BUSINESS COMBINATION AND

GROUP FINANCIAL STATEMENTS

LEARNING OUTCOMES
Explain regulatory requirement for
consolidation and exemption from liquidation
Explain basic structure of parent-subsidiary
relationship
To record consolidation at acquisition date.

INTRODUCTION
Business combination as a transaction or other event in which an
acquirer obtains control of one or more businesses. (MFRS 3:
B5)
An acquirer might obtain control of an acquiree in a variety of
ways, for example:
(a) by transferring cash, cash equivalents or other assets
(including net assets that constitute a business);
(b) by incurring liabilities;
(c) by issuing equity interests;
(d) by providing more than one type of consideration; or
(e) without transferring consideration, including by contract
alone (see paragraph 43).

INTRODUCTION
Group
a parent and its subsidiaries.
Consolidated financial statements
the financial statements of a group in which the
assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.

REGULATORY FRAMEWORK

Companies Act 1965:

Ninth Schedule Requirements
Ninth Schedule Exemptions
MFRS 3 - Business Combinations
MFRS 10 Consolidated Financial Statements
MFRS 127 Separate Financial Statements

MFRS
Strd
MFRS 3

Title

Effective Date

Issuance
Date

Business Combination 1 Jan 2012

19 Nov 2011

MFRS 127 Consolidated and Separa1 Jan 2012

te Financial
Statements *

19 Nov 2011

MFRS 10

Consolidated Financial 1 Jan 2013

Statement

19 Nov 2011

MFRS 127 Separate Financial Stat 1 Jan 2013

ements (IAS 27 as amend
ed by IASB in May 2011)

19 Nov 2011

* Will be superseded by MFRS 127 Separate Financial Statements

(IAS 27 as amended by IASB in May 2011) and MFRS 10
Consolidated Financial Statements with effect from 1 Jan 2013

REGULATORY FRAMEWORK
Requirement to consolidation:
Company Act, 1965
Require every holding company to annex a
consolidated profit and loss accounts to its profit
and loss account, and a consolidated balance
sheet to its balance sheet.
Parent-subsidiary relationship: Section 5 (1),
Section 5 (2), Section 5 (3)

REGULATORY FRAMEWORK
Requirement to consolidation:
Company Act, 1965
Prohibition on reciprocal shareholdings: Section 17
Requirement and exemptions:
Section 169 (requirements of financial statements),
Section 169(15) (present FS in AGM),
Section 168 (financial year of subsidiary companies
must coincide with the financial year of holding
company)

REGULATORY FRAMEWORK
Requirement to consolidation:
MFRS 10
A parent shall present consolidated
financial statements (para 4)
Parent is defined as an entity that has one
or more entities.(Appendix A)
Subsidiary is defined as an entity that is
controlled by another entity(Appendix A)

REGULATORY FRAMEWORK
Requirement to consolidation:
MFRS 10
An investor controls an investee when it is
exposed, or has rights, to variable returns from
its involvement with the investee and has the
ability to affect those returns through its power
over the investee(para 6)
Power - existing rights that give the current
ability to direct the relevant activities (Appendix
A).

REGULATORY FRAMEWORK
Control (MFRS10 para7):
An investor controls an investee if and only if
the investor has all the following:
a)power over the investee (see para1014);
b)exposure, or rights, to variable returns from
its involvement with the investee (see para
15 and 16);and
c) the ability to use its power over the investee
to affect the amount of the investors returns
(see para17 and 18).

REGULATORY FRAMEWORK
Exemption from consolidation:
MFRS 10 Para 4 (a) provides that a parent need not
present consolidated financial statement if:
i. it is a wholly-owned subsidiary or is a partiallyowned subsidiary of another entity and all its other
owners, including those not otherwise entitled to
vote, have been informed about, and do not object
to, the parent not presenting consolidated financial
statements;
ii. its debt or equity instruments are not traded in a
public market (a domestic or foreign stock
exchange or an over-the-counter market, including
local and regional markets);

REGULATORY FRAMEWORK
Exemption from consolidation (cont):
iii. it did not file, nor is it in the process of filing, its
financial statements with a securities
commission or other regulatory organisation for
the purpose of issuing any class of instruments
in a public market; and
iv. its ultimate or any intermediate parent produces
consolidated financial statements that are
available for public use and comply with
International Financial Reporting Standards.

BASIC PARENT-SUBSIDIARY STRUCTURE

Parent-Subsidiary Relationship (Group Structure
exist):
A business combination may result in a parentsubsidiary relationship in which the acquirer is the
parent and the acquiree a subsidiary of the acquirer
(MFRS 3, Para 6).

BASIC PARENT-SUBSIDIARY STRUCTURE

Stage/ Piecemeal Acquisition:
business combinations in which one entity obtains
control of another entity but for which the date of
obtaining control (ie the acquisition date) does not
coincide with the date or dates of acquiring an
ownership interest (ie the date or dates of
exchange).

Usefulness & Limitations of CFS

Usefulness:
Management of parent
Shareholder/investors of parent
Long-term creditor of parent
Limitation:
Non-controlling interest s/h & creditor of subsidiary
LHDN
CFS may not reveal some info
Maybe not meaningful if dissimilar activities
May mislead to unsophisticated readers.

CONSOLIDATION AT ACQUISITION DATE

MFRS 3 (para1) specifies that all business
combinations should be accounted for by applying the
acquisition method.
Views a business combination from the perspective of
the acquirer.
The acquirer purchases net assets and recognizes the
assets acquired and liabilities and contingent liabilities
assumed, including those not previously recognized by
the acquiree.
The acquirer records the assets and liabilities at fair
values.

CONSOLIDATION AT ACQUISITION DATE

Applying the acquisition method involves the
following steps:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognising and measuring the identifiable
assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree; and
(d) recognising and measuring goodwill or a gain
from a bargain purchase.

CONSOLIDATION AT ACQUISITION DATE

Identifying an acquirer
The acquirer is the combining entity that obtains
control of the other combining entities or
businesses.
determining the acquisition date
the date on which it obtains control of the
acquiree.
generally the date on which the acquirer legally
transfers the consideration, acquires the assets
and assumes the liabilities of the acquireethe
closing date.

CONSOLIDATION AT ACQUISITION DATE

the cost of the business combination:
the fair values, at the date of exchange, of assets
given, liabilities incurred or assumed, and equity
instruments issued by the acquirer, in exchange
for control of the acquiree;
Acquisition-related costs are treated as acquisition
expenses (MFRS 3:para 53)
include finders fees; advisory, legal, accounting,
valuation and other professional or consulting
fees; general administrative costs, including the
costs of maintaining an internal acquisitions
department; and costs of registering and issuing
debt and equity securities.

CONSOLIDATION AT ACQUISITION DATE

allocate the cost of the business

combination to the assets acquired and
liabilities and contingent liabilities
assumed (include assets and liabilities
that the acquiree had not previously
recognised as assets and liabilities in its
financial statements (eg: brand name)
The difference recognised as goodwill

CONSOLIDATION AT ACQUISITION DATE

Example 1 Cost of Investment:
ABC acquired a 100% interest in the equity capital of
WXY SB on 1 January 2013. The purchased
consideration was satisfied as follows:
An immediate cash payment of RM1,000,000
An amount of RM2,000,000 to be paid on 1 January
2013
An issue of RM1,000,000 ABCs ordinary shares of
RM1.00 each. These shares have been valued at
RM4.00 each by Merchant Bank Bhd., the advisor to
the acquisition and agreed upon by the regularity
authorities.

CONSOLIDATION AT ACQUISITION DATE

Example (cont..)
Cost incurred that were directly attributable to the
acquisition totaled RM500,000 and these have not
been paid.
The cost of registration for issuing shares is
RM100,000 paid by cash.
ABCs incremental borrowing cost was 8% per annum.
Required: Calculate the cost of investment and record
the related journal entry.

CONSOLIDATION AT ACQUISITION DATE

Solution:
Calculation of COI:
Immediate cash consideration
1,000,000
PV of deferred consideration (2,000,000 /[1.08])
1,715,000
Fair value of shares issued (1,000,000 x 4)
4,000,000
Cost of Investment
6,715,000
Journal Entry (ABC Bhd):
DR Investment in Subsidiary - WXY
6,715,000
CR Cash
1,000,000
CR Deferred liability
1,715,000
CR Share capital, at par
1,000,000
CR Share Premium
3,000,000
(to record investment in subsidiary company at cost)

CONSOLIDATION AT ACQUISITION DATE

At the date of acquisition, the net asset values of the subsidiary
must be stated at their fair values to the parent.
Consolidated adjustments are necessary to revise book
values to the fair values. Thus, the revalued amounts of the
net assets represent cost to the parent.
Pre-acquisition Adjustments
parent's investment in the subsidiary (as stated by
purchase consideration) is cancelled and substituted by the
underlying fair value of the net assets of the subsidiary
so that net assets of both companies are added across and
presented in aggregates to avoid double-counting in the
group accounts.

CONSOLIDATION AT ACQUISITION DATE

Consolidation Adjustment:
the investment in subsidiary account (the purchase
consideration) is cancelled against the share capital
and pre-acquisition reserves of the subsidiary
leaving the balanced as goodwill on acquisition.
Dr. Share Capital
xx
Dr. Pre-acquisition reserves
Dr. Goodwill
xx
Cr. Investment in Subsidiary

xx
xx

CONSOLIDATION AT ACQUISITION DATE

Preparing group accounts of a parent immediately after
it has acquired a subsidiary (as at the date of
acquisition)
Consolidation Procedure:
1. the investment in subsidiary account (COI) is
cancelled against the share capital and preacquisition reserves of the subsidiary.
2. The financial statement of parent & subsidiaries are

combined on a line-by-line basis by adding

together asset, liabilities, equity, revenue &
expenses.

CONSOLIDATION AT ACQUISITION DATE

Consolidation issues:
Goodwill on consolidation
Revaluation of subsidiarys assets
Non-Controlling interest
Reserves

GOODWILL
The differences between COI, noncontrolling interest (NCI) and the net fair
value of the identifiable assets, liabilities
and contingent liabilities(NIA) recognised
in accordance with Para 36.
Goodwill = COI + NCI FV of NIA

GOODWILL
The acquirer shall, at the acquisition date:
recognise goodwill acquired in a business
combination as an asset; and
initially measure that goodwill at its cost,
(MFRS 3, Para. 51)
After initial recognition, the acquirer shall
measure goodwill at cost less any accumulated
impairment losses. (MFRS 3, Para. 54)

GOODWILL
Example 2:
Refer example 1, the statement of financial position of
WXY SB as at 1 January 2013 was as follows:
RM
000
Share Capital of RM1.00 each
2,000
Reserves
3,000
5,000
Property, Plant & Equipment
4,000
Net current assets
3,000
Long term loans
(2,000)
5,000

GOODWILL
Example (cont..)
All items are recorded in the accounts are
assumed to be recorded at fair values.
Required:
Allocate the cost of the acquisition to the
identifiable net assets of WXY SB and calculate
the goodwill on consolidation .Prepare
consolidation journal entries at acquisition date.

GOODWILL
Solution:
COI, as recorded in ABC Bhds accounts(000)
Allocated to net assets (000):
Fair value of net assets
Goodwill on consolidation

(5,000)
1,715

6,715

GOODWILL
Consolidation journal entry:
DR Share Capital
2,000
DR Reserves
3,000
DR Goodwill on consol
1,715
CR COI
6,715
(to eliminate COI and to recognize GOC)

GAIN FROM A BARGAIN PURCHASE

(NEGATIVE GOODWILL)
If COI is less than FV of NIA
the acquirer shall:
reassess the identification and measurement of
the acquirees identifiable assets, liabilities and
contingent liabilities and the measurement of the
cost of the combination; (para 36)
recognise immediately (a gain) in profit or loss
any excess remaining after that reassessment.
(MFRS 3, Para 34)

REVALUATION OF SUBSIDIARYS ASSETS

The indentifiable assets & liabilities of the

acquired entity should be restated to fair
value (acquisition date)
The consolidation journal entries depend
on whether or not the subsiadiary has
made the required adjustments in its own
books.

REVALUATION OF SUBSIDIARYS ASSETS

Example 3:
Refer example 1, the Balance Sheet of WXY SB as at 1
January 2013 was as follows:
RM
000
Share Capital of RM1.00 each
2,000
Reserves
3,000
5,000
Property, Plant & Equipment
4,000
Net current assets
3,000
Long term loans
(2,000)
5,000

Revaluation of Subsidiarys Assets

Example (cont..):
Included in the fixed asset of WXY SB was a freehold property
at cost of RM1,000,000. At January 1 2013, this property had
an open market value of RM2,000,000.
Also, other identifiable assets (granite extraction rights) worth
RM500,000 as at 1 January 2013 were not reflected in the
accounts.
All other items recorded in the accounts are assumed to be
recorded at fair values.
Required: Allocate the cost of the acquisition to the
identifiable net assets of WXY SB and calculate the goodwill
on consolidation . Show the adjustments to consolidate WXY
SB.

Revaluation of Subsidiarys Assets

Solution:
Book Value Fair Value Differences
Freehold property 1,000,000
2,000,000 1,000,000
Intangible assets
500,000
500,000
DR Property, Plant & Equipment
1,000,000
Intangible asset
500,000
CR
Revaluation surplus (pre-acq)
1,500,000
(to adjust book value of net assets to fair value at acquisition date)

Revaluation of Subsidiarys Assets

Solution:
COI, as recorded in ABC Bhds accounts
6,715,000
Allocated to NIA:
Fair value of PPE
5,000,000
Fair value of granite extraction rights 500,000
Net current assets
3,000,000
Long term loans
(2,000,000)
Fair value of NIA
6,500,000
Goodwill on consolidation
215,000

Revaluation of Subsidiarys Assets

Solution:
Consolidation Journal entry:
DR Share Capital
2,000
DR Reserves
3,000
DR Revaluation surplus
1,500
DR Goodwill on consol
215
CR COI
6,715
(to eliminate COI and to recognize GOC)

NON-CONTROLLING INTEREST
Exists when the acquirer (Parent) has less than
100% interest in subsidiary. Example: If parent
acquired 70% interest in subsidiary, the NCI would
be 30%.
any non-controlling interest in the acquiree is
measured either: (para 19)
a) at fair value or,
b) at the non-controlling interests proportionate
share of the acquirees identifiable net assets.

NON-CONTROLLING INTEREST
Example 4:
Refer example 1, assuming that ABC acquired 80%
interest in WXY Bhd for RM5,100,000 and fair value
of the remaining 20% interest was RM1,275,000.
Required:
Prepare the relevant consolidation journal entries at
acquisition date using both methods for the
treatment of NCI.

NON-CONTROLLING INTEREST
Solution:
NCI at % of
net assets
COI
NCI
(*20% x 5,000,000)
FV of net identifiable
assets
Goodwill on
consolidation

NCI at fair value

5,100,000
*1,000,000

5,100,000
1,275,000

6,100,000
5,000,000

6,375,000
5,000,000

1,100,000

1,375,000

NON-CONTROLLING INTEREST
Method: NCI at proportionate share of net assets
Dr Share capital (80% x 2,000,000) 1,600,000
Reserves
(80% x 3,000,000) 2,400,000
Goodwill
1,100,000
Cr COI
5,100,000
Dr Share capital (20% x 2,000,000) 400,000
Reserves
(20% x 3,000,000) 600,000
Cr NCI
1,000,000

NON-CONTROLLING INTEREST
Method: NCI at fair value:
Dr Share capital (80% x 2,000,000) 1,600,000
Reserves
(80% x 3,000,000) 2,400,000
Goodwill
1,100,000
Cr COI
5,100,000
Dr Share capital (20% x 2,000,000) 400,000
Reserves
(20% x 3,000,000) 600,000
Goodwill
275,000
Cr NCI
1,275,000

RESERVES
Reserves could be categorized into two which are capital
reserve and revenue reserve.
In preparing CFS, reserves need to be differentiated into
2, that are:
1. Pre-acquisition arise in subsidiarys account at the
acquisition date. It is not belong to the parent. Need
to be eliminated each time when preparing CFS.
2. Post-acquisition Profit/loss earned by the
subsidiary after the date of acquisition. Parent has
share in this reserve as its % of ownership interest in
the subsidiary.

RESERVES
Example 5:
LM Bhd acquired 100% interest in MN Bhd. MN Bhd.s
equity is as follows:
Date of Acq. (T0) 1 year after (T1)
Share Capital
Retained Earning
Revaluation Reserve

RM

RM

50,000
20,000
10,000

50,000
30,000
15,000

RESERVES
Solution:
Pre-acquisition Post-acquisition
Reserve (RM)
Reserve (RM)
Retained Earning
Revaluation Reserve

20,000
10,000

10,000
5,000

CONSOLIDATION OF ACCOUNTS
Example 6:
Naga Bhd acquired an 80% interest in Garuda Bhd
on 31 December 2012. The acquisition was paid
in cash RM300,000 and issued 600,000 new
ordinary shares of Naga Bhd for RM1.50 per share
with par value RM1.00.
The balance sheet of both company before the
date of acquisition are as follow:

CONSOLIDATION OF ACCOUNTS
Example 6 (cont..):

CONSOLIDATION OF ACCOUNTS
Example 6 (cont):
All Identifiable assets and liabilities of Garuda Bhd are stated
at fair value except land which was revalued at RM450,000.
The non-controlling interest was fair valued at RM300,000.
REQUIRED:
a) Calculate the cost of investment in Garuda Bhd and
prepare the related journal entries to record the cost of
investment.
b) Prepare the consolidation journal entries as at 31
December 2012.
c) Prepare a consolidated statement of financial position as at
31 December 2012.

End of the Chapter