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Basic group structures – Basic consolidation example – ACCA (SBR) lectures

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  1. Hello there! I probably ought to know this but I can’t find the answer. I’ve just read the IAS 3 accounting standard on business combinations – for a goodwill calculation, why do we need to deduct the value of net assets at acquisition?

  2. Hello,

    Might be a dumb question I’m sorry. But when you add the assets line by line in the group statement, for example the non current assets or inventory how comes you adding them straight totally for example for inventory you add 450 and 580, shouldn’t it be 70% of 580? when only 70% was acquired of Finn. Don’t you need to do 70% of Finns Assets why adding 100% of Finns Asset when only 70% acquired.

    Thanks in advance

  3. Dear sir,
    I am unable to understand the workings and the example. It is maybe because I appeared in the F7 exam 4 years ago, and then I started working after F9. I have almost lost it all in these years and can’t seem to remember anything from F7. What would be your advice in this regard? How should I prepare for the exam?
    Many thanks

  7. Please I am a bit confused on the treatment of the dividend declared by the Associate, why are we deducting instead of adding it to the investment in associate. And I expected to see the Bank debited with the 5m dividend income to correspond with the Investment in associate being credited with 5m.

    • The dividend paid by the associate is paid out of its distributable profits, essentially its net assets. If the investor is receiving a part of these net assets as a dividend then the associate will no longer have the net assets in its books, and therefore we need to remove them by reducing the investment in associate by the dividend paid out.

      In the individual accounts the parent will record the cash and dividend income, but when equity accounting, the dividend income is replaced by the share of profit of associate in the statement of profit or loss.

      Thanks

      Thanks

      • Hi Chris

        Following your answer to nenny, I understand that we need to record the cash dividend in P’s book but do we need to record the equity income in P’s book as well i.e. dr investment in associates, cr income from investment? Or the increase or decrease in equity income is only shown on the Group’s?

      • Hi Lucie,
        I am also stuck in the same question, if we only consider about the distribution from associate:

        Dividend received:
        Dr: Cash 5
        Cr: Associate 5

        Profit received:
        Dr: Associate 10
        Cr: RE 10

        But at the end the total RE from associate is 5. Please help. Thanks.

      • Theo mình hi?u thì trong 80 ??ng l?i nhu?n c?a A mà P ???c ghi nh?n t?ng RE (Dr Associate/ Cr RE) thì ?ã có ngh?a v? chi tr? c? t?c trong ?ó r?i. Do ?ó, khi A th?c tr? c? t?c trong n?m (Dr Bank/ Cr Financial Income) thì ta ph?i ghi nh?n gi?m RE và Associate ?i (hi?u ??n gi?n RE và Associate t??ng ???ng 1 kho?n l?i ích mà chúng ta thu ???c t? l?i nhu?n công ty liên k?t). Bút toán:

        1. Ghi nh?n l?i nhu?n c?a A tron n?m mà P ???c h??ng
        Dr Associate 10 (t?ng tài s?n)
        Cr Group RE 10 (t?ng ngu?n v?n)

        2. Ghi nh?n gi?m l?i nhu?n c?a Group vì A ?ã “th?c hi?n 1 ph?n ngh?a v?” do chi tr? c? t?c:
        Dr Group RE 5 (gi?m ngu?n v?n)
        Cr Associate 5 (gi?m tài s?n)

        —————————————————————————–
        As far as I understand, out of the 80 profit of A that P is recorded to increase RE (Dr Associate / Cr RE), it is already included the A’s obligation to pay dividends to P within it. Therefore, when A actually pays dividends in the year (Dr Bank / Cr Financial Income), we must record the reduction of RE and Associate (understand simply RE and Associate are equivalent to the benefit that we gain from profits from Associated Company). Entry:

        1. Recognize the profit of A in the year P is entitled to
        Dr Associate 10 (increased assets)
        Cr Group RE 10 (increase in capital)

        2. Recording Group’s profit reduction because A has “partially performed its obligations” by dividend payment:
        Dr Group RE 5 (reducing capital)
        Cr Associate 5 (property reduction)

      • Theo minh hieu thi trong 80 dong loi nhuan cua A ma P duoc ghi nhan tang RE Dr Associate Cr RE thi da co nghia vu chi tra co tuc trong do roi Do do khi A thuc tra co tuc trong nam Dr Bank Cr Financial Income thi ta phai ghi nhan giam RE va Associate di hieu don gian RE va Associate tuong duong 1 khoan loi ich ma chung ta thu duoc tu loi nhuan cong ty lien ket But toan

        1 Ghi nhan loi nhuan cua A tron nam ma P duoc huong
        Dr Associate 10 tang tai san
        Cr Group RE 10 tang nguon von

        2 Ghi nhan giam loi nhuan cua Group vi A da thuc hien 1 phan nghia vu do chi tra co tuc
        Dr Group RE 5 giam nguon von
        Cr Associate 5 giam tai san

  9. can you clear one doubt of mine regarding purchase consideration.
    A acquired 70% OF B.
    PURCHASE CONSIDERATION = 20 m shares
    market price of a’s share – 2 dollars
    market price of b’s share = 4 dollars
    my question is why is purchase consideration calculated of market price of a’s share and not b’s market price while calculating goodwill.
    fair value of consideration = 20*2 = 40?

      • in the question it is given that finance director determined bargain purchase was 8 million dollars being purchase consideration of 40 million dollars less the fair value of identifiable net assets of 48 million dollars.

      • Again, the same question! How much value did A hand over to acquire 70% of B

        Incidentally, BOTH values are used in the calculation of goodwill …

        … because goodwill is essentially the difference between the value of the purchase consideration when compared with the fair value of the acquiree’s net assets

        OK?

  10. Q#2 Rey, Finn and Ben I have an issue with the depreciation, i dont understand why 2 yrs and not 1 yr as the date of acquisition was Jan 2014 and the date of the financial year is Dec 2015. Kindly explain i think that i’m overlooking something. Thanks

    • I have the same question – why are the dividends from the associate not prorated as well?

      Alternatively, to get the post-acquisition profits from the associate, could we not take profits for the year LESS dividends, and take the parent’s % of that? And then prorate that for 6 months.

      i.e. ($80m – $20m) x 25% x 6mths/12mths = $7.5m

    • Dividends are not pro-rated as they do not accrue over the period. A dividend is declared at a point in time and so only relates to that specific date, hence it is never pro-rated.

      Thanks

  13. Hello! Thank you for the lectures! They are very helpful! Why in W5 when we take 70% of retained earnings, we take 70% of 270 (total NA post acquisition) and not of the line “retained earnings” post acquisition. We know that the total is 270, the share capital is 1000, not sure what to do with FV adjustments, so we could calculate the exact line retained earnings.

    • Hi,

      Thanks for the kind comments, it’s always great to hear that people benefit from what we do here at Open Tuition.

      As there are no other components of equity within the question we can just take the movement in net assets as the movement in retained earnings. If you wish the 270 comes from the increase in retained earnings of 350 (800 – 450) less the depreciation 80 on the FV adjustment that would go through retained earnings too.

      Thanks

    • Hi,

      If you ignore adding them across then you would not lose any marks, but if you are a marginal candidate then it would work in your favour if you were to add them across.

      Thanks

    • Hi,

      I’m glad you find the lectures very helpful.

      The acquisition share capital of the subsidiary will always be the same as the share capital at the reporting date. The reporting date share capital can be found in the statement of financial position of the subsidiary.

      Good luck with the rest of the course.

      Thanks

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