a whole, not separable | Unidentifiable asset (should not
include unrecognized identifiable A&L measurement errors) | NCI Reconciliation
Overpayment is not substantiated by future economic benefits- gives (1) BV of NIA at end of period or shareholders book equity
rise to day 1 impairment losses, recognize immediately + (2) Unamortised balance of FV adj at end of period of assets
Core Goodwill or Internally generated goodwill: Synergies of (after taxes) (e.g. 8/10 X 80% X 1mil)
acquirees assets, FV of acquiree > FV acquiree net assets = Adjusted shareholders equity
Fair Value of Synergies or Combination Goodwill: Synergies X NCI %
among grp entities, FV of grp > sum of indiv entities = NCI share of equity Alt 2
Alt 1 include NCI share of goodwill Alt 2 Exclude NCI share + (3) Goodwill attributable to NCI (less impairment in yr) Alt 1
of goodwill (usually assume it is alt 1 if not mentioned) (4) Add in intangible asset after taxes if any, if it was previously
Goodwill = 100% FV of acquiree + control premium FV INA unrecognized in the acquire books
= Total FV consideration (include control premium) + FV NCI on = NCI balance at end of period
acquisition date + FV acquirers previously held equity interest
in acquiree [FV NIA of acquiree DTL effect (tax rate X (FB- Equity Accounting Entries
BV) of NIA)] There is re-enactment entries and current entries
Goodwill must be after tax effect Recognise Post-acq RE of Assoc
Journal Entries Dr Investment in A Cr Opening RE
A) Acquisition of Net assets RE of A on beg of period RE of A at acq date
On acquisition date = Change in RE after acq
1. Remeasurement gain/loss of PPE to FV X % share of ownership in A
E.g. Dr Land Cr Remeasurement gain = Share of As change in RE
2. Acquisition of biz record the exchange (Dr assets from Recognise Dividend received as a repayment of profits
acquiree, Cr contingent consideration payable at gross amt. Cash is Dr Dividends income Cr Investment in A
at net amt) all at FV Recognise share of Revaluation Reserves (after taxes)
Dr PPE Dr Intangible assets Dr Inventory Dr AR Dr Goodwill Dr Investment in A Cr Share of current RR Cr RR
Dr unamortized discount Cr Cash Cr Share capital ( given in Recognise share of past litigation losses (after-tax) if there is
exchange for acquiree) Cr Land Cr DTL Cr Loans Cr Provisions provision provided for at date of acq i.e. reversal entry
Cr AP Cr Contingent consideration payable (gross amt) Dr Investment in A Cr Opening RE (opening RE as it is past)
On subsequent reporting date Adjustment of unrealized profit from past years
1. Depreciation expense, amortization and impairment loss Dr Opening RE Cr Investment in A
2. Inventory sold Adjust for past depreciation
Dr COGS Cr Inventory Dr Investment in A Cr Opening RE
3. Interest expense on contingent consideration Share of current profit in Associate
Do amortization table, interest is on carrying amt Dr Investment in A (P-BS) Cr Share of profit in A (P-IS)
Dr Interest expense Cr unamortised discount or Dr Investment in A Cr Share of tax in A Cr Share of profit in A
4. Settlement of contingent consideration
Dr Loss on settlement (diff between settlement amt & expected Profit before tax for yr of A
value) Dr Contingent consideration (expected value) Cr Cash + Excess depn/amort
B) Acquisition of subsidiary + Gain on settlement on litigation loss
Dr or Cr to individual A&L of the subsi is to adjust BV to FV + Current year impairment loss
(i.e. elimination of investment entry is repeated as long as the = Adj profit before tax of A X % ownership in A
investment exists) = Share of adj profit before tax of A
Remember to Dr Goodwill & Dr RE into the assets!
Tax expense of A
 Cr Contingent liability (tax rate X FV-BV of NIA), RE, Investment + tax on excess depn/amort
in subsi (total FV consideration), FV NCI - tax on COS of undervalued inventory
subsequent reporting period record depreciation etc = Adj tax of A X % ownership in A
Gain on bargain purchase = Share of adjusted tax of A
Recognise immediately as profit or Loss
Cr Gain from bargain purchase (I/S) ** Or can just take As NPAT and +/- after-tax amounts of the
As BV > FV DTA is resulted Dr DTA adjustments. Then multiplied by % ownership in A
Gain from bargain purchase
= consideration trf + FV NCI FV NIA DTA (tax rate X NIA) EA Checks
Listings Approach
Chapter 4- Accounting for biz combi and NCI Investment in A at cost + all the EAs = Investment in A at end of year
Asset substitution: Elimination of investment in subsidiary and Analytical Check
substitute with identifiable assets and liabilities. Residual is goodwill
- prevents double counting of assets
- In grp or consol FS, Investment account is zero

On Date of acquisition and subsequent yr (re-enactment)

1. Equity items not recognized in parent consol FS on acquisition Consolidated amounts
date, as it does not reflect cumulative earnings of the new economic Consol RE Analytical Check
entity (e.g. RE, Share cap, reserves, equity items) Prisms RE @ 100% - includes unrealized profits
2. Recognize previously unrecognized intangible asset of subsi in + (RE @ period end RE @ Acq date) X % share in Assoc
consol FS + (RE @ period end RE @ Acq date) X % share in Subsi
3. Deferred tax effects of previously unrecognized intangible asset Less: Ps share of unrealized profit after-tax at EOY included in RE of
recognized each legal entity | Interco transactions
4. Residual is goodwill Less: Ps share of cumulative depn/amort of (FV-BV) after-tax
no carry-forward balances in consolidation = Consolidated RE
Consol RE Listings Approach
Elimination of investment in subsidiary Prism and Silvers RE @ 100% at EOY
Dr Share Capital Dr RE Dr Goodwill Dr Intangible Asset +/- CJEs that affect RE
Cr Investment in Subsidiary Cr DTL +/- EAs that affect RE
** Direct acquisition of net assets of biz no need consolidation = consol RE
No carry-forward balances in consolidation and each consolidation Only include items that will affect RE, RE JEs and IS items.
Exclude: BS items and OCI items and Reval Reserve Items
NCI are equity interests in subsi that does not belong to the parent
company. Only featured in consol FS.
NCI are equity items and must be shown separately from equity
owners of parent. Even if subsi is partially owned by parent, A&L
must be reported in full.
NCI comprises of (1) share of BV NIA of subsi
(2) Share of (FV-BV) NIA of subsi on acquisition date
(3) Goodwill attributable to NCI on acquisition date (for alternative 1.
Alt 2 no goodwill)
FV per share of NCI might differ from FV per share of acquirer
due to control premium paid by acquirer that is included in goodwill.

Consolidation entry (to be re-enacted each year) to credit NCI at

acquisition-date amt
Alternative 1 FV Basis
Dr Share Cap of subsi Dr RE on date of acquisition Dr Other equity
of subsi on date of acquisition Dr Goodwill (NCI + acquirer share)
Dr NIA (excess of FV over BV) Dr/Cr DTA/DTL
Cr NIA (excess of BV over FV) Cr Investment in subsi Cr NCI (FV)
NCI goodwill = FV NCI (NCI % X FV NIA)
Alternative 2 NCI as proportion of NIA
Dr Share Cap of subsi Dr RE on date of acquisition Dr Other equity
of subsi on date of acquisition Dr Goodwill (acquirer share only)
Dr NIA (excess of FV over BV) Dr/Cr DTA/DTL
Cr NIA (excess of BV over FV) Cr Investment in subsi
Cr NCI ( NCI% X FV of NIA)

NCI alternative 2
(1) Present ownership interests in subsi (at % of NIA)
(2) Potential ownership interests in subsi (at FV e.g. options)

** NCI can be a debit balance when NCI share of losses in subsi

exceed their share of the subsis share cap, RE and other equity

Allocation of Current Profit after tax to NCI

Dr Income to NCI (I/S)
Cr NCI (B/S)
Same for OCI
NCI always after-tax basis.
Shown below Profit after Tax Line in I/S
Without this attribution, RE of Grp w overstated and
NCI understated

Allocation of dividends to NCI

Dr Dividend income (Parent- I/S)
Dr NCI (B/S)
Cr Dividends declared by subsi
div to NCI reduces NCI equity | Div in consol is amt parent
receives | Div declared by subsi should be NIL at the end

NCI balance at end of period

NCI bal at acquisition date + Share of profit for year
= NCI Balance at end of period

Reconciliation of NCI
(1) BV of NIA at end of period +
(2) Unamortised balance of FV adj at end of period of assets
(after taxes)
= Adjusted shareholders equity
X NCI %
= NCI share of equity Alt 2
+ Goodwill attributable to NCI (less impairment in yr) Alt 1
= NCI balance at end of period

Week 4 Chapter 5
- Eliminate intragroup trxn and bal, as P/L is unrealized or unearned
until asset is sold to a third party.
- Elimination also applies to unrealized P/L attributable to NCI
- Adjust tax effect of unrealized P/L due to carrying amt DTL DTA
- Balances with associates are not eliminated, they dont from grp.
Unrealized P/L eliminated only to the extent of investors interest
- Sometimes cost of borrowing is capitalized into cost of asset.
Hence interest if expensed when asset is amortized, depreciated or
sold
--> need to calculate diff between grp and legal entitys depreciation
amt. and adjust depn amt during consol
- Inventory should be carried at lower of cost and NRV
- When inventory is finally sold to third party, COS should be OC
when transacted with unrelated third parties. Not the transfer price
(TP-OC) in remaining inventory is eliminated
- Frm grp perspective, depreciation calculated based on OC and not
TP. If there is a revision of useful or change in estimates, it is with
reference to carrying amt of OC.
- Opening RE of legal entities NOT EQUAL to consol opening RE
due to timing differences in income recognition- need to do consol
adjustments so consol opening RE = end of last yr consol RE

- Consol adj reclassifies tax expense of legal entity to DTA in consol

FS.
Dr DTA Cr Tax expense
In grp perspective, tax expensed only recognized when asset is sold
to third party or expensed off.
Dr Tax expense Cr DTA
Re-enactment each year before asset is gone:
Dr DTA Cr Opening RE
When legal entity and not grp get taxed, grp gets DTA
Unrealized losses of legal entity become deductible for it, grp will
get DTL in consol FS.
Every time re-enactment go to opening RE

Downstream sale
- Unrealized profit in parents books
- NCI share of profit in S is unaffected
Upstream Sale
- Unrealized profit in S books- affect both P and NCI share
- NCI share of unrealized P/L adjusted from carrying amt of asset

- Consol profit relates to entity as a whole, before allocation to NCI

Profit on sale of fixed assets = TP NBV of fixed assets

Excess depn = Legal entity depn Grp depn
= TP/remaining useful life NBV/ Remaining useful life
= (TP-NBV)/ Remaining useful life
= Profit on sale of fixed assets / Remaining useful life
Profit on sale of fixed assets = Excess depn X Remaining
useful life
Profit on sale of fixed asset when sold before end of useful
life
= (Excess depn X Expired period) + Excess profit on resale

Week 5- Associates, Significant influence

Significant influence (1) Power to participate through board
representation, voting rights in decision-making but not to govern the
policies or decisions on relevant activities. Usually 20-50% to
presume to have significant influence. Not Joint control | hold 20%
or more of the voting power of investee, presumed to have s.f.
influence unless clearly demonstrated that this is not the case.
Exceptions permitted but must be disclosed and justified. (2) One-
line consolidation (3) Associates are not members of the group
E.g. Board rep, participation in policy-making processes, material
trxn, provision of essential technical info

Equity Method
1. Transactions with assoc not eliminated as they are not subsi of
investor
e.g. No need to do EA for interco loans s
2. For trxn, only do EA when there is a bottom-line effect on PL of
group and only recognize to the extent of investors interest
3. Div seen as a repayment of profits more timely recognition of
profits
reduce investment account
4. Recognise OCI and PL effects
5. Initially recognize at cost and subsequently changes in share of
net assets in associate

Investment in assoc = Initial cost +/- % post-acq change in Net

assets
Initial cost = share of BV of NIA + Share of (FV-BV) of NIA + implicit
GW
% post-acq change in NIA = share of change in BV equity cum
amort of (FV-BV) cum impairment
cannot recognize newly internally generated intangbles in assoc
after acquisition, just like in subsidiaries. GW does not change after
acq date

Recognition methods in investment in associate/JV in consol

Investment at cost (+) reliable and objective
Investment at FV (+) Most timely income recognition (-) not
informative for investors decision-making (-) level 3 of FV hierarchy
Investment using equity method (+) More timely recognition of
profit
(+) avoid extremes of the other 2 bases (+) No additional
adjustments

Up/downstream transfers to associate, investor has to adjust for

those unrealized. Only recognize sale or portion being sold to other
owners of associated (i.e. unrelated parties)

Accounting for past depreciation has to be (after-tax basis)

Unrealized profit also after-tax basis
Litigation loss on associate also after-tax basis
Week 11 Elearn cash flow statement

Consolidated CF statement
OCF, ICF, FCF all reflect CF transactions with third parties
eliminate intragroup settlements, borrowings etc

Net impact of consol CF when a parent acquires

control of a subsidiary
acquires cash balance of subsidies too (inflow of cash)
also got outflow of cash from considering transferred
Net cash (paid)/received under Investing Activities

= Cash of subsi acquired consi paid in cash

(deferred and those paid in kind dont include. Solely in
cash at acquisition date)

Net impact of consol CF when a parent loses control

of a subsidiary
Net cash received/(paid) under investing activities
= consi received in cash cash of subsidiary
disposed

2 lines in cash flow statements

IFRS 7
Net cash paid on acquisition or net cash received on sale of
subsi has to be accompanied by supplementary info on all
assets and liabilities acquired or disposed

Investing Activities
Have to disclose carrying amount of net assets of a subsi
disposed
- net cash received will be shown as investing cash inflow
- Realisation of FCTR OCI reclassified to PL on divestment

Proceeds from sale received in cash

= carrying amt (net assets disposed of) + net profit
on disposal
+ Realisation of FCTR

Proceeds from sale received in cash Bank balances

and cash disposal
= Net cash received from disposal

(no non-cash, deferred components. If have, you will have

to subtract the Non-cash and deferred components)

Financing Activities
- Div paid by parent
- Div paid by subsi to NCI
- capital contributions by NCI
- Purchase of additional interests in subsi without change in
control
- Proceeds from NCI for reduction in interests in subsi
without change in control
only include proceeds/(purchase) from changes in
interests without change in control as these are owner
transactions, not considered investing activities

FRS 7
cash flows in foreign currency (legal entity) translated to
functional currency in a manner consistent to FRS 21
temporal or remeasurement method
1. Cash Flows from foreign currency transactions
translated at spot rate (consistent with accounting
for monetary items)
e.g. Non-monetary expenses depreciation X historical rate

sales in foreign currencies X spot rate

unrealized gains/losses from changes in forex rates (not
cash flows)

2. Cash flows of foreign subsi translated at spot rate

on cash flow date**
Assets and liabilities translated at closing rate
equity translated at spot rate (actual rate)
OCF, ICF, FCF changes in cash flow at actual rate
cash & cash equivalents (asset) use closing rate
(closing rate method)
OCF ICF FCF at actual, cash at closing, disconnect
between flow and stock concept, gives rise to FCTR
OCF ICF FCF USE ACTUAL OR APPROXIMATE RATE!! NOT
CLOSING RATE

THIS IS WRONG
Translation of OCF:
(NPAT X spot rate) +/- (Non-cash adj X Spot rate) +/-
(ending EC X CR 1) (beg WC X CR 0)
this is not equals to (Ending WC beg WC) X Spot
rate
should not use closing rate AT ALL

(Beginning CCE x Previous Years CR) (OCF x Spot or

Average Rate) (ICF x Spot Rate) (FCF x Spot Rate)
 (Ending CCE x Current Years CR)
Difference is the FCTR relating to CCE

To reconcile beg and end CCE,

- Exchange difference arise because ending CCE is at
closing rate, but beginning CCE is at previous years rate
and the OCF, ICF and FCF are at spot rates
- Is shown as a line item in the difference between
beginning and ending CCE
FCTR only appears at ending and beg recon of the CCE,
not in any of the OCF, FCF, ICF.

** (1) Translate the foreign subsis CF then

(2) consol the translated CF statements
NOT consol the IS, BS then prepare consol CF
the latter option is wrong, as you will use translated
consol BS to derive changes in WC which is wrong as the BS
would have translated WC at closing rate. Does not give
you changes in WC at ave or actual rates.

Steps to preparing the consolidated cash flow

statement
1. Translate current years foreign subsidiaries financial
statements to the parents presentation currency
2. Translate the previous years balance sheet to the
parents presentation currency
3. If the cash flow statement is not available, prepare the
foreign subsidiarys cash flow statement and translate
Analyze the movements of each asset, liability and
equity of the foreign subsidiary to identify the cash flow and
non-cash flow movements
4. Consolidate the translated cash flow statement of the
foreign subsidiary with that of the parent
5. Eliminate intra-group cash flow transactions

Depreciation and amortization is non-cash

Need to identify how much of FCTR relates to CCE
translate cash flow statement need to translate twice,
opening and closing BSs CCE
Analysis of movements of A&L (each and every one of
them)
each of them give rise to an FCTR, as all assets are
translated at closing rate and it will be different from the
movements

Change in WC (translated amounts, in presentation

currency)
AR Sales (non-cash) and collections (cash) mini FCTR
(Sales) + collections = Net AR

AP purchases (non-cash, can be on credit) and cash

payments (cash)
mini FCTR Payments purchases

Inventory purchases (cash) and cost of sales (non-cash)

mini FCTR
(Purchases) + COS = Net inventory
total = changes in operating cash flows

Total changes in FCTR for this year (both A&L) + FCTR at

beg of current period = ending FCTR for period (BS)

** remove sales and cost of sales non-cash

only recognize cash collections and cash payments cash

Eliminate div declared by subsi, received by parent (under

financing)
as they are paid in cash

Purchase of fixed assets (under investing activities)

Beg bal FCTR

+ FCTR on cash (changes throughout the year)
= End Bal FCTR

Sales ave rate (proxy to actual rate)

Div declared actual
Assets, including CCE and Liabilities closing rate
E.g. patents, inventory, AR

Equity items (Cannot use closing)

Share cap | Pre-acq RE | Goodwill acquisition date
(At acq date to allow elimination against investment in
foreign subsi)
Post-acq RE balancing fig 344,000 (see below)

Reconstructing BS at 31 Dec 20X4 to determine RE in

SGD at 1 Jan 20X5
 USD Rate SGD
Net assets 300,000 1.78 534,000
(closing
rate)

Share Cap 100,000 2.10 210,000

(acq rate)
Beg RE 200,000 344,000
(31 Dec (bal fig)
20X4)
FCTR (20,000)
(given)
300,00 534,000
0
(equals
to net
assets)

FCTR (check of translation gain)

USD Rate SGD
Net assets at 300,0 1.78 534,0
beg yr 00 (closing 00
(1 Jan 20X5) rate)
+ Movements in
net assets
during 20X5
Exchange gain
for year (aft tax)
Change in FV of
AFS
- div declared
Net assets
EOY per
movement
But Net assets 356,0 1.60 569,6
at 31 Dec 20X5 00 (CR on end 00
translated at Dec 20X5)
closing rate
Change in FCTR (59,08
for 20X5 0)

FCTR as at 1 Jan (20,00

20X5 0)
given
FCTR at 31 (79,0
Dec 20X5 80)

Analysis of movements of P&L

Fixed Purchases (Ave, Depn (ave, NC)
asset Cash)
Beg Bal CR 0
Purchases Current yr Ave Rate Cash
- Depn Current yr Ave Rate NC
FCTR No rate, Bal figure NC
End Bal CR 1
Patents Purchases (Cash) Amortin (ave,
NC)
Inventor Purchases (ave, COS (ave, NC)
y cash)
AR Sales (save, NC) Collections
(ave, Cash)
AP Cash payment (ave, Purchases (ave,
Cash) NC)

Cash Balances
Beg bal of cash
+ Collections AR - Fixed asset purchases - AP Payments -
operating Expenses - interest expenses tax (ave rate)
div (actual rate)
+ FCTR (bal fig between End bal USD and SGD using CR 1)
= End Bal of cash
dont include inv purchases though it is a cash item to
avoid double counting. Since purchases is recorded in
accounts payable, only the cash payments from accounts
payable is shown as cash payment.

End FCTR
Beg Bal FCTR + changes in FCTR (total A-L of FCTR) = End
FCTR (79,080)

FCTR (translation loss) on GW and FV adj

Dr FCTR 49,400 If FCTR is a gain, Cr FCTR
Dr DTL 600
Cr Goodwill 47,000
Cr Inventory 3,000
Numbers reflect all the mini-FCTR added up together, the
movements in all the FCTR in all A and L

FRS 12:32
Exchange gain on interco loan considered as gain on net
investment in subsidiary. Loan deemed as an extension of
net investment.
Exchange gain taken to FCTR
tax expense on the exchange gain taken to equity
Only exchange gain is reclassified to investment, loan is
not.
Loan still has to be eliminated
Reclassification of exchange gain (after-tax)
Dr Exchange gain on loan
Cr FCTR
Cr Tax expense

Allocation of FCTR to NCI (translation loss)

Dr NCI 11,348
Cr FCTR (equity) 11,348 (Dr FCTR if it is a translation
gain)

FCTR Total NCI Share 10%

Translation (79,080) (7,908)
loss on BV end period FCTR
assets
Translation (47,000) (3,200)
loss on Diff between acq GW attrib to
Goodwill and CR 1 rate NCI X (CR 1
acq rate)
Translation (2,400) (240)
loss on FV Translation loss
adj on undervalued
inv + DTL
Exchange
gain after
taxes
Total (128,480) (11,348)