Consolidation Notes: Lecture 7 Lecture Notes

Consolidation Lecture 7
Notes Complex Group Structures

INTRODUCTION
The complex group structures exist where subsidiary of an entity holds or owns shares in another
entity which makes that other entity the subsidiary of the parent company as well. Such structures
can be classified as vertical groups or mixed groups.

VERTICAL GROUPS
Sub-subsidiary is subsidiary of subsidiary and, of course, the parent entity has control over
subsidiary and sub-subsidiary both. A vertical group arises where parent has a subsidiary and
sub-subsidiary as well.

Entity A (Parent)

70% acquired on 01.01.2010

Entity B (Subsidiary)

60% acquired on 01.01.2009

Entity C (Sub-subsidiary)

MIXED GROUP
In such structure, the parent entity has a direct controlling interest in at least one subsidiary and in
addition to this; the parent entity and the subsidiary together hold a controlling interest in a further
entity.

Entity X (Parent)

60% acquired on 01.01.2010

30% acquired on 01.01.2010

Entity Y (Subsidiary)

30% acquired on 01.01.2009

Entity Z (Sub-subsidiary)

CONSOLIDATION TECHNIQUES
As parent entity has control over subsidiary and sub-subsidiary, both should be consolidated by
the parent. The group accounts of the ultimate parent entity must include the underlying net assets
and earnings of both the subsidiary and sub-subsidiary entities. The basic consolidation
techniques are the same as for simple group structures. However, for indirect subsidiary there are
certain slight more complicated calculations.

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Consolidation Notes: Lecture 7 Lecture Notes

1. ACQUISITION DATE
It is important to distinguish between pre-acquisition reserves and post-acquisition reserves, so is
the important to determine the acquisition date for all subsidiaries.

The acquisition date is when control is achieved. This implies that acquisition date of:
(a) subsidiary is when controlling interest is acquired in the subsidiary.
(b) sub-subsidiary is same as (a) above if subsidiary already had controlling interest in sub-
subsidiary when acquired by parent.
(c) sub-subsidiary is when it was acquired by subsidiary if subsidiary acquired it after being
acquired by the parent.

2. EFFECTIVE SHAREHOLDING & NCI

All consolidation adjustment and calculations (except indirect investment as this is an asset of
direct subsidiary) for indirect subsidiary are made on the basis of effective shareholding.

As for afore-mentioned vertical group structure the Group effective shareholding and NCI shall
be calculated as follows:

Subsidiary Acquisition Date Effective Group Share NCI

B 01.01.2010 Direct 70% 30%
C 01.01.2010 Indirect 70% x 60% = 42% 58%

As for afore-mentioned mixed group structure the Group effective shareholding and NCI shall
be calculated as follows:

Subsidiary Acquisition Date Effective Group Share NCI

Y 01.01.2010 Direct 60% 40%
Z 01.01.2010 Direct + Indirect 30% + (60% x 30%)=48% 52%

3. INDIRECT INVESTMENT
The indirect investment is investment by subsidiary in sub-subsidiary. As this figure is taken from
subsidiary’s SFP, it has to be apportioned as per subsidiary’s group share and NCI share
percentages. The group share is to be used for calculation of goodwill of sub-subsidiary and NCI
share is to be added to NCI of subsidiary.

NCI (Subsidiary) XX
(-) 1
Investment in sub-subsidiary XX
Indirect investment
Indirect investment x N% of subsidiary

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Consolidation Notes: Lecture 7 Lecture Notes

EXAMPLE 7A
The draft statement of financial positions of A, B and C as at 31 December 2004 are as follows:
A B C A B C
$000 $000
PPE 180 80 80 Share Capital 200 100 50
Investment in subsidiary 120 80 Retained Earnings 100 60 30
10% Loan Notes 70 10 15
Current assets 100 40 30 Current Liabilities 30 30 15
400 200 110 400 200 110
You ascertain the following:
 A acquired 75,000 $1 shares in B on 1 January 2004 when the retained earnings of B
amounted to $40,000
 B acquired 40,000 $1 shares in C on 30 June 2004 when the retained earnings of C
amounted to $25,000; they had been $20,000 on the date of A’s acquisition of B.
 It is group policy to value the NCI using the proportion of net assets method.
 Goodwill has suffered no impairment.
Required:
Produce the consolidated SFP of the A group at 31 December 2004.

EXAMPLE 7B
The following are the summarized statements of financial position at 31 December 2004 for J
group companies:
J Ltd K Ltd L Ltd
$
Property, plant and equipment 140,000 61,000 170,000
Investments 200,000 65,000

Current assets 60,000 34,000 50,000

400,000 160,000 220,000

Ordinary share capital ($1 shares) 200,000 80,000 100,000

Retained Earnings 150,000 60,000 80,000

Long term loans 30,000 15,000 10,000

Current liabilities 20,000 5,000 30,000
400,000 160,000 220,000
The following points are relevant:
 On 1 January 2003 K acquired 35,000 ordinary shares in L at a cost of $65,000 when the
retained earnings of L amounted to $40,000
 On 1 January 2004 J acquired 64,000 shares in K at a cost of $120,000 and 40,000 shares
in L at a cost of $80,000. The retained earnings of K and L amounted to $50,000 and
$60,000 respectively on 1 January 2004.
 The fair value of NCI in K at that date was $27,000 and the fair value of NCI of the whole
(direct and indirect) NCI in L at that date was $56,000. It is group policy to value the NCI
using the full goodwill method. Goodwill has not been impaired.
Required:
Produce the consolidated SFP of the J group.

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ANSWER 7A
A Group
SFP as at 31 December 2004
$000 $000
PPE $180+80+80 340
Goodwill W3 30 370

Current assets $100+40+30 170

540

Share Capital 200

Retained earnings W6 118
318
NCI W5 52 370

10% Loan Notes $70+10+15 95

Current Liabilities $30+30+15 75

540

W1 GROUP STRUCTURE
B Subsidiary Acquisition: 1 Jan 2004 Group 75% NCI 25%
C Subsidiary Acquisition: 30 Jun 2004 Group 75% x 80% = 60% NCI 40%
$000

W2 NET ASSETS (of subsidiaries) AT ACQUISITION B C

Equity share capital 100 50
Retained earnings (pre) 40 25
140 75

W3 GOODWILL B C
Investment [120] ; [80 – 20 J1] 120 60
Less: [140 W2 x 75% W1] ; [75 W2 x 60% W1] (105) (45)
15 15

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

B C
Balance 20 5
20 5

W5 NON CONTROLLING INTEREST B C

[140 W2 x 25%] ; [75 W2 x 40%] 35 30
[20 W4 x 25%] ; [5 W4 x 40%] 5 2
J1 (20)
20 32

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W6 GROUP RESERVES RE
Parent reserves 100
- -
100
B [20 W4 x 75%] 15
C [5 W4 x 60%] 3
118

NCI (B) 20
(-) 1
Investment in C (sub-subsidiary) 20
Indirect investment
80 x 25% = $20

ANSWER 7B
J Group SFP as at 31 December 20X4
$ $
Property, plant and equipment $140,000+61,000+170,000 371,000
Goodwill W3 45,000 416,000

Current assets $60,000+34,000+50,000 144,000

560,000

Share Capital 200,000

Retained earnings W6 171,600
371,600
NCI W5 78,400 450,000

Long term loan $30,000+15,000+10,000 55,000

Current Liabilities $20,000+5,000+30,000 55,000

560,000

W1 GROUP STRUCTURE
K Subsidiary Acquisition: 1 Jan 2004 Group 80% NCI 20%
L Subsidiary Acquisition: 1 Jan 2004 Group 40% + (75% x 80%) = 68% NCI 32%
$

W2 NET ASSETS (of subsidiaries) AT ACQUISITION K L

Equity share capital 80,000 100,000
Retained earnings (pre) 50,000 60,000
130,000 160,000

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W3 GOODWILL K L
Investment [120,000];[80,000 + 65,000 – 13,000 J1] 120,000 132,000
Less: [130,000 W2 x 80%] ; [160,000 W2 x 68%] (102,000) (108,800)
16,000 23,200
FV of NCI 27,000 56,000
[130,000 W2 x 20%] ; [160,000 W2 x 32%] (26,000) (51,200)
1,000 4,800
17,000 28,000

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

K L
Balance 10,000 20,000
10,000 20,000

W5 NON CONTROLLING INTEREST K L

[130,000 W2 x 20%] ; [160,000 W2 x 32%] 26,000 51,200
NCI goodwill W3 1,000 4,800
[10,000 W4 x 20%] ; [20,000 W4 x 32%] 2,000 6,400
J1 (13,000)
16,000 62,400

W6 GROUP RESERVES RE
Parent reserves 150,000
- -
150,000
K [10,000 W4 x 80%] 8,000
L [20,000 W4 x 68%] 13,600
171,600

NCI (K) 13,000

(-) 1
Investment in L (sub-subsidiary) 13,000
Indirect investment
65,000 x 20% = $13,000

Dated: 19 September 2016

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