SBR- C11- Basic Groups

C11- BASIC GROUPS
PRESENTED BY:
HOLLEN KAMANGA
EXAM TIP
• Section A Question 1 of the exam will be based on the financial statements of

group entities, or extracts from them
• The chapter is a revision based on the presumed knowledge, however;
• It forms the basis for the more complex chapters that follow, some basic group
accounting techniques will usually be required in groups questions in the exam.
CONSOLIDATED FINANCIAL STATEMENTS
• The governing accounting standard is IFRS 10- Consolidated financial statements

• It requires a parent to present consolidated financial statements in which the accounts of the parent and
subsidiary (or subsidiaries) are combined and presented as a single economic entity (IFRS 10: para. 4)
• The individual financial statements of parents, subsidiaries, associates and joint ventures should be
prepared to the same reporting date.
Where this is impracticable;
• The difference must be no greater than three months;
• Adjustments are made for the effects of significant transactions in the intervening period; and
• The length of the reporting periods and any difference in the reporting dates must be the same from
period to period
• Uniform accounting policies should be used. Adjustments must be made where members of a group use
different accounting policies, so that their financial statements are suitable for consolidation.
REPORTING ENTITY
• A reporting entity is an entity that chooses, or is required, to prepare general

purpose financial statements
• The consolidated financial statements of a group are the financial statements for a
reporting entity which consists of a parent and subsidiaries.
EXEMPTION FROM PREPARING CONSOLIDATED
FINANCIAL STATEMENTS
• According to IFRS 10, a parent need not present consolidated financial statements
providing;
➢ It is itself a wholly-owned subsidiary, or is partially-owned with the consent of the non-
controlling interests;
➢ Its debt or equity instruments are not publicly traded;
➢ It did not file or is not in the process of filing its financial statements with a regulatory
organisation for the purpose of publicly issuing financial instruments; and
➢ The ultimate or any intermediate parent produces financial statements available for
public use that comply with IFRSs including all subsidiaries (consolidated or, if they are
investment entities, measured at fair value through profit or loss).
ACCOUNTING TREATMENT FOR THE INVESTMENT
• IAS 27- Separate Financial Statements states that;

• The investment in a subsidiary, associate or joint venture can be carried in the investor’s separate
financial statements either;
i. At cost;
ii. At fair value (as a financial asset under IFRS 9 Financial Instruments); or
iii. Using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.
• Hint: If the investment is carried at fair value under IFRS 9, both the investment (at fair value) and
the revaluation gains or losses on the investment must be cancelled on consolidation.
• The equity method will apply in the individual financial statements of the investor when the entity
has investments in associates and joint ventures but does not prepare consolidated financial
statements as it has no investments in subsidiaries.
SUBSIDIARY
• A subsidiary is an entity that is controlled by another entity where;

• Control is the power to govern the financial and operating policies of an entity so
as to obtain benefits from its activities.
• Power: refers to existing rights that give the current ability to direct the relevant
activities of the investee.
• Source: IFRS 10- Appendix A

CONTROL
• An investor controls an investee if, and only if, the investor has all of the following
(IFRS 10:paras. 10-12)
• Power over the investee to direct the relevant activities +
• 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
See example in the text under each item.
EXCLUSION OF THE SUBSIDIARY FROM
CONSOLIDATION
• IFRS 10 does not permit entities meeting the definition of a subsidiary to be
excluded from the consolidated financial statements unless it is an
investment entity whose;
❑ Investments in subsidiaries are not consolidated, and instead are held at fair value
through profit or loss.
• Take note of the characteristics of an investment entity as per IFRS 10

EXCLUSION OF THE SUBSIDIARY FROM
CONSOLIDATION
CONSOLIDATION JOURNALS
• All intragroup assets, liabilities, equity, income, expenses and cash flows are
eliminated in full
• Unrealised profits on intragroup transactions are eliminated in full
• See the entries below

ACCOUNTING ENTRIES ON CONSOLIDATION
IFRS 3- BUSINESS COMBINATION
• Business combination: A transaction or other event in which an acquirer obtains

control of one or more businesses
• Business: An integrated set of activities and assets that is capable of being conducted
and managed for the purpose of providing a return in the form of dividends, lower costs
or other economic benefits directly to investors or other owners, members or
participants.
• Entity does not have to be operating as a business to be classified as a business, the

activities just have to be capable of being run as a business.
IFRS 3- BUSINESS COMBINATION CLASS EXERCISE- SOURCE SEP18
ACQUISITION METHOD
• According to IFRS 3: All business combinations are accounted for using the
acquisition method in IFRS 3 which requires;
a. Identifying the acquirer
b. Determining the acquisition date (date control is obtained)

c. Recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree
d. Recognising and measuring goodwill or a gain from a bargain purchase.
MEASURING NON-CONTROLLING INTEREST AT
ACQUISITION
• This can be done in two ways;
a. At proportionate share of fair value of net assets (partial goodwill method) or
b. At fair value (full goodwill method)
See consolidation rules below for both;
- Statement of financial position and

- Statement of comprehensive income
WORKINGS
FAIR VALUES
• Goodwill
➢ Both the consideration transferred and the net assets at acquisition must be measured
at fair value to arrive at true goodwill
➢ Normally it is a positive balance which is recorded as an intangible non-current asset
➢ Occasionally it is negative and arises as a result of a 'bargain purchase’
➢ In this instance, IFRS 3 requires reassessment of the calculations to ensure that they are
accurate and then any remaining negative goodwill should be recognized as a gain in
profit or loss and therefore also recorded in group retained earnings (IFRS 3 paragraph
34,36)
➢ Measurement period- this can not be more than one year

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C11- BASIC GROUPS

• Section A Question 1 of the exam will be based on the financial statements of

• The governing accounting standard is IFRS 10- Consolidated financial statements

• A reporting entity is an entity that chooses, or is required, to prepare general

• IAS 27- Separate Financial Statements states that;

• A subsidiary is an entity that is controlled by another entity where;

• Source: IFRS 10- Appendix A

• Take note of the characteristics of an investment entity as per IFRS 10

• See the entries below

• Business combination: A transaction or other event in which an acquirer obtains

• Entity does not have to be operating as a business to be classified as a business, the

b. Determining the acquisition date (date control is obtained)

See consolidation rules below for both;

- Statement of financial position and

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