2

Module 6: What you will learn

This module covers eight IFRS® Standards that concern the preparation of
consolidated financial statements and covers a few other issues relating to
investments within groups:
 IFRS 10 looks at the preparation of consolidated financial statements
 IAS 27 (revised 2011) considers accounting for investments in separate entity financial
statements
 IFRS 3 looks at the treatment of goodwill in the context of business combinations
 IFRS 11 defines joint arrangements (including joint ventures)
 IAS 28 (revised 2011) deals with accounting for both associates and joint ventures
 IFRS 12 covers disclosure of interests in other entities
 IAS 21 and IAS 29 deal with items related to foreign currency and what to do when
subsidiaries operate in hyperinflationary environments.
3

Table of contents
Module 6: What you will learn
IFRS 10 Consolidated Financial Statements
Mechanics of Consolidation (IFRS 10)
Exercise - IFRS 10 Question 1
Exercise - IFRS 10 Question 2
Exercise - IFRS 10 Question 3
IAS 27 Separate Financial Statements
IFRS 3 Business Combinations
Exercise - IFRS 3 Question 1
Exercise - IFRS 3 Question 2
Case study - IFRS 3
Case study - IFRS 3 Question 1
Case study - IFRS 3 Question 2
IAS 28 Investments in Associates and Joint Ventures
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IAS 21 The Effects of Changes in Foreign Exchange Rates
Exercise - IAS 21 Question
IAS 29 Financial Reporting in Hyperinflationary Economies
Frequently asked questions
Quick Quiz
 4

IFRS 10 Consolidated Financial Statements

IFRS 10 defines a subsidiary and identifies principles of consolidation.

Definition of a subsidiary
A subsidiary is defined as an entity controlled by another entity.
"An investor controls an investee if it has ALL the following:
 Power over the investee;
 Exposure, or rights, to variable returns from its involvement with the investee; and
 The ability to use its power over the investee to affect the amount of the investor's
returns."
(IFRS 10 paragraph 7)
Note that an entity could have power over the investee without holding a majority of the
voting rights. Returns could be either positive or negative and could include dividends,
change in the value of the investment, management or service fees etc.

Non-controlling interests (NCI)

Non-controlling interests are the "equity in a subsidiary not attributable, directly or
indirectly, to a parent."
(IFRS 10 Appendix A)
For example, if a parent owns 60% of a subsidiary, then the non-controlling interest
percentage is 40%.

Principles of consolidation
A parent prepares consolidated financial statements applying uniform accounting
policies throughout.
(IFRS 10 paragraph 19)

A parent should start to consolidate from the date control is obtained and cease when
control is lost. There is just one exemption available to this under IFRS 5. Consolidation
is not required where temporary control is acquired because the subsidiary is held
exclusively with a view to its subsequent disposal in the near future.
(IFRS 10 paragraph 20)
5

A partial disposal of an interest in a subsidiary in which the parent retains

control, does not result in a gain or loss but an increase or decrease in equity. Purchase of
some or all of the non-controlling interest is treated as a treasury share-type transaction and
accounted for in equity.
(IFRS 10 paragraph 23)

Once an investment ceases to fall within the definition of a subsidiary, the parent
company should derecognise the assets and liabilities of the subsidiary, derecognise the
carrying amount of any non controlling interest and recognise the consideration received.
Any investment retained in the subsidiary should be recognised at fair value, and treated
as an associate under IAS 28, as a joint arrangement under IFRS 11 or as an investment
under IFRS 9 as appropriate.
(IFRS 10 paragraph B98)

A parent is exempted from the preparation of consolidated accounts if it is itself a

wholly or partially owned subsidiary and the ultimate or any intermediate parent
company produces consolidated financial statements that comply with IFRS.
(IFRS 10 paragraph 4)

Any difference between the reporting date of the parent and the reporting date of a
subsidiary should not exceed three months.
(IFRS 10 paragraph B93)
 6

Mechanics of Consolidation (IFRS 10)

To consolidate the financial statements, items of assets, liabilities, income, expenses and
cash flows are combined. The parent's investment in the subsidiary is also eliminated
against the subsidiary's equity when it was acquired, goodwill is recognised and
intragroup transactions are eliminated.
(IFRS 10 paragraph B86)

Example: Simple consolidated statement of financial position

In this example, assume that P Co acquired 75% of S Co 4 years ago when S Co had
retained earnings of $10million. S Co's share capital has not changed since acquisition.

Adjust Adjust Consol

Parent $m Sub $m
1* $m 2** $m $m
Non-current assets 100 50 150

Investment in S Co 14 (14)

Goodwill 2 2

Current assets 21 10 31

135 60 183

Share capital 15 6 (6) 15

Retained earnings 60 30 (10) (5) 75

Non controlling interest 4 5 9

Liabilities 60 24 84

135 60 183
7

*In adjustment 1:
 The $14m cost of P Co's investment in S Co is eliminated against S Co's equity at
acquisition ($6m share capital and $10m retained earnings).
 As P Co only acquires 75% of S Co, there is a non-controlling interest. At the date of
acquisition this is recognised as 25% of S's net assets at acquisition ($6m share capital
and $10m retained earnings) so 25% x $16m = $4m.
 Goodwill arises because the cost of the investment plus the NCI ($14m + $4m =
$18m) is greater than the value of net assets acquired ($10m + $6m = $16m).

**In adjustment 2:
 S Co has made $20m retained earnings since acquisition. 25% of this belongs to the
NCI rather than P Co and this is reallocated here.
 8

Example: Simple Consolidated statement of financial position

During the year, P Co has sold $20m of goods to S Co. These have all been sold on to
third parties by the year end.

Parent $m Sub $m Adjust $m Consol $m

Revenue 250 150 (20) 380

Cost of sales (120) (90) 20 (190)

Gross profit 130 60 190

Operating expenses (70) (35) (85)

Operating profit 60 25 85

Finance costs (10) (5) (15)

Profit before tax 50 20 70

Income taxes (10) (8) (18)

Retained profit 40 12 52

Allocated to:

Parent 40 9 69

NCI 3 3

In the adjustment
 Intragroup sales of $20m are eliminated from P Co's revenue
 The cost of these items to S Co is eliminated from S Co's cost of sales

S Co's profit must be allocated between the parent and the NCI
 The NCI is allocated 25% of $12million i.e. $3million
 The parent is allocated 75% of $12million i.e. $9million
9

Exercise - IFRS 10 Question 1

Why are intragroup transactions eliminated from consolidated financial statements?

Exercise - IFRS 10 Answer 1

Model Answer

Consolidated financial statements present a group of companies as if they were a single

entity. A single entity cannot transact with itself or owe itself money. Therefore any such
transactions are eliminated on consolidation even though they are represented in the
individual financial statements of group companies. The result is that consolidated
financial statements show only transactions with companies and entities outside the group.
This enables users of financial statements to better understand the position and
performance of the group.

Exercise - IFRS 10 Question 2

Can non controlling interests be presented within shareholders' funds? You should refer to the
text of the Standard when answering all exercises

Exercise - IFRS 10 Answer 2

Model Answer
The Standard requires that non controlling interests are presented within equity separately
from the parent shareholders’ equity (paragraph 22).

Exercise - IFRS 10 Question 3

Jam Co acquired 80% of the shares of Marmalade Co on 1 July 20X5.

Extracts from the statement of profit and loss for both companies for the year ended 31
December 20X5 were as follows:

Jam Co $'000 Marmalade Co $'000

Profit after tax 8,400 4,200

Calculate the profit after tax that will appear in the consolidated statement of profit and loss for
the Jam group for the year ended 31 December 20X5
 10

Exercise - IFRS 10 Answer 3

Model Answer
In a consolidated statement of profit and loss, 100% of the subsidiary’s post-acquisition
profits are added to those of the parent, even though the parent only owns 80% of the
subsidiary’s shares. The non-controlling interest are allocated their share of profits for the
period below the 'profit for year' line.

Therefore the answer is 100% of the profits of the parent ($8.4 million) plus six months
profit of the subsidiary ($2.1 million) = $10.50 million.

IAS 27 Separate Financial Statements

IAS 27 prescribes the accounting treatment of investments in individual financial
statements of the investor.
In the separate financial statements of the investor, investments in subsidiaries,
associates and joint ventures are accounted for either:
 At cost, or
 In accordance with IFRS 9, or
 Using equity accounting.
(IAS 27 paragraph 10)

IFRS 3 Business Combinations

IFRS 3 requires that the acquisition method is applied to business combinations. It

specifies the measurement of acquired assets and liabilities including goodwill.

A business combination is a transaction or other event in which an acquirer obtains

control of one or more businesses (appendix A).

Acquisition method
All business combinations within the scope of IFRS 3 must be accounted for using
the acquisition method.
(IFRS 3 paragraph 4)
11

This requires:
1. Identification of the acquirer
2. Determination of the acquisition date being the date on which the acquirer obtains
control of the business. This is often, but not always, the date on which the acquirer
transfers consideration
3. Recognition and measurement of the identifiable assets acquired and liabilities
assumed and any non-controlling interest in the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase (negative
goodwill).
(IFRS 3 paragraph 5)
Goodwill

Goodwill is measured as:

$
Consideration transferred X

Non-controlling interest X

Fair value of identifiable net assets of acquire (X)

Goodwill/bargain purchase X/(X)

Consideration is measured at fair value. This includes contingent consideration. It does

not include acquisition costs, which must be recognised in profit or loss.
(IFRS 3 paragraphs 37, 39, 53)

The non-controlling interest may be measured at either:

 Fair value on the acquisition date, or
 As a proportion of the fair value of net assets on the acquisition date
This choice is available on a transaction-by-transaction basis.
(IFRS 3 paragraph 19)
 12

The identifiable assets acquired and the liabilities assumed should be measured at
their fair values. In general the identifiable assets acquired and liabilities assumed must
meet the definition of assets and liabilities per the Conceptual Framework.

(IFRS 3 paragraph 11, 18)

There are limited exceptions to the general recognition and measurement principles
above, which lead to some items being recognised when normally they wouldn't be, or
being recognised at an amount other than acquisition date fair value:
 Intangible assets of the acquiree are recognised if they are identifiable. The other IAS 38
criteria need not be met, resulting in the recognition of intangibles on consolidation that
are not otherwise recognised
 Contingent liabilities are recognised even if it is not probable that there will be an
outflow of economic resources (contrary to the guidance given in IAS 37)
 The relevant Standard is applied to measure and recognise deferred tax (IAS 12),
employee benefits (IAS 19), share-based payments (IFRS 2) and assets held for sale
(IFRS 5)

(IFRS 3 paragraphs B31, 23, 24, 26, 30, 31, 56)

Full goodwill and partial goodwill

As the non-controlling interest (NCI) can be measured in one of two ways, it follows
that the resulting goodwill is one of two possible values:
 Where the NCI is measured at fair value the resulting goodwill is 'full goodwill' i.e. it is
the goodwill of the acquiree attributable to the parent and the NCI
 Where the NCI is measured as a proportion of net assets, the resulting goodwill is 'partial
goodwill' i.e. it is the goodwill of the acquiree attributable to the parent only.
13

Accounting for goodwill or a bargain purchase

Goodwill is not amortised but must be tested for impairment annually in accordance
with IAS 36 Impairment of Assets. An impairment loss on goodwill is not permitted
to be reversed at a subsequent date.
Negative goodwill (a bargain purchase) must be recognised immediately in the
statement of profit or loss as a gain. Before concluding that negative goodwill has arisen,
however, IFRS 3 requires that the acquirer re-assess the situation to ensure the accuracy of
the negative goodwill.
(IFRS 3 paragraph 34)

Exercise - IFRS 3 Question 1

When should negative goodwill (referred to in IFRS 3 as a bargain purchase) be recognised as income?

Exercise - IFRS 3 Answer 1

Model Answer

The Standard requires that before negative goodwill is recognised as income, the
values given to the net assets acquired and the price paid are reaffirmed. If the values
are found to be correct, then the whole amount is recognised immediately in the statement
of profit or loss. The IFRS Standard wants to ensure that errors have not occurred in the
valuation and that the negative goodwill has arisen out of a bargain purchase or because of
the fair valuation of items that are not normally fair valued, e.g. deferred tax balances.

Exercise - IFRS 3 Question 2

Missile Co acquired a subsidiary on 1 January 20X3 for $2,145 million. The fair value of the net assets
of the subsidiary acquired were $2170 million. Missile Co acquired 70% of the shares of the subsidiary.
The non controlling interest was fair valued at $683 million.

Calculate goodwill based on the partial and full goodwill methods under IFRS 3.
 14

Exercise - IFRS 3 Answer 2

Model Answer

As you can see from the table below, goodwill is effectively adjusted for the change in
the value of the non controlling interest:

Missile Co

Partial goodwill $ Million

Identifiable net assets - fair value 2,170

Non controlling interest (30% x 2,170) (651)

Net assets acquired 1,519

Purchase consideration (2,145)

Goodwill 626

Full goodwill $ Million

Identifiable net assets - fair value 2,170

Non controlling interest (683)

Net assets acquired 1,487

Purchase consideration (2,145)

Goodwill 658
15

Case study - IFRS 3

This case study once again reviews Newberg Co and the details that were presented
to you in Module 5. Newberg Co is German. Its statements of profit or loss for 20X1 and
20X2 are shown right. On the following page you can see some accounting policies and
notes.

Consolidated statements of income (in billions Euro) 20X1 20X2

Sales 32 38

Cost of goods sold (10) (12)

Gross profit 22 26

Marketing and distribution (8) (10)

Research and development (5) (6)

Administrative (2) (2)

Other expenses (1) (1)

Operating profit 6 7

Non-operating income 3 3

Results before special charges and taxes 9 10

Special charges

Acquired in-process research and development - (9)

Restructuring - (6)

Taxes

On result before special charges (2) (2)

Benefit from special charges - 3

Net income (loss) 7 (4)

 16

Extracts from significant accounting policies and notes

Basis of preparation of financial statements. The consolidated financial statements of

the Newberg Group are prepared in accordance with International Financial Reporting
Standards.
Consolidation policy. The consolidated financial statements of the Group include the
parent and the companies which it controls (subsidiaries). Control is evidenced by power
over the investee, exposure, or rights, to variable returns from the investee and ability to
use that power to affect the amount of return to the investor. Control is normally
evidenced when the Group owns, either directly or indirectly, more than 50% of the
voting rights of a company’s share capital.
Changes in group organisation. On 24 June 20X2, a subsidiary of Newberg Co entered
into an agreement with the shareholders of Orange Co to purchase all of the issued and
outstanding common shares. Completion of the transaction was not possible until certain
regulatory clearances had been obtained. In view of the overall materiality of the
transaction and the advanced state of the integration planning, the consolidated financial
statements of the Group give effect to the acquisition of Orange Co from
31 December 20X2.
Obtaining clearance from the regulatory authorities caused a delay in completing
the transaction. These final clearances were received on 24 February 20X3 and the
purchase of the shares was completed on 10 March 20X3.

The combination was accounted for under the acquisition method of

accounting.Accordingly, the cost of the acquisition, including expenses incidental
thereto, was allocated to identifiable assets and liabilities and to in-process research and
development based on their estimated fair values. The portion of the acquisition cost
allocated to in-process research and development was charged in full against income.
This approach is consistent with the Group's accounting policy for research and
development costs. After consideration of these items, the excess of the acquisition cost
over the fair values was recorded as goodwill.

When you have studied the notes and table please go to the next page to see a question
relating to the case study.
17

Case study - IFRS 3 Question 1

At what date did Newberg Co start consolidating Orange Co? You should refer to the text of the Standard
when answering all exercises

Case study - IFRS 3 Answer 1

Model Answer
Newberg consolidated Orange from 31 December 20X2. That is, there was no effect on
the group operating income, but a full effect on the statement of financial position. It seems
a remarkable coincidence that there was no control on 30 December 20X2, but full control
before 1 January 20X3.

Case study - IFRS 3 Question 2

Is Newberg Co's treatment of purchased R&D in line with IFRS Standards? You should refer to
the text of the Standard when answering all exercises

Case study - IFRS 3 Answer 2

Model Answer
The acquired in-process R&D has been separately identified on 31 December
20X2. IFRS 3 requires an intangible item to be recognised as an asset separately from
goodwill if it meets the definition of an asset, is either separate or arises from contractual
or legal rights, the intangible should be carried at cost/valuation less amortisation and any
impairment losses. The intangible should not be expensed if it meets the definition in IAS
38/IFRS 3.
 18

IAS 28 Investments in Associates and Joint Ventures

IAS 28 defines an associate and prescribes the equity accounting method for associates
and joint ventures.
Definition of associate
The Standard defines an associate "as an entity over which the investor has
significant influence".
(IAS 28 paragraph 3)
This could include the power to participate in policy-making process, representation on the
Board of directors, or interchange of management personnel or provision of essential
technical information. This is presumed to exist where the investor owns 20% or more of
the voting power in the investee.
(IAS 28 paragraph 5)
Equity method
Associates and joint ventures are to be included in consolidated financial statements
using the equity method.
(IAS 28 paragraph 11)
The equity method requires that an investment is initially recorded at cost and is
subsequently adjusted to reflect the investor's share of the net retained post acquisition
profit or loss of the associate.
(IAS 28 paragraph 10)

The investment in an associate or joint venture is tested for impairment when there are
indications of impairment.
(IAS 28 paragraph 41A)

In the statement of profit or loss and other comprehensive income, share of profit after
tax and share of other comprehensive income of an associate or joint venture are
recognised.

(IAS 28 paragraph 27)

Unrealised profits and losses should be eliminated to the extent of the investor's interest
in the associate.
(IAS 28 paragraph 28)
19

IFRS 11 Joint Arrangements

IFRS 11 defines a joint arrangement, classifies joint arrangements as joint ventures and
joint operations and prescribes the accounting treatment for each.
Definitions

A joint arrangement is "an arrangement of which two or more parties have joint control."
(IFRS 11 Appendix A)

Joint control is "the contractually agreed sharing of control of an arrangement which

exists only when decisions about the relevant activities require the unanimous consent of
the parties sharing control"
(IFRS 11 Appendix A)

Note that joint control requires:

 A contractual arrangement, and
 Unanimous consent.

If either of these is absent, there is no joint control and IFRS 11 does not apply.
 20

Forms of joint arrangement

Joint arrangements are either joint ventures or joint operations. Joint arrangements
that are not structured through a separate entity are always joint operations.

Accounting treatment
 IFRS 11 requires interests in joint ventures to be equity accounted in accordance with
IAS 28
 Joint operators recognise their share of assets, liabilities, revenues and expenses in
accordance with applicable IFRS Standards.

IFRS 12 Disclosure of Interests in Other Entities

IFRS 12 contains disclosure requirements in respect of subsidiaries, associates and joint

ventures.

An entity should disclose information that helps the users of its financial statements
to evaluate the nature of, and risks associated with, its interests in other entities. In
order to achieve this objective the disclosure requirements introduced by IFRS 12 are
extensive. However the entity must also make any additional disclosures necessary to meet
the overall objective if those required by IFRS 12 and other Standards are not sufficient.
(IFRS 12 paragraph 1)

An entity should disclose the significant judgements and assumptions it has made in
determining whether it controls or has joint control or significant influence over an
entityand also in determining the type of joint arrangement where applicable.
(IFRS 12 paragraph 7)
The Standard outlines detailed disclosure provisions in relation to investments in each of
subsidiaries, associates, joint arrangements, and unconsolidated structured entities.
21

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 21 prescribes how to record foreign currency transactions in individual financial
statements and how the financial statements of a foreign operation should be translated
into a presentation currency for consolidation purposes.
Currency definitions

IAS 21 refers to two types of currency:

Functional currency. The currency of "the primary economic environment in which the
entity operates."
(IAS 21 paragraph 8)
The Standard contains guidance on how to determine this currency. It is the currency that
influences sales prices of goods and costs of inputs.

Presentation currency. The "currency in which financial statements are presented."

(IAS 21 paragraphs 8,9)
This may be any currency.
Foreign currency transactions
Transactions involving foreign currencies are recorded at the rate of exchange
ruling on the date of the transaction. If exchange rates do not fluctuate significantly
then an average rate may also be used.
At a subsequent reporting date:
 Non-monetary items (such as inventory and non-current assets) that are measured under
the cost model should continue to be recorded at that exchange rate;
 Non-monetary items that are measured under the fair value model should be recorded at
the exchange rate prevailing at the date of the latest revaluation to fair value;
 Monetary items (such as receivables and payables) resulting from past transactions should
be translated at the closing rate and the resulting gains and losses recognised in profit or
loss immediately

The settlement of a foreign monetary item (e.g. the payment of a supplier) is recorded at
the prevailing exchange rate on the date of settlement. Any exchange gain or loss is
recognised in profit or loss.

(IAS 21 paragraphs 21, 23, 28)

 22

Foreign operations
A foreign operation is a subsidiary, associate, joint venture, or branch whose activities
are based in a country other than that of the reporting entity.

The results of a foreign operation must be translated for the purposes of preparing
consolidated financial statements. The method is as follows:
 Assets and liabilities are translated at the closing rate
 Pre acquisition reserves are translated at the exchange rate on the date of acquisition
 Income and expenses are translated at the spot rate on the date of the transaction
(or average rate as an approximation)
 Exchange differences are recognised in OCI and accumulated in a separate component
of equity
 Goodwill is also translated at the closing rate and any exchange difference recognised
in OCI.
On disposal of a foreign subsidiary, the cumulative exchange differences held in a separate
component of equity are reclassified to profit or loss as part of the gain or loss on disposal.
(IAS 21 paragraphs 39, 40, 48)

Monetary items forming part of the net investment in a foreign operation

Where a reporting entity has, for example, made a loan to one of its foreign
subsidiaries and settlement is not likely in the future, this forms part of the net
investment in the foreign operation.

Exchange differences that arise on the retranslation of the loan (using the closing rate) in
the reporting entity's separate accounts are recognised in profit or loss; in the consolidated
accounts, they are however recognised in OCI and reclassified to profit or loss on the
disposal of the foreign operation.
23

Exercise - IAS 21 Question

On 18 August 20X5 Europe Co, which has the Euro as functional currency, bought a
property in India as a base from which to expand its Asian operations. The property costs
220million rupees. Europe Co applies the IAS 16 revaluation model to its property,
however a valuation exercise at 31 December 20X5 reveals that the fair value of the Indian
property is not significantly different from carrying amount. 200 million rupees of the
purchase consideration was paid by Europe Co immediately on 18 August; the remaining
amount was payable on 31 October 20X5. Exchange rates at relevant dates were:

18 August 20X5 85 rupee : €1

31 October 20X5 87 rupee : €1
31 December 20X5 88 rupee: €1
 24

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 29 prescribes the method to restate the financial statements of an entity operating in
a hyperinflationary economy.

This Standard should be applied by any entity that reports in the currency of a
hyperinflationary economy.

Hyperinflation is not specifically defined, but an indication would be where there is a

cumulative inflation rate of one hundred percent over three years. For most countries this
would not apply at present. However, groups might have a subsidiary in such a country,
which is why this Standard has been included here in this module on group accounting.

Restatement
IAS 29 requires the financial statements of a hyperinflationary enterprise to be
restated into current measuring units.
(IAS 29 paragraph 8)

If the entity is using historical cost financial statements, this suggests that the
application of a general price index to non-monetary items is required. Even those
entities using current cost accounting would need to re-express certain numbers using a
measuring unit current at the reporting date.

A gain or loss on the net monetary position should be included in profit or loss and
disclosed separately.
(IAS 29 paragraph 9)
25

Frequently asked questions

1. When a European company adopts IFRS Standards for its consolidated statements, does
this change its tax bills?

Answer

Possibly; in the UK the tax authorities allow IFRS Standards to be used for tax
purposes, however you should remember that tax authorities tax individual companies,
not groups. Therefore an impact is only likely to be felt if group companies' separate
financial statements are prepared in line with IFRS Standards.

2. If a foreign subsidiary is using non-IFRS Standard policies, what happens on consolidation?

Answer

The policies have to be corrected for consolidation, usually by consolidation

adjustments rather than by changing the foreign statutory accounts.

3. What are reclassification adjustments (i.e. recycling)?

Answer

Reclassification is the practice of reporting an amount in other comprehensive

income in one period and then "recycling" or reporting it again through profit or
loss in another period. An example of this is the recycling of exchange differences on
the translation of a foreign subsidiary that are held in equity through profit or loss when
it is sold.

4. Do the parties to a joint venture each need to own exactly the same proportion of shares?

Answer

No. For example, there is nothing to stop a 30/30/40 or some other arrangement. The
key point is that to have joint control, decisions regarding the entity must require the
unanimous consent of all parties that together control the arrangement.
 26

Module 6 quick quiz

27

Question 1

Netley Co purchased the whole of the share capital of Orell Co for $2,500,000 cash.
Shareholders’ funds of the two companies at the date of the purchase were as follows:

Netley Orell
$ $
Share capital 5,000,000 2,000,000
Retained earnings 600,000 250,000

The fair value of Orell Co’s tangible assets exceeded carrying amount by $150,000. What
balance should appear in the consolidated statement of financial position of Netley Co for
goodwill at aquisition?
 28

Question 2

One third of the shares, and also voting rights, in Snow White Co are held by each of
Sneezy Co, Sleepy Co and Dopey Co.

Which of the following statements is true?

The correct answer is C

In A there is a specified minimum proportion of voting rights required for decision
making (60%) that could be achieved by more than one combination of the three
shareholders. This is not a joint arrangement unless the agreement specifies which parties
are required to agree unanimously. Option B allows decisions to be made without the
agreement of Sneezy Co.
29

Question 3

Harwich Co holds 70,000 $1 preference shares in Sall Co.

These are non-voting but rank equally with the ordinary shares in a winding-up.

Felixstowe Co holds 20,000 $1 voting ordinary shares in Sall Co .

The share capital of Sall Co is made up of the following:

$
100,000 preference shares of $1 each 100,000
30,000 ordinary shares of $1 each 30,000
130,000

Sall Co is a subsidiary undertaking of:

The correct answer is C

Control is established where an investor has power over an investee, exposure to variable
returns and the ability to use its power to affect the variable returns.

Power is the current ability to direct relevant activities and can be established through
ownership of voting rights.
 30

Question 4

What is disclosed in the consolidated statement of financial position of an investor when

the equity method is used to account for associates?

The correct answer is B

Investment in associate at cost plus /minus the group's share of the associate's retained
post acquisition profits or losses (less any impairment losses).
31

Question 5

Inveresk Co has equity shareholdings in three other companies, as shown below, and has
a seat on the board of each.
Inveresk Other shareholders
Raby Co 40% No other holdings larger than 10%
Seal Co 30% Another company holds 60% of Seal Co’s equity
Toft Co 15% Two other companies hold respectively 50% and 35% of Toft
Co’s equity, and each has a seat on its board. Inveresk Co exerts
significant influence over Toft Co.

The associated undertakings of Inveresk Co, are:

The correct answer is C

Raby Co - over 20%, significant influence demonstrated.
Seal Co - over 20%, but no significant influence as another party has dominant influence.
Toft Co - less than 20%, but has a significant influence.
Therefore Raby Co and Toft Co are associated undertakings of Inveresk Co.