APPLIED FINANCIAL

ACCOUNTING II
FAC4862/4
TUT 104 classes
Presented by:
Tosca van Mourik

1
 Topics for this session
• Related parties (IAS 24) – self study
• Change in degree of control

2
 TUT 104
Change in degree of control

3
 CTA LEVEL 1 – FAC 4862

– Subsidiary (IFRS 10) Investment (IFRS 9)

(disposal of controlling interest)

– Investment (IFRS 9) Subsidiary (IFRS 10)

(acquisition of controlling interest)

– Subsidiary (IFRS 10) Subsidiary (IFRS 10)

(acquisition/disposal of partial interest in subsidiary)

– Disposal of entire interest in subsidiary

4
 CTA LEVEL 2 – FAC 4864
– Associate / JV (IAS 28) Investment (IFRS 9)
(disposal of significant influence)
– Subsidiary (IFRS 10) Associate / JV (IAS 28)
(disposal of controlling interest, and only have
significant influence)
– Investment (IFRS 9) Associate / JV (IAS 28)
(acquisition of significant influence)
– Associate / JV (IAS 28) Subsidiary (IFRS 10)

 Rights issues (only were control stays)

 Share buy-backs (only were controls stays)
5
Just to refresh how each type of
investment is held in the group’s
books:
 Accounting for investment per entity:
IFRS 9 equity investment
Parent Investment Group

• At FV through P/L • No information • At FV through P/L

[IFRS 9.4.1.5] required [IFRS 9.4.1.5]
• At FV through • At FV through
OCI OCI
[IFRS 9.5.7.5] [IFRS 9.5.7.5]

Adjust investment to fair value at year end

7
 Accounting for investment per entity:
Investment in subsidiary (IFRS 10)
Parent Subsidiary Consolidation

• At cost • 100% of trial • Trial balance of

[IAS 27.10(a)] balance parent + sub
• Eliminate at
acquisition equity
• All assets/liabilities
at FV (IFRS 3)?
• Account for NCI’s
share
• Eliminate intragroup
transactions

How will different policies of the parent affect consolidated f/s?

8
 Accounting for investment per entity:
Investment in associate / joint venture

Associate /
Parent Group
JV
• At COST • Share of profit after • Trial balance of
[IAS 27.10(a)] tax parent ONLY
• Share of other • COST + share of
comprehensive P/L + share of OCI
income – dividend received
• Dividend paid
Equity method

How will different policies of parent affect consolidated f/s?

9
First we look at will be change from Subsidiary
to IFRS 9 investment
• 2 approaches
• UNISA approach – No consolidation (follow the
same approach as “equity accounting” + reverse
of profit in separated and calculate consolidation
profit)
• Alternative approach – Do full consolidation with
elimination of at acquisition, allocate profit to NCI,
then the IFRS 10.B98 will be in journal, and the
consolidated profit will be balancing figure.
• Last journal – reverse the day 1 profit or loss
which was done in separate. (Investment was @
cost and now it will be FV)
Subsidiary becomes IFRS 9 investment:
Subsidiary measured at cost

Recognise
profit for NOT NCI (SFP)
period = Why?
while sub
Transfer
cumulative
gains or losses Calculate
within equity gain in
(IFRS 10.B99) Consolidated separate f/s
f/s

Reverse fair
Reverse gain in
value adjustment
separate +
on remaining
recognise
interest
consolidated gain
processed in
(IFRS10.B98)
separate f/s
11
Loss of control – Subsidiary to IFRS 9
 UNISA “Equity
approach accounting” –
Bring in only our
share of opening
RE and M2M
Required
 Allocate NCI
their profit

Day 1 gain (P/L) 75 000

[135 000 – (300 000 x12/60) 75 000

Income tax expense (P/L) 16 800
Any questions?

20
IFRS 9 investment becomes subsidiary
(IFRS 9 investment at FV through OCI)

Separate financial statements

Remeasure investment at FV on date of

acquisition ito IFRS 3.42

Account for further interest

(Dr Investment, Cr Bank)

21
 IFRS 9 investment becomes subsidiary
(IFRS 9 investment at FV through OCI)
ALL adjustments
from date of
Consolidated financial statements purchase of IFRS 9
1 investments to date
of control
Transfer FV adjustments previously recognised
in OCI to RE at group level ito IFRS 9.B5.7.1
(ONLY if elected)

2
Consolidate
• At acquisition elimination journal
• IFRS 3 adjustments
• Intragroup transactions
• Account for NCI’s share

22
 IFRS 9 investment becomes a subsidiary
(TUT 104 example)
Blue Ltd acquired a 10% interest in Red Ltd on 30 November 2015 for R85 000
cash, which was deemed the fair value on that date.

On 30 June 2016 Blue Ltd acquired a further 70% controlling interest in Red Ltd
for a cash amount of R300 000. All assets/liabilities were regarded to be fairly
valued on this date. From this date Blue Ltd has control over Red Ltd as per
definition.

The fair value of the previously held investment was as follows on the different
dates:
R
31 December 2015 105 000
30 June 2016 130 000

The fair value of the shares was R4.30 per share on 31 December 2016.

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The equity of Red Ltd was as follows on the different dates:

30/6/2016 31/12/2016
Share capital 150 000 150 000
Retained earnings 350 000 450 000

Additional information

1. Blue Ltd elected to measure investments in subsidiaries at cost and all other
investments in terms of IFRS 9 in its separate financial statements and irrevocably
elected to present subsequent changes in the FV of the investment in OCI in a mark-
to-market reserve.

2. Red Ltd paid a dividend of R7 500 on 31 December 2015.

3. Blue Ltd elected to transfer any cumulative gains or losses within equity in terms of
IFRS 9.B5.7.1

4. Blue Ltd elected to measure NCI at the proportionate share of the subsidiary’s net
identifiable assets for all acquisitions.

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REQUIRED

(a) Prepare the journal entries in the separate financial

statements of Blue Ltd for the year ended 31 December
2016.

(b) Prepare the pro forma consolidation journal entries for the
Blue Ltd Group for the year ended 31 December 2016.

25
 Equity analysis of Red Ltd

Cost of 50%
acquired

FV of
previously held
interest

26
 IFRS 9 investment becomes a subsidiary
 Blue Ltd’s accounting policy is to measure the subsidiary at cost

30/11/2015 31/12/2015 30/6/2016 31/12/2016

Date of initial Year end Date control Year end

investment is obtained

Transfer cumulative FV Investment now

adjustments to retained held at cost i.t.o
earnings (within equity) IAS 27.10(a)

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 Journals in separate f/s Consolidation journals
Dr/(Cr) Dr/(Cr)
Investment in Red Ltd 85 000
Bank (85 000)
(original transaction on 30 Nov 2015)

Investment in Red Ltd 1

(105 000 – 85 000) 20 000 Mark-to-market (SCE) 34 920
Mark-to-market (SCE) (15 520) [(130 000 – 85 000 = 45 000) – (45 000
x 28% x 80%)]
Deferred tax (SFP) (4 480)
(20 000 x 28% x 80%) Retained earnings (SCE) (34 920)
(FV of IFRS 9 investment at year end)
Transfer of cumulative FV adjustments
Investment in Red Ltd 25 000 (after tax) within equity (IFRS 9.B5.7.1)
(130 000 – 105 000)
Mark-to-market (OCI) (19 400)
Deferred tax (SFP) (5 600) FV from date of initial investment
(25 000 x 28% x 80%) (30/11/2015) (R85 000) to date of
acquisition (30/6/2016) (R130 000)
FV adjustment on
date of acquisition 28
 Journals in separate f/s Consolidation journals
Dr/(Cr)
Investment in Red Ltd 300 000 2 Dr/(Cr)
Bank (SFP) (300 000) Share capital (SCE) 150 000
Cash amount paid RE (SCE) 350 000
for additional 50%
Goodwill (SFP) 30 000
Cost of R200 000 PLUS NCI (SFP) (100 000)
fair value of previously Investment (SFP) (430 000)
held interest of R120 000
Bank (SFP) 6 000 NCI (P/L) 21 500
Dividends received (6 000) NCI (SFP) (21 500)
(P/L)

Dividends received (P/L) 6 000

NCI (SFP) 1 500
NCI in profit from Dividends paid (SCE) (7 500)
30/6/2015 (date of control
obtained) to 31/12/2015 Elimination of
intragroup dividend 29
 What is the balance of the investment on
31 December 2016?

Separate financial statements Consolidated financial statements

R R
Balance of IFRS 9 investment
on 31 Dec 2015 Investment in separate F/S 430 000
(85 000 + 20 000) 105 000
Fair value adjustment 25 000
Further acquisition 300 000 Eliminate cost (J3) (430 000)
Balance on 30 Jun 2016 430 000 Balance on 31 Dec 2016 -
Fair value adjustment -
Balance on 31 Dec 2016 430 000 TEST =
correct

30
Any questions?

31
 No change in degree of control

Acquisition or disposal of interest whereby

subsidiary remains a subsidiary

NO CHANGE IN DEGREE OF CONTROL

IFRS 10.23

Recognise directly in equity the difference between consideration

paid/received and amount by which NCI are adjusted

EQUITY TRANSACTION
IFRS 10.B96

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Change in ownership (IFRS 10.B96)

Year
end
 Did they lost
This is profit for 3
control?
months (1 350 000 –
Are these journals
1 025 300 + 25 000)
correct?
x 3/12
Required
What would happen if the interest decreased, but
control was not lost?

 Still follow the same steps as in previous example

 NCI would now increase, NCI would thus be credited,

and the investment debited. The balancing leg would
be the change in ownership account

 If there’s a profit on disposal in the separate f/s =

reverse on group level (calculated as proceeds less
historic cost)

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 Summary: change in degree of control

• When to calculate profit or loss?

 Disposal of interest (loss of control) IFRS 10.B98

• When to calculate amount to be recognised in equity

 Disposal or acquisition of partial interest IFRS 10.B96

• When to fair value existing shareholding?

 Acquisition of controlling interest IFRS 3.42

41
Any questions?

42
 Question 1 – FAC4864 TUT104
Lost of
SSA purchased 110 000 ordinary share in ESC on 1 September 2010. control
SSA exercised control over ESC. 110 000 / 200 000 = 55% interest
Purchase consideration of R480 000 was paid on 1 Sept 2010. This amount
included R20 000 legal fees for the drafting of the purchase agreement.

Acquisition date
Mark-to-market reserve relates to FV gains on the financial assets.
All the assets were fairly valued except for plant.
Carrying amount was R1 300 000 and fair value was R1 150 000. Plant
was originally purchased for R1 950 000 on 1 Jan 2008. Remaining useful
life is 8 years, and residual value was Rnil on 1 Jan 2008. These
remained unchanged at acquisition date. Remaining useful life is 64
months at acquisition date.
SSA lost control over ESC when it sold 80 000 of the ordinary shares for
R560 000 on 31 Dec 2011.
8 months into the
year
Additional information
• SSA elected to measure NCI at FV. (R4 per share at acquisition)
• Investments in subsidiaries is measured at cost
• Income and expenses earned evenly throughout the year
• Fair value adjustment on financial assets through P/L in separate FS
• Fair value per share on date of disposal R6,50
• Fair value per share at year end R6,45
 Required:
Prepare the pro forma journal entries to account for the investment in
ESC in the financial statements of the SSA Group for the year ended
30 April 2012
1 May 2011 31 Dec 2011 30 April 2012
8 months 4 months

Lost control =
Investment in subsidiary Investment in IFRS 9
IFRS 10.B98
2 approaches, EITHER Fair value adjustments
Unisa approach or 80 000 / through P/L
alternative approach 200 000 =
40% Already done in
separate fs, therefore
Remaining: not again in Group
30 000 /
200 000 =
15%
 Solution
Dr Cr
R R
Investment in ESC 67 925
Retained earnings – beginning of year 65 175
Mark-to-market reserve 2 750
(Recognition of opening equity relating to
subsidiary)

Investment in ESC 150 425

Non-controlling interests (P/L) 123 075
Profit for the period (P/L) Allocate profit and 273 500
OCI to parent and
NCI for 8 months
Investment in ESC 16 500
Non-controlling interests (OCI) 13 500
Mark-to-market (OCI) 30 000
 NCI is measured at FV, but we
have given the fair value at
acquisition, if not, purely take
the R1 247 000 x 45%

Or: R1 854’ + 255’ + 157’ + 95’ + 175’ – 1 200’ – 76’ = R1 260’ + GW

R68’ – (remaining balance of FV of plant) (-150’ + 42’ + 18,75’ –
5,25’ + 18,75’ – 5,25’)
 Dr Cr
R R
Gain on share disposal (separate) 225 455
Gain on share disposal (consolidated) 60 150
Investment in ESC 165 305

Fair value adjustment (P/L) / Day 1 loss 69 545

Investment in ESC
((195 000 – (15/55 x 460 000) 69 545
Income tax expense (P/L) 15 578
Deferred tax (SFP) (69 545 x 28% x 80%) 15 578

Mark-to-market reserve (SCE) (16,5’ + 2,75’) 19 250

Retained earnings (SCE) 19 250
Transfer of M2M in terms of IFRS 10.B98(c) and
IFRS 10.B99
Alternative approach
 CTA LEVEL 2 – FAC 4864
– Associate / JV (IAS 28) Investment (IFRS 9)
(disposal of significant influence)
– Subsidiary (IFRS 10) Associate / JV (IAS 28)
(disposal of controlling interest, and only have
significant influence)
– Investment (IFRS 9) Associate / JV (IAS 28)
(acquisition of significant influence)
– Associate / JV (IAS 28) Subsidiary (IFRS 10)

54
 Change in degree of control: Disposals

Type of disposal Effect

1. Loss of control IFRS 10.25 and
IFRS 10.B98
2. Disposal where no loss of control/ IFRS 10.23 and IFRS
significant influence occurs 10.B96, IAS 28.25
3. Loss of significant influence IAS 28.22
4. Loss of joint control of joint operation IFRS 11

55
Associate/JV becomes an IFRS 9 investment:
Associate measured at cost
Share of P/L, OCI for
Equity account for period while an associate period while associate

(FV of remaining
Recognise P/L on disposal in terms of IAS 28.22 interest + consideration
and reverse profit in separate f/s received) – CA of
investment at date of
disposal

Reverse fair value adjustment on remaining

interest on date of sale processed in separate f/s

Reclassifications required by other IFRSs

(to P/L or retained earnings) on disposal date
56
 Subsidiary becomes an associate:
Subsidiary measured at cost

Recognise
profit for
period while
sub
Reverse gain in
separate +
Equity account the recognise
associate consolidated
Consolidated gain
f/s (IFRS10.B98)

Transfer amounts
previously recognised in
OCI to RE when control
is lost
(IFRS 10.B99)
62
Loss of
control
Required
Profit for year:
R72 000
 UNISA
Approach
Alternative
Approach
Any questions?

75
Change in degree of control: Acquisitions

Type of acquisition Standard

1. Step acquisition (control obtained) IFRS 3.41 and 3.42
2. Obtain significant influence IAS 28.6
3. Increase in interest that do not result IFRS 10.23 and
in a change in the degree of control/ IAS 28.25
significant influence.

76
IFRS 9 investment becomes an associate

• The investment was previously held in terms of IFRS 9

• Transfer FV adjustments from initial date of investment to
date of significant influence to RE in terms of
IFRS 9.B5.7.1 if elected
• Cost of associate is fair value of original interest PLUS
consideration paid for additional interest.
• Use equity method from date of significant influence.
(Start with cost + share of P/L + share of OCI – dividends)

77
Associate becomes a subsidiary:
Associate measured at cost

Equity
account for
period while
associate

Fair value
Consolidate CONSOLIDATED adjustment in P/L
subsidiary F/S in terms of IFRS
3.42 and IAS 28.22

Amounts
previously
recognised in OCI
reclassified
[IAS 28.22(c)]
78
 Question 2 – FAC4864 TUT104
Invesco acquired 40% interest in BB4U for an amount of R720 000, payable
immediately on 31 October 2011. All assets were regarded as fairly valued.
Invesco will have 2 out of the 5 seats of board of directors.
Invesco has option to acquire a further 10% interest in BB4U from 30 June
2012 for R440 000, and this will entitle them to an additional seat on the board.
Board of directors is the highest decision making body and decisions are taken
by way of majority vote in the directors’ meetings.
Assoc Sub
Net assets of BB4U, fairly valued were as follows: acquisition
acquisition
31 Oct 2011 31 Dec 30 Jun 2012 31 Dec 2012
2011

Share capital (200’ shares) 800 000 800 000 800 000 800 000

Retained earnings 685 000 935 000 1 218 000 1 569 000

Mark-to-market reserve 85 000 125 000 180 000 245 000

Revaluation surplus 180 000 255 000 315 000 280 000

1 750 000 2 115 000 2 513 000 2 894 000

On 1 May 2012 the shareholders approve the resolution to acquire the
additional 10% interest as per acquisition agreement which exercised on
30 June 2012. Therefore Invesco were entitled to the additional seat on the
board of directors from 30 June 2012 and also gain control on that date.
BB4U has a subscriber base of 300 000 customers which was valued at
R1 650 000 on 30 June 2012. Useful life is 4 years
Share price of BB4U was R22 per share on 30 June 2012.

Additional information
• NCI is measured at proportionate share
• Investments in subsidiaries and associates are measured at cost
• Intangible assets are accounted in terms of cost model

Required:
Prepare the pro forma consolidation entries to account for the investment in
BB4U for the year ended 31 December 2012
 Dr Cr
Investment in BB4U (SFP) 146 000
Retained earnings (SCE) (935’ – 685’) x 40% 100 000
Mark-to-market reserve (SCE) (125’ – 85’) x 40% 16 000
Revaluation surplus (SCE) (255’ – 180’) x 40% 30 000
Share of reserves at the beginning of the year

Investment in BB4U (SFP) 159 200

Share of profit of associate (P/L)(1 218’ – 935’) x 40% 113 200
Share of OCI of associate (OCI) 46 000
[M2M (180’ – 125’) x 40% = 22 000 +
RS (315’ – 255’) x 40% = 24 000]
Share of profit and OCI for current year to 30 June 2012

Investment in BB4U (SFP) 734 800

Remeasurement gain (P/L) 734 800
CA of Assoc
Fair value of 40% Cost R720 000
interest = 200’ x 40% x Share of reserves R 146 000
R22 = R 1760 000 Share of profit and OCI R159 200
= R1 025 200
 Dr Cr
Mark-to-market reserve (SCE) (16 000 + 22 000) 38 000
Revaluation reserve (SCE) (30 000 + 24 000) 54 000
Retained earnings (SCE) 92 000
Reclassification of previous recognised OCI items to
retained earnings on the date of acquisition of control

Share capital (SFP) 800 000

Retained earnings (SFP) 935 000
Profit for the year (P/L) (1 218’ – 935’) 283 000
Mark-to-market reserve (SCE) 125 000
Mark-to-market reserve (OCI) (180’ – 125’) 55 000
Revaluation reserve (SCE) 255 000
Revaluation reserve (OCI) (315’ – 255’) 60 000
Intangible asset (SFP) 1 650 000
Deferred tax (SFP) (1 650’ x 28%) 462 000
NCI (SFP) 1 850 500
Investment in BB4U (SFP) (440’ + (R22 x 80’) 2 200 000
Goodwill(SFP) 349 500
 Dr Cr
NCI (P/L) [(1 569’ – 1 218’ – (1 188/4 x 6/12)] x 50% 101 250
NCI (OCI) [M2M (245’ – 180’) + RS (280’ – 315’)] x 15 000
50%
NCI (SFP) 116 250
Share of profit and OCI to NCI from 30 June 2012 to
31 December 2012

Amortisation: Intangible asset (P/L) (1 650’ /4 x 6/12) 206 250

Accumulated amortisation (SFP) 206 250
Deferred tax (SFP) (206 250 x 28%) 57 750
Income tax expense (P/L) 57 750