Group Statements Vol. 2

Group Statements – Volume 2
Seventeenth edition
Group Statements – Volume 2
Seventeenth edition
CS Binnekade
MCom(Taxation)(Pret) CA(SA)
Associate Professor of Accounting
University of South Africa
ZR Koppeschaar
DCom(Acc)(Pret) CA(SA)
N Stegmann
DCom(RAU)
University of Johannesburg
J Rossouw
MAcc(UFS) CA(SA)
University of the Free State
C Wright
MCom(Forensic Acc) (Potchefstroom) CA(SA)
Senior Lecturer of Accounting
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Preface
The purpose of this book is to set out the principles and conceptual issues of
consolidated financial statements as based on International Financial Reporting
Standards (IFRSs). It focuses on the principles of control and consolidation techniques
in preparing consolidated financial statements for a group of entities. Furthermore, the
accounting treatment of an investor’s interests in associates and joint arrangements is
covered in Volume 2 of this work.
Group Statements focuses on providing detailed explanatory application examples of
the following IFRSs:
• IAS 27 Separate Financial Statements;
• IFRS 3 Business Combinations;
• IFRS 10 Consolidated Financial Statements;
• IAS 28 Investments in Associates and Joint Ventures; and
• IFRS 12 Disclosure of Interests in Other Entities (by providing limited disclosure
examples of some core aspects).
The text includes numerous illustrative and practical examples which expand on the
principles and conceptual issues of the standards above and related aspects of other
IFRSs. The approach of the book is to primarily make use of the analysis of owners’
equity in table format, but extensive use is also made of consolidation journal entries. In
addition, the worksheet approach is applied up to the end of chapter 4. The text makes
use of commentary to explain important concepts. Disclosure requirements for the
consolidated financial statements are illustrated and taxation issues are also addressed
to the extent that deferred tax is applicable to certain accounting areas.
The book is aimed at:
• undergraduate and postgraduate university students registered for financial
accounting modules;
• members and students of professional bodies such as the South African Institute of
Chartered Accountants (SAICA), the South African Institute of Professional
Accountants (SAIPA), the Institute of Certified Professional Accountants (CPA), etc.;
and
• practicing accountants and preparers of consolidated financial statements.
LexisNexis Passplus is still included for Volume 1 of this work. PassPlus is an
electronic assessment tool which allows students to continuously assess their own
understanding of, and progress through the textbook. All PassPlus questions are
automatically and immediately graded by the system, which allows students to receive
their feedback instantly. PassPlus also affords lecturers the opportunity to use the
system for continuous assessment purposes, without adding any additional marking to
their own workload. The most beneficial way for students to use PassPlus is to work
v
Preface
through each chapter in the textbook and then complete the accompanying questions to
test their progress.
During the latter part of 2017, the SAICA finalised its “syllabus overload” review and
some aspects were excluded or moved to an “awareness level” for the sake of SAICA’s
professional assessment (the Initial Test of Competence (ITC)). The major aspects thus
affected relating to Group Statements are as follows:
• investment entities;
• some aspects relating to the identification of a business combination and the
acquirer;
• pre-existing relationships and reacquired rights in a business combination;
• some aspects relating to determining control (such as delegated power, principal/
agent consideration; control of specified assets);
• vertical groups (less detailed emphasis);
• subsidiaries classified as held for sale and subsidiaries acquired with a view to
resale;
• share buy-backs and rights issues of subsidiaries leading to loss of control or step
acquisition;
• joint operation accounting;
• parent recognising its investment in investees at fair value/under the equity method
in its separate financial statements (the update of this work focused on the parent
carrying the investment at cost);
• group reorganisations;
• changes in interests in associate (but still an associate); and
• associates held for sale.
This work was updated to still include a brief discussion of some of these aspects
(where relevant), but without very detailed explanatory examples thereof. Volume 2 was
mostly affected by these changes.
We trust that users of this publication will find it beneficial.
THE AUTHORS
November 2017
vi
Contents
Page
9 IFRS 3 Business combinations – Advanced aspects ...................................... 1
10 IFRS 10 Consolidated financial statements – Control..................................... 41
11 Investments in associates and joint ventures.................................................. 59
12 Interests in joint arrangements ........................................................................ 149
13 Changes in ownership of subsidiaries through buying or selling shares......... 167
14 Changes resulting from the issue of additional shares by investees
and other changes in ownership ..................................................................... 283
15 Foreign operations .......................................................................................... 373
16 Consolidated statement of cash flows............................................................. 433
vii
9
IFRS 3
Business combinations
– Advanced aspects
Introduction
9.1 Overview of the topic .............................................................................. 4
The acquisition method .............................................................................. 4
Recognising and measuring the identifiable assets acquired,

the liabilities assumed and any non-controlling interests
in the acquiree
9.2 Recognition principle................................................................................ 5
Example 9.1: Recognition of identifiable liabilities .................................. 5
Example 9.2: Classification of identifiable assets acquired .................... 6
Example 9.3: Recognition of intangible assets ....................................... 9
9.3 Measurement principle............................................................................. 10
Example 9.4: Remeasurement of liability to fair value ............................ 11
Example 9.5: Fair value of operating lease – Lessor ............................ 12
Example 9.6: Fair value of items used differently ................................... 13
Example 9.7: Measurement of non-controlling interests......................... 15
9.4 Exceptions to the recognition and measurement principles..................... 15
Example 9.8: Contingent liabilities ......................................................... 17
Example 9.9: Deferred tax ..................................................................... 17
Example 9.10: Indemnification asset ........................................................ 18
Example 9.11: Recognition and measurement of a favourable
operating lease ................................................................. 20
Example 9.12: Non-current assets held for sale....................................... 22
Consideration transferred
9.5 Measurement of consideration transferred .............................................. 23
Example 9.13: Measurement of consideration transferred ....................... 23
Example 9.14: Measurement of consideration transferred – Asset .......... 24
1
Chapter 9
9.6 Measurement of contingent consideration transferred............................. 25

Example 9.15: Contingent consideration – Financial liability .................... 26
Example 9.16: Contingent consideration – Asset ..................................... 29
Example 9.17: Compensation for reduction in equity instruments............ 29
Measurement period
9.7 Measurement period adjustments............................................................ 30
Example 9.18: Measurement period and adjustment to goodwill ............. 31
Example 9.19: Measurement period adjustment – Non-controlling
interest measured at proportionate share ......................... 32
Example 9.20: Measurement-period adjustment – Non-controlling
interest measured at fair value ......................................... 34
Self-assessment question
Question 9.1 ..................................................................................... 36
2
IFRS 3 Business combinations – Advanced aspects
IFRS 3: BUSINESS COMBINATIONS – SUMMARY
Acquisition method
Identify the acquirer and account for l Entity that obtains control is acquirer
business combination transaction
l Separate related transactions and apply other IFRS
separately from related transactions
standards
l Date on which control of net assets and operations is

Date of acquisition
transferred to the acquirer
l Use fair value at acquisition date, also for business

combination achieved in stages
Consideration related to business
l Costs directly attributable not part of business
combination
combination
l Contingent consideration
l Assets/liabilities recognised separately

l Basic recognition: Meet definitions in Conceptual
Recognition of identifiable assets Framework
and liabilities
l Classifying or designating
l Exceptions
l Fair value as at acquisition date

Initial measurement at fair value
l Market values or valuation techniques
of identifiable assets and liabilities
l Exceptions
l At proportionate share of net assets, or

Non-controlling interests
l At fair value
l Consideration transferred + non-controlling interests +

FV of previously-held interest at date of acquisition (only
step acquisition) – Net assets acquired and measured in
accordance with IFRS 3 = Goodwill/(bargain purchase
Goodwill/bargain purchase gain gain)
l Goodwill: Recognise as asset, subsequent impairment
test
l Bargain gain: Reassess all items; if still gain, recognise
at acquisition date in profit or loss
l Limited to one year

l Provisional values recognised if accounting incomplete
l Provisional fair values adjusted retrospectively
l Also recognise assets and liabilities that previously were
Measurement period not recognised even though they existed
l Facts and circumstances existing at acquisition date
should be considered
l Correction of error if it becomes known after
measurement period
Disclosure
3
Chapter 9
Introduction
9.1 Overview of the topic
The basic principles and the disclosure requirements of IFRS 3 Business
Combinations are discussed in chapter 2 of Volume 1.
IFRS 3 establishes very important principles on how the acquirer recognises and
measures the following in its records:
l the assets acquired and liabilities assumed;
l the non-controlling interests in the acquiree;
l the goodwill acquired in a business combination or the gain from a bargain
purchase; and
l adequate disclosure of information relating to the business combination, in order to
provide useful information for decision making to the user of the financial
statements.
In this chapter more advanced aspects are discussed relating to the recognition and
measurement of the identifiable assets acquired, the liabilities assumed and any non-
controlling interests in the acquiree, as well as the consideration transferred and
measurement period. It is also important to remember that business combinations refer
to the acquisition of a business (a subsidiary or the acquisition of assets and liabilities
that constitute a business as defined in IFRS 3). This chapter focuses on the acquisition
of a subsidiary. For guidance on the acquisition of assets and liabilities that constitute a
business, refer to chapter 2 of Volume 1.
Comment
Also refer to chapter 8 of Volume 1 which addresses the accounting of a business
combination achieved during instead of at the beginning of the financial reporting
period.
The acquisition method

In terms of the acquisition method the goodwill or a gain from a bargain purchase is
calculated as follows:
Identifying the acquirer Chapter 2.4 of Volume 1
Determining the acquisition date Chapter 2.5 of Volume 1
Consideration transferred Chapter 9.5 and 9.6 of Volume 2
Plus
Non-controlling interests Chapter 9.3 of Volume 2
Less
Total net assets (identifiable assets Chapter 9.2–9.4 of Volume 2
acquired less liabilities assumed)
Equals
Goodwill/gain from a bargain purchase
4
Recognising and measuring the identifiable assets acquired, the

liabilities assumed and any non-controlling interests in the acquiree
9.2 Recognition principle
IFRS 3 determines that the acquirer shall recognise, separately from goodwill, the
identifiable assets acquired, the liabilities assumed and any non-controlling interests in
the acquiree at the acquisition date.
1 Recognition conditions
Firstly, to be recognised, the identifiable assets and liabilities acquired and assumed
must meet the definition of an asset or liability as defined in the Conceptual
Framework. For this reason, future planned costs to be incurred by the acquirer will not
meet the definition of a liability as at the date of acquisition, as there is no present
obligation to incur these costs at this date. These costs will therefore only be
recognised after the date of acquisition, when an obligation to pay arises.
Secondly, to be recognised, the identifiable assets and liabilities acquired and
assumed must be part of what the acquirer and acquiree exchanged in the business
combination transaction and not the result of separate transactions. Guidance is
provided in IFRS 3 as to what forms part of a business combination transaction – this
guidance is addressed in chapter 2.10.
Thirdly, the acquirer’s application of the recognition principle and conditions may result
in some assets and liabilities being recognised in the business combination that the
acquiree had previously not recognised as assets and liabilities in its pre-acquisition
financial statements. This would be the case especially where the acquirer recognises,
for example, certain intangible assets (e.g. brand names, customer relationships, etc.)
at the acquisition date where these items were not recognised as intangible assets by
the acquiree as they were internally generated by the acquiree. IFRS 3 has introduced
some new principles, especially in respect of intangible assets in accordance with
IAS 38. These are dealt with below.
Example 9.1 Recognition of identifiable liabilities
On 1 April 20.18 P Ltd acquired 90% of the shares of S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in accordance with IFRS 10. On
1 April 20.18, S Ltd had correctly recognised a liability of R350 000 in respect of a
breach of contract that was previously filed against the entity. Furthermore, on
1 April 20.18 P Ltd was planning to restructure the operations of S Ltd. The
restructuring costs were estimated at R240 000. Ignore any tax consequences.
As part of the business combination on 1 April 20.18, P Ltd shall recognise the
identifiable liability for the breach of contract amounting to R350 000. However, on
1 April 20.18 there is no present obligation for the restructuring provision. The
restructuring is rather a result of the business combination. P Ltd will only recognise the
provision for the restructuring of R240 000 in the period after the business combination.
5
Chapter 9
This will give rise to the following pro forma consolidation journal entry (*):
Dr Cr
R R
1 April 20.18
Equity at acquisition (SCE) 350 000
Liability (SFP) 350 000
Remeasurement of plant to fair value
Comment
When remeasuring assets and liabilities of the acquiree to fair value on the acquisition
date in terms of IFRS 3, the pro forma remeasurement can be recorded in any equity
account of the acquiree. For ease of reference, the authors refer to “equity at
acquisition”. The specific equity account used is not important, as at acquisition date
the entire equity balance of the acquiree (including any remeasurements) will be
eliminated in the main elimination journal, against the “investment in subsidiary”
recorded in the separate accounting records of the acquirer.
(*) A pro forma journal entry is a journal entry that is not processed in the separate
financial statements of the acquirer or the individual financial statements of the
acquiree, but processed for the purposes of drawing up consolidated financial
statements. Pro forma journal entries therefore only adjusts the consolidated financial
statements and are processed to give effect to IFRS 3 requirements and to eliminate
intragroup transactions and balances in accordance with IFRS 10.
2 Classifying or designating identifiable assets acquired and liabilities assumed

in a business combination
The acquirer shall classify or designate the identifiable assets at the acquisition date
acquired and liabilities assumed to facilitate the subsequent application of other IFRSs.
These designations or classifications shall be made on the basis of contractual terms,
economic conditions, the acquirer’s operating or accounting policies and other pertinent
conditions as they exist at the acquisition date.
Two exceptions to this rule exist:
l the classification of a lease contract in which the acquiree is the lessor as either an
operating lease or a finance lease in accordance with IFRS 16 Leases; and
l the classification of a contract as an insurance contract in accordance with IFRS 4
Insurance Contracts.
The above contracts will be classified on the basis of the contractual terms and other
factors at the inception of the contract (or, if the terms of the contract have been
modified in a manner that would change the classification of the contract, at the date of
the modification, which may be the acquisition date).
Example 9.2 Classification of identifiable assets acquired
On 1 January 20.19 P Ltd acquired a 75% interest in S Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in accordance with IFRS 10. On this
date S Ltd also had, amongst others, the following assets and contracts:
l For the past few years, S Ltd has been leasing a building to P Ltd. S Ltd classified
the building as investment property as the building was held for rental income.
6
l On 1 January 20.13 (six years before the business combination) S Ltd entered into
a lease agreement to lease equipment to X Ltd. The lease term was seven years
and the economic life of the equipment was estimated to be eight years. S Ltd
correctly classified the lease as a finance lease at the inception of the lease, as
substantially all the risks and rewards incidental to ownership passed to S Ltd (this
may be evident from the fact that the lease term (seven years) was for a major part
of the economic life (eight years) of the asset (7/8 = 88%)).
In accounting for the business combination of S Ltd, P Ltd may classify the
above-mentioned assets and contract as follows:
l P Ltd is occupying the building of S Ltd. Therefore, from the date of the business
combination, the building will be owner-occupied. For the combined entity, the
building shall be classified as property, plant and equipment in accordance with
IAS 16 Property, Plant and Equipment instead of investment property.
l The lease will still be classified as a finance lease (based on the contractual terms
at the inception of the contract) even though the remaining lease term (one year)
may not be a major part of the remaining economic life (which is two years).
3 Guidance with respect to recognition of intangible assets
IAS 38 Intangible Assets provides extensive guidance about the acquisition of an
intangible asset as part of a business combination (refer to IAS 38.33 to .43). The main
principles are summarised below.
The fair value of an intangible asset at initial recognition is its acquisition date fair
value. This fair value reflects market expectations about the probability that the future
economic benefits embodied in the asset will flow to the entity. In other words, the entity
expects there to be an inflow of economic benefits, even if there is uncertainty about
the timing or amount of the inflow. Therefore, the probability-recognition criterion per
IAS 38.21(a) is always considered to be satisfied for intangible assets in a business
combination.
Intangible assets shall therefore be recognised separately from goodwill, if they are
identifiable. IAS 38 defines the concept of identifiability, and these principles must
therefore also be applied to the recognition of intangible assets at the acquisition date
in a business combination.
In accordance with IAS 38, an intangible asset is identifiable if it meets either the
separability criterion or the contractual-legal criterion. An intangible asset that meets
the contractual-legal criterion is identifiable even if the asset is not transferable or
separable from the acquiree or from other rights and obligations.
An intangible asset that is not individually separable from the acquiree or combined
entity, and does not meet the contractual-legal criterion meets the separability criterion
if it is separable in combination with a related contract, identifiable asset or liability.
The separability criterion means that an acquired intangible asset is capable of being
separated or divided from the acquiree and sold, transferred, licensed, rented or
exchanged (individually or together with a related contract, identifiable asset or liability).
An acquired intangible asset meets the separability criterion if there is evidence of
exchange transactions for that type of asset or an asset of a similar type, even if those
transactions are infrequent and regardless of whether the acquirer is involved in them.
The contractual-legal criterion is met when the intangible asset arises from contractual
or other legal rights.
7
Chapter 9
The acquirer will subsume (absorb) into goodwill the value of all intangible assets that
are not identifiable and all other assets that do not qualify as assets at the acquisition
date. This is consistent with the principle in IAS 38.68(b).
The recognition of intangible assets in accordance with IFRS 3 can be summarised as
follows:
Intangible assets
Identifiable Not identifiable
Separable Contract/Legal Do not recognise

Recognise separately Recognise separately Included in
from goodwill from goodwill goodwill
The following intangible assets, that could be acquired in a business combination, are
usually considered identifiable:
Identifiable intangible assets
Separable Contractual or other legal rights
Marketing-related intangible assets
Trademarks, trade names, etc.
Customer-related intangible assets
Customer lists and non-contractual Order or production backlog, customer
customer relationships contracts and related customer relationships
Artistic-related intangible assets (if protected by copyright)
Plays, operas, etc.
Books, magazines, newspapers and other
literary works
Musical works such as compositions, etc.
Pictures and photographs
Video and audio visual material
continued
8
Separable Contractual or other legal rights

Contract-based intangible assets
Licensing, royalty, etc.
Advertising, construction, etc.
Lease agreements (whether the acquiree is
the lessee or the lessor)
Construction permits
Franchise agreements
Broadcast rights
Service contracts
Beneficial employee contracts
(from the perspective of the employer)
Use rights, for example water, air, etc.
Technology-based intangible assets
Unpatented technology Patented technology
Databases (if not protected by copyright) Databases (if protected by copyright)
Trade secrets, such as secret formulas, Trade secrets, such as secret formulas,
processes and recipes processes and recipes (if legally protected)
(if not legally protected)
Computer software and mask works
(if protected by patent or copyright)
Comment
Refer to IFRS 3.IE18–.IE44 for a detail discussion of the above mentioned identifiable
intangible assets.
Example 9.3 Recognition of intangible assets
1 January 20.19 S Ltd had, amongst others, the following assets:
Carrying Fair
amount value
Licences and registered patent R50 000 R62 000
Internally generated trademark – R34 000
Internally generated customer lists (subject to
confidentiality agreements and cannot be disposed of) – R18 000
Assembled workforce – R13 000
Goodwill R60 000 –
In-process research – R29 000
9
Chapter 9
The licences, patent and trademark are identifiable as they arise from contractual or
other legal rights. These items are recognised as intangible assets at fair value
(R62 000 and R34 000 respectively) as part of the business combination.
As the confidentiality agreements prohibit the disposal/exchange of information
contained in the customer lists, the lists do not meet the separability criterion and are
not recognised separately from goodwill. These intangible assets also do not arise from
contractual/legal rights.
The assembled workforce does not meet the definition of an asset as it is not controlled
(S Ltd does not have a contract with the collection of employees as a whole). The
assembled workforce cannot be sold separately and does not meet the separability
criterion. Therefore, the assembled workforce is not separately recognised as an
intangible asset. The value placed on the assembled workforce is therefore subsumed
into goodwill.
The goodwill of R60 000 arose due to a previous business combination. The goodwill is
not an identifiable intangible asset as it is not separable nor contract/legal. The value
placed on the goodwill is therefore also subsumed into the goodwill that will be accounted
for by P Ltd.
The in-process research is separately identifiable as it can be sold separately and is
therefore recognised as an intangible asset, separately from goodwill, at its fair value of
R29 000.
Research and development expenditure

It was indicated above that it is possible for an acquirer to recognise some assets and
liabilities that the acquiree had not previously recognised as assets and liabilities in its
pre-acquisition financial statements. The in-process research in the example above is
an illustration thereof. Furthermore, IAS 38 provides specific guidance on the treatment
of research and development expenditure. Research or development expenditure that:
l relates to an in-process research or development project acquired separately or in
a business combination and recognised as an intangible asset; and
l is incurred after the acquisition of that project;
shall be recognised as an expense when incurred if it is research expenditure or
development expenditure that does not satisfy the criteria for recognition as an
intangible asset, and included in the carrying amount of the acquired in-process
research or development project if it is development expenditure that satisfies the
criteria for recognition as an intangible asset per IAS 38.57.
9.3 Measurement principle

The acquirer shall measure the identifiable assets acquired and liabilities assumed at
their acquisition date fair values. Fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, i.e. acquisition date.
10
Example 9.4 Remeasurement of liability to fair value
On 1 January 20.17 P Ltd acquired a 100% controlling interest in S Ltd. On acquisition

date, S Ltd’s liabilities included 10 000 7% debentures of R100 each, issued on
1 January 20.16 to Z Ltd. The debentures are redeemable at nominal value on
31 December 20.20 and interest is payable annually in arrears. On 1 January 20.16 the
applicable discount rate was 10% and on 1 January 20.18 the applicable discount rate
reduced to 9%. Ignore any tax consequences.
On 1 January 20.17 the assets acquired and liabilities assumed of S Ltd should be
measured at fair value.
S Ltd already accounted for the debentures in its individual accounting records
according to IFRS 9. Therefore, the pro forma consolidation journal entries will account
for the difference between the carrying amount of the debentures in S Ltd’s individual
financial statements and the fair value as calculated in accordance with IFRS 3.
S Ltd Group Difference

(1)
Fair value 1 January 20.16 886 276
(2)
Finance costs 88 628
Debenture payment (70 000)
Amortised cost 31 December 20.16 R904 904

(3)
Carrying value/Fair value 1 January 20.17 904 904 935 206 30 302
(5) (4)
Finance costs 90 490 84 169 (6 321)
Debenture payment (70 000) (70 000) –
Amortised cost 31 December 20.16 R925 394 R949 375 R23 981
(1) Pmt = 70 000; i = 10%; n = 5; FV = 1 000 000 (2) 886 276 × 10%
(3) Pmt = 70 000; i = 9%; n = 4; FV = 1 000 000 (4) 935 206 × 9%
(5) 904 904 × 10%
The pro forma consolidation journal entry at the date of acquisition will be as follows:
Dr Cr
R R
1 January 20.17
Lease liability (SFP) 30 302
Remeasurement of debentures
The following consolidation journal entry will be required at the reporting date
(31 December 20.17):
Dr Cr
R R
Debentures (SFP) 6 321
Finance costs (P/L) 6 321
Adjustment of finance costs for 20.17
11
Chapter 9
Comment
Income and expenses of the subsidiary are based on the amounts of the assets and
liabilities recognised in the consolidated financial statements at the acquisition date. For
example, depreciation expense recognised in profit or loss after the acquisition date is
based on the fair values of the related depreciable assets recognised in the
consolidated financial statements at the acquisition date.
1 Guidance with respect to measurement of assets with uncertain cash flows

The effects of uncertainties about future cash flows should be reflected in the
acquisition date fair value of assets and liabilities, on the acquisition date. All acquired
assets and assumed liabilities are measured on acquisition date at fair values, and thus
shall not be subject to a separate valuation allowance in respect of cash flows that are
deemed uncollectible at the acquisition date. For example, the fair value of receivables
acquired as part of a business combination will be determined based on the expected
cash flows, timing thereof and the appropriate discount rate. A separate valuation
allowance (allowance for credit losses) will not be recognised because the discount rate
already accounts for any uncertainties.
2 Guidance with respect to measurement of assets subject to operating leases

in which the acquiree is a lessor
The acquisition date fair value of an asset, which is subject to an operating lease in
which the acquiree is a lessor, should take into account the terms of the operating
lease. This means that the lessor shall not recognise a separate asset or liability if the
terms of the operating lease in which the acquiree is the lessor are either favourable or
unfavourable when compared to market terms.
Example 9.5 Fair value of operating lease – Lessor
P Ltd acquires a 100% interest in S Ltd on 1 January 20.15. From that date P Ltd had
control over S Ltd as per the definition of control in accordance with IFRS 10. S Ltd
owns a plant, with a carrying amount of R3 750 000, that is leased to Z Ltd in terms of
an operating lease, at an annual rental of R550 000 (a market-related rental is
R450 000 per annum). The remaining period of the lease is 10 years, while the
remaining useful life of the plant is 25 years. The estimated fair value of the plant,
based on a market-related rental for 25 years, is equal to R5 million. Assume that the
present value of the favourable component of the lease contract with Z Ltd amounts to
R560 000. Ignore any tax consequences.
When accounting for the business combination, the plant should be recognised at its
total fair value of R5 560 000 (R5 000 000 + R560 000).
This will give rise to the following pro forma consolidation journal entry:
Dr Cr
R R
1 January 20.15
Plant (SFP) (5 560 000 – 3 750 000) 1 810 000
Equity at acquisition (SCE) 1 810 000
Remeasurement of plant to fair value
12
For group purposes, the subsequent depreciation of the plant should be based on
R5 560 000. As the favourable component of R560 000 of the plant will realise over the
remaining lease period of 10 years (refer to IAS 16.44), it would be appropriate to
depreciate this component over 10 years, while the remainder of the asset should be
depreciated over 25 years. The annual depreciation will therefore amount to R256 000
[(5 000 000/25) + (560 000/10)] from a group perspective. In its individual financial
statements S Ltd will account for depreciation of R150 000 (3 750 000/25).
On 31 December 20.15 (reporting date) the following consolidation journal is required:
Dr Cr
R R
31 December 20.15
Depreciation (P/L) (256 000 – 150 000) 106 000
Accumulated depreciation (SFP) 106 000
Additional depreciation for 20.15
3 Guidance with respect to measurement of assets that the acquirer intends

not to use or use in a way that is different from the way other market
participants would use them
To protect its competitive position, or for other reasons, the acquirer may intend not to
use an acquired non-financial asset, or it may not intend to use the asset according to
its highest and best use. However, the acquirer shall measure the fair value of the non-
financial asset assuming its highest and best use by market participants in accordance
with the appropriate valuation technique in accordance with IFRS 13 Fair Value
Measurement.
Example 9.6 Fair value of items used differently
P Ltd acquires a 100% interest in S Ltd and has control over S Ltd as per the definition
of control in accordance with IFRS 10. S Ltd owns export licences to export goods
globally. The fair value of the global export licenses is determined to be R900 000.
However, P Ltd intends to export only to Africa and determines the fair value of the
license to export to Africa only, at R390 000. Ignore any tax consequences.
At the acquisition date, S Ltd also had an in-process research project with a fair value
of R140 000. P Ltd does not intend to continue with the research.
P Ltd does not intend to use the export license or in-process research according to its
highest and best use. Nevertheless for the business combination, the export licences
will be measured at R900 000 and the in-process research project at R140 000. An
impairment loss may probably be recognised in the period after the business
combination.
4 Guidance with respect to measurement of intangible assets

If an asset acquired in a business combination is separable or arises from contractual
or other legal rights (i.e. is identifiable as discussed above), sufficient information exists
to reliably measure the fair value of the asset. Thus, the reliable-measurement criterion
per IAS 38.21(b) is always considered to be satisfied for intangible assets acquired in a
business combination. It is therefore clear that the emphasis lies on the satisfaction of
13
Chapter 9
the definition of an intangible asset (incorporating identifiability), rather than on the

recognition criteria, as the latter are considered to be satisfied in a business
combination as explained.
The fair value of an intangible asset would be the price that would be received to sell an
asset in an orderly transaction between market participants at the acquisition date.
Quoted market prices provide the most reliable estimate of the fair value of an
intangible asset. If such market prices are not available, the price of the most recent
similar transaction may provide a basis from which to measure the fair value of the
intangible asset, provided no significant changes have occurred from the date of the
most recent similar transaction to the acquisition date.
If no active market exists for an intangible asset, valuation techniques may be used to
determine the fair value of intangible assets.
5 Guidance with respect to measurement of non-controlling interests

The non-controlling interests, if any, shall be measured by the acquirer in one of two
ways, i.e. either:
l at fair value; or
l at the non-controlling interests’ proportionate share of the acquiree’s identifiable
net assets (i.e. not taking into account the fair value of the non-controlling interests
but basing the non-controlling interests on the net asset value of the entity instead).
The measurement choice is only available for present ownership interests (e.g. ordinary
shares) which entitle their holders to a proportionate share of the entity’s net assets in
the event of liquidation. All other components of non-controlling interests must be
measured at fair value. If non-controlling interests include preference shares the
preference shares shall be measured at fair value unless the preference shareholders
are entitle to a proportionate share of the entity’s net assets in the event of liquidation.
The choice between the two methods of measuring non-controlling interests is not part
of the accounting policy of the acquirer and can be exercised for each separate
business combination.
If the acquirer measures non-controlling interests at fair value at the acquisition date,
this value can sometimes be based on the market prices for the equity shares not held
by the acquirer. Where market prices are not available for these equity shares, the fair
value shall be determined by the acquirer using other valuation techniques. It is very
possible that the fair value of the acquirer’s interest in the acquiree and the fair value of
the non-controlling interests in the acquiree on a per-share basis will differ due to the
inclusion of a control premium in the per-share fair value of the acquirer’s interest in the
acquiree, or a discount, for the lack of control, included in the per-share fair value of the
non-controlling interests in the acquiree.
The amount assigned to the non-controlling interests is included in the calculation of
goodwill or the gain from a bargain purchase arising from the business combination.
The acquirer’s choice of the measurement basis of non-controlling interests for ordinary
shares will therefore influence the resultant goodwill or the gain from a bargain
purchase.
14
Example 9.7 Measurement of non-controlling interests
The equity of N Ltd consists of 100 000 ordinary shares and 10 000 preference shares.
The preference shares give their holders the right to a preferential dividend before the
payment of any dividend to the ordinary shareholders. On liquidation of N Ltd, the
preference shareholders are entitled to receive their initial investment back before the
remainder of the net assets are distributed to the ordinary shareholders. The preference
shareholders do not have any further rights on liquidation. On 1 January 20.19 the
ordinary and preference shares were trading at R34 and R15 each respectively. On
1 January 20.19 P Ltd acquired a 60% interest in N Ltd at a cost of R2,2 million. From
that date P Ltd had control over N Ltd as per the definition of control in accordance with
IFRS 10. P Ltd was willing to pay more than R34 per share in order to gain control
(60 000 shares × R34 = R2,04 million). The fair value of the identifiable net assets of
N Ltd amounts to R3,3 million at the acquisition date.
P Ltd can elect to measure the 40% present ownership interest at its fair value. Non-
controlling interests will then amount to R1,51 million (40 000 shares × R34 plus 10 000
shares × R15); OR,
P Ltd can elect to measure the 40% present ownership interest at its share of N Ltd’s
identifiable net assets. Non-controlling interests will then amount to R1,47 million (40%
× R3,3 million plus 10 000 shares × R15).
9.4 Exceptions to the recognition and measurement principles

IFRS 3 provides the following exceptions to the recognition and measurement
principles:
Exceptions
Exceptions to the Exceptions to both the Exceptions to the

recognition recognition and measurement
principle measurement principles principle
Contingent liabilities l Deferred tax assets l Reacquired right

and liabilities l Share-based
l Employee benefits payment awards
l Indemnification l Non-current assets
assets held for sale
l Leases in which the
acquiree is the
lessee
15
Chapter 9
1 Exceptions to the recognition principle

Contingent liabilities
A contingent liability is defined in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets as:
l a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity; or
l a present obligation that arises from past events but is not recognised because it is
either not probable that future economic benefits will be required to settle the
obligation or the amount of the obligation cannot be measured with sufficient
reliability (i.e. the definition of a liability is satisfied, but one or both of the recognition
criteria is not satisfied).
However, a contingent liability assumed in a business combination shall be recognised
by the acquirer at the acquisition date if:
l it is a present obligation that arises from past events; and
l its fair value can be reliably measured.
The contingent liability is therefore recognised by the acquirer, even if it is not probable
that an outflow of economic benefits will be required to settle the obligation.
Contingent liability IAS 37
No present obligation exists Present obligation exists
Definition of liability not met However, one or more

(possible obligation) recognition criteria not met
Do not recognise
If fair value can be reliably
met, recognise contingent
liability i.t.o IFRS 3
16
Example 9.8 Contingent liabilities
On 1 January 20.19 P Ltd acquired a 75% interest in S Ltd. From that date P Ltd
had control over S Ltd as per the definition of control in accordance with IFRS 10. At
this stage a claim for damages was filed against S Ltd for damages caused by the
company. S Ltd was defending the claim and its lawyers were of the opinion that there
was only a remote possibility that the claim would succeed. Although the claim
represents a present obligation (i.e. S Ltd was responsible for damages caused), S Ltd
did not recognise the liability in its individual financial statements as the possibility of
the outflow of economic benefits was remote (i.e. not probable). The fair value of the
contingent liability was estimated at R45 000 at the acquisition date. Ignore any tax
consequences.
P Ltd would have taken this contingent liability into account in considering the fair value
of the identifiable net assets of S Ltd and in determining the amount of the
consideration for the business combination. In accounting for the business combination,
P Ltd will therefore recognise the contingent liability at R45 000 in the combined entity
at the acquisition date.
2 Exceptions to both the recognition and measurement principles

Deferred tax
A deferred tax asset or liability arising from the acquisition of the assets and
assumption of the liabilities in the business combination shall be recognised and
measured by the acquirer in accordance with IAS 12 Income Taxes. It is important to
note that the initial recognition exemption in respect of deferred tax does not apply to
temporary difference that arose from a business combination. A deferred tax liability or
asset is therefore recognised on all temporary differences. The potential tax effects of
temporary differences and carry-forwards of an acquiree that exist at the acquisition
date or arise as a result of the acquisition shall also be recognised and measured in
accordance with IAS 12.
Example 9.9 Deferred tax
Deferred tax on fair value remeasurements of an asset

The date of the business combination of P Ltd and S Ltd is 1 March 20.19. On this date
the carrying amount of the plant of S Ltd was R700 000 and the tax base was
R600 000. The tax rate is 28%. S Ltd recognised a deferred tax liability of R28 000 in
respect of this plant. On 1 March 20.19 the fair value of the plant was R730 000.
For the purpose of the business combination, the plant will be recognised at its fair
value of R730 000. The remeasurement of R30 000 (R730 000 – R700 000) is
recognised as equity at acquisition. An adjustment of R8 400 (R30 000 × 28%) is also
recognised for the deferred tax liability.
Details of the deferred tax calculation are as follows:
Carrying Tax Temporary Deferred Adjust-
amount base difference tax liability ment
Balance on
1 January 20.19 R700 000 R600 000 R100 000 R28 000
Business combination R730 000 R600 000 R130 000 R36 400 R8 400
17
Chapter 9
Subsequent recognition of deferred tax asset

P Ltd acquired a 100% interest in S Ltd on 1 December 20.18. On this date S Ltd had
an assessed loss of R500 000. S Ltd did not recognise a deferred tax asset, as there
was no certainty regarding future taxable income and thus no tax asset was recognised
in the consolidated financial statements.
On 31 December 20.19 (reporting date) S Ltd assessed that future taxable profit should
be sufficient to recover the total benefit of the assessed loss of R500 000. Assume a
tax rate of 28%.
On 31 December 20.19 S Ltd will recognise a deferred tax asset of R140 000
(R500 000 × 28%) in S Ltd’s individual financial statements. No consolidation journals
are required in respect of this deferred tax asset. S Ltd recognised the deferred tax
asset (SFP) and the benefit thereof (P/L), which is also the correct treatment in the
consolidated financial statements.
Employee benefits
The acquirer shall recognise and measure a liability or asset related to the acquiree’s
employee benefit arrangements in accordance with IAS 19 Employee Benefits.
Indemnification assets
The seller in the business combination (i.e. the acquiree) may contractually indemnify
the acquirer for the outcome of a contingency or uncertainty related to all or part of a
specific asset or liability. For example, a seller may guarantee that an acquirer’s liability
will not exceed a specified amount. As a result, the acquirer obtains an indemnification
asset. The acquirer shall recognise the indemnification asset at the same time it
recognises the indemnified item, and measures the indemnification asset on the same
basis as the indemnified item, subject to the need for a valuation allowance for
uncollectible amounts. If the indemnified asset or liability is therefore recognised at fair
value on the acquisition date, the indemnification asset will also be recognised at fair
value on the acquisition date. If the indemnification asset is measured at fair value, the
uncertainty about future cash flows because of collectability is included in the fair value
and a separate valuation allowance for uncollectible amounts is not necessary.
If an indemnification asset relates to an item that is an exception to the recognition or
measurement principles, for example a contingent liability that is not recognised at the
acquisition date as its fair value cannot be reliably measured, or an item that is not
measured at the acquisition date fair value, e.g. an employee benefit liability, the
indemnification asset shall be recognised and measured using assumptions consistent
with those used to recognise and measure the indemnified item.
Example 9.10 Indemnification asset
P Ltd acquires a 60% interest in S Ltd on 1 July 20.15 from Q Ltd. From that date P Ltd
had control over S Ltd as per the definition of control in accordance with IFRS 10. On
this date S Ltd is also involved in a court case in terms of which S Ltd may be liable to
pay damages amounting to R2,5 million for violating Z Ltd's patent rights. Although
S Ltd's lawyers are of the opinion that the patent rights were indeed violated, there is a
possibility that the court's ruling may be in S Ltd's favour. It is therefore not possible to
predict the outcome of the court case on 1 July 20.15. Should the ruling not be in
S Ltd's favour, Q Ltd agrees contractually to reimburse S Ltd for 60% of the damages
18
payable to Z Ltd. The fair value of the potential liability to pay damages to Z Ltd
amounts to R500 000 at 1 July 20.15. Ignore any tax consequences.
From S Ltd's perspective, the court case represents a contingent liability, as there is a
present obligation to pay damages (patent rights were violated), but the outflow of
future economic benefits is not probable (court's ruling uncertain). Although S Ltd does
not recognise this contingent liability in its individual financial statements, it should be
recognised in the consolidated financial statements at acquisition date at fair value
when accounting for the business combination. As the indemnified liability is recognised
at acquisition date at fair value, the indemnification asset should also be recognised at
acquisition date at fair value (note that S Ltd will not recognise this indemnification
asset in its individual financial statements at acquisition date, as it represents a
contingent asset at that date).
The following consolidation journal will be required at acquisition date:
Dr Cr
R R
1 July 20.15
Indemnification asset (SFP) (500 000 × 60%) 300 000
Recognised contingent liability (SFP) 500 000
Recognition of contingent liability and indemnification
asset
If there are indications at the end of the reporting period (31 December 20.15) that the
claim will succeed and the amount of the claim is estimated at R2 million, S Ltd will
raise a provision of R2 million in its individual financial statements, as the outflow of
economic benefits are now probable. S Ltd will then also recognise a reimbursement
asset of R1,2 million (2 million × 60%). For consolidation purposes the liability should
be measured at the higher of R500 000 (amount initially recognised) and R2 million
(amount recognised in accordance with IAS 37) – therefore R2 million, while an
indemnification asset of R1,2 million should also be recognised. As the individual
financial statements of S Ltd already include the provision and the reimbursement
asset, it will be necessary to reverse the liability of R500 000 and indemnification asset
of R300 000 recognised at acquisition date.
The following additional consolidation journal is required:
Dr Cr
R R
31 December 20.15
Recognised contingent liability (SFP) 500 000
Indemnification asset (SFP) 300 000
Other expenses (law suit) (P/L) 200 000
Reversal of contingent liability and indemnification asset
19
Chapter 9
Comment
The effect of the above two consolidation journals is that the P Ltd Group recognises a
liability of R500 000 and an asset of R300 000 on 1 July 20.15, which are then adjusted
to R2 million and R1,2 million respectively at 31 December 20.15. The adjustment of
R600 000 is included in profit or loss and consists of the net expense of R800 000
(2 million – 1,2 million) recognised by S Ltd when the provision and reimbursement
asset was raised, less the above adjustment of R200 000 on 31 December 20.15.
Leases in which the acquiree is the lessee

The acquirer shall recognise right-of-use assets and lease liabilities for leases identified
in accordance with IFRS 16 in which the acquiree is the lessee, except for:
l leases for which the lease term ends within 12 months of the acquisition date; or
l leases for which the underlying asset is of low value (as described in IFRS 16).
The acquirer shall measure the lease liability at the present value of the remaining
lease payments (as defined in IFRS 16) as if the acquired lease were a new lease at
the acquisition date. The acquirer shall measure the right-of-use asset at the same
amount as the lease liability, adjusted to reflect favourable or unfavourable terms of the
lease when compared with market terms.
Example 9.11 Recognition and measurement of a favourable operating lease
1 January 20.18, S Ltd signed a lease agreement as lessee in respect of a specific
building situated in a prime business area with Z Ltd. The lease agreement stated that
the lease payment of R50 000 per annum was payable in arrears and, at the inception
of the lease, S Ltd's incremental borrowing rate was 16%. On 1 January 20.19 the
remaining lease term was five years, a market-related lease payment for similar
buildings was R58 000 per annum and S Ltd's incremental borrowing rate reduced to
15%. Ignore any tax consequences.
At acquisition date (1 January 20.19) P Ltd shall firstly measure the lease liability and
right-of-use asset at R167 608, calculated as Pmt = 50 000; i = 15%; n = 5; FV = 0 (the
present value of the remaining lease payments as if the acquired lease were a new
lease at the acquisition date).
Comment
A favourable component to the lease agreement arises from the favourable terms of the
lease agreement. The annual instalment payable by S Ltd is only R50 000, while a
market-related instalment amounts to R58 000.
Secondly, P Ltd will adjust the value of the right-of-use asset to reflect the favourable
terms of the lease when compared with market terms. The favourable component of the
lease equals R26 817 (Pmt = (58 000 – 50 000); i = 15%; n = 5; FV = 0). Therefore, the
fair value of the right-of-use asset will be R194 425 (R167 608 + R26 817).
20
Comment
The fair value of the right-of-use asset can also be calculated as the present value of
the market-related instalments of R58 000 discounted at 15% (Pmt = 58 000; i = 15%;
i = 5; FV = 0).
S Ltd already accounted for the lease agreement in its individual accounting records
according to IFRS 16. Therefore, the pro forma consolidation journal entries will
account for the difference between the carrying amount of the lease liability and right-
of-use asset in S Ltd’s accounting records and the fair value as calculated in
accordance with IFRS 3.
S Ltd Group Difference
(1) (5)
Lease liability 1 January 20.19 163 715 167 608 3 893
(2) (6)
Finance costs 26 194 25 141 (1 053)
Lease instalment (50 000) (50 000) –
Lease liability 31 December 20.19 R139 909 R142 749 R2 840
(3) (7)
Right-of-use asset 1 January 20.19 153 531 194 425 40 894
(4) (8)
Depreciation (30 706) (38 558) (8 179)
Right-of-use asset 31 December 20.19 R122 825 R155 867 R32 715
(1) Pmt = 50 000; i = 16%; n = 5; FV = 0 (5) Pmt = 50 000; i = 15%; n = 5; FV = 0

(2) 163 715 × 16% (6) 167 608 × 15%
(3) (Pmt = 50 000; i = 16%; n = 6; FV = 0) × 5/6 (7) Pmt = 58 000; i = 15%; i = 5; FV = 0
(4) 184 237/6 (8) 194 425/5
The pro forma consolidation journal entry at the date of acquisition will be as follows:
Dr Cr
R R
1 January 20.19
Right-of-use asset (SFP) (194 425 – 153 531) 40 894
Lease liability (SFP) (167 608 – 163 715) 3 893
Remeasurement of lease
The following consolidation journal entry will be required at the reporting date
(31 December 20.19):
Dr Cr
R R
Depreciation (P/L) 8 179
Right-of-use asset (SFP) 8 179
Financial liability (SFP) 1 053
Finance costs (P/L) 1 053
Adjustment of depreciation and finance costs for 20.19
21
Chapter 9
3 Exceptions to the measurement principle

Reacquired rights
The acquirer can reacquire a right that it had previously granted to the acquiree, such as
the right to use one or more of the acquirer’s recognised or unrecognised assets. This
right is recognised separately from goodwill. An example is the acquisition of the right to
use its trade name under a franchise agreement that the acquirer had previously granted
to the acquiree.
Share-based payment awards

The acquirer shall measure a liability or an equity instrument related to the replacement
of an acquiree’s share-based payment awards with share-based payment awards of the
acquirer in accordance with the method in IFRS 2 Share-based Payment. This method
is called the “market-based measure” of the award. Refer to IFRS 3.B56–.B62 and
.IE61–.IE71 for detailed guidance and illustrations.
Assets held for sale
The acquirer shall measure an acquired non-current asset held for sale (or disposal
group held for sale) at the acquisition date in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations at fair value less costs to sell
(refer to IFRS 5.15–.18).
Example 9.12 Non-current assets held for sale
S Ltd classified a machine as held for sale on 31 March 20.15, when the carrying
amount of the machine amounted to R250 000 and the fair value less costs to sell
amounted to R275 000. P Ltd acquired an 80% interest in S Ltd on 31 May 20.15, when
the machine’s fair value less costs to sell amounted to R287 500. From this date P Ltd
had control over S Ltd as per the definition of control in accordance with IFRS 10. At
the reporting date (30 June 20.15), the machine’s fair value less costs to sell decreased
to R280 000. Ignore any tax consequences.
In the individual financial statements of S Ltd the machine should be measured on
31 March 20.15 at the lower of its carrying amount (R250 000) and its fair value less
costs to sell (R275 000), i.e R250 000. When accounting for the business combination
on 31 May 20.15, the machine should be measured in the consolidated financial
statements at its fair value less costs to sell of R287 500.
The following consolidation journal is required:
Dr Cr
R R
31 May 20.15
Non-current assets held for sale (SFP) (287 500 – 250 000) 37 500
Remeasurement of non-current asset held for sale
At the end of the reporting period the machine should be remeasured to the lower of its
carrying amount and fair value less costs to sell. In the individual financial statements of
S Ltd no adjustment is required – measured at the lower of the carrying amount
(R250 000) and fair value less costs to sell (R280 000). In the consolidated financial
22
statements the machine should be measured at the lower of R287 500 (carrying
amount) and R280 000 (fair value less costs to sell). An impairment loss of R7 500
should thus be recognised in the consolidated financial statements.
The following consolidation journal is required:
Dr Cr
R R
30 June 20.15
Impairment loss (P/L) 7 500
Non-current asset held for sale (SFP) (287 500 – 280 000) 7 500
Remeasurement of non-current asset held for sale
Consideration transferred
9.5 Measurement of consideration transferred
The consideration transferred in a business combination should be measured at fair
value determined at acquisition date. The consideration is calculated as the sum of the
fair values of:
l the assets transferred by the acquirer (cash, property, plant and equipment,
investments, businesses or subsidiaries of the acquirer);
l the liabilities incurred by the acquirer (settlement of the purchase price at a future
date); and
l the equity interests issued by the acquirer (ordinary shares, preference shares and
options).
The carrying amount of assets and liabilities transferred as part of consideration may be
different from their fair values at acquisition date. If so, the acquirer should remeasure
the transferred assets or liabilities to their fair values as at the acquisition date and
should then recognise the resulting gains or losses, if any, in profit or loss.
Example 9.13 Measurement of consideration transferred
control over S Ltd as per the definition of control in accordance with IFRS 10. The
purchase price was settled as follows:
l A cash payment of R1 750 000 on 1 January 20.15.
l The issue of 10 000 shares on 15 January 20.15. The fair value of these shares
amounted to R350 000 on 1 January 20.15 and R385 000 on 15 January 20.15.
l The transfer of land, with a carrying amount of R525 000. The fair value of the land
amounted to R700 000 on 1 January 20.15 and R787 500 on 31 January 20.15,
when the transfer of the land was formally registered.
l As P Ltd did not have sufficient cash reserves, it was agreed that the outstanding
amount of R1 225 000 will be paid on 31 December 20.16. The fair value of this
liability amounted to R1 050 000 on 1 January 20.15.
Ignore any tax consequences.
23
Chapter 9
The fair value of the consideration transferred will amount to R3 850 000 (1 750 000
(cash) + 700 000 (land) + 350 000 (shares) + 1 050 000 (liability)). The fair value of the
land and shares should be determined at the acquisition date (1 January 20.15). The
requirement to measure liabilities at fair value necessitates the calculation of the
present value whenever settlement of the purchase consideration is deferred (the
difference between the present value (R1 050 000) and the amount payable
(R1 225 000) should be accounted for as interest paid over two years, using the
effective interest method). The transfer of land will result in a gain of R175 000
(700 000 – 525 000) being recognised in profit or loss.
The journal entry to account for the acquisition of S Ltd in the separate financial
statements of P Ltd as well as in the consolidated financial statements will be as
follows:
Dr Cr
R R
Investment in S Ltd (SFP) 3 850 000
Bank (SFP) 1 750 000
Share capital (SCE) 350 000
Financial liability (SFP) 1 050 000
Property, plant and equipment (Land) (SFP) 525 000
Gain on transfer of land (P/L) 175 000
Recognising the acquisition of S Ltd
Comment
In the above example the land was transferred to the former owners of the acquiree. If,
however, the transferred assets or liabilities remain within the combined entity after the
business combination, for example, because the assets or liabilities were transferred to
the acquiree, and, therefore, the acquirer retains control of them, the assets and
liabilities should be measured at their carrying amounts immediately before the
acquisition date and no gain or loss should be recognised. This will happen, for
example, if the acquirer obtains its interest in the acquiree directly from the acquiree
instead of its shareholders (the acquiree issues shares to the acquirer in exchange for
the transfer of an asset).
Example 9.14 Measurement of consideration transferred – Asset
S Ltd was incorporated on 1 January 20.15, on which date it issued all of its authorised
share capital to P Ltd in exchange for land owned by P Ltd. From that date P Ltd had
control over S Ltd as per the definition of control in accordance with IFRS 10. The land
had a carrying amount of R1 125 000 in the accounting records of P Ltd and a fair value
of R1 575 000 at that date. Ignore any tax consequences.
The journal entry to account for the acquisition of S Ltd in the separate financial
statements of P Ltd is as follows:
Dr Cr
R R
Property, plant and equipment (Land) (SFP) 1 125 000
Recognising the acquisition of S Ltd
24
As P Ltd retained control of the land transferred to S Ltd, a gain on the transfer of the
land may not be recognised in P Ltd's separate financial statements.
The journal entry to account for the issue of the shares in the individual financial
statements of S Ltd is as follows:
Dr Cr
R R
Property, plant and equipment (Land) (SFP) 1 575 000
Share capital (SCE) 1 575 000
Issuing of shares
S Ltd has issued shares worth R1 575 000 in exchange for land worth R1 575 000. In
accordance with IAS 16.16 the land should be measured at its purchase price, which is
R1 575 000.
In the consolidated financial statements, it would not be appropriate to recognise a gain
on the transfer of the land, as P Ltd retained control of the land. In addition, the land
should be recognised in the consolidated financial statements at its previous carrying
amount of R1 125 000 and not at the fair value of R1 575 000.
The following consolidation journal entry should be processed:
Dr Cr
R R
Share capital of S Ltd (SCE) 450 000
Property, plant and equipment (Land) (SFP) 450 000
Reversal of intragroup profit
An acquirer sometimes obtains control of an acquiree without transferring
consideration. Examples can include:
l The acquiree repurchases a sufficient number of its own shares, for an existing
investor (the acquirer) to obtain control.
l Minority veto rights lapse that previously kept the acquirer from controlling an
acquiree in which the acquirer held the majority voting rights.
l The acquirer and acquiree agree to combine their businesses by contract alone.
If the business combination is achieved by contract alone, the acquirer shall account for
the equity interests held by other parties as non-controlling interests in the consolidated
financial statements. Refer to example 14.13 for an example on the accounting
treatment of obtaining control through an agreement.
9.6 Measurement of contingent consideration transferred

The acquirer may agree to transfer additional equity interests, cash, or other assets to
the former owners of the acquiree after the acquisition date, provided that specified
events occur, for example if certain profit levels are reached – this is referred to as
contingent consideration. Contingent consideration is defined as an obligation of the
acquirer to transfer additional assets or equity interests to the former owners of an
acquiree as part of the exchange for control of the acquiree if specified future events
occur or conditions are met. The fair value of this contingent consideration as at
acquisition date should be included in the fair value of the total consideration that the
acquirer transfers in exchange for the acquiree (the fair value of the contingent
consideration reflects the probability that it will be paid).
25
Chapter 9
The obligation to pay contingent consideration should be classified as a financial liability

or as equity, based on the definitions of an equity instrument and financial liability
contained in IAS 32. If the obligation is not classified as equity or a financial liability, it
should be classified as a liability in terms of other standards. When measuring the fair
value of contingent payments, the acquirer's agreement to make contingent payments
is the obligating event that requires the recognition of a liability at acquisition date.
Contingent consideration may also give the acquirer the right to the return of previously
transferred considerations if specified future events occur or conditions are met, for
example where a portion of the purchase price will be repaid if profits fall below a
certain level. Contingent considerations receivable should be taken into account when
measuring the total consideration relating to the business combination. This will be
accounted for as a reduction in the total consideration transferred and the fair value
thereof will reflect the probability that it will be received. The right to receive this
contingent consideration should be classified as an asset.
Subsequent changes may occur in the fair value of the assets and liabilities recognised
for consideration receivable or payable. If these changes result from additional
information obtained after the acquisition date regarding circumstances that already
existed at acquisition date, the financial statements should be corrected retrospectively,
provided the adjustment is made within one year from acquisition date. This is referred
to as a measurement period adjustment. Changes in fair value, resulting from events
that occurred only after the acquisition date, such as share price and profit targets
being met, are not regarded as measurement period adjustments and are not
accounted for retrospectively. Instead, these changes in fair value are accounted for as
follows:
l Contingent consideration classified as equity is not remeasured. When the amount
is settled, the settlement is accounted for within equity.
l Contingent consideration classified as a financial asset or liability within the scope
of IFRS 9 should be measured to fair value at each reporting date. Any gains or
losses will be recognised in profit or loss in the period after the business
combination.
l Contingent consideration classified as an asset or liability not within the scope of
IFRS 9 should also be measured to fair value at each reporting date. Any gains or
losses will be recognised in profit or loss in the period after the business
combination.
Comment
It should be noted that most contingent consideration obligations are financial
instruments, and many are derivatives, as the value of the obligation changes, no initial
net investment is required and settlement is at a future date.
Example 9.15 Contingent consideration – Financial liability
control over S Ltd as per the definition of control in accordance with IFRS 10. At
1 January 20.15 the fair value of the identifiable net assets of S Ltd amounted to
R375 000, while the fair value of the 40% non-controlling interests amounted to
26
R125 000 (the non-controlling interests in the acquiree is measured at fair value). The
purchase price was settled as follows:
l R500 000 in cash;
l P Ltd also agreed to pay the previous owners of S Ltd an additional amount of
R75 000 in cash if the earnings of S Ltd increases by more than 10% per year for
two consecutive years. On 1 January 20.15 the fair value of this obligation is
estimated at R57 500 (taking into account the probability of meeting the earnings
target, as well as the time value of money).
On 31 December 20.15 (reporting date), the earnings of S Ltd have increased by 11%.
As the probability of payment increases, and as a result of the payment being one
period closer, the fair value of the liability is R65 000 on 31 December 20.15.
On 31 December 20.16 the earnings of S Ltd has increased by 12% and P Ltd is
obligated to pay the additional consideration of R75 000.
P Ltd recognised the equity investment in S Ltd in its separate records using the cost
price method.
In its separate financial statements, P Ltd will process the following journal entry on
1 January 20.15:
Dr Cr
R R
Investment in S Ltd (SFP) 557 500
Bank (SFP) 500 000
Financial liability at fair value through profit or loss (SFP) 57 500
Recognising contingent consideration as part of the
consideration transferred for the business combination
On 31 December 20.15, the financial liability is remeasured to fair value:
Dr Cr
R R
Fair value adjustment (P/L) 7 500
Financial liability at fair value through profit or loss (SFP)
(65 000 – 57 500) 7 500
Fair value adjustment of the financial liability for
contingent consideration
On 31 December 20.16 the following journal entries will be required:
Dr Cr
R R
J1 Fair value adjustment (P/L) 10 000
Financial liability at fair value through profit or loss
(SFP) (75 000 – 65 000) 10 000
J2 Financial liability at fair value through profit or loss (SFP) 75 000
Bank (SFP) 75 000
Settlement of the contingent consideration
27
Chapter 9
The following pro forma consolidation journal entry will be required to eliminate the at
acquisition equity of S Ltd:
Dr Cr
R R
At acquisition equity (SCE) 375 000
Goodwill (SFP) [(557 500 + 125 000) – 375 000] 307 500
Non-controlling interests (SCE/SFP) 125 000
Elimination of at acquisition equity
If the contingent consideration will be settled by the issuing of P Ltd’s shares (equal to
R75 000), the amount will still be classified as a financial liability. This is so because
IAS 32 requires contracts that will be settled in a variable number of the entity's own
shares to be classified as a financial liability. Assuming that P Ltd’s share price is
R12,50 on this date, all the journal entries will remain the same, except for the entry to
be processed on 31 December 20.16 by P Ltd, which will be as follows:
Dr Cr
R R
Financial liability at fair value through profit or loss
(SFP) (75 000 – 65 000) 10 000
J2 Financial liability at fair value through profit or loss (SFP) 75 000
If the parties agreed that P Ltd will settle the contingent consideration by issuing 6 000
shares, the amount will be classified as equity. This is because IAS 32 requires
contracts that will be settled in a fixed number of the entity's own shares to be classified
as equity. Equity instruments are not remeasured in accordance with IAS 32. In such a
case, P Ltd will process the following journal entry on 1 January 20.15:
Dr Cr
R R
Bank (SFP) 500 000
Equity (SCE) (contract to issue shares) 57 500
Recognising contingent consideration as part of the
consideration transferred for the business combination
On 31 December 20.16, the following journal entry will be required:
Dr Cr
R R
Equity (SCE) (contract to issue shares) 57 500
28
Example 9.16 Contingent consideration – Asset
On 31 December 20.15 (reporting date) P Ltd acquires an 80% interest in S Ltd at a

cost of R2,5 million. From that date P Ltd had control over S Ltd as per the definition of
control in accordance with IFRS 10. In terms of the purchase agreement, 6% of the
selling price amount will be repaid by the sellers to P Ltd if the profits of S Ltd fall below
R500 000 per annum in any of the next two years. Ignore any tax consequences.
At the acquisition date, an estimate should be made of the fair value of the contingent
consideration (the amount that may be received from the sellers). The fair value should
take into account the time value of money, as well as the probability that the amount will
be received. If it is assumed that the fair value of this receivable is R25 000 (low fair
value as it is expected that profits will exceed R500 000 per annum), the fair value of
the total consideration will amount to R2,475 million (2,5 million – 25 000).
On 31 December 20.15, the following journal entry will be required:
Dr Cr
R R
Financial asset (SFP) 25 000
Bank (SFP) 2 500 000
Recognising the consideration transferred to acquire
an 80% interest in S Ltd
If expectations at acquisition date are that the profit targets will be reached but, due to
an increase in interest rates subsequent to acquisition date there is a downward trend
in the economy, resulting in the targets not being met, the fair value of the consideration
should not be adjusted retrospectively. Instead, the difference between the initial fair
value of R25 000 and the amount received of R150 000 (6% × R2,5 million) should be
recognised in profit or loss.
Comment
If, after the acquisition date, information is obtained which confirms that the sellers of the
interest in S Ltd supplied fraudulent profit forecasts to P Ltd during negotiations and that,
based on the correct information as at acquisition date, the profits of S Ltd will definitely
not exceed R500 000 per annum, the fair value of the consideration transferred should
be adjusted retrospectively, by restating comparatives as the fraudulent information
meets the definition of a prior period error in accordance with IAS 8.
Example 9.17 Compensation for reduction in equity instruments
On 1 January 20.15 P Ltd acquires a 60% interest in S Ltd by issuing 10 000 shares
with a fair value of R25 each as settlement of the purchase price. From that date P Ltd
had control over S Ltd as per the definition of control in accordance with IFRS 10. P Ltd
undertakes to issue additional shares if the fair value of its shares decreases within the
first year after acquisition of S Ltd. On 1 January 20.15 expectations are that the share
price of P Ltd will increase in future and therefore the fair value of the potential
obligation to issue additional shares amounts to R15 000. However, the share price of
29
Chapter 9
P Ltd dropped during December and on 31 December 20.15 (reporting date) the fair
value of P Ltd's shares amounted to R15 each. Ignore any tax consequences.
The fair value of the consideration transferred is R265 000 and consists of the fair value
of the 10 000 shares issued on 1 January 20.15, amounting to R250 000 (10 000 × 25)
as well as the fair value of the contingent consideration of R15 000. The obligation to
issue additional shares if the share price decreases represents a financial liability, as
the number of shares issued depends on the extent of the reduction in the share price.
When the value of the shares decreases on 31 December 20.15, additional shares
need to be issued.
The following journal entries will appear in the separate financial accounts of P Ltd:
Dr Cr
R R
J1 1 January 20.15
Share capital (SCE) (25 × 10 000) 250 000
Fair value of consideration transferred
J2 31 December 20.15
Fair value adjustment (P/L) (((25 – 15) × 10 000) – 15 000) 85 000
Remeasurement of financial liability to fair value
J3 Financial liability (SFP) 100 000
Settlement of liability
Measurement period
9.7 Measurement period adjustments
In the sections above, it was indicated that the acquirer needs to identify and recognise
all the assets and liabilities of the acquiree. Furthermore, the fair value of the various
assets, liabilities, non-controlling interests, consideration, etc., needs to be obtained.
From a practical point of view, one should bear in mind that all these requirements are
very time-consuming. The measurement period in IFRS 3 therefore allows the acquirer
some leeway to finalise all the required procedures to complete the accounting of the
business combination properly.
If the initial accounting for the business combination is incomplete at the end of the
reporting period in which the combination transaction occurs, the acquirer shall report
provisional amounts in its financial statements for the items for which the accounting
is incomplete.
During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about
facts and circumstances that existed at the acquisition date that, if known, would have
affected the measurement of the amounts recognised at the acquisition date.
During the measurement period, the acquirer shall also recognise additional assets and
liabilities if new information is obtained about facts and circumstances that existed at
the acquisition date that, if known, would have resulted in the recognition of those
assets and liabilities at the acquisition date.
30
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed at the acquisition date or learns that
more information is not obtainable. However, the measurement period shall not exceed
more than one year from the acquisition date.
The effect of the above principle is that goodwill is subsequently adjusted for such
changes due to the fact that the changes resulting from new information are processed
retrospectively, as if the information had existed at the acquisition date. This results in a
fairer presentation of the goodwill (or gain from a bargain purchase) at the acquisition
date.
It is very important to note that not all information obtained in the measurement period
will result in changes to the provisional amounts at the acquisition date. The acquirer
should apply professional judgement to ensure that the new information reflects the
circumstances that existed at the acquisition date and not those that arose thereafter.
The shorter the time period between the estimate of the provisional amount at the
acquisition date and the receipt of additional information about the provisional amount
in the measurement period, the more likely the new information will relate to a
circumstance that existed at the acquisition date. The opposite is also true.
After the measurement period ends, the acquirer shall revise the accounting for a
business combination only to correct an error in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.
Example 9.18 Measurement period and adjustment to goodwill
The date of the business combination of P Ltd and S Ltd is 1 December 20.18. P Ltd
acquired a 55% interest in S Ltd. By the end of the reporting period of the group
(31 December 20.18), P Ltd determined the fair value of the identifiable net assets
(excluding plant) to be R2,4 million. The plant was provisionally valued at R600 000.
The business combination was effected through the transfer of R1,5 million in cash and
through the transfer of another investment to the seller. The other investment was
provisionally valued at R300 000.
The non-controlling interests are measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date.
price method.
By 31 December 20.18 the goodwill arising from the business combination at
1 December 20.18 was provisionally calculated as follows:
Consideration transferred (R1,5 million + R300 000) 1 800 000
Non-controlling interests [45% × (R2,4 million + R600 000)] 1 350 000
3 150 000
Less: Net identifiable assets acquired (R2,4 million + R600 000) (3 000 000)
Goodwill (provisional) R150 000
During March 20.19 P Ltd obtained the final valuation reports from an expert. The fair
value of plant on 1 December 20.18 was R650 000, while the fair value of the
investment transferred was R290 000. Furthermore, P Ltd did not identify any additional
assets acquired or liabilities assumed as at 1 December 20.18.
31
Chapter 9
The final goodwill from the business combinations at 1 December 20.18 will be
calculated as follows:
Consideration transferred (R1,5 million + R290 000) 1 790 000
Non-controlling interests [45% × (R2,4 million + R650 000)] 1 372 500
3 162 500
Less: Net identifiable assets acquired (R2,4 million + R650 000) (3 050 000)
Goodwill (final) R112 500
The amount for goodwill, as presented in the consolidated statement of financial
position as at 31 December 20.18, will therefore be retrospectively adjusted by R37 500
(i.e. R150 000 – R112 500) to reflect the true goodwill of R112 500 as at the date of the
acquisition (1 December 20.18).
The consolidation journal will be as follows:
Dr Cr
R R
1 December 20.18
Goodwill (SFP) (balancing) 150 000
Non-controlling interests (SCE/SFP) 1 350 000
At acquisition elimination journal of S Ltd
The provisional amounts used for the valuation of the plant and the investment
transferred will be retrospectively adjusted to the final valuation amounts in the
subsequent financial period. Consolidation journals are repeated every year and
therefore the final valuation amounts will be used in the 20.19 elimination journal.
Dr Cr
R R
31 December 20.19
Non-controlling interests (SCE/SFP) 1 372 500
Measurement period adjustment – Non-controlling interests

Example 9.19
measured at proportionate share
P Ltd acquired an 80% interest in S Ltd on 1 December 20.15 for R1 750 000. From
that date P Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. The net assets (excluding machinery) of S Ltd had a fair value of R1,5 million.
At that date the machinery of S Ltd had a remaining useful life of five years and carrying
amount of R500 000. P Ltd sought an independent appraisal for the machinery owned
by S Ltd, which was only finalised during March 20.16. Initially the value of the
32
machinery was estimated at R600 000, but the appraisal indicated a fair value of
R675 000 (the difference in fair value related to circumstances that existed at
acquisition date). The financial statements of P Ltd for the reporting period ended
31 December 20.15 were issued on 28 February 20.16.
The non-controlling interests are measured at their proportionate share of S Ltd’s
identifiable net assets.
price method.
When preparing the consolidated financial statements for the reporting period ended
31 December 20.15, a value of R600 000 will be assigned to the machinery.
The consolidation journals for 20.15 will be as follows:
Dr Cr
R R
J1 Machinery (SFP) (600 000 – 500 000) 100 000
Remeasurement of machinery to provisional fair
value
J2 Equity at acquisition (SCE) (1 500 000 + 600 000) 2 100 000
Non-controlling interests (SCE/SFP)
(2 100 000 × 20%) 420 000
Elimination of investment against equity at
acquisition
J3 Depreciation (P/L) (100 000/5 × 1/12) 1 667
Additional depreciation for 20.15 due to fair value
remeasurement
J4 Non-controlling interests (SCE/SFP) (1 667 × 20%) 333
Non-controlling interests (P/L) 333
Non-controlling interests in additional depreciation
for 20.15
The provisional amount used for the machinery will be corrected in the 20.16 financial
statements by means of a retrospective adjustment, as the amount is finalised within
12 months from the acquisition date.
The consolidation journal entries for 20.16 will therefore be as follows:
Dr Cr
R R
J1 Machinery (SFP) (675 000 – 500 000) 175 000
Remeasurement of machinery to final fair value
continued
33
Chapter 9
Dr Cr
R R
Non-controlling interests (SCE/SFP) (2 175 000 × 20%) 435 000
acquisition
J3 Retained earnings (SCE) (175 000/5 × 1/12) 2 917
remeasurement
Retained earnings (SCE) 583
for 20.15
J5 Depreciation for 20.16 (P/L) (175 000/5) 35 000
remeasurement
J6 Non-controlling interests (SCE/SFP) (35 000 × 20%) 7 000
Non-controlling interests for 20.16 (P/L) 7 000
for 20.16
Measurement-period adjustment – Non-controlling interests

Example 9.20
measured at fair value
P Ltd acquired an 80% interest in S Ltd on 1 December 20.15 for R1 750 000. From
that date P Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. The net assets (excluding machinery) of S Ltd had a fair value of R1 500 000.
At that date the machinery of S Ltd had a remaining useful life of five years and carrying
amount of R500 000. P Ltd sought an independent appraisal for the machinery owned
by S Ltd, which was only finalised during March 20.16. Initially the value of the plant
was estimated at R600 000, but the appraisal indicated a fair value of R675 000 (the
difference in fair value related to circumstances that existed at acquisition date).
The financial statements of P Ltd for the reporting period ended 31 December 20.15
were issued on 28 February 20.16.
The non-controlling interests at acquisition date are measured at a fair value of
R440 000.
price method.
When preparing the consolidated financial statements for the year ended
31 December 20.15, a value of R600 000 will be allocated to the plant.
34
The consolidation journals for 20.15 will be as follows:

Dr Cr
R R
J1 Machinery (SFP) (600 000 – 500 000) 100 000
Remeasurement of machinery to provisional fair
value
acquisition
J3 Depreciation (P/L) (100 000/5 × 1/12) 1 667
remeasurement
for 20.15
The provisional amount used for the machinery will be corrected in the 20.16 financial
statements by means of a retrospective adjustment, as the amount is finalised within
12 months from the acquisition date.
The consolidation journal entries for 20.16 will therefore be as follows:
Dr Cr
R R
J1 Machinery (SFP) (675 000 – 500 000) 175 000
Remeasurement of machinery to final fair value
acquisition
J3 Retained earnings (SCE) (175 000/5 × 1/12) 2 917
remeasurement
continued
35
Chapter 9
Dr Cr
R R
for 20.15
J5 Depreciation for 20.16 (P/L) (175 000/5) 35 000
remeasurement
J6 Non-controlling interests (SCE/SFP) (35 000 × 20%) 7 000
Non-controlling interests for 20.16 (P/L) 7 000
for 20.16
Comment
The pro forma fair value remeasurement and elimination journal entries (Journal 1 and
2) could also have been combined into one journal:
Dr Cr
R R
1 December 20.15
Machinery (SFP) 175 000
Equity at acquisition (SCE) (1 500 000 + 500 000) 2 000 000
Non-controlling interests (SFP/SCE) 440 000
Elimination journal entry at acquisition
Question 9.1
P Ltd is a new company listed on the JSE Limited. The company primarily invests in a
number of diversified subsidiaries. All the companies in the group have a 30 September
reporting period. P Ltd acquired an 87% holding in S Ltd on 1 October 20.19 from
X Ltd. From that date P Ltd had control over S Ltd as per the definition of control in
accordance with IFRS 10. The purchase agreement stipulated that the 87% interest in
S Ltd must be settled as follows:
l A cash payment of R12 million was made to X Ltd on 1 October 20.19.
l An amount of R30 million will be paid to X Ltd on 30 September 20.25.
l P Ltd transferred land to X Ltd. The land has a fair value of R50 million and a
carrying amount of R42 million on 1 October 20.19. The fair value increased to
R55 million on 15 October 20.19 when transfer was formally registered with the
Deeds Office.
36
l An additional amount of R10 million will be paid in cash to X Ltd on 31 March 20.23
if the profits generated by S Ltd during the period 1 October 20.19 to
31 March 20.23, increase by 150% above the current level. The probability of this
at 1 October 20.19 is 45%. The fair value of this obligation, taking into account the
probability and time value of money, is R3 198 066.
l P Ltd issued 200 000 call options on its own shares to X Ltd on 1 October 20.19.
The options entitle X Ltd to take up 200 000 ordinary shares in P Ltd on
30 September 20.20 at an exercise price of R7 per share. If the share price of
P Ltd drops before or on 31 March 20.20, additional options will be issued to X Ltd
in order to maintain the original value of the options issued.
l An amount of R100 000 was paid to an attorney for the valuation of S Ltd’s assets.
These costs were included in the cash amount of R12 million paid by P Ltd.
The abridged statement of financial position of S Ltd as at 1 October 20.19 was as
follows:
Equity
Share capital (10 000 000 shares) 5 000 000
Reserves 55 957 000
Total equity R60 957 000
The net asset value of S Ltd is considered to be fairly valued with the exception of the
following:
l S Ltd has owner-occupied property, consisting of land and buildings, with the
following relevant information on the 1 October 20.19:
Carrying Fair Residual
Cost amount value value
Land R19 million R19 million R25 million –
Buildings R32 million R28 million R44 million R36 million
It is the accounting policy of both P Ltd and S Ltd to account for property, plant and
equipment using the cost price model in accordance with IAS 16 Property, Plant
and Equipment.
l At acquisition S Ltd is facing legal action from Y Ltd due to a deal that went sour.
The amount of the claim is R5 million. The legal advisors of S Ltd are of the opinion
that there is a 30% chance that the claimant will be successful with its case. After
talks with their legal team S Ltd is contemplating taking out insurance to cover the
claim. An independent insurer has quoted a once-off premium of R750 000. The
SARS will not allow any deductions relating to the claim or the once-off premium.
l The success of S Ltd is largely due to its workforce. Their staff has been trained by
the best to be the best. P Ltd has taken note of this, and it is as a crucial reason for
acquiring S Ltd. S Ltd has determined that to replace their current workforce would
cost R6 million (P Ltd accept this as the fair value).
l Another reason why P Ltd was interested in S Ltd is their huge customer data
base. The attorney determined the fair value of the customer data base at
R5 million. It can be assumed that customer data bases are frequently exchanged.
S Ltd has signed confidentiality agreements with all its customers preventing them
from exchanging information with third parties.
37
Chapter 9
Additional information
l Unless stated otherwise, assume a fair pre-tax market-related rate of 10% per
annum, compounded annually.
l P Ltd elected to measure non-controlling interests at fair value on acquisition date.
l P Ltd recognised the equity investment in S Ltd in its separate records using the
cost price method.
l Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
l The following information relates to P Ltd:
Fair value of P Ltd shares (per share)
1 October 20.19 R15
31 March 20.20 R14,20
Fair value of call options to X Ltd (per option)
1 October 20.19 R6
31 March 20.20 R5,30
l The following information relates to S Ltd:
Fair value of S Ltd shares (per share)
1 October 20.19 R9
Required
(a) Prepare the journal entry to account for the acquisition of S Ltd, as required in the
separate financial statements of P Ltd on 1 October 20.19, in accordance with
IFRS 3 Business Combinations.
(b) Prepare the at acquisition consolidation journal entry that is required on
1 October 20.19, in order to include S Ltd in the consolidated financial statements
of the P Ltd Group. Journals should also include applicable items which have no
value and deferred tax calculation for applicable items.
Round off to the nearest rand.
Suggested solution 9.1
(a) Journal entry in the separate financial statements of P Ltd

Dr Cr
R R
1 October 20.19
Investment in S Ltd (SFP) (balancing) 83 232 284
Valuation expenses (P/L) 100 000
Bank (SFP) 12 000 000
Liability (SFP) (C1) 16 934 218
Land (SFP) 42 000 000
Gain on land transferred (P/L) 8 000 000
Contingent consideration liability (SFP) 3 198 066
Options (SCE) (C2) 1 200 000
Recognise the acquisition of S Ltd
38
Comment
The consideration transferred may include assets of the acquirer that have carrying
amounts that differ from their fair values at the acquisition date. If so, the acquirer shall
remeasure the transferred assets or liabilities to their fair values and recognise the
resulting gains or losses in profit or loss.
However, sometimes the transferred assets remain within the combined entity after the
business combination and the acquirer therefore retains control of them. In this situation,
the acquirer shall measure those assets at their carrying amounts immediately before
the acquisition date and shall not recognise a gain or loss.
(b) Consolidation journal entry in the consolidated financial statements of the

P Ltd Group
Dr Cr
R R
1 October 20.19
Share capital (SCE) 5 000 000
Retained earnings (SCE) 55 957 000
Land (SFP) (C3.1) 6 000 000
Buildings (SFP) (C3.2) 16 000 000
Contingent liability (SFP) 750 000
Intangible asset (SFP) – Workforce –
Intangible asset (SFP) – Customer data base –
Deferred tax (SFP) (C4) 5 600 000
Goodwill (SFP) (balancing) 18 325 284
Investment in S Ltd (SFP) (Part (a)) 83 232 284
Non-controlling interests (SCE/SFP) (C5) 11 700 000
Calculations
C1 Liability – Deferred settlement
FV=30 000 000; i=10%; n=6; Pmt=0; PV=16 934 218
C2 Equity instrument – Share options

200 000 × 6 = 1 200 000
C3 Owner-occupied property
Land Building
Fair value 1 October 20.19 25 000 000 44 000 000
Carrying amount 1 October 20.19 19 000 000 28 000 000
Fair value remeasurement 6 000 000 16 000 000
(C3.1) (C3.2)
39
Chapter 9
C4 Deferred tax
Carrying Tax Temporary
Deferred tax
amount base difference
Land – Fair value
(*)
remeasurement 6 000 000 – 6 000 000 1 344 000
Building – Fair value
remeasurement
Carrying amount to cost 4 000 000 – 4 000 000 1 120 000
(*)
Cost to residual 4 000 000 – 4 000 000 896 000
Above residual 8 000 000 – 8 000 000 2 240 000
16 000 000 16 000 000 4 256 000
Contingent liability 750 000 750 000 –
5 600 000
(*) Will be realised at the capital gains tax rate
C5 Non-controlling interests
10 000 000 × 13% × 9 = 11 700 000
40
10
IFRS 10
Consolidated financial statements
– Control
Introduction
10.1 Overview of the topic ............................................................................... 43
10.2 Investment entities ................................................................................... 43
Example 10.1: Investment entities .......................................................... 45
Control ............................................................................................................... 45
10.3 Purpose and design of the investee......................................................... 46
Example 10.2: Purpose and design of the investee ................................ 47
10.4 Power of an investee ............................................................................... 47
Example 10.3: Substantive rights ............................................................ 49
Example 10.4: Protective rights .............................................................. 50
Example 10.5: Majority of voting rights without power ............................ 51
Example 10.6: Power without a majority of voting rights ......................... 52
Example 10.7; Potential voting rights ...................................................... 53
10.5 Exposure to variable returns from an investee ........................................ 54
10.6 Link between power and variable returns ................................................ 54
Example 10.8: Investor acting as agent or principal ................................ 55
10.7 Unconsolidated structured entities ........................................................... 56
10.8 Summary of control assessment.............................................................. 56
Question 10.1 ........................................................................................................ 57
41
IFRS 10 Consolidated financial statements – Control
Introduction
10.1 Overview of the topic
The objective of IFRS 10 Consolidated Financial Statements is to establish principles
for the presentation and preparation of consolidated financial statements.
To meet the above objective, the standard:
l requires a parent entity to present consolidated financial statements;
l defines the principle of control, and establishes control as the basis for
consolidation;
l set out how to apply the principle of control to identify whether an investor controls
an investee and therefore must consolidate the investee;
l sets out the accounting requirements for the preparation of consolidated financial
statements; and
l defines an investment entity and sets out an exception to consolidating particular
subsidiaries of an investment entity.
The presentation and preparation of consolidated financial statements are dealt with in
Volume 1, chapter 1 and chapter 3 to 8, respectively. Investment entities will be briefly
dealt with under chapter 10.2 below and the principles of control will be summarised
and illustrated in the remainder of this chapter. IFRS 10 contains detailed guidance for
the application of the principles of control and should also be consulted.
The definition and principle of control is also important when applying IFRS 3 Business
Combinations as a business combination is defined in IFRS 3 as a transaction or other
event in which an acquirer obtains control of one or more businesses. The business
combination definition thus comprises mainly two core aspects, namely “control” and
“business”. Although “business” is defined in IFRS 3, control is only addressed in
IFRS 10.
10.2 Investment entities

IFRS 10 specifically states that investment entities are excluded from the requirement
to prepare consolidated financial statements. Investment entities are defined as an
entity that:
l obtains funds from one or more investors for the purpose of providing those
investor(s) with investment management services;
l commits to its investor(s) that its business purpose is to invest funds solely for
capital appreciation, investment income, or both; and
l measures and evaluates the performance of substantially all of its investments on
a fair value basis.
Investment entities also have the following typical characteristics that should be
considered when assessing if an entity is an investment entity:
l the entity has more than one investment;
l the entity has more than one investor;
l the entity has investors that are not related parties of the entity; and
l the entity has ownership interests in the form of equity or similar interests.
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Chapter 10
If an entity is classified based on the above definition and typical characteristics as an

investment entity:
l the entity is not required to assess control in terms of IFRS 10;
l the entity is not required to apply IFRS 3 Business Combinations; and
l the entity is not required to consolidate its subsidiaries.
Instead the entity will measure their investments in subsidiaries at fair value through
profit or loss in accordance with IFRS 9 Financial Instruments.
If the circumstances and facts indicate that there were changes to one or more of the
elements that make up the definition of an investment entity, or to the typical
characteristics of an investment entity, the investor should reconsider the investment
entity classification. Any change in the status of the investment entity classification shall
be accounted for prospectively from the date at which the change in status occurred.
IFRS 12 requires an investment entity to disclosure the following:
l the fact that the entity is classified as an investment entity;
l significant judgements and assumptions the entity has made in determining that it
is an investment entity;
l if the investment entity does not have one or more of the typical characteristics of
an investment entity, it shall disclose its reasons for concluding that it is
nevertheless an investment entity;
l for each unconsolidated subsidiary:
• the subsidiary’s name;
• the principal place of business (and country of incorporation if different from the
principal place of business) of the subsidiary; and
• the proportion of ownership interest held by the investment entity and, if
different, the proportion of voting rights held;
l the nature and extent of any significant restrictions on the ability of an
unconsolidated subsidiary to transfer funds to the investment;
l any current commitments or intentions to provide financial or other support to an
unconsolidated subsidiary;
l if, during the reporting period, an investment entity or any of its subsidiaries has,
without having a contractual obligation to do so, provided financial or other support
to an unconsolidated subsidiary the entity shall disclose:
• the type and amount of support provided to each unconsolidated subsidiary; and
• the reasons for providing the support;
l the terms of any contractual arrangements that could require the entity or its
unconsolidated subsidiaries to provide financial support to an unconsolidated,
controlled, structured entity, including events or circumstances that could expose
the reporting entity to a loss;
l if during the reporting period an investment entity or any of its unconsolidated
subsidiaries has, without having a contractual obligation to do so, provided
financial or other support to an unconsolidated, structured entity that the
investment entity did not control, and if that provision of support resulted in the
investment entity controlling the structured entity, the investment entity shall
disclose an explanation of the relevant factors in reaching the decision to provide
that support.
44
Example 10.1 Investment entities
P Ltd was established to manage retirement funds of various public and private sector
pension funds. The company has two main investors being the Government Pension
Fund and Invest Pension Fund. P Ltd prepares quarterly reports which are sent to
investors and used internally to measure performance. These reports typically include
information about the return on investment and fair value movements of the
investments made by P Ltd. The commission earned by P Ltd is also based on the
quarterly reports. P Ltd’s investments consist mainly of equity investments of various
local companies listed on the JSE Ltd. For one of these equity investments, S Ltd, P Ltd
holds a 62% controlling interest.
P Ltd was established to manage retirement funds. P Ltd also uses fair value
measurement to gauge their performance and invests in various local companies. P Ltd
has more than one investment, more than one investor, it does not appear if the parties
are related and P Ltd invests in equity. P Ltd therefore meets the definition of an
investment entity.
P Ltd shall thus not consolidate S Ltd, but will instead measure the investment in a
subsidiary at fair value through profit or loss in accordance with IFRS 9 Financial
Instruments.
Comment
IFRS 10.B85A–.B85W provides detail guidance on the assessment of an investment
entity.
Control
In terms of IFRS 10 Consolidated Financial Statements an entity that is a parent
shall present consolidated financial statements. A parent is defined as an entity that
controls one or more entities. Therefore, an investor, regardless of the nature of its
involvement with the investee, shall determine whether it is a parent by assessing
whether it controls the investee. An investor controls an investee when the investor is
exposed, or has rights, to variable returns from its involvement with the investee and
has the ability to affect those returns through its power over the investee (IFRS 10
Appendix A). The definition can be illustrated as follows:
Link between
Exposure to
Power power and
Control variable returns
(chapter 10.4) returns
(chapter 10.5)
(chapter 10.6)
Taking into account the purpose and design of the investee
(chapter 10.3)
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Chapter 10
Comment
It is important to note that all three elements of control must be present in a scenario
before control over an investee can be achieved. If any one of the elements are not
satisfied, the control assessment can be ceased because control is not present.
An investor should continuously assess if it still controls an investee. If the

circumstances and facts indicate that there were changes to one or more of the three
elements of control, as indicated above, the investor should consider if control over an
investee was perhaps obtained or lost.
Comment
It may even happen that an investor gains or loses power over an investee without any
action taken by the investor. For example, an investor can gain power over an investee
because decision-making rights held by another party or parties that previously
prevented the investor from controlling an investee have lapsed.
Two or more investors cannot jointly be regarded as the parent of an investee. If two or
more investors collectively control (act together to direct the relevant activities) an
investee, none of the investors individually controls the investee. Each investor would
account for its interest in the investee in accordance with other relevant IFRSs, such as
IFRS 11 Joint Arrangements, IAS 28 Investments in Associates and Joint
Ventures or IFRS 9 Financial Instruments.
10.3 Purpose and design of the investee

The purpose and design of the investee impacts the determination of control. Although
the purpose and design of the investee is not an element of the control definition, it is
the primary consideration when accessing control. An investor shall consider the
purpose and design of the investee in order to identify:
l the relevant activities;
l how decisions about the relevant activities are made;
l who has the current ability to direct those activities; and
l who receives returns from those activities.
Comment
The assessment may be straightforward, for example if an investee, in the absence of
additional arrangements that alter decision-making, is controlled by means of equity
instruments for instance shares. The equity instruments give the holder proportionate
voting rights. The party who is able to exercise voting rights sufficient to determine the
investee’s operating and financing policies will control the investee and should therefore
prepare consolidated financial statements. In other cases the assessment may be more
complex and the other elements of control should also be considered in assessing
control.
46
Example 10.2 Purpose and design of the investee
S Ltd was incorporated exclusively to manage the debtors of a commercial bank, P Ltd.
The only assets of S Ltd are the debtors. When the purpose and design of S Ltd are
considered, it is determined that the only relevant activity is managing the debtors upon
default. The party that has the ability to manage the defaulting debtors has power over
S Ltd, irrespective of whether any of the debtors are currently recoverable or not.
10.4 Power of an investee

The assessment of power can be explained by the following decision tree:
The investor has power
over the investee
Identify the
relevant Yes
activities of the
investee. Does the Are the voting The investor
How are the Through voting investor hold Yes rights substantive No does not
relevant rights more than ½ and not merely control the
activities of the of the voting protective? investee
investee rights?
directed?
No Yes
Is there a contractual arrangement with other

investors? Or
Through a Is there a contractual arrangement to direct
contractual relevant activities? Or
agreeement Does voting rights provide the investor the
practical ability to direct the relevant activites
unilaterally? Or
Are there potential voting rights to consider?
An investor has power over an investee when the investor has existing rights that give
it the current ability to direct the relevant activities (activities that significantly affect the
investee’s returns) of the investee.
1 Existing rights
Power arises from rights. The rights that may give an investor power can differ between
investees. Rights that, either individually or in combination, can give an investor power
include:
l voting rights or potential voting rights of an investee;
l rights to appoint, reassign or remove members of an investee’s key management
personnel who have the ability to direct the relevant activities;
l rights to appoint or remove another entity that directs the relevant activities;
l rights to direct the investee to enter into, or veto any changes to transactions for
the benefit of the investor; and
l other rights for instance decision-making rights specified in a management contract
that give the holder the ability to direct the relevant activities.
In the absence of additional arrangements that alter decision-making, control is simply
determined by voting rights. The party that is able to exercise voting rights (power)
sufficient to determine the investee’s operating and financial policies (relevant
activities), controls the investee.
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Chapter 10
Comment
Refer to chapter 1 (Volume 1) for examples of different group structures.
For the purpose of assessing power, an investor shall only consider substantive rights
and rights that are not protective (refer to point 3 and 4 respectively, below).
2 Relevant activities
It is important to note that the investor should have control over the relevant activities of
the investee. IFRS 10 defines relevant activities, as activities of the investee that
significantly affect the investee’s returns. This implies that the investor, who ultimately
can direct the relevant activities, would control the investee. Activities that, depending
on the circumstances, can be relevant activities include:
l selling and purchasing of goods or services;
l managing financial assets during their life;
l selecting, acquiring or disposing of assets;
l researching and developing new products or processes; and
l determining a funding structure or obtaining funding.
Comment
Refer to example 10.4 and 10.5 for examples of relevant activities.
3 Substantive rights
An investor’s rights over an investee’s relevant activities should be considered when
assessing control. Only substantive rights may lead to control. A right is substantive
when the holder of the right has the practical ability to exercise that right relating to an
investee. The investor should also consider the nature of the investee’s relationship
with other parties when determining if the rights are substantive. Factors that could
impact if a right is substantive or not include:
l Whether there are any barriers that prevent the holder from exercising the rights,
for example, financial penalties that would prevent or deter the holder from
exercising its rights.
l When the exercise of rights requires the agreement of more than one party, or
when the rights are held by more than one party, whether a mechanism is in place
that provides those parties with the practical ability to exercise their rights
collectively if they choose to do so. The lack of such a mechanism is an indicator
that the rights may not be substantive. The more parties that are required to agree
to exercise the rights, the less likely it is that those rights are substantive.
l Whether the party or parties that hold the rights would benefit from the exercise of
those rights, for example, the holder of potential voting rights in an investee shall
consider the exercise or conversion price of the instrument.
To be substantive, rights also need to be exercisable when decisions about the
direction of the relevant activities need to be made. Usually, to be substantive, the
rights need to be currently exercisable, However, sometimes rights can be substantive,
even though the rights are not currently exercisable.
48
Comment
Potential voting rights (refer below) are also only considered when those rights are
substantive.
Example 10.3 Substantive rights
On 1 April 20.18 P Ltd acquired an option to acquire the majority of shares in S Ltd. The
option will be settled on 25 April 20.18. In terms of S Ltd’s memorandum of
incorporation, policies over the relevant activities can be changed only at special or
scheduled shareholders’ meetings. This includes the approval of material sales of
assets as well as the making or disposing of significant investments. The next
scheduled shareholders’ meeting is in three months. Shareholders that individually or
collectively hold at least 5% of the voting rights can call a special meeting to change the
existing policies over the relevant activities, but a requirement to give notice to the other
shareholders means that such a meeting cannot be held for at least 30 days.
P Ltd is considered to have the practical ability to settle the option. The option will only
be settled in 25 days. However, the existing shareholders are unable to change the
existing policies over the relevant activities because a special meeting cannot be held
for at least 30 days, at which point the option will have been settled. There are also no
barriers preventing P Ltd from settling the option.
On 1 April 20.18 P Ltd’s option is a substantive right that gives P Ltd the current ability
to direct the relevant activities even before the option is settled. Therefore, P Ltd has
rights that are essentially equivalent to the majority shareholder in S Ltd.
Comment
If however the exercise price of the option is substantively more than the current share
price of S Ltd, the option would not be a substantive right as P Ltd would not benefit
from exercising the right.
4 Protective rights
Substantive rights exercisable by other parties can prevent an investor from controlling
the investee to which those rights relate. As long as the rights are not merely protective,
substantive rights held by other parties may prevent the investor from controlling the
investee even if the rights give the holders only the current ability to approve or block
decisions that relate to the relevant activities.
IFRS 10 defines protective rights as rights designed to protect the interest of the party
holding those rights without giving that party power over the entity to which those rights
relate. Examples of protective rights include:
l a lender’s right to restrict a borrower from undertaking activities that could
significantly change the credit risk of the borrower to the detriment of the lender;
l the right of a party holding a non-controlling interest in an investee to approve
capital expenditure greater than that required in the ordinary course of business, or
to approve the issue of equity or debt instruments;
l the right of a lender to seize the assets of a borrower if the borrower fails to meet
specified loan repayment conditions.
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Chapter 10
Example 10.4 Protective rights
P Ltd holds a 55% interest in S Ltd and another shareholder B Ltd holds the remaining
45%. The shareholders agreement between P Ltd and B Ltd states that B Ltd is
responsible for the day to day running of S Ltd and approval from P Ltd will only be
required if S Ltd required additional funding. The terms of the shareholders agreement
can only be changed with the approval of both parties.
P Ltd holds more than half of the voting rights of S Ltd. P Ltd has the right to restrict
S Ltd from undertaking activities that could significantly change the credit risk (through
additional funding) of S Ltd to the detriment of P Ltd. Another entity, B Ltd, has existing
rights that provide them with the right to direct the relevant activities of S Ltd. P Ltd can
also not change the shareholders agreement without the approval of B Ltd. Thus
although P Ltd holds the majority of the voting rights of S Ltd, it only holds protective
rights and does not have power over S Ltd.
Comment
Because protective rights are designed to protect the interests of their holder without
giving that party power over the investee to whom those rights relate, an investor that
holds only protective rights cannot have power or prevent another party from having
power over an investee.
The difference between substantive rights and protective rights is important and often
confused. The difference can be summarised as follows:
5 Franchises
A franchise agreement for which the investee is the franchisee often gives the
franchisor rights that are designed to protect the franchise brand. Franchise
agreements typically also give franchisors some decision-making rights with respect to
the operations of the franchisee.
However, it is necessary to distinguish between having the current ability to make
decisions that significantly affect the franchisee’s returns and having the ability to make
50
decisions that protect the franchise brand. The franchisor does not have power over the
franchisee if other parties have existing rights that give them the current ability to direct
the relevant activities of the franchisee. For example, the shareholders of an investee
will have power over the business (relevant activities) of the franchisee and run the
business to maximise profits. In doing so, the franchisee will have to follow some rules
meant to protect the franchise brand in terms of the franchise agreement.
6 Power through majority of voting rights

An investor has power over an investee if the following requirements are met:
l the investor holds more than half of the voting rights of an investee;
l the voting rights are substantive; and
l voting rights direct the relevant activities (refer to chapter 10.4, point 2) of the
investee or the voting right may appoint the majority of the executive management
of the investee.
Example 10.5 Majority of voting rights without power
S Ltd was incorporated by the local municipality to install prepaid water and electricity
meters at residential properties. P Ltd, a manufacturer of prepaid water and electricity
meters acquired a 60% interest in S Ltd from the municipality. The shareholders
agreement between the municipality and P Ltd stipulates the following terms:
l Each share entitles the holder to one vote.
l The board of directors will comprise of two nominees of P Ltd and the municipality
each.
l S Ltd will purchase all the meters from P Ltd at a fixed price. The fixed price can
only be changed with the approval of the municipality.
l The municipality will determine the selling and installation price of the meters.
In general P Ltd will be regarded as having power over S Ltd, as P Ltd own 60% (each
share entitle the holder to one vote) of the total voting rights, which constitutes the
majority of the voting rights. However, although P Ltd owns the majority of the voting
rights, the shareholders agreement stipulate the municipality will determine the selling
and installation price of the prepaid meters and will have to approve any change into
the input cost of S Ltd’s inventory. These activities are deemed to be the relevant
activities, as they significantly affect the returns of S Ltd; therefore, the relevant
activities are directed by the municipality through the shareholders agreement. P Ltd
does not have the power of S Ltd as it does not have the power to direct the relevant
activities that significantly affects the returns of S Ltd.
Comment
Power over the investee can therefore not be automatically assumed if the investor
merely owns more than 50% of the shares in an investee. Other factors should also be
considered to determine control over an investee.
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Chapter 10
7 Power without a majority of voting rights (de facto power)

An investor can have power with less than a majority of the voting rights of an investee,
for example, through:
l a contractual arrangement between the investor and other vote holders, for
example a contractual arrangement might ensure that the investor can direct
enough other vote holders on how to vote to enable the investor to make decisions
about the relevant activities;
l rights arising from other contractual arrangements, for example a contractual
arrangement in combination with voting rights may be sufficient to give an investor
the current ability to direct the relevant activities of the investees;
l voting rights, if the voting rights provides the investor the practical ability to direct
the relevant activities unilaterally; or
l potential voting rights (refer to point 8 below); or
l a combination of the above.
When assessing whether an investor’s voting rights are sufficient to give it power, all
facts and circumstances should be considered. The size of the investor’s holding of
voting rights relative to the size and dispersion of holdings of the other vote holders is
important, as the more voting rights an investor holds, the more likely the investor is to
have existing rights enabling it to direct relevant activities. An investor is also more
likely to have the current ability to direct relevant activities, where a lot of parties are
needed to act together to outvote the investor.
Example 10.6 Power without a majority of voting rights
S Ltd has 1 million shares in issue and each ordinary share entitles the holder to one
vote at shareholders’ meetings. S Ltd’s operating and financial policies are determined
by the company’s Board of Directors. All the directors of S Ltd are appointed by the
shareholders at annual general meetings by simple majority vote.
Details of voting rights represented at the annual general meetings of S Ltd’s
shareholders are as follows:
Annual general meeting held on
31 May 20.14 31 May 20.13 31 May 20.12
Voting rights represented,
in person or by proxy 90% 92% 87%
On 1 January 20.15 P Ltd acquired 49% of the shares of S Ltd in the open market. The
remaining shares were widely held by shareholders holding less than 1% each of the
share capital.
The relevant activities of S Ltd are the operational and financial activities of the
company. Changes through the operational and financial policies will affect the
investee’s returns. From the information provided it is evident that the board of directors
make the operating and financial decisions and in turn they direct the relevant activities
of S Ltd. Directors are appointed by the shareholders by a simple majority vote on
shareholder meetings. Therefore, a majority shareholder vote (>50%) at meetings
would enable the appointment of the directors and implicitly gain power over the
relevant activities of S Ltd. However, no single investor holds the majority of the voting
rights.
52
Nonetheless, P Ltd’s shareholding of 49% is significant in relation to the other

shareholders and based on past attendance of the shareholders meetings, P Ltd has
significantly more voting rights than any other vote holder.
Attendance at shareholders’ meetings reveals that during the last three years, on
average no more that 90% of shareholders were present at the shareholder meetings.
Therefore, any shareholder who holds more than 45% (50% of the 90% voting rights at
a shareholders’ meeting) of the voting rights would be considered to have the majority
vote. As P Ltd acquired 49% of the shares of S Ltd, P Ltd will be deemed to have power
over S Ltd even without holding the majority of the voting rights.
Comment
IFRS 10.B39–.B46 provides detail guidance on assessing power when the investor
does not own a majority of voting rights.
8 Potential voting rights

Potential voting rights should also be considered in assessing power, if the rights are
substantive (see point 3 above). This will include potential voting rights of the investee
held by the investor or other parties. Potential voting rights are rights to obtain voting
rights of an investee, such as those arising from convertible instruments, options, or
forward contracts.
When considering potential voting rights, an investor shall consider the purpose and
design of the instrument, as well as the purpose and design of any other involvement
with the investee. This includes an assessment of the various terms and conditions of
the instrument as well as the investor’s apparent expectations, motives and reasons for
agreeing to those terms and conditions.
Example 10.7 Potential voting rights
P Ltd owns 42% of the issued share capital of S Ltd. S Ltd issued share capital consist
of 1 000 shares and each share qualifies for one vote. P Ltd also holds 400 convertible
debentures in S Ltd. The convertible debentures are convertible at any time at the
discretion of the holder. Two debentures are convertible into one share and the
debentures are currently convertible.
If the debentures are converted S Ltd’s issued share capital will increase to 1 200
shares and P Ltd’s investment in S Ltd will increase to 620 shares (420 previously
owned shares and 200 converted shares). P Ltd will therefore own 52% (620/1200) of
S Ltd.
For that reason, P Ltd has power over S Ltd even though the convertible debentures
have not yet been converted as P Ltd’s potential voting power of 52% constitutes more
than half of the total voting power (assuming there are no other contractual agreements
or rights that dictate otherwise).
Comment
When consolidating S Ltd, the present ownership interest should be used to allocate the
equity of S Ltd between the controlling and non-controlling interests, thus 42% to P Ltd
and 58% to the non-controlling shareholders.
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Chapter 10
10.5 Exposure to variable returns from an investee

The second component of the definition of control is that an investor should be
exposed, or have rights to variable returns from its involvement with the investee. An
investor is exposed to variable (not fixed) returns from its involvement with the investee
when the investor’s returns from its involvement have the potential to vary as a result of
the investee’s performance. Variable returns can be only positive, only negative or both
positive and negative.
Examples of returns include:
l dividends, other distributions of economic benefits from an investee and changes
in the value of the investor’s investment in that investee;
l remuneration for servicing an investee’s assets or liabilities, fees and exposure to
loss from providing credit or liquidity support, residual interests in the investee’s
assets and liabilities on liquidation of that investee, tax benefits, and access to
future liquidity that an investor has from its involvement with an investee;
l returns that are not available to other interest holders, for example, an investor
might use its assets in combination with the assets of the investee, such as
combining operating functions to achieve cost savings, sourcing scarce products,
limiting some operations or assets, or to enhance the value of the investor’s other
assets.
Comment
Although only one investor can control an investee, more than one party can share in
the returns of an investee, for example, holders of non-controlling interests can share in
the profits or distributions of an investee. The investor who controls the investee has the
power to influence the performance of the investee (through its decisions regarding the
relevant activities) which will result in variable returns to the controlling investor and
other investors.
10.6 Link between power and variable returns

An investor controls an investee if the investor not only has power over the investee,
and exposure to variable returns from its involvement with the investee, but also has
the ability to use its power to use its power to affect the investor’s returns from its
involvement with the investee. There must be a connection between the power and
variable returns.
Agent classification
An investor may use its power over the investee itself, or it may appoint an agent to
exercise its power on its behalf. When an investor with decision-making rights assesses
whether it controls an investee, it shall determine whether it is a principal or an agent.
An agent is a party that acts on behalf of and for the benefit of another party namely
54
the principal. The difference between an agent and a principal can be illustrated as
follows:
Power:
Exposure to Variable returns
Principal decision-making
variable returns for own benefit
rights
Variable
Power:
Exposure to returns for
Agent decision-making
variable returns other party's
rights
benefit
Important to note is that a decision-maker is not regarded as an agent simply because
other parties can benefit from the decisions that it makes. An agent does not control the
investee when it exercises its decision-making authority and therefore will not have to
present consolidated financial statements. Control still lies with the principal on whose
behalf the agent is acting.
The agent/principal assessment is crucial for investment managers who make
investment decisions on behalf of investors in exchange for a fee. A decision-maker
should consider their relationship with the investee and other parties involved with the
investee in determining whether the decision-maker is acting in the capacity of an
agent. The following factors should all be considered in the assessment:
l the scope of the decision-maker’s authority over the investee;
l the rights held by other parties;
l the remuneration to which the decision-maker is entitled; and
l the decision-maker’s exposure to variability of returns from other interests that it
holds in the investee.
Comment
IFRS 10 provides detail additional guidance on the factors that should be considered in
accessing agent/principal relationship (IFRS 10.B60–.B72).
Example 10.8 Investor acting as agent or principal
P Ltd, a fund manager markets and manages an investment fund that provides
investment opportunities to a number of investors. P Ltd (decision-maker) must make
decisions in the best interests of all investors and in accordance with the fund’s
governing agreements. Nonetheless, P Ltd has wide decision-making discretion. P Ltd
also receives a market-based fee for its services equal to 1% of the assets under its
management and 20% of all the fund’s profits if a specified profit level is achieved. The
fees are proportionate to the services provided. P Ltd can also be dismissed by
investors with a majority vote.
P Ltd must make decisions in the best interests of all investors. P Ltd is paid fixed and
performance-related fees that are proportionate to the services provided. In addition,
the remuneration aligns the interests of the fund manager with those of the other
investors (the fund manager’s fee is based on the fund’s performance). Although P Ltd
does have decision-making powers over the fund, it does so under the governing
agreement as set up by the investors. P Ltd can also be removed as decision-maker by
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Chapter 10
the investors if they are not satisfied with the fund’s performance. P Ltd is acting as an
agent and therefore does not control the fund.
If P Ltd also has a significant investment in the fund, it can be argued that P Ltd is
exposed to variable returns that may arise from the activities of the fund. Together with
P Ltd’s decision-making authority it may be concluded that P Ltd does control the fund.
10.7 Unconsolidated structured entities

A structured entity is an entity that has been designed so that voting or similar rights
are not the dominant factor in deciding who controls the entity, for example when the
voting rights relate to administrative tasks only and the relevant activities are directed
by means of contractual arrangements (IFRS12.B21). An unconsolidated structured
entity would therefore be a structured entity that is not controlled (nor consolidated) by
the investor. Examples of structured entities include securitisation vehicles, asset-
backed financings and some investment funds.
Entities that have an interest in an unconsolidated structured entity shall disclose
information that enables the users of the financial statements to:
l understand the nature and extent of its interest in the unconsolidated structured
entity; and
l evaluate the nature of, and changes, in the risks associated with its interest in the
inconsolidated structured entity.
Comment
Refer to IFRS 12.B21–.B26 for a detailed explanation of unconsolidated structured
entities as well as the disclosure requirements.
10.8 Summary of control assessment

The control assessment can be illustrated as a follows:
56
Question 10.1
Beta Ltd grows coffee beans and supplies coffee beans exclusively to Alpha Ltd.
Alpha Ltd acquired a 50% shareholding (each share entitles a shareholder to one vote)
in Beta Ltd from Mr B, the sole shareholder.
Mr B and Alpha Ltd signed the purchase agreement on 1 January 20.15. In terms of the
purchase agreement, Alpha Ltd will have the right to appoint staff and key management
personnel of Beta Ltd.
On the date of acquisition, Beta Ltd’s equity consisted of the following:
Ordinary share capital R150 000
Convertible non-cumulative preference shares R30 000
Retained earnings R340 000
The unlisted convertible preference shares were issued on 1 August 20.10 and are
mandatorily convertible into 50 000 Beta Ltd ordinary shares on 31 July 20.16. The
preference shares are not convertible prior to that date. The holders of the preference
shares do not have voting rights except on matters that directly affect their rights. The
preference shares had a fair value of R1,2 million on 30 September 20.15. The
company’s founder, Mr B, has held the preference shares since 1 August 20.10.
Required
Discuss, with reasons, whether Beta Ltd is a subsidiary of Alpha Ltd as at
30 September 20.15.
A subsidiary is an entity that is controlled by another entity (IFRS 10.App A).

Alpha Ltd, as the investor, has to determine whether it is a parent by assessing whether
it controls the investee, Beta Ltd (IFRS 10.5).
An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.
Power
An investor has power over an investee when the investor has existing rights that give it
the current ability to direct the relevant activities (IFRS 10.10).
Examples of rights that, either individually or in combination, can give an investor power
include but are not limited to:
(a) rights in the form of voting rights (or potential voting rights of an investee); and
(b) rights to appoint, reassign or remove members of an investee’s key management
personnel who have the ability to direct the relevant activities (IFRS 10.B15).
Potential voting rights:
When assessing whether Alpha Ltd’s voting rights are sufficient to give it power over
Beta Ltd, all facts and circumstances should be considered, including potential voting
57
Chapter 10
rights held by others. For a potential voting right to be substantive, the holder must
have the practical ability to exercise that right.
At 30 September 20.15 Mr B held potential voting rights in the form of the convertible
preference shares. However, these were not substantive on 30 September 20.15 as it
is not currently exercisable and therefore the convertible preference shares can be
ignored.
Protective voting rights:
In evaluating whether rights give an investor power over an investee, the investor shall
also assess whether its rights, and rights held by others, are protective rights
(IFRS 10.B26).
Because protective rights are designed to protect the interests of their holder without
giving that party power over the investee, an investor that holds only protective rights
cannot have power or prevent another party from having power over an investee.
Mr B’s preference shares are protective rights as he can only vote on matters that
directly affect his rights as a preference shareholder and are therefore the preference
shares are not included in the assessment of control over Beta Ltd.
Rights in the form of voting rights:
Alpha Ltd owns 50% of the voting rights of Beta Ltd, which does not constitute the
majority voting rights. Therefore, Alpha Ltd does not have power over Beta Ltd based
on its voting rights alone.
Rights to appoint members of an investee’s key management personnel:
An investor can have power even if it holds less than a majority of the voting rights of
an investee through rights arising from other contractual arrangements (IFRS 10.B38).
Based on the purchase agreement, Alpha Ltd has a contractual right to appoint key
management personnel.
In light of all of the above, Alpha Ltd does have power over Beta Ltd.
Exposure to variable returns

Alpha Ltd has exposure to variable returns by means of the dividends received from the
shares owned in Beta Ltd.
Link between power and returns
Alpha Ltd has existing rights (voting rights and rights to appoint key management
personnel) through which it is exposed to variable returns (dividends).
Conclusion
The voting rights and contractual agreement, together with the exposure to variable
returns and the ability to affect the amount of the returns, results in Alpha Ltd having
control over Beta Ltd. Beta Ltd is a subsidiary of Alpha Ltd.
58
11
Investments in associates
and joint ventures
Introduction
11.1 Background .............................................................................................. 62
11.2 Significant influence ................................................................................. 62
Accounting for investments in associates in the separate

financial statements of the investor ...................................................... 63
Accounting for investments in associates

in the consolidated financial statements of the investor
11.3 Equity method .......................................................................................... 63
Application of the equity method

11.4 Equity method procedures ....................................................................... 65
Example 11.1a: Application of the equity method ...................................... 67
Example 11.1b: Fair value adjustment at acquisition date ......................... 69
Example 11.2: Revaluation surplus of an associate .................................. 71
Example 11.3: Attributable loss of an associate ....................................... 76
Example 11.4: Elimination of unrealised profit in inventories
(investor company sells to associate) ............................... 80
Example 11.5: Elimination of unrealised profit in inventories
(associate sold to investor company) ............................... 86
Example 11.6: Elimination of unrealised profit in equipment
(investor sells to associate) .............................................. 92
Example 11.7: Elimination of unrealised profit in equipment
(associate sells to investor company) ............................... 98
Example 11.8: Associates in a horizontal group....................................... 104
Example 11.9: Investment in an associate which itself is a parent ........... 109
Example 11.10: Investment in associate by a partially-owned subsidiary .. 113
11.5 Classification as held for sale .................................................................. 116
11.6 Impairment losses .................................................................................... 117
11.7 Discontinuing the use of the equity method ............................................. 119
11.8 Disclosure ................................................................................................ 119
59
Chapter 11
Piecemeal acquisition of interests in investees

11.9 Changes in ownership interest................................................................. 121
Example 11.11: Piecemeal acquisition whereby the status
of an investment changes to that of an associate
(significant influence is obtained) ..................................... 121
Example 11.12: Acquisition of additional interest ....................................... 126
Disposal of interests in an investee

Example 11.13: Disposal of the entire interest in an associate
(significant influence is lost).............................................. 130
Example 11.14: Partial disposal of an interest in an associate –
Loss of significant influence (associate becomes
IFRS 9 investment ............................................................ 136
Self-assessment questions
Question 11.1 Basic equity accounting/interest received ................................... 140
Question 11.2 Basic equity accounting/reporting dates differ ............................. 145
60
Investments in associates and joint ventures
INVESTMENTS IN ASSOCIATES (IAS 28)

Definitions Accounting treatment
Associate Equity method = Cost + Changes in equity
An entity over which the investor has since acquisition
significant influence and that is neither a Cost
subsidiary nor an interest in a joint venture. l Recognised initially at cost.
Equity method l Goodwill part of cost of investment.
Investment initially recognised at cost and l Consider effect of revaluations or fair
adjusted thereafter for the since acquisition value adjustments.
change in the investor’s share of net assets l Recognise excess in profit or loss.
of the investee. The profit or loss of the Changes in equity
investor includes the investor’s share of the l Recognise share of profit of associate,
profit or loss of the investee. The other adjust:
comprehensive income of the investor • depreciation or amortisation;
includes the investor’s share of the other • cumulative preference dividends;
comprehensive income of the investee. • intragroup profits and losses.
Significant influence l Recognise share of other comprehensive
The power to participate in the financial and income of associate.
operating policy decisions of the investee but l Consider recognition of impairment loss.
is not control or joint control over those l Share of losses of associate:
policies. • carrying amount of the investment
Presume significant influence if investor limited to Rnil;
holds 20% or more of the voting power. • include other long-term interests that
Evidenced in the following ways: will not be settled in foreseeable
l Representation on board of directors; future;
l Participation in policy-making processes; • recognise subsequent profits only after
l Material transactions between parties; they exceed unrecognised losses.
l Interchange of managerial personnel;
l Provision of essential technical
information.
Consider potential voting rights, held by
investor and by other entities, that are
currently exercisable or convertible.
Other issues Separate financial statements

l Accounting policies – use uniform An investment in an associate should be
policies. accounted for as follows:
l Reporting dates – if different: l Account for investment at cost; or
• associate prepares financial l In terms of IFRS 9.
statements at investor’s reporting date
or
• if impracticable, use available financial
statements, adjusted for significant
transactions (not more than 3 months’
difference).
l Discontinue equity method – if no longer
significant influence:
• measure retained investment at fair
value; recognise profit or loss;
• account for investment in terms of
IFRS 9.
61
Chapter 11
1
Introdu
uction
11.1 Ba
ackground
IAS 28 In
nvestments s in assocciates and joint ventu ures (issue ed May 2011) prescrib
bes
the accou
unting treatm
ment for as
ssociates ass well as joiint ventures
s.
Comment
The examples in this chapter refe er only to a
associates, but
b they wou uld be equa
ally
applicable if the invesstee was a jjoint venturre, since thee equity method is applied
identically to
t associates
s and joint ven
ntures.
An assoc ciate is an entity

e in wh
hich the inve
estor has siignificant influence.
From thee above de efinition of an associa ate, it is cle
ear that sig
gnificant inffluence is an
importantt concept for the iden ntification o
of an assocciate. IAS 28.4
2 defines significaant
influencee as the po ower to parrticipate in tthe financiaal and operrating policyy decisions of
the investtee, but is not
n control oro joint contrrol of those policies.
11.2 Siignificant influence

e
estor holds, directly or indirectly, through subsidiaries or
If an inve o joint venttures, 20% or
more of the
t voting power of th he investee e, it is pressumed that the investo or does ha ave
significan
nt influencee unless it can be cle early demonstrated th hat this is not
n the cas se.
Converse ely, if the investor
i olds, directly or indire
ho ectly, throu
ugh subsidiaries or jo oint
ventures, less than 20% of the voting po ower of the e investee, it is presu
umed that thet
investor does not haveh signifficant influe
ence, unless such in nfluence ca an be clea arly
demonstrrated. A substantial or majorityy ownership by another investtor does not n
necessarrily precludee an investoor from having significa ant influenc
ce.
The existence of significant influence iis usually evidenced d in one orr more of the
following g ways:
l repre esentation on
o the board d of directorrs or equivaalent governning body off the investe
ee;
l partic cipation in policy-mak king processses, includiing particip pation in de
ecisions abo out
dividends or othher distributtions;
l mate erial transacctions betwe een the invvestor and the investee e;
l interc change of managerial
m personnel;
l proviision of esssential techn nical informmation.
Potentiall voting rig ghts

An entity may own share warrrants, share e call options, debt orr equity instruments th hat
are conve ertible into ordinary
o sh
hares that h
have the pottential, if ex
xercised or converted, to
give the entity
e additional votingg power or reduce ano other party’s voting po ower over the
t
financial and operating policie es of anoth
her entity, aand should d thus be considered
c in
establishiing whethe er an investtor has conntrol or significant influence over an investtee
(this is ca
alled potential voting rights).
All presently exercissable or prresently convertible in nstruments held by th he investor or
other sha areholders are
a taken in nto accountt when asse essing whether significcant influennce
exists. The combin ned interests of the parent and d the subs sidiaries are e considerred
in assessing significant influe ence. How wever, the interests thatt joint ventures
v and
a
62
Investmen
nts in assoc
ciates and joint
j ventures
associate
es in the gro
oup hold arre not taken into acco ount. Potenttial voting rights
r that are
a
exercisab
ble or conveertible only at a future
e date or on nly upon the occurrencce of a futu ure
event are also no ot brought into the assessmen nt. The facts and circumstanc
c ces
surroundiing the po otential votting rights instrumen nts should be consid dered in the
t
assessme ent. Howevver, the inttention of manageme ent and thee financial capability to
exercise or
o convert are
a not take en into conssideration ((IAS 28.7–8
8).
Commentt
P Ltd hold
ds 15% of the e issued ordin nary share ca apital of A Ltdd, but also haas an option to
t
acquire a further
f 10% of o A Ltd’s ordinary share ccapital. As P Ltd L potentiallyy owns 25% of o
the voting rights, it is assumed
a thatt P Ltd has siignificant influ
uence over A Ltd, provide ed
that the op
ption is prese ently exercisaable, resulting in A Ltd be eing an assocciate of P Ltdd.
However, when A Ltd’s s results, asssets and liabiilities are equuity accounted for, only th
he
15% existiing interest will
w be taken in nto account aand not the po otential intere
est of 25%.
Instrumennts containiing potentia

al voting rig
ghts are acccounted for as financia
al instrumen
nts
in terms of
o IFRS 9 Financial
F In
nstruments s.
Accounnting for investmeents in as

ssociates
s in the separate
s financial
stateme
ents of th
he investtor
An investtment in an associate that t is inclu
uded in the separate financial stattements of an
investor should
s be accounted
a fo
or in accord dance with IAS 27.10:
l carrie ed at cost; or
l acco ounted for in
n accordanc ce with IFRS 9 Financ cial Instrum
ments.
When an n investmen nt in an as ssociate, or a portion n thereof, meets
m the criteria to be
classified as held fo or sale, it will be acccounted forr in accordance with IFRS 5 No on-
current Assets
A He
eld for Sale e and Disc continued Operation ns. Any retained portion
that has notn been classified as held for sa ale, will be e
equity accoounted for. After
A dispossal
any retained portio on will be accounted d for in acccordance with IFRS S 9 Financ cial
Instrume ents, unlesss the retained interest continues to be an as ssociate, in which case e it
will still be
e equity acccounted forr.
An investtor that ha as investme ents in associates ma ay not issue consolida ated financ
cial
statements because e it does nott have subssidiaries. It is appropria ate that succh an investor
provide th he same in nformation about
a its investments in associattes as thosse enterpris ses
that issue al statements.
e consolidatted financia
Accounnting for investmeents in as

ssociates
s in the consolida
c ated
financia
al statem
ments of the
t inves stor
11.3 Eq
quity meth
hod
An investtment in ann associatee must be accounted for in accordance with the equ uity
method in
n the consoolidated fina
ancial statem
ments, exce ept when (IAS 28.17):
l The exception in IFRS 10 0 allowing a parent tthat also has an inve estment in an
ociate not to
asso o prepare coonsolidatedd financial sstatements, applies; orr
63
Chapter 11
l All four conditions apply, namely:

• the investor is a wholly-owned subsidiary of another entity, or the investor is a
partially-owned subsidiary of another entity and the non-controlling shareholders
have no objection against not applying the equity method; and
• the debt and equity instruments of the investor are not traded in a public market;
and
• the investor is not in the process of filing its financial statements with a securities
commission in order to issue the instruments in a public market; and
• the ultimate or any intermediate parent of the investor prepares consolidated
financial statements.
l If the investment in an associate is held directly or indirectly by a venture capital
organisation, a mutual fund, a unit trust or similar entity, the entity may elect to
measure the investment at fair value through profit or loss in accodance with
IFRS 9 Financial Instruments. When the entity has an investment in an
associate, a portion of which is held by a venture capital organisation, mutual fund,
unit trust or similar entity, this treatment still applies, regardless of whether this
entity excercises significant influence over that portion of the investment. If the
entity makes this election, the equity method must still be applied by the entity to
the remaining portion of the investment not held by a venture capital organisation
or similar entity.
According to the equity method the investment is initially recorded at cost and after the
date of acquisition, increases or decreases are recorded by including the following:
l the proportionate share of the profit or loss of the investor in the investee after the
date of acquisition;
l distributions received from the investee;
l the portion of prior year adjustments in the investee since the date of acquisition;
and
l adjustments to the carrying amount due to changes to the proportionate interest of
the entity in the investee, flowing from changes to the equity interest of the
investee not included in profit or loss – such as the revaluation of property, plant
and equipment after the acquisition date, which is recognised in other
comprehensive income (IAS 28.10).
The equity method therefore involves the inclusion of only the investment in the
associate in the consolidated statement of financial position and only the investor’s
share of profit and other comprehensive income in the consolidated statement of profit
or loss and other comprehensive income. The associate’s individual assets, liabilities,
income and expenses are not separately included in the consolidated financial
statements.
64
Application of the equity method

OVERVIEW – APPLICATION OF THE EQUITY METHOD
Equity method procedures

l Goodwill/Gain from a bargain
purchase
l Other comprehensive income
Classification as held for sale
l Contribution of non-monetary asset
l Treatment of reserves
l Cumulative preference shares
Impairment losses
l Reporting dates/Accounting policies
l Losses of an associate
Discontinuing the equity method l Intragroup transactions

l Deferred tax implications
l Associates in horizontal/vertical
groups
Disclosure
Changes in ownership interest l Piecemeal acquisition

l Disposal of interest
11.4 Equity method procedures

An investment in an associate is accounted for under the equity method from the date
on which it falls within the definition of an associate. The basic principles and
procedures that apply in the preparation of consolidated financial statements also apply
in the application of the equity method. In particular, in the application of the equity
method:
l an owners’ equity analysis is used as basic calculation;
l where necessary, individual assets and liabilities of the associate are revalued on
the acquisition date;
l the excess of the cost of the investment over the investor’s share in the fair value
of the net assets of the associate on the acquisition date is recognised as goodwill.
It is however not recognised as a separate asset, but is rather reflected in the cost
of the investment. Goodwill is therefore effectively included in the carrying amount
of the investment;
l the excess of the investor’s share in the fair value of the net assets of the associate
over the cost of the investment on the acquisition date is recognised as a gain from
a bargain purchase. This is done by taking this gain from a bargain purchase into
65
Chapter 11
account in calculating the share of profit of associate in the period in which the
investment is acquired; and
l unrealised profits or losses on intragroup transactions are eliminated.
1 Goodwill and gain from a bargain purchase on acquisition

Where the purchase price of the shares in an associate exceeds the portion of the
identifiable net assets acquired at fair value, and this is not attributable to a particular
asset(s), it is recorded as goodwill in accordance with IFRS 3 Business
Combinations. Conversely, if the portion of identifiable net assets at fair value exceeds
the purchase price of shares in the associate, a gain from a bargain purchase at
acquisition will be recognised.
Goodwill that relates to an associate is included in the carrying amount of the
investment, and is not amortised. As the goodwill is an integral part of the investment, it
cannot be recognised separately, nor assessed separately for the purposes of
recognising impairment. Instead, the entire carrying amount of the investment should
be tested, if there are indications of impairment.
A gain from a bargain purchase on acquisition is recognised in the profit or loss
section of the statement of profit or loss and other comprehensive income as part of the
share of profit from the associate. The initial investment is increased by the gain from a
bargain purchase at acquisition to equal the entity’s share of the investee’s net asset
value on the date of acquisition.
Fair value adjustments at acquisition
All the identifiable assets and liabilities of an associate should be measured at fair value
at the date of acquisition (similar to the acquisition of a subsidiary). If the fair values
differ from the carrying amounts, fair value adjustments will have to be made. These fair
value adjustments affect the carrying amount of assets and liabilities at the acquisition
date and consequentially the amount of goodwill (or gain from a bargain purchase)
recognised.
When fair value adjustments are recognised at acquisition date, the investee’s profits
after acquisition date may need to be adjusted, for example, additional depreciation
may need to be recognised or a profit on the sale of an asset may need to be adjusted.
2 Other comprehensive income
Not all changes in equity of an associate or joint venture are recognised in profit or loss.
Some changes, for example revaluations of property, plant and equipment, as well as
fair value adjustments on financial assets subsequently measured at fair value through
other comprehensive income, are recognised in other comprehensive income. The
entity must recognise its share of these changes in other comprehensive income in its
own statement of profit or loss and other comprehensive income (to the extent that it
has not been recognised at date of acquisition). They must be presented in the
line-item share of other comprehensive income of associate in the consolidated
statement of profit or loss and other comprehensive income (IAS 28.27).
3 Contribution of a non-monetary asset

When an investor contributes a non-monetary asset to an associate in exchange for an
equity interest in that entity, the profit or loss from this contribution is recognised in the
investor’s financial statements only to the extent of the other investors’ interests in the
66
associate. However, if the contribution lacks commercial substance and no other assets
have been received, no profit or loss is recognised (IAS 28.30).
When an investor receives, in exchange for its own non-monetary asset, a monetary or
dissimilar non-monetary asset over and above the equity interest in the associate, the
entity will recognise in full in profit or loss the portion of the gain or loss on the
non-monetary contribution relating to those assets (IAS 28.31).
Example 11.1a Application of the equity method
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17
P Ltd
A Ltd
Group
Profit 188 000 100 000
Dividends received from A Ltd 12 000 –
Profit before tax 200 000 100 000
Income tax expense (94 000) (50 000)
PROFIT FOR THE YEAR 106 000 50 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R106 000 R50 000
Total comprehensive income attributable to:

Owners of the parent 91 000 50 000
Non-controlling interests 15 000 –
R106 000 R50 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

Retained earnings
P Ltd
A Ltd
Group
Balance at 1 January 20.17 79 000 70 000
Changes in equity for 20.17
Dividends (50 000) (30 000)
Total comprehensive income for the year:
Profit for the year 91 000 50 000
Balance at 31 December 20.17 R120 000 R90 000
67
Chapter 11
1 On 1 January 20.12, P Ltd acquired a 40% equity interest in A Ltd for R84 000.
Since the acquisition date, P Ltd has exercised significant influence over the
financial and operating decisions of A Ltd. At the date of the acquisition of the 40%
equity interest in A Ltd, A Ltd had share capital of R195 000. At that stage, the
reserves of A Ltd consisted of retained earnings of R15 000.
2 In the above draft consolidated statement of profit or loss and other comprehensive
income and draft consolidated statements of changes in equity, the results of A Ltd
are accounted for according to the cost method.
Solution 11.1a
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
Profit 188 000
Share of profit of associate 20 000
Profit before tax 208 000
Income tax expense (P) (94 000)
PROFIT FOR THE YEAR 114 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R114 000
Owners of the parent 99 000
Non-controlling interests 15 000
R114 000
P LTD GROUP
EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (79 000(P) + 22 000(A)) 101 000
Dividends (50 000)
Profit for the year 99 000
Balance at 31 December 20.17 (Test: 120 000(P) + 30 000(A)) R150 000
68
Investmen
nts in assoc
ciates and joint
j ventures
Commentt
The inves stment in thee associate w
will appear in
n the consolid
dated stateme
ent of financial
position att an amount of
o R114 000 ((84 000 + 30 000) at 31 December 20.1 17.
Calculatiions
C1 Analy ysis of owners’ equitty of A Ltd
P Ltd
d 40%
Total
At Since
i At acq
quisition (01/01/20.12)
Share capital 195 000 78 000
Retain
ned earningss 15 000 6 000
210 000 84 000
Investm
ment in A Lttd (84 000)
–
ii Since acquisition
n
• To begginning of cuurrent year (20.12
( – 20..16)
Retain
ned earningss (70 000 – 15 000) 55 000 22 000
• Currennt year (20.117)
Profit for
f the year 50 000 20 000
Dividends (30 000) (12 000)
R
R285 000 R30 000
C2 Pro forma
f cons
solidation journal
j enttries
Dr Cr
R R
J1 Inv
vestment in A Ltd (SFP) 42 000
Share
S of pro
ofit of assoc
ciate (P/L) 20 00
00
Retained eaarnings – Beeginning of yyear (SCE) 22 00
00
J2 Div
vidend income (P/L) 12 000
In
nvestment in A Ltd (SFP) 12 00
00
Example
e 11.1b Fair value
e adjustme
ent at acqu
uisition date
Assume thet same in nformation as

a in examp ple 11.1a. A
All the asse
ets and liabilities of A Ltd
L
were fairly valued on
n 1 Januaryy 20.12, exxcept for maachinery thaat was undervalued withw
R25 000 (after taking into acco
ount 28% ta ax). The ma achinery haad a remainning useful life
l
of eight years.
69
Chapter 11
1
Solution
n 11.1b
Calculatiions
P Ltd
d 40%
Total
At Since
i At acq
quisition (01/01/20.12)
Retain
Revalu
uation surplu
us (machine
ery) 25 000 10 000
235 000 94 000
Investm
Gain frrom a barga
ain purchase
e 10 000
ii Since acquisitionn
• To begginning of cuurrent year (20.12–20.1
( 6) :
Retain
ned earningss
(70 000
0 – 15 000 – (25 000/8 × 5)(deprecia
ation)) 39 375 15 750
• Currennt year (20.117)
Profit for
f the year (50 000 – (25
5 000/8)) 46 875 18 750
Dividends (30 000) (12 000)
R
R291 250 R22 500
C2 Pro forma
f cons
solidation journal
j enttries
Dr Cr
R R
J1 Inv
Retained eaarnings – Be
eginning of yyear (SCE) 10 00
00
J2 Inv
Share
S of pro
ofit of assoc
ciate (P/L) 18 75
50
Retained eaarnings – Beeginning of yyear (SCE) 15 75
50
J3 Div
vidend income (P/L) 12 000
In
nvestment in A Ltd (SFP) 12 00
00
Comment
The gain from a bargaiin purchase wwas recognissed in profit or
o loss in 20.12 and would
therefor im
mpact on the opening
o balan
nce of retaine
ed earnings in
n 20.17.
The investtment in the e associate w
will appear in
n the consolid
dated statemeent of financia
al
position at an amount of
o R116 500 (884 000 + 10 0 000 + 22 500
0) at 31 Decemmber 20.17.
70
4 Treatment of the reserves of an associate

l Transfers to and from reserves via the statement of changes in equity
of the associate
If a subsidiary makes a transfer to a reserve in the statement of changes in equity
during the current year, it is customary to transfer the portion of the transfer attributable
to the shareholding of the investor to the specific reserve in the consolidated statement
of changes in equity. If an associate makes a transfer to a reserve, the transfer is
treated in a manner similar to transfers made by subsidiaries. This transfer reflects the
fact that the investor influences the policy and operating decisions of the associate.
l Revaluation of the assets of an associate since acquisition

If the assets of an associate are revalued after the acquisition of the investment, the
attributable portion of the revaluation surplus that is created must be recognised within
other comprehensive income in the consolidated statements of the investor, and the
carrying amount of the investment must be increased by the amount of the investor’s
share in the revaluation surplus of the associate. The portion of the revaluation that has
already been taken into account in the investor’s original cost of the investment is not
taken into consideration.
Any surplus that was paid on the acquisition date must, as far as possible, be allocated
to the assets of the associate on the date of acquisition. If a depreciable asset was
revalued in this manner, the accompanying adjustment to the depreciation expense
must be set off in the calculation of the share of profit of the associate. The above
treatment is in accordance with the basic viewpoint that the consolidation process and
the equity method are based on the same procedures and principles.
Example 11.2 Revaluation surplus of an associate
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17

P Ltd
A Ltd
Group
ASSETS
Property, plant and equipment 250 000 150 000
Investment in A Ltd (40 000 shares at cost) 50 000 –
Inventories 350 000 140 000
Total assets R650 000 R290 000
EQUITY AND LIABILITIES
Share capital (250 000/100 000 shares) 250 000 100 000
Retained earnings 300 000 120 000
Other components of equity (revaluation surplus) – 30 000
Deferred tax liability – 20 000
Long-term loans 50 000 20 000
Total equity and liabilities R650 000 R290 000
71
Chapter 11
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

P Ltd
A Ltd
Group
Profit 378 000 150 000
Dividends received 4 000 –
Other comprehensive income
Items that will not be reclassified to profit or loss
Revaluation of land – 30 000
Other comprehensive income for the year, net of tax – 30 000
Profit attributable to:
R230 000 R90 000
R230 000 R120 000

Retained earnings
P Ltd
A Ltd
Group
Dividends (15 000) (10 000)
1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A Ltd when
the retained earnings of A Ltd amounted to R10 000. Since that date, P Ltd
exercises significant influence over the financial and operating policy decisions of
A Ltd.
2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the land was
revalued.
72
Solution 11.2
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment (P) 250 000
Investment in associate (50 000 + 56 000) 106 000
356 000
Current assets
Inventories (P) 350 000
Total assets R706 000
Equity attributable to owners of the parent
Share capital 250 000
Retained earnings 344 000
Other components of equity (revaluation surplus) 12 000
606 000
Total equity 656 000
Non-current liabilities
Long-term loans 50 000
Total equity and liabilities R706 000
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.17
Profit (P) 378 000
Share of other comprehensive income of associate 12 000
Other comprehensive income for the year, net of tax 12 000
R262 000
R274 000
73
Chapter 11
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Revalu- Non-
Share Retained Total
tion Total controlling
capital earnings equity
surplus interests
Balance at
1 Jan 20.17 250 000 * 112 000 – 362 000 35 000 397 000
Changes in
equity for
20.17
Dividends – (15 000) – (15 000) – (15 000)
Total
comprehensive
income for the
year
Profit for the year – 247 000 – 247 000 15 000 262 000
Other
comprehensive
income – – 12 000 12 000 – 12 000
Balance at
31 Dec 20.17 R250 000 @ R344 000 R12 000 R606 000 R50 000 R656 000
* 100 000(P) + 12 000 = 112 000

@ Test: 300 000(P) + 44 000(A) = 344 000
Calculations
C1 Analysis of owners’ equity of A Ltd
Total P Ltd 40%
At Since
i At acquisition
110 000 44 000
Investment in A Ltd (50 000)
Goodwill (6 000)
• To beginning of current year :
Retained earnings (40 000 – 10 000) 30 000 12 000

• Current year :

Dividends (10 000) (4 000)
Revaluation surplus 30 000 12 000
R250 000 R12 000 RS
R44 000 RE
74
C2 Pro forma consolidation journal entry

Dr Cr
R R
J1 Investment in A Ltd (SFP)(12 000 + 44 000) 56 000
Share of profit of associate (P/L) 36 000
Share of other comprehensive income of associate
(OCI) 12 000
Retained earnings – Beginning of year (SCE) 12 000
Dividend income (P/L) 4 000
5 Cumulative preference shares

When applying the equity method, only the income attributable to equity or ordinary
shares is included. Preference shares can be classified either as equity or as a financial
liability. If an associate has issued cumulative preference shares which are classified as
equity, the current dividend payable on these shares should be deducted when
determining the income or loss attributable to the ordinary shareholders, irrespective of
whether such dividends have been declared. If the preference shares are classified as
a financial liability, the dividends are regarded as interest and would therefore have
already been recognised as an expense in the calculation of the associate’s profit for
the year (IAS 28.37).
6 Reporting dates/Accounting policies

l Non-coterminous year ends
The investor uses the most recent available financial statements of the associate in
applying the equity method; they are usually drawn up to the same date as the financial
statements of the investor.
When financial statements with a different reporting date are used, adjustments are
made for the effects of any significant events or transactions that occur between the
date of the associate’s financial statements and the date of the investor’s financial
statements. The difference may not be more than three months. When the difference is
more than three months, the associate prepares, for the use of the investor, statements
as at the same date as the financial statements of the investor (IAS 28.33–34).
l Different accounting policies
The investor’s financial statements are usually prepared using uniform accounting
policies for like transactions and events in similar circumstances. In cases where an
associate uses accounting policies other than those adopted by the investor for like
transactions and events in similar circumstances, appropriate adjustments have to be
made to the associate’s financial statements when they are used by the investor in
applying the equity method (IAS 28.35).
7 Losses of an associate
If an associate suffers a loss during a financial year, the carrying amount of the
investment is reduced according to the equity method by the investor’s attributable
portion of the loss. If the attributable portion of the loss exceeds the carrying amount of
the investment, the write-off must be limited to the investor’s net investment in the
associate.
75
Chapter 11
The investor’s net investment in the associate includes the carrying amount of the
investment in equity and other long-term interests of the associate such as loans to the
associate. However, items for which settlement has been planned and will take place in
the foreseeable future, for instance long-term loans for which security has been
provided and trade payables, are not included.
If the associate consequently makes a profit, the equity method should only be
resumed as soon as the investor’s attributable portion of the profit exceeds the losses
that were not previously recognised.
If the investor has guaranteed certain of the company’s debts, the possibility exists that
a greater loss may be suffered. In this case, an additional provision should be created
for the amount of the loss. (IAS 28.38–39).
Example 11.3 Attributable loss of an associate

P Ltd
A Ltd
Group
ASSETS
Investment in A Ltd – 40 000 ordinary shares at cost 50 000 –
– 10 000 preference shares at cost 10 000 –
6% non-redeemable preference shares (20 000 shares) – 20 000
Total equity and liabilites R800 000 R185 000

P Ltd
A Ltd
Group
R300 000 R200 000
76
EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

Retained earnings
P Ltd
A Ltd
Group
Balance at 1 January 20.17 140 000 (135 000)
Dividends (100 000) –
On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A Ltd when the
retained earnings of A Ltd amounted to R25 000. On the same date, P Ltd also
acquired a 50% interest in the 6% non-redeemable non-cumulative preference share
capital at R10 000. Since that date, P Ltd has exercised significant influence over the
financial and operating policy decisions of A Ltd.
Solution 11.3
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Investment in associate (50 000 + 16 000 + 10 000) 76 000
516 000
Current assets
716 000
77
Chapter 11
1
P LTD
D GROUP
CO
ONSOLIDATTED STATEEMENT OF P
PROFIT OR
R LOSS
AND OT
THER COMPREHENSIVE INCOME E
FOR THE YEAR END
DED 31 DEC
CEMBER 200.17
Profit (P)) 300 00
00
Share of profit of asssociate 76 00
00
PROFIT FOR THE YEAR
Y 376 00
00
TOTAL COMPREHE
C ENSIVE INC
COME FOR THE YEAR
R R376 00
00
Total com
mprehensive e income atttributable to
o:
Owners of
o the paren nt 336 00
00
Non-conttrolling interests 40 00
00
R376 00
00
P LTD
D GROUP
EXTR
RACT FROM
M THE CON
NSOLIDATEED STATEM
MENT OF CH
HANGES IN
N EQUITY
FOR THE YEAR END
DED 31 DEC
CEMBER 200.17
Retained
d
earnings
s
Balance at 1 Janua ary 20.17 (14
40 000(P) – 6
60 000(A)) 80 00
00
Changes s in equity for
f 20.17
Dividends (100 000)
Total commprehensive e income forr the year:
00
Balance at 31 Dece
ember 20.17
7 (Test: 300 000(P) + 16 0000(A)) R316 00
00
Commentt
The carrying amount off the investment is compile
ed as follows:
l Cost 50 000
l Cumu ulative since acquisition
a eq
quity 16 000
• Re
etained earnin ngs up to beg
ginning of the current year (60 000)
• Pro
ofit for the current year 76 000
l Investment in prefe
erence share
es 10 000
R76 000
78
Investmen
nts in assoc
ciates and joint
j ventures
Calculatiions
P Ltd
d 40%
Total
At Since
i At acq
quisition
Retain
125 000 50 000
Investm
n
• To begginning of cuurrent year:
Retainned earningss (135 000 + 25 000) ((160 000) (64 000)
Correc ction (4 000) 4 000
• Currennt year:
Profit for
f the year 200 000 80 000
Correc ction 4 000 (4 000)
R
R165 000 R16 000
Commentt
Take note e that P Ltd’s
s attributable losses up too the beginniing of the cuurrent year arre
limited to the
t net investment in A Ltd, namely the e cost of R500 000 plus the
e investment in
preference e shares of R10
R 000. The surplus of R R4 000 is analysed in the “At”
“ column fo
or
control purposes.
In the current year, the
t first R4 0
000 of the p profit is empployed againsst the R4 00 00
attributable losses that were not reccognised in prrevious years
s.
C2 Pro forma
f cons
solidation journal
j enttries
Dr Cr
R R
J1 Re
etained earn
nings – Begiinning of the
e year (SCE
E) 60 000
Investment (ordinary sh
hares) (SFP P) 50 00
00
Investment (preferencee shares) (SFP) 10 00
00
J2 Inv
vestment (ordinary sharres) (SFP) 66 000
Inv
vestment (preference shares) (SFP P) 10 000
Share
S of pro
ofit of assoc
ciate (P/L) 76 00
00
8 Intrag group transactions

Unrealiseed intragrouup profits may arise ass a result of:
l sales s by the invvestor to the
e associate, or
l sales s by the asssociate to th
he investor.
IAS 28.2 28 requiress the elimination of u unrealised profits and losses on
o intragro oup
transactio
ons where an associa ate is one of the partties (simila
ar manner to
t that of the
t
eliminatio
on of unrealised profitss on intragrroup transa diary is one of
actions where a subsid
79
Chapter 11
the parties). The difference is however that only the percentage of interest in the
associate must be eliminated. Where an associate is accounted for by use of the equity
method, unrealised profits and losses arising from transactions between an investor (or
its consolidated subsidiaries) and associates should be eliminated to the extent of the
investor’s interest in the associate.
Balances such as receivables, payables, loans to and loans from associates are not
eliminated as the individual line items of the associate are not reflected in the equity
accounted financial statements. Income and expense items such as interest received,
interest paid and management fees items are also not eliminated.
Where an associate is accounted for by using the equity method, unrealised profits and
losses resulting from upstream and downstream transactions between an entity (or its
consolidated subsidiaries) and associates should be eliminated to the extent of the
entity’s interest in the associate (IAS 28.28). However, when downstream transactions
provide evidence of an impairment of the transferred asset, the unrealised losses
should be recognised in full by the investor. When upstream transactions provide
evidence of a reduction of an impairment of the transferred asset, the investor shall
recognise its share in the losses (IAS 28.29).
Elimination of unrealised profit in inventories

Example 11.4
(investor company sells to associate)

P Ltd
A Ltd
Group
ASSETS
Long-term loans 50 000 –
80

P Ltd
A Ltd
Group
Revenue 800 000 320 000
Cost of sales (400 000) (160 000)
Gross profit 400 000 160 000
Other income (dividend received) 4 000 –
Other expenses (22 000) (10 000)
R230 000 R90 000
R230 000 R140 000

Retained earnings
P Ltd
A Ltd
Group
Dividends (15 000) (10 000)
the retained earnings of A Ltd amounted to R10 000. At that stage, all the assets
and liabilities of A Ltd were deemed to be fairly valued. Since 1 January 20.13,
P Ltd has been exercising significant influence over the financial and operating
policy decisions of A Ltd.
81
Chapter 11
revalued.
3 Since 1 January 20.16, P Ltd has been selling inventories to A Ltd at a profit of 50%
on cost. Included in the inventories of A Ltd on 31 December 20.16 is R15 000 in
respect of such inventories at the cost for A Ltd. Included in the inventories of A Ltd
on 31 December 20.17 is R30 000 in respect of such inventories at the cost for
A Ltd. Total sales of P Ltd to A Ltd amounted to R100 000.
4 Assume a tax rate of 28%.
Solution 11.4
P LTD GROUP
ASSETS
Non-current assets
Investment in associate (54 000 + 72 000 – 2 000(J2) + 2 000(J3) – 4 000(J5)) 122 000
Deferred tax (560(J2) – 560(J4) + 1 120(J6)) 1 120
373 120
Current assets
619 120
Non-controlling interests (P) 50 000
82
P LTD GROUP
Revenue (800 000(P) + 6 000(J3) – 12 000(J5)) 794 000
Cost of sales (400 000(P) + 4 000(J3) – 8 000(J5)) (396 000)
Gross profit 398 000
Other expenses (P) (22 000)
Income tax expense (152 000(P) + 560(J4) – 1 120(J6)) (151 440)
R260 560
R280 560
83
Chapter 11
1
P LTD
D GROUP
EX OLIDATED STATEMEN
XTRACT FROM CONSO NT OF CHA
ANGES IN EQUITY
E
FOR THE YEAR END
DED 31 DEC
CEMBER 20
0.17
Non-
Revalu-
Share Retained control-- Total
ation Total
c
capital earnings ling equity
surplus
interestss
Balance at
1 Jan 20.17
2 250 000 * 118 560 – 368 560 35 000 403 560
Changes s in
equity for
20.17
Total
compre ehensive
income e for the
year:
Other
compre ehensive
income e – – 20 000 20 000 – 20 000
Dividends – (15 000)) – (15 000)) – (15 000)
Balance at
a
31 Dec 20.17 R
R250 000 @R349
@ 120 R20 000 R619 120 R50 000 R669 120
* 100 000 + 20 000 – 1 440(J2) = 118 560

@ Test: 300
3 000(P) + 52 000(A) – 1 440(J2) + 6 000(J3) – 4 000(J3)) – 560(J4) – 12 000(J5)) +
8 000(J
J5) +1 120(J6
6) = 349 120
Commentt
The carryying amount of the investment in the associate is compiled as follows:
l Cost 54 000
a eq
quity 72 000
• Re
ginning of the current year 20 000
• Pro
• Re
evaluation surrplus 20 000
l Unrea
alised profit eliminated in cclosing inventtories (4 000)
R122 000
84
Calculations
Total P Ltd 40%
At Since
i At acquisition
110 000 44 000
Goodwill (R10 000)

• Current year :

Dividends (10 000) (4 000)
R290 000 R52 000 RE
R20 000 RS
C2 Pro forma consolidation journal entries

Dr Cr
R R
J1 Investment in A Ltd (SFP) 72 000
Revaluation surplus (OCI) 20 000
Retained earnings – Beginning of the year (SCE) 20 000
Bringing to book of associate
J2 Retained earnings – Beginning of year (SCE) 1 440
Deferred tax (SFP) (2 000 × 28%) 560
Investment in associate (SFP)(15 000 × 50/150 × 40%) 2 000
Correction of retained earnings at the beginning
of the year
J3 Cost of sales (P/L)(15 000 × 100/150 × 40%)) 4 000
Investment in associate (SFP)(15 000 × 50/150 × 40%) 2 000
Revenue (P/L)(15 000 × 40%) 6 000
Realisation of unrealised profit in opening
inventories of A Ltd
J4 Income tax expense (P/L)(2 000 × 28%) 560
Deferred tax (SFP) 560
Tax implication of realisation of unrealised profit
in opening inventories of A Ltd
continued
85
Chapter 11
Dr Cr
R R
J5 Revenue (P/L)(30 000 × 40%) 12 000
Cost of sales (P/L)(30 000 × 100/150 × 40%) 8 000
Investment in associate (SFP) [(30 000 – 20 000) × 40%] 4 000
Elimination of unrealised profit in closing
J6 Deferred tax (SFP) 1 120
Income tax expense (P/L)(4 000 × 28%) 1 120
Tax implication of unrealised profit in closing
Elimination of unrealised profit in inventories

Example 11.5
(associate sold to investor company)

P Ltd
A Ltd
Group
ASSETS
Long-term loan 50 000 –
86

P Ltd
A Ltd
Group
Revenue 800 000 320 000
Cost of sales (400 000) (160 000)
Gross profit 400 000 160 000
Other income (dividends received) 4 000 –
R230 000 R90 000
R230 000 R140 000

Retained earnings
P Ltd
A Ltd
Group
Dividends (15 000) (10 000)
87
Chapter 11
revalued.
3 Since 1 January 20.16, A Ltd has been selling inventories to P Ltd at a profit of 50%
on cost. Included in P Ltd’s inventories on 31 December 20.16 is R15 000 in respect
of such inventories at the cost for P Ltd. Included in the inventories of P Ltd on
31/12/20.17 is R30 000 in respect of such inventories at the cost for P Ltd. Total
sales of A Ltd to P Ltd amounted to R100 000.
Solution 11.5
P LTD GROUP
ASSETS
Non-current assets
Deferred tax (J5) 1 120
377 120
Current assets
Inventories (346 000(H – 4 000(J4)) 342 000
619 120
88
P LTD GROUP
Revenue (P) 800 000
Cost of sales (P) (400 000)
Other expenses (P) (22 000)
Share of profit of associate
(36 000(J1) + 2 000(J2) – 560(J3) – 4 000(J4) + 1 120(J5)) 34 560
R260 560
R280 560
89
Chapter 11
1
P LTD
D GROUP
CONSOLIDATED STATEMMENT OF CH
HANGES IN
N EQUITY
FOR THE YEAR END
DED 31 DEC
CEMBER 20
0.17
Reval- Non-
uation Total ng
controllin
c
surplus interests
s
Balance at
1 Jan 20.17
2 250 000 * 118 560 – 368 560 35 000 403 560
Changes s in
equity for
20.17
Dividends – (15 000)) – (15 000)) – (15 000)
Total
compre ehen-
sive inccome for
the yea ar:
Other
compre ehen-
sive inccome – – 20 000 20 000 – 20 000
Balance at
31 Decc 20.17 R
R250 000 @R349
@ 120 R20 000 R619 120 R50 000 R669 120
* 100 000 + 20 000 – 2 000(J2) + 560(J3)

5 = 1188 560
@ 300 000(P) + 52 000
0(A) – 4 000(J4) + 1 120(JJ5) = 349 120
0
Commentt
The carrying amount off the investmment in the as
ssociate is compiled as fo
ollows:
l Cost 54 000
a eq
quity 72 000
• Re
• Pro
• Re
R126 000
90
Calculations
Total P Ltd 40%
At Since
i At acquisition
110 000 44 000
Goodwill (R10 000)

• Current year :

Dividends (10 000) (4 000)
R290 000 R52 000 RE
R20 000 RS

Dr Cr
R R
Elimination of unrealised profit in opening
inventories of P Ltd (15 000 × 50/150 × 40%)
J3 Share of profit of associate (P/L) 560
Retained earnings – Beginning of year (SCE) 560
Tax implication of unrealised profit in opening
inventories of P Ltd (2 000 × 28%)
J4 Share of profit of associate (P/L) 4 000
Inventories (SFP) 4 000
Elimination of unrealised profit in closing
inventories of P Ltd (30 000 × 50/150 × 40%)
J5 Deferred tax (SFP) 1 120
Tax implication of unrealised profit in closing
inventories of P Ltd (4 000 × 28%)
91
Chapter 11
Elimination of unrealised profit in equipment

Example 11.6
(investor sells to associate)

P Ltd
A Ltd
Group
ASSETS
Long-term loans 50 000 –

P Ltd
A Ltd
Group
Revenue 800 000 320 000
Cost of sales (400 000) (160 000)
Gross profit 400 000 160 000
R230 000 R90 000
R230 000 R140 000
92

Retained earnings
P Ltd
A Ltd
Group
Dividends (15 000) (10 000)
revalued.
3 On 1 January 20.15, P Ltd sold equipment to A Ltd at a profit of 50% on cost
(for P Ltd). The equipment is still included in the equipment of A Ltd on
31 December 20.17. Depreciation is provided at 20% per annum on the cost of the
equipment. The cost of the equipment in the books of A Ltd was R15 000.
93
Chapter 11
Solution 11.6
P LTD GROUP
ASSETS
Non-current assets
Investment in associate (54 000 + 72 000 – 1 200(J2) + 400(J3)) 125 200
Deferred tax (336(J2) – 112(J4)) 224
375 424
Current assets
621 424
94
P LTD GROUP
Revenue (P) 800 000
Other expenses (22 000(P) – 400(J3)) (21 600)
Income tax expense (152 000(P) + 112(J4)) (152 112)
R262 288
R282 288
95
Chapter 11
1
P LTD
D GROUP
EX
XTRACT FROM CONSO
OLIDATED STATEMENNT OF CHA
ANGES IN EQUITY
E
FOR THE YEAR END
DED 31 DEC
CEMBER 20
0.17
Non-
Reval-
Share Retained
d control- Total
uation
n Total
capital earnings
s ling equity
surpluus
interestts
Balance at
1 Jan 20.17
2 250 000 * 119 13
36 – 36
369 13 35 00
00 404 136
Changes s in
equity for 20.17
Dividends – (15 00
00) – (15 00
00) – (15 000)
Total
compre ehensive
income e for the
year:
Profit for the year – 247 28
88 – 247 28
88 15 00
00 262 288
Other
compre ehensive
income e – – 20 00
00 20 00
00 – 20 000
Balance at
31 Decc 20.17 R250 000 @ R351 42
24 R20 00
00 R621 42
24 R50 00
00 R671 424
* 100 000 + 20 000 – 864(J2) = 119 136

@ 300 000(P) + 52 000
0(A) – 684(J2
2) + 400(J3) – 112(J4) = 3
351 424
Commentt
The carrying amount off the investmment in assoc
ciate is comp
piled as follow
ws:
l Cost 54 000
a eq
quity 72 000
• Re
• Pro
• Re
l Unrealiised profit inc
cluded in the cclosing balan
nce of equipm
ment (800)
R125 200
96
Calculations
P Ltd 40%
Total
At Since
i At acquisition
110 000 44 000
Goodwill (R10 000)

• Current year :

Dividends (10 000) (4 000)
R290 000 R52 000 RE
R20 000 RS

Dr Cr
R R
J2 Retained earnings – Beginning of year (SCE)
(1 200 – 336) 864
Deferred tax (SFP) (1 200 × 28%) 336
Investment in associate (SFP) ((15 000 × 50/150 × 40%
= 2 000) – (2 000 × 20% = 400) – 400) 1 200
of the year in respect of unrealised profit included
in the equipment of A Ltd
J3 Investment in associate (SFP) 400
Depreciation (P/L) 400
Realisation of unrealised profit in the current year
through depreciation
J4 Income tax expense (P/L) (400 × 28%) 112
in the current year
97
Chapter 11
Elimination of unrealised profit in equipment

Example 11.7
(associate sells to investor company)

P Ltd
A Ltd
Group
ASSETS
Long-term loan 50 000 –
Total liabilities R650 000 R290 000

P Ltd
A Ltd
Group
Revenue 800 000 320 000
Cost of sales (400 000) (160 000)
Gross profit 400 000 160 000
R230 000 R90 000
R230 000 R140 000
98

Retained earnings
P Ltd
A Ltd
Group
Dividends (15 000) (10 000)
revalued.
3 On 1 January 20.15, A Ltd sold equipment to P Ltd at a profit of 50% on cost (for
A Ltd). The equipment is still included in the equipment of P Ltd on
31 December 20.17. Depreciation is provided at 20% per annum on the cost of the
equipment. The cost of the equipment to P Ltd was R15 000.
99
Chapter 11
Solution 11.7
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (250 000 – 1 200(J2) + 400(J3)) 249 200
Deferred tax (336(J2) – 112(J4)) 224
375 424
Current assets
621 424
Long-term loan 50 000
100
P LTD GROUP
Revenue 800 000
Cost of sales (400 000)
Other expenses (22 000)
Share of profit of associate (36 000(J1) + 400(J3) – 112(J4)) 36 288
Income tax expense (152 000)
R262 288
R282 288
P LTD GROUP
Non-
Reval-
Share Retained control- Total
uation Total
surplus
interests
Balance at
1 Jan 20.17 250 000 * 119 136 – 369 136 35 000 404 136
Changes in
equity for 20.17
Dividends – (15 000) – (15 000) – (15 000)
Total
comprehensive
income for the
year:
Other
comprehensive
income – – 20 000 20 000 – 20 000
Balance at
31 Dec 20.17 R250 000 # R351 424 R20 000 R621 424 R50 000 R671 424
* 100 000 + 20 000 – 864(J2) = 119 280

# 300 000(P) + 52 000(A) – 864(J2) + 400(J3) – 112(J4) = 351 424
101
Chapter 11
1
Commentt
The carrying amount off the investmment in assoc
ciate is comp
piled as follow
ws:
l Cost 54 000
a eq
quity 72 000
• Re
• Pro
• Re
R126 000
Calculatiions
P Ltd
d 40%
Total
At Since
i At acq
quisition
Retain
110 000 44 000
Investm
Goodw
will (R10 000)
ii Since acquisition n
• To begginning of cuurrent year :
Retainned earningss (60 000 – 10 000) 50 000 20 000

• Currennt year :
Profit for
f the year 90 000 36 000
Dividends (10 000) (4 000)
Revalu uation surplu
us 50 000 20 000
R
R290 000 R52 000 RE
R
R20 000 RR
R
102

Dr Cr
R R
J2 Retained earnings – Beginning of year (SCE)(1 200 – 336) 864
Deferred tax (SFP) ((2 000 - 800) × 28%) 336
Equipment – Cost (SFP)(15 000 × 50/150 × 40%) 2 000
Accumulated depreciation on equipment (SFP)
(2 000 × 20% × 2 years) 800
of the year in respect of unrealised profit included
in the equipment of P Ltd
J3 Accumulated depreciation on equipment (SFP) 400
Share of profit of associate (P/L) 400
Realisation of unrealised profit in the current year
through depreciation
J4 Share of profit of associate (P/L) (400 × 28%) 112
in the current year
9 Deferred tax implications as a result of the application of the equity method

Income tax arising from investments in associates is accounted for in accordance with
IAS 12 Income Taxes.
Temporary differences arise when the carrying amount of the investment in the
associate (namely the investor’s portion of the net assets of the investee, including
goodwill) is no longer the same as the tax base (which is often the cost) thereof. Such
differences may arise in various circumstances, for example:
l the existence of undistributed profits of the associate; and
l a reduction in the carrying amount of an investment in an associate to its
recoverable amount (i.e. an impairment loss).
In consolidated financial statements, there may be a difference between the investment
in the associate compared to the amount of the investment in the separate financial
statements of the investor, if the investor carries the investment in its separate financial
statements at cost or a revalued amount.
An entity should recognise a deferred tax liability for all taxable temporary differences
that relate to investments in associates, except to the extent that both the following
conditions have been met:
l the investor can control the timing of the write-back of the temporary difference;
and
l it is probable that the temporary difference will not be written back in the
foreseeable future.
103
Chapter 11
An investment in an associate can be recovered in one of two ways:

l the receipt of dividends from the associate; or
l the sale of the investment in the associate.
Section 10(1)(k) of the Income Tax Act 58 of 1962 stipulates that any dividend received
by or accrued to any person is exempt. The receipt of dividends from the associate can
therefore not lead to taxable temporary differences.
The sale of an investment in an associate will lead to a capital profit which will be taxed
at the capital gains tax rate. A deferred tax liability will have to be created and the
deferred tax liability must be calculated as the difference between the carrying amount
of the investment in the associate and the tax base thereof (usually the cost of the
investment) multiplied by the capital gains tax rate. The deferred tax liability should not
be created at the normal tax rate.
An entity should recognise a deferred tax asset for all deductible temporary differences
arising from investments in associates to the extent that, and only to the extent that, it is
probable that:
l the temporary difference will be written back in the foreseeable future; and
l taxable income will be available against which the temporary difference may be
utilised.
In deciding whether a deferred tax asset should be recognised for deductible temporary
differences that bear relation to investments in associates, an entity considers the
guidance set out in IAS 12.
10 Associates in horizontal/vertical groups
Associates in horizontal groups
Where an investor has more than one associate, the results of the associates are
grouped together in the consolidated financial statements.
Example 11.8 Associates in a horizontal group

P Ltd
A Ltd Z Ltd
Group
ASSETS
Property, plant and equipment 315 000 150 000 250 000
Investment in A Ltd (40 000 shares at cost) 50 000 – –
Investment in Z Ltd (50 000 shares at cost) 85 200 – –
Inventories 349 800 250 000 200 000
Total assets R800 000 R400 000 R450 000
Share capital (200 000/100 000/250 000 shares) 200 000 100 000 250 000
Retained earnings 500 000 300 000 200 000
Non-controlling interests 100 000 – –
Total equity and liabilities R800 000 R400 000 R450 000
104

P Ltd
A Ltd Z Ltd
Group
Profit 315 000 255 000 170 000
Other income (dividend received) 16 000 – –
Profit before tax 331 000 255 000 170 000
Income tax expense (131 000) (105 000) (70 000)
PROFIT FOR THE YEAR 200 000 150 000 100 000
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR R200 000 R150 000 R100 000
Owners of the parent 150 000 150 000 100 000
R200 000 R150 000 R100 000

Retained earnings
P Ltd
A Ltd Z Ltd
Group
Balance at 31 December 20.16 400 000 180 000 120 000
Dividends paid: 31 December 20.17 (50 000) (30 000) (20 000)
Profit for the year 150 000 150 000 100 000
Balance at 31 December 20.17 R500 000 R300 000 R200 000
1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A Ltd, when
the retained earnings of A Ltd amounted to R20 000. Since the acquisition date,
decisions of A Ltd.
2 On 30 June 20.17, P Ltd acquired 20% of the issued share capital of Z Ltd for
R85 200. Since the acquisition date, P Ltd has been exercising significant influence
on the financial and operating decisions of Z Ltd.
3 Z Ltd’s profit for 20.17 accrued evenly, with the exception of R2 000 included in
income tax expense, which arose during the second half of the year.
105
Chapter 11
Solution 11.8
P LTD GROUP
ASSETS
Non-current assets
Investment in associates (50 000 + 85 200 + 112 000 + 5 800) 253 000
568 000
Current assets
817 800
P LTD GROUP
Profit 315 000
Share of profit of associate (60 000 + 9 800) 69 800
R253 800
106
P LTD GROUP
Retained
earnings
Balance at 1 January 20.17 (400 000(P) + 64 000(A)) 464 000
Dividends (50 000)
Balance at 31 December 20.17 (Test: 500 000(P) + 112 000(A) + 5 800(Z)) R617 800
Calculations
P Ltd 40%
Total
At Since
i At acquisition
120 000 48 000
Goodwill (R2 000)

• Current year :

Dividends (30 000) (12 000)
R400 000 R112 000
107
Chapter 11
C2 Analysis of owners’ equity of Z Ltd

P Ltd 20%
Total
At Since
i At acquisition
Retained earnings (120 000 + 51 000*) 171 000 34 200
421 000 84 200
Investment in Z Ltd (85 200)
Goodwill (R1 000)
• Current year :
Profit up to 31/12/20.17 49 000* 9 800

Dividends (20 000) (4 000)
R450 000 R5 800
* Profit split:
Before acquisition date = (100 000 + 2 000) × 6/12 = 51 000
After acquisition date = [(100 000 + 2 000) × 6/12] – 2 000 = 49 000
Associates in vertical groups

Basically, three cases may occur:
l the associate is itself a parent; or
l the investment in the associate is held by a partially-owned subsidiary, or
l the investment in the associate is held by another associate of the parent.
1 The associate itself is a parent

Where the associate itself is a parent, the consolidated statements of the associate
should be used to account for the results of the associate according to the equity
method in the consolidated financial statements of the investor. Consider the following
group: P Ltd, which also has various subsidiaries, owns 40% of the issued ordinary
shares of A Ltd, which in turn owns 80% of the issued ordinary shares of S Ltd. The
interest of A Ltd in the owners’ equity of S Ltd must be analysed. The analysis is then
used to calculate the consolidated owners’ equity of A Ltd and to analyse P Ltd’s
interest therein.
108
Example 11.9 Investment in an associate which itself is a parent

P Ltd
A Ltd S Ltd
Group
ASSETS
Investment in A Ltd (40 000 shares at cost) 50 000 – –
Investment in S Ltd (80 000 shares at cost) – 208 400 –
Inventories 400 000 99 600 50 000
Total assets R700 000 R400 000 R300 000
Share capital (100 000 shares) 100 000 100 000 100 000

P Ltd
A Ltd S Ltd
Group
Profit 660 000 322 000 168 000
Other income (dividend received) 8 000 8 000 –
FOR THE YEAR R400 000 R200 000 R100 000
R400 000 R200 000 R100 000

P Ltd
A Ltd S Ltd
Group
Balance at 1 January 20.17 150 000 120 000 110 000
109
Chapter 11
1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A Ltd for
R50 000, when the retained earnings of A Ltd amounted to R20 000. Since the
acquisition date, P Ltd has been exercising significant influence over the financial
and operating decisions of A Ltd.
2 On 30 June 20.17, A Ltd acquired 80% of the issued share capital of S Ltd for
R208 400.
3 S Ltd’s profit for 20.17 accrued evenly, with the exception of R1 000 included in
income tax expense, which arose during the second half of the year.
Solution 11.9
P LTD GROUP
ASSETS
Non-current assets
424 640
Current assets
624 640
110
Investmen
nts in assoc
ciates and joint
j ventures
P LTD
D GROUP
CO
ONSOLIDATTED STATEEMENT OF P
PROFIT OR
R LOSS
AND OT
THER COMPREHENSIVE INCOME E
FOR THE YEAR END
DED 31 DEC
CEMBER 200.17
Profit (P)) 660 000
Share of profit of asssociate (15 840
8 + 76 800)) 92 640
Profit be
efore tax 752 640
Income taax expense (P) (268 000)
PROFIT FOR THE YEAR
Y 484 640
TOTAL COMPREHE
C ENSIVE INC
COME FOR THE YEAR
R R484 640
Total com
mprehensive e income atttributable to
o:
Owners of
o the paren nt 384 640
Non-conttrolling interests 100 000
R484 640
P LTD
D GROUP
EX
XTRACT FROM CONSO
OLIDATED STATEMENNT OF CHA
ANGES IN EQUITY
E
FOR THE YEAR END
DED 31 DEC
CEMBER 20
0.17
Retained
d
earnings
s
Balance at 1 Janaury 20.17 (15 50 000(P) + 440 000(A)) 190 000
Changes s in equity for
f 20.17
Dividends (50 000)
Total commprehensive e income forr the year:
Balance at 31 Dece
ember 20.17
7 (Test: 400 000(P) + 1244 640(A)) R524 640
Commentt
Take note e that the equity method is applied to the consolid
dated stateme
ent of profit or
o
loss and other comp prehensive inncome of A Ltd. In most cases, the e consolidateed
financial statements
s of
o A Ltd will be availablee and can consequently
c be employe ed
directly in the equity ac
ccounting of A Ltd.
111
Chapter 11
Calculations
C1 Analysis of owners’ equity of S Ltd
A Ltd 80% Non-
Total controlling
At Since interests
i At acquisition (30/6/20.17)
Share capital 100 000 80 000 20 000
Retained earnings
(110 000 + 50 500) 160 500 128 400 32 100
260 500 208 400 52 100
Investment in S Ltd (208 400)
–
• Current year:
Profit up to 31/12/20.17 49 500 39 600 9 900
Dividends (10 000) (8 000) (2 000)
R300 000 R31 600 R60 000

P Ltd 40%
Total
At Since
120 000 48 000
Goodwill (R2 000)
• To beginning of current year
• Current year:
Profit for the year
S Ltd 39 600 15 840
A Ltd (200 000 – 8 000) 192 000 76 800
Dividends (20 000) (8 000)
R431 600 R124 640
112
2 The investment in the associate is held by a partially-owned subsidiary

Consider the following group: P Ltd owns 80% of the issued shares of S Ltd, which in
turn owns 40% of the issued shares of A Ltd. For the purposes of the preparation of the
consolidated statements of P Ltd, S Ltd’s interest in A Ltd’s owners’ equity will be
analysed. The analysis is then used to calculate the consolidated owners’ equity of
S Ltd and to analyse P Ltd’s interest therein.
Example 11.10 Investment in associate by a partially-owned subsidiary

P Ltd
S Ltd A Ltd
Group
ASSETS
Investment in S Ltd (80 000 shares at cost) 80 000 – –
Investment in A Ltd (40 000 shares at cost) – 65 000 –
Inventories 200 000 300 000 120 000
Total assets R500 000 R600 000 R200 000
Share capital (200 000/100 000/100 000 shares) 200 000 100 000 100 000

P Ltd
S Ltd A Ltd
Group
Profit 100 000 330 000 85 000
Other income (dividend received) 40 000 4 000 –
FOR THE YEAR R100 000 R200 000 R50 000
R100 000 R200 000 R50 000
113
Chapter 11

Retained earnings
P Ltd S Ltd A Ltd
Group
1 P Ltd acquired 80% of the issued share capital of S Ltd at incorporation of S Ltd.
2 S Ltd acquired 40% of the issued share capital of A Ltd on 1 January 20.17. Since
the acquisition date, S Ltd has been exercising significant influence over the
financial and operating decisions of A Ltd.
Solution 11.10
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (220 000 + 235 000) 455 000
536 000
Current assets
Inventories (200 000 + 300 000) 500 000
Total assets R1 036 000
Share capital: R1 ordinary shares 200 000
812 800
Non-controlling interests (100 000(given) + 123 200(S)) 223 200
Total equity 1 036 000
Total equity and liabilities R1 036 000
114
P LTD GROUP
Profit (100 000 + 330 000) 430 000
Income tax expense (40 000 + 134 000) (174 000)
Non-controlling interests (20 000(given) + 43 200(S)) 63 200
R276 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (150 000(P) + 280 000(S)) 430 000
Dividends (30 000)
Balance at 31 December 20.17 (Test: 200 000(P) + 412 800(S)) R612 800
Calculations
S Ltd 40%
Total
At Since
i At acquisition
160 000 64 000
Goodwill (R1 000)
• Current year:
Dividends (10 000) (4 000)
R200 000 R16 000
115
Chapter 11

P Ltd 80% Non-
Total controlling
At Since interest
i At acquisition
Share capital 100 000 80 000 20 000
–

• Current year :
Profit – S Ltd (200 000 – 4 000) 196 000 156 800 39 200
Equity profit – A Ltd 20 000 16 000 4 000
Dividends (50 000) (40 000) (10 000)
R616 000 R412 800 R123 200
3 The investment in the associate is held by an associate of the parent

A parent may own shares in an associate which itself also owns shares in another
associate. Consider the following group: P Ltd owns 80% of the issued ordinary shares
of S Ltd, and also owns 40% of the issued ordinary shares of A Ltd, which in turn owns
30% of the issued ordinary shares of AA Ltd. A mechanical application of the 20%
criterion allows P Ltd to use the equity financial statements of A Ltd (i.e. that already
includes the investment in AA Ltd in accordance with the equity method) for the
purposes of the preparation of consolidated statements. The equity accounting of
associates in which the parent owns indirect interests through other associates must be
approached with caution, since the influence by the parent over the financial and
operating decisions of the eventual associate may be so diluted that equity accounting of
the associate is inappropriate.
11.5 Classification as held for sale

If an entity decides to sell an investment in an associate, or a portion of an investment,
and it meets the criteria contained in IFRS 5, the investment becomes a non-current
asset held for sale, and is accounted for in accordance with IFRS 5 Non-current
Assets Held For Sale and Discontinued Operations (IAS 28.20).
Refer to chapter 14.10 for associates classified as held for sale.
116
11.6 Impairment losses

After equity accounting for the investment, the entity applies the requirements of IAS 39
Financial Instruments, to determine whether there is any indication of impairment of
the net investment in the associate. The entity also uses IAS 39 to determine whether
an additional impairment loss should be recognised for the entity’s interest in the
associate that does not constitute part of the net investment.
Since goodwill forms part of the carrying amount of the investment in the associate and
is not recognised separately, it is not tested separately for impairment in accordance
with IAS 36. If, by applying the requirements of IAS 39, there is an indication of possible
impairment of the investment in the associate, the entire carrying amount of the
investment will be tested for impairment in accordance with IAS 36, by comparing the
recoverable amount (greater of value in use and fair value less costs of disposal) to the
carrying amount of the investment. The impairment loss is not allocated to any asset,
including goodwill, that forms part of the carrying amount of the investment.
In determining the value in use of the investment, an entity estimates:
l its share of the present value of the estimated future cash flows expected to be
generated by the investee as a whole, including the cash flows from the operations
of the investee and the proceeds on the ultimate disposal of the investment; or
l the present value of the estimated future cash flows expected to arise from
dividends to be received from the investment and from the ultimate disposal of the
investment.
The recoverable amount of an investment in an associate is assessed for each
individual associate, unless an individual associate does not generate cash inflows from
continuing use that are largely independent of those from other assets of the reporting
entity (IAS 28.40–42).
117
Chapter 11
1
Commentt
P Ltd acqquired a 25% interest in A Ltd on 1 Janu uary 20.18 att a cost of R2
250 000. P Ltd
d
has signifficant influenc
ce over A Ltdd.
The carryying amount of o the investmment was as ffollows on 31 December 20.19:
Cost of in
nvestment 250 000
Share in retained earn nings – to 31 December 20 0.18 (200 0000 × 25%) 50 000
Share of profit of assoociate for the yyear ended 3
31 December 20.19
(100 0000 × 25%) 25 000
Carrying amount of the
t investme
ent R325 000
The significant decrea ase in profit fo
or the year en nded 31 Dece ember 20.19 occurred
o as a
result of a declining market
m (there are indicatio ons of impairmment presentt in respect of
o
the invesstment). P Ltd’s financial advisor estiimated that A Ltd will pa ay an annua al
dividend of R90 000 to its shareh holders in futture. A fair dividend
d returrn rate for ann
entity with
h a similar ris
sk and growth h profile is 10%
%.
The recovverable amou unt of the inve estment (25% % interest) on
n 31 Decembe er 20.19 is as
s
follows:
Expected d annual divid dend (90 000 × 25%) R22 500
Fair dividend return ra ate 10%
Recovera able amount – capitalised dividend (22 500/0,10) R225 000
The impa airment loss ono the investm ment is as folllows:
Carrying amount of inv vestment 325 000
Recovera able amount (225 000)
Impairme
ent loss (recog
gnised in proffit or loss) R100 000
Journal entry
e
31 Decemmber 20.19 Dr Cr
Impairmeent loss (P/L) R100 000
Investm
ment in assocciate (SFP) R100 000
The impa airment loss of R100 000 on the invvestment in the
t associatee is reversedd
against th
he investmennt in the asso
ociate in sub
bsequent periods to the extent that the
e
recoverabble amount of
o the investtment increasses. Assumee the recoverable amoun nt
increasess to R275 000
0 on 31 Deceember 20.20:
Recoveraable amount 20.19
2 225 000
Recoveraable amount 20.20
2 275 000
Reversal of impairmen
nt loss R50 000
Journal entry
e
31 Decemmber 20.20 Dr Cr
Investment in associatte (SFP) R50 000
Reverssal of impairm
ment loss (P/L
L) R50 000
118
11.7 Discontinuing the use of the equity method

An investor should discontinue the use of the equity method from the date that it ceases
to be an associate as follows (IAS 28.22):
l If the investment becomes a subsidiary, the investment must be accounted for in
accordance with IFRS 3 Business Combinations, or IFRS 10 Consolidated
Financial Statements.
l If the retained interest in the former associate is a financial asset, it must be
measured at fait value in accordance with IFRS 9 Financial Instruments, which
will be deemed its fair value on initial recognition of the financial asset. On the date
that an investment ceases to be an associate, the investor will measure the
retained investment at fair value. The difference between the following must be
recognised in profit or loss:
• the fair value of the retained interest plus any proceeds from the disposal of the
equity accounted investment; and
• the carrying amount of the equity accounted investment on the date that
significant influence was lost.
l If the equity method is discontinued or if the current interest in the associate is
reduced and the entity continues to apply the equity method, all amounts, or a
proportionate part thereof, previously recognised in other comprehensive income
relating to the investment, will be accounted for on the same basis as would have
been required if the related assets or liabilities were disposed of. This means that if
an amount that was recognised in other comprehensive income would be
reclassified to profit or loss on disposal of the related assets or liabilities, the entity
would reclassify the gain or loss from equity via other comprehensive income to
profit or loss when the equity method is discontinued.
l If an investment in an associate becomes an investment in a joint venture or vice
versa, the entity will continue to apply the equity method and retained earnings will
not be remeasured.
11.8 Disclosure
The disclosure requirements for joint arrangements and associates are set out in
IFRS 12 Disclosure of Interests in Other Entities (IFRS 12.20–23) (refer to chapter
12 for joint arrangements).
An entity is required to disclose information that will enable users of financial
statements to evaluate the nature, extent and financial effects of its interests in
associates, including the nature and effect of its contractual relationship with other
investors with significant influence, as well as the nature of and changes in the risks
associated with its interests in associates.
An entity must disclose information about significant adjustments and assumptions
made in determining if the entity has significant influence over another entity (this may
also include disclosure of assumptions and judgements made to determine that no
significant influence is excercised, although the entity holds more than 20% of the
voting rights of the investee, or vice versa, where an investor does excercise significant
influence, although it holds less than 20% of the voting rights).
119
Chapter 11
The following information must be disclosed separately for each associate that is
material to the reporting entity:
l the name of the associate;
l the nature of the entity’s relationship with the associate;
l the principal place of business (and country of incorporation, if applicable or
different); and
l the proportion of ownership interest or participating share and if different, the
proportion of voting rights held.
The following information must be disclosed for every associate that is material to the
reporting entity:
l whether the investment in the associate is measured using the equity method or at
fair value;
l summarised financial information of the associate (obtained from the financial
statements, the total amount and not only the investor’s share thereof), including
dividends received, non-current and current assets, non-current and current
liabilities, revenue, profit or loss from continuing and discontinued operations, other
comprehensive income and total comprehensive income;
l if the equity method is applied, the fair value of investments in associates for which
there are published price quotations;
l if the equity method is applied, the amounts in the financial statements of the
associate must be adjusted by fair value adjustments at acquisition and
adjustments for differences in accounting policy;
l if the equity method is applied, a reconciliation must be provided between the
summarised financial information and the carrying amount of the interest in the
associate; and
l if the interest is measured at fair value or if the associate does not prepare IFRS
financial statements, the summarised financial information may be prepared on the
basis of the associate’s financial statements.
The following information must be disclosed for associates which are individually
immaterial to the reporting entity (it must be disclosed in total for all associates which
are individually immaterial):
l the carrying amount in total of all individually immaterial associates that were
equity accounted for; and
l summarised financial information of the associate, including profit or loss from
continuing and discontinued operations, other comprehensive income and total
comprehensive income.
The following must also be disclosed:
l the nature and extent of any significant restrictions on the associate’s ability to
transfer funds to the entity;
l if the reporting periods of the entity and the associate differ, the reporting period of
the associate should be mentioned, as well as the reason for the use of different
reporting periods;
120
l the unrecognised share of losses of an associate, both for the current period and
cumulatively;
l any contingent liabilities incurred relating to interests in associates in accordance
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which
must be seperately disclosed.
Piecemeal acquisition of interest in investees

11.9 Changes in ownership interest
1 Acquisition of additional shares whereby the investee becomes
an associate
Where the equity method is applied for the first time, since significant influence has now
been secured, for instance because of the acquisition of additional shares or the
conclusion of a shareholders’ agreement, the investor’s share of since acquisition equity
(i.e. profit or loss) is accounted for as follows:
l The investor’s share of the retained earnings (i.e. profit or loss) of the associated
company, from the date on which the investee becomes an associate, is included
in the current period’s profit or loss in the investor’s financial statements as share
of profit of associate.
Piecemeal acquisition whereby the status of an investment

Example 11.11 changes to that of an associate
(significant influence is obtained)
On 31 December 20.13, the following information relating to P Ltd and A Ltd is

available:
P Ltd
and sub-
sidiaries A Ltd
(consoli-
dated)
ASSETS
Investment in A Ltd
(40 000 shares at fair value; consideration R162 500) 240 000 –
Inventory 487 500 450 000
Mark-to-market reserve 60 140 –
Deferred tax 17360 –
121
Chapter 11
EXTRACT FROM STATEMENT OF PROFIT OR LOSS

P Ltd
and
subsidiaries A Ltd
(consoli-
dated)
Revenue 800 000 300 000
Cost of sales (300 000) (150 000)
Fair value adjustment on investment 9 312 –
Other comprehensive income for the year, net of tax 9 312 –
R450 000 R120 000
R459 312 R120 000

Retained earnings
P Ltd
and
subsidiaries A Ltd
(consoli-
dated)
Dividends (100 000) –
122
1 P Ltd acquired 15% of A Ltd’s issued share capital on 31 December 20.12 for
R15 000. This interest did not enable P Ltd to exercise significant influence over
A Ltd.
2 P Ltd acquired a further 25% of A Ltd’s issued share capital for R147 500 on
30 November 20.13, from which date P Ltd exercised significant influence over
the financial and operating decisions of A Ltd. The fair value of the previously held
15% interest on this date was R88 000.
3 A Ltd’s profit was earned evenly throughout the period.
4 P Ltd recognised all fair value adjustments on the investment in A Ltd through other
comprehensive income using a mark-to-market reserve in its separate financial
statements. The cumulative fair value gain on 1 January 20.13 amounted to
R65 500.
5 On each date of purchase, the identifiable assets and liabilities of A Ltd were
regarded to be fairly valued.
6 Assume a company tax rate of 28% and that capital gains tax is recognised at 80%
thereof.
Solution 11.11
P LTD GROUP
ASSETS
Non-current assets
Investment in associate (88 000 + 147 500 + 500 + 4 000) 240 000
490 000
Current assets
Inventory (P) 487 500
911 148
Liabilities
Deferred tax (17 360 – 1 008(J1)) 16 352
Total liabilities 16 352
123
Chapter 11
P LTD GROUP
Revenue 800 000
Share of profit of associate (4 000 + 500) 4 500
Fair value adjustment on investment
(88 000 – (15 000 + 65 500) = 7 500 – (7 500 × 28% × 80%)) 5 820
Non-controlling interests (other subsidiaries) 50 000
454 500
Owners of the parent 410320
R460 320
P LTD GROUP
Mark- Non-
Share Retained to- con- Total
Total
capital earnings market trolling equity
reserve interests
Balance at
1 January 20.13 250 000 300 000 *50 828 600 828 #– 600 828
Changes in equity
for 20.13
Dividends – (100 000) (100 000) – (100 000)
Total
comprehensive
income for the
year:
Profit for the year – 404 500 5 820 410 320 50 000 460 320
Transfers 56 648 (56 648)
Balance at
31 Dec 20.13 R250 000 R661 148 – R911 148 R50 000 R961 148
# 50 000 – 50 000 (current year) = Nil

* 65 500(given) – (65 500 × 28% × 80%) = 50 828
124
Calculations
C1 Analysis of owners’ equity in A Ltd
P Ltd 40%
Total
At Since
i At acquisition of additional interest
Retained earnings ((500 000 – (120 000/12)) 490 000 196 000
590 000 236 000
Gain from a bargain purchase (500)
Consideration (88 000 + 147 500) R235 500
Current year :
Profit: 1/12/20.13–31/12/20.13 (1) 10 000 4 000
R600 000 R4 000
(1) 120 000 × 1/12 = 10 000 (accrued evenly)

Dr Cr
R R
J1 Mark-to-market reserve (OCI) 3 492
Deferred tax (SFP) (4 500 × 28% × 80%) 1 008
Investment in A Ltd (SFP) (240 000 – 88 000 – 147 500) 4 500
Pro forma reversal of fair value adjustments
in respect of investment in A Ltd at group level
J2 Mark-to-market reserve (SCE) 56 648
Retained earnings (SCE) 56 648
Fair value gain realised at deemed disposal of
investment when obtain significant influence
J3 Investment in A Ltd (SFP) 500
Share of profit of associate (P/L) 500
Recognise gain from a bargain purchase
Equity accounting of the investment in A Ltd
at group level
125
Chapter 11
Example 11.12 Acquisition of additional interest
A Ltd acquired a 15% equity interest in B Ltd on 1 March 20.14 for R150 000. The
consideration was paid in cash. In terms of the acquisition contract A Ltd have the
unconditional right to exercise options that will allow A Ltd to obtain a further 10%
equity stake. The options however must be exercised before 28 February 20.16.
B Ltd had the following financial information:
1/03/20.14 28/02/20.15 28/02/20.16
Mark-to-market reserve 100 000 120 000 120 000
Total equity R800 000 R920 000 R870 000
Fair value B Ltd * R1 100 000 R1 000 000
* This fair value represents the fair value of the shares of B Ltd.
On 31 August 20.14 B Ltd sold machinery, with a carrying amount of R50 000, to A Ltd
for R60 000. A Ltd paid the R60 000 amount in cash. The remaining useful life of the
machinery at the date of sale was 5 years with a residual value of Rnil. A Ltd’s
accounting policy is to depreciate machinery over the remaining useful life. A Ltd
recognised the asset and depreciation for the year based on R60 000 (purchased
amount). No other entries were processed by A Ltd in respect of this transaction.
1 Ignore any tax implications for the purpose of this question.
2 Assume that the identifiable assets and assumed liabilities on 1 March 20.14 and
28 February 20.15 were carried at fair value.
3 A Ltd Group’s accounting policy for investments in associates is to account for the
investments in terms of the equity method in accordance with IAS 28.
4 It is the policy of A Ltd to classify investments in associates in its own financial
statements at “Fair value through profit or loss”.
5 A Ltd has classified the option in B Ltd as financial instruments at “Fair value
through profit or loss”. The fair value gain on the options amounted to R30 000 on
28 February 20.15. The options represent derivatives in terms of IFRS 9.
6 Both A Ltd’s and B Ltd’s reporting dates are 28 February.
126
Solution 11.12
Assume that A Ltd has exercised their options on 1 March 20.15 at a cost of R50 000
and consequently obtained the additional 10% equity interest. The R50 000 was paid in
cash.
Pro forma consolidation journal entries

Dr Cr
R R
28 February 20.16
At acquisition
J1 Retained earnings – Opening balance (SCE) 15 000
Investment in associate (SFP)
((1 100 000 × 15%) – 150 000 (initial cost)) 15 000
Elimination of fair value adjustment
Since acquistion
J2 Investment in associate (SFP) 18 000
Retained earnings (SCE) ((300 000 – 200 000) × 15%) 15 000
Mark-to-market reserve (SCE)
((120 000 – 100 000) × 15%) 3 000
Intragroup transaction
J3 Retained earnings (SCE) (C3) 1 350
Accumulated depreciation (SFP) (C3) 150
Machinery (SFP) (C3) 1 500
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.16 agree with the
end of 20.15.
J4 Accumulated depreciation (SFP) 300
Share of profit of associate (P/L) (C3) 300
Realisation of intragroup profit
Current year
Investment in associate (SFP) (C4) 5 000
Elimination of fair value adjustment
J6 Investment in associate (SFP) (C1) 12 000
Gain on option
J7 Share of loss of associate (P/L) 12 500
((250 000 – 300 000) × 25%) 12 500
A Ltd’s share of the loss of the current year
127
Chapter 11
Control check for the journals

Total equity – B Ltd on 28/02/20.16 (500 000 + 250 000 + 120 000) 870 000
Equity interest at 25% held by A Ltd (870 000 × 25%) 217 500
Goodwill at initial acquisition of 15%
((500 000 + 200 000 + 100 000) ×15%) – 150 000 (Cost price) 30 000
Unrealised profit (intragroup profit) made on sale of machinery (C2) (1 500)
Realised profit in 20.15 (C3) 150
Realised profit in 20.16 (C3) 300
Total value of investment in B Ltd R246 450
Reconciliation with group statement
Cost price of initial acquisition 150 000
Cost price of options 80 000
Bargain purchase gain recognised in profit or loss on options (C1) 12 000
Since acquisition reserves 18 000
Loss of associate for 20.16 (12 500)
Remaining unrealised profit at end of 20.16 (1 500 – 450) (1 050)
Total value of investment in B Ltd as per journals R246 450
Assume that A Ltd sold the right to the options for the additional 10% equity on the
1 March 20.15 at its fair value of R30 000. A Ltd therefor loses significant influence over
B Ltd and should discontinue the equity method. The investment is then accounted for
under IFRS 9 (See IAS 28.22b).
Pro forma consolidation journal entries

Dr Cr
R R
1 March 20.15: Same journal as J1 to J3 above
28 February 20.16
J4 Investment in B Ltd (SFP) 168 000
(carrying amount = cost of R150 000 and since
acquisition equity of R18 000 (J2) 168 000
Investment in associate becomes an ordinary
investment as a result of the sale of options
Investment in B Ltd (SFP)
((1 100 000 ×15%) – 168 000) 3 000
Fair value adjustment
J6 Mark-to-market reserve (SCE) 3 000
Mark-to-market reserve realised transferred to
retained earnings
128
Calculations
C1 Gain on bargain purchase price as a result of the exercise of the option
Total equity for B Ltd on 01/03/20.15 (500 000 + 300 000 + 120 000) 920 000
10% Equity interest gained on execution of option by A Ltd (920 000 × 10%) 92 000
Amount paid for options (C5) 80 000
Gains from a bargain purchase (92 000 – 80 000) R12 000
OR the “Gain from a bargain purchase” can be calculated as follows:
Interest after option exercise 260 000
l Net asset value (920 000 × 25%) 230 000
l Goodwill on 15% acquisition
[(500 000 + 200 000 + 100 000) × 15%] – 150 000(cost price) 30 000
Interest before option exercise (168 000)
l Net asset value (920 000 × 15%) 138 000
l Goodwill on 15% acquisition 30 000
Additional cash outflow (cost of options) (C5) 80 000
Gain from a bargain purchase R12 000
C2 Sale of machinery
Consideration received by B Ltd 60 000
Carrying amount of machinery for B Ltd (50 000)
Profit made on the sale of machinery 10 000
15% of the profit pertains to intragroup (15% × 10 000) 1 500
C3 Realisation of unrealised profit through depreciation

Unrealised profit (intragroup profit) (C2) 1 500
Realised over 5 years (useful life) (1 500/5) 300
Thus realised for 20.15 (6 months) (300 × 6/12) 150
Thus realised for 20.16 (1 year) 300
C4 Investment in the books of A Ltd

Carrying amount of investment at 28 February 20.15
(fair value of R1 100 000 × 15%) 165 000
Cost of addition purchase 80 000
Fair value gain for the year (balancing) 5 000
Carrying amount of investment at 28 February 20.16
(fair value of R1 000 000 × 25%) R250 000
129
Chapter 11
1
Commentt
When an investor
i acquuires an additional interestt in an existin
ng associate, it is dealt witth
as follows:
l The co ost price of th
he additional shares acqu uired is added d to the carryying amount of o
the invvestment.
The additional equ uity obtained (at carrying amount) is compared
c to the purchas se
price thereof to determine
d whhether goodw will or a barrgain gain arose
a with th
he
additio
onal purchase e.
l The inccreased equitty interest (aftter the acquissition of the additional
a sha
ares) is used to
t
calcula
ate the inve estor’s interest in the eq quity profit or
o loss accrued after th he
acquissition of the ad
dditional interrest.
Disposa
al of inte
erests in an
a investtee
2 Dispo osal of the entire inte erest in an associate
The same e principless apply wheen significant influencee over an associate,
a o joint conttrol
or
over a joointly controolled entity, is relinqu
uished. The e example hereafter deals
d with an
associatee where IAS S 28.18 is applicable.
a The total in
nterest in th
he associatte is dispos
sed
e retained investment in the former associatte is therefo
of and the ore carried at
a Rnil.
Disposal of
o the entirre interest in an asso
ociate
Examplle 11.13
(significan
nt influenc
ce is lost)
STATEMEN
S NTS OF FIN
NANCIAL PO
OSITION AS
S AT 31 DE
ECEMBER 20.17
2
P Ltd
and sub-
sidiaries A Ltd
(consoli-
dated)
ASSETS S
Property,, plant and equipment
e 400 000 100 00
00
Inventory
y 100 000 150 00
00
Total ass
sets R500 000 R250 00
00
EQUITY AND LIABIILITIES
Share ca
apital (200 0000/100 000 sh
hares) 200 000 100 00
00
Retained
d earnings 200 000 150 00
00
Non-conttrolling interests 100 000 –
Total equ
uity and lia
abilities R500 000 R250 00
00
130

P Ltd
and sub-
sidiaries A Ltd
(consoli-
dated)
Revenue 300 000 200 000
Cost of sales (112 000) (100 000)
Gross profit 188 000 100 000
Other income (gain on disposal of shares) 16 000 –
R110 000 R50 000
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY

Retained earnings
P Ltd
and sub-
sidiaries A Ltd
(consoli-
dated)
Dividends (31 December 20.17) (30 000) (25 000)
1 P Ltd acquired 40% of the issued share capital of A Ltd on 1 January 20.13 for
R50 000, when the retained earnings of A Ltd amounted to R10 000. P Ltd exercised
significant influence over the financial and operating policies of A Ltd from that date.
2 On 30 June 20.17, P Ltd disposed of its entire interest in A Ltd for R66 000.
3 A Ltd’s profit after tax for the six months ended 30 June 20.17 amounted to
R25 000.
131
Chapter 11
4 The disposal of the interest in the associate did not comply with the requirements of
IFRS 5 Non-current Assets Held for Sale and discontinued operations up to the
date of disposal of the interest.
5 P Ltd measures investments in associates at cost in its separate financial
statements.
6 Ignore taxation.
Solution 11.13
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment 400 000
400 000
Current assets
Inventory 100 000
400 000
132
P LTD GROUP
Revenue 300 000
Other expenses (loss on disposal of interest (J1)) (40 000)
Share of profit of associate (J1) 10 000
Non-controlling interests (given) 30 000
R64 000
Non-controlling interests (given) 30 000
R64 000
P LTD GROUP
Non-
Total controlling
interests
Balance at
1 January 20.17 200 000 * 196 000 396 000 ! 70 000 466 000
Changes in equity
for 20.17
Dividends – (30 000) (30 000) – (30 000)
Total comprehensive
income for the year:
Profit for the year – 34 000 34 000 30 000 64 000
Balance at
31 December 20.17 R200 000 R200 000 R400 000 R100 000 R500 000
* = 150 000(P) + 46 000(A) = 196 000

! = balancing figure, as the comparative information was not given to calculate opening balance
133
Chapter 11
Calculations
P Ltd 40%–0%
Total
At Since
i At acquisition
110 000 44 000
• Current year:
Profit: 1/1/20.17–30/6/20.17 (given) 25 000 10 000
250 000 56 000
Disposal of entire interest (44 000) (56 000)
R250 000 –
C2 Calculation of gain/(loss) on disposal of interest in associate

Proceeds on disposal of interest 66 000
Historic cost of interest disposed of (50 000)
Gain on disposal in P Ltd’s separate records (66 000 – 50 000) 16 000
Since acquisition reserves disposed of
Retained earnings (46 000 + 10 000) (56 000)
Loss on disposal of interest in group context (R40 000)
The calculation can also be done as follows (IAS 28.18):
Fair value N/A
Carrying amount on date of disposal (50 000 + 56 000(*)) (106 000)
Loss on disposal of interest in group context (R40 000)
(*) The R56 000 represents P Ltd’s interest in the since acquisition reserves of A Ltd by which the
investment in A Ltd has been adjusted upwards in terms of the equity method.
C3 Pro forma consolidation journal entry

Dr Cr
R R
J1 Gain on disposal of interest (P/L)
(Reverse P Ltd’s gain on disposal) 16 000
Loss on disposal of interest (P/L)
(establish loss in group context) 40 000
Retained earnings – Beginning of period (SCE) 46 000
Gain correction at group level and equity accounting
of associate
134
Investmen
nts in assoc
ciates and joint
j ventures
Commentts
The gain from
f the dispposal of intere
est of R16 00
00 according to the separrate records of
P Ltd is therefore effeectively repla
aced, on appplying the equity method, by a loss ono
disposal of
o interest of R40
R 000 (i.e. R16 000 – R R56 000).
3 Partia
al disposal of an inte erest in an associate
l If the
e retained interest in the forme er associate is a fina ancial asse et, it must be
meas sured at fair value, wh hich will be
e deemed itts fair valuee on initial recognition
r of
the fiinancial assset, in accoordance with h IFRS 9 Fiinancial Insstruments.
l On the
t date thhat an investment ce eases to b be an asso ociate, the investor will w
meas sure the rettained inves stment at faair value. Th
he differenc
ce between n:
• the e fair value
e of the retaained intere est plus anyy proceeds from the disposal of the t
eqquity accoun nted investm ment; and
• th he carrying g amount of the equ uity accoun nted investtment on the t date th hat
sig
gnificant inffluence was s lost, must be recognised in proffit or loss.
l If the
e equity me ethod is discontinued or if the ccurrent inte erest in thee associate is
reduc ced and th he entity co ontinues to apply the equity me ethod, all amounts,
a orr a
propo ortionate pa art thereof relating to the investmment previoously recogn nised in othher
comp prehensive income will be accounted for o on the samme basis ass would ha ave
been n required iff the investeee had direectly disposeed of the re
elated assetts or liabilitiies
(IAS 28.22(c)). This means that if an amount that wa as recognissed in oth her
comp prehensive income wo ould be recclassified to profit or loss on dissposal of the t
relateed assets oro liabilities
s, the entityy would reclassify the gain or losss from equ uity
via other
o compprehensive income to o profit or loss when n the equitty method is
discoontinued.
135
Chapter 11
Partial disposal of an interest in an associate – Loss of

Example 11.14 significant influence (associate becomes IFRS 9
investment)
EXTRACT OF STATEMENTS OF FINANCIAL POSITION OF A LTD

01/01/20.14 31/12/20.15 30/06/20.16 31/12/20.16
Share capital 600 000 600 000 600 000 600 000
Retained earnings 180 000 270 000 315 000 360 000
Revaluation surplus 225 000 276 600 276 600 276 600
Mark-to-market reserve 258 000 296 700 309 600 335 400
Total equity and liabilities R1 263 000 R1 443 300 R1 501 200 R1 572 000
R525 000. P Ltd exercised significant influence over the financial and operating
policies of A Ltd from that date.
2 On 30 June 20.16, P Ltd disposed of a 35% interest in A Ltd for R615 000. The
remaining 5% interest had a fair value of R112 500 on 30 June 20.16 and R165 000
on 31 December 20.16. A Ltd classified the investment as a financial asset at fair
value through other comprehensive income.
3 A Ltd’s profit after tax for the six months ended 30 June 20.16 amounted to R45 000
(earned evenly during the year).
4 P Ltd measures investments in associates at cost in its separate financial
statements.
5 The revaluation surplus relates to land. It is the policy of P Ltd to realise the
revaluation surplus on the disposal of the land. The mark-to-market reserve relates
to fair value gains on financial assets at fair value through other comprehensive
income. It is the policy of P Ltd to transfer these gains to retained earnings on the
disposal of the financial assets.
6 P Ltd included the following items in its separate financial statements for 20.16:
l Financial asset at fair value through other comprehensive income R165 000;
l Gain on disposal of investment in associate R155 625 (615 000 – (525 000 ×
35/40));
l Mark-to-market reserve R52 500 (165 000 – 112 500);
l Day one gain (P/L) R46 875 ((112 500 – (525 000 x 5/40)).
7 Ignore taxation.
136
Solution 11.14
P LTD GROUP
EXTRACT FROM CONSOLIDATED STATEMENT OF FINANCIAL POSITION
20.16 20.15
ASSETS
Non-current assets
Investment in associate – 597 120
Financial asset 165 000 –
20.15: 525 000 + 20 640 + 15 480 = 597 120
20.16: Fair value (given)
The following items relating to only A Ltd will be included in the consolidated statement
of changes in equity:
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Reval- Mark-to-
Retained
uation market
earnings
surplus reserve
Other comprehensive income *57 660
Transfers from revaluation surplus 20 640 (20 640)
Transfer from mark-to-market reserve 20 640 (20 640)
Balance at 31 December 20.16 R202 500 – R52 500
* 5 160(J2) + 52 500(J7) = 57 660
137
Chapter 11
Calculations
P Ltd 40%–35%
Total
At Since (RE) (MtM;RS)
Mark-to-market reserve 258 000 103 200
1 263 000 505 200
Goodwill 19 800
Consideration 525 000
• To beginning of current year
Retained earnings (1) 90 000 36 000
Revaluation surplus (2) 51 600 20 640 RS
Mark-to-market reserve (3) 38 700 15 480 MtM
• Current year (20.16)
Profit: 1/1/20.16–30/6/20.16 (4) 45 000 18 000
Mark-to-market reserve (5) 12 900 5 160 MtM
1 501 200 525 000 54 000 20 640 RS
20 640 MtM
Disposal of 35% (8);(C2) (459 375) (83 370)
Transfer to retained earnings 20 640 (20 640) RS
Transfer to retained earnings 20 640 (20 640) MtM
R1 501 200 *R65 625 *R11 910 –
(1) (270 000 – 180 000); (2) (276 600 – 225 000)
(3) (296 700 – 258 000); (4) (315 000 – 270 000)
(5) (309 600 – 296 700); (6) (360 000 – 315 000)
(7) (335 400 – 309 600); (8) (525 000 × 35/40)
* Carrying amount of remaining interest: 65 625 + 11 910 = 77 535
Fair value adjustment: Fair value – Carrying amount = 112 500 – 77 535 = 34 965
C2 Calculation of gain/(loss) on disposal of interest in associate

Cost of interest disposed of (525 000 × 35/40) (459 375)
Gain on disposal in P Ltd’s separate records 155 625
Less: Since acquisition reserves disposed of ((1 501 200 – 1 263 000) × 35%) 83 370
Gain on disposal of interest (group context) R72 255
The calculation can also be done as follows:
Consolidated net asset value (1 501 200 × 35%) (525 420)
Goodwill (19 800 × 35/40) (17 325)
Gain on disposal of interest (group context) R72 255
138

Dr Cr
R R
Revaluation surplus (SCE) 20 640
Mark-to-market reserve (SCE) 15 480
Recognition of opening equity
(OCI) 5160
Recognition of profit and other comprehensive
income (01/01/20.16–30/06/20.16)
J3 Gain on sale of shares (separate) (P/L) 155 625
Gain on sale of shares (consolidated) (P/L) 72 255
Investment in A Ltd (SFP) 83 370
Recognition of consolidated gain on disposal of 35%
interest in associate
J4 Revaluation surplus (SCE) 20 640
Mark-to-market reserve (SCE) 20 640
Transfer to retained earnings on date of disposal
J5 Gain on mark-to-market reserve (OCI) (given) 52 500
Day one gain (P/L) 46 875
Elimination of mark-to-market adjustment
in separate financial statements
J6 Investment in A Ltd (SFP) (C1) 34 965
Fair value adjustment (P/L) 34 965
Fair value adjustment for the group on 30 June 20.16
J7 Investment in A Ltd (SFP) (165 000 – 112 500) 52 500
Gain on mark-to-market reserve (OCI) 52 500
Fair value adjustment for the group on
31 December 20.16
139
Chapter 11
Question 11.1 Basic equity accounting/interest received
The profit-or-loss section of the draft consolidated statements of profit or loss and other
comprehensive income and an extract from the consolidated statements of changes in
equity of P Ltd and its subsidiaries and A Ltd and subsidiaries for the 20.17 financial
year are as follows:
P Ltd A Ltd
Group Group
Revenue 5 873 000 1 857 000
Cost of sales (4 600 000) (1 539 000)
Gross profit 1 273 000 318 000
Interest received 15 000 –
Gain from sale of land – 100 000
Dividends received 14 000
Interest paid – (30 000)
Profit before tax 1 302 000 388 000
Income tax expense
Current (390 000) (106 000)
Deferred (90 000) (34 000)
Non-controlling interests 24 000 30 000
R822 000 R248 000

Retained earnings
P Ltd A Ltd
Group Group
Balance at 1 January 20.17 1 149 000 242 000
Dividends paid (235 000) (56 000)
Balance at 31 December 20.17 R1 712 000 R404 000
140
1 A Ltd’s issued share capital consists of 150 000 shares of R1 each. The company is
situated in Cape Town.
2 A Ltd revalues its buildings annually on 31 August. The revaluation surplus (after tax
at 28%) had arisen as follows:
31 August 20.15 20 000
31 August 20.16 20 000
31 August 20.17 10 000
Revaluation surplus on 31 August 20.17 R50 000
3 On 1 September 20.15, P Ltd acquired 22 500 shares in A Ltd, a manufacturer of
musical instruments, for R50 000, when A Ltd’s consolidated retained earnings
amounted to R100 000. Since 1 September 20.15, P Ltd also has an option to take
up another 10 000 shares in A Ltd. The option has been exercisable at any time
since 1 September 20.15, but P Ltd has not exercised it as of yet. On 31 December
20.17, the shares in A Ltd traded at R4,10.
4 On 1 September 20.15, A Ltd issued R100 debentures to the amount of R150 000.
At this date, half of the debentures were taken up by P Ltd; the other half was taken
up by other shareholders. The interest received and paid by P Ltd and A Ltd
respectively relates to these debentures. The debentures bear a market-related
interest rate.
5 The profit from sale of land relates to a farm sold by A Ltd to P Ltd. It was a
transaction negotiated under extreme conditions and the profit is of a capital nature.
6 Included in P Ltd’s profit before tax are the following items:
Secretarial services rendered by an external person R20 000
Directors’ remuneration – for services as directors R100 000
7 The carrying amounts of A Ltd’s assets and liabilities as at 31 December 20.17 are
the following:
Non-current assets R1 561 100
Current assets R438 900
Non-current liabilities R1 300 000
Current liabilities R96 000
8 Assume a normal tax rate of 28% and that 80% of capital gains are taxable.
9 The balance of non-controlling interests in the P Ltd Group’s consolidated statement
of financial position as at 31 December 20.16 amounted to R110 000.
Required
(a) Prepare the consolidated statement of profit or loss and other comprehensive
income and consolidated statements of changes in equity of the P Ltd Group for
the year ended 31 December 20.17;
(b) Indicate the components that the carrying amount of the investment in associate on
31 December 20.17 are compiled of; and
(c) Prepare the following notes in the consolidated financial statements of the P Ltd
Group for the year ended 31 December 20.17 (ignore comparative amounts):
l Profit before tax;
l Investment in associate.
141
Chapter 11
Part (a)
P LTD GROUP
Revenue (P) 5 873 000
Cost of sales (P) (4 600 000)
Gross profit 1 273 000
Other income (14 000 + 15 000 – 8 400) 20 600
Share of profit of associate (32 700(C1) – 15 000 + 3 360(C2)) 21 060
Profit before tax 1 314 660
Income tax expense
Current (P) (390 000)
Deferred (P) (90 000)
R834 660
R836 160
142
P LTD GROUP
Revalu- Non-
Retained
ation controlling Total
earnings
surplus interests
Balance at 1 January 20.17 # 1 170 300 3 000 110 000 1 283 300
Dividends (P) (235 000) – – (235 000)
Total comprehensive income
for the year:
Profit for the year 810 660 – 24 000 834660
Other comprehensive income – 1 500 – 1 500
Balance at 31 December 20.17 * R1 745 960 @ R4 500 R134 000 1 882 960
# 1 149 000(P) + 21 300(C1) = 1 170 300

* Test: 1 712 000(P) + 45 600(C1) – 15 000 + 3 360(C2) = 1 745 960
@ Test: 0(P) + 4 500(C1) = 4 500
Part (b)
Investment in associate
The carrying amount of the investment is compiled as follows:
l Cost 50 000
l Cumulative since acquisition equity 50 100
• Retained earnings to beginning of the current year 21 300
• Profit for the current year (32 700 – 8 400) 24 300
• Revaluation surplus 4 500
# R100 100
# Test: 50 000(cost) + 45 600(retained earnings C1) + 4 500(revaluation surplus C1) = 100 100
Part (c)
1 Profit before tax
Profit before tax is stated after taking into account the following expenses:
l Secretarial services R20 000
l Directors’ remuneration – for services as director R100 000
143
Chapter 11
2 Investment in associate
P Ltd owns a 15% interest in the manufacturing company, A Ltd. A Ltd is
incorporated in South Africa and its principal place of business is Cape Town. The
interest is equity accounted for.
Summarised financial information of associate R
Non-current assets 1 561 100
Current assets 438 900
Non-current liabilities 1 300 000
Current liabilities 96 000
Revenue 1 857 000
Total comprehensive income 248 000
Reconciliation to the carrying amount of the investment
Net assets of associate 604 000
15% interest in net assets of associate 90 600
Plus: Goodwill at acquisition 9 500
Carrying amount of investment in associate 100 100
Fair value of investment in associate
The fair value of the investment in the associate is R92 250
(R4,10 × 22 500 shares)
Calculations
P Ltd 15%
Total
At Since
270 000 40 500
Goodwill (R9 500)
• To beginning of current year:
• Current year:
Dividends (56 000) (8 400)
R604 000 45 600 RE
4 500 RS
144
C2 Journals in respect of unrealised profit

Dr Cr
R R
J1 Share of profit of associate (P/L) 15 000
Land (SFP) (100 000 × 15% = 15 000) 15 000
J2 Deferred tax (SFP) (15 000 × 28% × 80%) 3 360
Question 11.2 Basic equity accounting/reporting dates differ
On 1 January 20.13, P Ltd purchased 40% of the issued share capital of A Ltd for
R65 000. On this date, the retained earnings of R70 000 were the only reserve of A Ltd.
Except for land, which was undervalued by R5 000, all the assets of A Ltd were fairly
valued. A Ltd’s share capital consisted of 100 000 shares of R1 each. P Ltd exercises
significant influence over the financial and operating decisions of A Ltd.
The following represents the statements of profit or loss and other comprehensive
income and an extract from the statements of changes in equity of the two companies
for the relevant periods:
P Ltd
A Ltd
Group
30/9/20.17
31/12/20.17
Revenue 1 000 000 850 000
Cost of sales (880 000) (710 000)
Gross profit 120 000 140 000
Income tax relating to other comprehensive income – (1 500)
R68 000 R70 000
R68 000 R78 500
145
Chapter 11

Retained earnings
P Ltd
A Ltd
Group
30/9/20.17
31/12/20.17
Dividends paid (30 June 20.17) (15 000) (20 000)
1 The reporting date of P Ltd is 31 December and that of A Ltd is 30 September.
2 Since the acquisition date, the investment in A Ltd has been accounted for
according to the equity method in the consolidated financial statements.
3 The revaluation surplus arose during June 20.17 when A Ltd revalued its land.
Deferred tax on revaluations of land is recognised at the capital gains tax rate of
15% (namely half of the normal tax rate of 30%).
4 During November 20.17, A Ltd suffered a loss of R30 000 when a warehouse
burned down. This is regarded as a significant event.
5 The balance of non-controlling interests in the P Ltd Group’s consolidated statement
of financial position as at 31 December 20.16 amounted to R75 000.
6 Assume a normal tax rate of 28% and that 80% of capital gains are taxable.
Required
(a) Prepare the consolidated statement of profit or loss and other comprehensive
income and consolidated statement of changes in equity of the P Ltd Group which
account for the results of A Ltd according to the equity method; and
(b) Calculate the investment in the associate as it will appear in the consolidated
statement of financial position at 31 December 20.17. Also show the compilation
thereof.
146
Part (a)
P LTD GROUP
Revenue (P) 1 000 000
Share of profit of associate (C1) 16 000
R76 000
R77 552
P LTD GROUP
Non-
Retained Revaluation
controlling Total
earnings surplus
interests
Balance at 1 January 20.17 # 296 552 – 75 000 371 552
Dividends (P) (15 000) – – (15 000)
for the year:
Profit for the year 71 000 – 5 000 76 000
Other comprehensive income – 1 552 – 1 552
Balance at 31 December 20.17 * R352 552 R1 552 R80 000 R434 104
# 260 000(P) + 32 000 + 4 552(C1) = 296 552
* 308 000(P) + 40 000 + 4 552(C1) = 352 552
147
Chapter 11
Part (b)
The carrying amount of the investment in associate is compiled as follows:
l Cost 65 000
l Cumulative since acquisition equity 46 104
• Retained earnings to beginning of the current year (32 000 + 4 627) 36 552
• Profit for the current year (16 000 – 8 000) 8 000
• Revaluation surplus 1 552
# R111 104
# Test: 65 000(cost) + 40 000(retained earnings C1) + 1 552(revaluation surplus C1) + 4 627 (bargain
purchase C1) = 111 104
Calculation
P Ltd 40%
Total
At Since
Revaluation surplus (2) 3 880 1 552
173 880 69 552
Gain from a bargain purchase R4 552
Retained earnings (1) 80 000 32 000
• Current year:
Profit for the year (70 000 – 30 000) 40 000 16 000
Revaluation surplus (3)# 3 880 1 552
Dividends (20 000) (8 000)
R277 760 R40 000 RE
R1 552 RS
(1) 150 000 – 70 000 = 80 000

(2) 5 000 – (5 000 × 28% × 80%) = 3 880
(3) (10 000 – 5 000 #) = 5 000 – (5 000 × 28% × 80%) = 3 880
# A Ltd revalued its land by R10 000 in its own financial statements, but P Ltd had already revalued
the land of A Ltd by R5 000 at date of acquisition of the interest in A Ltd.
148
12
Interests in joint arrangements
Basic concepts
12.1 Description of basic concepts .................................................................. 151
12.2 Types of joint arrangements .................................................................... 151
Classification of joint arrangements ..................................................... 152

12.3 Structure of the joint arrangement ........................................................... 153
12.4 Legal form of the separate vehicle ........................................................... 153
12.5 Terms of the contractual arrangement ..................................................... 154
12.6 Other facts and circumstances ................................................................ 154
Accounting for joint arrangements

12.7 Joint operations........................................................................................ 156
12.8 Joint ventures........................................................................................... 156
Disclosure ........................................................................................................ 157
Examples
Example 12.1: Basic approach – Joint arrangement in a separate entity ........ 158
Example 12.2: Joint operation not structured in a separate entity .................... 164
149
Basic concepts
12.1 Description of basic concepts
IFRS 11 Joint Arrangements focuses on investments where an investor can exercise
joint control, in contrast to control that is established between a parent and a
subsidiary in terms of IFRS 10 Consolidated Financial Statements.
A joint arrangement is an arrangement where two or more parties exercise joint
control that is the contractually agreed sharing of control. This means that the
unanimous consent of the parties sharing control is required for all decisions about the
relevant activities.
A joint arrangement is classified as follows:
l assess if collective control of an arrangement exists; and
l then assess if the contractual arrangement gives two or more parties joint control.
Collective control of an arrangement exists when all the parties must act together to
direct the activities that significantly affect the returns of the arrangement. If collective
control exists, it must be assessed whether joint control exists.
Joint control is the contractually agreed sharing of control over an arrangement, which
exists only when decisions about the relevant activities require the unanimous consent
of the parties sharing control. An entity must assess whether all the parties have joint
control of the arrangement. No single party can control the arrangement individually.
Control is not defined in IFRS 11. In accordance with IFRS 10 Consolidated
Financial Statements an investor controls an investee when it is exposed or has rights
to variable returns from its involvement with that investee and has the ability to affect
those returns through its power of the investee.
An arrangement can be a joint arrangement even though not all of its parties have joint
control of the arrangement. Therefore, there are parties exercising joint control of an
arrangement and other parties participating in the arrangement. An entity must apply its
judgement to assess whether all of the parties jointly control an arrangement.
12.2 Types of joint arrangements

A joint arrangement is an arrangement of which two or more parties have joint control.
IFRS 11 identifies two types of joint arrangements: a joint operation and a joint
venture. The following characteristics are present in both:
l two or more parties are bound by a contractual arrangement; and
l the contractual arrangement establishes joint control.
A contractual arrangement is often in writing in the form of a formal contract or
minutes of discussions between parties. When the joint arrangement is structured
through a separate vehicle, the contractual arrangement or some aspects thereof will
be incorporated in the articles, charter or by-laws of this entity. A separate vehicle is a
separately identifiable financial structure, including separate legal entities or entities
151
Chapter 12
recognised by statute, regardless of whether those entities have a legal personality.

The contractual arrangement deals with the following:
l the purpose, activities and duration of the joint arrangement;
l the appointment of the board of directors or similar governing body of the joint
arrangement;
l the decision-making process: the matters requiring decisions from the parties, the
voting rights of the parties and the required level of support for those matters. This
process establishes joint control of the arrangement;
l capital or other contributions required of the parties; and
l the sharing of production, revenues, expenses or profit or loss of the joint
arrangement.
A joint operation is a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the assets and obligations for the liabilities relating to
the arrangement. Those parties are called joint operators.
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called
joint venturers.
Is it a joint arrangement?
Does the contractual arrangement give the parties

(or a group of parties) all control of the arrangement ĺNo
collectively?
Ļ Yes Outside the

scope of
Do the decisions about the relevant activities
require the unanimous consent of all the parties ĺNo
IFRS 11
(not a joint
that collectively control the arrangement? arrangement)
Ļ Yes
Joint arrangement
Classification of joint arrangements

The classification of a joint arrangement depends upon the rights and obligations of the
parties to the arrangement. An entity must consider the following in order to classify a
joint arrangement:
l the structure of the joint arrangement;
l when a joint arrangement is structured through a separate vehicle:
• the legal form of the separate entity;
• the terms of the contractual arrangement; and
• other facts and circumstances, if applicable.
152
Sometimes a framework agreement exists that contains the general terms for one or
more activities, which sets out that the parties establish different joint arrangements for
specific activities that form part of the same agreement. Even though those joint
arrangements are governed under the same framework agreement, they may be
classified as different types of arrangements if the rights and obligations differ.
Therefore, joint operations and joint ventures can co-exist when different activities are
undertaken by the parties that form part of the same framework agreement.
12.3 Structure of the joint arrangement

Joint arrangements can either be structured through a separate vehicle, or not.
A joint arrangement which is not structured through a separate vehicle can only be
classified as a joint operation. In such cases the contractual arrangement establishes
the rights and obligations of the parties, for example, where the parties agree to
manufacture a product together, with each party being responsible for a specific task by
using its own resources and incurring its own liabilities. The contractual arrangement
can also specify how the revenues and expenses are to be shared. Another example is
where the parties to a joint arrangement might agree to share and operate an asset
together. The contractual arrangement establishes the parties’ rights to the jointly
operated asset and how the output or revenue earned from the asset and the operating
costs are shared between the parties. In such a case, each joint operator accounts for
its assets and liabilities used for the specific task or its share of the jointly operated
asset in its financial statements, as well as its share of the revenues and expenses
according to the contractual arrangement.
A joint arrangement in which the assets and liabilities are held in a separate vehicle can
be classified either as a joint operation or a joint venture, depending on the rights and
obligations of the parties. The legal form of the separate vehicle, the terms of the
contractual arrangement and other facts and circumstances must be considered to
assess whether the parties either have rights to the assets and obligations for the
liabilities of the arrangement (i.e. a joint operation), or they have rights to the net assets
of the arrangement (i.e. a joint venture).
12.4 Legal form of the separate vehicle

The legal form of the separate vehicle is considered in the initial assessment of the
parties’ rights to the assets and obligations for the liabilities held in the separate vehicle.
When the joint arrangement is structured through a separate vehicle, the legal form
causes the separate vehicle to be considered in its own right, that is the assets and
liabilities held in the separate vehicle, are the assets and liabilities of the separate
vehicle and not those of the parties. In such a case the assessment of the rights and
obligations indicates that the arrangement is a joint venture.
However, the terms agreed by the parties in the contractual arrangement, as well as
other facts and circumstances, can override the initial assessment of the rights and
obligations as was determined by the legal form.
An arrangement can only be classified as a joint operation when the assessment of the
rights and obligations as determined by the legal form, indicate no separation between
the parties and the separate vehicle. Thus the assets and liabilities of the separate
vehicle are the assets and liabilities of the parties.
153
Chapter 12
12.5 Terms of the contractual arrangement

In many cases the rights and obligations agreed to by the parties in the contractual
arrangement are consistent, or do not conflict, with the rights and obligations that
determined the legal form of the separate vehicle in which the arrangement has been
structured.
In other cases, the parties use the contractual arrangement to reverse or modify the
rights and obligations as determined by the legal form of the separate vehicle.
When the contractual arrangement specifies that the parties have rights to the assets
and obligations for the liabilities of the arrangement, the arrangement is classified as a
joint operation and other facts and circumstances do not need to be considered for
classification purposes.
12.6 Other facts and circumstances

Even though the fact that the legal form and the contractual arrangement may indicate
that it is a joint operation, other facts and circumstances may:
l give the parties rights to substantially all the economic benefits relating to the
arrangement; and
l cause the arrangement to depend on a continuous basis on the parties for settling
its liabilities.
In such a case the arrangement is classified as a joint operation.
When the activities of the arrangement are designed to provide output to the parties, it
is an indication that the parties have rights to substantially all the economic benefits of
the assets of the arrangement. Parties to such arrangements often ensure their access
to the output of the arrangement by preventing sales to third parties. The effect of such
an arrangement is that the liabilities incurred by the arrangement, is settled only by the
cash flow received from the parties through their purchases of the output. When the
parties are the only source of cash flow contributing to the continuity of the operations,
this indicates that the parties have an obligation for the liabilities of the arrangement
and thus such an arrangement is classified as a joint operation.
154
Classification of a joint arrangement structured through a separate vehicle
Legal form of
Does the legal form of the
separate vehicle give the
parties rights to the assets,
ĺ
the separate Yes
and obligations for the
vehicle
liabilities, relating to the
arrangement?
Ļ No
Terms of the
Do the terms of the
contractual arrangement
specify that the parties
ĺ
Yes
contractual have rights to the assets,
arrangement and obligations for the
liabilities, relating to the
arrangement?
Ļ No
Joint
ĺ
operation
Have the parties designed
the arrangement so that:
Yes
l Its activities primarily
aim to provide the
parties with an output
(i.e. the parties have
rights to substantially all
of the economic benefits
Other facts and
of the assets held in the
circumstances
separate vehicle); and
l It depends on the
parties on a continuous
basis for settling the
liabilities relating to the
activity conducted
through the
arrangement?
Ļ No
Joint venture
155
Chapter 12
Accounting for joint arrangements

12.7 Joint operations
A joint operator includes its interest in a joint operation in its own accounting records
and accounts for its interest in its separate financial statements and, if applicable, in its
consolidated financial statements according to its share in the joint operation. This
includes:
l its assets, including its share of any assets held jointly;
l its liabilities, including its share of any liabilities incurred jointly;
l its share of the revenue from the sale of its share of the output from the joint
operation, as well as its share of the revenue from the sale of the output by the
joint operation; and
l its expenses, including its share of any expenses incurred jointly.
A party participating in a joint operation but who does not have joint control, shall
account for its interest in the arrangement in the same way as described above, if the
party has rights to the assets and obligations for the liabilities of the arrangement.
If such a party does not have rights to the assets and obligations form the liabilities of
the arrangement, the interest will be accounted for in accordance with IFRS 9 Financial
Instruments.
12.8 Joint ventures

A joint venturer shall account for its interest in a joint venture by applying the equity
method in accordance with IAS 28 Investments in Associates and Joint Ventures.
The equity method is an accounting method in terms of which the interest in a joint
venture is initially recorded at cost and is subsequently adjusted for the venturer’s share
of the post-acquisition share of net assets of the joint venture (refer to chapter 11,
Investments in associates, for a detailed discussion and explanation of the equity
method).
If a party only participates in a joint arrangement and does not have joint control, the
interest in the arrangement must be accounted for in accordance with IFRS 9 Financial
Instruments.
Joint arrangement
Accounting treatment
Joint operation Joint venture
Separate Recognise own assets, l Cost or

financial statements liabilities and transactions, l Financial asset
including its share of those (IFRS 9)
incurred jointly
Consolidated Recognise own assets, Equity method (IAS 28)

financial statements liabilities and transactions,
including its share of those
incurred jointly
156
Comment
The interest in a joint operation is recognised in an entity’s separate financial
statements. Consequently there is no difference in what is recognised in the entity’s
separate financial statements and the entity’s consolidated financial statements.
Disclosure
The disclosure requirements for joint arrangements and associates are set out in
IFRS 12 Disclosure of Interests in Other Entities (IFRS12.20–23).
An entity must disclose information to enable users of the financial statements to
evaluate the nature, extent and financial effects of interests in joint arrangements,
including the nature and effects of contractual relationships with other investors with
joint control, as well as the nature of and changes in the risks associated with these
investments.
An entity must disclose information about significant adjustments and assumptions
made in determining:
l if the entity has joint control of an arrangement or significant influence over another
entity; and
l the type of joint arrangement (i.e. a joint operation or joint venture) if the
arrangement was structured through a separate vehicle.
The following disclosure requirements are applicable specifically to joint

arrangements that are both joint operations and joint ventures
The following information must be disclosed separately for each joint arrangement
(which includes joint operations and joint ventures) that is material to the reporting
entity:
l the name of the joint arrangement;
l the nature of the entity’s relationship with the joint arrangement;
l the principal place of business (and country of incorporation, if applicable or
different); and
l the proportion of ownership interest or participating share and if different, the
proportion of voting rights held.
The following disclosure requirements are applicable specifically to joint

ventures
The following information must be disclosed for every joint venture that is material to
the reporting entity:
l whether the investment in the joint venture is measured using the equity method or
at fair value;
l summarised financial information of the joint venture (obtained from the financial
statements, the total amount and not only the investor’s share thereof), including
dividends received, non-current and current assets, non-current and current
liabilities, revenue, profit or loss from continuing and discontinued operations, other
comprehensive income and total comprehensive income;
157
Chapter 12
l in addition, for every material joint venture, cash and cash equivalents, financial
current and non-current liabilities (excluding trade and other creditors and
provisions), depreciation and amortisation, interest income, interest expense and
income tax expense;
l if the equity method is applied, the fair value of investments in joint ventures for
which there are published price quotations;
l if the equity method is applied, the amounts in the financial statements of the joint
venture must be adjusted by fair value adjustments at acquisition and adjustments
for differences in accounting policy;
l if the equity method is applied, a reconciliation must be provided between the
summarised financial information and the carrying amount of the interest in the
joint venture; and
l if the interest is measured at fair value or if the joint venture does not prepare IFRS
financial statements, the summarised financial information may be prepared on the
basis of the joint venture’s financial statements.
The following information must be disclosed for joint ventures which are individually
immaterial to the reporting entity. It must be disclosed in total and separately for all
joint ventures which are individually immaterial:
l the carrying amount in total of all individually immaterial joint ventures that were
equity accounted for; and
l summarised financial information of the joint venture, including profit or loss from
continuing and discontinued operations, other comprehensive income and total
The following must also be disclosed:
l the nature and extent of any significant restrictions on the joint venture’s ability to
transfer funds to the entity;
l if the reporting periods of the entity and the joint venture differ, the reporting period
of the joint venture should be mentioned, as well as the reason for the use of
different reporting periods;
l the unrecognised share of losses of a joint venture, both for the current period and
cumulatively;
l commitments that the entity has relating to its joint ventures, which must be
separately disclosed from any commitments mentioned above; and
l any contingent liabilities incurred relating to interests in joint ventures in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent
Assets which must be separately disclosed.
Examples
Example 12.1 Basic approach – Joint arrangement in a separate entity
On 2 January 20.15, P Ltd acquired 40% of the issued shares of J (Pty) Ltd for
R100 000. On this date, the shareholders’ equity of J (Pty) Ltd consisted of the
following:
Share capital (200 000 shares) 200 000
R250 000
158
P Ltd exercises joint control over the financial and operating policy decisions of
J (Pty) Ltd in terms of a joint arrangement.
Assume a normal tax rate of 28% and that 80% of capital gains are taxable.
The abridged consolidated financial statements of P Ltd and its subsidiaries, as well as
the abridged financial statements of J (Pty) Ltd for the year ended 31 December 20.17,
are shown below.
P Ltd J (Pty)
Group Ltd
ASSETS
Investment in J (Pty) Ltd: (80 000 shares at cost) 100 000 –
Total assets R1 600 000 R500 000
Long-term loans 250 000 100 000
Total equity and liabilities R1 600 000 R500 000

P Ltd J (Pty)
Group Ltd
Profit 800 000 600 000
Dividends received from J (Pty) Ltd 120 000 –
R600 000 R360 000
159
Chapter 12

Retained earnings
P Ltd Group J (Pty) Ltd
Dividends paid (250 000) (300 000)
The joint arrangement will be accounted for as follows:

(i) Assume that, after considering all the requirements, the joint arrangement is
classified as a joint operation. The contractual arrangement specifies that all
revenues, expenses, assets and liabilities are allocated according to the
respective interests held by the operators.
(ii) The joint arrangement is classified as a joint venture.
Solution 12.1
(i) Joint operation

P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (750 000(P) + 120 000(J)) 870 000
Current assets
Inventories (750 000(P) + 80 000(J)) 830 000
1 260 000
Long-term loans (250 000(P) + 40 000(J)) 290 000
160
P LTD GROUP
Profit before tax (800 000(P) + 240 000(J)) 1 040 000
Income tax expense (320 000(P) + 96 000(J)) (416 000)
R624 000
P LTD GROUP
Retained
earnings
Balance at 1 January 20.17 (400 000(P) + 36 000(J)) 436 000
Ordinary dividends (P) (250 000)
Balance at 31 December 20.17 (Test: 700 000(P) + 60 000(J)) R760 000
Comment
There is no difference in recognising the joint operation in the entity’s separate financial
statements and the entity’s consolidated financial statements. In the above example
the joint operation is shown in the consolidated financial statements as a result of other
interests held by the parent (the given information included non-controlling interests).
161
Chapter 12
(ii) Joint venture

P LTD GROUP
ASSETS
Non-current assets
Investment in joint venture (100 000 + 60 000) 160 000
910 000
Current assets
1 260 000
Long-term loans (P) 250 000
P LTD GROUP
Profit (P) 800 000
Share of profit of joint venture 144 000
R624 000
162
P LTD GROUP
Retained
earnings
Balance at 1 January 20.17 (400 000(P) + 36 000(J)) 436 000
Dividends (P) (250 000)
Profit for the year (550 000 + 24 000) 574 000
Balance at 31 December 20.17 (Test: 700 000(P) + 60 000(J)) R760 000
Calculations
C1 Analysis of owners’ equity of J (Pty) Ltd
P Ltd 40%
Total
At Since
i At acquisition
250 000 100 000
Investment in J (Pty) Ltd (cost) (100 000)
–

• Current year :

Dividends paid (300 000) (120 000)
R400 000 R60 000

Dr Cr
R R
J1 Investment in joint venture (SFP) 60 000
Dividends received (P/L) (given) 120 000
Retained earnings – Beginning of year (SCE)
((140 000 – 50 000) × 40%) 36 000
Share of profit of joint venture (P/L) 144 000
Accounting for the joint venture according to the
equity method
163
Chapter 12
Example 12.2 Joint operation not structured in a separate entity
P Ltd has various farming activities. On 1 January 20.16, P Ltd entered into the
following contractual agreement with Z Ltd:
l Z Ltd will be the only supplier of P Ltd’s wheat to customers for the following two
years. Z Ltd will market and distribute the wheat. Z Ltd will acquire the necessary
equipment to distribute the wheat at its own cost and also make use of its own
assets.
l P Ltd will continue to use its own equipment and existing employees to produce the
wheat. These employees and equipment are also used in P Ltd’s other farming
activities. P Ltd is responsible for all expenses relating to the production of the
wheat.
l Z Ltd incurs all expenses on the retail side. All income from the sale of wheat will
be collected by Z Ltd and then shared in the ratio 50:50 between Z Ltd and P Ltd
(the profit of the joint operation is also shared in this ratio).
l Once the wheat inventory has been transferred to Z Ltd, the inventory (and any
accounts receivable resulting from the sales) belongs to the operators jointly.
This arrangement is not structured through a separate entity.
The information for the joint operation for the year ended 31 December 20.16 is as
follows (no settlement between the joint operators had occurred):
R
Revenue from sales 2 250 000
Gross production cost 1 275 000
Retail and distribution costs 600 000
Closing inventory (P Ltd) 165 000
Closing inventory (Z Ltd) 172 500
Accounts receivable (31 December 20.16) 322 500
Solution 12.2
Journal entries (P Ltd)

Dr Cr
R R
J1 Inventory (SFP) 1 275 000
Bank (SFP) 1 275 000
Cost of production
J2 Joint operation receivable (SFP) (1 275 000 – 165 000) 1 110 000
Inventory (SFP) 1 110 000
Inventory transferred to joint operation
continued
164
Dr Cr
R R
J3 Cost of sales (P/L) ((1 110 000 – 172 500 + 600 000) × 50%) 768 750
Joint operation receivable (SFP) 356 250
Revenue (P/L) (2 250 000 × 50%) 1 125 000
Share of profit from joint operation
J4 Inventory (SFP) (joint operation) (172 500 × 50%) 86 250
Accounts receivable (SFP) (joint operation) (322 500 × 161 250
50%)
Joint operation receivable (SFP) 247 500
Recognise joint operation inventory and receivable
Journal entries (Z Ltd)

Dr Cr
R R
J1 Joint operation payable (SFP) 600 000
Bank (SFP) 600 000
Cost of distribution
J2 Bank (SFP) (2 250 000 – 322 500) 1 927 500
Joint operation payable (SFP) 1 927 500
Revenue received in cash
J3 Cost of sales (P/L) ((1 110 000 – 172 500 + 600 000) × 50%) 768 750
Joint operation payable (SFP) 356 250
Revenue (P/L) (2 250 000 × 50%) 1 125 000
Share of profit from joint operation
J4 Inventory (SFP) (joint operation) (172 500 × 50%) 86 250
Accounts receivable (SFP) (joint operation) (322 500 × 161 250
50%)
Joint operation payable (SFP) 247 500
Recognise joint operation inventory and receivable
165
13
Changes in ownership of subsidiaries
through buying or selling shares
Introduction
13.1 Methods of change in ownership ............................................................. 170
Acquisition of interests in subsidiaries

13.2 Methods of step-acquisition ..................................................................... 171
13.3 Acquisition of an additional interest in an existing subsidiary .................. 171
Example 13.1a: Acquisition of a further interest in an existing subsidiary
where the subsidiary remains a subsidiary
(there is no change in status) (NCI is measured
at its proportionate share of the acquiree’s identifiable
net assets at the acquisition date) .................................. 172
Example 13.1b: Acquisition of a further interest in an existing subsidiary
where the subsidiary remains a subsidiary
(there is no change in status) (NCI is measured
at fair value at the date of acquisition)............................. 181
13.4 Acquisition of an additional interest whereby the investee
(investment) becomes a subsidiary ......................................................... 187
Example 13.2: Acquisition of a further interest where the investment
becomes a subsidiary (NCI is measured at fair value
at the date of acquisition). .............................................. 189
13.5 Acquisition of an additional interest whereby an associate becomes
a subsidiary .............................................................................................. 196
Example 13.3: Acquisition of a further interest where an associate
becomes a subsidiary (control is obtained)
(NCI is measured at its proportionate share
of the acquiree’s identifiable net assets
at the acquisition date). .................................................. 198
Disposal of interests in a subsidiary

13.6 Basic approach on disposal of an interest ............................................... 205
167
Chapter 13
13.7 Partial disposal of an interest in a subsidiary where control is not lost .... 207
Example 13.4a: Partial disposal of an interest in a subsidiary with no
change in the status as the subsidiary remains a
subsidiary (control is not lost) (NCI is measured at its
proportionate share of the acquiree’s identifiable net
assets at the acquisition date) ........................................ 208
Example 13.4b: Partial disposal of an interest in a subsidiary with no
subsidiary (control is not lost) (NCI is measured at fair
value at the date of acquisition). ..................................... 219
13.8 Loss of control with partial disposal of a subsidiary, with a simple
investment retained.................................................................................. 224
Example 13.5: Partial disposal of a subsidiary (loss of control) and an
investment retained (NCI is measured at their
assets at the acquisition date). ....................................... 228
13.9 Partial disposal of an interest in a subsidiary, whereby it becomes
an associate ............................................................................................. 237
Example 13.6: Partial disposal of an interest in a subsidiary resulting
in a change in status as the subsidiary becomes an
associate (a loss of control by the parent occurs) (NCI is
measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date) ................. 237
13.10 Loss of control and intragroup sale of assets .......................................... 249
Example 13.7: Loss of control over a subsidiary with previous
intragroup profits on the sale of depreciable assets ......... 250
13.11 Changes of interest in complex groups ................................................... 261
Question 13.1 ........................................................................................................ 262
Question 13.2 ........................................................................................................ 270
Question 13.3 ........................................................................................................ 275
168
Changes in ownership of subsidiaries through buying or selling shares
Acquisitions Disposals
Increased interest in existing Partial disposal of interest in existing

subsidiary subsidiary
l Transaction with owners l Transaction with owners
l Change in the relative interests of the l Change in the relative interests of the
owners recognised directly in equity owners recognised directly in equity
NCI at NCI at
NCI at NCI at
proportionate proportionate
fair value fair value
share share
Investment becomes subsidiary Disposal of subsidiary

l Constitutes a business combination l Loss of control
l Remeasure previously held equity l Derecognise net assets, goodwill and
interest to fair value and recognise NCI of subsidiary and recognise gain
remeasurement in profit or loss or or loss
other comprehensive income as l Treat any amounts in OCI of subsidiary
appropriate as if underlying assets were sold
l Treat cumulative fair value l Remeasure retained interest to fair
adjustments on investment as if value and recognise gain or loss
investment was sold
Associate becomes subsidiary Subsidiary becomes associate

l Equity-accounting for associate l Loss of control
l Constitutes a business combination l Derecognise net assets, goodwill and
l Remeasure previously held equity NCI of subsidiary and recognise gain
interest from carrying amount to fair or loss
value and recognise remeasurement l Treat any amounts in OCI of subsidiary
in profit or loss as if underlying assets were sold
l Treat any amounts in OCI of l Remeasure retained equity interest to
associate as if underlying assets fair value and recognise gain or loss
were sold l Equity-accounting for associate
Changes of interest in complex Subsidiary held for sale

groups l (End of chapter 14)
l Integrated revision example
169
Chapter 13
Introduction
13.1 Methods of change in ownership
Changes in ownership in an investee can occur in the following circumstances:
l piecemeal acquisition of interests in an investee from other owners;
l disposal of interests in an investee to other owners;
l as a result of the issue of additional shares by an investee;
l as a result of a buy-back of shares by an investee; and
l as a result of other events such as obtaining or losing control through a contract
with other owners.
In previous chapters, it was accepted that:
l the parent acquired control over the subsidiary as a result of a single purchase
of shares or as a result of the issue of shares to the parent upon incorporation of the
subsidiary; and
l the parent’s interest in the subsidiary remained unchanged throughout the entire
period covered by the financial report.
This assumption was adopted in order not to obscure the basic aspects involved in the
preparation of consolidated financial statements.
It may nevertheless happen that control is obtained not in a single purchase, but by
means of successive share purchases, or that various changes in the nature and
extent of ownership of the parent in, or influence of the parent over, the investee could
have taken place.
It is important to note that any acquisition of control over a business would constitute
a business combination in terms of IFRS 3. Disclosure of the business combination
should be made in terms of IFRS 3.59–63 and B64–B67. In this chapter the business
combination would be achieved in stages and the following information should, in
particular, be disclosed (IFRS 3.B64(p)):
l the acquisition-date fair value of the equity interest in the acquiree held by the
acquirer immediately before the acquisition date;
l the amount of any gain or loss recognised as a result of re-measuring to fair value
the equity interest in the acquiree held by the acquirer before the business
combination; and
l the line item in the statement of profit or loss and other comprehensive income in
which that gain or loss is recognised.
The issues arising in the preparation of consolidated financial statements of a group
when changes occur in the nature and extent of ownership of the parent in a
subsidiary are discussed in this chapter. This chapter only deals with:
l changes in ownership of subsidiaries; where
l the parent buys or sells shares of the subsidiary.
Changes in the ownership of associates and joint ventures through buying or selling
shares of the associate and joint ventures were addressed in the chapter on
investments in associates and joint ventures (see chapter 11). The next chapter of this
work deals with other changes (e.g. rights issues, buyback, etc.) in the ownership of
investees (see chapter 14).
170
Acquisition of interests in subsidiaries

13.2 Methods of step-acquisition
There are various ways in which interests can be acquired on a piecemeal basis:
l acquisition of an additional interest in an existing subsidiary/associate/joint
venture (i.e. there is no change in status of the investee); and
l acquisition of an additional interest in an entity, with the result that the entity
becomes a subsidiary/associate/joint venture (i.e. a change in status).
It was mentioned that this chapter only deals with subsidiaries and that changes in
associates and joint ventures through share purchases are addressed in the chapter on
associates and joint ventures (chapter 11).
13.3 Acquisition of an additional interest in an existing subsidiary

1 IFRS 10.23 states that changes in a parent’s ownership interest in a subsidiary
that do not result in a loss of control are accounted for as equity transactions
(i.e. transactions with owners in their capacity as owners). It should be borne in
mind that non-controlling interests are also classified as equity (IFRS 10.22).
Furthermore, the consolidated carrying amounts of the parent’s and non-
controlling interests must be adjusted to reflect the change in their relative interests
in the subsidiary. This change shall be recognised directly in equity and is
attributable to the owners of the parent. This means that no gain or loss should be
recognised in the consolidated profit or loss.
The acquisition by the parent of additional shares in an existing subsidiary which it
already controls, is not a business combination (obtaining control). This
transaction does not result in additional goodwill being recognised and does not
affect the measurement of the subsidiary’s assets and liabilities, as would be the
case for a business combination. This means that no change in the carrying amount
of the subsidiary’s assets (including goodwill) or liabilities are recognised. The
transaction only changes the parent’s and non-controlling relative interests in the
subsidiary.
2 IFRS 10.B96 states that the amount to be recognised in equity would be the
difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received. This adjustment in
the amount of the non-controlling interests will be affected by the initial
measurement of the non-controlling interests at the date of the business
combination (at its proportionate share of the acquiree’s identifiable net assets or at
fair value), which is illustrated in the examples below.
There may arguably be various approaches to calculate the adjustment to the non-
controlling interests. It is important to note the IFRIC has considered the issue of the
reallocation of the equity represented by goodwill between the non-controlling and
controlling interests after a change in a parent’s ownership interest where control is
not lost. The IFRIC has recommended that the IASB should address this issue (and
other related issues) as part of their IFRS 3 post-implementation review. Refer to
the IFRIC Update September 2010 and the IASB Update May 2011 for more detail.
171
Chapter 13
During the IASB’s post-implementation review of IFRS 3 they regarded the

measurement of the non-controlling interests as a “low” significance for future steps
to be taken. Until a final conclusion has been reached, this work follows the
approach that the equity represented by goodwill is only re-attributed between the
parent and the non-controlling interests if any goodwill was initially recognised in
respect of the non-controlling interests (i.e. NCI measured at fair value) (also see
comment (b) to the analysis in example 13.1b). Under this approach the subsidiary
basically consists of two separate asset pools: one asset pool in respect of all the
other net assets (excluding goodwill); and goodwill (which may be recognised only
in respect of the parent’s interest or for both the parent’s and the non-controlling
interests’). Also refer to chapter 3.7 for an additional discussion in this regard.
3 Disclosure of the change in a parent’s ownership interest in a subsidiary that did
not result in a loss of control should be made in terms of IFRS 12 Disclosure of
Interests in Other Entities. The parent shall disclose information that enables
users of the consolidated financial statements to evaluate the consequences of
such changes (IFRS 12.10(b)(iii)). In meeting this requirement the parent shall
present a schedule that shows the effect on the equity attributable to owners of the
parent of any changes in its ownership interest in a subsidiary that did not result in a
loss of control (IFRS 12.18).
Acquisition of a further interest in an existing subsidiary

where the subsidiary remains a subsidiary (there is no change
Example 13.1a
in status) (NCI is measured at its proportionate share of the
acquiree’s identifiable net assets at the acquisition date)
The following are the draft condensed financial statements of P Ltd and subsidiary
S Ltd at 30 June 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.19
P Ltd S Ltd
ASSETS
Investment in S Ltd at cost:
90 000 shares purchased on 1/7/20.17 97 000 –
30 000 shares purchased on 31/12/20.18 40 000 –
Inventory 106 000 182 500
172

FOR THE YEAR ENDED 30 JUNE 20.19
P Ltd S Ltd
Revenue 200 000 100 000
Cost of sales (157 000) (58 000)
Gross profit 43 000 42 000
Dividend received 6 000 –
Other comprehensive income – –

Retained earnings
P Ltd S Ltd
Balance at 1 July 20.18 18 000 12 000
Dividends: 30/9/20.18 (10 000) (10 000)
Balance at 30 June 20.19 R43 000 R32 500
1 S Ltd became a subsidiary of P Ltd on 1 July 20.17, on which date the credit
balance on its retained earnings amounted to R9 000. On this date, P Ltd acquired
90 000 shares in S Ltd at a cost of R97 000.
2 P Ltd elected to measure the non-controlling interests at the non-controlling
interests’ proportionate share of the acquiree’s identifiable net assets at the
acquisition date.
3 On the date of the business combination, the assets and liabilities of S Ltd were
regarded to be a fair reflection in terms of the requirements of IFRS 3.
4 P Ltd classified the investment in S Ltd at cost in its separate financial statements.
5 On 31/12/20.18, P Ltd acquired another 30 000 shares in S Ltd from the other
shareholders at a cost of R40 000.
6 The profit of S Ltd was earned evenly during the current year ended 30 June 20.19.
7 The company tax rate is 28% and CGT (capital gains tax) is calculated at 80%
thereof.
173
Chapter 13
1
Comments s
a The datte of the bus siness combin nation is 1 JJuly 20.17. At
A that date thhe assets an nd
liabilitiess of S Ltd weere regarded to be fairly mmeasured in terms of IFRS S 3. Therefore e,
no reme easurements of any item were needed d. However, if the assetss and liabilitie
es
were no ot fairly valued
d, remeasure ements may h have been ne eeded as werre explained in
chapter 9.
b The acq quisition of thhe 30 000 shares at 31/12 2/20.18 doess not constitu
ute a busines ss
combina ation as P Ltd already ha ad control ove er S Ltd. The
e transaction was betwee en
equity participants
p and
a the effecct of the traansaction shoould be reco ognised within
equity in n the consolid dated financia
al statements.
Solution 13.1a
The cons solidated fin

nancial state
ements of P Ltd and itts subsidiary S Ltd are
e prepared as
follows:
P LTD
D GROUP
CONSOLIDATED STATEMENT OF FIN NANCIAL POSITION
P
0 JUNE 20.1
AS AT 30 19
ASSETS S
Non-currrent assets s
Goodwill 1 600
Current assets
Inventory
y (106 000(P)) + 182 500(S
S)) 288 500
Total ass
sets R290 100
Share ca
apital 200 000
Retained
d earnings 60 150
Other com
mponents of
o equity (cha
anges in ow
wnership) (6 550)
253 600
Non-con
ntrolling inte
erests 36 500
Total equ
uity 290 100
Total equ
uity and lia
abilities R290 100
174
P LTD GROUP
Revenue (200 000(P) + 100 000(S)) 300 000
Cost of sales (157 000(P) + 58 000(S)) (215 000)
Gross profit (43 000(P) + 42 000(S)) 85 000
Income tax expense (14 000(P) + 11 500(S)) (25 500)
Other comprehensive income for the year –
Owners of the parent(#) 50 350
Non-controlling interests (6 100 + 3 050)(#) 9 150
R59 500
Owners of the parent(#) 50 350
Non-controlling interests (6 100 + 3 050)(#) 9 150
R59 500
(#) The same as profit for the year, as there is no other comprehensive income in the example.
P LTD GROUP
Non-
Changes
Share Retained con- Total
in Total
capital earnings trolling equity
ownership
interests
Balance at
1 July 20.18 200 000 * 19 800 – 219 800 ! 64 800 284 600
Changes in
equity for
20.19
Total
comprehensive
income
for the year:
Profit for the
year – 50 350 – 50 350 9 150 59 500
Dividends – (10 000) – (10 000) (4 000) (14 000)
Purchase of
interest – – (6 550) (6 550) (33 450) (40 000)
Balance at
30 June 20.19 R200 000 R60 150 (R6 550) R253 600 R36 500 R290 100
* 18 000 + 1 800(S) = 19 800
! 63 600 + 1 200 = 64 800
175
Chapter 13
1
P LTD
D GROUP
NOTES
S TO THE CONSOLIDA
C ATED FINA
ANCIAL STA
ATEMENTS
S
Changes s in owners ship in subssidiary:
During thhe current year,
y P Ltd acquired
a an
n additional 20% interest in S Ltd,
an existing subsidiary. This resulted in n an amou unt of R6 550 being
recogniseed in equityy as presentted in the co
onsolidated statement of changes
in equity. Details of the transacction betweeen the equuity participa
ants are as
follows:
Fair value
e of the con
nsideration paid
p 40 000
Decrease e in the non-controlling interests (33 450)
Adjustme
ent to equityy attributable
e to owners of the paren
nt R6 550
Comments s
IFRS 12.18 8 requires thaat an entity shhall present a schedule that shows the effects on thhe
equity attrib
butable to owwners of the p parent of anyy changes in its ownership interest in a
subsidiary that do not re esult in a losss of control. Other disclosures relating
g to the grou
up
and the sub bsidiary are also
a required in terms of IFFRS 12, but are
a not illustraated in chapte
er
13 and 14 ini detail.
Calculatiions
The basicc consolidattion proced dures comprise:
l elimination of co ommon item ms;
l elimination of in ntragroup ite
ems; and
l the consolidatio
c on of the rem
maining itemms.
In this chapter,
c the shorter method iss used to perform the t basic consolidation
procedurees (i.e. no worksheet
w is drawn up
p). The pro forma cons
solidation jo
ournal entriies
are also shown
s to prrovide a commplete picture.
176
C1 Analysis of the owners’ equity of S Ltd

P Ltd 60%–80%
Total NCI
At Since
Share capital 150 000 90 000 60 000
159 000 95 400 63 600
Equity represented by
goodwill –– Parent 1 600 1 600 –
Consideration and NCI 160 600 97 000 63 600
Retained earnings
(12 000 – 9 000) 3 000 1 800 1 200
• Current year:
Profit: 1/7/20.18–31/12/20.18
(30 500 × 6/12) 15 250 9 150 6 100
Dividend: 30/9/20.18 (10 000) (6 000) (4 000)
168 850 4 950 66 900
Further acquisition
(66 900 (NCI) × 20/40 = 33 450) 33 450 (33 450)
Changes in ownership (equity)
(per IFRS 10.23) 6 550
Consideration and NCI 40 000 33 450
Profit: 1/1/20.19–30/6/20.19
(30 500 × 6/12) 15 250 12 200 3 050
R184 100 R17 150 R36 500 (*)
(*) Note that, due to the inclusion of the goodwill of R1 600 (relating to the parent only) in the total
equity column, this amount will no longer equate to exactly 20% of the total equity column.
177
Chapter 13
1
Comments s
a The ana alysis repres sents a chro onological exxposition of the
t events that affect thhe
owners’ equity in the subsidiary.
b The proffit of the currrent period is allocated to two periods, namely the periods beforre
and afteer the change in owners’ equity. Specia al attention muust be paid to
o the treatmennt
of the subsidiary’s dividend decla ared/paid, whhich relates to
o a specific date
d and must
therefore e be allocated to the correect period – iin this examp
ple to the period before thhe
acquisitiion of addition
nal shares byy the parent.
c The amount for the change in ow wnership reccognised in equity can be calculated as a
follows (see
( IFRS 10.B96) (from tthe perspecttive of the NC CI):
Fair valuue of the conssideration recceived by NCCI 40 000
Amount by which the e non-controlling interests are adjusted
(reserrves acquiredd by parent froom NCI) (66 9 900 × 20/40 = 33 450) (33 450))
NCI afte
er transaction ((168 850 – 1 600GW) × 20%) 33 450
NCI befo
ore transactio
on ((168 850 – 1 600GW) × 40%) (66 900))
Amount to be recogn
nised directly in equity R6 550
The app proach in term ms of IFRS 10.B96 that th he difference between the change in th he
non-con ntrolling intere
ests and the a
amount paid o or received is
s to be recognised in equitty
is also clear
c from journal 5 below.
It is impoortant to understand the ra ational of the
e calculation of
o the change e in ownership p.
The non n-controlling shareholderss sold 50% o of their intere
est in the sub bsidiary to th
he
parent. The
T carrying amount of th he NCI is therefore reduce ed by 50%, being
b R33 4500.
The parrent paid R40 000 for this equity and d, as such, th he differencee of R6 550 is
recognissed within equity as a transaction betwe een the equitty participantss.
d The amount for the change in ow wnership reccognised in equity can be calculated as a
follows (see
( IFRS 10.B96) (from tthe perspecttive of the pa arent):
Fair valuue of the cons sideration paid by the pare ent (40 000))
Increase e in parent’s interest/amou unt by which tthe non-contrrolling
interestss are adjusted d (reserves acquired from NCI) 33 450
Parent’ss interest after transaction
((168 850 – 1 600G GW) × 80%) + 1 600GW) 135 400
Parent’ss interest befo ore transactio
on
((168 850 – 1 600G GW) × 60%) + 1 600GW) (101 950))
Amount to be recogn
nised directly in equity (R6 550))
C2 Proo of of calcu
ulation of goodwill of S Ltd in te erms of IFR RS 3.32
Considera
ation transfferred at ac
cquisition da
ate: IFRS 3
3.32(a)(i) 97 00
00
o non-contrrolling interests: IFRS 3.32(a)(ii) ((159 000 × 40%)
Amount of 63 60
00
160 60
00
e identifiable assets ac
Net of the cquired and
d liabilities a
assumed
at acqu uisition date
e: IFRS 3.32
2(b) (159 000)
Goodwill (parent) R1 60
00
178

Dr Cr
R R
J1 Share capital (SCE) 150 000
Goodwill (SFP) (parent only) 1 600
Main elimination journal entry at acquisition date
J2 Retained earnings (SCE) 1 200
Non-controlling interests’ portion of retained
earnings since acquisition to beginning of current
year
J3 Non-controlling interests (P/L) 6 100
Non-controlling interest’s portion of current year’s
profit (1/7/20.18–31/12/20.18, i.e. before additional
acquisition)
J4 Dividend received (P/L) 6 000
Dividend paid (SCE) 10 000
Elimination of intragroup dividend
J5 Non-controlling interests (SFP/SCE) 33 450
Changes in ownership (equity) (SCE) (IFRS 10.23) 6 550
Acquisition of a further 20% interest in S Ltd
eliminated
Non-controlling interests’ portion of current year’s
profit (1/1/20.19–30/6/20.19, i.e. after additional
acquisition)
C4 Test of consolidated equity

P Ltd (200 000 + 43 000) 243 000
S Ltd (Retained earnings per analysis) 17 150
R260 150
Consolidation adjustments (refer to pro forma consolidation journal entries)
l Recognise change in ownership (in terms of IFRS 10.23) (6 550)
l Recognise non-controlling interests 36 500
Consolidated equity R290 100
179
Chapter 13
1
C5 Detailed calculation of alllocation off equity

Attrib
butable Attributable
A
Tota
al to parent
p to NCI
Equity of subsidiary before
b chan
nge
representted by: 168 8
850 101
1 950 66 900
Other net assets 167 2
250 100
1 350 66 900
Goodwill 16600 1 600 –
Change in ownership
p represente
ed by: 33 450 (33 450)
Other net
n assets re eallocated 33 450 (33 450))
Goodwwill relinquish
hed N/A N/A
Equity of subsidiary after
a change
e
850 135
1 400 33 450
Other net assets 167 2
250 133
1 800 33 450
Goodwill 16600 1 600 –
Commentts
a No fair value adjustment was ma ade to the noon-controlling interests at the
t acquisitioon
date ass P Ltd electe ed to measure the non-co ontrolling inte
erests at theirr proportionatte
share of the acquiree’s identifiiable net assets at the acquisition date. d Refer to
t
IFRS 3.19.
3
b This example
e is not a bussiness comb bination achieved in sttages (i.e. a
step-accquisition) as s defined in IFRS 3.41 an nd .42, as P Ltd obtained control at th he
date off the first share purchase (i.e. the acqu uisition of the 60% interest). Since S Lttd
immediately becam me a subsidiary, no rem measurement of previouslly held equitty
interestt in S Ltd is re
equired as pe er IFRS 3.42.
c IFRS 10.23 requires s that change es in a parentt’s owners’ eqquity in a subssidiary that do
d
not ressult in a loss s of control ((which is the case in this example)
e are accounted fo or
as equity transactions (i.e. transa actions with oowners in the eir capacity asa owners). In
this chaapter, these equity transa actions will bee referred to as “changess in ownership p”
as can be seen in th he journal enttries and the statement of changes in equity.
e IFRS 10
1
is not specific
s abouut the exact e equity categoory to be use ed for this traansaction. Thhe
authorss are of the op pinion that a s
separate equity category should
s be used, because thhe
transacction is regardded as equity by IFRS 10 and specifica ally transaction
ns with owners
in theirr capacity as s owners. So ome are of th he opinion thaat the transacction should be
b
accounnted for within retained earn nings, which is also an acceptable altern native.
d In volu
ume 1 of this s work (chaptter 3.3), it was indicated that the inve estment in thhe
subsidiiary (in the parent’s record ds) represents a claim ag gainst the nett assets of thhe
subsidiiary as repre esented by itss equity. As a result it should be elim minated in thhe
consoliidated financ cial statementts (i.e. an elimination of common item ms in terms ofo
IFRS 10.B86(b)). As s a result of the journals entries above e, the investmment is indeeed
elimina
ated: Investme ent of R137 0 000 (given) – R97 000 (J1) – R40 000 (J5) ( = Rnil.
e The twwo separate asset
a pools aand the alloca ation of these asset poolss between th he
parent and the non-controlling interests are cllearly evidentt from Calcula ation 5 abovee.
180
The following example is used to contrast the measurement of the non-controlling

interests at fair value at the acquisition date, to the measurement thereof at their
proportionate share of the acquiree’s identifiable net assets (as the example above).
Acquisition of a further interest in an existing subsidiary

where the subsidiary remains a subsidiary (there is no
Example 13.1b
change in status) (NCI is measured at fair value at the date of
acquisition)
Assume the same information as in example 13.1a, except that P Ltd elected to
measure non-controlling interests at fair value at the date of acquisition. The fair value
of the non-controlling interests was R64 200 at the acquisition date (when P Ltd
obtained control over S Ltd).
Solution 13.1b
The consolidated statement of profit or loss and other comprehensive income is the
same as in part (a) of this example. The rest of the consolidated financial statements
are prepared as follows:
P LTD GROUP
AS AT 30 JUNE 20.19
ASSETS
Non-current assets
Goodwill (parent and NCI) 2 200
Current assets
Inventory (106 000(P) + 182 500(S)) 288 500
Other components of equity (changes in ownership) (6 250)
253 900
181
Chapter 13
P LTD GROUP
Changes Non-
Share Retained in con- Total
Total
capital earnings owner- trolling equity
ship interests
Balance at
1 July 20.18 200 000 * 19 800 – 219 800 ! 65 400 285 200
Changes in
equity for
20.19
Total
comprehensive
income for
the year:
Dividends – (10 000) – (10 000) (4 000) (14 000)
Purchase of
interest – – (6 250) (6 250) (33 750) (40 000)
Balance at
30 June
20.19 R200 000 R60 150 (R6 250) R253 900 R36 800 R290 700
* 18 000 + 1 800(S) = 19 800

! 63 600 + 600 (represented by goodwill) + 1 200 (interest in RE) = 65 400
P LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Changes in ownership in subsidiary:
During the current year, P Ltd acquired an additional 20% interest in S Ltd,
an existing subsidiary. This resulted in an amount of R6 250 being
recognised in equity as presented in the consolidated statement of changes
in equity. Details of the transaction between the equity participants are as
follows:
Fair value of the consideration paid 40 000
Decrease in the non-controlling interests (33 750)
Adjustment to equity attributable to owners of the parent R6 250
182
Calculations
P Ltd 60%–80%
Total NCI
At Since
Share capital 150 000 90 000 60 000
159 000 95 400 63 600
goodwill – Parent and NCI
(comment (a)) 2 200 1 600 600
Retained earnings
(12 000 – 9 000) 3 000 1 800 1 200
• Current year:
Profit: 1/7/20.18–31/12/20.18 15 250 9 150 6 100
Dividend: 30/9/20.18 (10 000) (6 000) (4 000)
169 450 4 950 67 500
Further acquisition
(67 500 (NCI) × 20/40 = 33 750) 33 750 (33 750)
(per IFRS 10.23) 6 250
Profit: 1/1/20.19–30/6/20.19 15 250 12 200 3 050
R184 700 R17 150 R36 800 (*)
(*) This amount will not be 20% of the total equity of S Ltd as the goodwill (at the acquisition date) that
was included in the equity at acquisition date is not in the same proportion to owners’ equity at the
acquisition date.
183
Chapter 13
1
Commentts
a Since NCI
N is now measured
m at fair value, th
he goodwill arrising at acquuisition date is
treated
d as an asset of the subsid diary, i.e. equ
uity also incre
eases by that same amoun nt
(R2 200) at acquisition in order for the acco ounting equation to stay in i balance, asa
follows:
EQUIT TY = ASS SETS LESS L LIABILITIES
+ 2 2000 = +2 200 (goodwill)
This ammount is seen in the totall equity colum mn. The net equity
e therefo
ore representts
the gooodwill contribu
uted of R2 2000.
b The am mount for thee change in o ownership reccognised in equity
e can bee calculated as
a
follows (see IFRS 10.B96) (from m the perspec ctive of the NCI):
N
Fair va
alue of the connsideration re
eceived by NC CI 40 000
0
Amoun nt by which the non-controlling interestss are adjustedd (reserves
acquuired by parennt from NCI a
and goodwill rre-attributed)
(67 500
5 × 20/40 = 33 750) (33 750
0)
NCI aftter transaction
n ((169 450 – 2 200GW) × 20% + (6000GW × 20/40))) 33 750
0
NCI be
efore transaction ((169 450 0 – 2 200GW)) × 40% + (60
00GW × 40/4
40)) (67 500
0)
Amoun
nt recognised directly in eq
quity R6 250
0
Throug gh the parentt’s acquisition n of another 20% interestt in the subssidiary, 20% of o
the nett asset value e (excluding g goodwill) ((16
69 450 – 2 200)
2 × 20% = 33 450) wa as
transferred from the e non-controlling interestss to the pare ent’s interest.. Furthermore e,
the non n-controlling owners relinquished som me of the goo odwill (600 × 20/40 = 300 0)
that waas attributablee to them to the parent. T This resulted
d in a decreasse of the non n-
controlling interests of R33 750 ((33 450 + 300 0).
Take note
n that the amount for g goodwill in tthe consolida ated financial statements is
not ad djusted. It is the equity, represented d by the goodwill that iss re-attribute ed
betwee en the equity participants ((parent and N NCI).
As wass explained in n chapter 13.3 3 above, this work follows the approach h that the non
n-
controlling owners relinquished
r ssome of the ggoodwill that was attributa
able to them to t
the parrent.
c The am mount for the e change in o ownership reccognised in equity
e can bee calculated asa
follows (see IFRS 10.B96) (from m the perspec ctive of the parent):
p
Fair vaalue of the connsideration pa aid by the parent (40 000
0)
Increasse in parent’ss interest / am
mount by whicch the non-controlling
intere
ests are adjusted (reserve es acquired frrom NCI) 33 750
0
Parent’’s interest afte
er transaction
n ((169 450 – 2 200GW) × 80%) + 1 60
00 135 700
0
own GW + 300GW W from NCI)
Parent’’s interest beffore transactiion
((169
9 450 – 2 200 0GW) × 60%)) + 1 600 own n GW) (101 950)
Amoun
nt to be recognised directlyy in equity (R6 250
0)
C2 Prooof of calculaation of gooodwill of S Ltd in terrms of IFRS

S 3.32
Considera
ation transfferred at ac
cquisition da
ate: IFRS 3
3.32(a)(i) 97 00
00
Amount of
o non-contrrolling interests: IFRS 3.32(a)(ii) 64 20
00
161 20
00
d liabilities a
assumed
e: IFRS 3.32
2(b) (159 000)
Goodwill (parent and
d NCI) 00
R2 20
184

The pro forma consolidation journal entries are the same as in example 13.1a, except
for those indicated below.
Dr Cr
R R
Goodwill (parent and NCI) (SFP) 2 200
Changes in ownership (equity) (SCE) (IFRS 10.23) 6 250
Acquisition of a further 20% interest in S Ltd
eliminated
C4 Test of consolidated equity

P Ltd (200 000 + 43 000) 243 000
S Ltd (RE per analysis) 17 150
R260 150
Consolidation adjustments
(refer to pro forma consolidation journal entries)
l Recognise gain from a bargain purchase in retained earnings –
l Recognise change in ownership (in terms of IFRS 10.23) (6 250)
l Recognise non-controlling interests 36 800
Consolidated equity R290 700
C5 Detailed calculation of allocation of equity

Attributable Attributable
Total
to parent to NCI
Equity of subsidiary before change
represented by: 169 450 101 950 67 500
Other net assets 167 250 100 350 66 900
Goodwill 2 200 1 600 600
Change in ownership represented by: 33 750 (33 750)
Other net assets reallocated 33 450 (33 450)
Goodwill relinquished 300 (300)
Equity of subsidiary after change
represented by: 169 450 135 700 33 750
Other net assets 167 250 133 800 33 450
Goodwill 2 200 1 900 300
185
Chapter 13
1
Comments s
a In this example (compared to e example 13.1a), the non-controlling in nterests at thhe
acquisittion date are measured att the acquisittion-date fair value, as P Ltd elected to t
measure the non-con ntrolling interests at fair vaalue. Refer too IFRS 3.19.
b The goo odwill recogn
nised from th he perspectivve of the non n-controlling interests,
i as a
result of
o the measu urement of th he non-contro olling interestts at fair value, should beb
taken in nto account in
n adjusting th he carrying a amount of the e non-controlliing interests to
t
reflect th
he change in their relative iinterest in the
e subsidiary.
4 If an increase in the pa arent’s interest has ttaken place, the ana alysis of the
t
subsid
diary’s ownners’ equityy also separately refllects this increase in n interest in
everyy consolida ation there
eafter. This is done to o ensure thaat changes in ownersh hip
(which
h are regarrded as traansactions w with ownerrs) are dete ermined se eparately, and
a
transfers to and from
f the no
on-controllinng interestss are correc
ctly taken in
nto accountt at
the re
elevant dattes. With reeference to o example 13.1a, the appropriatte sections of
o owners’ equity with a view to tthe consolid
S Ltd’s analysis of dation on 303 June 20..20
(end of
o the next reporting
r pe
eriod) will be
e as followss:
Analysis
s of the owners’ equitty of S Ltd
d 60%–80%
P Ltd %
Totall NCI
At Since
e
i At ac
cquisition (1/7/20.17)
(
Sharre capital 150 00
00 90 00
00 60 000
Reta
ained earninngs 9 00
00 5 40
00 3 600
159 00
00 95 40
00 63 600
Equity represented by –
good
dwill – Paren
nt 16
600 1 600
Conssideration and NCI 160 60
00 97 00
00 63 600
ce acquisition
ii Sinc
• To beginning
b of current yea
ar:
The period: 1/7//20.17–31/122/20.18
Reta
ained earninngs (aggregaated) 8 25
50 4 95
50 3 300
168 85
50 66 900
Purc
chase of sha
ares (20%) 33 45
50 (33 450)
Channges in own
nership (equ
uity) 6 55
50
Cons sideration and NCI 40 00
00 33 450
The period: 1/1//20.19–30/6//20.19
Reta
ained earnin ngs 15 25
50 12 20
00 3 050
• Currrent year: deetail for that year
5 A chaange in the degree of control usu ually means that the profit
p and ittems of oth
her
comprehensive income
i of the subsidiiary involveed must, fo
or the curreent period, be
alloca
ated betweeen two perriods, i.e. the periodss before an nd since th he change in
degreee of contro
ol. As indiccated earlieer, the reta
ained earnings of a subsidiary
s are
a
dealt with in the
e analysis s of ownerrs’ equity by accoun nting for the constitue ent
elemeents thereoff, namely profit and divvidends.
186
l Profit
The allocation is generally done evenly on the assumption that profit is earned
evenly during the period, except where the operations of the subsidiary clearly
reflect fluctuations or unique items. Certain items arising from the consolidation
process must also first be accounted for before such allocation can be made, for
example, the allocation of the preference dividend of the subsidiary or the
increased depreciation of the subsidiary resulting from a pro forma
remeasurement of a depreciable asset of the subsidiary at acquisition date.
Unrealised profit resulting from regular sales of inventories by the subsidiary to
the parent, should, in general, be treated as follows:
• Unrealised profit at the beginning of the period realises in the period before
the change in degree of control.
• Unrealised profit at the date of the change in degree of control realises in the
period since (after) the change in interest.
l Dividends
Dividends are allocated to the relevant period (before or after the change in
interest), based on the date on which the dividend was declared by the
subsidiary (and no longer at the discretion of the entity – refer to IFRIC 17).
l Items of other comprehensive income
Items of other comprehensive income are usually the result of fair value
movements or the remeasurement of asset or liabilities. These items are
allocated to the relevant period (before or after the change in interest), based on
when the fair value movements occurred or when the assets or liabilities were
remeasured.
13.4 Acquisition of an additional interest whereby the investee

(investment) becomes a subsidiary
1 In the previous chapters, it was repeatedly emphasised that:
l the acquisition date is an important point in time; and
l the periods before and after the acquisition date are important time phases in
the preparation of consolidated financial statements.
IFRS 3 Business Combinations defines the acquisition date as the date on which
the acquirer effectively obtains control over the acquiree. An investor may have
had a simple investment in an entity (say 15%, without significant influence or
control), and later obtained an additional interest in the entity, resulting in
obtaining control. In accounting for such a business combination, the investor would
effectively derecognise the previously held investment at its fair value, and then
account for the business combination in terms of IFRS 3 (refer to chapters 2 and
9 for more detail).The accounting for a business combination achieved in stages is
prescribed in IFRS 3.41 and .42, and paragraphs BC384–BC389 in the basis for
conclusions supporting IFRS 3.
2 IFRS 3 establishes the acquisition date as the single measurement date for all
assets acquired, liabilities assumed and any non-controlling interests in the acquiree
(refer to chapters 2 and 9 for detail). The obtaining of control therefore triggers
remeasurement of all the identifiable net assets of the subsidiary and the
187
Chapter 13
recognition of goodwill (if any). In a business combination achieved in stages, the

acquirer furthermore remeasures its previously held equity interest in the acquiree
at its acquisition-date fair value, and recognises the resulting gain or loss, if any, in
profit or loss or other comprehensive income, as appropriate (refer to IFRS 3.42).
In prior reporting periods, the acquirer may have recognised changes in the fair
value of its equity interest in the acquiree in other comprehensive income (e.g.
because the parent elected to do so in accordance with IFRS 9 Financial
Instruments). If so, the amount that was previously recognised in other
comprehensive income shall be recognised as if the acquirer had disposed directly
of the previously held equity interest. This may require the acquirer (in the
consolidated financial statements) to transfer the amount in the mark-to-market
reserve to retained earnings (IFRS 9.B5.7.1) on the date that control is obtained
over the acquiree. This would, for example, occur when a simple investment that
was previously measured at “fair value through other comprehensive income” now
becomes a subsidiary over which control is exercised in the current year. Thus, all
the fair value adjustments on the equity investment that were previously recognised
in a mark-to-market reserve (i.e. other comprehensive income) before control was
obtained, will be transferred within equity (in the consolidated financial statements)
when control over the subsidiary is obtained.
The IASB motivated the approach above by concluding that a change from holding
a non-controlling investment in an entity to obtaining control of that entity, is a
significant change in the nature of and economic circumstances surrounding that
investment. That change warrants a change in the classification and measurement
of that investment. Once it obtains control, the acquirer is no longer the owner of a
non-controlling investment (asset) in the acquiree. The acquirer, therefore, ceases
its accounting for an investment (asset) and begins reporting in its consolidated
financial statements the underlying assets, liabilities and results of the operations
of the acquiree. In a business combination achieved in stages, the acquirer basically
derecognises its investment asset in an entity in its consolidated financial
statements when it achieves control (refer to IFRS 3.BC384–389). The above
approach is therefore similar to disposing an equity investment and then buying a
controlling interest in a subsidiary through a business combination.
3 Full disclosure of the business combination is made in terms of IFRS 3. For a
business combination achieved in stages, the following information should in
particular be disclosed:
l the acquisition-date fair value of the equity interest previously held;
l the amount of any gain or loss recognised as a result of remeasuring the above-
mentioned interest to fair value; and
l the line item in which the gain or loss was recognised.
188
Acquisition of a further interest where the investment becomes

Example 13.2 a subsidiary (NCI is measured at fair value at the date of
acquisition)
The following are the draft condensed financial statements of P Ltd and subsidiary
S Ltd at 31 December 20.19:
P Ltd S Ltd
ASSETS
Investment in S Ltd (fair value of previously held interest of
R54 000 plus additional consideration of R216 000) 270 000 –
Deferred tax 3 136 –

P Ltd S Ltd
Revenue 700 000 600 000
Cost of sales (280 000) (240 000)
Gross profit 420 000 360 000
Other expenses – (90 000)
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Mark-to-market reserve (fair value adjustment to investment) 4 000 –
Income tax relating to items that will not be reclassified (896) –
Other comprehensive income for the year, net of tax 3 104 –
189
Chapter 13

Mark-to- Retained earnings
market
reserve P Ltd S Ltd
P Ltd
Profit for the year – 300 000 189 000
Other comprehensive income 3 104 – –
Dividends: None – – –
1 P Ltd bought 15 000 shares in S Ltd on 1 January 20.17 for R40 000.
2 S Ltd became a subsidiary of P Ltd on 1 March 20.19, when P Ltd bought another
60 000 shares in S Ltd for R216 000.
3 P Ltd elected to measure non-controlling interests at fair value at the date of
acquisition. The fair value of the non-controlling interests was R90 000 at the
acquisition date (when P Ltd obtained control over S Ltd).
4 On the date of the business combination, the assets and liabilities of S Ltd were
regarded to be a fair reflection in terms of the requirements of IFRS 3.
5 P Ltd classified the investment in S Ltd at cost after it became a subsidiary. Before
S Ltd became a subsidiary, P Ltd classified the investment under IFRS 9 in its
separate financial statements and recognised fair value adjustments in the mark-to-
market reserve (other comprehensive income). Details of the 15% investment are
as follows:
Number Fair value Fair value Fair value
of shares on 1/1/20.17 on 1/1/20.19 on 1/3/20.19
15 000 R40 000 R50 000 R54 000
6 The profit of S Ltd was earned evenly during the current year ended
31 December 20.19.
thereof.
190
Solution 13.2
The consolidated financial statements of P Ltd and its subsidiary S Ltd are prepared as
follows:
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (400 000(P) + 505 500(S)) 905 500
Goodwill 12 000
784 989
Liabilities
Deferred tax 3 136
191
Chapter 13
P LTD GROUP
Revenue (700 000(P) + 600 000(S) – 100 000 (J2)) or
(700 000(P) + 600 000 × 10/12 (S)) 1 200 000
Cost of sales (280 000(P) + 240 000(S) – 40 000 (J2))
or (280 000(P) + 240 000 × 10/12 (S)) (480 000)
Gross profit (420 000(P) + 360 000(S) × 10/12) 720 000
Other expenses (90 000(S) – 15 000 (J2)) or (90 000 × 10/12 (S)) (75 000)
Income tax expense
(120 000(P) + 81 000(S) – 13 500 (J2)) or (120 000(P) + 81 000 × 10/12 (S)) (187 500)
Mark-to-market reserve (fair value adjustment to investment)
(before the business combination) 4 000
Income tax relating to items that will not be reclassified (896)
Non-controlling interests (#) 39 375
R457 500
Owners of the parent (418 125 (profit) + 3 104 (OCI)) 421 229
Non-controlling interests (#) 39 375
R460 604
(#) The same as profit for the year, as the non-controlling interests do not share in the other
comprehensive income in this example.
192
Ch
hanges in ow
wnership off subsidiarie
es through buying or selling
s shares
P LTD
D GROUP
HANGES IN
N EQUITY
FOR THE YEAR END
DED 31 DEC
CEMBER 20
0.19
Mark-to- Non-
market Total g
controlling
reserve interests
Balance at
1 Jan 20.19
2 150 000 206 000 * 7 760 363 760 – 363 76
60
Changes s in
equity for
20.19
Acquisitioon of
subsidiiary – – – – ! 90 000
0 90 00
00
Total
compre ehensive
income e for the
year:
Profit for the year – 418 125 – 418 125 39 375
5 457 50
00
Other
compre ehensive
income e – – 3 104 3 104 3 10
04
Transfer (J1) – 10 864 (10 864) – – –
Balance at
c 20.19
31 Dec R150 000 R634 989 – R784 989 R129 375
5 R914 36
64
* (50 000
0 – 40 000) × 77.6% = 7 760
! 87 000 + 3 000(reprresented by goodwill)
g = 90
0 000
Comments s
The amounnts in the marrk-to-market rreserve can b
be explained as
a follows:
Opening balance
b after tax
t (50 000 – 40 000) × 77 7,6% 7 760
Recognise
ed in other co
omprehensive e income for the year: 3 104
Movementt for the perio
od 1/1/20.19 – 28/2/20.19, after tax
(54 000 – 50 000) × 77,6%
7 3 104
Movementt for the perio
od 1/3/20.19 – 31/12/20.199 – investmen
nt in
subsidia
ary was now held
h at “cost” and there we
ere no subseq
quent –
remeasuurements
Transferre
ed to retained earnings on the date of a
acquisition, aftter tax
(54 000 – 40 000) × 77,6%
7 as if th
he investment was dispose ed of (10 864)
(IFRS 3.42)
Closing ba
alance Rnil
193
Chapter 13
1
Calculatiions
C1 Analy ysis of the
e owners’ equity
e of S Ltd
P Ltd 15%–75%
Total NCI
At Since
e
i At acq
quisition (1//3/20.19)
0 25 00
00
Retain
ned earningss at acquisition 248 000 186 000
0 62 00
00
As at beginning
b off year 216 500
Profit for
f the perio
od 1/1/20.19 9–
28/22/20.19 (189 000 × 2/12) 31 500
348 000 261 000
0 87 00
00
Equity
y represented by goodw
will
– Paarent and NCCI 12 000 9 000
0 3 00
00
Consid
deration and
d NCI 360 000 270 000
0 90 00
00
Cons sideration paid
p for addittional
shhares purchaased 0
216 000
Fair value of equity interestt
preeviously helld 54 000
0
• Currennt year:
Profit: 1/3/20.19–3
31/12/20.19
(189 000 × 10/12)) 157 500 25
118 12 39 37
75
Dividend: None – – –
R517 500 R118 12
25 R129 37
75
Comments s
a The retained earnin ngs at acquisition of S Ltd compris ses of the balance
b at th
he
beginninng of the yeaar and the n net profit for first two mon
nths up to thhe date of th he
businesss combinatio on. Refer to o chapter 8 dealing with h interim accquisition of a
subsidia
ary (i.e. acquisition of con
ntrol during the current yeear) for more e detail in this
regard.
b The consideration for the business combination (gainiing of contro ol over S Ltd d)
comprises of the amo ount paid for the additionaal shares and
d the fair value of the equitty
interest previously held. In termss of IFRS 3.4 42, P Ltd should remeasure its previou us
investmeent of 15 000
0 shares to the fair value oof R54 000 at the date of acquisition.
C2 Proo of of calculaation of gooodwill of S Ltd in terrms of IFRS S 3.32

Consideraation transfferred at ac
cquisition da
ate: IFRS 33.32(a)(i) 216 00
00
Amount ofo non-contrrolling interests: IFRS 3.32(a)(ii) 90 00
00
on-date fair value of ac
Acquisitio cquirer’s pre
eviously heeld equity interest
in the acquiree:
a IFRS 3.32(a)(iii) 54 00
00
360 00
00
d liabilities a
assumed
e: IFRS 3.32
2(b) (348 000)
Goodwill (parent and
d NCI) 00
R12 00
194

Dr Cr
R R
J1 Mark-to-market reserve (SCE)
((54 000 – 40 000) × 77,6%) (comment (b)) 10 864
Transfer of fair value adjustments previously
recognised in mark-to-market reserve (OCI) to
retained earnings with remeasurement of equity
interest previously held, at group level
Retained earnings – Opening balance (SCE)
(comment (c)) 216 500
Goodwill (SFP) (parent and NCI) 12 000
Revenue (P/L) (comment (c)) (600 000 × 2/12) 100 000
Cost of sales (P/L) (comment (c)) (240 000 × 2/12) 40 000
Other expenses (P/L) (comment (c)) (90 000 × 2/12) 15 000
Income tax expense (P/L) (comment (c)) (81 000 × 2/12) 13 500
Investment in S Ltd (SFP) (54 000 + 216 000) 270 000
profit (1/3/20.19–31/12/20.19 i.e. after additional
acquisition)
195
Chapter 13
1
Comments s
a S Ltd only became a subsidiaryy on 1 Marcch 20.19. The ereafter, P Ltd
L elected to t
measure e its investment in the su ubsidiary at ccost in its sep parate financcial statementts
and therre were no further remeasurements to ffair value afte er this date.
b In termss of IFRS 3.42 2, P Ltd shou uld first reme
easure its previous investm ment of 15 00 00
shares tot the fair va alue of R54 0 000 at the da ate of acquis sition as is in
ndicated in th he
analysiss above. Furthermore, P Ltd alreadyy recognised d the resultiing fair valu ue
adjustments with the remeasurem ment in other comprehensiive income un nder IFRS 9 in
its separate financiall statements. Then, for the e group, the cumulative fa air value gainns
previoussly recognise ed in the marrk-to-market rreserve (OCII) is transferrred to retaine ed
earningss on the da ate of acquissition. IFRS 3 basically treats t the previously held
investme ent as being disposed of at fair value e and a new subsidiary acquired
a at fa
air
value. Note
N that the
ere are no ta ax conseque ences as the ere is no acttual sale (only
deemed d disposal for the sake of th he group’s co onsolidated financial statem ments).
The cosst of the origin nal investmen nt was R40 0 000. The fair value of this investment on o
1 March h 20.19 was R54 R 000, whiich resulted iin a cumulatiive gain of R14 R 000 beforre
tax. The e after tax amount
a of RR10 864 is trransferred wiithin equity, similar to th he
accounting treatment as if th he investme ent would have h been derecognise ed
(IFRS 9.B5.7.1).
c To prepa are the conso olidated finanncial statemen nts, the financ cial statemennts of S Ltd arre
combine ed (consolida ated) with the e financial staatements of P Ltd (i.e. add ding every linne
item in the
t financial statements o of S Ltd to tha at of P Ltd). This
T implies that the whole
amount (i.e. for the fuull year) of alll items of proffit or loss is added
a to that of P Ltd. S Lttd
was nott a subsidiary y of P Ltd fo or the first tw
wo months an nd the profit earned durin ng
these twwo months should not form m part of the pprofit or loss for
f the group and should be b
eliminate ed from the group’s proffit or loss. The profits for the first tw wo months arre
actually part of the re eserves at the acquisition date and should be elimiinated as suc ch
in accou unting for thee business combination. Refer to cha apter 8 dealinng with interim m
acquisitiion of a subs sidiary (i.e. accquisition of ccontrol during g the current year) for morre
detail in this regard.
d Full discclosure of thee business co ombination sh hould be made in terms of IFRS 3.59–6 63
and B64 4–B67. Of parrticular interest to this example is the disclosure of the acquisition n-
date fairr value of thee equity intere est in the acq quiree held by b the acquire er immediately
before thhe acquisition n date (being g R54 000) an nd the amoun nt of the gain recognised as a
a result of remeasuring to fair value the equityy interest in th he acquiree held
h before thhe
businesss combinatio on (being the e transfer of the cumulative gain of R10 R 864 within
equity – see journal 1).
1
13.5 Accquisition
n of an additional in
nterest wh
hereby an
n associatte become
es
a subsidiarry
1 The section
s abovve dealt witth a busine ess combina ation achieved in stag ges where thet
acquirrer obtains an additio onal interesst in an exxisting investee. The status of the t
investtment changed from a simple invvestment to an investm ment in a suubsidiary. The
T
same principles and disclosure requ uirements w will also be
b applicab ble where an
assocciate or jointt venture be
ecomes a ssubsidiary.
2 An innvestor mayy have ob btained an interest in n an investee whereb by significaant
influen
nce is exerrted. Where e the acqu uirer then oobtains an additional interest
i in an
assocciate, wherreby contro ol is obtaiined, the business combinatio
c n should be
accouunted for in n terms of IFRS 3.41 and .42. W With regards s to an associate or jo oint
venturre that becoomes a subs sidiary durin
ng the curre
ent period, th
he following
g consolidatiion
proceddures will be
e relevant:
196
l up to the acquisition date, the investment in the associate or joint venture should
be accounted for in terms of the equity method (note that all investments in
associates and joint ventures must be accounted for in terms of the equity
method, unless one of the exceptions in IAS 28.17 applies, in which case the
investment will be measured in terms of IFRS 9 Financial Instruments);
l where the investor/parent accounted for the investment in the associate, joint
venture and subsidiary in accordance with IFRS 9 at fair value in its separate
financial statements, any fair value adjustments must be reversed upon
consolidation (an investment in an associate, joint venture or subsidiary may be
accounted for at cost (which is arguably the most common approach in South
Africa) or in accordance with IFRS 9 in the investor’s separate financial
statements – refer to IAS 28.44 and IAS 27.10);
l the previously held equity interest in the acquiree should be remeasured at its
acquisition-date fair value and the resulting gain or loss, if any, recognised in
profit or loss directly (as if the interest in the associate or joint venture was
disposed of and a controlling interest purchased (IFRS 3.42) – then follow
IAS 28.22 for the deemed disposal of the associate or joint venture);
l in terms of the equity method, the investor may have recognised its share of
items recognised in other comprehensive income of the associate or joint
venture. If so, these amounts that were previously recognised in other
comprehensive income shall be recognised as if the acquirer had disposed
directly of the previously held equity interest (as any asset). Depending on the
nature of underlying assets remeasured or revalued in other comprehensive
income, some of these items will be reclassified from other comprehensive
income to profit or loss (e.g., the foreign currency translation reserve – refer to
chapter 16), and some items will only be transferred within equity (e.g., the
revaluation surplus on property, plant and equipment and the mark-to-market
reserve on equity investments (if so elected) transferred to retained earnings);
l remeasurement of identifiable net assets in terms of IFRS 3 (see chapters 2
and 9), where applicable;
l elimination of common items at the acquisition date and the recognition and
measurement of any goodwill or bargain gain and non-controlling interests (it
should be noted that the retained earnings that will be eliminated at the
acquisition date, would comprise of the opening balance at the beginning of the
year and the net profit for the period of the current year (various line items in the
statement of profit or loss and other comprehensive income before the
acquisition date – similar to the interim acquisition of a subsidiary that was
addressed in chapter 8); and
l applying basic consolidation principles after the acquisition date.
197
Chapter 13
Acquisition of a further interest where an associate

becomes a subsidiary (control is obtained) (NCI is
Example 13.3
identifiable net assets at the acquisition date)
On 31 December 20.12 the following summarised financial information relating to P Ltd

and other wholly-owned subsidiaries (consolidated) and S Ltd is supplied:
SUMMARISED FINANCIAL INFORMATION
P Ltd
and sub-
sidiaries S Ltd
(consoli-
dated)
DEBITS
8 000 shares purchased on 1/1/20.11 (consideration) 8 000 –
Inventory 144 500 31 000
Cost of sales (*) 8 000 3 000
Income tax expense (*) 2 000 1 000
R220 000 R44 000
CREDITS
Retained earnings: 1/1/20.12 50 000 4 000
Revaluation surplus – 1 000
Sundry liabilities (including deferred tax) – 9 000
Revenue (*) 20 000 10 000
R220 000 R44 000
(*) Accrued/incurred evenly
1 P Ltd acquired 8 000 shares in S Ltd at the incorporation of S Ltd on
1 January 20.11. On 30 April 20.12, P Ltd purchased a further 5 000 shares in S Ltd
from the non-controlling owner, thereby obtaining control over the voting rights of
S Ltd.
2 At the acquisition date (i.e. the date on which P Ltd obtained control of S Ltd), the
assets and liabilities of S Ltd were regarded as a fair reflection in terms of the
requirements of IFRS 3. The acquisition-date fair value of P Ltd’s previously held
equity interest was R11 100.
3 P Ltd elected to measure the non-controlling interests at their proportionate share of
the acquiree’s identifiable net assets at the acquisition date.
4 P Ltd accounts for all investments in associates in accordance with the equity
method in its consolidated financial statements, as none of the exceptions in
IAS 28.17 apply.
198
5 On 31 December 20.11 S Ltd revalued its land and recognised a surplus of R1 000
(after tax) in the revaluation surplus (OCI) in its individual financial statements. It is
the policy of the group to realise the revaluation surplus when the asset is sold.
6 P Ltd measures the investment in S Ltd at cost in terms of IAS 27.10(a) in its
separate financial statements.
thereof.
Solution 13.3
follows:
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent) 1 050
60 050
Current assets
Inventory (144 500(P) + 31 000(S)) 175 500
215 700
Non-controlling interests (10 850(S)) 10 850
Liabilities (9 000(S)) 9 000
199
Chapter 13
P LTD GROUP
Revenue (20 000(P) + 10 000(S) – 3 333(J5)) 26 667
Cost of sales (8 000(P) + 3 000(S) – 1 000(J5)) (10 000)
Gross profit 16 667
Other income (remeasurement gain) (J3) 300
Share of profit of associate (J2) 800
Income tax expense (2 000(P) + 1 000(S) – 333(J5)) (2 667)
Other comprehensive income –
Non-controlling interests (last eight months of current period) (J6) 1 400
R15 100
R15 100
P LTD GROUP
Revaluati Non-
on Total controlling
surplus interests
Balance at
1 Jan 20.12 150 000 * 51 600 # 400 202 000 – 202 000
Changes in
equity for
20.12
Acquisition of
subsidiary – – – – 9 450 9 450
Transfers – 400 (400) – – –
Total
comprehensive
income for
the year:
Balance at
31 Dec 20.12 R150 000 R65 700 – R215 700 R10 850 R226 550
* 50 000(P) + 1 600(S) = 51 600

# 400(S)
200
Calculations
C1 Analysis of the owners’ equity of S Ltd – as associate
P Ltd 40%
Total NCI
At Since
i Date of first purchase
Share capital 20 000 8 000 12 000 *
Retained earnings – – –
20 000 8 000 12 000 *
Consideration 8 000
ii Since date of first purchase
Retained earnings (4 000 – 0) 4 000 1 600 RE 2 400 *
Revaluation surplus 1 000 400 RS 600 *
• Current year:
Profit: 1/1/20.12–30/4/20.12
(6 000 × 4/12 = 2 000 (accrued evenly)) 2 000 800 RE 1 200 *
27 000 2 800 16 200 *
Associate becomes a subsidiary
Derecognise associate (IFRS 3.BC384) (27 000) (8 000) (2 800)
Transfer between reserves 400 RE
(400 RE – 400 RS) (comment (d)) – – (400)RS –
– – –
* See comment (c)

RE = retained earnings; RS = revaluation surplus
201
Chapter 13
C1 Analysis of the owners’ equity of S Ltd – as subsidiary

P Ltd 65%
Total NCI
At Since
i At acquisition (30 April 20.12)
Share capital 20 000 13 000 7 000
Retained earnings at beginning of year 4 000 2 600 1 400
Profit for the current year before
acquisition 2 000 1 300 700
Total equity acquired 27 000 17 550 9 450
Equity represented by goodwill – Parent 1 050 1 050 –
Consideration paid for additional shares
purchased (25%) 7 500
Fair value of equity interest previously
held (40%) (comment (b) 11 100
Profit: 1/5/20.12–31/12/20.12
(6 000 × 8/12 = 4 000 (accrued evenly)) 4 000 2 600 RE 1 400
R32 050 R2 600 RE R10 850
RE = retained earnings
202
Ch
hanges in ow
s shares
Commentts
a The re etained earnings at acqu uisition of S Ltd compris ses of the balance
b at th
he
beginning of the yea ar and the ne et profit for th
he first four months
m up to the
t date of th he
businesss combinatio on. Refer to JJ5 and comment (c) to the journal entrie es.
b The co onsideration n for the bussiness combination (gain ning of contro ol over S Ltdd)
comprisses of the amount
a paid for the addittional shares s and the fair value of th he
equity interest prev viously held. In terms of IIFRS 3.42, P Ltd should re-measure
r itts
equity interest prev viously held (i.e. investm ment in assoc ciate) to the fair value ofo
R11 10 00 at the datee of acquisitioon. Note that the carrying g amount of thet investmen nt
in S Ltd d (previouslyy held equity interest) at th he acquisition date (in the e consolidateed
financia al statements s) is R10 80 00 (i.e. R8 00 00 (cost) + R1 600 (sha are in retaineed
earning gs) + R400 (s share in revaluation surplu us) + R800 (current-period share of proffit
of asso ociate)). The investment is remeasure ed to R11 10 00 and a rem measuremen nt
gain of o R300 (11 100 – 10 80 00) is reco ognised in the t consolidated financial
statements – refer to t J3 below. This is the same treatment as if the associatea (witth
carrying amount of R10 R 800) wass sold at its fa air value of R11
R 100.
In this example,
e all the
t assets an nd liabilities of S Ltd were regarded as fairly
f valued at
a
the datte of the business combination and no adjustment to t the individuual assets annd
liabilitie
es in terms off IFRS 3 was needed. Reffer to self-ass sessment que estion 1 wherre
this wa as indeed the case.
c Before 30 April 20.1 12 (the acquisition date), S Ltd is only y an associate e of P Ltd annd
the non-controlling interests are e not recogn nised as suc ch. These am mounts (*) arre
given for f informatio on purposess only as S Ltd only bec came a sub bsidiary at thhe
acquisiition date an nd the non--controlling in nterests are then recognised. In this
example, the non-c controlling inteerests are m measured at their proportio onate share ofo
the acq quiree’s idenntifiable net aassets at the e acquisition date as R9 450 4 (27 000 ×
35%). IFRS 3.B64(o o)(i) only requ
uires disclosu ure of the ammount of the non-controllin
n ng
interestts in the acqu uiree recognissed at the acq quisition date
e (i.e. R9 450)).
d In term ms of IFRS 3.42 and IAS 2 28.22(c), anyy amount prev viously recog
gnised in otheer
compre ehensive inco ome (i.e. the rrevaluation su urplus) shall be recognise ed on the samme
basis as a would be re equired if the acquirer had d disposed directly of the previously
p held
equity interest. In terms of IAS S 16.41, a re evaluation su urplus may be b transferre ed
directlyy to retained earnings
e wheen the asset iss derecognise ed. Also see J4
J below.
C2 Proo of of calcula ation of go oodwill of S Ltd in terrms of IFRS S 3.32

Consideraation transfeerred at acquuisition date
e: IFRS 3.32
2(a)(i) 7 50
00
Amount of non-contro olling interes
sts:
IFRS 3.32(a)(ii) (277 000 × 35%) or (16 200 × 35/60) 9 45
50
Acquisition-date fair value
v of acq
quirer’s previously held e
equity intere
est
in the accquiree: IFR
RS 3.32(a)(iiii) (given) 11 10
00
28 05
50
Net of the
e identifiable
e assets acq
quired and lia
abilities asssumed
at acquiisition date: IFRS 3.32(b) (27 00
00)
Goodwill (parent)
( R1 05
50
203
2
Chapter 13

Dr Cr
R R
J1 Investment in S Ltd (associate) (SFP) (comment (a)) 2 000
Revaluation surplus (SCE) 400
Accounting for investor’s interest in reserves
of associate at the beginning of the year
J2 Investment in S Ltd (associate) (SFP) (comment (a)) 800
Share of profits of associate (P/L) 800
Accounting for investor’s share of current year’s
profit (1/1/20.12–30/4/20.12 i.e. before additional
acquisition) of associate
J3 Investment in S Ltd (associate) (SFP) (comment (b)) 300
Other income (remeasurement gain) (P/L) 300
Accounting for remeasurement gain on equity
interest previously held
J4 Revaluation surplus (SCE) (comment (d) above) 400
Transfer of revaluation surplus to retained earnings
with business combination
Retained earnings – Opening balance (SCE)
(comment (c)) 4 000
Goodwill (SFP) (parent) 1 050
Income tax expense (P/L) (comment (c)) (1 000 × 4/12) 333
Investment in S Ltd (SFP) (now subsidiary)
(8 000 + 2 000 + 800 + 300 + 7 500) or (11 100 + 7 500) 18 600
profit (1/5/20.12–31/12/20.12 i.e. after additional
acquisition)
204
Ch
hanges in ow
s shares
Comments s
a Journal 1 and 2 are typical
t journa
al entries for tthe accountin ng of associates in terms of o
the equity method (se ee chapter 11 1 for detail).
b Journal 3 represent thet adjustme ent of the equ uity interest previously held d to fair valuee,
with the e recognition n of the re emeasuremen nt gain in the t consolidated financial
statements in terms of o IFRS 3.42.
c To prepa are the consoolidated finanncial statemen nts, the financ cial statemen nts of S Ltd arre
combine ed (consolidated) to the fin nancial statem ment of P Ltd (i.e. adding everye line item
m
in the fiinancial stateement of S L Ltd to those of P Ltd). This implies that the whole
amount (i.e. for the fuull year) of alll items of proffit or loss is added
a to that of P Ltd. S Lttd
was nott a subsidiary y of P Ltd for the first fou ur months an nd the profit earned durin ng
these foour months sh hould not form part of the e profit or loss for the group and should
be eliminated from th he group’s profit or loss. The profits fo or the first fo
our months arre
actually part of the reeserves at the acquisition date and should be elimiinated as suc ch
in accou unting for thee business combination. Refer to cha apter 8 dealin ng with interim m
acquisitiion of a subssidiary (i.e. accquisition of ccontrol during g the current year) for morre
detail in this regard.
d Full discclosure of the
e business co ombination sh hould be made in terms of IFRS 3.59–6 63
and B6 64–B67. Of particular intterest to thiis example, is the discclosure of th he
acquisitiion-date fair value of the equity intere est in the acq quiree held by b the acquire er
immedia ately before the acquisitio on date (beiing R11 100)) and amoun nt of the gain
recognissed as a resu ult of remeassuring to fair vvalue the equ uity interest in
n the acquire ee
held beffore the busin ness combina ation (being th he gain of R3 300 included in i the line item m
for “otheer income”).
Disposa
al of inte
erests in a subsidiary
13.6 Ba
asic appro
oach on disposal
d o
of an interrest
1 The disposal
d of interests
i in a subsidia
ary (whether entirely orr partially) byb a parentt is
materrially similarr to the dis
sposal of an ny other assset by the parent. Th he transaction
consis sts of the fo
ollowing commponents:
l the e recognitioon of the asset received for the dissposal (e.g. cash procceeds);
l derecognition n of the carrying amo ount of the asset disp posed of fro om the ass set
account (e.g. the investm ment held inn another entity is dereecognised);; and
l rec cognition off any gain or loss on disposal (e either in pro
ofit or loss or directly in
equity, depen nding on wh hether contrrol has been n lost).
2 In thee separate financial sttatements o of the paren nt, the gain
n or loss on n the dispos sal
of the e shares iss calculated in accorrdance with h the cost method or o fair value
metho od (depen nding on the accoun nting policyy applied by the pa arent for the
t
measurement off investmen nts in subsiidiaries in iits separatee financial statements s –
IAS 27 7.10). Thiss policy de ecision will affect the accounting g for the disposal
d off a
paren nt’s interest in a subsid
diary:
l If the
t parent has accoun nted for the
e investmen nt in the su
ubsidiary in n its separaate
financial stateements at cost, the g gain or loss on the disposal
d of its interest is
calculated pu urely as the
e differencee between the procee eds from th he disposal of
thee shares an nd the histo
oric cost pricce of the sh
hares dispoosed of. The e gain or lo
oss
is recognised in profit or loss.
205
2
Chapter 13
1
Commentts
This work focusses on the investme ent in a subssidiary, associate or joint venture
v carrie
ed
at cost in
n the parent’s/investor’s sseparate finaancial statements, as it iss arguably th he
most common approac ch applied by companies in n South Africa.
l If the
t parent has accoun nted for the
e investmen nt in the su
ubsidiary inn its separaate
financial stattements in accordance with IF FRS 9 the e investme ent would be
me easured at fair value at any give en time. The e parent ma ay choose to remeasu ure
thee investme ent to fair value thro ough other comprehe ensive inco ome (refer to
IFRRS 9.5.7.5)). If the parent elected d this altern
native, it can furthermo ore choose to
tra
ansfer the e cumulattive fair value adjustments recognise ed in oth her
comprehensivve income, to retain ned earnin ngs when the investment is so old
(IF
FRS 9.B5.7..1).
3 Howe ever, for thee group (co onsolidated d), the dispposal of thee parent’s in
nterest will be
dealt with differe ently. In the
e group con ntext, the ddisposal of the sharess comprises sa
dispos sal of:
l an attributable interest in the net a assets (i.e. equity) of the subsidiary as at the t
daate of the tra
ansaction; as
a well as
l a proportiona
p ate portion of
o the goodw will or gain from a bargain purcha ase (the latter
willl form part of the equitty recognised since the acquisitio on date).
It is apparent tha at, with refeerence to tthe “at-acqu uisition secction” of the
e analysis of
owners’ equity of o a subsidiary, the co ost price of tthe shares is equal to the fair value
of the attributable e net assetts (equity) as at the a acquisition date
d plus (o
or minus) the
t
goodw will (or gain from a barg gain purchaase). Conse equently, thhe followingg applies:
l ga ain/loss on disposal of o shares in a subssidiary per the separrate financ cial
sta
atements off the parentt (calculated d in accorda ance with the cost method)
less
l atttributable re eserves ea arned since e acquisition (which evidences an increas se/
decrease in the net asse et value sin
nce acquisition date) nown given up
u due to the
t
dis
sposal of the shares
equals
l ga ain/loss on disposal off interest in group co ontext (refer to comme ent (g) to the
t
analysis in exxample 13.4 4a).
Commentts
Net asset value as at the acquisitioon date plus reserves to date of dispo
osal equal th
he
net asset value
v as at th
he date of the
e disposal.
4 The accounting
a treatment of the pare
ent’s dispossal of an in
nterest in th
he subsidia
ary
depen nds on whe ether contro ol over the
e subsidiarry is lost or
o not. IFRS S 10 contaiins
detaileed requirem ments for both
b casess and these e requireme ents are discussed and
a
illustra
ated in the sections be elow. IFRSS 10.23 wou uld be applicable in the
e case wheere
contro ol is not lostt, and IFRS
S 10.25 whe ere control iis lost.
206
13.7 Partial disposal of an interest in a subsidiary where control

is not lost
1 IFRS 10.23 states that changes in a parent’s owners’ equity in a subsidiary that
do not result in a loss of control are accounted for as equity transactions (i.e.
transactions with owners in their capacity as owners). It should be borne in mind
that non-controlling interests are also classified as equity (IFRS 10.22).
Furthermore, the consolidated carrying amounts of the parent’s and non-
controlling interests must be adjusted to reflect the change in their relative interests
in the subsidiary. This change in the relative interests of the owners shall be
recognised directly in equity and is attributable to the owners of the parent. This
means that no gain or loss should be recognised in profit or loss where a parent
disposes some of its interest in a subsidiary without losing control (i.e. the
subsidiary remains a subsidiary of the parent, but the parent’s interest in the
subsidiary declined).
This transaction only changes the parent’s and non-controlling shareholders’
relative interests in the subsidiary and is therefore recognised only within equity.
This means that no change in the carrying amount of the subsidiary’s assets
(including goodwill) or liabilities is recognised.
2 When a parent sells a portion of its investment in a subsidiary (but retains control),
the parent would recognise a gain or loss on the disposal in its separate statement
of profit or loss and other comprehensive income (if the investment was carried
at cost) or as a transfer within equity in its separate statement of changes in
equity (if the investment was accounted for in accordance with IFRS 9). This gain
or loss or the transfer within equity will be reversed upon consolidation.
The amount for the consolidated gain or loss for the group may be different from
that of the parent and must be recognised directly in equity. In preparing the
consolidated financial statements, the adjustment to the non-controlling
interests (reflecting the change in their relative interest in the equity of the
subsidiary) will also need to be reflected in the consolidated statement of
changes in equity. This approach will also be evident from the pro forma
consolidation journal entries in the example below (see journal 4).
3 IFRS 10.B96 states that the amount to be recognised in equity would be the
difference between the amount by which the non-controlling interests is adjusted
and the fair value of the consideration paid or received. This adjustment in the
amount of the non-controlling interests will be affected by the initial measurement of
the non-controlling interests at the date of the business combination (at their
proportionate share of the acquiree’s identifiable net assets or at fair value – see
comment (f) to the analysis in example 13.4a for more detail), which is illustrated in
the examples below.
It was mentioned in chapter 13.3 above that the approach for calculating the
adjustment to the non-controlling interests is based on the view that the subsidiary
basically consists of two separate asset pools: one asset pool in respect of all the
other net assets (excluding goodwill); and goodwill. With a partial sale of an interest
in a subsidiary by the parent (without losing control), the equity represented by the
other net assets will always be re-attributed between the parent and the non-
controlling interests based on their new ownership’ interests. The equity
207
Chapter 13
represented by goodwill will only be re-attributed between the parent and the non-
controlling interests if goodwill was initially measured in respect of the non-
controlling interests (i.e. the non-controlling interests were initially measured at fair
value). This approach is illustrated in calculation 4 of the following two examples.
4 Disclosure of a schedule that shows the effect on the equity, attributable to
owners of the parent of any changes in its ownership interest in a subsidiary that did
not result in a loss of control, should be made in terms of IFRS 12.18. Refer to
paragraph 13.3 of this chapter for more detail.
Partial disposal of an interest in a subsidiary with no change

in the status as the subsidiary remains a subsidiary (control
Example 13.4a
is not lost) (NCI is measured at its proportionate share of the
The following represents the condensed financial statements of P Ltd and its subsidiary
at 31 December 20.15:
P Ltd S Ltd
ASSETS
Inventory 70 000 100 000
Bank 63 150 60 000
Investment in S Ltd: 6 000 shares at cost (R40 000 – R10 000) 30 000 –
Replacement reserve (comment (a)) – 120 000
208

P Ltd S Ltd
Revenue 100 000 80 000
Cost of sales (67 000) (56 000)
Other income (profit on sale of shares) 25 000 –
Profit for the year before tax 58 000 24 000

Retained earnings
P Ltd S Ltd
1 P Ltd acquired its 80% interest (8 000 shares) in S Ltd on 1 January 20.11 for
R40 000. On that date S Ltd’s equity consisted of the following:
Share capital R10 000
Replacement reserve R30 000
the acquiree’s identifiable net assets at the acquisition date. On the date of the
business combination, the assets and liabilities of S Ltd were regarded to be a fair
reflection in terms of the requirements of IFRS 3.
209
Chapter 13
1
4 On 30 0 June 20.115 P Ltd dis

sposed of 2 000 of the shares in
n S Ltd for R35 000 (ffair
value)). P Ltd acccounted forr the cash proceeds from the dis
sposal of th
he interest as
follow
ws in its sep
parate finan
ncial statem
ments:
Dr Cr
R R
J1 Bank
B (SFP) 35 000
0
Investmennt in S Ltd (S
SFP) 10 00
00
(2 000/8 00
00 shares × R40
R 000 cost))
Profit on sale
s of share
es (P/L) 25 00
00
Recording
R p
proceeds an
nd profit on
n partial dis
sposal
of
o investment
J2 Income tax exxpense (P/L
L) 5 600
0
SARS tax payable/Ban
p nk (SFP) 5 60
00
(25 000 × 80% × 28%)
Caapital gains
s tax (curre
ent tax) pay
yable on dis
sposal
off shares
5 The disposal
d of the interest in the ssubsidiary d did not commply with the
t criteria of
IFRS 5 Non-current Assetts Held for Sale and D Discontinu ued Operattions until thet
date of
o disposal.
6 The profit
p of S Lttd was earn
ned evenly dduring 20.15.
7 S Ltd made no trransfer to/frrom the rep
placement re eserve duriing the currrent year.
8 The company taxx rate is 28% and CGT T is calculatted at 80% thereof.
Comments s
a Although h the Compa anies Act doe es not requirre specific re eserves to be e created, it is
assumed that a company may we ell create anyy reserve by choice
c (as a transfer within
equity, i.e. from retained earningss to a reserve e). In this exa
ample, it was assumed tha at
S Ltd crreated a replacement resserve in the past to replace assets that t were fully
deprecia ated during th
he current pe eriod, in the n
next year. The e reserve is merely
m used to
t
illustrate
e the effect of
o a partial sa ale of an inte
erest in a su ubsidiary on other
o reservees
(other thhan retained earnings).
e
b There area various ways in wh hich the partiial disposal of the invesstment can be b
recognissed in the invvestor’s separrate financial statements. When share disposals tak ke
place, thhe separate financial
f state
ements of the e parent may y contain an item such as a
“suspense account” to t which the p proceeds on disposal hav ve been provisionally credit-
ed (and not as was done
d in note 4 of this exammple). If this is the case, the separate fi-
f
nancial statements of o the paren nt (P Ltd) mu ust first be corrected
c byy some actual
correctinng journal enntries (i.e. nott pro forma cconsolidation journal entries) to achiev ve
the entriies indicated in note 4 abo ove.
210
Solution 13.4a
In this example, P Ltd retained control over S Ltd, even though it sold some of its
interest in S Ltd to the non-controlling interests. P Ltd therefore combines its financial
statements and those of S Ltd (as a subsidiary) line by line by adding together like
items of assets, liabilities, equity, income and expenses (IFRS 10.B86(a)). Thereafter,
the normal consolidation principles will be followed to eliminate common items and to
recognise any non-controlling interests and goodwill.
follows:
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent only) 4 000
Current assets
Inventory (70 000(P) + 100 000(S)) 170 000
Bank (63 150(P) + 60 000(S)) 123 150
293 150
Other components of equity (54 000 + 4 500) 58 500
233 150
211
Chapter 13
P LTD GROUP
Revenue (100 000(P) + 80 000(S)) 180 000
Cost of sales (67 000(P) + 56 000(S)) (123 000)
Gross profit 57 000
Other income (no gain on disposal of interest is recognised here)
(25 000(P) – 25 000(J4)) –
Non-controlling interests (1 500 + 3 000) (#) 4 500
R33 150
Non-controlling interests (1 500 + 3 000) (#) 4 500
R33 150
(#) The same as profit for the year, as there is no other comprehensive income in the example.
212
P LTD GROUP
Changes Re- Re- Non-
Share in tained place- con- Total
Total
capital owner- earn- ment trolling equity
ship ings reserve interests
Balance at
1 Jan 20.15 90 000 – * 38 000 72 000 200 000 ! 29 000 229 000
Changes in
equity for
20.15
Total
compre-
hensive
income for
the year:
Profit for the
year – – 28 650 – 28 650 4 500 33 150
Transfer from
replacement
reserve – – 18 000 (18 000) – – –
Disposal of
interest – 4 500 – – 4 500 30 500 35 000
Balance at
31 Dec 20.15 R90 000 R4 500 R84 650 R54 000 R233 150 R64 000 R297 150
* 30 000(P) + 8 000(S) = 38 000

! 9 000(at) + 2 000(RE) + 18 000(RR) = 29 000
P LTD GROUP
During the current year, P Ltd sold a 20% interest in S Ltd, an existing
subsidiary, without losing control over S Ltd. This resulted in an amount of
R4 500 being recognised in equity as presented in the consolidated state-
ment of changes in equity. Details of the transaction between the equity
participants are as follows:
Fair value of the consideration received 35 000
Increase in the non-controlling interests (30 500)
213
Chapter 13
Calculations
P Ltd 80%–60%
Total NCI
At Since
Share capital 10 000 8 000 2 000
Replacement reserve 30 000 24 000 6 000
45 000 36 000 9 000
Equity represented by goodwill
– Parent 4 000 4 000 –
Retained earnings
(15 000 – 5 000) 10 000 8 000 RE 2 000
Replacement reserve
(120 000 – 30 000) 90 000 72 000 RR 18 000
• Current year:
Profit: 1/1/20.15–30/6/20.15
(15 000 × 6/12) 7 500 6 000 RE 1 500
156 500 14 000 RE 30 500
72 000 RR
Disposal of 2 000 shares (1) (3 500) RE
(comment (b)) (9 000) (18 000) RR 30 500
156 500 61 000
Profit: 1/7/20.15–31/12/20.15
(15 000 × 6/12) 7 500 4 500 RE 3 000
R164 000 R15 000 RE R64 000
R54 000 RR
RE = Retained earnings
RR = Replacement reserve
(1) 36 000 × 20/80 = 9 000 AT
(8 000 + 6 000) × 20/80 = 3 500 RE
72 000 × 20/80 = 18 000 RR
30 500(NCI) × 40/20 = 61 000 – 30 500(existing) = 30 500(equity acquired from parent)
214
Ch
hanges in ow
s shares
Comments s
a The pa arent’s interest in S Ltd changed fro om 80% (8 000/10
0 000 shares)
s up tot
30 June e 20.15 to 60%% (6 000/10 0000 shares) tthereafter.
b Note that as controll is not lost in this examp ple, there is no need to remeasure
r th
he
retainedd investment in the subsiddiary to fair va
alue at the daate the intere
est is dispose ed
of. IFRSS 10.25(b) th herefore doees not apply. It should also be borne e in mind tha at
IFRS 10 0.23 states thhat changes in a parent’ss owners’ equ uity in a subssidiary that do
d
not res sult in a lo oss of contrrol are acco ounted for as equity tran nsactions (i.e e.
transacttions with owners in their capacity as owners).
c The am mount for the change in ow wnership reccognised in equity
e can be
e calculated as a
follows (see IFRS 10 0.B96) (from the perspec ctive of the NCI):
N
Fair valuue of the consideration pa
aid by NCI (35 0000)
Amountt by which the e non-controllling interests are adjusted
(reserrves acquired
d from parent – see below)) 30 500 0
NCI afte
er transaction
n ((156 500 – 4 000GW) × 40%) 61 000
0
NCI before transactioon ((156 500 – 4 000GW) × 20%) (30 500)
Amountt to be recogn
nised directly in equity (R4 500
0)
The app proach in term ms of IFRS 10.B96 that th he difference between the change in th he
non-con ntrolling intere
ests and the aamount paid or received iss to be recognised in equitty
is also clear
c from J44 below. The e entries madde by the parrent against the
t investmennt
(R10 00 00) and the profit
p on the sale of the sshares (R25 000) are revversed and th he
principle
es of IFRS 10 0.B96 are app plied.
d The am mount for the change in ow wnership reccognised in equity
e can be
e calculated as
a
follows (see IFRS 10 0.B96) (from the perspec ctive of the parent):
Fair valuue of the consideration recceived by thee parent 35 000
0
Decreasse in parent’s s interest/amo
ount by whichh the non-conntrolling
intere
ests are adjus sted (reservess sold to NCI)) (30 500
0)
Parent’ss interest afte
er transaction
((156 500 – 4 000G GW) × 60%) + 4 000GW) 95 500
0
Parent’ss interest befoore transactio
on
((156 500 – 4 000G GW × 80%) + 4 000GW) (126 000)
0
The am mount for the change
c in ow
wnership recoognised in eq
quity can also
o be calculate
ed
as follow
ws (from the perspective e of the parennt):
Fair valu
ue of the consideration recceived by the
e parent 35 0000
Equity relinquished to NCI (30 500
0)
Historic fair value of shares dispo
osed of (excluuding goodwill)
(comm ment (f)) ((40 000 cost – 4 000 goodwilll) × 20/80) (9 000)
Attributa
able post-acqquisition equitty disposed o
of:
Retained earnings s ((8 000 + 6 0000) × 20/80)) (3 500)
Repla acement rese erve (72 000 × 20/80) (18 000)
nised directly in equity (in g
group contex
xt) R4 500
0
continu
ued
215
2
Chapter 13
e Alternatively, the amount can also be calculated as follows:

Attributable net assets disposed (excluding goodwill)
((156 500 – 4 000) × 20%) (30 500)
Goodwill relinquished (not realised as control not lost and not
transferred as NCI did not share in any goodwill at acquisition)
(comment (f)) –
Amount to be recognised directly in equity (in group context) R4 500
f In this example, goodwill was only recognised in respect of the parent as the
non-controlling interests were not measured at fair value on the acquisition date.
Therefore, the non-controlling interests did not share in any of the goodwill
recognised. Furthermore, IFRS 10.BCZ168 indicates that no changes should be
made to goodwill in respect of a disposal of interest where control is maintained (i.e.
not lost). As this applies to this particular example, goodwill of R4 000 should be
maintained in the consolidated financial statements of the parent company until such
time that control is relinquished and the full amount remains attributable to the parent.
The calculation of the gain on disposal (at group level) should therefore incorporate
the fact that goodwill is not transferred to the non-controlling interests. This is done by
using the historic fair value of the assets and liabilities obtained with the original
business combination (acquisition) and not the purchase price which includes the
goodwill amount.
As was explained in chapter 13.3 above, this work follows the approach that the
parent only relinquishes some of the goodwill that was attributable to it, to the non-
controlling owners if goodwill was initially also recognised in respect of the non-
controlling interests (NCI was measured at fair value at the date of the business
combination).
g The group’s gain on the partial disposal of the interest can also be calculated from (or
reconciled to) the parent’s entries as recognised in its separate financial
statements, as follows:
Parent’s profit on sale of shares 25 000
Adjustments to be made at group level:
Add back goodwill included in cost of investment above, not to be
transferred within the group (IFRS 10.BCZ168) (comment (f))
(4 000 × 20/80) 1 000
Deduct parent’s interest in since-acquisition reserves disposed
of (3 500 RE + 18 000 RR) (21 500)
C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date: IFRS 3.32(a)(i) 40 000
Amount of non-controlling interests: IFRS 3.32(a)(ii) 9 000
49 000
Net of the identifiable assets acquired and liabilities assumed
at acquisition date: IFRS 3.32(b) (45 000)
216

Dr Cr
R R
Replacement reserve (SCE) 30 000
Allocation of non-controlling interests’ portion
of retained earnings and replacement reserve
of current year’s profit
J4 Investment in S Ltd (SFP) (comment (b)) 10 000
Profit on sale of shares (P/L) 25 000
Changes in ownership (equity) (SCE) 4 500
Pro forma correction of group gain on disposal
to separate equity category to give effect to the
requirements of IFRS 10.23
J5 Replacement reserve (SCE) (72 000 × 20/80) 18 000
Retained earnings: Transfer from replacement
reserve (SCE) 18 000
Transfer of replacement reserve due to disposal
of owners’ equity (comment (c))
of current year’s profit
217
Chapter 13
1
Commentts
a The pa arent accountted for its invvestment in th
he subsidiary at cost and there were no
n
fair valu
ue adjustmen
nts in the separate financia al statements
s of P Ltd.
b J4 firstly reverses th he entries ma ade by the pa arent with the e sale of somme shares (th he
parent credited the investment w with the partiial cost of R1 10 000 and recognised th he
profit of
o R25 000). Then the g group’s adju ustments in respect of th he change in i
ownersship are reco ognised in acccordance with IFRS 10.23 and B96.. The parent’s
balance e for the inveestment in the e subsidiary is effectively cancelled (ba alance is Rniil)
after alll the pro form
ma consolida ation journal e entries (Inves stment of R30 0 000(given) –
R40 00 00(J1) + R10 000(J4) = Rn nil).
c From the
t analysis and comment (g) above e, it is clear that the parent effectively
dispose ed of a portion of its inte erest in the rreplacement reserve of S Ltd (20/80 ×
72 000 = R18 000) (i.e. loss of reserves atta ached to the shares dispo osed of). J5 is
needed d to reflect thiis loss of a poortion of the rreserve. It is also
a clear from
m the analysis
that thee closing balance for the e replacemen nt reserve sh hould be R54 4 000 and no ot
R72 00 00. This trans sfer to retaineed earnings w will also be ma ade from anyy other reserv ve
(e.g. re
evaluation su urplus, or ma ark-to-market reserve) tha at the subsidiary may hav ve
had.
d J4 reveerses the entries made byy the parent w with the sale of o the sharess, but note tha at
the acttual current tax
t (capital g gains tax) pa aid by the parent, is not reversed.
r This
payment has indeed d been made to the South h African Revenue Service es, irrespectiv
ve
of the group’s
g adjusstments and ccannot be revversed. Some e experts are of the opinio on
that this tax expense should, how wever, be mo oved to equity y as the group p’s adjustmen nt
is mad de to equity. The journal entry would be to debit the “change e in ownershiip
(equity))” and to creedit the “incom me tax expen nse (P/L)”. However,
H this has not bee en
done inn this work as s the authors are of the op pinion that the e tax expense e rather relate
es
to the parent’s
p sale of the sharess, than to the group’s adjus stment of its owners’
o equitty
interestts (between the
t parent and the non-con ntrolling interests).
C4 Detailed calculation of alllocation off equity

Attribu
utable Atttributable
Total to paarent to NCI
Equity of subsidiary before
b chan
nge repre-
sented byy: 156 50
00 126 000 30 500
Other net
n assets 152 50
00 122 000 30 500
Goodwwill 4 00
00 4 000 –
Change in ownership
p represente
ed by: (30 500) 30 500
Other net
n assets re eallocated (30
0 500) 30 500
Goodwwill relinquish
hed N/A N/A
Equity of subsidiary after
a change
e
00 95 500 61 000
Other net
n assets 152 50
00 91 500 61 000
Goodwwill 4 00
00 4 000 –
218
The following example is used to contrast the measurement of the non-controlling

interests at fair value at the acquisition date, to the measurement thereof at their
proportionate share of the acquiree’s identifiable net assets (as the example above).
Partial disposal of an interest in a subsidiary with no change

in the status as the subsidiary remains a subsidiary (control
Example 13.4b
is not lost) (NCI is measured at fair value at the date of ac-
quisition)
Assume the same information as in example 13.4a, except that P Ltd elected to
measure non-controlling interests at fair value at the date of acquisition. The fair value
of the non-controlling interests was R9 900 at the acquisition date (when P Ltd obtained
control over S Ltd).
Solution 13.4b
The consolidated statement of profit or loss and other comprehensive income is the
same as in part (a) of example. The rest of the consolidated financial statements are
prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Current assets
Inventory (70 000(P) + 100 000(S)) 170 000
Bank (63 150(P) + 60 000(S)) 123 150
293 150
232 150
219
Chapter 13
P LTD GROUP
Changes Re- Non-
Re-
Share in place- con- Total
tained Total
capital owner- ment trolling equity
earnings
ship reserve interests
Balance at
1 Jan 20.15 90 000 – * 38 000 72 000 200 000 ! 29 900 229 900
Changes in
equity for
20.15
Total
compre-
hensive
income for
the year:
Profit for the
year – – 28 650 – 28 650 4 500 33 150
Transfer from
replacement
reserve – – 18 000 (18 000) – – –
Disposal of
interest – 3 500 – – 3 500 31 500 35 000
Balance at
31 Dec 20.15 R90 000 R3 500 R84 650 R54 000 R232 150 R65 900 R298 050
* 30 000(P) + 8 000(S) = 38 000

! 9 900(at) + 2 000(RE) + 18 000(RR) = 29 900
P LTD GROUP
During the current year, P Ltd sold a 20% interest in S Ltd, an existing
subsidiary, without losing control over S Ltd. This resulted in an amount of
R3 500 being recognised in equity as presented in the consolidated
statement of changes in equity. Details of the transaction between the equity
participants are as follows:
Fair value of the consideration received 35 000
Increase in the non-controlling interests (31 500)
220
Calculations
P Ltd 80%–60%
Total NCI
At Since
Share capital 10 000 8 000 2 000
Replacement reserve 30 000 24 000 6 000
45 000 36 000 9 000
– Parent and NCI 4 900 4 000 900
Retained earnings (15 000 – 5 000) 10 000 8 000 RE 2 000
Replacement reserve
(120 000 – 30 000) 90 000 72 000 RR 18 000
• Current year:
Profit: 1/1/20.15–30/6/20.15
(15 000 × 6/12) 7 500 6 000 RE 1 500
157 400 14 000 RE 31 400
72 000 RR
Disposal of 2 000 shares (1) (9 000) (3 500) RE 31 500
(comment (b)) (1 000) (18 000) RR
157 400 62 900
Profit: 1/7/20.15–31/12/20.15
(15 000 × 6/12) 7 500 4 500 RE 3 000
R164 900 R15 000 RE R65 900
R54 000 RR
RR = Replacement reserve
(1) 36 000 × 20/80 = 9 000 AT
4 000 × 20/80 = 1 000 Goodwill (comment (d))
(8 000 + 6 000) × 20/80 = 3 500 RE
72 000 × 20/80 = 18 000 RR
NCI: 9 000 + 1 000 + 3 500 + 18 000 = 31 500(equity acquired from parent)
221
Chapter 13
1
Comments s
a The amount for the change in ow wnership reccognised in equity can be calculated as
a
follows (see
( IFRS 10.B96) (from tthe perspecttive of the NC CI):
Fair valuue of the cons
sideration paid by NCI (35 000))
Amount by which the e non-controlling interests are adjusted
(reserrves acquired
d from parent – see below)) 31 500
NCI afte
er transaction ((157 400 – 4 900GW) × 40%) + (900 initial GW of
NCI) + (4 000 GW of parent × 2 20/80) relinquished to NCI)) 62 900
NCI befo
ore transactio
on ((157 400 – 4 900GW) × 20%) +
(900 initial GW of NCI))
N (31 400))
Amount to be recogn
nised directly in equity (R3 500))
Through h the parent’ss disposal of 20% of the interest in thee subsidiary (being
( 20/80 =
25% of the parent’s interest), 20% of the net asset value v (exclud
ding goodwill)
((157 4000 – 4 900) × 20% = 30 5 500) was trannsferred from the parent’s interest to th
he
non-con ntrolling interests. Furthermore, the parent relinq quished som me of its ow wn
goodwilll (4 000 × 20 0/80 = 1 000)) to the non--controlling owners.
o This resulted in an
a
increase e of the non-c
controlling inte
erests of R31
1 500 (30 5000 + 1 000).
b The amount for the change in ow wnership reccognised in equity can be calculated as a
follows (see
( IFRS 10.B96) (from tthe perspecttive of the pa arent):
Fair valuue of the conssideration recceived by the parent 35 000
Decreasse in parent’s interest / ammount by whicch the non-controlling
interessts are adjusted (reservess sold to NCI)) (31 500))
Parent’ss interest after transaction ((157 400 – 4 900GW) × 60%)
6 +
4 000GW – (4 000 GW of paren nt × 20/80)) 94 500
Parent’ss interest befo
ore transactioon
((156 500 – 4 000G GW × 80%) + 4 000GW) (126 000))
Amount to be recogn
The amo ount for the change
c in ow
wnership reco ognised in equity can also
o be calculate
ed
as follow
ws (from the perspective of the paren nt):
Fair valu
ue of the cons sideration recceived by the parent 35 000
Equity reelinquished too NCI (31 500))
Historic fair value of shares
s dispossed of (includding goodwiill)
(comm ment (d)) (40 000 cost × 20 0/80) (10 000))
Attributa
able post-acquisition equityy disposed off:
Retainned earnings ((8 000 + 6 0 000) × 20/80) (3 500))
Repla acement reserve (72 000 × 20/80) (18 000))
Amount to be recogn
group contextt) R3 500
c Alternatiively, the amoount can also o be calculate
ed as follows:
Proceed ds on disposa al of interest 35 000
Attributa
able net assetts disposed (excluding goo odwill)
((157 400 – 4 900) × 20%) (30 500))
Goodwilll relinquishedd (as NCI also o shared in th
he goodwill)
(comm ment (d)) (4 000
0 × 20/80) (1 000))
Amount to be recogn
group contextt) R3 500
continu
ued
222
d In this example, goodwill was recognised in respect of the parent and the non-
controlling interests (by being measured at fair value on the acquisition date).
Therefore, the non-controlling did share in the goodwill recognised. Furthermore,
IFRS 10.BCZ168 indicates that no changes should be made to goodwill in respect of
a disposal of interest where control is maintained (i.e. not lost). As this is the case in
this particular example, goodwill of R4 900 should be maintained in the consolidated
financial statements of the parent company until such time that control is relinquished.
However, R3 000 (4 000 – 1 000 relinquished) of the goodwill is now attributable to
the parent and R1 900 (900 initial + 1 000 from parent) is now attributable to the non-
controlling interests. The calculation of the gain on disposal (at group level) should
therefore incorporate the fact that goodwill is indeed transferred to the non-controlling
interests. This is done by using the purchase price of the investment, which includes
the goodwill number.
As was explained in chapter 13.3 above, this work follows the approach that the
parent does relinquish some of the goodwill that was attributable to it, to the non-
controlling owners if goodwill was initially also recognised in respect of the non-
controlling interests (NCI was measured at fair value at the date of the business
combination).
e The group’s gain on the partial disposal of the interest can also be calculated from (or
reconciled to) the parent’s entries as recognised in its separate financial statements,
as follows:
Parent’s profit on sale of shares 25 000
Adjustments to be made at group level:
Deduct parent’s interest in since-acquisition reserves disposed
of (3 500 RE + 18 000 RR) (21 500)

49 900
Goodwill (parent and NCI) R4 900
223
Chapter 13

The pro forma consolidation journal entries are the same as in example 13.4a, except
for those indicated below.
Dr Cr
R R
J4 Investment in S Ltd (SFP) (comment (b)) 10 000
Profit on sale of shares (P/L) 25 000
Pro forma correction of group gain on disposal to
separate equity category to give effect to the
requirements of IFRS 10.23
C4 Detailed calculation of allocation of equity

Attributable Attributable
Total to parent to NCI
Equity of subsidiary before change repre-
sented by: 157 400 126 000 31 400
Other net assets 152 500 122 000 30 500
Goodwill 4 900 4 000 900
Change in ownership represented by: (31 500) 31 500
Other net assets reallocated (30 500) 30 500
Goodwill relinquished (4 000 × 20/80) (1 000) 1 000
Equity of subsidiary after change represent-
ed by: 157 400 94 500 62 900
Other net assets 152 500 91 500 61 000
Goodwill 4 900 3 000 1 900
13.8 Loss of control with partial disposal of a subsidiary, with a simple

investment retained
This section of the work deals with a loss of control and IFRS 10.25–26 and B97–B99
should be consulted in this regard.
1 IFRS 10.25 and B98 states that if a parent loses control of a subsidiary, it (in the
consolidated financial statements):
l derecognises the assets (including any goodwill) and liabilities of the subsidiary
at their carrying amounts on the date when control is lost;
224
Ch
hanges in ow
s shares
l derecognisess the carryin ng amount of any non n-controllingg interests in the formmer
subsidiary on n the date when
w contrrol is lost (iincluding any compon nents of othher
comprehensivve income attributable
a to them);
l reccognises:
• the fair value of the consideratio on received, if any, from the transsaction, eve ent
or circumsttances that resulted in the loss off control; an nd
• if the transsaction thatt resulted in n the loss o of control involves a distribution
d of
shares of the subs sidiary to owners in their cap pacity as owners, th hat
n;
distribution
l reccognises an ny investment retained in the former subsid diary at its fair value on
thee date when n control is lost;
l recclassifies to
o profit or lo
oss, or transsfers directlly to retaineed earningss if required
d in
accordance withw other IF FRSs, the a amounts fro om other co omprehensive income as
if the parent had
h directly disposed o of that subssidiary (refeer to IFRS 10.B99); and d
l reccognises an ny resulting g difference as a gain o or loss in profit or los
ss attributabble
to the parent.
Commentts
a As indiicated abovee, the carrying g amounts o of goodwill an nd non-contro olling interestts
are derrecognised. This
T applies irrrespective off whether the non-controllling interestts
(which effects the measurement
m t of goodwill) were measu ured at fair va
alue or at the
eir
proporttionate share of the acquirree’s identifia
able net assetts at the date of acquisition n,
in terms of IFRS 3.119.
b The proocess listed above
a (in terrms of IFRS 1 10.B98) can easily be use ed to calculatte
the grooup’s profit or
o loss on the e loss of conttrol of the sub
bsidiary.
2 This treatment
t r
reflects that a loss off control is a significaant econom mic event thhat
chang ges the na ature of th he investm ment (refer to IFRS 10.BCZ180– –183). It allso
indicaates that the e loss of coontrol over a subsidiarry represen nts a loss of
o control ovver
the as ssets and liabilities of the subsid diary and th
hat a new in nvestment (if any) in the
t
forme er subsidiaryy is acquireed.
Any investment that is retained in the formerr subsidiary y (i.e. after the loss of
contro ol) should beb measure ed at its fa
air value oon the date e when control is lost.
Any gain
g or loss arising fromm such rem measureme ent should be recognissed directly y in
profitt or loss of o the grou up. Note thhat this principle also o applies to o the loss of
significant influence or joint control where the re etained inteerest is a financial assset
(IAS 28.22(b))
2 (re
efer to IAS 28.BC29 fo or more info
ormation in this regard d).
IFRS 10.25(b) further
f stattes that, o
on the losss of contro ol of a subsidiary, any
a
investtment retain ned in the former sub bsidiary shaall be accounted for in n accordannce
with other
o IFRSSs from th he date when contro ol is lost (e.g. IFRS S 9 Financ cial
Instruuments or IAS 28 Inv vestments in Associa ates and Jo oint Ventures). The fair
f
value of any inve estment reta ained in thee former su
ubsidiary at the date when control is
lost shall be regarded as th he fair valu on of a financial asset in
ue on initiall recognitio
accord dance with IFRS 9 Financial Ins struments or, when appropriate
a e, the cost on
initial recognitionn of an inves stment in a
an associatee or joint ve
enture.
225
2
Chapter 13
3 In its separate financial statements the parent will recognise a gain or loss on the
disposal of the shares or will transfer an appropriate amount from the mark-to-
market reserve to retained earnings, depending on whether the investment in the
subsidiary was measured at cost or in accordance of IFRS 9 (at fair value through
other comprehensive income). Refer to paragraph 13.6 of this chapter for more
detail in this regard. The entries made in the parent’s separate financial statements
will be reversed upon consolidation and the consolidated profit or loss will be
accounted for, as indicated above.
IAS 27 and IFRS 10 are not clear on how any retained investment should be
accounted for after the partial sale in the separate financial statements of the
parent. If the retained investment only represents a simple investment (with no con-
trol, joint control, or significant influence), it should be accounted for as a financial
asset under IFRS 9 and initially be measured at fair value. If the parent had
measured the investment in the former subsidiary at cost, it is assumed that the
remeasurement to fair value should be recognised in profit or loss (similar to a
“day 1” gain – refer to IFRS 9.B5.1.2A(a)). If the parent had measured the
investment in the former subsidiary at fair value under IFRS 9, that fair value would
merely represent the initial measurement of the financial asset.
4 Should control over a subsidiary be lost during the course of the financial
reporting period, the following applies with respect to the consolidated statement of
financial position and statement of profit or loss and other comprehensive income:
l Consolidated statement of financial position
The consolidated statement of financial position as at the financial reporting date
contains the assets and liabilities of the parent as well as the assets and
liabilities of companies which, at the financial reporting date, are in fact
subsidiaries of the parent. Consequently, a subsidiary disposed of in its entirety
during the current financial period is not included at all in the consolidated
statement of financial position at the consolidation date.
l Consolidated statement of profit or loss and other comprehensive income
The consolidated statement of profit or loss and other comprehensive income
contains the income and expenses and other comprehensive income of:
• the parent;
• the subsidiaries that were subsidiaries for the whole term of the year under
consideration; and
• the appropriate portion of the income and expenses and other
comprehensive income of subsidiaries that were subsidiaries only for a part of
the year (for the period that the parent controlled the subsidiary) under
consideration.
The operating results of subsidiaries acquired during the reporting period are
consequently included in the consolidated statement of profit or loss and other
comprehensive income as from the date of acquisition, whilst the results of a
subsidiary disposed of are included up to the date of disposal.
226
Ch
hanges in ow
s shares
Commentt
As a starrting point to o the conso olidation, it iss important to note thatt the financial
statementts of a subsid diary disposedd of before thhe reporting date
d will not be combine ed
(i.e. addeed together) to those of the parent. The amounts in respect of the pos st-
acquisitionn reserves ofo the subsid diary need be journalis sed into the e consolidateed
statementt of profit or loss and otheer comprehen nsive income and stateme ent of change
es
in equity for the period while the subsidiary was controlled by y the parent. This approacch
is clearly evident
e in jou
urnal 4 below.. However, a different appproach may be e followed an
nd
this is con
ntrasted in the
e example below.
5 Disclo osure of a loss of con ntrol should d be made in terms off IFRS 12 Disclosure
D of
Intereests in Other Entitie es. The pa arent shall disclose in nformation that enablles
users of the consolidated financial sstatements to evaluate the conssequences of
losingg control off a subsidia ary during the reporting period (IFRS 12.10(b)(iv)). The T
follow
wing informa ation should d be disclossed (IFRS 1 12.19):
l the e total gain or loss with h the loss o of control;
l the e portion off this gain oro loss attrib butable to m measuring any investm ment retained
in the former subsidiary at its fair va alue at the d date of the loss; and
l the e line item((s) in profitt or loss in n which the e gain or lo oss is recog gnised (if not
n
preesented sep parately).
6 Given n the requ uirements of o IFRS 5 Non-curre ent Assetts Held fo or Sale and
Disco ontinued Operations,
O , it should be noted that in the period preceding p the
t
dispos sal of a su ubsidiary, thet will most probably me
latter w eet the req quirements of
IFRS 5 for classsification as s a non-current assett held for sale s in the consolidatted
financcial statemeents of the parent com mpany. Thiss would enta ail classifyin
ng the asse ets
of the subsidiaryy as held for sale on th he face of th he statement of financcial position n in
a singgle line item
m, as well as a separate ely classifyinng and disc closing the liabilities and
a
equityy items of the
t subsidiary directlyy relating to o non-curre ent assets held for sa ale.
The subsidiary
s h
held for sale will mostt probably also qualify y as a com mponent of an
entity which is a major line e of busine ess or a separate geo ographical segment,
s and
a
may therefore
t qualify for separate
s prresentation and disclo osure as a discontinued
opera ation in term
ms of IFRS 5. 5 This asp pect is speccifically dealt with laterr at the end of
chapter 14 and iss, for the sa ake of simp plicity, not ta
aken into acccount at th his stage.
7 The in nclusion of the results s of a subssidiary disposed of up p to the datte of dispos sal
ensurres that the part of the e results of the subsid diary for thee current finnancial period
over which the parent exercised d control, is reflecte ed in the consolidatted
statemment of proffit or loss and
a other co omprehensive income. It also enssures that the t
conso olidated reta
ained earnin ngs at the b beginning o of the financ
cial period correspond
c to
the coonsolidated d retained earnings
e at the end off the previo ous year for consisten ncy
and comparabilit
c ty purposes s. In the exxecution off the conso olidation proocedures, thet
inclussion of the results of a subsidia ary dispose ed of to th he date off disposal is
achiev ved by dividing the ga ain on dis sposal of s shares in a subsidiary (under the t
cost model)
m as reflected
r in the separa ate financiaal statemen nts of the parent,
p wheere
appliccable, into the compo onent elem ments there eof, and th hen incorpo orating theese
eleme ents in the consolidate ed stateme ent of profitt or loss an nd other co omprehensiive
incomme accordingly. The co omponent elements are e the follow
wing:
l the e parent’s share
s in thee retained e earnings sin nce acquisition and othero reserv
ves
of the subsidiary dispose ed of to the beginning of the curre ent year
p
plus
227
2
Chapter 13
l the parent’s share in the subsidiary’s profit for the current year to the date of
disposal
plus
l the gain (loss) on disposal of the interest in group context (as discussed
earlier)
equals
l the gain (loss) on disposal of shares as reflected in the separate records of the
parent under the cost model.
8 The following example illustrates the use of this approach on the consolidation of
the financial statements of a group where control over a subsidiary was lost during
the course of a year.
Partial disposal of a subsidiary (loss of control) and an

investment retained (NCI is measured at their proportionate
Example 13.5
share of the acquiree’s identifiable net assets at the
acquisition date)
The following are the abridged trial balances of P Ltd and S Ltd on 31 December 20.14:
P Ltd S Ltd
CREDITS
Retained earnings (at 1/1/20.14) 6 000 1 600
Mark-to-market reserve (at 31/12/20.14)
((1 230 – 1 200) × 77,6%) 23 –
Deferred tax
((1 230 – 693) × 80% × 28%) (R1 rounding adjustment) or (114 + 7) 121 –
Revenue (*) 8 000 2 000
Profit on the sale of shares (P/L) 3 293 –
Remeasurement gain on retained investment (after tax) (P/L) 507 –
R67 944 R9 600
DEBITS
Bank 60 447 8 000
Cost of sales (*) 4 800 1 400
Income tax expense (*) 1 467 200
Investment in S Ltd: 600 shares at fair value 1 230 –
R67 944 R9 600
(*) Accrued/incurred evenly (irrespective of the sale of the shares)
1 P Ltd purchased 4 500 shares in S Ltd on 1 January 20.12 for R5 200, when the
retained earnings of the latter amounted to R400. P Ltd disposed of 3 900 of these
shares on 30 June 20.14 for R7 800.
228

3 P Ltd accounted for the investment in S Ltd (as a subsidiary) at cost in its separate
financial statements.
4 After the loss of control, P Ltd classified the investment in S Ltd as a financial asset
under IFRS 9 in its individual financial statements and P Ltd recognised fair value
adjustments in the mark-to-market reserve (other comprehensive income). Fair
value adjustments are recognised monthly. P Ltd elected to present the other
comprehensive income net after tax in the statement of profit or loss and other
comprehensive income (IAS 1.91(a)). The fair value per share of S Ltd on the
various dates was as follows:
On 30 June 20.14 R2,00
On 31 December 20.14 R2,05
5 The disposal of the subsidiary does not comply with the criteria of IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations until the date of
disposal.
6 The subsidiary does not represent a separate major line of business or geographical
area of the group.
7 A company tax rate of 28% applies and CGT is calculated at 80% thereof.
The actual journal entries to recognise the partial sale of the share investment in the
separate financial statements of the parent will be:
Dr Cr
R R
J1 Bank (SFP) (3 900 × R2,00 per share) 7 800
Investment in S Ltd (SFP) (3 900/4 500 × R5 200) 4 507
Profit on the sale of shares (P/L) 3 293
Recording proceeds and profit on partial disposal
of investment
J2 Income tax expense (P/L) (3 293 × 80% × 28%) 738
SARS tax payable/Bank (SFP) 738
Capital gains tax (current tax) payable on disposal
of shares
The remaining investment is still recognised at cost of R693 (600/4 500 × R5 200). This
investment should now be classified as a financial asset and must initially be measured
at fair value (IFRS 9.5.1.1). It is assumed that the initial remeasurement to fair value
should be recognised in profit or loss. The subsequent remeasurements to fair value
(from R1 200 to R1 230) are recognised in other comprehensive income (mark-to-
market reserve) in terms of the company’s accounting policy.
229
Chapter 13
1
The actuual journall entries too recognisse the inittial remeas surement of
o the sha
are
investment in the ind
dividual fin
nancial state
ements of tthe parent will
w be:
Dr Cr
R R
J3 Inv
vestment in S Ltd (SFP
P)
((6
600 shares × R2,00) – (600
0/4 500 × R5
5 200)) 507
Remeasurrement gain on retained
d investmentt (P/L) 507
7
(comment (b))
Remeasurem
R ment gain on
o retained d investmennt
J4 Inc
come tax exxpense (P/L) (507 × 80%
% × 28%) 114
Deferred taxx (SFP) 11
14
Taax effect of remeasure
ement to faiir value
Commentt
a In this example the parent electe ed to accoun nt for the inve
estment in the
e subsidiary at
cost in its separate financial stattements. Reffer to self-asssessment que estion 3 wherre
the invvestment in the subsidiary is accoun nted for unde er IFRS 9 in n the parentt’s
separa ate financial sttatements.
b The treeatment of the e remeasurem ment gain is not explicitly explained in IAS 27. In th
his
example, the initial remeasurement of the invvestment from m the remaining cost to fa air
value after
a control was
w lost, wass recognised in profit or lo oss in line wiith the generral
requireements of a finnancial assetts in terms of IFRS 9.5.1.1 and IFRS 9.B5.1.2A.
Solution 13.5
The conssolidated fin
nancial sta
atements off P Ltd and d its subsid
diaries in re
espect of the
t
year ende
ed 31 Dece ember 20.14 4, are prepa
ared as follows:
P LTD
D GROUP
CONSOLIDATED STATEMENT OF FIN
NANCIAL POSITION
P
AS
A AT 31 DEECEMBER 20.14
ASSETS S
Investme
ent at fair va
alue (1 230(P)) or (600 shaares × R2,05)) 1 23
30
Current assets
Bank (60 447(P)) 60 44
47
Total ass
sets R61 66
67
Equity atttributable to owners of the pare ent
Share ca
apital 50 00
00
Retained
d earnings 11 64
47
market reserve ((1 230 – 1 200) × 77,6%)
Mark-to-m 23
2
61 67
70
Non-con
ntrolling inte
erests –
Total equ uity 61 67
70
Liabilitie
es
Deferred tax ((1 230 – 1 200) × 80
0% × 28%) orr (121 – 114) 7
Total equ
uity and lia
abilities R61 66
67
230
P LTD GROUP
Revenue (8 000(P) + 1 000(J1)) 9 000
Cost of sales (4 800(P) + 700(J1)) (5 500)
Gross profit 3 500
Other income (gain on disposal of interest) 2 750
Income tax expense (1 467(P) – 114(J2) + 100(J1)) (1 453)
Other comprehensive income, net of tax:
Mark-to-market reserve (fair value adjustment on investment)
((1 230 – 1 200) × 77,6%) 23
Other comprehensive income for the year, net of tax 23
Non-controlling interests (50(J1)) 50
R4 797
Owners of the parent (4 747 + 23) 4 770
Non-controlling interests (50(J1)) 50
R4 820
231
Chapter 13
1
P LTD
D GROUP
HANGES IN
N EQUITY
FOR THE YEAR END
DED 31 DEC
CEMBER 20
0.14
Mark-to- Non-
market Total g
controlling
reserve interests
Balance at
1 Jan 20.14
2 50 000 * 6 900 – 56 900 1 900
0 58 80
00
Changes s in
equity for
20.14
Total
compre ehensive
income e for the
year:
Profit for the year – 4 747 – 4 747 50
0 4 79
97
Other com mpre-
hensive e
income e – – 23 23 – 23
2
Loss of control
c
over su ubsidiary – – – – (1 950) (1 950)
Balance at
c 20.14
31 Dec R50 000 R11 647 R23 R61 670 – R61 67
70
* 6 000((P) + 900(S) = 6 900
P LTD
D GROUP
NOTES
S TO THE CONSOLIDA
C ATED FINA
ANCIAL STA
ATEMENTS
S
Loss of control
c ove er subsidiarry:
During th he current year, P Ltd sold a 65 5% interest in S Ltd (p parent’s conntrolling 75%
interest reduced
r to a simple invvestment of 10% in S LLtd) and lostt control oveer S Ltd. Thhis
resulted in a total am mount of R2 750 being g included in the line ittem of “Otheer income” in
profit or loss. Includeed in this am
mount is R3
367 that rela
ates to the measuring
m of the retaine
ed
investme ent to its fair value. P Ltd now do oes not have e control, jooint control or significa
ant
influencee over S Ltd d and accounts for its investment as a financial asset at fair valu ue
through other
o comprrehensive income.
Commentt
a Due to the disposal of the interesst held in S LLtd by P Ltd, the
t non-contrrolling interests
are derrecognised. This
T is because S Ltd is no o longer a suubsidiary of P Ltd (control is
relinquished).
b IFRS 12.19
1 require
es that an en ntity shall discclose the gain or loss (ga ain of R2 7500)
with thee loss of control over a su
ubsidiary. Furrthermore, the entity should disclose th he
portion of that gain or loss attrib
butable to me easuring any investment retained
r in th
he
former subsidiary at its fair valuee at the datee when contro ol is lost (bein
ng R367). Th he
line item
m (being otheer income) inn profit or losss in which the
e gain or losss is recogniseed
(if not presented
p sep
parately) should also be d disclosed.
232
Ch
hanges in ow
s shares
Calculatiions
Although control ovver the subsidiary w was relinquiished durin ng the current financcial
period, itt is essenttial to ana alyse the e equity of th
his subsidia ary up to the date of
disposal. The detail in the ana wners’ equitty makes it possible to
alysis of ow o break dowwn
the gain on disposa al of intere est in S Ltd
d into the th
hree compo onents conta
ained there
ein,
i.e.:
l the gaing in group context;
l profitts attributab ble since ac cquisition o
of the subsiddiary to the
e beginning of the period
in wh
hich the sub
bsidiary was s disposed of; and
l attrib butable proffit of the sub
bsidiary for the period in which it was dispossed of.
Commentt
These thrree compone ents (togethe
er with the reversal of the parent’s entries in its
separate financial
f state
ements) are a
also clearly evvident in journ
nal 1 below.
C1 Analy
ysis of the
e owners’ equity
e of S Ltd
P Ltd 75%–10%
7
Total NCI
At Since
i At acquisition (1
1/1/20.12)
Share
e capital 6 000 4 500 1 50
00
Retain
ned earninggs 400 300 10
00
6 400 4 800 1 60
00
Equity
y represente
ed by goodw
will
– Paarent 400 400 –
Consiideration and NCI 6 800 5 200 1 60
00
ii Sincee acquisitio on
• To beeginning of current
c year:
Retainned earning gs (1 600 – 40
00) 1 200 900
0 30
00
• Current year:
Profit:: 1/1/20.14–
–30/6/20.14
((2 000
0 – 1 400 – 200) × 6/12)) 200 150
0 50
5
Total equity (repreesented by otther net
asse 0 and goodwill of R400)
ets of R7 800 8 200 1 050
0 1 95
50
Derec
cognise asse ets (including
g good- (4 800))
will)), liabilities and
a NCI (IFR RS 10.B98) (8 200) (400)) (1 050
0) (1 950)
– – –
233
2
Chapter 13

6 800
Goodwill (parent) R400
C3 Pro forma consolidation journal entries – S Ltd

Dr Cr
R R
J1 Profit on the sale of shares (P/L) 3 293
Remeasurement gain on retained investment (P/L) 507
Cost of sales (P/L) (comment (d)) (1 400 × 6/12) 700
Income tax expense (P/L) (comment (d)) (200 × 6/12) 100
Gain on disposal of interest (group context) (P/L)
(comment (b)) 2 750
Revenue (P/L) (comment (d)) (2 000 × 6/12) 1 000
Consolidation of subsidiary S Ltd and recognition
of disposal of interest at group level
J2 Deferred tax (SFP) 114
Income tax expense (P/L) (507 × 80% × 28%) 114
Reversal of tax effect on remeasurement gain as in
parent’s individual financial statements
J3 Non-controlling interests (SFP/SCE) (derecognised) 1 950
Non-controlling interests (SFP/SCE)
(opening balance in equity) 1 900
(current year’s interest in profit) 50
Accounting for various line items of non-controlling
interests in equity for S Ltd
234
Ch
hanges in ow
s shares
Commentts
a The fair value adjustments to the
e investment iin S Ltd were
e as follows:
Fair value of remain
ning investmeent at 30 Junee 20.14 (600 × R2,00) 1 200
0
Fair value adjustment to end of ccurrent year 30
0
Fair value at end of current year (600 × R2,05
5) R1 230
0
b If a parrent loses control, as is th
he case with S Ltd here, th he gain or losss on disposa al
of the interest wouldd be calculateed as follows using IFRS 10.B98:
1
Dereco ognise assetss (including gooodwill) and liabilities on date
d control iss lost
(7 80
00 other net assets
a + 400 goodwill) (8 200
0)
Dereco ognise non-coontrolling interests 1 950
0
Carryin
ng amount of P Ltd’s intereest in S Ltd lo
ost (6 250
0)
Recogn nise considerration receive
ed 7 800
0
Fair value of investm
ment retainedd (600 sharess × R2,00) 1 200
0
Gain (cconsolidated) recognised in profit or losss R2 750
0
The tottal gain should effectively be presentedd as a gain on
n the disposal of an interes
st
in the subsidiary
s andd a remeasurrement gain o on remeasuring the retaine ed investmen nt
to fair value
v (IFRS 12.19).
1 Thesee items could be calculated
d as follows:
Carryin ng amount of interest sold (65/75 × R6 250 (above)) (5 417
7)
ed 7 8000
Profit on
o disposal R2 383
3
Carryin
ng amount of interest retained (10/75 × R6 250 (abo
ove)) (833
3)
ment retained
d (600 sharess × R2,00) 1 200
0
Remea
asurement ga
ain R367
7
c By mea ans of the re elevant amou unts (as conttained in the analysis of the
t ownershiip
interestt of S Ltd), th
he gain on the e disposal of the shares in
n S Ltd can be
b analysed as
a
follows:
Proceeeds on dispos sal of interest 7 800
0
Historicc cost of sharres disposed of (5 200 × 3 900/4 500) (4 507
7)
At-acqu
uisition equity
y disposed off (4 800 × 65//75) (4 160)
Goodwwill realised (o
only for the pa
arent companny) (400 × 65//75) (347)
Gain on n disposal of interest per s
separate recoords of P Ltd 3 293
3
Attributtable post-acq
quisition retained earningss disposed off
((9000 + 150)) × 655/75) (910
0)
Profit on
o disposal 2 383
3
Plus reemeasuremen nt of retained investment to
o fair value
(1 2000 – ((4 800 × 10/75) + (1 050 × 10/75)) + (400 × 10//75))
or (1 200 – ((net asset
a value of 7 800 × 10%
%) + (400 × 10/75)) 367
7
Consollidated gain on
o disposal off the interest R2 750
0
Or
Proceeeds on dispos sal of interest 7 800
0
Attributtable net asseets disposed of (net asset value of R7 800 × 65%) (5 070
0)
Goodw will realised (o
only for the pa
arent companny) (400 × 65//75) (347
7)
Profit on
o disposal 2 383
3
Remea asurement of retained inve
estment to fair value 367
7
Consollidated gain on
o disposal off the interest R2 750
0
continu
ued
235
2
Chapter 13
Care should be taken not to confuse the proceeds of R7 800 with the net asset value
of the subsidiary of R7 800 at the date of the loss of control. It is purely coincidence
that the amounts are the same.
d In the consolidation, the financial statements of S Ltd are not combined (i.e. added
together) with those of P Ltd as S Ltd is not a subsidiary of P Ltd at the end of the
reporting period. The amounts in respect of S Ltd are accounted for by means of J1
(i.e. these amounts have to be journalised into the consolidated statement of
profit or loss and other comprehensive income and the consolidated statement
of changes in equity for the period while S Ltd was a subsidiary).
e The investment in S Ltd is, after the loss of control, treated as a simple investment (at
fair value through other comprehensive income). The investment account should
therefore be equal to the fair value of R1 230 (see comment (a)). The mark-to-market
reserve should reflect the fair value gain after the loss of control, being R23 ((1 230 –
1 200) × 77,6%), while the deferred tax balance should be R7 ((1 230 – 1 200) × 80%
× 28%) as is included in the consolidated statement of financial position.
Alternative pro forma consolidation journal entries for sale of interest

Dr Cr
R R
J1 Investment in S Ltd (SFP) 900
Accounting for retained earnings at the beginning
of the year
Revenue (P/L) (2 000 × 6/12) 1 000
Cost of sales (P/L) (1 400 × 6/12) 700
Income tax expense (P/L) (200 × 6/12) 100
Accounting for profit of subsidiary for the year
J3 Profit on the sale of shares (P/L) 3 293
Remeasurement gain on retained investment (P/L) 507
Reversal of parent’s entries for profit on sale of
shares and remeasurement of retained investment
J4 Investment in S Ltd (SFP) 2 383
Gain on disposal of interest (group context) (P/L) 2 383
Recognition of gain at group level
Gain on disposal of interest (remeasurement
of retained investment to fair value) (P/L) 367
Recognition of gain at group level from
remeasurement of retained investment to fair value
236
13.9 Partial disposal of an interest in a subsidiary, whereby it becomes

an associate
This section of the work is similar to the section above and also deals with a loss of
control over a subsidiary. The requirements of IFRS 10.25–26 and B97–B99 are also
applicable. The section above addressed the scenario where the entire interest in a
subsidiary was disposed of. This section deals with the scenario where control over the
subsidiary is lost, but an interest is retained whereby significant influence is exercised.
Therefore, the subsidiary now becomes an associate (or joint venture). In this scenario
specific attention should be placed on the following consolidation procedures:
l in accounting for the loss of control over the subsidiary, any investment retained in
the former subsidiary should be recognised at its fair value on the date when
control is lost;
l this implies that a remeasurement gain or loss should be recognised as part of the
profit or loss with the disposal of the interest in the subsidiary;
l after control is lost the investment in the associate (or joint venture) should be
accounted for under the equity method in terms of IAS 28.
Partial disposal of an interest in a subsidiary resulting in a

change in status as the subsidiary becomes an associate (a
Example 13.6 loss of control by the parent occurs) (NCI is measured at its
proportionate share of the acquiree’s identifiable net assets
at the acquisition date)
The following represents the condensed financial statements of P Ltd (with some
subsidiaries already consolidated) and A Ltd (that should still be accounted for in the
consolidated financial statements) at 31 December 20.17:
P Ltd and
subsidiaries A Ltd
(consolidated)
ASSETS
Investment in A Ltd – 40 000 shares at cost 51 000 –
Equity investments at fair value through other
comprehensive income – 25 477
Inventory 369 000 109 200
Mark-to-market reserve – 4 250
Non-controlling interests –
(60 000 opening balance + 40 000 current year) 100 000
Deferred tax – 1 227
237
Chapter 13

P Ltd and
sub-
sidiaries A Ltd
(consoli-
dated)
Revenue 671 000 111 200
Cost of sales (210 000) (36 000)
Other income (gain on disposal of interest) 35 000 –
Mark-to-market reserve (fair value adjustment on investment) – 3 286
Income tax relating to items that will not be reclassified – (736)
R360 000 R51 200
R360 000 R53 750
238

Retained earnings
P Ltd
Mark-to- and
market sub-
reserve sidiaries A Ltd
A Ltd (consoli-
dated) –
parent
Change in equity for 20.17
Profit for the year – 320 000 51 200
Other comprehensive income 2 550 – –
Dividend paid: 31/12/20.17 – (50 000) (25 000)
R102 000, when the retained earnings of A Ltd amounted to R25 000.
3 On 31 March 20.17 P Ltd disposed of 40 000 shares in A Ltd for R86 000. P Ltd has
exercised significant influence over the financial and operating policy decisions of
A Ltd since that date. The fair value of the remaining investment by P Ltd in A Ltd
was R80 000 at the date of disposal of the interest.
4 P Ltd accounted for the investment in A Ltd at cost in its separate financial statements
(in terms of IAS 27.10 and IAS 28.44).
5 The disposal of the interest in the subsidiary did not comply with the criteria of
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations until the
date of disposal thereof.
6 The subsidiary does not represent a separate major line of business or
geographical area of the group.
7 A Ltd’s profit and tax for 20.17 accrued evenly. The fair value gain on the equity
investments at fair value through other comprehensive income of A Ltd only relates
to the period after 1 April 20.17.
8 The company tax rate is 28% and CGT is calculated at 80% thereof.
239
Chapter 13
1
Commentts
a The seeparate financial statemen nts of P Ltd already inclu
ude the gain on the partial
disposaal of its investment in A Ltd
d. The gain w
was calculated as follows:
Procee
eds 86 0000
Cost prrice of portion
n sold (40 0000/80 000 shares × R102 000)
0 (51 000
0)
Gain on
n disposal R35 000
0
b The seeparate financ cial statemen
nts of P Ltd a
also already include the ta
ax payable on
o
this gaiin of R7 840 (35 000 × 80%
% × 28%).
Solution 13.6
The consolidated financial

f statements,
s incorpora
ating the results
r of A Ltd (as a
y before the partial sa
subsidiary ale and in a
accordance with the eq
quity metho
od thereafte
er),
are prepa
ared as follo
ows.
P LTD
D GROUP
CONSOLIDATED STATEMENT OF FIN
NANCIAL POSITION
P
AS
A AT 31 DEECEMBER 20.17
ASSETS S
e (P and otherr subsidiarie
es) 500 00
00
Investme
ent in associiate
(51 000(remaining co ost) + 29 000
0(J1) + 16 380 0(J4) – 10 0000(J5)) or (80 000(fair 86 38
80
value off retained inve
estment afterr loss of contrrol) + 6 380(ssince))
586 38
80
Current assets
Inventory
y (P and other subsidiarries) 369 00
00
Total ass
sets R955 38
80
Equity atttributable to owners of the pare
ent
Share ca
apital 400 00
00
Retained
d earnings 454 36
60
Mark-to-m
market reserve 1 02
20
855 38
80
Non-con
ntrolling inte espect of other subsidia
erests (in re aries) 100 00
00
Total equ
uity and lia
abilities R955 38
80
240
P LTD GROUP
Revenue (671 000(P) + 27 800(A)(J1)) 698 800
Cost of sales (210 000(P) + 9 000(A)(J1)) (219 000)
Gross profit (461 000(P) + 18 800(A)) 479 800
Other income (gain on disposal of interest) 14 000
Share of profit of associate (J4) 15 360
Income tax expense (146 000(P) + 6 000(A)(J1)) (152 000)
Share of other comprehensive income of associates (comment (a)) 1 020
Owners of the parent (balancing) 314 600
Non-controlling interests (40 000(other) + 2 560(A)(J1)) 42 560
R357 160
Owners of the parent (314 600 profit + 1 020 OCI) 315 620
Non-controlling interests (40 000(other) + 2 560(A)(J1)) 42 560
R358 180
241
Chapter 13
P LTD GROUP
Non-
Mark-to-
market Total
reserve
interests
Balance at
1 Jan 20.17 400 000 * 188 400 1 360 589 760 ! 94 940 684 700
Changes in equity
for 20.17
Dividends – (50 000) – (50 000) – (50 000)
Total
comprehensive
income for the
year:
Other comprehen-
sive income – – 1 020 1 020 – 1 020
Transfer with dis-
posal of interest
in A Ltd 1 360 (1 360)
Disposal of interest
in A Ltd and
derecognition of
non-controlling
interests ((J3) and
comment (b)) – – – – (37 500) (37 500)
Balance at
31 Dec 20.17 R400 000 R454 360 R1 020 R855 380 R100 000 R955 380
* 150 000(P) + 38 400(J1) = 188 400

! Other: 100 000 end – 40 000 current year = 60 000 opening balance plus A Ltd: 25 000 + 9 600 +
340 = 94 940
P LTD GROUP
Loss of control over subsidiary:
During the current year, P Ltd sold a 40% interest in S Ltd (half of its 80% interest) and lost
control over S Ltd. This resulted in a total amount of R14 000 being included in the line
item of “other income” in profit or loss. Included in this amount is R4 000 that relates to the
measuring of the retained investment to its fair value. P Ltd now has significant influence
over S Ltd and accounts for its interest in the associate by applying the equity method.
242
Ch
hanges in ow
s shares
Commentts
a In termms of the Guidance on implementiing IAS 1 Presentation P of Financial
Statem ments, the sh hare of other comprehenssive income of o associates is the amount
attributtable to the parent (i.e. the after ta ax and non-c controlling in
nterests in th he
associa ate).
b Upon the loss of co ontrol by P Ltdd, A Ltd is noo longer a subsidiary of thhe parent P Lttd
and no on-controlling
g interests too the amountt of R37 500 0 (113 500 – 76 000) arre
derecognised from the consolidated financia al statements of P Ltd. Th his results in a
final ammount of R10 00 000 in resppect of the no on-controlling interests beiing recognise ed
in the consolidated d financial sstatements o of P Ltd, wh hich relates to the othe er
subsidiiaries of P Ltdd.
c IFRS 12.19
1 requires that an enttity shall discclose the gainn or loss (gain of R14 000 0)
with the e loss of control over a su
ubsidiary. Furrthermore, the entity should disclose th he
portion of that gain or loss attribbutable to me easuring any investment retained
r in th
he
former subsidiary att its fair value
e (being R4 0 000) at the daate when conttrol is lost. Thhe
line itemm (being othe er income) in
n profit or losss in which the
e gain or losss is recogniseed
(if not presented
p sep
parately) should also be d disclosed.
Calculatiions
C1 Analy ysis of the
e owners’ equity
e of A Ltd – as s
subsidiary
P Ltd
d 80%
Total NCI
At Since
i At acq
quisition
Share capital 100 000 80 000 20 000
Retain
ned earningss 25 000 20 000 5 000
125 000 1
100 000 25 000
Equity represented
d by goodwill
– Paarent 2 000 2 000 –
Consid deration and
d NCI 127 000 1
102 000 25 000
• To begginning of cuurrent year:
Retainned earningss (73 000 – 25 000) 48 000 38 400 RE
E 9 600
Mark-tto-market reeserve 1 700 1 360 MtM
M 340
• Currennt year:
Profit: 1/1/20.17–3
31/3/20.17
(51 200
2 × 3/12) 12 800 E
10 240 RE 2 560
189 500 48 640 RE
E 37 500
1 360 MtM
M
Loss of
o control overo subsid
diary: 50 000
Derecoognise asse ets (including
g
gooddwill), liabilitties and NCI 102 000)
(189 500) (1 (50
( 000) (37 500)
(IFRS 10.B98)
Transffer of mark-tto-market (1 360) MtM
M
reserve (IFRS 10.B99) (J2) 1 360 REE
– – – –
RE = Retaiined earningss; MtM = Mark-to-market reserve
243
2
Chapter 13
C1 Analysis of the owners’ equity of A Ltd – as associate

P Ltd 40%
Total NCI
At Since
i At acquisition
Recognise remaining interest at fair
value 200 000 80 000 n/a
• Current year:
Profit: 1/4/20.17–31/12/20.17
(51 200 × 9/12) 38 400 15 360 RE n/a
Mark-to-market reserve 2 550 1 020 MtM n/a
Dividend (25 000) (10 000) RE n/a
R215 950 R5 360 RE n/a
R1 020 MtM
RE = Retained earnings; MtM = Mark-to-market reserve
C2 Proof of calculation of goodwill of A Ltd in terms of IFRS 3.32

127 000

Dr Cr
R R
J1 Investment in A Ltd (SFP) (80 000 fair value – cost of
R51 000 in separate financial statements of P Ltd) 29 000
Gain on disposal of interest (P) (P/L) 35 000
Cost of sales (P/L) (36 000 × 3/12) (comment (a)) 9 000
Non-controlling interests (P/L) (first 3 months)
(comment (a)) 2 560
Income tax expense (P/L) (24 000 × 3/12) (comment (a)) 6 000
Revenue (P/L) (111 200 × 3/12) (comment (a)) 27 800
Mark-to-market reserve – Beginning of year (SCE) 1 360
(Remeasurement gain) (IFRS 10.25) 4 000
Consolidation of subsidiary for first three months
and recognition of disposal of interest
continued
244
Dr Cr
R R
J2 Mark-to-market reserve (SCE) (comment (c)) 1 360
Transfer of mark-to-market reserve to retained
earnings on loss of control over subsidiary in terms
of IFRS 10.B99
Non-controlling interests (SFP/SCE) (opening
balance in equity) (25 000 at + 9 600 RE + 340 MtM) 34 940
(current year’s interests in profit) 2 560
interests in equity for A Ltd (comment (j))
J4 Investment in A Ltd (as associate) (SFP) 16 380
(MtM) (OCI) 1 020
Accounting for P Ltd’s share of equity of associate
for current year (last nine months)
J5 Other income
(dividend received from A Ltd as in P Ltd) (P/L) 10 000
Investment in A Ltd (as associate) (SFP) 10 000
Elimination of dividend received from associate –
IAS 28.10
245
Chapter 13
1
Commentts
a Note th hat A Ltd wa as only a sub bsidiary of P Ltd for the first
f three months
m of th
he
currentt year. Since A Ltd was no ot a subsidiarry of P Ltd att the reporting
g date, A Ltd’’s
individuual financial statements
s w
will not be commbined with those of the parent (P Ltd d)
as a sttarting point for consolida ation. This m
means that the results for A Ltd (for th he
period that it was a subsidiary of P Ltd) would have to o be journalised into th he
consollidation, as is s seen in the pro forma co onsolidation joournal entry above.
a
b P Ltd disposed
d of 40
4 000 sharess in A Ltd an nd lost contrrol over A Ltd d. The gain or
o
loss ono the dispo osal of the interest wo ould be calc culated as follows usin ng
IFRS 10.B98:
Dereco ognise assets s (including go oodwill) and liabilities on date
d control
is losst (187 500 otther net asse ets + 2 000 gooodwill) (IFRS S 10.B98(a)) (189 500 0)
Dereco ognise non-co ontrolling interests (IFRS 110.B98(a)) 37 500 0
Net assset value (attributable to p
parent) dereco ognised (152 000
0)
Fair value of consideration receivved recognise ed (i.e. cash received)
(IFRSS 10.B98(b)) 86 000
0
Recogn nise fair value
e of investmeent in former ssubsidiary reta
ained
(IFRSS 10.B98(b)) 80 000
0
Net gain on dispos
sal of interes
st (group con
ntext)
(IFRSS 10.B98(d)) attributable
e to the owne
ers of the pa
arent R14 000
0
n the disposa
al of an interest
in the subsidiary
s and a remeasurement gain on remeasuring the retain ned investmen nt
to fair value
v (IFRS 12.19).
d as follows:
Carryin ng amount of interest sold (40/80 × R1552 000 (abovee)) (76 0000)
ed 86 0000
Profit on
o disposal R10 000
0
Carryin
ng amount of interest retained (40/80 × R152 000 (a
above)) (76 000
0)
ment retained
d (given) 80 000
0
Remea
asurement ga
ain R4 000
0
The amount
a of R14 000 co omprises R4 4 000 in res spect of th he fair valu ue
remeassurement of the retained interest (reffer to (d) bellow), plus R1 10 000 arisinng
from th he R86 000 received for e equity of R76 6 000 that wa as disposed of o (refer to (e
e)
below).. These two amounts
a (R4
4 000 and R10 000) were presented se eparately in J1
J
for illusstration purpos
ses. Note tha at both these amounts sho ould be disclossed separately
in termss of IFRS 12.19.
c With th he loss of conntrol over a suubsidiary, anyy amount pre eviously recog gnised in otheer
compre ehensive incoome, should b be reclassifie
ed to profit or loss, or transsferred directly
to reta ained earnin ngs if required in acco ordance with h other IFR RSs (refer to t
IFRS 10.B98(c) and d B99).
d Remea asurement of investment re etained in terrms of IFRS 10.25(b):
1
Fair value of retaine ed 40% investtment in form mer subsidiary y (given)
(IFRS S 10.25(b)) 80 0000
Carryin ng amount of retained 40% % investment in former sub bsidiary
((102 2 000 × 40/800) + (50 000 × 40/80)(analysis)) or
(152 000(commen nt (b)) × 40/80) (76 0000)
Remea asurement (ga ain) to be reccognised in prrofit or loss (B
BCZ182)
(refer to J1) R4 0000
continu
ued
246
e By means of the relevant amounts (as contained in the analysis of the ownership
interest of A Ltd), the gain on disposal of shares in A Ltd can be analysed as follows:
Historic cost of shares disposed of (102 000 × 40/80) (51 000)
At-acquisition equity disposed of (100 000 × 40/80) (50 000)
Goodwill realised (2 000 × 40/80) (1 000)
Gain on disposal of interest per separate records of P Ltd 35 000
Attributable post-acquisition reserves disposed of
((48 640 RE × 40/80) + (1 360 MtM × 40/80) (25 000)
Gain from equity relinquished 10 000
Remeasurement of investment retained (refer to (d) above) 4 000
Total consolidated gain on disposal of the interest R14 000
The gain of R10 000 from the equity relinquished to NCI can also
be calculated as follows:
Attributable net assets disposed of (75 000)
(net asset value of R187 500 × 40%)
Goodwill realised (only for the parent company) (2 000 × 40/80) (1 000)
Consolidated gain on disposal of interest R10 000
It is important to note that only the goodwill relating to the parent company (i.e.
R2 000) is realised in respect of A Ltd. The goodwill relating to the non-controlling
interests, if any (none in this example) are not realised in the consolidated financial
statements of P Ltd, as this amount already relates to the non-controlling interests
and should therefore not be transferred to it again.
f To obtain continuity between the amounts of the current and previous periods’
consolidated statements of profit or loss and other comprehensive income, the gain
of R35 000 (per the separate financial statements of the parent) is included in the
current period’s consolidated statement of profit or loss and other comprehensive
income and the consolidated statement of changes in equity, as follows:
Included in opening consolidated retained earnings at the beginning
of the period 38 400
Included in opening consolidated mark-to-market reserve at the
beginning of the period 1 360
Included in profit for the current period (*) as various line items 10 240
50 000
Group’s net gain in the consolidated statement of profit or loss and
other comprehensive income (see comment (b) above) 14 000
Adjustment of carrying amount of the investment in associate to fair
value (see comment (h) below). (29 000)
Gain on disposal of interest per separate records of P Ltd R35 000
This approach is also evident from J1 above where the investment in A Ltd is
increased with R29 000 (fair value of R80 000 less cost price of R51 000 still
contained in the separate financial statements of P Ltd), the amount of profit per
P Ltd is reversed and replaced by the parent’s portion of the retained earnings and
mark-to-market reserve at the beginning of the period, the various line items in profit
or loss and the group’s profit on the loss of control over the subsidiary.
continued
247
Chapter 13
g The R10 240(*) is taken up in the consolidated statement of profit or loss and other
comprehensive income by adding R12 800 to the profit of the group, and by adding
(thereafter) R2 560 to the non-controlling interests.
h The calculation of the group’s profit or loss on the loss of control over a subsidiary
includes the measurement of the investment in the former subsidiary retained, at fair
value (IFRS 10.25(b)). In this example, the carrying amount of the investment in
A Ltd, after the sale of the 40 000 shares, is reflected in P Ltd as R51 000 (remember
that the financial statements of P Ltd are the starting point for consolidation –
IFRS 10.B86(a)). The fair value of the investment retained is R80 000. An adjust-
ment of R29 000 (80 000 – 51 000) is therefore needed to correctly account for the
investment at fair value on the date of the disposal of the interest. In contrast to
example 13.5 above, this adjustment was not needed as the parent had already
remeasured the retained investment to its fair value in its separate financial
statements. A comparison table of the pro forma consolidation journal entries for
example 13.5 (investment retained is a simple investment measured at fair value)
and example 13.6 (investment retained is an associate that is still measured at cost)
is given below.
i The question arises whether any deferred tax adjustment is needed on the above-
mentioned remeasurement gain. Note that P Ltd already accounted for the actual tax
expense from the sale of the shares in its separate financial statements. Some are of
the opinion that this remeasurement changes the temporary differences on the
investment and that deferred tax should then be recognised (4 000 × 80% × 28% =
896). However, this remeasurement is in respect of P Ltd’s equity interest retained
in the net assets of A Ltd. Equity is by definition (in terms of the Conceptual
Framework) always an after-tax amount. The fair value of the investment retained
now becomes the initial investment in an associate. In terms of the equity method,
only the investor’s share of the net assets of the investee is added to the investment
(net assets would be the amount after tax). Similar to the approach that no deferred
tax is recognised for changes in the investment in an associate for accounting for the
investor’s share of the profit (after tax) of the associate, no deferred tax is recognised
in respect of this remeasurement gain in this work.
j All entries in J3 are made against the same ledger account with no net effect. Thus,
it may be argued that J3 is not needed. J3 only assists in preparing the various line
items for the non-controlling interests in A Ltd in the consolidated statement of
changes in equity.
248
Comparison table for loss of control:

LOSS OF CONTROL:
PARENT’S SEPARATE FINANCIAL STATEMENTS AND CONSOLIDATION
Subsidiary becomes IFRS 9 investment Subsidiary becomes associate
Parent’s separate financial statements: Parent’s separate financial statements:
l Parent elected to measure investment in l Parent elected to measure investment in
subsidiary at cost (IAS 27). subsidiary at cost (IAS 27).
l Parent sold part of its share investment l Parent elected to measure investment in
and remainder of investment (no control, associate at cost (IAS 27) (i.e. what
significant influence or joint control) remains of the initial cost after partial
must then be measured at fair value on sale; no requirement to remeasure to
initial recognition (IFRS 9.5.1.1). fair value).
Sale transaction (example 13.5): Sale transaction (example 13.6):
Dr Bank R7 800 Dr Bank R86 000
Cr Investment R4 507 Cr Investment R51 000
Cr Profit on sale (P/L) # R3 293 Cr Profit on sale (P/L) # R35 000
Remeasurement of retained investment to No remeasurement of retained investment
fair value: to fair value.
Dr Investment R507
Cr Remeasurement (P/L) # R507
Consolidated financial statements: Consolidated financial statements:
l Retained investment to be remeasured l Retained investment to be remeasured
to fair value for purpose of the group to fair value for purpose of the group
(IFRS 10.B98). The “investment” in (IFRS 10.B98). The “investment” in
parent’s separate financial statements is parent’s separate financial statements is
already at fair value of R1 200 coming still at “remaining cost” coming into the
into the consolidation (parent plus consolidation (parent plus subsidiary)
subsidiary) and no pro forma journal en- and a pro forma journal is needed to
try is needed against the investment- adjust the remaining cost of R51 000 to
account. the fair value of R80 000.
l The parent’s “profit” and “remeasure- l The parent’s “profit” (as indicated by #)
ment” (as indicated by #) must be re- must be replaced by the group’s profit
placed by the group’s profit (in terms of (in terms of IFRS 10.B98) and as such
IFRS 10.B98) and as such are are eliminated.
eliminated.
Pro forma journals: Pro forma journals:
Dr Profit on sale (P/L) # R3 293 Dr Profit on sale (P/L) # R35 000
Dr Remeasurement (P/L) # R507 Dr Remeasurement (P/L) n/a
Dr Investment (SFP) n/a Dr Investment (SFP) R29 000
Cr Group’s profit (P/L) R2 750 Cr Group’s profit (P/L) R14 000
And all the other line items... And all the other line items...
13.10 Loss of control and intragroup sale of assets

The consolidation adjustments in respect of intragroup sale of assets were discussed in
chapter 5 of this work. It was emphasised that all unrealised intragroup profits should
be eliminated in full until the asset is sold to parties outside the group. Furthermore, it
was indicated that the unrealised intragroup profit on depreciable assets also realises
through the process of depreciation/amortisation while the asset is being used. Should
249
Chapter 13
the partially-owned subsidiary sell assets to another entity in the group, the relevant
portion of the unrealised gain should be allocated to the non-controlling interests in the
subsidiary. When the unrealised gain is again realised, the relevant portion is once
again allocated to the non-controlling interests in the subsidiary.
On the loss of control over a subsidiary, the parent-subsidiary relationship ceases to
exist. The parent no longer controls the subsidiary’s individual assets and liabilities.
Therefore, the group derecognises all the individual assets, liabilities and equity related
to that subsidiary. It follows that the underlying assets and liabilities of the subsidiary
are effectively sold to parties outside the group. When a parent loses control over a
subsidiary, any unrealised intragroup profit is regarded as being realised from the
group’s perspective and it is recognised in full (irrespective of whether the parent
retains an investment in the former subsidiary – this approach is similar to realising the
amounts previously recognised in other comprehensive income in full with the loss of
control over a subsidiary). All unrealised intragroup profits will thus be realised with a
loss of control over a subsidiary that is regarded as a business (as defined)
(IFRS 10.B99A).
Loss of control over a subsidiary with previous intragroup

Example 13.7
profits on the sale of depreciable assets
The following represents the condensed financial statements of P Ltd (with some
subsidiaries already consolidated) and S Ltd (that should still be accounted for in the
consolidated financial statements) at 31 December 20.17:
P Ltd and
subsidiaries S Ltd
(consolidated)
ASSETS
Patents – 60 000
Investment in S Ltd at cost – –
Bank 413 488 109 200
Total assets R1 013 488 R239 200
Non-controlling interests
(60 000 opening balance + 40 000 current year) 100 000 –
Total liabilities 30 000 20 000
Total equity and liabilities R1 013 488 R239 200
250

P Ltd and
subsidiaries
S Ltd
(consoli-
dated)
Revenue 671 000 111 200
Cost of sales (210 000) (36 000)
Profit and total comprehensive income attributable to:
R423 488 R51 200

Retained earnings
P Ltd
and
subsidiaries
S Ltd
(consoli-
dated) –
parent
Change in equity for 20.17
Dividend paid: 31/12/20.17 (50 000) (25 000)
1 P Ltd acquired 80% of the issued share capital of S Ltd on 1 January 20.13 for
R102 000, when the retained earnings of S Ltd amounted to R25 000.
251
Chapter 13
1
3 On 1 January 20 0.16 S Ltd sold

s an item
m of plant tto P Ltd at a profit of R10
R 000. The T
remaining usefull life of the plant at tha
at date wass five years s with no re
esidual valuue.
The plant
p is deprreciated on the straighht-line basiss.
4 On 1 January 20 0.16 P Ltd sold
s a patent to S Ltd at a profit of R9 000. The patentt is
amorttised evenlyy over threee years.
5 On 31 1 March 20..17 P Ltd diisposed of a all its share
es in S Ltd for
f R220 00 00.
6 P Ltd accounted d for the investment in S Ltd at cost in n its separate financ cial
statem
ments.
7 The disposal
d of the interesst in the subsidiary d did not com mply with the
t criteria of
IFRS 5 Non-current Assetts Held forr Sale and Discontinu ued Operattions until the
t
date of
o disposal thereof.
8 The subsidiary does not rep present a separate ma ajor line of business
b orr geographiccal
area of
o the groupp.
9 S Ltd’s profit and
d tax for 20..17 accrued d evenly.
10 The company taxx rate is 28% and CGT T is calculatted at 80% thereof.
Commentts
a The se eparate financ
cial statemen
nts of P Ltd a
already includ
de the gain on
o the disposal
of its in
nvestment in S Ltd. The ga
ain was calculated as follows:
Procee eds 220 000
0
Cost prrice (102 000
0)
Gain on
n disposal R118 000
0
b The seeparate financcial statemen
nts of P Ltd a
also already include the ta
ax payable on
o
this gaiin of R26 432
2 (118 000 × 8
80% × 28%).
c This exxamples assu umes that adjjustments ma ade to the depreciation annd amortisatio
on
in resp
pect of the inntragroup pro ofit from the pplant and paatent sold bettween the tw wo
companies in the same group, w will affect the
e cost of sale
es line item as
a these costts
form paart of the prod
duction cost oof inventory. Neither comp pany had inveentory on hannd
at the reporting
r date
e, therefore th
he full adjustment is made e to cost of sale (nothing to
t
invento
ory) as all the inventory prooduced has a already been sold.
252
Solution 13.7
The consolidated financial statements, incorporating the results of S Ltd (as a subsidiary
before the sale), are prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (P and other subsidiaries) 600 000
600 000
Current assets
Bank (P and other subsidiaries) 413 488
883 488
Non-controlling interests (in respect of other subsidiaries) 100 000
Liabilities
Total liabilities 30 000
P LTD GROUP
Revenue (671 000(P) + 27 800(S)(J1)) 698 800
Cost of sales (210 000(P) + 8 500(S)(J1) - 750(P)(J3)) (217 750)
Other income (gain on disposal of interest) (60 860(J1) + 5 250(J3)) 66 110
Income tax expense
(155 512(P) + 6 140(S)(J1) + 2 100(S)(J1) + 210(P)(J3) + 1 470(J3)) (165 432)
Profit and total comprehensive income attributable to:
Owners of the parent (balancing) 338 016
Non-controlling interests (40 000(other) + 2 632(S)(J1) + 1 080(S)(J1)) 43 712
R381 728
253
Chapter 13
P LTD GROUP
Non-con-
Share Retained
Total trolling Total equity
capital earnings
interests
Balance at 1 Jan 20.17 400 000 * 195 472 595 472 ! 97 448 692 920
Dividends – (50 000) (50 000) – (50 000)
for the year:
Disposal of interest in S Ltd
and derecognition of non-
controlling interests (J2) – – – (41 160) (41 160)
Balance at 31 Dec 20.17 R400 000 R483 488 R883 488 R100 000 R983 488
* 150 000(P) + 49 792(J1) – 4 320(J3) = 195 472

! Other: 60 000 opening balance plus S Ltd: 25 000 + 12 448 = 97 448
P LTD GROUP
During the current year, P Ltd sold its entire 80% interest in S Ltd and lost control over
S Ltd. This resulted in a total amount of R66 110 being included in the line item of “other
income” in profit or loss. This amount does not include any amount that relates to the
measuring of the retained investment to its fair value.
The loss of control over S Ltd resulted in previously unrealised gains on the disposal of
plant (by S Ltd to P Ltd) to an amount R4 320 and patent (by P Ltd to S Ltd) to an amount
of R3 780 being realised and attributable to the parent.
254
Calculations
P Ltd 80%
Total NCI
At Since
i At acquisition
Share capital 100 000 80 000 20 000
125 000 100 000 25 000
– Parent 2 000 2 000 –
Retained earnings (93 000 – 25 000 –
((10 000 - 2 000) × 72%)) 62 240 49 792 RE 12 448
(comment (d))
• Current year:
Profit: 1/1/20.17–31/3/20.17
((51 200 × 3/12) + 500 – 140 13 160 10 528 RE 2 632
((comment (b))
202 400 60 320 RE 40 080
Derecognise assets (including
goodwill), liabilities and NCI (202 400) (102 000) (60 320) (40 080)
(IFRS 10.B98)
– – – –

127 000
255
Chapter 13

Dr Cr
R R
J1 Investment in S Ltd (SFP)
(no adjustment needed as P Ltd sold all its shares in S Ltd) –
Gain on disposal of interest (P) (P/L) (comment (a) above) 118 000
Cost of sales (P/L) ((36 000 × 3/12) – 500) (comment (b)) 8 500
(comment (a)) 2 632
Income tax expense (P/L)
((24 000 × 3/12) + 140) (comment (b)) 6 140
Gain on disposal of subsidiary (group context) (P/L)
(comment (f)) 60 860
Income tax expense (P/L) (7 500 × 28%) (comment (f)) 2 100
Non-controlling interests (P/L) (5 400 × 20%) (comment (f)) 1 080
J2 Non-controlling interests (SFP/SCE) (derecognised)
(40 080 (analysis) + 1 080 realisation of intragroup profit (J1)) 41 160
balance in equity) (25 000 at + 12 448) 37 448
Non-controlling interests (SFP/SCE) (current year’s
interests in profit) 3 712
(2 632 (analysis) + 1 080 realisation of intragroup profit (J1))
J3 Retained earnings (opening balance of parent) (SCE)
((9 000 – 3 000) × 72%) (comment (e)) 4 320
Cost of sale (amortisation) (P/L)
(9 000/3 years × 3/12) (comment (e)) 750
Income tax expense (P/L) (750 × 28%) (comment (e)) 210
(comment (e)) 5 250
Income tax expense (P/L) (5 250 × 28%) (comment (e)) 1 470
Elimination of unrealised intragroup gain and
realisation of remaining unrealised intragroup gain
with loss of control over subsidiary
256
C4 Alternative pro forma consolidation journal entries

Alternative journal entries for J1 and J2 could also be as follows (first without the
unrealised profit and the unrealised profit separately):
Dr Cr
R R
J1.1 Investment in S Ltd (SFP) (not adjustment needed as P Ltd
sold all its shares in S Ltd) –
Gain on disposal of interest (P) (P/L) (comment (a) above) 118 000
Cost of sales (P/L) (36 000 × 3/12) (comment (a)) 9 000
(comment (a)) (51 200 × 3/12 × 20%) 2 560
Income tax expense (P/L) (24 000 × 3/12) (comment (a)) 6 000
((93 000 – 25 000) × 80%)
(comment (g)) 53 360
J1.2 Retained earnings (opening balance of subsidiary
attributable to parent) (SCE) 4 608
((10 000 – 2 000) × 72%) × 80%) (comment (d))
Non-controlling interests (opening balance of subsidiary)
(SCE) (5 760 × 20%) (comment (d)) 1 152
Accumulated depreciation (SFP) (comment (d)) 2 000
Deferred tax (SFP)
((10 000 – 2 000) × 28%) (comment (d)) 2 240
Plant (SFP) (P) 10 000
Elimination of unrealised intragroup gain included in
plant and recognition of portion realised to the
beginning of the current year through depreciation,
after tax
J1.3 Accumulated depreciation (SFP)
(10 000 / 5 years × 3/12) (comment (d)) 500
Cost of sale (amortisation) (P/L) 500
Income tax expense (P/L) (500 × 28%) (comment (d)) 140
Non-controlling interests (P/L) ((500 – 140) × 20%) 72
Non-controlling interests (SFP/SCE) (current year’s 72
interests in profit)
Recognition of portion of unrealised intragroup gain
realised in first three months with related tax effect
and non-controlling interests
continued
257
Chapter 13
Dr Cr
R R
J1.4 Plant (SFP) (P) 10 000
Accumulated depreciation (SFP) (2 000(J1.2) + 500(J1.3)) 2 500
Gain on disposal of subsidiary (group context) (P/L) 7 500
Income tax expense (P/L) (7 500 × 28%)) 2 100
Deferred tax (SFP) ((2 240(J1.2) – 140(J1.3)) 2 100
Non-controlling interests (P/L) ((7 500 – 2 100) × 20%)
(comment (d)) 1 080
interests in profit) 1 080
Realisation of remaining unrealised intragroup gain
J2 Non-controlling interests (SFP/SCE) (derecognised)
(40 080 (analysis) + 1 080 realisation of intragroup profit) 41 160
balance in equity) (25 000 at + ((93 000 – 25 000) × 20%)) 38 600
interests in profit) (51 200 × 3/12 × 20%) 2 560
Alternative journal entries for J3 could also be as follows (first dealing with the unreal-
ised profit and then realising it with the loss of control):
Dr Cr
R R
J3 Retained earnings (opening balance of parent) (SCE)
((9 000 – 3 000) × 72%) (comment (e)) 4 320
Accumulated amortisation (SFP) (comment (e)) 3 000
Deferred tax (SFP)
((9 000 – 3 000) × 28%) (comment (e)) 1 680
Patent (SFP) (S) 9 000
Elimination of unrealised intragroup gain included in
patent and recognition of portion realised to the
beginning of the current year through amortisation,
after tax
J4 Accumulated amortisation (SFP)
(9 000 / 3 years × 3/12) (comment (e)) 750
Cost of sale (amortisation) (P/L) 750
Income tax expense (P/L) (750 × 28%) (comment (e)) 210
Recognition of portion of unrealised intragroup gain
realised in first three months with related tax effect
J5 Patent (SFP) (S) 9 000
Accumulated amortisation (SFP) (3 000(J3) + 750(J4)) 3 750
Gain on disposal of subsidiary (group context) (P/L) 5 250
Income tax expense (P/L) (5 250 × 28%)) 1 470
Deferred tax (SFP) ((1 680(J3) – 210(J4)) 1 470
Realisation of remaining unrealised intragroup gain
258
Ch
hanges in ow
s shares
Commentts
a Note th hat S Ltd wa as only a sub bsidiary of P Ltd for the first
f three months
m of th
he
currentt year. Since S Ltd was no ot a subsidiarry of P Ltd att the reportingg date, S Ltd’’s
individuual financial statements
s w
will not be com mbined with those of the parent (P Ltd d)
as a sttarting point for consolida ation. This mmeans that the results for S Ltd (for th he
period that it was a subsidiary of P Ltd) would have to o be journalised into th he
consollidation, as is s seen in the pro forma co onsolidation joournal entry (J1)
( above.
b The ad djustment to depreciation
d o
of R500 (R10 0 000/5 years s = R2 000 × 3/12 = R500 0)
(comment (d)) and the tax effecct thereof of R140 (R500 × 28%) that relates to th he
intragrooup sale of plant
p are alre
eady included d in the analy ysis of S Ltd. Separate prro
forma consolidation
c journal entries to accoun nt for this is not
n needed ass the adjuste ed
retained earnings and profit p per the ana alysis (as ad djusted for the intragrou up
transacction) is journ nalised into the consolida ation. The linne items of S Ltd are no ot
combin ned to those of the pare ent and, therefore, the unrealised
u gaain cannot beb
elimina ated as it wou
uld normally b be done (as inn chapter 5 off this work).
c With th he loss of co ontrol over a subsidiary, any unrealiised intragroup profits arre
effectivvely realised as the subsidiary is effecctively sold in n full to partie
es outside thhe
group. The parent-s subsidiary rela ationship endds and all individual assetss and liabilitie
es
of the subsidiary
s aree effectively dderecognised d from the gro oup (i.e. not included in thhe
consoliidated statem ment of financcial position). The realisatio on of intragrooup profits witth
the sale of the subs sidiary should d therefore fo
orm part of the e consolidateed gain or losss
with the e loss of conttrol. See commment (g) whe ere the realisation of this iss added to thhe
group’ss profit with th
he loss of con ntrol.
d The un nrealised proffit from the sale of the pla ant by S Ltd d to P Ltd (n note that thesse
adjustm ments are efffectively inclu uded in the aanalysis of the equity of S Ltd as S Lttd
was the selling entity and the u unrealised prrofit relates too the subsidiiary’s financia al
statements) is as follows:
Initial unrealised
u pro
ofit (given) 10 0000
Realise ed through de epreciation du uring 20.16 (110 000/5 yearrs) (2 0000)
Balance at beginnin
ng of current yyear 8 000
0
Realise
ed through de
epreciation duuring 20.17 (1
10 000/5 yearrs × 3/12) (500
0)
Balance realised witth the loss of control 7 500
0
Tax efffect (× 28%) (2 100
0)
Amoun
nt after tax 5 400
0
Amoun
nt attributable to the non-co
ontrolling inte
erests (× 20%
%) (1 080
0)
Amoun
nt attributable to the parentt R4 320
0
e The un nrealised proffit from the sa
ale of the pattent by P Ltd
d to S Ltd (n note that thes
se
adjustm ments are not included in the analysis of the equity y of S Ltd as P Ltd was th he
selling entity and the unrealised profit relatess to the parennt’s financial statements) is
as folloows:
Initial unrealised
u pro
ofit (given) 9 000
0
Realise ed through ammortisation du uring 20.16 (9
9 000/3 yearss) (3 000
0)
Balance at beginnin
ng of current yyear 6 000
0
Realise
ed through am
mortisation duuring 20.17 (9
9 000/3 years
s × 3/12) (750
0)
Balance realised witth the loss of control 5 250
0
Tax efffect (× 28%) (1 470
0)
Amoun
nt after tax 3 780
0
Amoun
nt attributable to the non-co
ontrolling inte
erests (N/A) –
Amoun
nt attributable to the parentt R3 780
0
continu
ued
259
2
Chapter 13
f P Ltd disposed of all its shares in S Ltd and lost control over S Ltd. The gain or loss
on the disposal of the interest can still be calculated using the steps in IFRS 10.B98
(as was done in the preceding examples), but adjustments should also be made for
the realisation of intragroup profits. Furthermore, attention should be given to the
various line items that relate to the consolidated gain or loss. The calculation in
terms of IFRS 10.B98 results in the consolidated gain or loss on the loss of the
control over the subsidiary, attributable to the owners of the parent (i.e. after tax
and after the non-controlling interests). However, the realisation of the intragroup
profits would also have a tax effect (separate line item) and it may affect the non-
controlling interests in profit or loss (separate line item) if the unrealised intragroup
profit relates to a partially-owned subsidiary.
The calculation of the consolidated gain or loss on the loss of the control over the
subsidiary, attributable to the owners of the parent, are as follows:
Derecognise assets (including goodwill) and liabilities on date control
is lost (200 400 other net assets + 2 000 goodwill) (IFRS 10.B98(a)) (202 400)
Derecognise non-controlling interests (IFRS 10.B98(a)) 40 080
Net asset value (attributable to parent) derecognised (162 320)
Fair value of consideration received recognised (i.e. cash received)
(IFRS 10.B98(b)) 220 000
Recognise fair value of investment in former subsidiary retained
(IFRS 10.B98(b)) 0
Net gain on disposal of interest (group context)
(IFRS 10.B98(d)) attributable to the owners of the parent R57 680
(In J1 above as: 60 860 – 2 100 – 1 080 (comment (d) = 57 680, with
the tax and non-controlling interests in respect of the realisation of the
intragroup profits as separate line items)
(The realisation of the unrealised gain from the sale of the plant by
S Ltd to P Ltd (see comment (d)) (after tax) is effectively included in this
amount.)
Plus the realisation of the unrealised gain from the sale of the patent by
P Ltd to S Ltd (see comment (e)) (after tax) 3 780
(In J3 above as: 5 250 – 1 470 = 3 780)
Total net gain on disposal of interest (group context)
(IFRS 10.B98(d)) attributable to the owners of the parent (after tax) R61 460
The total gain on the disposal of the subsidiary will be presented as
follows in the profit or loss:
Other income (gain on disposal of interest)
(60 860(J1)(S) + 5 250(J3)(P) 66 110
Income tax expense (2 100(J1)(S) + 1 470(J3)(P)) (3 570)
Profit after tax 62 540
Non-controlling interests (comment (d)) (1 080)
Total gain on disposal of interest (group context)
(IFRS 10.B98(d)) attributable to the owners of the parent (after tax) R61 460
continued
260
Alternative calculation: Gross Tax NCI Parent

Gain on disposal (without unrealised
profit) (J1.1) 53 360 * N/A 53 360
Realisation of profit on plant
(comment (d)) 7 500 (2 100) (1 080) 4 320
Amounts recognised in J1 above 60 860 (2 100) (1 080) 57 680
Realisation of profit on patent (J3)
(comment (e)) 5 250 (1 470) N/A 3 780
Total gain on disposal of interest
attributable to the owners of the
parent R66 110 (R3 570) (R1 080) R61 460
* = Refer to comment (i) to example 13.6 for the discussion on the tax effect on the
gain on the disposal of the subsidiary. Also keep in mind that the actual tax paid by
the parent on the disposal of the share investment has already been recognised by
the parent. Refer to comment (b) to the information given in this example.
g The gain on the disposal of the subsidiary can also (as an alternative) be calculated
as follows:
Carrying amount of parent’s interest in subsidiary lost (166 640)
Consolidated carrying amount of subsidiary (without the elimination of
the unrealised profit) (205 800)
(R100 000 share capital + R93 000 retained earnings at beginning of
year + R12 800 (R51 200 × 3/12) profit for first three months)
Portion attributable to non-controlling interests (205 800 × 20%) 41 160
Goodwill of parent derecognised (2 000)
Gain on disposal of interest without unrealised profit 53 360
Unrealised profit from sale of the plant (comment (d) above) attributable
to the parent, after tax 4 320
57 680
Unrealised profit from sale of the patent (comment (e) above) attributable
to the parent, after tax 3 780
Total gain on disposal of interest attributable to the owners of the
parent, after tax R61 460
h The other alternatives for the calculation of the group’s gain on the disposal of the
interest as outlined in the preceding examples may also be applicable in this
example, but were not repeated here. There are arguably other alternatives to the
journal entries as well.
13.11 Changes of interest in complex groups

In the case of changes of interest in complex groups, no new principles apply. The
complexity of the problems which may be encountered here simply requires a very
careful application of the principles that have been dealt with in this chapter (as well as
those in the next chapter).
261
Chapter 13
Question 13.1
On 1 January 20.17, the first day of the financial year, P Ltd held a 35% ownership
interest in S Ltd. On 31 March 20.17, P Ltd acquired a further ownership interest of
20% in S Ltd from other shareholders for R200 000. P Ltd accounted for its initial
investment in S Ltd in its consolidated financial statements in terms of the equity
method, as significant influence was exercised over the financial and operating policies
of S Ltd from the date of purchase of the initial interest. From the date of acquisition of
the second interest in S Ltd, P Ltd had control S Ltd.
The following information applies to the year ended 31 December 20.17:
DRAFT STATEMENTS OF PROFIT OR LOSS
P Ltd and
other
subsidiaries S Ltd
(consoli-
dated)
R’000 R’000
Revenue 11 825 1 200
Cost of sales (6 450) (700)
Other income (dividend received) 60 –
Other income (interest received) 30 –
Depreciation on non-manufacturing assets (425) –
Finance costs – (40)
Other expenses (1 000) (80)
Income tax expense (1 470) (150)
PROFIT FOR THE YEAR (*) R2 570 R230
Owners of the parent 1 750 230
Non-controlling interests 820 –
R2 570 R230
(*) There is no “other comprehensive income” relevant to this statement of profit or loss and other
262

Retained earnings
P Ltd and
other
subsidiaries S Ltd
(consoli-
dated)
R’000 R’000
Balance at 1 January 20.17 3 420 420
Profit for the year 1 750 230
Dividend paid: 31 December 20.17 (700) (100)
Balance at 31 December 20.17 R4 470 R550
1 P Ltd acquired its 35% interest in S Ltd some time ago for R175 000 (equalling its
proportion of the net asset value of S Ltd) when S Ltd’s retained earnings amounted
to R150 000. Since then, S Ltd has not issued any new shares.
2 S Ltd’s major asset is land. S Ltd revalued this property in its individual financial
statements just before P Ltd acquired its 35% interest, and credited the revaluation
surplus by R100 000 (after tax). The land, presented in S Ltd’s statement of
financial position at R800 000, is not depreciated. It is the policy of the group to
realise the revaluation surplus when the asset is sold.
S Ltd revalued the land on 1 January 20.17 and credited the revaluation surplus
with R172 500 (after tax).
3 The fair value of P Ltd’s previously held equity interest in S Ltd was R350 000 at the
date on which P Ltd obtained control over the financial and operating policies of
S Ltd (i.e. the acquisition date). No goodwill or gain from bargain purchase arose
with the business combination and S Ltd’s net assets were regarded as fairly stated
in terms of the requirements of IFRS 3 Business Combinations.
4 S Ltd’s net income was earned evenly throughout the current reporting period.
6 P Ltd measures the investment in S Ltd at cost in its separate financial statements
in terms of IAS 27.10(a) and IAS 28.44.
7 Assume that the opening balance of the non-controlling interests of P Ltd and other
subsidiaries at 1 January 20.17 was R1 million.
263
Chapter 13
Required
Prepare the consolidated statement of profit or loss and other comprehensive income
and consolidated statement of changes in equity (column for share capital is not
required) of the P Ltd Group for the year ended 31 December 20.17. Notes are not
required.
P LTD GROUP
Revenue (11 825 000(P) + (1 200 000 × 9/12)(S)) 12 725 000
Cost of sales (6 450 000(P) + (700 000 × 9/12)(S)) (6 975 000)
Other income
(60 000 (dividends) + 30 000 (interest)(P) – 55 000 (dividends of S)) 35 000
Other expenses (425 000(P) + 1 000 000 (P) + (80 000 × 9/12)(S)) (1 485 000)
Finance cost (40 000 × 9/12)(S) (30 000)
Share of profit of associate (57 500 × 35%)(S) 20 125
Income tax expense (1 470 000(P) + (150 000 × 9/12)(S)) (1 582 500)
PROFIT FOR THE YEAR 2 707 625
Share of other comprehensive income of associate (C1) (comment (b)) 60 375
Income tax relating to other comprehensive income –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R2 768 000
Non-controlling interests (820 000(P) + 77 625(C1)) 897 625
R2 707 625
Owners of the parent (1 810 000 + 60 375) 1 870 375
Non-controlling interests (897 625 (as above)) 897 625
R2 768 000
264
P LTD GROUP
Revalu- Non-
Retained Total
ation Total controlling
earnings equity
surplus interests
Balance at
1 January 20.17 # 3 514 500 – 3 514 500 ^ 1 000 000 4 514 500
Changes in equity
for 20.17
Dividends (700 000) – (700 000) (45 000) (745 000)
Total comprehensive
Profit for the year 1 810 000 – 1 810 000 897 625 2 707 625
Other comprehensive
income – 60 375 60 375 – 60 375
Transfers 60 375 (60 375) – – –
Acquisition of
subsidiary – – – 450 000 450 000
Balance
31 December 20.17 $ R4 684 875 – R4 684 875 R2 302 625 R6 987 500
# 3 420 000(P) + 94 500(S) = 3 514 500

$ 4 470 000(P) + 175 000 (since acquisition as associate) + 39 875 (since acquisition as subsidiary)
= 4 684 875
^ Povided in question’s information
265
Chapter 13
Calculations
C1 Analysis of the owner’s equity of S Ltd – as associate
P Ltd 35%
Total NCI
At Since
i At date of first purchase
Share capital (comment (a)) 250 000 87 500
Revaluation surplus (given) 100 000 35 000
500 000 175 000 n/a
Consideration (R175 000)
ii Since date of first
purchase
Retained earnings
(420 000 – 150 000) 270 000 94 500 RE n/a
• Current year:
1/1/20.17–31/3/20.17
Profit (230 000 × 3/12) 57 500 20 125 RE n/a
Revaluation surplus
(comment (b)) 172 500 60 375 RS n/a
(350 000/35%) 1 000 000 175 000 n/a
Associate becomes a
subsidiary (comment (c))
Derecognise associate (1 000 000) (175 000) (175 000)
Transfer between reserves
(60 375 RE – 60 375 RS) 60 375 RE
(comment (d)) – (60 375) RS n/a
– – – –
RE = Retained earnings (SCE); RS = Revaluation surplus (SCE)
266
C1 Analysis of the owner’s equity of S Ltd – as subsidiary

P Ltd 55%
Total NCI
At Since
i At acquisition
Share capital 250 000 137 500 112 500
Retained earnings at
beginning of year 420 000 231 000 189 000
Profit for current year before
acquisition (230 000 × 3/12) 57 500 31 625 25 875
Revaluation surplus
(100 000 + 172 500) 272 500 149 875 122 625
Total equity acquired 1 000 000 550 000 450 000
goodwill – Parent – – –
Consideration (comment (e))
and NCI 1 000 000 R550 000 450 000
1/4/20.17–31/12/20.17:
Profit (230 000 × 9/12) 172 500 94 875 RE 77 625
Dividend paid (100 000) (55 000) RE (45 000)
NCI (comment (f)) R1 072 500 R39 875 RE R482 625
RE = Retained earnings (SCE); RS = Revaluation surplus (SCE)
267
Chapter 13
1
Commentts
a Since thet investmeent is acquire ed at R175 0 000, which represents 35 5% of the ne et
assets on the date e of first purcchase (as givven in the qu uestion), the R87 500 (i.e e.
250 000 share capittal × 35%) m may be deducced as the ba alancing amo ount in the “A
At”
column n and 87 500//35% leaves R R250 000 in tthe “Total” co olumn.
b With th his revaluatioon of the land d at the beg ginning of the e current yea ar, S Ltd is an
a
associa ate of P Ltd and
a P Ltd the erefore sharess in the otherr comprehenssive income of o
the asssociate amounting to R60 375 (refer to IAS 28.10).
c P Ltd’s previously heldh ownershhip interest iin S Ltd has a fair value e of R350 00 00
(inform
mation given) at the date o of the businesss combinatio on. Thereforee, no fair valu
ue
adjustmment has to be b processed d in this regarrd in terms ofo IFRS 3.42, as the equity y-
accoun nted carrying amount of tthe investme ent at this da ate is also R350
R 000 (i.ee.
R175 000
0 (cost) + R175R 000 (earnings and OOCI since first purchase)).
d In term ms of IFRS 3.42, any a amount that was previo ously recognised in othe er
compre ehensive inco ome (i.e. the rrevaluation suurplus) shall be
b recognised on the sam me
basis asa would be required if th he acquirer h had disposed d directly of the
t previously
held eq quity interest.. In terms of IAS 16.41, a revaluation surplus
s may be transferre ed
directlyy to retained earnings
e wheen the asset iss derecognise ed.
e The coonsideration fo or the busineess combination effectively y consists of R350 000 (fa air
value ofo previously held interesst (given)) + R200 000 (c consideration for additiona al
20%) = R550 000.
f The NC CI is equal to exactly 45% of the total e equity of R1 0720 500 in thiis example, as a
there iss no goodwilll or gain from m a bargain p purchase that arose at anyy stage, whic ch
would have
h been in
ncluded in thee analysis of ownership interest; thereb by causing thhe
NCI to not equal its ownership in nterest in the ttotal equity ex
xactly.
C2 Proo of of calculaation of puurchasing d difference of S Ltd inn terms of IFRS

I 3.32
Consideraation transfferred at ac
cquisition daate: IFRS 3
3.32(a)(i) 200 0000
Amount ofo non-contrrolling interests: IFRS 3.32(a)(ii) 450 0000
on-date fair value of ac
Acquisitio cquirer’s preeviously he
eld equity interest
in the acquiree:
a IFRS 3.32(a)(iii) (given) 350 0000
1 000 00
00
Net of the
cquired and
d liabilities a
assumed
e: IFRS 3.32
2(b) (1 000 000)
Difference
e –
268

Dr Cr
R R
J1 Investment in S Ltd (associate) (SFP) 94 500
Accounting for investor’s interest in reserves
of associate at the beginning of the year
Share of profits of associate (P/L) 20 125
profit (before additional acquisition) of associate
(OCI) (172 500 × 35%) 60 375
Accounting for investor’s share of revaluation
of land of associate
J4 Revaluation reserves (SCE) (share of other
comprehensive income of associate
(OCI) accumulated in equity) 60 375
Transfer of revaluation surplus to retained earnings
with business combination
Retained earnings: opening balance (SCE) 420 000
Revaluation reserve (SCE) (100 000 + 172 500) 272 500
Revenue (P/L) (1 200 000 × 3/12) 300 000
Cost of sales (P/L) (700 000 × 3/12) 175 000
Other expense (P/L) (80 000 × 3/12) 20 000
Finance cost (P/L) (40 000 × 3/12) 10 000
Income tax expense (P/L) (150 000 × 3/12) 37 500
(350 000 + 200 000) 550 000
Non-controlling interests (SFP) 77 625
profit after additional acquisition
Elimination of intragroup dividend and correction
of non-controlling interests
269
Chapter 13
Question 13.2
P Ltd is listed on the JSE Ltd. P Ltd's financial director approached you to help him with
the preparation of the consolidated financial statements of the P Ltd group for the
financial year ended 31 December 20.19.
The following abridged draft financial statements of P Ltd and S Ltd, in which P Ltd has
an interest, are presented to you:
P Ltd S Ltd
ASSETS
Investment in S Ltd at cost: 19 800 –
1 200 shares purchased on 1 January 20.15 for R4 800
400 shares purchased on 30 June 20.19 for R15 000 –
Current assets 28 000 35 000
Total liabilities including deferred tax 28 525 7 000

P Ltd S Ltd
Dividend received 1 600 –
270
STATEMENTS OF CHANGES IN EQUITY

Retained earnings
P Ltd S Ltd
Dividends: 31 December 20.19 (2 000) (2 000)
1 P Ltd acquired 1 200 of the issued ordinary shares (60% interest) in S Ltd on
1 January 20.15 for R4 800, on which date its retained earnings amounted to
R4 000. On this date the directors of P Ltd fair-valued all the identifiable assets and
liabilities as required by IFRS 3 Business Combination. The following is relevant
and the fair value adjustment is material:
The plant and machinery had a carrying amount of R20 000 and a fair value of
R22 500. All S Ltd’s plant and machinery was purchased on 1 January 20.9 and
was depreciated on a straight-line basis over 10 years. On 1 January 20.15 there
was no change in the remaining useful life of four years with no residual value. The
fair value adjustment was not recorded in the books of S Ltd.
2 On 30 June 20.19, P Ltd purchased a further 400 ordinary shares (20% interest) for
R15 000 in S Ltd from other shareholders.
3 P Ltd elected to measure the non-controlling interests at fair value at the date of
acquisition. On 1 January 20.15 the fair value of the non-controlling interests was
R3 300 (when P Ltd obtained control over S Ltd).
5 The profit of S Ltd was earned evenly during the current year.
6 S Ltd purchases some of its inventories from P Ltd at cost plus 25%. S Ltd had the
following inventories, which were bought from P Ltd, on hand at:
31 December 20.18 R15 000
31 December 20.19 R10 000
Inventory usually realises within three months.
thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year ended
31 December 20.19. Notes are not required.
271
Chapter 13
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent and NCI) 300
Current assets (28 000(P) + 35 000(S) – 2 000 unrealised inventory) 61 000
Share capital 6 000
Other components of equity (changes in ownership) (942)
164 245
Total liabilities (28 525 (P) – 560 (on inventory) + 7 000(S)) 34 965
P LTD GROUP
Gross profit
(5 000(P) + 6 000(S) + 3 000(opening inventory) – 2 000(closing inventory)) 12 000
Income tax expense (1 400(P) + 1 680(S) + 840 – 560) (3 360)
Non-controlling interests (864 + 432) 1 296
R8 640
Non-controlling interests (864 + 432) 1 296
R8 640
272
P LTD GROUP
Non-
Changes
in owner- Total
ship
interests
Balance at
1 January 20.19 6 000 * 153 843 – 159 843 ! 27 252 187 095
Changes in equity
for 20.19
Total comprehensive
Dividends – (2 000) – (2 000) (400) (2 400)
Purchase of interest – – (942) (942) (14 058) (15 000)
Balance at
31 December 20.19 R6 000 R159 187 (R942) R164 245 R14 090 R178 335
* 120 075(P) + 35 928(S) – 2 160(opening inventory, after tax) = 153 843

! 3 300 + 23 952 = 27 252
273
Chapter 13
Calculations
P Ltd 60% – 80%
Total NCI
At Since
Share capital 2 000 1 200 800
Revaluation surplus (2 500 × 72%) 1 800 1 080 720
7 800 4 680 3 120
– Parent and NCI 300 120 180
Retained earnings
(65 680 – 4 000 – 1 800 extra depreciation
as a result of fair value adjustment of PPE
at acquisition for 4 years) 59 880 35 928 23 952
• Current year:
Profit: 1/1/20.19–30/6/20.19
(4 320 × 6/12) 2 160 1 296 864
70 140 37 224 28 116
Further acquisition
(28 116(NCI) × 20/40) 14 058 (14 058)
(per IFRS 10.23) 942
Profit: 1/7/20.19–31/12/20.19 2 160 1 728 432
Dividend: 31/12/20.19 (2 000) (1 600) (400)
R70 300 R37 352 R14 090
274
Ch
hanges in ow
s shares
Questio
on 13.3
Commen nt
This quesstion is simila
ar to examplee 13.5, but the investmen nt in the subsidiary is herre
accountedd for under IFRS 9 (an nd not at coost). The question thereffore facilitatees
comparisoon between thet methods of accounting g for the inve
estment in the
e subsidiary in
the paren
nt’s separate financial
f state
ements.
The follow
wing are the
e abridged trial
t balance
es of P Ltd a
and S Ltd on 31 Decem
mber 20.14::
P Ltd S Ltd
CREDITS S
Share ca
apital (50 0000/6 000 sharees) 50 000 6 00
00
Retained
d earnings (a at 1/1/20.14) 6 000 1 60
00
Retained
d earnings: Transfer
T from
m mark-to-m
market reserrve 2 555 –
Mark-to-m
market reserve (at 31/12/20.14) ((1 230 – 693) × 77,6%) 417 –
Deferred tax ((1 230 – 693) × 80%% × 28%) 120 –
Revenuee (*) 8 000 2 00
00
R67 092 R9 60
00
DEBITS
Bank 60 447 8 00
00
Cost of sales (*) 4 800 1 40
00
Income taax expense (*) 615 20
00
Investmeent in S Ltd: 600 shares at fair value
e 1 230 –
R67 092 R9 60
00
(*) Accrue
ed/incurred evvenly (irrespe
ective of the ssale of the sh
hares)
Additional informattion
1 P Ltd purchased d 4 500 sha ares in S LLtd on 1 Jaanuary 20.12 for R5 20 00, when the
t
retained earnings of the latter amountted to R400 0. P Ltd dissposed of 3 900 of the ese
shares on 30 Jun ne 20.14 for R7 800.
2 P Ltd elected to measure th he non-conttrolling interests at theeir proportio
onate share of
the accquiree’s identifiable net assets aat the acquissition date.
3 P Ltd classified the investtment in S Ltd underr IFRS 9 in its separate financ cial
statem
ments and recognised e adjustments in the mark-to-ma
d fair value arket reserrve
(otherr comprehe ensive incoome). Fair value adju ustments area recognised month hly.
P Ltd chose to present th he other ccomprehenssive income net afte er tax in the
t
statem
ment of pro a other ccomprehensive income (IAS 1.91
ofit or loss and 1(a)). The fair
f
value per share ofo S Ltd on the variouss dates wass as follows s:
On 1 January
J 200.14 R1,90
On 300 June 20.14 R2,00
On 311 December 20.14 R2,05
275
2
Chapter 13
4 The disposal of the subsidiary does not comply with the criteria of IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations until the date of
disposal.
5 The subsidiary does not represent a separate major line of business or geographical
area of the group.
Required
Prepare the pro forma consolidation journal entries to consolidate S Ltd into the
financial statements of the P Ltd group for the year ended 31 December 20.14. Notes
are not required.
Pro forma consolidation journal entries – S Ltd

Dr Cr
R R
J1 Mark-to-market reserve opening balance (SCE)
(3 350 × 77,6%) (comment (a)) 2 600
Deferred tax (SFP) (3 350 × 80% × 28%) 750
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
J2 Mark-to-market reserve (OCI) ((450 + 30) × 77,6%)
(comment (e)) 372
Deferred tax (SFP) ((450 + 30) × 80% × 28%) 108
Investment in S Ltd (SFP) 480
Reversal of fair value adjustment on investment
and tax effect in S Ltd for current year at group level
J3 Retained earnings (SCE) (comment (c)) 2 555
Mark-to-market reserve (SCE)
((3 900 × R2) – 4 507 (cost of shares sold) × 77,6%) 2 555
Reversal of parent’s entry for transfer for transfer
within equity with sale of shares
J4 Income tax expense (P/L) (comment (c)) 738
Deferred tax (SFP) (3 293 × 80% × 28%) 738
Reversal of parent’s entry for deferred tax with sale
of shares
continued
276
Dr Cr
R R
J5 Investment in S Ltd (SFP) (3 350(J1) + 450(J2)
(see comment (a) read with comment (e)) or 3 800
((600 x 2 fair value) – (1 230 given – 3 350(J1) – 480 (J2) (see
comment (f))
Cost of sales (P/L) (comment (d)) (1 400 × 6/12) 700
Income tax expense (P/L) (comment (d)) (200 × 6/12) 100
(comment (b)) 2 750
Revenue (P/L) (comment (d)) (2 000 × 6/12) 1 000
Consolidation of subsidiary S Ltd and recognition
of disposal of interest at group level
(opening balance in equity) 1 900
(current year’s interest in profit) 50
J7 Investment in S Ltd (SFP) (1 230 – 1 200) 30
Mark-to-market reserve (OCI) (30 × 77,6%) (rounded) 23
Deferred tax (SFP) (30 × 80% × 28%) (rounded) 7
Recognition of fair value increase on retained
investment for period after sale of interest
(comment (e))
277
Chapter 13
1
Commentts
a The fair value adjus
stments to the
e investment in S Ltd were
e as follows:
Cost off investment (4
( 500 sharess) 5 200
0
Fair va
alue adjustmeent to beginnin
ng of current year 3 350
0
Fair va
alue at beginn
ning of current year (4 500 × R1,90) 8 550
0
Fair va
alue adjustmeent to 30 June
e 20.14 450
0
Fair va
alue at 30 Jun
ne 20.14 (4 50
00 × R2,00) 9 000
0
Carryin
ng amount of shares sold ((3 900 × R2,0
00) (7 800
0)
Fair va
alue of remain
ning investmeent 1 200
0
Fair va
alue adjustme
ent to end of ccurrent year 30
0
Fair va
alue at end of current year (600 × R2,05
5) R1 230
0
b If a paarent loses control, as is the case wiith S Ltd here, the gain or o loss on thhe
disposaal of the interest would be calculated ass follows usin ng IFRS 10.B B98:
Dereco ognise assets s (including gooodwill) and lliabilities on date
d control iss lost
(7 80
00 other net assets
a + 400 goodwill) (8 200
0)
Dereco ognise non-co ontrolling interests 1 950
0
Carryin
ng amount of P Ltd’s intereest in S Ltd lo
ost (6 250
0)
ed 7 800
0
Fair va
alue of investm
ment retainedd (600 sharess × R2,00) 1 200
0
Gain (cconsolidated) recognised in profit or losss R2 750
0
n the disposal of an interes
st
in the subsidiary
s and d a remeasurrement gain oon remeasuring the retaine ed investmen nt
to fair value
v (IFRS 12.19).
d as follows:
Carryin ng amount of interest sold (65/75 × R6 250 (above)) (5 417
7)
ed 7 8000
Profit on
o disposal R2 383
3
Carryin
ng amount of interest retained (10/75 × R6 250 (abo
ove)) (833
3)
Fair va
alue of investm
ment retained
d (600 sharess × R2,00) 1 200
0
Remea
asurement ga
ain R367
7
continu
ued
278
c By means of the relevant amounts (as contained in the analysis of the ownership
interest of S Ltd), the gain on disposal of shares in S Ltd can be analysed as follows:
Historic cost of shares disposed of (5 200 × 3 900/4 500) (4 507)
At-acquisition equity disposed of (4 800 × 65/75) (4 160)
Goodwill realised (only for the parent company) (400 × 65/75) (347)
Gain on disposal of interest per separate records of P Ltd 3 293

(P Ltd would have recognised this gain as an after tax transfer from the
mark-to-market reserve of R2 555 (3 293 × 77,6%) to retained
earnings and a reversal of deferred tax of R738 (3 293 × 80% × 28%).
These entries are again reversed upon consolidation – see J3 and J4.)
Attributable post-acquisition retained earnings disposed of
((900 + 150)) × 65/75) (910)
2 383
Plus remeasurement of retained investment to fair value
(1 200 – ((4 800 × 10/75) + (1 050 × 10/75) + (400 × 10/75))
or (1 200 – ((net asset value of 7 800 × 10%) + (400 × 10/75)) 367
Consolidated gain on disposal of the interest R2 750
Or
Attributable net assets disposed of (net asset value of R7 800 × 65%) (5 070)
Goodwill realised (only for the parent company) (400 × 65/75) (347)
Profit on disposal 2 383
Remeasurement of retained investment to fair value 367
Consolidated gain on disposal of the interest R2 750
Care should be taken not to confuse the proceeds of R7 800 with the net asset value
of the subsidiary of R7 800 at the date of the loss of control. It is purely coincidence
that the amounts are the same.
d In the consolidation, the financial statements of S Ltd are not combined (i.e. added
together) with those of P Ltd as S Ltd is not a subsidiary of P Ltd at the end of the
reporting period. The amounts in respect of S Ltd are accounted for by means of J5
(i.e. these amounts have to be journalised into the consolidated statement of
profit or loss and other comprehensive income and the consolidated statement
of changes in equity for the period while S Ltd was a subsidiary).
e In J1 and J2 the total fair value adjustment on the investment was reversed, similar to
the approach in the examples in the chapter. In J7 the fair value adjustment after the
partial sale of the investment is again accounted for on the investment to illustrate
the group’s treatment of the fair value adjustments. As an alternative, the R30 fair
value gain after 30 June 20.14 could not have been included in the reversal in J2 and
J7 would then not be needed.
f After the loss of control, the investment in S Ltd is treated as a simple investment (at
fair value through other comprehensive income). The investment account should
therefore be equal to the fair value of R1 230 (see comment (a)). The mark-to-market
reserve should reflect the fair value gain after the loss of control, being R23 (see J7).
These balances should remain after all the consolidation journals, as follows:
Investment in S Ltd: 1 230(given) – 3 350(J1) – 480(J2) + 3 800(J5) + 30(J7) = 1 230
Mark-to-market reserve: 417(given) – 2 600(J1) – 372(J2) + 2 555(J3) + 23(J7) = 23
279
Chapter 13
Alternative pro forma consolidation journal entries for sale of interest

Dr Cr
R R
Accounting for retained earnings at the beginning
of the year
Revenue (P/L) (2 000 × 6/12) 1 000
Cost of sales (P/L) (1 400 × 6/12) 700
Income tax expense (P/L) (200 × 6/12) 100
Accounting for profit of subsidiary for the year
J7 Investment in S Ltd (SFP) 2 383
Recognition of gain at group level
Gain on disposal of interest (remeasurement
of retained investment to fair value) (P/L) 367
Recognition of gain at group level from
remeasurement of retained investment to fair value
Calculations
P Ltd 75%–10%
Total NCI
At Since
Share capital 6 000 4 500 1 500
Retained earnings 400 300 100
6 400 4 800 1 600
– Parent 400 400 –
Retained earnings (1 600 – 400) 1 200 900 300
• Current year:
Profit: 1/1/20.14–30/6/20.14
((2 000 – 1 400 – 200) × 6/12) 200 150 50
Total equity (represented by other net
assets of R7 800 and goodwill of R400) 8 200 1 050 1 950
Derecognise assets (including
goodwill), liabilities and NCI (4 800)
(IFRS 10.B98) (8 200) (400) (1 050) (1 950)
– – –
280

6 800
281
14
Changes resulting from the issue
of additional shares by investees
and other changes in ownership
Introduction ..................................................................................................... 285
Changes in subsidiaries............................................................................. 286
Issue of shares
14.1 Issue of capitalisation shares ................................................................... 286
Example 14.1: Capitalisation issue giving rise to fractional dealings ........ 286
14.2 Rights issue by a subsidiary .................................................................... 287
Example 14.2: Illustrative example of the entries by the subsidiary
and the parent with a rights issue .................................. 288
Example 14.3: Rights issue by subsidiary with no change in relative
interests (there is no loss of control with the rights issue)
and no change in status as the subsidiary remains a
subsidiary (NCI is measured at its proportionate share
of the acquiree’s identifiable net assets at the
acquisition date)............................................................. 288
Example 14.4: Illustrative example of a parent’s owners’ equity
increasing after a rights issue (i.e. the parent takes
up more than its proportionate share of the new shares
on offer in the rights issue) ............................................. 295
Example 14.5: Rights issue by a subsidiary resulting in an increase
of the interest of the parent (control is not lost in the
rights issue) and the status does not change as the
subsidiary remains a subsidiary (NCI is measured at its
Example 14.6: Rights issue by a subsidiary resulting in a decrease
of the interest of the parent (control is not lost in the
rights issue) and the status does not change as the
subsidiary remains a subsidiary (NCI is measured at
fair value at the acquisition date) .................................... 303
283
Chapter 14
Buy-back of shares
14.3 Buy-back of shares by a subsidiary ......................................................... 311
Example 14.7: Simple illustration of a share buy-back. ........................... 312
Example 14.8: Buy-back of shares by a subsidiary with no change in
relative interests (there is no loss of control) (NCI is
identifiable net assets at the acquisition date) ................. 314
Example 14.9: Buy-back of shares by a subsidiary with no change in
status as an increase in the parent’s interest occurs
(there is no loss of control) and the subsidiary remains
a subsidiary (NCI is measured at its proportionate share
of the acquiree’s identifiable net assets at the
Example 14.10: Buy-back of shares by a subsidiary where there is no
subsidiary (there is no loss of control) and a decrease
in the parent’s interest occurs due to the share buy-back
(NCI is measured at fair value at the acquisition date) ..... 331
Other changes in ownership

14.4 Share-based payments of a subsidiary.................................................... 340
Example 14.11: Issue of new shares by a subsidiary in terms of a
share-based payment transaction resulting in a
decrease of the interest of the parent (control is not lost)
and the status does not change as the subsidiary
remains a subsidiary (NCI is measured at its
14.5 Loss of control through expiry of an agreement and obtaining control
through an agreement.............................................................................. 347
Example 14.12: Loss of control over a subsidiary on expiry of agreement
(NCI is measured at fair value at the acquisition date) ..... 348
Example 14.13: Obtaining control through an agreement where an
associate becomes a subsidiary (NCI is measured
at its proportionate share of the acquiree’s identifiable
net assets at the acquisition date) .................................... 354
14.6 Accounting for a change in investment entity status ................................ 360
Changes in associates and joint ventures ......................................... 360

14.7 Accounting for other changes in the net assets of an associate .............. 360
IFRS 5 and investments held for sale ................................................... 362

14.8 Important definitions................................................................................. 362
14.9 Applying IFRS 5 in the consolidated financial statements ....................... 363
14.10 Associates classified as held for sale ...................................................... 365
Question 14.1 ........................................................................................................ 366
284
Changes resulting from the issue of additional shares by investees

and other changes in ownership
Same principles for changes in interest as in previous chapter,
for the following transactions:
Capitalisation issue
Rights issue by subsidiary

Rights issue by associate
No change in parent’s interest
Increase in parent’s interest
Increase in parent’s interest
Decrease in parent’s interest
Buy-back of shares by subsidiary

No change in parent’s interest Buy-back of shares by associate
Increase in parent’s interest Loss of significant influence
Loss of control through expiry

Share-based payment by
of an agreement and obtaining control
subsidiary
through an agreement
Introduction
The preceding chapter dealt with changes in the ownership of subsidiaries which
primarily came about as a result of an action by the investor, i.e. an acquisition of
additional shares or a disposal (or partial disposal) of interests in a subsidiary. This
chapter deals mainly with the appropriate consolidation procedures that occur when an
investee issues additional shares or buys back shares and other changes in ownership.
The issue of additional shares can occur by way of a new issue, a capitalisation issue
or a rights issue.
It is important to note that the concepts and procedures followed for the accounting
treatment of changes in the parent’s/investor’s interest in a subsidiary/associate/joint
venture in this chapter are similar to those covered in the preceding chapters and the
same accounting principles will be applied. Furthermore, the same presentation
and disclosure requirements should be adhered to as were discussed and illustrated
in the preceding chapters. The presentation and disclosure examples of the preceding
chapters are thus equally applicable to this chapter. These aspects are thus not
repeated in this chapter.
285
Chapter 14
Changes in subsidiaries
Issue of shares
14.1 Issue of capitalisation shares
If authorised to do so by its memorandum of incorporation, a company may use its
retained earnings and other reserves to issue fully paid up capitalisation shares instead
of distributing a cash dividend. A capitalisation share dividend is merely a book entry
executed by transferring reserves or retained earnings to share capital. This amounts to
a capitalisation of retained earnings or other reserves.
The amount thus capitalised represents reserves of the group and must be disclosed
as such. The same principle applies should the investment be realised at any point in
time. In the consolidation worksheet, the capitalisation issue is merely reversed as a
consolidation adjustment before the analysis of the owners’ equity of the subsidiary is
prepared. The total equity of the subsidiary to be analysed still remains the same,
although the individual composition of the equity differs from the composition before
the capitalisation issue.
The issue of capitalisation shares by a company to its owners does not normally
result in a change in the percentage owners’ equity of the various owners. Thus, a
capitalisation issue by a partially-owned subsidiary will normally be taken up by its
parent and the non-controlling interests in proportion to their existing ownership before
the capitalisation issue.
From the point of view of the investor, the receipt of capitalisation shares, regardless of
whether the investment is in a subsidiary or not, is merely recorded by means of a
memorandum entry, as a capitalisation issue is not regarded as income. An important
fact, which must be borne in mind on consolidation after such a capitalisation issue, is
that the issue does not normally change the pro rata interest in the investee.
Fractional dealings in shares
A change in the proportionate owners’ equity could, however, come about as a result of
fractional dealings in shares, as illustrated below.
Example 14.1 Capitalisation issue giving rise to fractional dealings
The following are the abridged statements of financial position of P Ltd and its
subsidiary S Ltd immediately before the issue of capitalisation shares by S Ltd:
STATEMENTS OF FINANCIAL POSITION
P Ltd S Ltd
ASSETS
Inventory 160 000 110 000
Investment in S Ltd: 45 000 shares at cost price 120 000 –
Share capital
(200 000/60 000 shares before the capitalisation issue) 200 000 60 000
Total assets and liabilities R280 000 R110 000
286
1 The non-controlling interests in S Ltd consist of 2 500 persons each holding six
shares (i.e. 15 000 shares). S Ltd makes a capitalisation issue on the basis of one
share for each five shares held (i.e. 1:5 = 3 000 additional shares to the non-
controlling shareholders). Each of the non-controlling owners will thus be entitled to
1
1 /5 shares. Although shares cannot be held in fractions, the memorandum of
incorporation of a company usually authorise the directors to deal in the fractional
shares in such cases. Assume that the directors of S Ltd decide in the present case
1
to sell the fractional shares concerned (i.e. 2 500 × /5 = 500 shares) to P Ltd, in
which case the interest of the parent (P Ltd) in S Ltd will change from 75% to 75,7%
(54 500/72 000 shares), as follows:
Shares held before capitalisation issue 45 000
Capitalisation issue (45 000/5) 9 000
Shares purchased as fractional shares 500
Shares held after the capitalisation issue 54 500
The purchase of the 500 shares is dealt with in the same way as the purchase of any
additional interest in a subsidiary, the specific procedures depending on whether it
gives rise to control, a loss of control, or neither.
14.2 Rights issue by a subsidiary

A rights issue of shares takes place when the right to apply for the shares (which are
issued to obtain cash funds) is at first only granted to existing owners of a company, in
proportion to their existing ownership. The existing owners can then either decide to
exercise their rights and thus acquire further shares in the company, or in the case of
renounceable rights issues, sell their rights to apply for additional shares to someone
else.
In the case of a parent/subsidiary relationship, the parent, as controlling owner,
frequently underwrites the rights issue of a subsidiary. If all the owners exercise their
rights to take up all the shares offered to them, the relative interests of all the owners
remain exactly the same. The parent’s relative interest could however increase if the
parent takes up more shares than those originally allocated to it (e.g. due to
underwriting the rights issue where the parent had to take up those shares that were
not taken up by the other owners).
In instances where the parent desires to dilute its owners’ equity in a subsidiary, it can
undertake not to take up its full share of the rights issue. The parent can even relinquish
its rights in favour of a particular investor whom the parent would like to see become
involved in the group. Both these actions will result in the relative interest of the parent
being diminished (diluted).
1 No change in parent’s interest

If the parent and the non-controlling owners take up all of their respective rights fully,
there is no change in the relative ownership in the subsidiary. The new shares issued
as a result of the rights issue, however, have an equal claim on the reserves of the
subsidiary as the existing issued shares. On the same basis, the new equity arising from
the rights issue accrues to all the issued shares in the same proportion as is held by
every owner directly after the rights issue.
287
Chapter 14
Illustrative example of the entries by the subsidiary and the

Example 14.2
parent with a rights issue
P Ltd has held 120 000 of S Ltd’s 150 000 issued shares (80%) since 20.17. S Ltd
made a rights issue on 30 June 20.19 of 1 share for every 3 shares held. All the owners
exercised their rights.
The following actual journal entry will be processed in the individual financial
statements of S Ltd:
Dr Cr
R R
Bank (SFP) (50 000 shares × R2 per share) 100 000
Rights issue of shares
The following actual journal entry will be processed in the separate financial
statements of P Ltd:
Dr Cr
R R
Bank (SFP) (40 000 shares × R2,00 per share) 80 000
Additional investment in shares of S Ltd
Comment
Similar journals will be processed by the parent (P Ltd) and the subsidiary (S Ltd) in the
next few examples on rights issues, but are not repeated there.
Rights issue by subsidiary with no change in relative

interests (there is no loss of control with the rights issue)
Example 14.3 and no change in status as the subsidiary remains a
subsidiary (NCI is measured at its proportionate share of the
The following represents the abridged financial statements of P Ltd and its subsidiary
S Ltd on 31 December 20.19:
P Ltd S Ltd
ASSETS
Inventory 354 000 415 000
Investment in S Ltd: 160 000 shares at cost (150 000 + 80 000) 230 000 –
288

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000

Retained earnings
P Ltd S Ltd
Dividend paid: 31/5/20.19 (16 000) (20 000)
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R150 000 when the
equity of S Ltd consisted of the following:
R180 000
2 P Ltd elected to measure non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
3 S Ltd made a rights issue on 30 June 20.19 of 1 share for every 3 shares held
previously, at R2,00 per share. All the owners of S Ltd took up their rights in
proportion to their existing owners’ equity.
4 S Ltd’s profit after tax for 20.19 accrued evenly.
5 P Ltd accounts for the investment in S Ltd at cost in its separate financial
statements.
289
Chapter 14
Comment
The journal entries of the parent (P Ltd) and the subsidiary (S Ltd) were illustrated in the
preceding example. These journals must be reversed upon consolidation as common
items should be eliminated. This reversal is done in J5 below, after which the
adjustment to the non-controlling interests and the change of ownership, if any, are
recognised in equity (IFRS 10.B96).
Solution 14.3
follows:
P LTD GROUP
ASSETS
Non-current assets
Current assets
Inventory (354 000(P) + 415 000(S)) 769 000
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
Gross profit before tax 300 000
Non-controlling interests (6 000 + 6 000) 12 000
R180 000
R180 000
290
P LTD GROUP
Non-
Total
interests
Balance at 1 January 20.19 300 000 * 240 000 540 000 55 000 595 000
Dividends – (16 000) (16 000) (4 000) (20 000)
Total comprehensive
Profit for the year: – 168 000 168 000 12 000 180 000
Rights issue (comment (a)) – – – 20 000 20 000
Balance at
31 December 20.19 R300 000 # R392 000 R692 000 R83 000 R775 000
* 164 000(P) + 76 000(S) = 240 000

# Test: 284 000(P) + 108 000(S) = 392 000
Comment
a No reserves in respect of the rights issue are allocated to the parent in the statement
of changes in equity as the share capital belonging to the parent have been
eliminated against the consideration paid for the additional shares acquired by the
parent (investment made by P Ltd) (refer to J5). However, the NCI increased by
R20 000 in the process, as these owners contributed R20 000 in cash to the group.
291
Chapter 14
Calculations
P Ltd 80%
Total NCI
At Since
Share capital 150 000 120 000 30 000
180 000 144 000 36 000
– Parent 6 000 6 000 –
Retained earnings (125 000 – 30 000) 95 000 76 000 19 000
• Current year:
Profit: 1/1/20.19–30/6/20.19
(60 000 × 6/12) 30 000 24 000 6 000
Dividend (20 000) (16 000) (4 000)
Owners’ equity before rights issue 291 000 84 000 57 000
Rights issue (30/6/20.19)
Shares issued (250 000 – 150 000) 100 000 80 000 20 000
Changes in ownership (equity) – –
391 000 77 000
Profit: 1/7/20.19–31/12/20.19 30 000 24 000 6 000
R421 000 R108 000 R83 000
292
Comments
a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows:
To 30/6/20.19 (120 000/150 000 shares in issue) 80%
Since 1/7/20.19 (160 000/200 000 shares in issue) 80%
Consequently, there is no loss of control and IFRS 10.23 is thus applicable. The
parent’s interest in the subsidiary did not change (remained 80%) and the parent
paid exactly the same amount (R80 000) as the increase in the parent’s total equity
interest (R80 000). Therefore, there is no gain or loss on a change in ownership to
be recognised directly in equity.
b The profit and the dividend are analysed up to the date of the change in ownership.
c The exact amount paid by P Ltd and the non-controlling shareholders for the shares
taken up by them respectively (i.e. the amounts paid for the increase in the total
equity for the rights issue) is analysed in the “At” and “Non-controlling interest”
columns. This approach then resembles the pro forma consolidation journal entry
(see J5) to account for the rights issue and any change in ownership. It is accepted
that there may be different possible methods to incorporate a rights issue in the
analysis. However, the analysis remains only a tool (calculation) to assist in the
consolidation procedure. An alternative approach for the calculations for a rights
issue in the analysis is given in examples 14.5 and 14.6, which may also be
applicable to the other examples in this chapter.
d The amount for the change in ownership recognised in equity can be calculated as
follows (see IFRS 10.B96):
Fair value of the consideration paid by NCI for new shares issued to them (20 000)
Amount by which the non-controlling interests are adjusted 20 000
NCI after rights issue ((391 000 – 6 000GW) × 20%) 77 000
NCI before rights issue ((291 000 – 6 000GW) × 20%) (57 000)
Amount to be recognised directly in equity –

e The amount for the change in ownership recognised in equity can be calculated as
follows (see IFRS 10.B96) (from the perspective of the parent):
Fair value of the consideration paid by the parent (80 000)
Increase in parent’s interest 80 000
Parent’s interest after rights issue
((391 000 – 6 000GW) × 80%) + 6 000GW) 314 000
Parent’s interest before rights issue
((291 000 – 6 000GW) × 80%) + 6 000GW) (234 000)

186 000
293
Chapter 14

Dr Cr
R R
Main elimination journal entry
of retained earnings
of current year’s profit before the rights issue
Elimination of rights issue transaction
of current year’s profit after the rights issue
2 Increase in parent’s interest

Should the interest of the parent increases as a result of the rights issue, the
attributable reserves at the date of the rights issue must be allocated to the new parcel
of shares, so that it can be eliminated against the consideration transferred for those
shares. The reserves so allocated are yielded by the owners’ equity of the parent prior
to the rights issue as well as by the non-controlling owners.
294
Illustrative example of a parent’s owners’ equity increasing

after a rights issue (i.e. the parent takes up more than its
Example 14.4
proportionate share of the new shares on offer in the rights
issue)
P Ltd held 120 000 of S Ltd’s 150 000 issued shares since 20.17. S Ltd made a rights issue
on 30 June 20.19 of 1 share for every 3 shares held and P Ltd underwrote the rights
issue. The non-controlling owners of S Ltd took up only 4 000 shares, with the result
that P Ltd had to take up 46 000 shares instead of just the 40 000 that it was entitled to
originally (based on its original share ownership).
The increase in P Ltd’s interest from 80% to 83% can be analysed as follows:
Original parcel of shares (120 000/150 000 to 120 000/200 000) 60%
New parcel of shares (46 000/200 000) 23%
P Ltd’s new owners’ equity after the rights issue (166 000/200 000) 83%
As a result, a part of the reserves which pertained to P Ltd’s original owners’ equity as
well as to that of the non-controlling interests should be allocated to the new parcel of
shares.
The above scenario may be treated as:
(a) A dilution of the original 80% owners’ equity to 60% due to the rights issue; and
(b) a re-purchase of 20% owners’ equity diluted (i.e. lost) in respect of the original
parcel of shares; and
(c) a purchase of an additional 3% owners’ equity not held before.
Note that in this scenario, IFRS 10.23 should be read very carefully. The paragraph
states that changes in the owners’ equity of a subsidiary that do not result in the loss
of control are accounted for as equity transactions (i.e. transactions with owners in
their capacity as owners). Broadly interpreted, this means that no goodwill, gain from
a bargain purchase, or gain or loss on a rights issue may be recognised, but any such
purchase difference, where control was not lost in the rights issue, shall be accounted
for as an equity transaction (i.e. directly in equity). As in the examples in the previous
chapter, this equity adjustment, if any, will be done against “changes in ownership”
directly in equity. Some are of the opinion that this adjustment may also be processed
directly to retained earnings, which is also an acceptable alternative.
295
Chapter 14
Rights issue by a subsidiary resulting in an increase of the

interest of the parent (control is not lost in the rights issue)
Example 14.5 and the status does not change as the subsidiary remains
a subsidiary (NCI is measured at its proportionate share of
the acquiree’s identifiable net assets at the acquisition date)
S Ltd at 31 December 20.19.
P Ltd S Ltd
ASSETS
Inventory 342 000 415 000

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000
296

Retained earnings
P Ltd S Ltd
Total comprehensive income for the year
Dividend paid: 31/5/20.19 (16 000) (20 000)
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R150 000 when the
R180 000
2 On 30 June 20.19 S Ltd made a rights issue of 1 share for every 3 shares previously
held, at R2.00 per share.
3 The rights issue was taken up as follows: Number of shares
P Ltd 46 000
297
Chapter 14
Solution 14.5
follows:
P LTD GROUP
ASSETS
Non-current assets
Current assets
Inventory (342 000(P) + 415 000(S)) 757 000
692 450
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
R180 000
R180 000
298
P LTD GROUP
Changes Non-
Share Retained in control- Total
Total
capital earnings owner- ling equity
ship interests
Balance at
1 Jan 20.19 300 000 * 240 000 – 540 000 § 55 000 595 000
Changes in
equity for 20.19
Dividends – (16 000) – (16 000) (4 000) (20 000)
Total
comprehensive
income for the
year:
Rights issue – – (450) (450) 8 450 8 000
Balance at
31 Dec 20.19 R300 000 # R392 900 (R450) R692 450 R70 550 R763 000
* 164 000(P) + 76 000(S) = 240 000
# 284 000(P) + 108 900(S) = 392 900
§ 36 000 + 19 000 = 55 000
Calculations
P Ltd 80%–83%
Total NCI
At Since
Share capital 150 000 120 000 30 000
180 000 144 000 36 000
– Parent 6 000 6 000 –
• Current year:
Profit: 1/1/20.19–30/6/20.19
(60 000 × 6/12) 30 000 24 000 6 000
Dividend paid: 31/5/20.19 (20 000) (16 000) (4 000)
Shares issued 100 000 92 000 8 000
Changes in ownership (equity) (450) 450
391 000 65 450
Profit: 1/7/20.19–31/12/20.19 30 000 24 900 5 100
R421 000 R108 900 R70 550
299
Chapter 14
Comments
Since 1/7/20.19 (166 000/200 000 issued shares) 83%
Consequently, there is no loss of control. However, there is a change in the ownership
interest that should be recognised directly in equity in terms of IFRS 10.23.
b The exact amount paid by P Ltd and the non-controlling shareholders for the shares
taken up by them respectively is analysed in the “At” and “Non-controlling interest”
columns. This approach then resembles the pro forma consolidation journal entry
(see J5) to account for the rights issue and any change in ownership. An alternative
approach for the calculations for a rights issue in the analysis is given below, which
may also be applicable to the other examples in this chapter.
c The amount for the change in ownership recognised in equity can be calculated as
follows (see IFRS 10.B96) (from the perspective of the NCI):
NCI after rights issue ((391 000 – 6 000GW) × 17%) 65 450
NCI before rights issue ((291 000 – 6 000GW) × 20%) (57 000)
Amount to be recognised directly in equity R450

The NCI decreased by 3% in this example (from 20% to 17%). Thus the NCI ceded
3% of its equity to P Ltd’s new parcel of shares. Also remember that, due to the fact
that goodwill was not calculated for the NCI in this example, there is no equity that is
represented by goodwill that should be reattributed to the parent. Thus, the
calculation can also be performed as follows:
Previous equity interest held relinquished (57 000 × 3/20) (8 550)
Increased equity attributable to NCI as a result of the rights issue
(100 000 × 17%) 17 000

d The amount for the change in ownership recognised in equity can also be calculated
as follows (from the perspective of the parent):
Fair value of the consideration paid by the parent for new shares issued (92 000)
Increase in P Ltd owners’ equity through rights issue: 91 550
Owners’ equity held by P Ltd before rights issue
(((291 000 – 6 000GW) × 80%) + 6 000GW) (234 000)
Owners’ equity held by P Ltd after rights issue
(((391 000 – 6 000GW) × 83%) + 6 000GW) 325 550
Amount to be recognised directly in equity (R450)
continued
300
The amount of R450 is the amount paid in excess of the carrying amount of the
interest acquired, being R91 550.
Goodwill is excluded from total owners’ equity in the calculation above since,
although it forms part of total owners’ equity, it does not represent 100% of goodwill,
but only the parent’s portion. This is due to the non-controlling interests being
measured at their proportionate share of the acquiree’s identifiable net assets at the
acquisition date. Refer to self-assessment question 1 where the NCI is measured at
fair value, and goodwill is then reattributed to the parent.
e The difference of R450 results from 6 000 new shares additionally taken up by P Ltd
as the issue price is higher than the net asset value of the shares after the issue
((R385 000/200 000 shares – R2,00) × 6 000 shares).
f When the interest of the parent increases (e.g., 80% – 83%) as a result of a rights
issue, no gain or loss on the rights issue, additional goodwill, or gain from a bargain
purchase can be recognised in terms of IFRS 10.23. Instead, any difference between
the consideration paid for the shares and the increase in owners’ equity is attributed
to changes in ownership directly in equity as is indicated above.
C1.1 Alternative approach for the rights issue in the analysis

P Ltd 80%–83%
Total NCI
At Since
Shares issued (83%:17%) 100 000 83 000 17 000
Transfer from NCI (57 000 × 3/20) 8 550 (8 550)
391 000 91 550
Changes in ownership (equity) 450

186 000
301
Chapter 14

Dr Cr
R R
Allocation of non-controlling interests’ portion of
retained earnings
current year’s profit before rights issue
Changes in ownership (SCE) 450
Non-controlling interests (SFP/SCE) (8 000 + 450) 8 450
Investment in S Ltd (SFP) (46 000 × R2,00) 92 000
current year’s profit after rights issue
3 Reduction in interest of the parent

Should the parent’s interest decrease (without losing control) as a result of a rights
issue, a part of the reserves that was attributed to the previous owners’ equity must be
transferred from the parent’s owners’ equity to the non-controlling interests.
302
Rights issue by a subsidiary resulting in a decrease of the

interest of the parent (control is not lost in the rights issue)
Example 14.6 and the status does not change as the subsidiary remains a
subsidiary (NCI is measured at fair value at the acquisition
date)
P Ltd S Ltd
ASSETS
Inventory 434 000 415 000
Investment in S Ltd: 120 000 shares at cost 150 000 –

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000
303
Chapter 14

Retained earnings
P Ltd S Ltd
Dividend paid: 31/5/20.19 (16 000) (20 000)
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17, when the equity of
S Ltd consisted of the following:
R180 000
The fair value of the non-controlling interests amounted to R36 600 (i.e. 30 000
shares × R1,22 per share) at the acquisition date.
2 On 30 June 20.19, S Ltd made a rights issue of 1 share for every 3 shares held
previously, at R2,00 per share.
3 All shares available in terms of the rights issue were taken up by the non-controlling
interests. P Ltd did not participate in the rights issue at all.
6 P Ltd elected to measure the non-controlling interests at their fair value at the
acquisition date.
304
Solution 14.6
follows:
P LTD GROUP
ASSETS
Non-current assets
Current assets
Inventory (434 000(P) + 415 000(S)) 849 000
Other components of equity (changes in ownership) 1 500
687 500
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
Other income –
R180 000
R180 000
305
Chapter 14
P LTD GROUP
Changes
Non-
Share Retained in Total
Total controlling
capital earnings owner- equity
interests
ship
Balance at
1 Jan 20.19 300 000 * 240 000 – 540 000 !55 600 595 600
Changes in
equity for
20.19
Dividends – (16 000) – (16 000) (4 000) (20 000)
Total
compre-
hensive
income for
the year:
Profit for the
year – 162 000 – 162 000 18 000 180 000
Rights issue – – 1 500 1 500 98 500 100 000
Balance at
31 Dec
20.19 R300 000 # R386 000 R1 500 R687 500 R168 100 R855 600
* 164 000(P) + 76 000(S) = 240 000

! 36 600 + 19 000 = 55 600
# 284 000(P) + 102 000(S) = 386 000
306
Calculations
P Ltd 80%–60%
Total NCI
At Since
Share capital 150 000 120 000 30 000
180 000 144 000 36 000
– Parent and NCI 6 600 6 000 600
Retained earnings
(125 000 – 30 000) 95 000 76 000 19 000
• Current year:
Profit: 1/1/20.19–30/6/20.19
(60 000 × 6/12) 30 000 24 000 6 000
Dividend paid: 31/5/20.19 (20 000) (16 000) (4 000)
291 600 84 000 57 600
Shares issued 100 000 100 000
Changes in ownership (equity) 1 500 (1 500)
391 600 84 000 156 100
Profit: 1/7/20.19–31/12/20.19 30 000 18 000 12 000
R421 600 R102 000 R168 100
307
Chapter 14
Comments
b The exact amount paid by P Ltd (Rnil) and the non-controlling shareholders for the
shares taken up by them respectively is analysed in the “At” and “Non-controlling
interest” columns. This approach then resembles the pro forma consolidation journal
entry (see J5) to account for the rights issue and any change in ownership – see
below. An alternative approach for the calculations for a rights issue in the analysis is
given below, which may also be applicable to the other examples in this chapter.
NCI after rights issue ((391 600 – 6 600GW) × 40%) + (600 initial GW of
NCI) + (6 000 GW of parent × 20/80) relinquished to NCI) 156 100
NCI before rights issue ((291 600 – 6 600GW) × 20%+ (600 initial GW
of NCI)) (57 600)
Amount to be recognised directly in equity (R1 500)

Fair value of the consideration paid by the parent for new shares issued –
Increase in P Ltd owners’ equity through rights issue (including goodwill
reattributed): 1 500
(((291 600 – 6 600GW) × 80%) + 6 000GW) (234 000)
((391 600 – 6 600GW) × 60%) + 6 000GW - (6 000 GW of parent ×
20/80) relinquished to NCI) 235 500
Amount to be recognised directly in equity R1 500

Note in this case that the equity represented by the goodwill amount now forms part
of the calculations. This is because the NCI is measured at its fair value at the
acquisition date and therefore goodwill is measured for all owners. With the change
in the ownership interest as a result of the right-issue, P Ltd effectively relinquished
some of its goodwill to the non-controlling interests. This approach is explained in
more detail in chapter 13.3.
308
C1.1 Alternative approach for the rights issue in the analysis

P Ltd 80%–60%
Total NCI
At Since
Shares issued (60%:40%) (1) 100 000 39 000 21 000 40 000
Transfer to NCI (2) (36 000) (21 000) 57 000
Goodwill reattributed to NCI (3) (1 500) 1 500
391 600 1 500
Changes in ownership (equity) (1 500)
Consideration and NCI – 156 100
(1) 100 000 × 60% (thus new ownership interest) = 60 000; allocated 39 000 and 21 000
Although the parent did not take up any shares, it is nonetheless still entitled to a portion of the
new equity because of its existing ownership interest in the ratio of ownership interest after the
rights were exercised. This “bonus” serves as compensation for the equity lost (ceded) to the non-
controlling interests.
(2) 144 000 × 20/80 = 36 000; 84 000 × 20/80 = 21 000
(3) 6 000 × 20/80 = 1 500
Comments
A gain (R1 500) results from the parent’s new ownership interest, as the parent’s new
attributable equity (R60 000) is higher than the equity and goodwill ceded to the non-
controlling interests (R36 000 + R21 000 + R1 500 = R58 500). This gain is to be treat-
ed in terms of IFRS 10.23 – i.e. taken directly to equity, as the parent (P Ltd) does not
relinquish control over S Ltd. Although P Ltd’s interest decreased from 80% to 60%, its
actual ownership interest increased with R1 500.

186 600
309
Chapter 14

Dr Cr
R R
retained earnings
Non-controlling interests (SFP/SCE) (100 000 – 1 500) 98 500
4 Obtaining or losing control as a result of a rights issue by subsidiary

In the previous examples, the rights issues of the subsidiary did not result in a loss of
control. In terms of IFRS 10.23 such transactions between equity participants are
recognised within equity. In some instances, a rights issue by an investee (e.g. an
associate or joint venture) may lead to the investor gaining control. In such case the
investor would treat the acquisition of the subsidiary as a business combination.
The same principles (refer to IFRS 3) would be followed as was discussed in chapter 9
and chapter 13 (e.g., in cases where the associate or joint venture would become a
310
subsidiary). A rights issue of a subsidiary may also lead to the parent losing control
over the subsidiary. The same principles (refer to IFRS 10.25 and B98) would be
followed as was discussed in chapter 13 (e.g. where the subsidiary would become an
associate).
Buy-back of shares
14.3 Buy-back of shares by a subsidiary
Entities sometimes buy back their issued share capital from the existing owners to
avoid issuing new shares or to avoid amending their authorised share capital. These
shares might be required by the entity for issue in employee-share participation
schemes, for share-based payment transactions in terms of IFRS 2 Share-based
Payment, or for many more similar transactions.
This section is not as complex as the section dealing with rights issues. This is because
the parent receives cash back from the subsidiary for the shares bought back by the
subsidiary and is not “reimbursed” by means of “new equity” in terms of a rights issue
for giving up reserves. A gain or loss on the share buy-back for the group should,
however, still be calculated under certain circumstances. This is done by applying the
method used in the previous chapter. It should still be borne in mind that those share
buy-back transactions leading to a change in ownership but not resulting in the loss
of control should be treated as equity transactions (i.e. transactions with owners in
their capacity as owners) in terms of IFRS 10.23. Furthermore, it should be noted that
where there is a loss of control due to a share buy-back transaction, such loss of
control is regarded as a significant event in terms of IFRS 10.BCZ180–183, and in most
cases leads to the remeasurement, at fair value, of the remaining investment in the
investee in terms of IFRS 10.25(b). Note that this principle also applies to the loss of
significant influence or joint control where the retained interest is a financial asset
(IAS 28.22(b)). The situation is similar to the principles dealt with under the disposal of
an interest in an entity as was illustrated in the previous chapter.
The following summarises the approach:
l Share buy-back with no loss of control:
gain or loss to be treated as equity transaction (i.e. changes in ownership) and no
remeasurement of remaining investment at the date of the share buy-back;
l Share buy-back with no loss of significant influence or joint control:
gain or loss to be recognised as gain or loss on share buy-back in profit or loss
and no remeasurement of remaining investment at the date of the share buy-back;
l Share buy-back with a loss of control, significant influence or joint control:
gain or loss recognised as gain or loss on share buy-back in profit or loss in
terms of IFRS 10.25(b) and IAS 28.22(b). Any remaining investment is remeasured
at fair value at the date of loss of control, significant influence or joint control; and
l Share buy-back in which investor obtains control, significant influence or joint
control:
the previously held investment is measured at its fair value (IFRS 3.42 and
IAS 28.26). The acquisition of control is accounted for as a business combination
(goodwill or gain from a bargain purchase is recognised).
311
Chapter 14
The journal entry processed in the separate financial statements of the parent is
similar to a normal journal entry to recognise the disposal of an equity investment (i.e.
shares in another company) in the accounting records. The parent’s entries for the sale
of shares in another company depend on the accounting policy adopted for the
treatment of its investment in a subsidiary, an associate or joint venture (i.e. at cost or
in accordance with IFRS 9 – see chapter 13.7):
l Investment is measured at cost:
The parent debits the bank account with the cash received and credits the
investment with the historical cost price of the shares bought back. The difference
between these two items constitutes a gain or loss on share buy-back which is
recognised in profit or loss (this is the gain/loss in the parent’s separate financial
statements and will not be the same as the gain/loss at group level).
l Investment is measured in accordance with IFRS 9:
If the fair value method is used to measure the investment in the separate financial
statements of the parent, it is assumed (for this chapter) that the parent will
remeasure its investment to fair value through other comprehensive income. The
investment would then be remeasured to fair value (taking the consideration
received for the shares bought back into account). The parent debits the bank
account with the cash received and credits the investment with this fair value of the
shares bought back. The parent then transfers the cumulative fair value
adjustments on these shares (after tax) from the mark-to-market reserve (if this
policy was chosen) to another equity item (assumed to be the retained earnings).
The journal entry arising in the parent’s separate financial statements will be reversed
upon consolidation where control was not lost or obtained and the true fair value of the
shares bought back by the investee will be taken into account (similar to the journal
entry when the parent disposes of an interest in a subsidiary, where the parent’s initial
gain/loss on disposal or the transfer within equity, is replaced by the correct gain/loss
on disposal at group level, which takes into account the equity and/or reserves
relinquished in the transaction).
The shares bought back by an investee (subsidiary, associate of joint venture) are
referred to as “treasury shares” in terms of IAS 32.33–.34. When an entity reacquires its
own equity shares, those shares shall be deducted from equity (share capital and
retained earnings). No gain or loss on the buy-back of shares shall be recognised in
profit or loss in the entity’s separate financial statements. The amount of treasury
shares held is disclosed separately either in the statement of financial position,
statement of changes in equity or in the notes, in accordance with IAS 1. Disclosure in
accordance with IAS 24 Related Party Disclosures is also required if the entity
reacquires its own shares from related parties (e.g. the parent).
Example 14.7 Simple illustration of a share buy-back
Assume the equity of S Ltd is composed as follows at 31 December 20.18:

R’000
Share capital (100 000 shares issued at R1,50 each at incorporation) 150
2 150
312
On 31 December 20.18, S Ltd buys back 10 000 shares from its parent (P Ltd) at a
cash price of R20.00 per share. P Ltd paid R3,00 per share when it invested in 50 000
shares of S Ltd on 1 January 20.12. The company tax rate is 28% and CGT is calculated
at 80% thereof.
Solution 14.7
(a) P Ltd measures the investment in S Ltd at cost in its separate financial statements
in terms of IAS 27.
The actual journal entry to recognise the share buy-back in the separate financial
statements of the parent will be:
Dr Cr
R R
Investment at cost price (SFP)
(10/50 × (50 000 × R3,00 per share)) 30 000
Gain on share buy-back (P/L) 170 000
Recording proceeds and profit on sale of shares
J2 Income tax expense (P/L) (170 000 × 80% × 28%) 38 080
SARS tax payable/Bank (SFP) 38 080
of shares
(b) P Ltd measures the investment in S Ltd in accordance with IFRS 9 in its separate
financial statements (per choice in terms of IAS 27).
P Ltd remeasures its investment to R1 000 000 (50 000 shares × R20) through
other comprehensive income and recognises the related deferred tax. The actual
journal entry to recognise the share buy-back in the separate financial statements
of the parent will be:
Dr Cr
R R
Investment at fair value (SFP) 200 000
Recording proceeds on sale of shares
J2 Income tax expense (P/L) (170 000 × 80% × 28%) 38 080
SARS tax payable/Bank (SFP) 38 080
of shares
J3 Mark-to-market reserve (SCE)
(10 000 × (R20 – R3) × 77,6%) 131 920
Transfer of cumulative gains within equity
on portion of investment sold
J4 Deferred tax (SFP) (170 000 × 80% × 28%) 38 080
Income tax expense (P/L) 38 080
Movement in deferred tax on investment
derecognised
313
Chapter 14
Comment
All these respective journal entries by the parent (except for the cash received and the
entry to recognise the current tax payable) must be reversed upon consolidation, where
control of a subsidiary is not obtained or lost (i.e. the subsidiary remains a subsidiary
after the share buy-back).
The journal entry in the individual financial statements of the investee (S Ltd) will
depend on the way in which the investee utilises its reserves to buy back the shares
(mostly due to tax reasons which are beyond the scope of this work).
In the above-mentioned example, the actual journal entry to recognise the share buy-
back in the individual financial statements of the investee is:
Dr Cr
R R
Share capital (SCE) (10 000/100 000 × R150 000 share capital) 15 000
Retained earnings (SCE) (balancing) 185 000
Bank (SFP) (10 000 × R20,00 per share) 200 000
Recording of share buy-back transaction
1 No change in parent’s interest

The only new principle in this section is the recognition of the journal entry by the
investee to adjust its own equity in respect of the buy-back information. Note that the
debits per the journal entry (as above) are processed in the total column of the analysis
of ownership interest. This is logical, as the investee is reducing its own equity by the
amount of the share capital bought back, as well as the premium (additional amount
over and above share capital) paid on the buy-back of the shares, which is funded from
other reserves (e.g. retained earnings). Once again, these adjustments have to be
allocated to the parent and the non-controlling interests.
Buy-back of shares by a subsidiary with no change in

relative interests (there is no loss of control) (NCI is
Example 14.8
The following are the abridged financial statements of P Ltd and its subsidiary S Ltd at
31 December 20.19:
P Ltd S Ltd
ASSETS
Inventory 484 000 265 000
Investment in S Ltd at cost (220 000 – 44 000) 176 000 –
314

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000
Other income (gain on buy-back of shares) 76 000 –

Retained earnings
P Ltd S Ltd
Dividend paid: 31 May 20.19 (16 000) (20 000)
Buy-back of shares – (100 000)
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R220 000, when the
R280 000
2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 each. The shares
were bought back proportionally from all owners, i.e. 24 000 shares were bought
back from P Ltd, while the remaining 6 000 shares were bought back from the non-
controlling interests.
315
Chapter 14
3 S Ltd’s profit and tax accrued as follows for 20.19:

1/1/20.19 to 1/7/20.19 to
Total
30/6/20.19 31/12/20.19
Tax (40 000) (22 000) (18 000)
R60 000 R30 000 R30 000
4 P Ltd accounted for the investment in S Ltd at cost in its separate financial
statements.
6 Ignore any tax consequences for S Ltd in respect of the share buy-back.
From the information provided, it is evident that the following actual journal entry was
processed in the separate financial statements of P Ltd:
Dr Cr
R R
Investment in S Ltd (SFP) (1) 44 000
Gain on buy-back of shares (P/L) 76 000
(1) 24 000/120 000 × 220 000 = 44 000 or 176 000 × 24 000/96 000
From the information provided, it is also evident that the following actual journal entry
was processed in the individual financial statements of S Ltd:
Dr Cr
R R
Share capital (SCE) (30 000/150 000 shares × R250 000) 50 000
Comment
These journals must be reversed upon consolidation of the parent (P Ltd) and the
subsidiary (S Ltd), as the share buy-back represents an intragroup transaction
between P Ltd and S Ltd at group level as S Ltd is a subsidiary of P Ltd. This reversal
(i.e. elimination of common items) is done in J6 below, after which the adjustment to
non-controlling interests and the change of ownership, if any, are recognised in equity
(IFRS 10.B96).
316
Solution 14.8
The consolidated financial statements of P Ltd and its subsidiary S Ltd for the year
ended 31 December 20.19 will be prepared as follows:
P LTD GROUP
ASSETS
Current assets
Inventory (484 000(P) + 265 000(S)) 749 000
Share capital (P) 300 000
Retained earnings (360 000(P) – 76 000(J6) profit reversed + 4 000(J1)
gain from a bargain purchase + 108 000(S) analysis) 396 000
696 000
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
R180 000
R180 000
317
Chapter 14
P LTD GROUP
Non-
Total
interests
Balance at
1 January 20.19 300 000 * 244 000 544 000 ! 75 000 619 000
Changes in equity
for 20.19
Dividends – (16 000) (16 000) (4 000) (20 000)
Total comprehensive
Profit for the year – 168 000 168 000 ^ 12 000 180 000
Share buy-back (@) – – – $ (30 000) (30 000)
Balance at
31 December 20.19 R300 000 R396 000 R696 000 R53 000 R749 000
* 164 000(P) + 76 000(S) + 4 000(bargain gain) = 244 000

! 56 000 + 19 000 = 75 000
^ 6 000(before buy-back) + 6 000(after buy-back) = 12 000
$ 6 000 shares × R5 = 30 000 (see analysis)
@ See comment below
Comments
The share capital and retained earnings affected by the share buy-back in respect of the
parent (P Ltd), have all been eliminated on a pro-forma basis at group level as the share
buy-back transaction represents an intragroup transaction between the parent (P Ltd)
and the subsidiary (S Ltd). The parent’s interest in the subsidiary did not change
(remained 80%) and there is no gain or loss on a change in ownership to be recognised
directly in equity.
318
Calculations
P Ltd 80%
Total NCI
At Since
Share capital 250 000 200 000 50 000
280 000 224 000 56 000
Gain from a bargain purchase
– Parent (4 000) (4 000) –
• Current year:
Profit: 1/1/20.19–30/6/20.19 (given) 30 000 24 000 6 000
Dividend: 31/5/20.19 (20 000) (16 000) (4 000)
381 000 84 000 77 000
Share buy-back
Share capital and retained earnings
utilised (100 000 + 50 000) (150 000) (120 000) (30 000)
231 000 47 000
Profit: 1/7/20.19–31/12/20.19 (given) 30 000 24 000 6 000
R261 000 R108 000 R53 000
319
Chapter 14
Comments
Since 1/7/20.19 ((120 000 – 24 000)/(150 000 – 30 000) shares in issue) 80%
No change in ownership interest or loss of control is evident.
b The exact amount received by P Ltd and the non-controlling shareholders for the
shares bought back from them respectively is analysed in the “At” and “Non-
controlling interest” columns. P Ltd received R120 000 (24 000 shares × R5) and
NCI received R30 000 (6 000 shares × R5). This approach then resembles the pro
forma consolidation journal entry (see J6) to account for the buy-back and any
change in ownership. The alternative approach for the calculations for a rights issue
in the analysis may also be applicable to the examples on buy-back of shares in this
chapter.
Fair value of the consideration received by NCI for shares bought back
(6 000 shares × R5) 30 000
Amount by which the non-controlling interests are adjusted (30 000)
NCI after buy-back ((231 000 + 4 000) × 20%) 47 000
NCI before buy-back ((381 000 + 4 000) × 20%) (77 000)

Fair value of the consideration received by parent for shares bought
back (24 000 shares × R5) 120 000
Decrease in P Ltd owners’ equity through buy-back: (120 000)
Owners’ equity held by P Ltd before buy-back ((381 000 + 4 000) × 80%) (308 000)
Owners’ equity held by P Ltd after buy-back ((231 000 + 4 000) × 80%) 188 000
C2 Proof of calculation of gain from a bargain purchase in terms of IFRS 3.32

276 000
Gain from a bargain purchase (parent) (R4 000)
320

Dr Cr
R R
Retained earnings (SCE)
(gain from a bargain purchase) 4 000
of current year’s profit before buy-back
of current year’s profit after buy-back
Investment in S Ltd (reverse over-elimination) 44 000
Other income (gain on buy-back) (P)(P/L) 76 000
Changes in ownership (equity) (SCE) –
Elimination of share buy-back transaction
321
Chapter 14
Comments
a Note that pro forma consolidation journal entries are processed in chronological
order. The historic cost price of the investment in S Ltd (as per P Ltd’s separate
financial statements) is only R176 000 after the recognition of the share buy-back.
The investment in S Ltd at R220 000 (in J1) is therefore “over-eliminated” in order to
determine the gain from the bargain purchase and to keep the amount for the gain
constant as at the acquisition date. J6 therefore subsequently corrects the over-
elimination caused by J1.
Thus the following happens to the investment in S Ltd on consolidation:
176 000 (given) – 220 000(J1) + 44 000(J6) = Rnil.
b J6 is the journal entry that deals with the buy-back of the shares. Note that the debit
processed by P Ltd (R120 000) in its separate financial statements is not reversed,
as the cash value received for the shares does not change due to consolidation. The
cost of the shares bought back (per P Ltd’s separate financial statements) is replaced
by the fair value of the shares bought back (in the group), thereby accounting for the
changes in ownership account in respect of the buy-back at group level.
The credit side of the journal entry re-establishes the share capital and retained
earnings due to the chronological order in which the journal entries take place (as
explained previously).
Remember that S Ltd reduced (debited) the share capital and the retained earnings
by means of an actual journal entry (as discussed above) in its individual financial
statements. This leaves, for example, a share capital of R200 000 (250 000 – 50 000
= R200 000 as given in the statement of financial position of S Ltd) flowing into the
consolidation. “At-acquisition” information (that cannot subsequently change because
of the effect that such a change would have on goodwill/gain from a bargain
purchase at acquisition) dictates that share capital of R250 000 be debited (refer to
J1). Yet only R200 000 flowed into the consolidation from S Ltd. Thus the share
capital has been over-eliminated and J6 must therefore be processed to correct this
over-elimination.
Thus the following happens to the share capital of S Ltd on consolidation:
200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.
2 Increase in parent’s interest

A parent’s percentage interest in an existing subsidiary may increase as a result of the
share buy-back. Where the subsidiary remains a subsidiary (parent is not obtaining control),
the buy-back transaction by both the parent and subsidiary will effectively be reversed upon
consolidation and the effect of the transaction will be recognised within equity in the
consolidated financial statements (IFRS 10.23).
322
Buy-back of shares by a subsidiary with no change in status

as an increase in the parent’s interest occurs (there is no
Example 14.9 loss of control) and the subsidiary remains a subsidiary
(NCI is measured at its proportionate share of the acquiree’s
31 December 20.19:
P Ltd S Ltd
ASSETS
Inventory 484 000 265 000

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000
Other income (gain on the buy-back of shares) 66 667 –
323
Chapter 14

Retained earnings
P Ltd S Ltd
R280 000
2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 per share. 20 000 of
these shares were bought back from P Ltd, while the other 10 000 were bought
back from the non-controlling interests.
3 S Ltd’s profit before tax and tax accrued as follows for 20.19:
1/1/20.19 to 1/7/20.19 to
Total
30/6/20.19 31/12/20.19
Tax (40 000) (22 000) (18 000)
R60 000 R30 000 R30 000
statements.
Dr Cr
R R
Investment in S Ltd (SFP)(1) 33 333
(1) 20 000/120 000 × 200 000 = 33 333
324
Dr Cr
R R
Comment
These journals must be reversed (i.e. elimination of common items) upon consolidation
of the parent (P Ltd) and the subsidiary (S Ltd), as the share buy-back represents an
intragroup transaction between P Ltd and S Ltd at group level.
Solution 14.9
The consolidated financial statements of P Ltd and subsidiary S Ltd for the year ended
31 December 20.19 will be prepared as follows:
P LTD GROUP
ASSETS
Current assets
Inventory (484 000(P) + 265 000(S)) 749 000
Retained earnings (350 667(P) – 66 667(J6) profit reversed + 24 000(J1)
gain from a bargain purchase + 109 000(S) analysis) 417 000
Other components of equity (changes in ownership) (12 167)
704 833
325
Chapter 14
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
Other income (no gain on buy-back is recognised here) –
R180 000
R180 000
P LTD GROUP
Changes Non-
Total
ship interests
Balance at
1 January 20.19 300 000 * 264 000 – 564 000 ! 75 000 639 000
Changes in equity
for 20.19
Dividends – (16 000) – (16 000) (4 000) (20 000)
Total comprehensive
income for the
year:
Share buy-back – – (12 167) (12 167) # (37 833) (50 000)
Balance at
31 Dec 20.19 R300 000 R417 000 (R12 167) R704 833 R44 167 R749 000
* 164 000(P) + 76 000(S) + 24 000(gain from a bargain purchase) = 264 000
! 56 000 + 19 000 = 75 000
# 10 000 shares × R5 = 50 000; 50 000 – 12 167 = 37 833 or 77 000 – 39 167 = 37 833 (see analysis)
326
Calculations
P Ltd 80%–83,33%
Total NCI
At Since
Share capital 250 000 200 000 50 000
280 000 224 000 56 000
Gain from a bargain purchase
– Parent (24 000) (24 000) –
Retained earnings
(125 000 – 30 000) 95 000 76 000 19 000
Current year:
• Profit: 1/1/20.19–30/6/20.19
(given) 30 000 24 000 6 000
Dividend: 31/5/20.19 (20 000) (16 000) (4 000)
361 000 84 000 77 000
Share buy-back
Share capital and retained
earnings utilised (100 000 + 50 000)
(comment (b)) (150 000) (100 000) (50 000)
Changes in ownership (equity) (12 167) 12 167
211 000 39 167
Profit: 1/7/20.19–31/12/20.19 30 000 25 000 5 000
R241 000 R109 000 R44 167
327
Chapter 14
Comments
Since 1/7/20.19 ((120 000 – 20 000)/(150 000 – 30 000) shares in issue) 83,33%
Consequently there is no loss of control. However, there is a change in the ownership
interest that should be recognised directly in equity in terms of IFRS 10.23. The par-
ent’s ownership interest in the subsidiary increased as the subsidiary bought back
fewer shares from the parent company than from the other owners (i.e. the buy-back
does not take place in the same proportion as the existing ownership).
controlling interest” columns. P Ltd received R100 000 (20 000 shares × R5) and NCI
received R50 000 (10 000 shares × R5). This approach then resembles the pro
forma consolidation journal entry (see J6) to account for the buy-back and any
change in ownership. An alternative approach for the calculations for the buy-back of
shares in the analysis is given below, which may also be applicable to the other
examples in this chapter.
(10 000 shares × R5) 50 000
NCI after buy-back ((211 000 + 24 000) × 16,667%) 39 167
NCI before buy-back ((361 000 + 24 000) × 20%) (77 000)

back (20 000 shares × R5) 100 000
Owners’ equity held by P Ltd before buy-back ((361 000 + 24 000) × 80%) (308 000)
Owners’ equity held by P Ltd after buy-back
((211 000 + 24 000) × 83,33%) 195 833
328
C1.1 Alternative approach for the buy-back of shares in the analysis

P Ltd 80%–83,33%
Total NCI
At Since
Owner’s equity before buy-back 361 000 84 000 77 000
Share buy-back
Equity reduced with buy-back
(83,33:16.67%) (150 000) (125 000) (25 000)
Transfer from NCI (77 000 × 3,33/20) 12 833 (12 833)
211 000 (112 167)
Changes in ownership (equity) 12 167
Consideration received and NCI (100 000) 39 167
C2 Proof of calculation of gain from a bargain purchase in terms of IFRS 3.32

256 000
Gain from a bargain purchase (parent) (R24 000)

Dr Cr
R R
Retained earnings (SCE)
(gain from a bargain purchase) 24 000
Main elimination journal entry at the acquisition
date
Allocation on non-controlling interests’ portion
continued
329
Chapter 14
Dr Cr
R R
J6 Non-controlling interests (SFP/SCE) (50 000 – 12 167) 37 833
Investment in S Ltd (reverse over-elimination) 33 333
Gain on share buy-back (P)(P/L) 66 667
Comments
determine the gain from the bargain purchase and to keep the amount for the gain
constant as at the acquisition date. J6 therefore subsequently corrects the over-
elimination caused by J1.
166 667 (given) – 200 000(J1) + 33 333(J6) = Rnil.
of the effect that such a change would have on goodwill/gain from a bargain purchase
at acquisition) dictates that share capital of R250 000 be debited (refer to J1). Yet
only R200 000 flowed into the consolidation from S Ltd. Thus the share capital has
been over-eliminated and J6 must therefore be processed to correct this over-
elimination.
200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.
330
3 Decrease in parent’s interest

A parent’s percentage interest in an existing subsidiary may decrease as a result of the
share buy-back. Where the subsidiary remains a subsidiary (control is not lost), the buy-
back transaction by both the parent and subsidiary will effectively be reversed upon
consolidation and the effect of the transaction will be recognised within equity in the
consolidated financial statements (IFRS 10.23).
Buy-back of shares by a subsidiary where there is no change

in the status as the subsidiary remains a subsidiary (there is
Example 14.10 no loss of control) and a decrease in the parent’s interest
occurs due to the share buy-back (NCI is measured at fair
value at the acquisition date)
31 December 20.19:
P Ltd S Ltd
ASSETS
Inventory 484 000 265 000

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000
Other income (gain on buy-back of shares) 84 000 –
331
Chapter 14

Retained earnings
P Ltd S Ltd
R280 000
The fair value of the NCI was R60 000 at the date of acquisition.
2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 per share. 28 000 of
these shares were bought back from P Ltd, while the remaining 2 000 shares were
bought back from the non-controlling interests.
3 S Ltd’s profit before tax and tax accrued as follows for 20.19:
1/1/20.19 to 1/7/20.19 to
Total
30/6/20.19 31/12/20.19
Tax (40 000) (22 000) (18 000)
R60 000 R30 000 R30 000
statements.
acquisition date.
Dr Cr
R R
Investment in S Ltd (SFP)(1) 56 000
(1) 28 000/120 000 × 240 000 = 56 000, or 28 000/92 000 × 184 000 = 56 000
332
Dr Cr
R R
Comment
These journals must be reversed (i.e. elimination of common items) upon consolidation
of the parent (P Ltd) and the subsidiary (S Ltd), as the share buy-back represents an
intragroup transaction between P Ltd and S Ltd at group level.
Solution 14.10
The consolidated financial statements of P Ltd and subsidiary S Ltd for the year ended
31 December 20.19 will be prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent and NCI) (comment (a)) 20 000
Current assets
Inventory (484 000(P) + 265 000(S)) 749 000
Retained earnings
(368 000(P) – 84 000(J6) profit reversed + 107 000(S) analysis) 391 000
702 500
333
Chapter 14
Comment
Note that goodwill is not realised, as control is not relinquished by the parent (P Ltd) in
this example. Goodwill is however reattributed proportionately to the NCI in this example,
because of the decrease in the ownership interest of the parent (P Ltd) and the NCI
being measured at fair value at the acquisition date (i.e. goodwill was calculated for the
NCI and for the parent (P Ltd)). In the previous examples, this was not the case, and
goodwill was not reattributed from P Ltd to the NCI as the NCI was not measured at fair
value at the acquisition date (meaning that goodwill was not calculated for all owners at
the acquisition date).
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
Other income (no gain on buy-back is recognised here) –
R180 000
R180 000
334
P LTD GROUP
Changes
Non-
Total controlling
interests
ship
Balance at
1 Jan 20.19 300 000 # 240 000 – 540 000 ! 79 000 619 000
Changes in
equity for
20.19
Dividends – (16 000) – (16 000) (4 000) (20 000)
Total
comprehensive
income for the
year:
Profit for the year – 167 000 – 167 000 @ 13 000 180 000
Share buy-back – – 11 500 11 500 * (21 500) (10 000)
Balance at
31 Dec 20.19 R300 000 R391 000 R11 500 R702 500 R66 500 R769 000
# 164 000(P) + 76 000(S) = 240 000

! 60 000 + 19 000 = 79 000
@ 6 000(before buy-back) + 7 000(after buy-back) = 13 000
* 10 000 + 11 500 = 21 500(see analysis)
335
Chapter 14
Calculations
P Ltd 80%–76,67%
Total NCI
At Since
Share capital 250 000 200 000 50 000
280 000 224 000 56 000
– Parent and NCI 20 000 16 000 4 000
Retained earnings
(125 000 – 30 000) 95 000 76 000 19 000
• Current year:
Profit: 1/1/20.19–30/6/20.19 30 000 24 000 6 000
Dividend: 31/5/20.19 (20 000) (16 000) (4 000)
405 000 84 000 81 000
Share buy-back
Share capital and retained
earnings utilised
(100 000 + 50 000) (comment (b)) (150 000) (140 000) (10 000)
Changes in ownership (equity) 11 500 (11 500)
255 000 59 500
Profit: 1/7/20.19–31/12/20.19 30 000 23 000 7 000
R285 000 R107 000 R66 500
336
Comments
Since 1/7/20.19 ((120 000 – 28 000)/(150 000 – 30 000) shares in issue) 76,67%
interest that should be recognised directly in equity in terms of IFRS 10.23. The par-
ent’s ownership interest in the subsidiary decreased as the subsidiary bought back
more shares from the parent company than from the other owners (i.e. the buy-back
does not take place in the same proportion as the existing ownership).
controlling interest” columns. P Ltd received R140 000 (28 000 shares × R5) and NCI
received R10 000 (2 000 shares × R5). This approach then resembles the pro forma
consolidation journal entry (see J6) to account for the buy-back and any change in
ownership.
(2 000 shares × R5) 10 000
NCI after buy-back ((255 000 – 20 000GW) × 23,33%) + (4 000 initial
GW of NCI) + (16 000 GW of parent × 3,33/80) relinquished to NCI) 59 500
NCI before buy-back ((405 000 – 20 000GW) × 20%) + (4 000 initial
GW of NCI) (81 000)

The amount for the change in ownership recognised in equity can also be calculated
back (28 000 shares × R5) 140 000
Owners’ equity held by P Ltd before buy-back
(((405 000 – 20 000GW) × 80%) + 16 000GW) (324 000)
Owners’ equity held by P Ltd after buy-back
(((255 000 – 20 000GW) × 76,67%) + 16 000GW – (16 000 GW of 195 500
parent × 3,33/80) relinquished to NCI)

Note in this case that the equity represented by the goodwill figure now forms part of
the calculations. This is because the NCI is measured at its fair value at the acquisi-
tion date and therefore goodwill is measured for all owners. With the change in the
ownership interest as a result of the buy-back, P Ltd effectively relinquished some of
its goodwill to the non-controlling interests.
337
Chapter 14

300 000

Dr Cr
R R
Main elimination journal entry at the acquisition
date
J6 Non-controlling interests (SFP/SCE) (10 000 + 11 500) 21 500
Investment in S Ltd (SCE) (reverse over-elimination) 56 000
Other income (gain on share buy-back) (P)(P/L) 84 000
338
Comments
determine the goodwill and to keep the amount for the goodwill constant as at the
acquisition date. J6 therefore subsequently corrects the over-elimination caused by
J1.
184 000 (given) – 240 000(J1) + 56 000(J6) = Rnil.
of the effect that such a change would have on goodwill/gain from a bargain purchase
at acquisition) dictates that share capital of R250 000 be debited (refer to J1). Yet
only R200 000 flowed into the consolidation from S Ltd. Thus the share capital has
been over-eliminated and J6 must therefore be processed to correct this over-
elimination.
200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.
4 Obtaining or losing control as a result of a share buy-back

In the previous examples, the share buy-back of the subsidiary did not result in a loss of
control. In terms of IFRS 10.23 such transactions between equity participants are
recognised within equity. In some instances, a rights issue by an investee (e.g. an
associate or joint venture) may lead to the investor gaining control. In such case the
investor would treat the acquisition of the subsidiary as a business combination. The
same principles (refer to IFRS 3) would be followed as was discussed in chapter 9 and
chapter 13 (e.g., in cases where the associate or joint venture would become a
subsidiary). A share buy-back of a subsidiary may also lead to the parent losing
control over the subsidiary. The same principles (refer to IFRS 10.25 and B98) would
be followed as was discussed in chapter 13 (e.g. where the subsidiary would become
an associate).
339
Chapter 14

14.4 Share-based payments of a subsidiary
In terms of a typical share-based payment transaction a subsidiary may grant shares or
options to its employees. When the new shares are issued to the employees, the total
number of issued shares will increase, but the number of shares held by the parent will
stay the same. This will lead to a decline in the parent’s equity interest in the subsidiary,
which should be accounted for by applying the same principles as was illustrated
previously.
Issue of new shares by a subsidiary in terms of a share-

based payment transaction resulting in a decrease of the
interest of the parent (control is not lost) and the status does
Example 14.11
not change as the subsidiary remains a subsidiary (NCI is
P Ltd S Ltd
ASSETS
Inventory 434 000 415 000

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000
Other comprehensive income for the year – –
340

Retained earnings
P Ltd S Ltd
Dividend paid: 31/5/20.19 (16 000) (20 000)
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17, when the equity of
S Ltd consisted of the following:
R180 000
2 On 1 January 20.18 S Ltd granted options to its employees conditional upon one
year’s service. The vesting date was 31 December 20.18. The exercise price was
set at R2.00 per share. On 31 December 20.18, 50 000 options vested and S Ltd
recorded R20 000 in equity in terms of IFRS 2 Share-based Payment.
3 On 30 June 20.19 the employees of S Ltd exercised all their options. S Ltd passed
the following journal entry:
Dr Cr
R R
Bank (SFP) (50 000 options × R2,00 each) 100 000
Share-based payment reserve (transfer within equity) 20 000
Issue of shares after employees exercised their options
statements.
341
Chapter 14
Solution 14.11
follows:
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent) 6 000
Current assets
Inventory (434 000(P) + 415 000(S)) 849 000
689 000
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
Other income –
R180 000
R180 000
342
P LTD GROUP
Changes
Non-
Total controlling
interests
ship
Balance at
1 Jan 20.19 300 000 * 224 000 – 524 000 ! 71 000 595 000
Changes in
equity for
20.19
Dividends – (16 000) – (16 000) (4 000) (20 000)
Total compre-
hensive
income for the
year:
Options exer-
cised and new
issue – – 19 000 19 000 $ 81 000 100 000
Balance at
31 Dec 20.19 R300 000 # R370 000 R19 000 R689 000 R166 000 R855 000
* 164 000(P) + 60 000(S) = 224 000
! 36 000 + 15 000 + 20 000 = 71 000
# 284 000(P) + 86 000(S) = 370 000
$ See J6
343
Chapter 14
Calculations
P Ltd 80%–60%
Total NCI
At Since
Share capital 150 000 120 000 30 000
180 000 144 000 36 000
– Parent 6 000 6 000 –
Retained earnings
(105 000 – 30 000) 75 000 60 000 15 000
Share-based payment
(comment (b)) 20 000 – 20 000
• Current year:
Profit: 1/1/20.19–30/6/20.19
(60 000 × 6/12) 30 000 24 000 6 000
Dividend paid: 31/5/20.19 (20 000) (16 000) (4 000)
291 000 68 000 73 000
Options exercised (30/6/20.19)
Shares issued 120 000 120 000
Equity transferred (20 000) (20 000)
(comment (d) and (e)) 19 000 (19 000)
391 000 68 000 154 000
Profit: 1/7/20.19–31/12/20.19 30 000 18 000 12 000
R421 000 R86 000 R166 000
344
Comments
Consequently there is no loss of control. However, there is a change in the ownership
b S Ltd granted options to its employees in terms of the share-based payment
transaction. These options (equity) are not held by the parent (P Ltd) and are
therefore analysed in the column for the “non-controlling interests”. These options
represent other equity instruments held only by the employees (not the parent).
Similar to the treatment of preferences shares (refer to chapter 6 of this work), a
separate analysis could have been prepared for these equity instruments.
c The exact amount paid by P Ltd (Rnil) and the non-controlling shareholders for the
shares taken up by them respectively is analysed in the “At” and “Non-controlling
interest” columns. This approach then resembles the pro forma consolidation journal
entry (see J6) to account for the issue of shares and any change in ownership – see
below.
d The amount for the change in ownership recognised in equity can be calculated as
Fair value of the consideration paid by NCI for new shares issued to them
(R100 000 cash) (100 000)
NCI after transaction ((391 000 – 6 000GW) × 40%) 154 000
NCI before transaction ((291 000 – 6 000GW – 20 000) × 20% +
(20 000 share-based payment)) (73 000)

e The amount for the change in ownership recognised in equity can also be calculated
Fair value of the consideration paid by the parent for new shares issued –
Increase in P Ltd owners’ equity through new issue: 19 000
Owners’ equity held by P Ltd before issue
(((291 000 – 6 000GW – 20 000) × 80%) + 6 000GW) (218 000)
Owners’ equity held by P Ltd after issue
(((391 000 – 6 000GW) × 60%) + 6 000GW) 237 000
345
Chapter 14
C1.1 Alternative approach for analysis

P Ltd 80%–60%
Total NCI
At Since
Owner’s equity before share issue 291 000 68 000 73 000
Options exercised (30/6/20.19)
Equity transferred (20 000) (20 000)
Changes in ownership:
– Equity relinquished (1) (36 000) (17 000) 53 000
– Compensation by sharing
in new equity (2) 120 000 55 000 17 000 48 000
391 000 19 000
(see comment below) (19 000)
Consideration and NCI – R154 000
(1) 144 000 × 20/80 = 36 000; 68 000 × 20/80 = 17 000

(2) 120 000 × 60% (thus new ownership interest) = 72 000; allocated 55 000 and 17 000
Although the parent did not take up any shares, it is nonetheless still entitled to a portion of the
new equity because of its existing ownership interest in the ratio of ownership interest after the
issue of the new shares (i.e. 60:40). This “bonus” serves as compensation for the equity lost
(ceded) to the non-controlling interests.
Comment
A gain (R19 000) results from the parent’s new ownership interest, as the parent’s new
attributable equity (R72 000) is higher than the equity ceded to the non-controlling
interests (R36 000 + R17 000 = R53 000). This gain is to be treated in terms of
IFRS 10.23 – i.e. taken directly to equity, as the parent (P Ltd) does not relinquish
control over S Ltd. Although P Ltd’s interest decreased from 80% to 60%, its actual
ownership interest increased with R19 000.

186 000
346

Dr Cr
R R
Goodwill (SFP) (parent) 6 000
retained earnings
J3 Share-based payment reserve – Beginning of year
(SCE) 20 000
Allocation of non-controlling interests’ portion of the
share-based payment recognised in equity
current year’s profit before options exercised
Share-based payment reserve
(transfer within equity) (SCE) 20 000
(120 000 – 20 000 – 19 000) 81 000
Elimination of option exercised and new shares
issued, resulting in change in ownership interest
current year’s profit after new issue
14.5 Loss of control through expiry of an agreement and obtaining

control through an agreement
There may be various circumstances in which a parent may control a subsidiary in
terms of IFRS 10. Control can, for example, exist when the parent owns half or less of
the voting power of an entity but enjoys power over more than half of the voting rights
by virtue of an agreement with other investors (IFRS 10.11). IFRS 3.43–.44 also
stipulates that a business combination (gaining control) can be effected without the
transfer of any consideration and/or by virtue of an agreement.
347
Chapter 14
A parent may lose control of a subsidiary with or without a change in absolute or

relative ownership levels. Loss of control can result from the sale of an ownership
interest to other parties (see chapter 13) or by other means, such as when a subsidiary,
for example, issues new shares to other parties (see previous sections of this chapter).
Loss of control can also occur in the absence of a transaction. It may, for example,
occur on the expiry of an agreement that previously allowed an entity to control a
subsidiary (also see IFRS 10.BCZ180).
Loss of control over a subsidiary on expiry of agreement

Example 14.12
(NCI is measured at fair value at the acquisition date)
P Ltd had control over S Ltd through an agreement with other shareholders. The
following represents the abridged financial statements of P Ltd and its subsidiary S Ltd
on 31 December 20.19:
P Ltd S Ltd
ASSETS
Inventory 725 000 300 000

P Ltd S Ltd
Revenue 600 000 400 000
Cost of sales (250 000) (300 000)
Other comprehensive income for the year – –
348

Retained earnings
P Ltd S Ltd
1 P Ltd acquired 30 000 shares in S Ltd on 1 January 20.17, when the equity of S Ltd
consisted of the following:
R180 000
statements.
acquisition date. The fair value of the non-controlling interests at the acquisition date
was R130 000.
4 On 1 January 20.17, P Ltd signed an agreement with one of the other shareholders
(with 25% interest) whereby P Ltd became entitled to control its vote at a
shareholders’ meeting. P Ltd was not an agent of the other shareholder and did not
act on his behalf. P Ltd thus gained control over S Ltd as P Ltd has 55% of the
voting rights.
5 This agreement expired on 31 December 20.19. From this date P Ltd no longer
enjoyed control over S Ltd. The fair value of the investment by P Ltd in S Ltd was
R95 000 at the date when control was lost. After 31 December 20.19 P Ltd accounts
for its investment in S Ltd as an associate.
349
Chapter 14
Solution 14.12
follows:
P LTD GROUP
ASSETS
Non-current assets
Goodwill –
Investment in associate (55 000(cost) + 40 000(J1)) 95 000
95 000
Current assets
Inventory (725 000(P)) 725 000
Non-controlling interests –
P LTD GROUP
Revenue (600 000(P) + 400 000(S)) 1 000 000
Cost of sales (250 000(P) + 300 000(S)) (550 000)
Other income (gain on loss of control) 4 000
Share of profit of associate –
R234 000
R234 000
350
P LTD GROUP
Non-
Total
interests
Balance at 1 January 20.19 300 000 * 321 000 621 000 179 000 800 000
Total comprehensive
Control over subsidiary lost – – – (214 000) (214 000)
Balance at
31 December 20.19 R300 000 # R520 000 R820 000 – R820 000
* 300 000(P) + 21 000(S) = 321 000

# Test: 480 000(P) + 40 000(S) = 520 000
Calculations
P Ltd 30%
Total NCI
At Since
Share capital 100 000 30 000 70 000
180 000 54 000 126 000
– Parent and NCI 5 000 1 000 4 000
Retained earnings
(150 000 – 80 000) 70 000 21 000 49 000
• Current year: Profit 50 000 15 000 35 000
305 000 36 000 214 000
Derecognition of assets (including
goodwill), liabilities and NCI
(IFRS 10.B98(a)) (305 000) (55 000) (36 000) (214 000)
– – – –
351
Chapter 14
C1 Analysis of the owners’ equity of A Ltd – as associate

P Ltd 30%
Total NCI
At Since
i At acquisition
value 316 667 95 000 n/a

185 000

Dr Cr
R R
J1 Investment in S Ltd (SFP) (95 000 fair value – cost of
R55 000 in separate financial statements of P Ltd) 40 000
Gain on disposal of interest (P)(P/L) –
Cost of sales (P/L) (comment (a)) 300 000
Non-controlling interests (P/L) (full year) (comment (a)) 35 000
Income tax expense (P/L) (comment (a)) 50 000
Revenue (P/L) (comment (a)) 400 000
Gain on disposal of interest (group context) (P/L) –
(Remeasurement gain) (IFRS 10.25)) 4 000
Consolidation of subsidiary for full year and recogni-
tion of loss of control
(opening balance in equity) (130 000 + 49 000) 179 000
(Current year’s interest in profit) 35 000
352
Comments
a Note that S Ltd was a subsidiary of P Ltd for the full year. Since S Ltd was not a
subsidiary of P Ltd at the reporting date, S Ltd’s separate financial statements will
not be combined with those of the parent (P Ltd) as a starting point for consolidation.
This means that the results for S Ltd would have to be journalised into the
consolidation, as is seen in the pro forma consolidation journal entry above.
b Even though P Ltd did not dispose of any shares in S Ltd, it lost control over S Ltd
through expiry of the agreement by which P Ltd controlled S Ltd. The gain or loss on
the disposal of the interest would be calculated as follows, using IFRS 10.B98:
Derecognise assets (including goodwill) and liabilities on date control
is lost (300 000 other net assets + 5 000 goodwill) (IFRS 10.B98(a)) (305 000)
Derecognise non-controlling interests (IFRS 10.B98(a)) 214 000
Net asset value attributable to parent derecognised (91 000)
Fair value of consideration received recognised (i.e. cash received)
(IFRS 10.B98(b)) –
Recognise fair value of investment in former subsidiary retained
(IFRS 10.B98(b)) 95 000
Net gain on disposal of interest (group context) (IFRS 10.B98(d))
attributable to the owners of the parent R4 000
The amount of R4 000 only comprises the fair value remeasurement of the retained
interest, because P Ltd did not dispose of any shares in S Ltd
c Remeasurement of investment retained in terms of IFRS 10.25:
Fair value of retained 30% investment in former subsidiary (given)
(IFRS 10.25(b)) 95 000
Carrying amount of retained 30% investment in former subsidiary
(55 000 + 36 000) (analysis)) (91 000)
Remeasurement (gain) to be recognised in profit or loss (refer to J1) R4 000
d To obtain continuity between the amounts of the current and previous periods’
consolidated statements of profit or loss and other comprehensive income, the gain
of R0 (per the separate financial statements of the parent) is included in the current
period’s consolidated statement of profit or loss and other comprehensive income
and the consolidated statement of changes in equity, as follows:
Included in opening consolidated retained earnings at the beginning of the
period 21 000
Included in profit for the current period (*) as various line items 15 000
36 000
Group’s net gain in the consolidated statement of profit or loss and other
comprehensive income (comment (b) above) 4 000
Adjustment of carrying amount of the investment to fair value (40 000)
Gain on disposal of interest per separate records of P Ltd Rnil
This approach is also evident from J1 above where the investment in S Ltd is
increased with R40 000 (fair value of R95 000 less cost price of R55 000 still
contained in the separate financial statements of P Ltd), the amount profit according
to P Ltd is reversed (Rnil in this example) and replaced by the parent’s portion of the
retained earnings at the beginning of the period, the various line items in profit or
loss and the group’s profit on the loss of control over the subsidiary.
e The R15 000(*) is taken up in the consolidated statement of profit or loss and other
comprehensive income by adding R50 000 to the profit of the group, and by adding
(thereafter) R35 000 to the non-controlling interests.
353
Chapter 14
Obtaining control through an agreement where an associate

becomes a subsidiary (NCI is measured at its proportionate
Example 14.13
acquisition date)
On 31 December 20.12 the following summarised financial information relating to P Ltd

and other subsidiaries (consolidated) and S Ltd is supplied:
SUMMARISED FINANCIAL INFORMATION AS AT 31 DECEMBER 20.12
P Ltd
and sub-
sidiaries S Ltd
(consoli-
dated)
DEBITS
Inventory 144 500 31 000
Cost of sales (*) 8 000 3 000
Income tax expense (*) 2 000 1 000
R220 000 R44 000
CREDITS
Retained earnings: 1/1/20.12 50 000 5 000
Sundry liabilities (including deferred tax) – 9 000
Revenue (*) 20 000 10 000
R220 000 R44 000
(*) Accrued/incurred evenly
1 P Ltd acquired 8 000 shares in S Ltd at the incorporation of S Ltd on
1 January 20.11. On 30 April 20.12, P Ltd signed an agreement with one of the other
shareholders whereby P Ltd can exercise another 30% of the voting rights at a
meeting. P Ltd is not an agent of the other shareholder and does not act on his
behalf. P Ltd thereby obtained control of S Ltd in terms of IFRS 10.
2 At the acquisition date (i.e. the date on which P Ltd obtained control of S Ltd), the
assets and liabilities of S Ltd were regarded as a fair reflection in terms of the
requirements of IFRS 3, except for land for which the fair value was R548 more than
its carrying amount. The acquisition-date fair value of P Ltd’s previously held equity
interest was R11 100.
4 P Ltd accounts for all investments in associates in accordance with the equity
method in its consolidated financial statements, as none of the exceptions in
IAS 28.13 applies.
354
5 P Ltd measures the investment in S Ltd at cost in its separate financial statements.
Solution 14.13
follows:
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (57 500(P) + 9 000(S) + 548 (J4)) 67 048
Goodwill (parent) 130
67 178
Current assets
Inventory (144 500(P) + 31 000(S)) 175 500
214 700
Non-controlling interests (S) 18 855
Liabilities (9 000(S) + 123 (J4)) 9 123
355
Chapter 14
P LTD GROUP
Revenue (20 000(P) + 10 000(S) – 3 333(J5)) 26 667
Cost of sales (8 000(P) + 3 000(S) – 1 000(J5)) (10 000)
Gross profit 16 667
Other income (remeasurement gain) (J3) 300
Share of profit of associate (J2) 800
Income tax expense (2 000(P) + 1 000(S) – 333(J5)) (2 667)
R15 100
R15 100
P LTD GROUP
Non-
Total controlling
interests
Balance at
1 January 20.12 150 000 * 52 000 202 000 – 202 000
Changes in equity
for 20.12
Acquisition
of subsidiary – – – 16 455 16 455
Total comprehensive
Balance at
31 December 20.12 R150 000 R64 700 R214 700 R18 855 R233 555
* 50 000(P) + 2 000(S) = 52 000
356
Calculations
C1 Analysis of the owners’ equity of S Ltd – as associate
P Ltd 40%
Total NCI
At Since
i Date of first purchase
Share capital 20 000 8 000 n/a
Retained earnings – –
20 000 8 000 n/a
Consideration 8 000
ii Since date of first purchase
Retained earnings (5 000 – 0) 5 000 2 000 n/a
• Current year:
Profit: 1/1/20.12–30/4/20.12
(6 000 × 4/12 = 2 000(accrued evenly)) 2 000 800 n/a
27 000 2 800 n/a
Associate becomes a subsidiary
Derecognise associate (27 000) (8 000) (2 800) n/a
– – – –

P Ltd 40%
Total NCI
At Since
i At acquisition (30 April 20.12)
Share capital 20 000 8 000 12 000
Retained earnings at beginning of year 5 000 2 000 3 000
Profit for current year before acquisition 2 000 800 1 200
Revaluation surplus (548 × 77,6%) 425 170 255
Total equity acquired 27 425 10 970 16 455
– Parent 130 130 –
Profit: 1/5/20.12–31/12/20.12
(6 000 × 8/12 = 4 000(accrued evenly)) 4 000 1 600 2 400
R31 555 R1 600 R18 855
357
Chapter 14
Comments
a The retained earnings at acquisition of S Ltd as a subsidiary comprises of the
balance at the beginning of the year and the net profit for the first four months up to
the date of the business combination.
b This is a business combination (obtained control through an agreement) in which no
consideration was transferred (IFRS 3.33 and B46). The consideration for the
business combination is therefore replaced by the fair value of the equity interest
previously held. In terms of IFRS 3.42, P Ltd should remeasure its equity interest
previously held (i.e. investment in associate) to the fair value of R11 100 at the date
of acquisition. Note that the carrying amount of the investment in S Ltd (previously
held equity interest) at the acquisition date (in the consolidated financial statements)
is R10 800 (i.e. R8 000 (cost) + R2 000 (share in retained earnings) + R800 (current-
period share of profit of associate)). The investment is remeasured to R11 100 and a
remeasurement gain of R300 (11 100 – 10 800) is recognised in the consolidated
financial statements – refer to journal 3 below.

Consideration transferred at acquisition date: IFRS 3.32(a)(i)
now replaced by the acquisition-date fair value of acquirer’s previously
held equity interest in the acquiree: 11 100
27 555

Dr Cr
R R
J1 Investment in S Ltd (associate) (SFP) (comment (a)) 2 000
Accounting for investor’s interest in reserves of
associate at beginning of current year
J2 Investment in S Ltd (associate) (SFP) (comment (a)) 800
Share of profits of associate (P/L) 800
profit (1/1/20.12–30/4/20.12 i.e. before the business
combination) of associate
J3 Investment in S Ltd (associate) (SFP) (comment (b)) 300
Other income (remeasurement gain) (P/L) 300
Accounting for remeasurement gain on equity
interest previously held
continued
358
Dr Cr
R R
J4 Land (SFP) 548
Equity at acquisition (548 × 77,6%) 425
Deferred tax (548 × 80% × 28%) 123
Revaluation of land to the acquisition date fair value
Retained earnings: opening balance (SCE)
(comment (c)) 5 000
Equity at acquisition 425
Goodwill (SFP) (parent) 130
Income tax expense (P/L) (comment (c))
(1 000 × 4/12) 333
(8 000 + 2 000 + 800 + 300) 11 100
profit (1/5/20.12–31/12/20.12 i.e. after the business
combination)
Comments
a Journal 1 and 2 are typical journal entries for the accounting of associates in terms of
the equity method (see chapter 11 for detail).
b Journal 3 represent the adjustment of the equity interest previously held to fair value,
with the recognition of the remeasurement gain in the consolidated financial
statements in terms of IFRS 3.42.
c To prepare the consolidated financial statements, the financial statements of S Ltd
are combined (consolidated) to the financial statement of P Ltd (i.e. adding every line
item in the financial statement of S Ltd to those of P Ltd). This implies that the whole
amount (i.e. for the full year) of all items of profit or loss is added to that of P Ltd.
S Ltd was not a subsidiary of P Ltd for the first four months and the profit earned
during those four months should not form part of the profit or loss for the group and
should be eliminated from the group’s profit or loss. The profits for the first four
months are actually part of the reserves at the acquisition date and should be
eliminated as such in accounting for the business combination.
359
Chapter 14
14.6 Accounting for a change in investment entity status

An investment entity (as defined) (see chapter 10.2) may have control over another
entity, but is excluded from the requirement to prepare consolidated financial
statements. Instead, the investment in a subsidiary will be measured at fair value
through profit or loss. A change in the status of an investment entity should be
accounted for as follows:
1 An entity ceases to be an investment entity

When an entity ceases to be an investment entity, it shall follow the same principles as
were discussed previously in this and the preceding chapter:
l apply IFRS 3 to any subsidiary that was previously measured at fair value through
profit or loss (i.e. account for it as a business combination);
l the date of the change of status shall be the deemed acquisition date;
l the previously held interest shall be deemed disposed of;
l use the fair value of the subsidiary at the deemed acquisition date as the transferred
deemed consideration when measuring any goodwill or gain from a bargain
purchase that arises from the deemed acquisition; and
l consolidate the subsidiary from the date of the change of status.
2 An entity becomes be an investment entity

When an entity becomes an investment entity, it shall again follow the same principles
as were discussed previously:
l it shall cease to consolidate its subsidiaries at the date of the change in status; and
l account for the loss of control of those subsidiaries at that date.
Changes in associates and joint ventures

14.7 Accounting for other changes in the net assets of an associate
The current version of IAS 28 Investments in Associates and Joint Ventures does
not specifically address other changes in the net assets of an investee (e.g. issuing
of new shares). The standard only stipulates the treatment of items in profit or loss, and
other comprehensive income of the associate or joint venture under the equity method.
The IASB embarked on a project to address the accounting treatment of other changes
in the net assets of an associate or joint venture under the equity method. In
November 2012, the IASB published an Exposure Draft Equity Method: Share of
Other Net Asset Changes to amendment IAS 28. The proposed accounting treatment
was that an investor should recognise, in the investor’s equity, its share of the
changes in the net assets of the investee that are not recognised in profit or loss or
other comprehensive income of the investee, and that are not distributions received (i.e.
the other net asset changes). Furthermore, the investor shall reclassify to profit or loss
the cumulative amount of equity that the investor had previously recognised when the
investor discontinues the use of the equity method. However, a considerable number of
respondents to the ED disagreed with the IASB’s proposal.
The Interpretations Committee (IFRIC) observed that, under the equity method, the
investor accounts for the share of the other net asset changes in the carrying amount of
its investment if such changes arise. A change in the carrying amount of the investment
360
caused by the other net asset changes is an increase or decrease in the investor’s
assets and is not related to contributions from, or distributions to, equity participants.
Consequently, the IFRIC noted that, from an investor’s perspective, other net asset
changes of an investee meet the definition of income and expenses as set out in the
Conceptual Framework. In addition, the IFRIC noted that the other net asset changes
represent performance of the investor’s investments. Furthermore, the IFRIC observed
that the other net asset changes of the investee are economically similar to direct
acquisitions or disposals of investments and thus they should be accounted for
similarly.
During the process, the IFRIC upheld its original proposal to the IASB as in June 2012
and proposed that:
l where an investor‘s ownership interest in the investment is reduced, whether
directly or indirectly, the impact of the change should be accounted for as a partial
disposal and recognised in profit or loss of the investor; and
l where an investor’s ownership interest in the investment increases, whether directly
or indirectly, the impact of the change should be accounted for as an incremental
purchase of the investment and be recognised at cost.
However, the members of the IASB could not reach an agreement on the correct
accounting treatment for other changes in the net assets of an associate or joint
venture under the equity method and abandoned the project to amend IAS 28 (refer to
the IASB Update of May 2014). To date, the specific treatment of such changes is not
clear. The brief discussion below generally follows the approach that share issues or a
buy-back of shares by an associate or joint venture are treated similarly to a partial sale
or an incremental purchase of an interest in the investee as proposed by the IFRIC (see
above).
1 Rights issue by an associate
When an associate makes a rights issue, as in the case of a subsidiary, the relative
interest of the owners in the associate will only change if all the owners do not take up
their proportionate rights. Nevertheless, if the percentage interest of the investor
changes as a result of the rights issue, the carrying amount of the investment
accounted for under the equity method must be adjusted accordingly. Although IFRS 3
and IAS 28 do not provide specific guidance relating to the piecemeal acquisition of
associates, it seems that the purchase price of the additional interest acquired is added
to the existing carrying amount for the associate under the equity method. The amount
that has been added to the existing carrying amount should still be split between
goodwill/gain from a bargain purchase and the additional interest in the net assets of
the associate at the date of the increase in the associate.
When the percentage interest in the associate increases as a result of the rights issue,
the carrying amount of the interest in the associate at the date of the rights issue is
merely increased by the amount of the additional payment made to acquire such
increased interest. Any amount in respect of goodwill is already included in the carrying
amount of the investment in the associate. Any gain from a bargain purchase is
recognised in profit or loss of the investor.
In a rights issue where the investor does not take up any new shares (which effectively
may lead to a reduction in the investor’s share in the net assets of the associate) it
seems appropriate to recognise a gain or loss in profit or loss. This approach is similar
to a partial sale of an interest in an associate.
361
Chapter 14
When the percentage interest in the associate decreases as a result of the rights issue,
a potential loss arises as a consequence of the fact that P Ltd’s attributable reserves in
A Ltd decrease. P Ltd is compensated for this loss by the other owners, who effectively
contributed most, if not all, of the equity (shares issued) in the rights issue, and P Ltd
obtains its share of the new equity having given less or no consideration in return. The
difference between the attributable equity ceded and the attributable equity obtained is
a gain or loss on the rights issue in cases where the investor made no additional
investment. The carrying amount of the investment in the associate must be increased
or decreased as a result of the change in the investor’s interest in the associate.
2 Buy-back of shares by an associate

The accounting treatment is arguably similar to the buy-back of shares by a subsidiary
in chapter 14.3. It is also similar to the sale of an interest in an associate as discussed
in chapter 11. The investor would recognise a gain or loss on the shares bought back
by the associate and the carrying amount of the investment in the associate would be
reduced accordingly.
The following summarises the proposed approach:
l Share buy-back with no loss of significant influence or joint control:
gain or loss to be recognised as gain or loss on share buy-back in profit or loss
and no remeasurement of remaining investment at the date of the share buy-back;
and
l Share buy-back with a loss of significant influence or joint control where the retained
interest is a financial asset:
gain or loss recognised as gain or loss on share buy-back in profit or loss in
terms of IAS 28.22(b). Any remaining investment is remeasured at fair value at the
date of loss of significant influence.
IFRS 5 and investments held for sale

The preceding chapters ignored the implication of IFRS 5 on the sale of an interest in a
subsidiary or associate/joint venture. This section does not aim to provide a
comprehensive overview of the principles contained within IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations; but only those sections from IFRS 5 that
have a direct impact on the preparation of consolidated financial statements will be
addressed. It is recommended that IFRS 5 be consulted directly in conjunction with this
section of the work.
14.8 Important definitions

Disposal group
A disposal group is a group of assets (both non-current and current) to be disposed of
by sale or otherwise, together as a group in a single transaction. The liabilities
associated with those assets will be included in the transaction. The disposal group will
include goodwill acquired in a business combination if the group is a cash-generating
unit to which goodwill has been allocated. A disposal group can also be an operation
within a cash-generating unit with or without goodwill acquired.
362
Discontinued operation
A discontinued operation is a component of an entity that either has been disposed
of, or is classified as held for sale and:
l represents a separate major line of business or geographical area of operations;
and
l is part of a single co-ordinated plan to dispose of a separate major line of business
or geographical area of operations; or
l is a subsidiary acquired exclusively with a view to resale.
14.9 Applying IFRS 5 in the consolidated financial statements

A subsidiary held for sale refers to a situation where the parent is planning to dispose of
its interest in the subsidiary (i.e. selling the investment) but not by disposing of the
individual assets and liabilities of that subsidiary (for the latter, refer to chapter 14).
Subsidiaries held for sale shall still be included in the consolidated financial statements
of the parent and are not exempt from consolidation. A parent that is committed to a
sale plan involving loss of control of a subsidiary shall classify that subsidiary as
held for sale when the criteria set out above are met, even if the parent will retain a
non-controlling interest in its former subsidiary after the sale.
The effect of IFRS 5 is that the subsidiary held for sale is still consolidated in the
consolidated financial statements, but the assets and liabilities of the subsidiary are
classified as a disposal group that is held for sale and are presented separately in
the consolidated financial statements.
1 Subsidiaries classified as held for sale subsequent to the acquisition date
The classification of a subsidiary as held for sale subsequent to the acquisition date has
the following implications on the consolidation process:
l The assets of the subsidiary will not be classified as held for sale in the individual
financial statements of the subsidiary, as it is not the subsidiary that is planning to
sell its assets; it is the parent that plans to sell its interest in the subsidiary
whereby control over the subsidiary will be lost. The subsidiary (in its individual
financial statements) will keep on accounting for its assets and liabilities under the
relevant accounting standards, ignoring IFRS 5 (i.e. depreciate the items of
property, plant and equipment and measure deferred tax with reference to the tax
consequences flowing from using the assets).
l The parent will classify its investment in subsidiary (in the separate financial
statements of the parent) as held for sale. If the parent kept the investment at cost,
it shall now be measured in accordance with IFRS 5 at the lower of the carrying
amount of the investment and the fair value less costs to sell. If the parent
accounted for the investment in accordance with IFRS 9, the measurement will not
change as such investments are scoped out from the measurement provisions of
IFRS 5 (see IFRS 5.5(c)).
l Any adjustments to the carrying amount of the non-current asset held for sale in
the parent’s separate financial statements (impairment or fair value adjustments)
will need to be reversed upon consolidation so that the investment is at the amount
of initial recognition before the consolidation process can begin.
363
Chapter 14
l The deferred tax balance relating to the investment in the subsidiary held for sale
should reflect the tax consequences from selling the investment in the subsidiary.
The tax consequence for the parent would normally be the capital gain or loss on
disposing of the shares (investment) in the subsidiary at its carrying amount.
Deferred tax should therefore be measured at the effective capital gains tax rate
(currently 80% × 28%). It should be borne in mind that the individual assets of the
subsidiary will not be sold and there is no need to change the measurement of the
deferred tax on the individual assets and liabilities in the individual financial
statements of the subsidiary itself.
l The subsidiary would continue to recognise depreciation or amortisation on
specific assets in its individual financial statements (as explained above). For
consolidation purposes, any depreciation or amortisation recognised by the
subsidiary after it was classified as held for sale (in the consolidated financial
statements) should be reversed as the group has classified the assets as held for
sale.
l The assets, liabilities and any amount previously recognised in other
comprehensive income of the subsidiary held for sale, should be presented
separately as held for sale in the consolidated statement of financial position (this
implies that the assets, liabilities and items of other comprehensive income of the
subsidiary should not be consolidated on a line-by-line basis; the consolidation
may perhaps be described as a three-line consolidation).
l The assets and liabilities of the subsidiary would be the disposal group held for
sale and the disposal group must be measured at the lower of the consolidated
carrying amount and the fair value less costs to sell.
l The group may need to recognise an impairment loss (in profit or loss) in
measuring the disposal group at fair value less costs to sell. The impairment loss
should first be allocated against any goodwill recognised in respect of this
subsidiary and thereafter allocated to other assets measured according to IFRS 5
(refer to IFRS 5.23 and IAS 36.104). This allocation to the various assets is needed
as IFRS 5 requires disclosure of the major classes of assets classified as held for
sale. The impairment of any goodwill may need to be allocated between the parent
and the non-controlling interests in terms of Appendix C of IAS 36.
2 Subsidiaries acquired exclusively with a view to resale

A subsidiary acquired exclusively with a view to resale would immediately meet the
definition of a discontinued operation in terms of IFRS 5 and the results of the
subsidiary will be presented as a discontinued operation line item in the statement of
profit or loss and other comprehensive income. By nature, all the assets and liabilities
of the subsidiary will be classified as held for sale.
The classification of a subsidiary as acquired exclusively with a view to resale at the
acquisition date has the following implications on the consolidation process:
l The assets of the subsidiary will not be classified as held for sale in the individual
financial statements of the subsidiary, as it is not the subsidiary that is planning to
sell its assets; it is the parent that plans to sell its interest in the subsidiary
whereby control over the subsidiary will be lost. The subsidiary (in its individual
financial statements) will keep on accounting for its assets and liabilities under the
relevant accounting standards, ignoring IFRS 5 (i.e. depreciate the items of
property, plant and equipment and measure deferred tax with reference to the tax
consequences flowing from using the assets).
364
l The parent will classify its investment in subsidiary (in the separate financial
statements of the parent) as a non-current asset held for sale on the acquisition
date. The investment will be measured on initial recognition at the lower of its
carrying amount had it not been so classified (e.g., cost) and fair value less costs
to sell. Accordingly, it shall be measured at fair value less costs to sell. The
parent’s intention is to sell the shares of the subsidiary and therefore the fair value
less cost to sell referred to on initial recognition refers to the fair value less cost to
sell of the shares and not to that of all the individual net assets. This could result in
an impairment recognised on initial recognition.
l Any subsequent adjustments to the carrying amount of the non-current asset held
for sale (i.e. the share investment) in the parent’s separate financial statements
(impairment or fair value adjustments) will need to be reversed upon consolidation
so that the investment is at the amount of initial recognition before the consolidation
process can begin.
l In the consolidated financials the disposal group (i.e. the subsidiary as a whole with
all its assets and liabilities) is measured as fair value less cost to sell on acquisition
date, with reference to the fair value of the subsidiary’s shares. This value is
compared to the net asset value of the subsidiary and any impairment is
recognised in the subsidiary’s retained earnings and the assets of the disposal
group held for sale.
l The normal consolidation procedures should then be followed whereby all the line
items of the subsidiary are added to that of the parent.
l The liabilities of the subsidiary are measured in terms of their respective standards
and transferred to liabilities directly associated with the assets of the disposal
group held for sale. Next the assets of the subsidiary will be transferred to the
assets of the disposal group held for sale.
l At the reporting date the disposal group held for sale must be remeasured to the
lower of the consolidated carrying amount and the fair value less costs to sell of the
subsidiary’s shares.
l The subsidiary would continue to recognise depreciation or amortisation on specific
assets in its individual financial statements (as explained above). For consolidation
purposes, any depreciation or amortisation recognised by the subsidiary should be
reversed as the group has classified the assets as held for sale.
l The results (profit or loss) of the subsidiary will be presented as a discontinued
operation in the statement of profit or loss and other comprehensive income. This
line item will be made up of the profit after tax of the subsidiary as well as any
subsequent impairment recognised in the consolidated financial statements. All
profit or loss line items will be transferred to the profit/loss for the period from
discontinued operations.
14.10 Associates classified as held for sale

If an entity decides to sell an investment in an associate, or a portion of an investment,
and it meets the criteria contained in IFRS 5, the investment becomes a non-current
asset held for sale, and is accounted for in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations (IAS 28.20).
365
Chapter 14
Any retained portion of an investment in an associate that has not been classified as
held for sale should be accounted for using the equity method (until the disposal of the
portion that was classified as held for sale). After the disposal takes place, the retained
portion of the investment should be accounted for in accordance with IFRS 9 Financial
Instruments unless the retained investment continues to be an associate, in which
case the equity method should be used.
In instances where the investment in the associate no longer complies with the criteria
for classification as held for sale, the equity method is applied and the financial
statements are adjusted retrospectively, as if the investment had never been carried as
held for sale (IAS 28.21).
Question 14.1
S Ltd at 31 December 20.19.
P Ltd S Ltd
ASSETS
Inventory 342 000 415 000

P Ltd S Ltd
Revenue 500 000 300 000
Cost of sales (300 000) (200 000)
Gross profit 200 000 100 000
366

Retained earnings
P Ltd S Ltd
Dividend paid: 31/5/20.19 (16 000) (20 000)
1 On 1 January 20.17 P Ltd acquired 120 000 shares in S Ltd for R150 000 when the
R180 000
The fair value of the non-controlling interests at the acquisition date amounted to
R1,22 per share, amounting to R36 600 in total (30 000 shares × R1,22 per share).
2 On 30 June 20.19 S Ltd made a rights issue of 1 share for every 3 shares held
previously, at R2,00 per share.
3 The rights issue was taken up as follows: Number of shares
P Ltd 46 000
acquisition date.
Required
Prepare the consolidated financial statements of the P Ltd group for the year ended
31 December 20.19. Notes are not required.
367
Chapter 14
Comment
This question is similar to example 14.5, but the NCI is measured at fair value at the
acquisition date. The question therefore facilitates comparison between the methods of
measuring NCI for accounting for the change in ownership where the parent’s interest
increases as a result of a rights issue.
follows:
P LTD GROUP
ASSETS
Non-current assets
Current assets
Inventory (342 000(P) + 415 000(S)) 757 000
Total equity
692 540
368
P LTD GROUP
Revenue (500 000(P) + 300 000(S)) 800 000
Cost of sales (300 000(P) + 200 000(S)) (500 000)
R180 000
R180 000
P LTD GROUP
Changes Non-
Total
ship interests
Balance at
1 January 20.19 300 000 * 240 000 – 540 000 § 55 600 595 600
Changes in equi-
ty for 20.19
Dividends – (16 000) – (16 000) (4 000) (20 000)
Total
comprehensive
income for the
year:
Rights issue – – (360) (360) 8 360 8 000
Balance at
31 Dec 20.19 R300 000 # R392 900 (R360) R692 540 R71 060 R763 600
* 164 000(P) + 76 000(S) = 240 000

# 284 000(P) + 108 900(S) = 392 900
§ 36 000 + 19 000 + 600(goodwill relating to NCI) = 55 600
369
Chapter 14
Calculations
P Ltd 80%–83%
Total NCI
At Since
Share capital 150 000 120 000 30 000
180 000 144 000 36 000
– Parent and NCI 6 600 6 000 600
Retained earnings
(125 000 – 30 000) 95 000 76 000 19 000
• Current year:
Profit: 1/1/20.19–30/6/20.19
(60 000 × 6/12) 30 000 24 000 6 000
Dividend paid: 31/5/20.19 (20 000) (16 000) (4 000)
Owners’ equity before rights
issue 291 600 84 000 57 600
Shares issued 100 000 92 000 8 000
Changes in ownership (equity) (360) 360
391 600 65 960
Profit: 1/7/20.19–31/12/20.19 30 000 24 900 5 100
R421 600 R108 900 R71 060
Comments
b The exact amount paid by P Ltd and the non-controlling shareholders for the shares
taken up by them respectively is analysed in the “At” and “Non-controlling interest”
columns. This approach then closely resembles the pro forma consolidation journal
entry (see J5) to account for the rights issue and any change in ownership.
NCI after rights issue ((391 600 – 6 600GW) × 17%) + (600GW × 17/20)) 65 960
NCI before rights issue ((291 600 – 6 600GW) × 20%+ (600GW × 20/20)) (57 600)
continued
370
The NCI decreased by 3% in this example (from 20% to 17%). Thus, the NCI ceded
3% of its equity to P Ltd’s new parcel of shares. Also remember that, since goodwill
was calculated for the NCI (because NCI was measured at fair value at the
acquisition date), there is equity represented by goodwill that was ceded to the
parent in this example. Thus the calculation can also be performed as follows:
Previous equity interest held relinquished (including goodwill)
(57 600 × 3/20) (8 640)
Increased equity attributable to NCI as a result of the rights issue
(100 000 × 17%) 17 000
Fair value of the consideration paid by the parent for new shares issued (92 000)
Increase in P Ltd’s owners’ equity through rights issue (including good-
will reattributed): 91 640
(((291 600 – 6 600GW) × 80%) + 6 000GW) (234 000)
(((391 600 – 6 600GW) × 83%) + 6 000GW) 325 550
Goodwill relating to NCI now transferred to parent (600 × 3/20) 90
Amount to be recognised directly in equity (R360)

The amount of R360 is the amount paid in excess of the carrying amount of the
interest acquired, being R91 640.
Note in this case that the equity represented by the goodwill amount now forms part
of the calculations. This is because the NCI is measured at its fair value at the
acquisition date and therefore goodwill is measured for all owners. This means that
the goodwill is treated as part of the assets of the subsidiary and therefore also the
equity of the subsidiary. In this case, the inclusion of the goodwill as part of the
assets of the subsidiary resulted in the change in ownership declining from R450
(example 14.5) to R360. This is because an additional R90 equity (i.e. R600 × 3/20)
was transferred to the parent (P Ltd) from the non-controlling interests at the date of
the rights issue. The amount that P Ltd therefore “overpaid” was R90 less than
example 14.5.
e The difference of R360 results from 6 000 new shares additionally taken up by P Ltd
as the issue price is higher than the net asset value of the shares after the issue
(((R385 000/200 000 shares – R2.00) × 6 000 shares) + (600GW × 3/20)).
f When the interest of the parent increases (e.g., 80% – 83%) as a result of a rights
issue, no gain or loss on the rights issue, additional goodwill, or gain from a bargain
purchase can be recognised in terms of IFRS 10.23. Instead, any difference between
the consideration paid for the shares and the increase in owners’ equity is attributed
to changes in ownership directly in equity as indicated above.
371
Chapter 14

186 600

Dr Cr
R R
retained earnings
Changes in ownership (SCE) 360
Non-controlling interests (SFP/SCE) (8 000 + 360) 8 360
Investment in S Ltd (SFP) (46 000 × R2.00) 92 000
372
15
Foreign operations
Introduction ..................................................................................................... 375
Important definitions
15.1 Foreign operation ..................................................................................... 375
15.2 Functional currency.................................................................................. 375
15.3 Presentation currency .............................................................................. 376
15.4 Spot exchange rate .................................................................................. 377
15.5 Closing rate .............................................................................................. 377
15.6 Monetary item .......................................................................................... 377
15.7 Net investment in a foreign operation ...................................................... 377
Translation from the functional currency to the presentation

currency
15.8 Translation of financial statements to the presentation currency ............. 378
15.9 Translation of a foreign operation ............................................................ 380
Example 15.1 Basic conversion of the financial statements
of a foreign subsidiary .................................................... 381
Example 15.2 The impact of goodwill and IFRS 3 fair value
remeasurements on foreign operations ........................... 391
15.10 Foreign operation and reporting entity have different reporting dates ..... 399
15.11 Net investment in a foreign operation ...................................................... 399
Example 15.3 Loan to subsidiary as part of the net investment
in a foreign operation........................................................ 400
15.12 Foreign operations – Associates and joint ventures ................................ 403
Example 15.4 Foreign operation – Associate .......................................... 403
15.13 Disposal of a foreign operation ................................................................ 405
Example 15.5 Disposal of a foreign operation resulting in a loss of
control (NCI is measured at fair value at the
Example 15.6 Partial disposal of an interest in a foreign subsidiary
with no change in the status as the subsidiary remains
a subsidiary (control is not lost) (NCI is measured at its
Question 15.1 ........................................................................................................ 424
373
Foreign operations
Introduction
An entity may carry on foreign activities in two ways. It may have individual transactions
in foreign currencies, or it may have foreign operations. In addition, an entity may also
decide to present its financial statements in a foreign presentation currency.
IAS 21 The Effects of Changes in Foreign Exchange Rates prescribes how to include
individual foreign currency transactions, as well as the financial results of foreign
operations, in the financial statements of an entity. The standard also prescribes the
translation of a set of financial statements into a presentation currency other than its
functional currency. This chapter focuses on the following two aspects of IAS 21:
l how to include the financial results of foreign operations in the financial statements
of the reporting entity; and
l how to translate financial statements into a presentation currency.
Important definitions
15.1 Foreign operations
IAS 21.08 defines a foreign operation as an entity that is a subsidiary, associate, joint
arrangement or branch of a reporting entity the activities of which are based or
conducted in a country or currency other than those of the reporting entity. Many South
African undertakings have branches, subsidiaries, associates and/or joint arrangements
in other countries.
It is also important to note that a foreign operation is not only an entity that is situated in
a country other than the country of the reporting entity. It is clear from the definition that
a foreign operation is either:
l an entity that conducts its activities in a country other than the country of the
reporting entity; or
l conducts its activities in a currency other than the currency of the reporting entity.
This could therefore result in a scenario where a South African reporting entity has a
foreign operation that is situated in South Africa which has a functional currency
different from that of the reporting entity. The term “functional currency” is defined
below.
15.2 Functional currency

IAS 21.08 defines a functional currency as the currency of the primary economic
environment in which the entity operates. The primary economic environment in which
an entity operates is normally the one in which it primarily generates and expends cash.
According to IAS 21.09, an entity considers the following primary factors when
determining its functional currency:
l The currency
• that mainly influences sales prices for goods and services (this will often be the
currency in which sales prices for its goods and services are denominated
(quoted) and settled); and
• of the country whose competitive forces and regulations mainly determine the
sales prices of its goods and services.
375
Chapter 15
l The currency that mainly influences labour, material and other costs of providing
goods or services (this will often be the currency in which such costs are
denominated and settled).
According to IAS 21.10, the following factors may also provide evidence of an entity’s
functional currency:
l the currency in which funds from financing activities (i.e. issuing debt and equity
instruments) are generated; or
l the currency in which receipts from operating activities are usually retained.
According to IAS 21.11, the following additional factors are considered when determining
the functional currency of a foreign operation, and whether its functional currency is the
same as that of the reporting entity (the reporting entity in this context being the entity
that has the foreign operation as its subsidiary, branch, associate or joint arrangement):
l whether the activities of the foreign operation are carried out as an extension of the
reporting entity’s activities, rather than being carried out with a significant degree of
autonomy (independence). An example of the former is when the foreign operation
only sells goods imported from the reporting entity and remits the proceeds to it. An
example of the latter is when the operation accumulates cash and other monetary
items, incurs expenses, generates income and arranges borrowings, all substantially
in its local currency;
l whether transactions with the reporting entity constitute a high or a low proportion
of the foreign operation’s activities;
l whether cash flows from the activities of the foreign operation directly affect the
cash flows of the reporting entity and are readily available for remittance to it; and
l whether cash flows from the activities of the foreign operation are sufficient to
service existing and normally expected debt obligations without funds being made
available by the reporting entity.
When the above indicators give a mixed result, and the functional currency is not obvious,
management uses its judgement to determine the functional currency that most
faithfully represents the economic effects of the underlying transactions, events and
conditions. Management gives priority to the primary indicators in IAS 21.09 before
considering the indicators in IAS 21.10 and IAS 21.11, which are designed to provide
additional supporting evidence to determine an entity’s functional currency.
An entity’s functional currency reflects the underlying transactions, events and
conditions that are relevant to it. Accordingly, once determined, the functional currency
is not changed unless there is a change in those underlying transactions, events and
conditions.
The functional currency of an entity is not a free choice and must be carefully
determined.
15.3 Presentation currency

IAS 21.08 defines presentation currency as the currency in which the financial
statements are presented.
376
Foreign operations
The presentation currency of an entity is a free choice, in contrast to the functional

currency (as indicated above).
15.4 Spot exchange rate

The spot exchange rate is the exchange rate for immediate delivery.
15.5 Closing rate

The closing rate is the spot exchange rate at the end of the reporting period.
15.6 Monetary item

A monetary item is defined as units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency. Examples of
monetary items will include:
l pensions and other employee benefits to be paid in cash;
l provisions that are to be settled in cash; and
l cash dividends that are recognised as a liability.
The following are examples of non-monetary items:
l amounts prepaid for goods and services;
l goodwill;
l intangible assets;
l inventory;
l property, plant and equipment; and
l provisions that are to be settled by the delivery of a non-monetary asset.
15.7 Net investment in a foreign operation

An entity may have a monetary item that is receivable from or payable to a foreign
operation. An item for which settlement is neither planned nor likely to occur in the
foreseeable future is, in substance, a part of the reporting entity’s net investment in that
foreign operation. Such monetary items may include long-term receivables or loans.
They do not include trade receivables or trade payables.
Translation from the functional currency to the presentation

currency
IAS 21 requires the following approach in respect of the preparation of financial
statements in another currency than the functional currency:
l Each entity (whether stand-alone, an entity with foreign operations or a foreign
operation itself) determines its functional currency in terms of the principles
discussed in chapter 15.2 above.
l An entity translates foreign currency items (i.e. implying individual transactions that
did not take place in the functional currency of the entity) into its functional
currency and treats the translation in terms of IAS 21.20–.37 and .50.
377
Chapter 15
l All entities forming part of the reporting entity should be included in the financial
statements of the reporting entity. The financial results should be included in the
financial statements of the reporting entity in the same presentation currency as
that of the reporting entity, which could of course be any currency/currencies.
l Should the entity to be included in the reporting entity have a different functional
currency than the presentation currency of the reporting entity, the results of the
entity will be translated in terms of the principles discussed in chapter 15.8 below.
l Furthermore, any stand-alone entity that prepares financial statements (or an entity
preparing separate financial statements in terms of IAS 27 Separate Financial
Statements) may present its financial statements in any currency. If the
presentation currency selected differs from the functional currency of that entity,
the financial statements in the functional currency shall also be translated into the
presentation currency selected using the principles discussed in chapter 15.8.
15.8 Translation of financial statements to the presentation currency

The profit or loss, other comprehensive income and financial position of an entity shall
be translated into a different presentation currency using the following procedures:
l assets and liabilities (including comparatives) shall be translated at the closing
rate at the date of the statement of financial position;
l income and expenses (including comparatives) shall be translated at the exchange
rate applicable at the date of the transaction. For practical reasons an average
exchange rate for the period is often used to translate income and expense items.
However, if exchange rates fluctuate significantly, the use of the average rate for a
period would be inappropriate; and
l all resulting exchange differences shall be recognised as a separate component of
equity (commonly referred to as the foreign currency translation reserve (FCTR)) in
other comprehensive income.
These exchange differences are not recognised in profit or loss, because the changes
in exchange rates have little or no direct effect on the present and future cash flows
from operations. The exchange differences simply resulted from translating income and
expenses at the actual exchange rates and assets and liabilities at the closing rate, as
well as the fact that the opening net assets are translated at the current closing rate that
differs from the closing rate previously used to translate the balances in the previous
period.
Equity is defined by the Conceptual Framework as the residual interest in the assets
of an entity after deducting all its liabilities. However, the individual items of equity shall
be translated at various different rates of exchange, depending on the category of
equity. The following procedure in translating equity is typically used:
l Share capital is translated at the exchange rates that existed at the date of issue of
the shares.
l Income and expense items are translated at the actual rate of exchange or the
average rate that existed during the financial reporting period in which they arose.
Therefore, the same principle will apply to retained earnings.
l Reserves that arose on specific dates (e.g., revaluation surpluses) are translated at
the spot exchange rates that existed on the date the reserves arose.
378
Foreign operations
When translating the financial statements of the reporting entity from its functional
currency to the presentation currency, it is important to keep the accounting equation in
mind.
The following example illustrates the above:
The financial results of X Ltd, a South African stand-alone entity with a functional
currency of US Dollar (USD) and a chosen presentation currency of South African Rand
(ZAR), are as follows at 31 December 20.18:
ASSETS USD
Property, plant and equipment $100
Share capital 20
Retained earnings accumulated in 20.17 40
Profit for 20.18 30
Total equity 90
Long-term liability 10
$100
Applicable exchange rates USD1,00 = ZAR

At inception (spot exchange rate) 3,00
Average rate for the 20.17 financial year 4,00
Average rate for the 20.18 financial year 5,00
31 December 20.18 (closing rate at reporting date) 6,50
The translated results of X Ltd on 31 December 20.18 are therefore as follows:
ASSETS ZAR
Property, plant and equipment (USD100 × ZAR6,50) 650
Share capital (USD20 × ZAR3,00) 60
Retained earnings accumulated in 20.17 (USD40 × ZAR4,00) 160
Profit for 20.18 (USD30 × ZAR5,00) 150
Foreign currency translation reserve (FCTR) (balancing figure) 215
Total equity 585
Long-term liability (USD10 × ZAR6,50) 65
R650
379
Chapter 15
Proof of foreign currency translation reserve balance

As discussed above, equity is the residual interest in the assets of an entity after
deducting all its liabilities. Therefore, total equity shall also be translated to the
presentation currency using the closing rate as assets and liabilities are translated
using the closing rate. As a result the foreign currency translation reserve balance can
also be calculated by analysing only the equity section of the statement of financial
position:
ZAR
Share capital (USD20 × ZAR3,00) 60
Retained earnings accumulated in 20.17 (USD40 × ZAR4,00) 160
Profit for 20.18 (USD30 × ZAR5,00) 150
370
Total equity should be (USD90 × ZAR6,50) 585
Thus, the foreign currency translation reserve balance is R215
Comment
It is important to remember that all items in the financial statements should be translated
at an exchange rate that best approximates the value of that item on the reporting date.
Assets and liabilities should therefore be translated at the closing rate on the reporting
date. Share capital is translated at the spot exchange rate at the share issue date.
Retained earnings, income and expense items accrued over time and are therefore
translated at the average exchange rates during the financial reporting period in which
they arose.
15.9 Translation of a foreign operation

Many reporting entities comprise a number of individual entities (e.g., a group is made
up of a parent and one or more subsidiaries). Various types of entities, whether members
of a group or otherwise, may have investments in associates or joint arrangements.
They may also have branches. It is necessary for the results and financial position of
each entity included in the reporting entity to be translated from the functional
currencies of the individual entities into the presentation currency of the reporting
entity’s financial statements.
When the results and financial position of a foreign operation are translated from the
functional currencies of the individual entities into the presentation currency (so that the
foreign operation can be included in the financial statements of the reporting entity by
consolidation or the equity method) the applicable procedures discussed earlier in
chapter 15.8 should be applied in a similar way. In addition, the following principles
should also be applied:
l Although total owners’ interest is converted at the closing rate, certain components
of owners’ interest are translated at the historical exchange rate.
l Items of owners’ interest at acquisition are translated at the historical spot
exchange rate applicable when the equity interest was acquired. This conversion
basis ensures that the goodwill or gain from a bargain purchase is determined
once and for all and that it does not change in future, purely because exchange
rates subsequently changed.
380
Foreign operations
l Increases in components of owners’ interest since acquisition to the beginning of

the current period are converted at the presentation currency equivalent at the time
at which these increases appeared in the previous period’s conversion trial
balance. This approach is essential to ensure that the consolidated balances at the
beginning of the current period agree with the consolidated balances at the end of
the previous period.
l Any goodwill arising on the acquisition of a foreign operation, and any IFRS 3 fair
value remeasurements to the carrying amounts of assets and liabilities arising on
the acquisition of that foreign operation, shall be treated as assets and liabilities of
the foreign operation. Thus, they shall be expressed in the functional currency of
the foreign operation and shall be translated at the closing rate annually. This
principle is illustrated in example 15.2.
l Common items between the parent and the foreign operation (for example,
dividends received/paid) are converted at the actual exchange rate applicable to
these items on the respective dates that they arose.
l Transfers to reserves for the current period by the foreign operation are converted
at the closing rate.
The cumulative amount of the exchange differences is presented in a separate
component of equity (the foreign currency translation reserve) until disposal of the
foreign operation.
When the exchange differences relate to a foreign operation that is consolidated but not
wholly-owned, accumulated exchange differences arising from translation and
attributable to non-controlling interests are allocated to, and recognised as part of, non-
controlling interests in the consolidated statement of financial position.
After the translation of the results and financial position of a foreign operation into the
presentation currency in terms of chapter 15.8, and taking into account the above, the
incorporation of the results and financial position of a foreign operation with those of the
reporting entity follows normal consolidation procedures, for example, the elimination of
intragroup balances and intragroup transactions of a subsidiary.
Basic conversion of the financial statements of a foreign

Example 15.1
subsidiary
1 P Ltd is a South African company and has the South African Rand (ZAR) as its
functional currency.
2 P Ltd acquired 80% of the issued shares of S Ltd, a foreign entity with FC as its
functional currency, at the incorporation of the latter on 1 January 20.11. From this
date P Ltd had control over S Ltd in accordance with IFRS 10. The reporting date of
the group is 31 December.
3 P Ltd recognised the equity investment in S Ltd in its separate records using the
cost price method.
4 The P Ltd group of companies elected to measure the non-controlling interest at its
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
5 Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
381
Chapter 15
The following are the abbreviated trial balances of P Ltd and S Ltd for each of the
financial periods 20.11, 20.12 and 20.13:
20.11 20.12 20.13
P LTD
Assets
Investment in S Ltd 80 000 80 000 80 000
Inventory 120 000 147 500 182 500
R200 000 R227 500 R262 500
Equity
Retained earnings: beginning of the period 75 000 100 000 127 500
Profit for the current period 25 000 27 500 25 000
Dividends received from S Ltd – – 10 000
R200 000 R227 500 R262 500
S LTD
Assets
Trade receivables FC120 000 FC145 000 FC165 000
Equity
Retained earnings: beginning of the period – 20 000 45 000
Profit for the current period 20 000 25 000 30 000
Dividend paid – – (10 000)
FC120 000 FC145 000 FC165 000
Comment
FC represents the foreign currency unit concerned.
Applicable exchange rates FC1,00 = ZAR

1/1/20.11 1,00
Average for period 20.11 1,05
31/12/20.11 1,11
31/12/20.12 1,25
31/12/20.13 1,33
382
Foreign operations
Solution 15.1
The consolidated financial statements of P Ltd and its foreign subsidiary will be drafted
as follows for each of the periods concerned:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20.11 20.12 20.13
ASSETS
Current assets
Trade receivables 253 200 328 750 401 950
Total assets R253 200 R328 750 R401 950
Share capital 100 000 100 000 100 000
Other components of equity 9 760 24 600 34 440
226 560 292 250 358 060
Non-controlling interests 26 640 36 250 43 890
Total equity 253 200 328 750 401 950
P LTD GROUP
EXTRACT FROM CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER
20.11 20.12 20.13
Items that may be reclassified
subsequently to profit or loss:
Exchange differences arising on translating
foreign operations 12 200 18 550 12 300
Other comprehensive income for the year,
net of tax 12 200 18 550 12 300
FOR THE YEAR R58 200 R75 550 R75 700
R46 000 R57 000 R63 400
R58 200 R75 550 R75 700
383
Chapter 15
Comments
a Exchange differences arising on translating foreign operations are presented at
100% (i.e. not net of non-controlling interest) in the statement of profit or loss and
other comprehensive income.
b The non-controlling interests in total comprehensive income can be reconciled as
follows:
20.11 20.12 20.13
Other comprehensive income for the year 2 440 3 710 2 460
R6 640 R9 610 R10 140
P LTD GROUP
FOR THE YEAR ENDED 31 DECEMBER
capital FCTR earnings Total NCI equity
Balance at
1 January 20.11 100 000 – 75 000 175 000 – 175 000
Acquisition
of subsidiary – – – – 20 000 20 000
Total comprehensive
Profit for the year – – 41 800 41 800 4 200 46 000
Other comprehensive
income – 9 760 – 9 760 2 440 12 200
Balance at
31 December 20.11 100 000 9 760 1116 800 226 560 26 640 253 200
Total comprehensive
Other comprehensive
income – 14 840 – 14 840 3 710 18 550
Balance at
31 December 20.12 100 000 24 600 2167 900 292 500 36 250 328 750
Dividends – – – – (2 500) (2 500)
Total comprehensive
Other comprehensive
income – 9 840 – 9 840 2 460 12 300
Balance at
31 December 20.13 R100 000 R34 440 3R223 620 R358 060 R43 890 R401 950
FCTR = Foreign currency translation reserve
NCI = Non-controlling interests
(1) Test: 100 000 + 16 800 = 116 800
(2) Test: 127 500 + 40 400 = 167 900
(3) Test: 162 500 + 61 120 = 223 620
384
Foreign operations
Calculations
C1 Conversion trial balance of S Ltd at 31 December 20.11
FC Rate R
Trade receivables 120 000 R1,11 133 200
Share capital (100 000) R1,00 (100 000)
Profit for 20.11 (20 000) R1,05 (21 000)
Exchange differences on translation:
31/12/20.11 (Balancing) – (12 200)
– –
Comments
a All assets and liabilities as well as the total ownership interest of S Ltd are converted
at the closing rate (i.e. R1,11 = F1,00) on 31 December 20.11. Always keep in mind
the accounting equation, i.e.:
Equity = Assets – Liabilities
b The exchange rate conversion difference, which is known as the foreign currency
translation reserve (FCTR), is brought about by the fact that components of equity
are not all converted at the closing rate, as assets and liabilities.
l The acquisition date equity is converted at the historical exchange rate applicable
when the equity investment was made (e.g. R1,00 = F1,00). The use of the
historical exchange rate ensures that the goodwill or gain from a bargain
purchase on consolidation is determined once and for all, so that it will not
change in the future merely because the exchange rate has changed.
l Items of profit or loss for the current period are generally converted at the
average exchange rate for the period (e.g. R1,05 = F1,00).
c The net assets of the subsidiary increased during 20.11 by R33 200 (being R133 200
less R100 000). R21 000 is attributable to the net profit for 20.11. The balance of the
increase, namely R12 200, arose because the Rand weakened against the foreign
monetary unit. The exchange differences on translation are recognised in other
comprehensive income. These movements in other comprehensive income are then
accumulated in equity under the heading of foreign currency translation reserve. The
foreign currency translation reserve in essence represents a revaluation surplus
originating from the revaluation of P Ltd’s net investment in S Ltd. In this example,
deferred tax has not been provided for on the exchange differences accumulated in
the foreign currency translation reserve. Valid arguments also exist for the provision
of deferred tax on the translation gain or loss. Refer IAS 12 Income Taxes in this
regard.
385
Chapter 15
C2 Analysis of owners’ equity of S Ltd at 31 December 20.11

P Ltd 80%
Total NCI
At Since
i At acquisition date
Share capital 100 000 80 000 20 000
100 000 80 000 20 000
– Parent – – –
• Current year:
Exchange differences
on translation 12 200 9 760 2 440
R133 200 R16 800 RE R26 640
R9 760 FCTR
C3 Pro forma consolidation journal entries at 31 December 20.11

Dr Cr
R R
Elimination of equity at acquisition date
Recognition of non-controlling interests’ portion
in current year’s profit
J3 Non-controlling interests (OCI) 2 440
Recognition of non-controlling interests’ portion
in the exchange differences on translation
for current year
Comment
Note that the total exchange differences on translation of R12 200 do not get journalised
into the consolidated financial statements. It is included in the converted Rand trial
balance which is combined with the parent’s trial balance on a line-by-line basis. The
only journal required in respect of the exchange differences on translation is the
allocation of the non-controlling interests’ portion (refer journal 3).
386
Foreign operations

FC Rate R
Share capital (100 000) R1,00 (100 000)
Retained earnings 1/1/20.11 to 31/12/20.11 (20 000) A (21 000)
FCTR balance 31/12/20.11 – (12 200)
Profit for 20.12 (25 000) R1,18 (29 500)
Movement for 20.12 (Balancing) – (18 550)
– –
A = Actual amount as per previous period’s consolidated statement of financial position
Comments
a All assets and liabilities (i.e. total ownership interest) are converted at the closing
rate (i.e. R1,25 = FC1,00) on 31 December 20.12.
b The exchange differences on translation for 20.12 occur because:
l The profit for 20.12 is translated at the average rate of exchange, while the
corresponding assets and liabilities are translated at the closing rate of exchange
on 31 December 20.12.
l The opening net assets for 20.12 are translated at the closing rate of exchange
on 31 December 20.12, which differs from the previous 20.11 closing rate of
exchange.
c Note that the balance of the foreign currency translation reserve as at the end of
20.11 (i.e. R12 200) is taken up in the conversion trial balance at
31 December 20.12.

P Ltd 80%
Total NCI
At Since
Share capital 100 000 80 000 20 000
100 000 80 000 20 000
Foreign currency translation reserve 12 200 9 760 2 440
• Current year:
Exchange differences on translation 18 550 14 840 3 710
R181 250 R40 400 RE R36 250
R24 600 FCTR
387
Chapter 15

Dr Cr
R R
FCTR (SCE) 2 440
Recognition of non-controlling interests’ portion in
retained earnings and FCTR to beginning of current
year
current year’s profit
current year’s FCTR movement

FC Rate R
Share capital (100 000) R1,00 (100 000)
Retained earnings: 1/1/20.11 to 31/12/20.12 (45 000) A (50 500)
Foreign currency translation reserve
(12 200 + 18 550) – (30 750)
Profit for 20.13 (30 000) R1,28 (38 400)
Dividend paid 10 000 A 12 500
Movement for 20.13 (Balancing) – (12 300)
– –
388
Foreign operations
Comments
a All assets and liabilities (i.e. total ownership interest) are converted at the closing
rate (i.e. R1,33 = FC1,00) on 31 December 20.13.
b The exchange differences on translation for 20.13 occur because:
l the profit for 20.13 is translated at the average rate of exchange, while the
corresponding assets and liabilities are translated at the closing rate of exchange
on 31 December 20.13; and
l the opening net assets for 20.13 are translated at the closing rate of exchange
on 31 December 20.13, which differs from the previous 20.12 closing rate of
exchange.
c Note that the balance of the foreign currency translation reserve at the end of 20.12
(i.e. R30 750) has been directly taken up in the conversion trial balance at
31 December 20.13.
d The dividends paid by the subsidiary are converted to an appropriate equivalent by
scaling up the actual amount received by P Ltd to 100% (R10 000/0,8).
e The net assets of the subsidiary increased during 20.13 by R38 200 (R219 450 –
R181 250); R25 900 (R38 400 – R12 500) of which is attributable to retained
earnings for 20.13. The balance of the increase, namely R12 300, occurred as a
result of the weakening of the Rand against the foreign currency unit.

Total P Ltd 80% NCI
At Since
Share capital 100 000 80 000 20 000
100 000 80 000 20 000
Foreign currency translation
reserve (12 200 + 18 550) 30 750 24 600 6 150
• Current year:
Dividend (12 500) (10 000) (2 500)
Exchange differences on translation 12 300 9 840 2 460
R219 450 R61 120 RE R43 890
R34 440 FCTR
389
Chapter 15

Dr Cr
R R
J1 Share capital 100 000
Investment in S Ltd 80 000
J2 Retained earnings (SCE) (4 200 + 5 900) 10 100
FCTR (SCE) (3 710 + 2 440) 6 150
retained earnings and FCTR to beginning of current
year
current year’s FCTR movement
J5 Dividend received (P/L) (P’s portion) 10 000
Elimination of intragroup dividend in consolidated
financial statements
390
Foreign operations
The impact of goodwill and IFRS 3 fair value

Example 15.2
remeasurements on foreign operations
2 P Ltd acquired 75% of S Ltd, a foreign entity with FC as its functional currency, on
1 January 20.11 for FC3 000. At that date, S Ltd had share capital of FC1 000 and
retained earnings of FC2 000. From 1 January 20.11, P Ltd had control over S Ltd
as per the definition of control in accordance with IFRS 10 Consolidated Financial
Statements. All of S Ltd’s assets and liabilities were considered to be fairly valued
on acquisition date, except for land which was undervalued by FC500.
3 S Ltd’s retained earnings increased by FC300 in 20.11 and FC400 in 20.12.
4 During the 20.12 financial year, P Ltd sold inventory to S Ltd. On
31 December 20.12, inventory purchased from P Ltd amounting to FC20 was still on
hand. Total sales from P Ltd to S Ltd for the 20.12 financial year amounted to FC30.
P Ltd sells inventory at a mark-up of 20% on cost.
5 P Ltd recognised the equity investment in S Ltd in its separate records using the
cost price method.
6 The P Ltd group elected to measure the non-controlling interest at its proportionate
share of the acquiree’s identifiable net assets at the acquisition date. Ignore any
effects of taxation.
7 It is the accounting policy of S Ltd to measure all items of property, plant and
equipment according to the cost model in terms of IAS 16 Property, Plant and
Equipment.
8 Ignore any effects of taxation.
9 The following exchange rates are applicable:
FC1,00 = ZAR
1/1/20.11 2,00
Average 20.11 2,10
31/12/20.11 2,20
Average 20.12 2,40
31/12/20.12 2,50
Comments
Remember goodwill and the fair value remeasurements are deemed to be part of the
foreign entity (IAS 21.47).
391
Chapter 15
Solution 15.2

(FC) (R) (R) 75% (R) 75% (R) 25%
Rate
100% 100% At Since NCI
i At acquisition
Share capital 1 000 R2,00 2 000 1 500 500
Retained earnings 2 000 R2,00 4 000 3 000 1 000
Fair value remeasure-
ment (land) 500 R2,00 1 000 750 250
3 500 R2,00 7 000 5 250 1 750
Equity represented
by goodwill – Parent 375 R2,00 750 750 –
Consideration and NCI 3 875 7 750 6 000 1 750
• To beginning of current
year:
Retained earnings 300 R2,10 630 472 158
increase 20.11 (average)
FCTR
(excluding goodwill) 730 548 182
1
FCTR (goodwill only) 75 75 –
4 175 R2,20 9 185 1 095 2 090
• Current year:
Retained earnings 400 R2,40 960 720 240
increase 20.12 (average)
on translation
(excluding goodwill) 1 180 885 295
on translation
2
(goodwill only) 113 113 –
4 575 R2,50 R11 438 R2 813 R2 625
392
Foreign operations
Comments
The following steps are followed in calculating the exchange differences on translation
of R730 for the 20.11 financial year:
Step 1: Translate the foreign currency at acquisition owners’ equity of FC3 500 to the
presentation currency using the rate applicable at acquisition.
Step 2: Calculate the goodwill in the presentation currency and convert back to the
foreign currency as IAS 21 states goodwill is treated as an asset of the foreign operation.
Step 3: Translate the profit for the 20.11 financial year to the presentation currency.
Step 4: Remeasure goodwill to the closing rate at the end of the 20.11 financial year
(see below).
Step 5: Translate the year end total foreign currency owners’ equity of FC4 175 to the
presentation currency using the closing rate.
Step 6: The exchange differences on translation for the 20.11 financial year will be the
balancing amount in the presentation currency column (R9 185 – R75 – R630 –
R7 750).
The same principle will apply when calculating the exchange differences on translation
of R1 180 for the 20.12 financial year.
Goodwill remeasurement calculation (method only used in respect of foreign entities)
FC Rate R
At acquisition date FC375 R2,00 750
1
FCTR 20.11 75
31/12/20.11 FC375 R2,20 825
2
Exchange differences on translation: 20.12 113
31/12/20.12 FC375 R2,50 R938

Amount of non-controlling interest: IFRS 3.32(a)(ii) 1 750
7 750
Goodwill (parent only) R750
393
Chapter 15
C3 Proof of foreign currency translation reserve balance at 31 December 20.12

FC Rate R
Share capital (1 000) R2 (2 000)
Land remeasurement (500) R2 (1 000)
Retained earnings:
At acquisition (2 000) R2 (4 000)
Profit for 20.11 (300) R2,10 (630)
Profit for 20.12 (400) R2,40 (960)
1
Net assets 4 200 R2,50 10 500
1
Foreign currency translation reserve – (1 910)
– –
(1) Balancing
Comments
The foreign currency translation reserve of R1 910 agrees to the year end balance of
the reserve and includes the opening balance of R730 as well as the current year
movement of R1 180.

Dr Cr
R R
J1 Land (SFP) 1 000
Fair value remeasurement on land
Goodwill (SFP) 750
Investment in S Ltd (SFP) (at cost price) 6 000
Elimination of acquisition date equity
J3 Retained earnings (SCE) 158
Non-controlling interests (SFP/SCE) 158
Recognition of non-controlling interests’ portion of
retained earnings since acquisition to beginning of
current year
J4 FCTR (SCE) 182
FCTR since acquisition to beginning of current year
continued
394
Foreign operations
Dr Cr
R R
J5 Non-controlling interests (P/L) 240
J6 Non-controlling interests (OCI) 295
Allocate non-controlling interests’ portion of current
year’s FCTR
J7 Goodwill (SFP) (R938 – R750) 188
FCTR (SCE) 75
Exchange differences on translation (OCI) 113
Remeasure goodwill to closing rate at reporting date –
the non-controlling interest does NOT share in this
portion of the FCTR (comment (b))
J8 Land (SFP) 250
FCTR (SCE) (FC500 × (R2,20 – R2,00)) 100
Exchange differences on translation (OCI)
(FC500 × (R2,50 – R2,20)) 150
Recording effect of movement in exchange rate i.r.o.
fair value remeasurement on land (comment (a))
J9 Revenue (P/L) (FC30 × R2,40) 72
Cost of sales (P/L) 72
Elimination of intragroup sales
J10 Cost of sales (P/L) (FC20 × 2,50 × 20/120) 8
Inventory (SFP) 8
Elimination of unrealised profit on inventory
(comment (c))
395
Chapter 15
Comments
a Land is not presented on the subsidiary’s FC-denominated trial balance (i.e. before
conversion) at the remeasured amount. Therefore, the FCTR that arose on the
subsidiary’s Rand-denominated trial balance (i.e. after conversion and before
consolidation) was not completely correct from a group perspective, because the
pre-conversion trial balance does not take into account any pro forma adjustments
that are required at group level (e.g. fair value remeasurement on land i.t.o. IFRS 3).
This principle is very similar to an asset that is remeasured on a pro forma basis at
group level, where the subsequent depreciation is then also corrected at group level
on a pro forma basis. The non-controlling interest does share in this FCTR
movement of R250 and this is already taken into account in the non-controlling
interest amounts of R182 (prior-period FCTR) and R295 (current-period exchange
difference). This is so because the FCTR movements in the analysis above are
calculated on a net equity value inclusive of the effect of the remeasurement on
land.
b In this example, the non-controlling interest is measured at the proportionate share
of the acquiree’s identifiable net assets at acquisition. When this method is followed,
the non-controlling interest does NOT share in the FCTR on goodwill. However,
where the non-controlling interest is measured at fair value at acquisition, the non-
controlling interest will have a share in the FCTR on goodwill. This share is based on
the profit-sharing (ownership interest) ratio.
c Journal 10 is eliminating the unrealised profit included in the inventory balance at
year end. As the unrealised profit is only eliminated at year end and not throughout
the year, the closing rate (R2,50) will be used to translate the journal to the functional
currency. There are, however, different schools of thought on this principle. It can
also be argued that the elimination of any intragroup transactions will follow the
same translation principle, as discussed in chapter 15.8 above:
l assets and liabilities shall be translated at the closing rate at the date of the
statement of financial position;
l income and expenses shall be translated at the exchange rate applicable at the
date of the transaction or an average exchange rate for the period; and
l all resulting exchange differences shall be recognised in the foreign currency
translation reserve (FCTR)) in other comprehensive income.
396
Foreign operations
Assuming that P Ltd measures the non-controlling interest at fair value at the
acquisition date and that the fair value of the non-controlling interest is R1 800 at that
date, the analysis of owners’ equity of S Ltd and pro forma consolidation journal entries
would be as follows:

(FC) (R) (R) 75% (R) 75% (R) 25%
Rate
I At acquisition
Share capital 1 000 R2,00 2 000 1 500 500
Fair value remeasurement
(land) 500 R2,00 1 000 750 250
3 500 R2,00 7 000 5 250 1 750
– Parent and NCI 400 R2,00 800 750 50
Retained earnings movement R2,10
20.11 300 (average) 630 472 158
FCTR (excluding goodwill) 730 548 182
FCTR (goodwill only) 80 60 20
4 200 R2,20 9 240 1 080 2 160
• Current year:
Retained earnings movement 400 R2,40 960 720 240
20.12 (average)
on translation
(excluding goodwill) 1 180 885 295
on translation
(goodwill only) 120 90 30
FC4 600 R2,50 R11 500 R2 775 R2 725
Comment
Goodwill remeasurement calculation (method only used in respect of foreign entities)
FC Rate R
At acquisition date FC400 R2,00 800
FCTR 20.11 80
31/12/20.11 FC400 R2,20 880
Exchange differences on translation: 20.12 120
31/12/20.12 FC400 R2,50 R1 000
397
Chapter 15

7 800
Goodwill (parent and NCI) R800

Dr Cr
R R
J1 Land (SFP) 1 000
Fair value remeasurement on land
Goodwill (SFP) 800
Investment in S Ltd (SFP) (at cost price) 6 000
Elimination of acquisition date equity
J3 Retained earnings (SCE) 158
retained earnings since acquisition to beginning of
current year
J4 FCTR (SCE) 202
Non-controlling interests (SFP/SCE) (182 + 20) 202
FCTR since acquisition to beginning of current year
J5 Non-controlling interests (P/L) 240
J6 Non-controlling interests (OCI) 325
Non-controlling interests (SFP/SCE) (295 + 30) 325
current year’s FCTR
J7 Goodwill (SFP) (1 000 – 800) 200
FCTR (SCE) 80
Remeasure goodwill to closing rate at reporting date –
the non-controlling interests does share in this portion
of the FCTR (comment (a))
continued
398
Foreign operations
Dr Cr
R R
J8 Land (SFP) 250
FCTR (SCE) (FC500 × (R2,20 – R2,00)) 100
Exchange differences on translation (OCI)
(FC500 × (R2,50 – R2,20)) 150
Recording effect of movement in exchange rate i.r.o.
fair value remeasurement on land
J9 Revenue (P/L) (FC30 × R2,40) 72
Cost of sales (P/L) 72
Elimination of intragroup sales
J10 Cost of sales (P/L) (FC20 × 2,50 × 20/120) 8
Inventory (SFP) 8
Elimination of unrealised profit on inventory
Comment
The non-controlling interest does share in the FCTR on goodwill and this is already
taken into account in the non-controlling interest amounts of R202 (R182 + R20) and
R325 (R295 + R30).
15.10 Foreign operation and reporting entity have different reporting

dates
When the financial statements of a foreign operation are as of a date different from that
of the reporting entity, the foreign operation often prepares additional statements as of
the same date as the reporting entity’s financial statements. When this is not done,
IFRS 10 Consolidated Financial Statements allows the use of a different reporting
date, provided that the difference is no greater than three months and adjustments are
made for the effects of any significant transactions or other events that occur between
the different dates. In such a case, the assets and liabilities of the foreign operation are
translated at the exchange rate on the statement of financial position date of the foreign
operation. Adjustments are made for significant changes in exchange rates up to the
statement of financial position date of the reporting entity in accordance with IFRS 10.
The same approach is used in applying the equity method to associates and joint
ventures in accordance with IAS 28 Investments in Associates and Joint Ventures.
15.11 Net investment in a foreign operation

Exchange differences arising on a monetary item that forms part of a reporting entity’s
net investment in a foreign operation shall be recognised in profit or loss in the separate
financial statements of the reporting entity or the individual financial statements of the
foreign operation, as appropriate. However, in the consolidated financial statements of
the reporting entity that include the foreign operation, such an exchange difference shall
be recognised in other comprehensive income (foreign currency translation reserve).
Thus, the pro forma consolidation journals would normally include a reclassification
journal that reclassifies the exchange differences from profit or loss to other
399
Chapter 15
Loan to subsidiary as part of the net investment in a foreign

Example 15.3
operation
2 P Ltd obtained a controlling interest in S Ltd, a foreign subsidiary, with FC as its
functional currency, at the beginning of the financial year.
3 As part of the purchase agreement P Ltd granted a loan to S Ltd to the value of FC1
000. The loan bears interest at a market-related interest rate of 10% per annum,
payable annually. The repayment of the loan is, however, not expected in the
foreseeable future. P Ltd regarded the loan as part of its net investment in S Ltd.
4 According to P Ltd’s accounting policy, only the capital amount of the loan amount is
included as part of the net investment in a foreign operation.
FC1,00 = ZAR
At acquistion 2,00
Average for period 2,50
Year end 3,00
The journal entries in the separate accounting records of P Ltd would be as follows:
Dr Cr
R R
Initial recognition
J1 Loan to subsidiary (SFP) (1 000 × 2,00) 2 000
Bank (SFP) 2 000
Initial recognition of the loan at the spot exchange rate
Year end
J1 Bank (SFP) (1 000 × 10% × 3,00) 300
Interest received (P/L) (100 × 2,50) 250
Foreign exchange differences (P/L) 50
Recognition of interest received on foreign loan
J2 Loan to subsidiary (SFP) ((1 000 × 3,00) – 2 000) 1 000
Foreign exchange differences (P/L) 1 000
Restatement of foreign loan to the spot exchange rate
400
Foreign operations
The journal entries in the individual accounting records of S Ltd would be as follows:
Dr Cr
FC FC
Initial recognition
J1 Bank (SFP) 1 000
Loan from parent (SFP) 1 000
Initial recognition of the loan
Year end
J1 Interest paid (P/L) (1 000 × 10%) 100
Bank (SFP) 100
Recognition of interest paid on loan from parent
The conversion trial balance of S Ltd at year end
FC Rate R
Interest paid 100 R2,50 250
Loan from parent (1 000) R3,00 (3 000)
Equity (Balancing) 900 R3,00 2 700
Year end (Balancing) – 50
– –
The following pro forma consolidation journal entries should be processed at year end:
Dr Cr
R R
J1 Foreign exchange differences (P/L) 1 000
Exchange differences on translation (OCI) 1 000
Reclassification of the exchange differences that relate
the net investment in the foreign operation
J2 Interest received (P/L) 250
Interest paid (P/L) 250
Elimination of intragroup interest received and paid
J3 Loan from parent (SFP) 3 000
Loan to subsidiary (SFP) 3 000
Elimination of intragroup loan
Assume the same information as stated above, except that the loan granted was
denominated in the functional currency of the parent. The loan to S Ltd amounted to
R2 000.
401
Chapter 15
The journal entries in the separate accounting records of P Ltd would be as follows:
Dr Cr
R R
Initial recognition
J1 Loan to subsidiary (SFP) 2 000
Bank (SFP) 2 000
Initial recognition of the loan
Year end
J1 Bank (SFP) (2 000 × 10%) 200
Interest received (P/L) 200
Recognition of interest received on foreign loan
The journal entries in the individual accounting records of S Ltd would be as follows:
Dr Cr
FC FC
Initial recognition
J1 Bank (SFP) (2 000/2,00) 1 000
Loan from parent (SFP) 1 000
Initial recognition of the loan at the spot exchange
rate
Year end
J1 Interest paid (P/L) ((2 000 × 10%)/2,50) 80
Bank (SFP) ((2 000 × 10%)/3,00) 67
Recognition of interest paid on loan from parent
J2 Loan from parent (SFP) ((2 000/3,00) – 1 000) 333
Restatement of foreign loan to the spot exchange
rate
The conversion trial balance of S Ltd at year end:
FC Rate R
Interest expense 80 R2,50 200
Foreign exchange differences on interest (13) R2,50 (33)
Foreign exchange differences on loan (333) R2,50 (832)
Loan from parent (1 000 – 333) (667) R3,00 (2 000)
Equity (Balancing) 933 R3,00 2 799
Year end (Balancing) – (134)
– –
402
Foreign operations
The following pro forma consolidation journal entries should be processed at year end:
Dr Cr
R R
J1 Foreign exchange differences (P/L) 832
Reclassification of the exchange differences that relate
the net investment in the foreign operation
J2 Interest received (P/L) 200
Interest paid (P/L) 200
Elimination of intragroup interest received and paid
J3 Loan from parent (SFP) 2 000
Loan to subsidiary (SFP) 2 000
Elimination of intragroup loan
Comments
In the example above, P Ltd’s accounting policy is to include only the capital amount of
the loan (not the interest component) amount as part of the net investment in a foreign
operation. There are, however, different schools of thought on this principle. It can also
be argued that the interest is considered part of the net investment in a foreign
operation. If this is the case, the exchange differences on translation of the interest to
the presentation currency will also be reclassified to other comprehensive income in
accordance with IAS 21.32 upon consolidation. It would be sensible to disclose what is
included (capital and/or interest) in the net investment in a foreign operation in the
accounting policy of the group.
15.12 Foreign operations – Associates and joint ventures

When a parent has an investment in a foreign operation in the form of an associate or
joint venture, the translation of the foreign operation follows the same guidelines as
discussed in chapter 15.8. Assets and liabilities shall be translated at the closing rate
and income and expenses shall be translated at the exchange rate applicable at the
date of the transaction or an average rate. The resulting exchange differences shall be
recognised as a separate component of equity (commonly referred to as the foreign
currency translation reserve (FCTR)) in other comprehensive income until such time
as the associates or joint ventures are disposed of.
Example 15.4 Foreign operation – Associate
2 P Ltd obtained a 30% interest in A Ltd, a foreign entity with FC as its functional
currency, on 1 January 20.15 for FC3 000 and as a result obtained significant
influence over A Ltd from that date.
3 At acquisition date A Ltd’s net asset value amounted to FC8 000.
4 For the year ended 31 December 20.15, A Ltd made a net profit of FC1 500 and a
dividend of FC800 was declared and paid on 30 November 20.15.
403
Chapter 15
5 P Ltd accounts for investments in associates at cost in terms of IAS 27.10(a).

FC1,00 = ZAR
1 January 20.15 2,00
30 November 20.15 2,80
Average for period 2,50
31 December 20.15 3,00
The journal entry in the separate accounting records of P Ltd would be as follows:
Dr Cr
R R
1 January 20.15
J1 Investment in associate (SFP) (3 000 × 2) 6 000
Bank (SFP) 6 000
Initial recognition of investment in associate at the
sport exchange rate
30 November 20.15
J2 Bank (SFP) (800 × 30% × 2,80) 672
Dividend received (P/L) 672
Recognition of dividend received
Comments
The dividend received and paid will be translated at spot exchange rate on the date of
payment.
The pro forma consolidation journal entries would be as follows:

Dr Cr
R R
31 December 20.15
J1 Investment in associate (SFP) (1 500 × 30% × 2,50) 1 125
Recognition of share of profit of foreign associate
J2 Dividend received (P/L) 672
Investment in associate (SFP) 672
Elimination of intragroup dividend received
J3 Investment in associate (SFP) 3 177
Exchange differences on translation (OCI) 3 177
Remeasure the investment in associate to closing rate
404
Foreign operations

(FC) (FC) (R) 30% (R) 30%
Rate
100% 30% At Since
i At acquisition
Net asset value 8 000 2 400 R2,00 4 800
Investment in A Ltd (3 000) R2,00 (6 000)
Goodwill (600) R2,00 (1 200)
• Current year:
Profit for the year 1 500 450 R2,50 1 125
(average)
Dividends (800) (240) R2,80 (672)
700 210 453
Exchange differences on translation
2
(OCI) 3 177
1
F3 210 R3,00 R9 630
(1) FC3 000 + FC210

(2) R9 630 – R453 – R6 000
Comments
The difference between translating a foreign subsidiary and a foreign associate is that
when the foreign operation is an associate, the net assets at year end are not
translated to the presentation currency but rather the initial investment and since
acquisition reserves of the associate. This is because associates are accounted for
using the equity method. The equity method is a method of accounting whereby the
investment is initially recognised at cost and adjusted thereafter for the post-acquisition
change in the investor’s share of the investee’s net assets.
When equity accounting, the goodwill is not accounted for separately as it is included in
the initial investment in A Ltd. Therefore, no additional exchange difference on
translation adjustment is required for goodwill, as is the case for subsidiaries.
15.13 Disposal of a foreign operation

On the disposal of a foreign operation, the cumulative amount of the exchange
differences relating to that foreign operation, recognised in other comprehensive
income and accumulated in the separate component of equity, shall be reclassified
from equity to profit or loss (as a reclassification adjustment) when the consolidated
gain or loss on disposal is recognised. IAS 1 Presentation of Financial Statements
addresses the issue of reclassification adjustments.
The following are accounted for as a disposal of a foreign operation:
l the disposal of an entity’s entire interest in a foreign operation;
l the partial disposal of an entity’s interest in a foreign operation (an interest in the
former subsidiary, associate or jointly controlled entity is retained) and:
• the entity loses control of a subsidiary that includes a foreign operation;
405
Chapter 15
• the entity loses significant influence over an associate that includes a foreign
operation; and
• the entity loses joint control over a jointly controlled entity that includes a
foreign operation.
Therefore, on the disposal of a foreign operation, the cumulative amount of the
exchange differences relating to that foreign operation shall be reclassified from equity
to profit or loss as a reclassification adjustment. When disposing of a foreign subsidiary,
the cumulative amount of the exchange differences relating to that foreign operation
that have been attributed to the non-controlling interests shall be derecognised,
but shall not be reclassified to profit or loss. This means that the cumulative amount
of exchange differences reclassified to profit or loss will be done on a net basis, net of
the non-controlling interests. Example 15.5 illustrates this principle.
An entity can also partially dispose of its interest in a foreign operation without losing
control, significant influence or joint control. This would be any reduction in an
entity’s ownership in a foreign operation, except those reductions referred to above as
disposals. Partial disposals therefore include, amongst others, changes in a parent’s
ownership interest in a subsidiary that do not result in a loss of control.
Upon the partial disposal of a subsidiary that includes a foreign operation, the entity is
required to re-attribute the proportionate share of the cumulative amount of the
exchange differences to the non-controlling interests in that foreign operation.
Example15.6 below illustrates this principle. In any other partial disposal of a foreign
operation (e.g., a branch), the entity is required to reclassify to profit or loss only the
proportionate share of the cumulative amount of the exchange differences.
An entity may dispose (or partially dispose) of its interest in a foreign operation through
sale, liquidation, repayment of share capital or abandonment of all, or part of, that
entity. A write-down of the carrying amount of a foreign operation does not constitute a
partial disposal. Accordingly, no part of the foreign exchange gain or loss recognised in
other comprehensive income is reclassified to profit or loss at the time of a write-down.
406
Foreign operations
Disposal of a foreign operation resulting in a loss of control

Example 15.5
(NCI is measured at fair value at the acquisition date)

P Ltd and
sub-
sidiaries A Ltd
(consoli-
dated)
R FC
ASSETS
Investment in A Ltd – 4 000 shares at cost price 50 000 –
Inventory 200 000 12 750
Total assets R750 000 FC19 750
Total equity and liabilities R750 000 FC19 750

P Ltd and
subsidiaries
A Ltd
(consoli-
dated)
R FC
Revenue 500 000 30 000
Cost of sales (210 000) (20 000)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R190 000 FC4 750
R190 000 FC4 750
407
Chapter 15

Retained earnings
P Ltd and
sub-
sidiaries A Ltd
(consoli-
dated)
R FC
Dividend paid: 31/12/20.17 (50 000) (2 500)
Balance at 31 December 20.17 R250 000 FC9 750
functional currency. P Ltd purchased 8 000 shares in A Ltd, a foreign subsidiary with
FC as its functional currency, on 1 January 20.13 for R100 000. The analysis of
owners’ equity of A Ltd, calculated correctly up to 31 December 20.16, is as follows:
Analysis of owners’ equity of A Ltd

(FC) (R) (R) 80% (R) 80% (R) 20%
Rate
i At acquisition
Share capital 10 000 R8,00 80 000 64 000 16 000
12 500 R8,00 100 000 80 000 20 000
Equity represented by good-
will – Parent and NCI 3 250 R8,00 26 000 20 000 6 000
• Current year:
Retained earnings 5 000 (average) 42 250 33 800 8 450
FCTR (excluding goodwill) 15 250 12 200 3 050
FCTR (goodwill only) 3 250 2 600 650
31 December 20.16 20 750 R9,00 186 750 48 600 38 150
2 On 31 March 20.17, P Ltd disposed of 4 000 shares in A Ltd for R86 000. P Ltd
exercised significant influence over the financial and operating policy decisions of
A Ltd from that date. The fair value of the remaining investment by P Ltd in A Ltd
was R80 000 at the date of disposal of the interest.
3 A Ltd’s profit and tax for 20.17 accrued evenly.
4 P Ltd accounted for the investment in A Ltd at cost in its separate financial
statements.
408
Foreign operations
5 P Ltd elected to measure the non-controlling interest at fair value at the date of
acquisition.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations until the
date of disposal thereof and A Ltd does not represent a separate major line of
business or geographical area of the group.
7 None of P Ltd’s subsidiaries declared or paid a dividend during the 20.17 financial
year.
8 The company tax rate is 28%. Ignore capital gains tax consequences. Assume there
are no deferred tax consequences on the exchange differences on translation of the
foreign operation.
FC1,00 = ZAR
31/12/20.16 9,00
Average 1/1/20.17–31/3/20.17 9,20
31/3/20.17 9,50
Average 1/4/20.17–31/12/20.17 9,80
31/12/20.17 10,00
Solution 15.5
The consolidated financial statements, incorporating the results of A Ltd in accordance

with the equity method, for the year ended 31 December 20.17 are prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (P and other subsidiaries) 500 000
Investment in associate (50 000(remaining cost) + 30 000(J1) + 8 460(J3))
or (80 000(fair value of retained investment after loss of control) + 8 460(since)) 88 460
588 460
Current assets
Inventory (P and other subsidiaries) 200 000
Other components of equity 4 495
688 460
Non-controlling interests (i.r.o. other subsidiaries) 100 000
409
Chapter 15
P LTD GROUP
Revenue (500 000(P) + 69 000(A)) 569 000
Cost of sales (210 000(P) + 46 000(A)) (256 000)
Gross profit (290 000(P) + 23 000(A)) 313 000
Other income
(71(gain on disposal of interest) + 23 385(reclassification adjustment)) 23 456
Income tax expense (146 000(P) + 12 070(A)) (158 070)
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations 10 731
Less: Reclassification adjustment (23 385)
Non-controlling interests (40 000(other) + 2 186(A)) 42 186
R192 351
Non-controlling interests (42 186 + 1 821(A) + 325(A)) 44 332
R184 192
410
Foreign operations
P LTD GROUP
FCTR Total NCI
Balance at
1 2 3
1 Jan 20.17 400 000 183 800 14 800 598 600 98 150 696 750
Changes in equity
for 20.17
Dividends – (50 000) – (50 000) – (50 000)
Total comprehen-
sive income for
the year:
Other comprehen-
4 5
sive income – – (10 305) (10 305) 2 146 (8 159)
Derecognition of
non-controlling
interests – – – – (42 482) (42 482)
Balance at
6
31 Dec 20.17 R400 000 R283 965 R4 495 R688 460 R100 000 R788 460

(1) 150 000(P) + 33 800(A) = 183 800
(2) 12 200 + 2 600 = 14 800
(3) 100 000 + 42 482 – 2 146 – 42 186 = 98 150
(4) 139 860 – 150 165 = 10 305
(5) 44 332 – 42 186 = 2 146
(6) The cumulative amount of the exchange differences has been reclassified from equity to profit or
loss as a reclassification adjustment, on a net basis, in terms of IAS 21.48 and IAS 21.48B. The
balance of R4 495 remaining in the FCTR arises subsequent to the loss of control in the period in
which A Ltd is an associate. The originating entry for this is the share of other comprehensive
income of the associate presented in the statement of profit or loss and other comprehensive
income.
411
Chapter 15
Calculations
C1 Analysis of owners’ equity of A Ltd – as subsidiary
(FC) (R) (R) 80% (R) 80% (R) 20%
Rate
i At acquisition
Share capital 10 000 R8,00 80 000 64 000 16 000
12 500 R8,00 100 000 80 000 20 000
goodwill –Parent and
NCI 3 250 R8,00 26 000 20 000 6 000
year:
FCTR
(excluding goodwill) 15 250 12 200 3 050
FCTR (goodwill only) 3 250 2 600 650
31 December 20.16 20 750 R9,00 186 750 48 600 38 150
• Current year:
1
Profit: first three months 1 188 R9,20 10 930 8 744 2 186
on translation
(excluding goodwill) 9 106 7 285 1 821
on translation
(goodwill only) 1 625 1 300 325
31 March 20.17 21 938 R9,50 208 411 65 929 42 482
iii Loss of control over
subsidiary
Derecognise assets and
liabilities (IFRS 10.B98) (21 938) (208 411) (100 000) (65 929) (42 482)
– – – – –
(1) FC4 750/12 × 3 = FC1 188
412
Foreign operations
C2 Analysis of owners’ equity of A Ltd – as associate

(FC) (FC) (R) 40% (R) 40%
Rate
100% 40% At Since
i At acquisition
value 8 421 R9,50 80 000
• Current year:
1
Profit: last nine months 3 562 1 425 R9,80 13 965
Dividend (2 500) (1 000) R10,00 (10 000)
3 965
2
Exchange differences on translation 4 495
31 December 20.17 FC8 846 R10,00 R88 460
(1) FC4 750 – FC1 188 = FC3 562

(2) R88 460 – R3 965 – R80 000 = R4 495 as balancing amount
Comments
a If a parent loses control, as is the case with A Ltd here, the gain or loss on disposal
of interest would be calculated as follows using IFRS 10.B98:
Derecognise assets (incl. goodwill) and liabilities on date control is lost (208 411)
Derecognise non-controlling interest 42 482
Recognise consideration received 86 000
Fair value of investment retained 80 000
Gain (consolidated) recognised in profit or loss R71
b By means of the relevant amounts (as contained in the analysis of the ownership
interest of A Ltd), the gain on disposal of shares in A Ltd can be analysed as follows:
Attributable net assets disposed of [(208 411 – 26 000(GW)) × 40%] (72 964)
13 036
Goodwill realised (only for the parent company) (20 000 × 40/80) (10 000)
3 036
Remeasurement gain (80 000 versus (72 965 + 10 000)) (2 965)
Capital (consolidated) gain on disposal of the interest R71
c In this example, A Ltd had post-acquisition reserves comprising FCTR and retained
earnings. Any balance of the FCTR would, on the date of the disposal, be reclassified
through other comprehensive income to profit or loss on a net basis. See journal
entry 2. If A Ltd had other post-acquisition reserves, any balance of these reserves
would, on the date of the disposal, be transferred to retained earnings (e.g.
revaluation surplus or mark-to-market reserve).
413
Chapter 15

126 000

Dr Cr
R R
Gain on disposal of interest (P/L) (per P) (comment (a)) 36 000
Cost of sales (P/L) (20 000 × 3/12 × R9,20) 46 000
Non-controlling interest (P/L) (first 3 months) 2 186
Income tax expense (P/L) (5 250 × 3/12 = 1 312 × R9,20) 12 070
Non-controlling interest (OCI) (1 821 + 325) 2 146
Revenue (P/L) (30 000 × 3/12 × R9,20) 69 000
Retained earnings (SCE) (opening balance) 33 800
FCTR (SCE) (opening balance) 14 800
Gain on disposal of interest (P/L) (group context) 71
Exchange differences on translation of foreign
operation (OCI) (9 106 + 1 625) 10 731
Consolidating the relevant amounts in respect of
period when A Ltd was a subsidiary
J2 Reclassification adjustment (OCI) (comment (b)) 23 385
Gain on disposal of interest (P/L) 23 385
Reclassification of realised exchange gains to P/L
Non-controlling interests (SFP/SCE) (opening balance
in equity) 38 150
interest in profit) 2 186
Non-controlling interests (SFP/SCE) (1 821 + 325)
(current year’s exchange differences on translation) 2146
interests in equity for A Ltd (comment (c))
Other income (dividend received) (P/L) 10 000
Share of other comprehensive income
of associate (OCI) 4 495
Equity accounting of associate for current year
414
Foreign operations
Comments
a The gain on disposal in the separate accounting records of P Ltd could also be
calculated as 86 000 – (100 000 × 4 000/8 000) = 36 000 profit.
b 12 200 + 2 600 + 7 285 + 1 300 = 23 385 Done on a net basis in terms of
IAS 21.48B. Hence, no NCI is recognised in this journal entry.
c All entries in J3 are made against the same ledger account with no net effect. Thus,
it may be argued that J3 is not needed. J3 only assists in preparing the various line
items for the non-controlling interests in the consolidated statement of changes in
equity.
Partial disposal of an interest in a foreign subsidiary with no

change in the status as the subsidiary remains a subsidiary
Example 15.6 (control is not lost) (NCI is measured at its proportionate
acquisition date)

P Ltd and
sub-
sidiaries A Ltd
(consoli-
dated)
R FC
ASSETS
Investment in A Ltd – 6 000 shares at cost price 60 000 –
Inventory 167 000 15 250
Total assets R727 000 FC22 250
Total equity and liabilities R727 000 FC22 250
415
Chapter 15

P Ltd and
subsidiaries
A Ltd
(consoli-
dated)
R FC
Revenue 500 000 30 000
Cost of sales (210 000) (20 000)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R167 000 FC4 750
R167 000 FC4 750

Retained earnings
P Ltd and
subsidiaries
A Ltd
(consoli-
dated)
R FC
Dividend paid: 31/12/20.17 (50 000) –
Balance at 31 December 20.17 R227 000 FC12 250
functional currency. P Ltd purchased 8 000 shares in A Ltd, a foreign entity with FC
as its functional currency, for R80 000. From this date, P Ltd had control over A Ltd
in accordance with IFRS 10. The analysis of owners’ equity of A Ltd, calculated
correctly up to 31 December 20.16, is as follows:
416
Foreign operations
Analysis of owners’ equity of A Ltd

(FC) Rate (R) (R) 80% (R) 80% (R) 20%
i At acquisition
Share capital 10 000 R8,00 80 000 64 000 16 000
12 500 R8,00 100 000 80 000 20 000
goodwill – Parent – – – –
Consideration
and NCI 12 500 100 000 80 000 20 000
i Since acquisition
i
• Current year:
Retained earnings 5 000 (average) 42 250 33 800 8 450
FCTR 15 250 12 200 3 050
1
31 December 20.16 FC17 500 R9,00 R157 500 R46 000 R31 500
(1) 33 800(RE) + 12 200(FCTR) = 46 000

2 On 31 March 20.17, P Ltd disposed of 2 000 shares in A Ltd for R43 000.
3 A Ltd’s profit and taxation for 20.17 accrued evenly.
4 P Ltd accounted for the investment in A Ltd at cost in its separate financial statements.
5 P Ltd elected to measure the non-controlling interest at its proportionate share of
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
7 None of P Ltd’s subsidiaries declared or paid a dividend during the 20.17 financial
year.
8 The non-controlling interest opening balance on 1 January 20.17 in the statement of
changes in equity for all other subsidiaries (excluding A Ltd) was R60 000.
FC1,00 = ZAR
31/12/20.16 9,00
Average 1/1/20.17–31/3/20.17 9,20
31/3/20.17 9,50
Average 1/4/20.17–31/12/20.17 9,80
31/12/20.17 10,00
417
Chapter 15
Solution 15.6
The consolidated financial statements for the year ended 31 December 20.17 are
prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (500 000(P) + (7 000 × R10,00)(A)) 570 000
Current assets
Inventory (167 000(P) + (15 250 × R10,00)(A)) 319 500
700 501
418
Foreign operations
P LTD GROUP
Revenue (500 000(P) + 289 500(A)) 789 500
Cost of sales (210 000(P) + 193 000(A)) (403 000)
Gross profit (290 000(P) + 96 500(A)) 386 500
Other income (23 000(P) – 23 000(J5)) –
Income tax expense (146 000 + 50 662) (196 662)
PROFIT FOR THE YEAR R189 838
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations
(9 106(analysis) + 10 056(analysis)) 19 162
Non-controlling interests (40 000(other) + 2 186(analysis) + 13 963(analysis)) 56 149
R189 838
Non-controlling interests (56 149 + 1 821(analysis) + 4 022(analysis)) 61 992
R209 000
419
Chapter 15
P LTD GROUP
Changes Re-
Share Total
in owner- tained FCTR Total NCI
capital equity
ship earnings
Balance at
1 Jan 20.17 1 2
400 000 – 183 800 12 200 596 000 91 500 687 500
Changes in
equity for
20.17
Dividends – – (50 000) – (50 000) – (50 000)
Total
compre-
hensive
income for
the year:
Profit for the
year – – 133 689 – 133 689 56 149 189 838
Other
compre-
hensive
4 3
income – – – 13 319 13 319 5 843 19 162
Disposal of
interest (J5) – 12 364 – – 12 364 30 636 43 000
Transfer of
FCTR (J5) – – – (4 871) (4 871) 4 871 –
Balance at
31 Dec
20.17 R400 000 R12 364 R267 489 R20 648 R700 501 R188 999 R889 500

(1) 150 000(P) + 33 800(A) = 183 800
(2) 31 500(A) + 60 000(other subsidiaries) = 91 500
(3) 61 992 – 56 149 = 5 843
(4) 19 162(OCI) – 5 843 = 13 319 or 19 162(OCI) – 1 821(NCI) – 4 022(NCI) = 13 319
420
Foreign operations
Calculations
(FC) (R) (R) 80% (R) 80% (R) 20%
Rate
i At acquisition
Share capital 10 000 R8,00 80 000 64 000 16 000
12 500 R8,00 100 000 80 000 20 000
goodwill – Parent – – – –
year:
FCTR 15 250 12 200 3 050
31 December 20.16 17 500 R9,00 157 500 46 000 31 500
• Current year:
1
Profit: first three months 1 188 R9,20 10 930 8 744 2 186
on translation 9 106 7 285 1 821
31 March 20.17 18 688 R9,50 177 536 62 029 35 507
Sale of 2 000 shares2 (20 000) (15 507) 35 507
46 522 71 014
Profit:
3
last nine months 3 562 R9,80 34 908 20 945 13 963
on translation 10 056 6 034 4 022
4
31 December 20.17 FC22 250 R10,00 R222 500 R73 501 R88 999
(1) FC4 750/12 × 3 = FC1 188

(2) 80 000 × 20/80 = 20 000At
(33 800 + 8 744) × 20/80 = 10 636 RE
(12 200 + 7 285) × 20/80 = 4 871 FCTR
10 636 + 4 871 = 15 507
Equity acquired from parent = 35 507
(3) FC4 750 – FC1 188 = FC3 562
(4) (33 800 + 8 744 – 10 636 + 20 945) = 52 853 RE
(12 200 + 7 285 – 4 871 + 6 034) = 20 648 FCTR
Total Since = 52 853 + 20 648 = 73 501
421
Chapter 15
Comments
a The amount for the change in ownership recognised in equity can be calculated as
Fair value of the consideration paid by NCI 43 000
Amount by which the non-controlling interests are adjusted
(reserves acquired from parent – see below) (35 507)
NCI after transaction (177 536 × 40%) 71 014
NCI before transaction (177 536 × 20%) (35 507)
7 493
Add: FCTR already treated as equity 4 871
b The amount for the change in ownership recognised in equity can also be calculated
as follows (from the change in the parent’s interest):
Fair value of the consideration received by the parent 43 000
Equity relinquished to NCI (35 507)
Historic fair value of shares disposed of (20 000)
Attributable post-acquisition equity disposed of:
Retained earnings (10 636)
FCTR (4 871)
7 493
Amount to be recognised directly in equity/Capital gain on disposal
of interest (in group context) R12 364
c Alternatively, the amount can also be calculated as follows:
Attributable net assets disposed (35 507)
7 493
Amount to be recognised directly in equity/Capital gain on disposal
of interest (in group context) R12 364

100 000
Goodwill (parent) –
422
Foreign operations
C3 Pro forma consolidation journal entries for the consolidation

Dr Cr
R R
Goodwill (SFP) –
Main elimination journal entry at acquisition
FCTR (SCE) 3 050
Recognition of of non-controlling interests’ portion
of retained earnings & FCTR
of current year’s profit at 20%
of exchange differences on translation at 20%
Gain on disposal of interest (P/L) (per P) 23 000
FCTR (SCE) 4 871
Changes in ownership (SCE) 12 364
(20 000(At) + 10 636(RE) + 4 871(FCTR)) 35 507
Pro forma correction of group gain on disposal
of current year’s profit at 40%
of exchange differences on translation at 40%
423
Chapter 15
Comment
Conversion statement of profit or loss and other comprehensive income of A Ltd for the
year ended 31 December 20.17
First 3 months Last 9 months

TOTAL
FC (R9,20) (R9,80)
R
R R
Revenue 30 000 69 000 220 500 289 500
Cost of sales (20 000) (46 000) (147 000) (193 000)
Gross profit 10 000 23 000 73 500 96 500
Income tax expense (5 250) (12 070) (38 592) (50 662)
FC4 750 R10 930 R34 908 R45 838
Question 15.1
Eastern Ltd is a South African company and has the South African Rand (ZAR) as its
functional currency. You have commenced with the final audit of Eastern Ltd for the
financial reporting period ended 30 June 20.18.
A few weeks into the engagement, a few unresolved accounting issues have arisen.
These issues need to be dealt with by you and have been summarised below.
Separate/Individual financial statements of group companies are included in the
appendix.
Information relevant to the consolidation

Eastern Ltd acquired its 80% controlling interest in Travel Ltd, a foreign entity, on
1 July 20.17 for LSL3 million when the equity of Travel Ltd consisted of the following:
LSL
Retained earnings 1 254 687
Revaluation surplus 1 228 125
Equity 2 582 812
The functional currency of Travel Ltd is the Lesotho Loti (LSL). The fair value of
Travel Ltd ordinary shares at the acquisition date amounted to LSL36,00 per share.
All the assets and liabilities of Travel Ltd were deemed to be fairly valued at the
acquisition date, except for a factory building. No additional assets, liabilities or
contingent liabilities were identified at the acquisition date.
It was determined at the acquisition date that a factory building, owned by Travel Ltd,
appeared to be undervalued. Travel Ltd is entitled to a capital allowance on the
building, which is the same as the depreciation on the building. The building is
measured according to the revaluation model in the individual financial statements of
Travel Ltd.
424
Foreign operations
Details of the building are as follows:

LSL’000
Revalued carrying amount (1 July 20.17) 3 200
Fair value (1 July 20.17) 4 000
The directors of Travel Ltd have no intention of disposing of the building in the near
future. The building is depreciated on the straight-line basis over its estimated remaining
useful life of 10 years on 1 July 20.17. There is no residual value for the purposes of
depreciation. The factory building was revalued at the reporting date 30 June 20.18 in
the individual financial statements of Travel Ltd.
Eastern Ltd disposed of a 20% interest in Travel Ltd on 30 June 20.18 for R250 000
cash. Eastern Ltd therefore now holds a 60% interest in Travel Ltd after the date of
disposal and retains control over the board of directors of Travel Ltd. The accountant
was unsure how to account for the disposal in the separate financial statements and
therefore recorded the proceeds in a suspense account.
l The South African tax rate of companies is 28% and the capital gains tax inclusion
rate is 80%.
l The applicable tax rate of companies is 25% in Lesotho.
l The following exchange rates are applicable:
LSL1,00 = ZAR
1 July 20.17 0,50
30 June 20.18 0,70
Average for the 20.18 financial reporting period 0,60
Information about group accounting policies

l The Eastern Ltd Group elected to measure the non-controlling interests at fair
value at the acquisition date.
l The Eastern Ltd Group measures factory buildings according to the cost model in
terms of IAS 16 Property, Plant and Equipment.
l Eastern Ltd accounts for investments in subsidiaries at cost in accordance with
IAS 27.10(a) in its separate financial statements.
Required
Provide the pro forma journal entries that should be processed in respect of Travel Ltd
in the consolidated annual financial statements of Eastern Ltd for the financial
reporting period ended 30 June 20.18.
425
Chapter 15
APPENDIX
EXTRACTS FROM SEPARATE/INDIVIDUAL FINANCIAL STATEMENTS
OF GROUP COMPANIES
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
Eastern Travel
Ltd Ltd
R’000 LSL’000
ASSETS
Non-current assets
Equity investments at fair value (through other comprehensive
income) 8 500 –
Investment in subsidiary: Travel Ltd 1 500 –
Current assets
Inventory – 300
Trade receivables 5 800 280
Cash and cash equivalents 2 800 435
Total assets 20 685 5 015
Share capital (1 000 000/100 000 shares) 8 000 100
Revaluation surplus – 445
Total equity 15 000 2 323
Long-term borrowings 4 000 2 155
Deferred tax 350 120
Total non-current liabilities 4 350 2 275
Current liabilities
Trade and other payables 985 280
Suspense account: Proceeds on disposal 250 –
Current tax payable 100 137
Total current liabilities 1 335 417
Total equity and liabilities 20 685 5 015
426
Foreign operations

Eastern Travel
Ltd Ltd
R’000 LSL’000
Revenue 100 2 000
Cost of sales (20) (500)
Other income 2 000 300
Other expenses (500) (500)
Finance costs (net) (700) (50)
Income tax expense (180) (600)
Items that will not be reclassified to profit or loss,
net of tax:
Gains on equity investments at fair value 300 –
Loss on property revaluation – (660)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 000 (10)
STATEMENT OF CHANGES IN EQUITY THE YEAR ENDED 30 JUNE 20.18

Eastern Travel
Ltd Ltd
R’000 LSL’000
Retained earnings
Balance at 1 July 20.17 5 800 1 255
Total comprehensive income for the year 700 650
Transfer from revaluation surplus (on 30 June) – 123
Dividend declared and paid (on 30 June) (1 500) (250)
Balance at 30 June 20.18 5 000 1 778
427
Chapter 15
Pro forma consolidation journal entries for Travel Ltd

Dr Cr
R R
J1 Factory building (SFP) (LSL800 000 × R0,50) 400 000
Deferred tax (SFP) (LSL800 000 × 25% × R0,50) 100 000
Equity at acquisition (SCE) (balancing) 300 000
Pro forma IFRS 3 remeasurement of factory building at
acquisition including tax consequences
J2 Share capital (SCE) (LSL100 000 × R0,50) 50 000
Retained earnings (SCE) (LSL1 254 687 × R0,50) 627 344
Revaluation surplus (SCE) (LSL1 228 125 × R0,50) 614 063
Equity at acquisition (SCE) (J1 above) 300 000
Goodwill (SFP) 268 593
Investment in Travel Ltd (SFP) 1 500 000
Non-controlling interests (SFP/SCE) (at fair value)
(20 000 × LSL36 × R0,50) 360 000
Main elimination journal entry for Travel Ltd
at acquisition date
J3 Depreciation (P/L)
((LSL800 000/10 years) × R0,70 (closing spot)) 56 000
Pro forma adjustment of depreciation at group level
J4 Deferred tax (SFP) (R56 000 × 25%) 14 000
Income tax expense (P/L) 14 000
Tax effect for depreciation adjustment
J5 Factory building (SFP)
(LSL660 000 × 1/0,75 × R0,70 (closing spot)) 616 000
Loss on property revaluation (OCI) 616 000
Elimination of subsequent revaluation done by the
subsidiary due to group accounting policy of cost
J6 Tax on other comprehensive income (OCI)
(R616 000 (J6) × 25%) 154 000
Deferred tax (SFP) 154 000
Elimination of tax effect for building revaluation at year
end
J7 Retained earnings (SCE) (LSL123 000 × R0,70 (closing spot)) 86 100
Reversal of realisation of revaluation surplus to
retained earnings
continued
428
Foreign operations
Dr Cr
R R
J8 Goodwill (SFP) (LSL537 186 × (R0,70 – R0,50)) 107 437
Factory building (SFP) (LSL800 000 × (R0,70 – R0,50)) 160 000
Deferred tax (SFP) (LSL200 000 × (R0,70 – R0,50)) 40 000
Exchange differences on translation (OCI) (balancing) 227 437
Exchange differences on translation due to non-
inclusion of pro forma IFRS 3 remeasurement of
building and goodwill on pre-consolidation
conversion trial balance
Non-controlling interests (OCI) 160 600
Recognition of NCI’s portion of profit and exchange
differences on translation for the current year
J10 Other income: Dividend received (P/L) 140 000
Dividend paid (SCE) (LSL250 000 × R0,70 (closing spot)) 175 000
J11 Suspense account: Proceeds on disposal (SFP) 250 000
Foreign currency translation reserve (SCE) (analysis) 160 600
Changes in ownership (SCE) (balancing) 160 800
Non-controlling interests (SFP/SCE) (analysis) 571 400
Change in ownership interest on disposal of 20% to
separate equity category
429
Chapter 15
Comments
a The amount for the change in ownership recognised in equity can be calculated as
Fair value of the consideration paid by NCI 250 000
Amount by which the non-controlling interests are adjusted
(reserves acquired from parent) (571 400)
NCI after transaction (analysis) 1 127 800
NCI before transaction (analysis) (556 400)
(321 400)
b Alternatively, the amount for the change in ownership recognised in equity can also
be calculated as follows (from the change in the parent’s interest):
Fair value of the consideration received by the parent 250 000
Equity relinquished to NCI (571 400)
Historic fair value of shares disposed of (375 000)
Attributable post-acquisition equity disposed of:
Retained earnings (35 800)
FCTR (160 600)
(321 400)
430
Foreign operations
Calculations
C1 Analysis of owners’ equity of Travel Ltd
Total ECT (80%–60%) NCI

Total LSL Rate
ZAR At Since (20%–40%)
i At acquisition
(1/7/20.17)
Share capital 100 000 0,50 50 000 40 000 10 000
Retained earnings 1 254 687 0,50 627 344 501 875 125 469
Revaluation surplus 1 228 125 0,50 614 063 491 250 122 813
Remeasurement of
factory building
(4 million – 3,2 million) 800 000 0,50 400 000 320 000 80 000
Deferred tax
(800 000 × 25%) (200 000) 0,50 (100 000) (80 000) (20 000)
3 182 812 0,50 1 591 407 1 273 125 318 282
Equity represented
by goodwill –
Parent and NCI 537 188 0,50 268 593 226 875 41 718
Consideration
(3 000 000 × 0,5)
and NCI (100 000 ×
20% × 36 × 0,5) 3 720 000 0,50 1 860 000 1 500 000 360 000
• Current year:
Profit (650 000 –
1
80 000 + 220 000) 590 000 0,60 354 000 283 200 70 800
Dividend paid
(30/06/20.18) (250 000) 0,70 (175 000) (140 000) (35 000)
Exchange
differences on
translation – – 802 999 642 399 160 600
Equity/NAV
(30/06/20.18) 4 059 998 0,70 2 841 999 785 599 556 400
30/06/20.18
3
Disposal of interest (375 000) 4(196 400) 571 400
589 199 1 127 800
(1) 800 000 / 10 years remaining useful life = 80 000 depreciation

(2) 200 000 / 10 years remaining useful life = 20 000 deferred tax
(3) 1 500 000 × 20/80 = 375 000
(4) (283 200 – 140 000) × 20/80 = 35 800 RE
642 399 × 20/80 = 160 600 FCTR
196 400
431
Chapter 15
C2 Goodwill remeasurement
LSL Rate R
At acquisition date 537 186 R0,50 268 593
Exchange differences on translation: 20.18 107 437
30/06/20.18 537 186 R0,70 376 030
C3 Factory building remeasurement

LSL Rate R
At acquisition date 800 000 R0,50 400 0000
Exchange differences on translation: 20.18 160 000
30/06/20.18 800 000 R0,70 560 0000
C4 Deferred tax remeasurement

LSL Rate R
At acquisition date (200 000) R0,50 (100 000)
Exchange differences on translation: 20.18 (40 000)
30/06/20.18 (200 000) R0,70 (140 0000)
432
16
Consolidated statement of cash flows
Introduction
16.1 Background .............................................................................................. 436
Example 16.1: Consolidated statement of cash flows .............................. 437
Associates and joint ventures

16.2 Investments in associates and joint ventures .......................................... 442
Example 16.2: Investment in associate .................................................... 443
16.3 Acquisition and disposal of associates and joint ventures ....................... 444
Example 16.3: Acquisition and disposal of associate ............................... 444
Changes in ownership interests in subsidiaries

16.4 Acquisition and disposal of a subsidiary .................................................. 446
Example 16.4: Acquisition and disposal of a subsidiary ........................... 449
16.5 Acquisition of a subsidiary in terms of a non-cash transaction ................ 457
16.6 An associate becomes a subsidiary and a subsidiary
becomes an associate ............................................................................. 457
Example 16.5: Associate becomes a subsidiary and a subsidiary
becomes an associate ...................................................... 459
16.7 Financing activities between non-controlling shareholders
and the group ........................................................................................... 469
16.8 Acquisition and disposal of an interest in an existing subsidiary
that does not result in a loss of control .................................................... 469
Sundry aspects
16.9 Foreign operations ................................................................................... 469
16.10 Discontinued operations .......................................................................... 470
16.11 Intragroup loans ....................................................................................... 470
Example 16.6: Sundry aspects................................................................. 471
Question 16.1 ........................................................................................................ 479
433
STATEMENT OF CASH FLOWS – IAS 7

Definitions Accounting treatment
Cash Operating activities
Cash on hand and demand deposits. +/- Investing activities
Cash equivalents +/- Financing activities
Short-term, highly liquid investments that are = Movement in cash and cash equivalents
readily convertible to known amounts of cash and Use:
which are subject to an insignificant risk of
l Direct method
changes in value.
Receipts from customers less payments to
Operating activities suppliers and employees.
Principal revenue-producing activities of the entity
l Indirect method
and other activities that are not investing or
financing activities. Profit or loss adjusted for non-cash items,
investment income, finance costs and
Investing activities movements in debtors, creditors and inventory.
Acquisition and disposal of long-term assets and
other investments not included in cash
equivalents.
Financing activities
Activities that result in changes in the size and
composition of the contributed equity and
borrowings of the entity.
Operating activities Financing activities

Principal revenue-producing activities; generally Activities that result in changes in the size and
result from the transactions and other events that composition of the contributed equity and
enter into the determination of profit or loss. borrowings of the entity.
Examples: Examples:
l Sale of goods and rendering of services; l Issuing or redemption of shares or other equity
l Royalties, fees, commissions and other instruments;
revenue; l Proceeds from issuing debentures, loans,
l Payments to suppliers for goods and services; notes, bonds, mortgages and other short- or
long-term borrowings;
l Payments to and on behalf of employees;
l Repayments of amounts borrowed;
l Receipts and payments of an insurance entity
for premiums and claims, annuities and other l Payments by a lessee for the reduction of the
policy benefits; outstanding liability relating to a finance lease.
l Income taxes;
l Receipts and payments from contracts held for
dealing or trading purposes;
l Interest received/paid and dividends
received/paid disclosed separately.
Investing activities
Acquisition and disposal of long-term assets and
other investments not included in cash
equivalents.
Examples:
l Acquisition or sale of property, plant and
equipment, intangibles and other long-term
assets;
l Acquisition or sale of financial assets that are
not held for trading;
l Loans granted and repayment of loans.
435
Chapter 16
1
Introdu
uction
16.1 Ba
ackground
1 The contents
c and
d format of the consollidated stateement of ca
ash flows are
a essentia ally
identic
cal to those
e of the sta
atement of cash flowss of an indivvidual comppany and are
a
prescribed by IASS 7.
2 The consolidated d statementt of cash flo
ows comprisses four ele
ements:
l cash flows fro om operatinng activitiees;
l cash flows fro om investinng activitiees;
l cash flows fro om financinng activitiees;
l net changes in cash and cash h equivalents, representing the e differenc
ces
between cash h and cash h equivalen nts at the b
beginning and
a end of the reporting
period.
Commentt
The statemment of cash flows of a co
ompany in efffect represen nts a summaryy (in a speciffic
format) of the companyy’s primary re
ecord of first e
entry, namely
y the cashboo
ok.
436
Example 16.1 Consolidated statement of cash flows
The following represents the abridged consolidated statements of the P Ltd Group for
the year ended 31 December 20.17:
P LTD GROUP
20.17 20.16
ASSETS
Non-current assets
Land and buildings at valuation 122 389 102 000
Plant and equipment
Cost price 196 684 157 824
Accumulated depreciation (71 449) (54 100)
Goodwill 3 200 3 200
Investment in associate 12 973 7 505
Other financial assets 4 738 4 679
268 535 221 108
Current assets
Inventory 46 655 32 625
Receivables 68 387 60 345
Bank and money market assets 2 833 3 011
117 875 95 981
Other components of equity 99 149 78 760
201 770 171 118
Total equity 209 778 178 200
Deferred tax 40 351 34 639
Interest-bearing loans 49 308 34 423
Current liabilities
Payables 45 270 36 033
Tax due 2 388 2 712
Shareholders for dividends 6 291 6 291
Short-term loans 33 024 24 791
Total current liabilities 86 973 69 827
437
Chapter 16
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue 140 421
Gross profit 77 919
Other income (dividends received – R725; interest received – R2 264) 2 989
Finance costs (9 920)
Share of profit of associate (including dividend received R2 615) 4 745
Revaluation surplus 20 389
R23 094
R43 483
P LTD GROUP
Non-
Revalua-
tion Total
reserve
interests
Balance at
1 January 20.17 15 650 78 760 76 708 171 118 7 082 178 200
Changes in equity
for 20.17
Dividends declared – – (11 683) (11 683) (222) (11 905)
Total comprehensive
Other comprehensive
income – 20 389 – 20 389 – 20 389
Balance at
31 December 20.17 R15 650 R99 149 R86 971 R201 770 R8 008 R209 778
438
1 An analysis of the notes to the statement of profit or loss and other comprehensive
income indicates that the following items were included in profit before tax:
Depreciation on plant and equipment R18 640
Profit on sale of plant and equipment R280
2 The short-term portion of long-term loans included in short-term loans was R7 704
(20.16: R14 701).
3 No land and buildings were purchased or sold during the current year. Plant and
equipment with a cost price of R2 000 and a carrying amount of R709 was sold for
R989 during the current year. It is estimated that R12 000 of the current year’s
purchases of property, plant and equipment were incurred to expand activities.
4 There were no changes in the shareholdings in subsidiaries during the year under
review.
5 Ignore the deferred tax implications of the revaluation of the land of the parent.
Solution 16.1
P LTD GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities

Cash receipts from customers (C1) 132 379
Cash paid to suppliers and employees (C2) (87 958)
Cash generated from operations 44 421
Investment income (2 264 + 725 + 2 615) 5 604
Interest paid (9 920)
Tax paid (C7) (8 228)
Dividend paid (C8) (11 905)
Net cash from operating activities R19 972
Cash flows from investing activities
Replacement of plant and equipment (C6) (28 860)
Investment in other financial assets (4 738 – 4 679) (59)
Additions to plant and equipment (C6) (12 000)
Investment in associate (12 973 – 7 505 – (4 745 – 2 615)) (3 338)
Proceeds from sale of plant and equipment 989
Net cash used in investing activities (R43 268)
Cash flows from financing activities
Long-term loans raised (C3) 7 888
Short-term loans raised (C4) 15 230
Net cash used in financing activities R23 118
Net decrease in cash and cash equivalents (178)
Cash and cash equivalents at beginning of period 3 011
Cash and cash equivalents at end of period R2 833
439
Chapter 16
Calculations
C1 Cash received from customers
Receivables Dr Cr
Balance at beginning of year 60 345
Revenue 140 421
Bank (balancing figure) 132 379
Balance at end of year 68 387
R200 766 R200 766
or
Revenue 140 421
Increase in receivables (8 042)
R132 379
C2 Cash paid to suppliers and employees

Profit and loss account Dr Cr
Revenue 140 421
Depreciation 18 640
Interest paid 9 920
Interest received 2 264
Dividend received – other 725
Dividend received – associate 2 615
Equity accounted profit 2 130
Profit on sale of plant and equipment 280
Expenses (balancing figure) 83 165
R148 435 R148 435
or
Cost of sales 62 502
Other expenses (statement of profit or loss and other comprehensive income) 39 023
Depreciation (18 640)
Profit on sale of plant and equipment 280
Expenses R83 165
Expenses (83 165)

Increase in inventory (14 030)
Increase in payables 9 237
(R87 958)
C3 Long-term loans raised

Long-term loans Dr Cr
Balance at beginning of year (34 423 + 14 701) 49 124
Raised (balancing figure) 7 888
Balance at end of year (49 308 + 7 704) 57 012
R57 012 R57 012
440
Co
onsolidated statement of cash flow
ws
Commentt
The reclasssification of part of long--term loans a
as short-term
m loans does not represen
nt
cash flow.
C4 Shorrt-term loan
ns raised
Short-terrm loans Dr Cr
Balance at beginningg of year (24
4 791 – 14 70
01) 10 09
90
Raised (b
balancing fig
gure) 15 23
30
Balance at end of ye
ear (33 024 – 7 704) 25 320
R25 320 R25 32
20
C5 Land
d and build
dings
Land and
d buildings
s Dr Cr
Balance at beginning g of year 102 000
Revaluattion (99 149 – 78 760) 20 389
Balance at end of yeear 122 38
89
R122 389 R122 38
89
C6 Plant and equip

pment
Plant and equipmen
nt: Cost Dr Cr
Balance at beginning
g of year 157 824
Plant and
d equipmentt sold 2 00
00
Purchasees – expanssion 12 000
Purchasees – replace
ement (balan
ncing figure)) 28 860
ear 196 68
84
R198 684 R198 68
84
Plant and equipmen

nt: Accumu
ulated deprreciation Dr Cr
Balance at beginning
g of year 54 10
00
Sold 1 291
Deprecia
ation 18 64
40
ear 71 449
R72 740 R72 74
40
C7 Taxa
ation
Taxation
n payable Dr Cr
12
Statemen
nt of profit or loss and other
o compre
ehensive inccome
(13 616 – 5 712(defe
erred tax)) 7 90
04
Bank (ba
alancing figu
ure) 8 228
ear 2 388
R10 616 R10 61
16
441
4
Chapter 16
1
Deferred
d tax Dr Cr
39
Statemennt of profit or loss and other
o compre
ehensive inccome
(balancin
ng figure) 5 71
12
Balance at end of ye ear 40 351
R40 351 R40 35
51
C8 Divid
dends paid
d
Shareho
olders for diividends Dr Cr
Balance at beginningg of year 6 29
91
Dividends declared 11 90
05
Bank (ba
alancing figu
ure) 11 905
ear 6 291
R18 196 R18 19
96
Commentt
Dividends paid by a su ubsidiary onlyy have an inffluence on a group’s cash h flows insofaar
as the porrtion attributa
able to non-controlling sha areholders is concerned. The dividend ds
declared and
a paid by the t parent, ass well as the non-controlling sharehold der’s portion of
o
the subsid
diaries dividen nd, are shown n in the consolidated stateement of channges in equity
y.
As far as dividends declared by sub bsidiaries are
e concerned, only the porttion due to th
he
non-controolling shareh holders is included in th he consolidatted statemen nt of financial
position ass part of currrent liabilities. The cash efffect of the dividend paid is disclosed in
the statem
ment of cash flows.
f
Associa
ates and joint ven
ntures
16.2 Investmentts in associates and
d joint ven
ntures
Where an n associate e is equity accounted
a in the consolidated financial state
ements of the
t
group, an ny profits received in n cash by the investtor will be reflected as dividen nds
received in the state ement of caash flows e
either as an n investing or operatin
ng activity (as
(
other diviidends rece eived). Bec
cause the aaccumulated equity prrofits of the e associate in
the consoolidated sta atement of comprehen nsive incom me do not re epresent a flow of cassh,
they are excluded
e frrom the con
nsolidated sstatement o of cash flow
ws. Advancees made to or
by the associate durring the finaancial year will be refle
ected in the statement of cash flowws
and classsified as invvesting activ
vities.
442
Example 16.2 Investment in associate
P Ltd acquired an investment in an associate, A Ltd, on 31 December 20.16. P Ltd

granted a loan to A Ltd on 1 July 20.17. A Ltd made repayments of R17 000 on the
loan. Extracts from the consolidated financial statements of P Ltd reflect the following at
31 December 20.17:
STATEMENT OF FINANCIAL POSITION
20.17 20.16
R R
Investment in associate – at carrying amount 38 850 18 000
Loan to associate 18 000 –

20.17 20.16
R R
Share of profit of associate 22 650 –
The only cash flows in respect of the investment in A Ltd will be the dividends received.
R R
Opening balance 18 000 Dividend received (balancing) 1 800
Share of profit of associate 22 650 Closing balance 38 850
40 650 40 650
Loan to associate
R R
Opening balance – Repayments (given) 17 000
Loan advanced 35 000 Closing balance 18 000
35 000 35 000
The information will be presented as follows in the consolidated cash flow statement:
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 20.17
R
Repayment of loan by associate 17 000
Advances to associate (35 000)
443
Chapter 16
16.3 Acquisition and disposal of associates and joint ventures

Acquisitions
An investment made during the year in an associate or joint venture should be dis-
closed as cash flow from an investing activity. An additional investment in an existing
associate or joint venture (provided that there is no change in status, e.g. the associate
does not become a subsidiary) will also be disclosed as an investing activity.
Disposals
If the total investment in an associate of joint venture is disposed of, the proceeds
should be presented as an investing activity. Since the total proceeds are reflected as an
investing activity, the gain/loss on the disposal recognised in profit or loss should be
eliminated from operating activities for cash flow purposes.
If a portion of the investment is sold and the retained investment remains an associate
or joint venture, the total proceeds are reflected as an investing activity and the gain or
loss should be eliminated from operating activities.
If a portion of the investment is sold and significant influence or joint control is lost, the
total proceeds are reflected as an investing activity. Both the gain or loss on disposal
and the fair value adjustment on the retained investment should be eliminated from
operating activities for cash flow purposes.
Example 16.3 Acquisition and disposal of an associate
P Ltd acquired a 30% interest in A Ltd on 1 January 20.17 for R120 000. On
1 July 20.17 P Ltd acquired an additional 5% interest in A Ltd for R25 500, when the net
asset value of A Ltd was R570 000 (fairly valued). Extracts from the consolidated
financial statements of P Ltd reflect the following at 31 December 20.17:
STATEMENT OF FINANCIAL POSITION
20.17
R
Investment in associate – at carrying amount 180 000

20.17
R
The cash flows in respect of the investment in A Ltd will be the dividends received and
amounts paid for the acquisition of the associate and additional interest acquired.
444
R R
Acquisition of associate 120 000 Dividend received (balancing) 13 500
Acquisition of additional interest 25 500 Closing balance 180 000
Excess ((R570 000 × 5%) – R25 500) 3 000
193 500 193 500
R
Cash paid to suppliers and employees (+R3 000 excess) (XXX)
Investment in associate (120 000 + 25 500) (145 500)
Assume that P Ltd sold the total investment on 31 December 20.17 for R195 000.
R
Cash paid to suppliers and employees (XXX)
(+R15 000(profit) (195 000 – 180 000)
Disposal of associate 195 000
Assume that P Ltd sold 50% of the investment on 31 December 20.17 for R85 000.
Significant influence was lost and the retained investment was classified as at fair value
through other comprehensive income. The fair value adjustment (loss) on the retained
investment amounted to R2 000.
445
Chapter 16
R
Cash paid to suppliers and employees (XXX)
(–R5 000(loss) (180 000/2 – 85 000) – 2 000(fair value adjustment))
Disposal of part of associate 85 000
Changes in ownership interests in subsidiaries

16.4 Acquisition and disposal of a subsidiary
1 Where control of a subsidiary is obtained or lost, the amount of cash paid or
received as a purchase or sales consideration is entered into the statement of cash
flows (under investing activities) net of cash and cash equivalents acquired or
sold. In both cases, it is incumbent upon a group to provide full disclosure during a
period of each of the following:
l the total consideration paid or received;
l the portion of the consideration consisting of cash and cash equivalents;
l the amount of cash or cash equivalents in the subsidiary over which control is
obtained or lost; and
l the amount of the other assets and liabilities in the subsidiary over which control
is obtained or lost, summarised by each major category (IAS 7.40).
2 Obtaining or losing control of a subsidiary is therefore accounted for in terms of an
owner approach, rather than the entity approach, which forms the basis for the
preparation of the consolidated annual financial statements. The inclusion of the net
cash cost price of shares purchased/net cash proceeds from shares sold in the
statement of cash flows implies that the following items were calculated at the date
of the transaction (acquisition date/disposal date), and that they are thus excluded
from the consolidated statement of cash flows:
l the underlying assets and liabilities of the subsidiary acquired/disposed of;
l financing provided/discontinued by the non-controlling shareholders;
l goodwill or excess on acquisition arising from the purchase of the shares;
l excess of fair value over the cost of the purchase of shares in a subsidiary;
l the profit arising from the sale of shares; and
l the carrying amount of the investment in the associate at the date of the
transaction (in the case where an associate becomes a subsidiary, or a
subsidiary becomes an associate).
446
3 The treatment of the cash consideration paid or received at the time of obtaining or
losing control of a subsidiary is in principle a simple procedure. Consider the following
summary, which expresses the purchasing by P Ltd of an 80% equity share in the
subsidiary S Ltd at date of acquisition.
Net assets acquired
Land and buildings (1 200 000)
Plant and equipment:
Cost price (800 000)
Accumulated depreciation 300 000
Mortgage bond 500 000
Inventory (350 000)
Receivables (550 000)
Payables 180 000
Bank (30 000)
(1 950 000)
Goodwill (40 000)
Cost price of shares R1 600 000
In the consolidated statement of cash flows the following will be included as part of
“investing activities”:
Net cash cost price of shares in subsidiary (1 600 000 – 30 000) R1 570 000
It should be borne in mind that the collection of R1 570 000 implies that a portion of
the movement which occurred in the relevant statement of financial position items
(between the two “statement of financial position” dates) has been included in the
statement of cash flows. The portions of the movements that have been entered into
the statement of cash flows (as a result of the inclusion of the net cash cost price)
are represented by the amounts on the transaction date, as indicated in the above
summary. In addition, when analysing the movements that occurred in the
statement of financial position items, cognisance should be taken of assets and
liabilities (on the transaction date) purchased from and sold to subsidiaries. The
outline of the analysis of the movement in the statement of financial position items
under land and buildings would have to be expanded as follows:
447
Chapter 16
LAND AND BUILDINGS

Dr Cr
Balance at beginning of year XX
Non-cash portion of movement
Revaluation (the full revaluation movement for the current year, not
only the parent’s portion) XX
Mortgage bond XX
Portion of movement entered elsewhere in the statement
of cash flows
Interest charge (interest capitalised) XX
Land and buildings owned by a newly purchased subsidiary
at date of acquisition (at fair value in terms of IFRS 3) XX
Land and buildings owned by a subsidiary sold at the date
of sale of the subsidiary (at consolidated carrying amount) XX
Portion of movement arising from the relevant calculation to
be included in the statement of cash flows
Land and buildings sold
(sales by individual companies within the group) XX
Land and buildings purchased XX
Balance at end of year XX
RXXX RXXX
448
Example 16.4 Acquisition and disposal of a subsidiary
The following represents the abridged consolidated statements of the P Ltd Group for
the year ended 31 December 20.17.
P LTD GROUP
20.17 20.16
ASSETS
Non-current assets
Land and buildings at cost price 955 000 650 000
Plant and equipment
Cost price 2 610 000 1 850 000
Goodwill 75 000 50 000
Investment in associate 1 835 000 910 000
4 725 000 2 720 000
Current assets
Inventory 675 000 405 000
1 482 500 1 105 000
Total assets R6 207 500 R3 825 000
Share capital 1 050 000 600 000
Retained earnings 1 687 500 965 000
2 737 500 1 565 000
Total equity 3 232 500 1 965 000
Deferred tax 205 000 125 000
Interest-bearing loans 2 030 000 1 200 000
Total non-current liabilities 2 235 000 1 325 000
Current liabilities
Payables 445 000 305 000
Tax due 45 000 30 000
Total liabilities 2 975 000 1 860 000
Total equity and liabilities R6 207 500 R3 825 000
449
Chapter 16
P LTD GROUP
Revenue 3 250 000
Cost of sales (1 250 000)
Share of profit of associate
(dividend received – R125 000; equity-accounted profit – R375 000) 500 000
Non-controlling interests (225 000)
R1 197 500
P LTD GROUP
Non-
Total controlling
interests
Balance at
1 January 20.17 600 000 965 000 1 565 000 400 000 1 965 000
Changes in
equity for 20.17
Issue of shares 450 000 – 450 000 – 450 000
Acquisition
of interest in
subsidiary – – – 160 000 160 000
Sale of interest
in subsidiary – – – (260 000) (260 000)
Dividends
declared – (250 000) (250 000) (30 000) (280 000)
Total comprehensive
Profit for the year – 972 500 972 5000 225 000 1 197 500
Balance at
31 December 20.17 R1 050 000 R1 687 500 R2 737 500 R495 000 R3 232 500
450
1 The following items were included in the calculation of profit before tax:
Depreciation R370 000
Loss on sale of plant R30 000
Exchange rate loss on foreign loan R150 000
Profit on sale of land and buildings R200 000
2 Companies in the group sold plant and equipment for R50 000. Details of the plant
at date of sale were as follows:
Cost R350 000
Accumulated depreciation R270 000
The land and buildings of a subsidiary were expropriated by the local authority for
R450 000.
3 A portion of the plant and equipment purchased during the year under review, to the
value of R550 000, was used to replace the sold plant. In addition, a portion of these
purchases was financed through a finance lease of R300 000. The balance of the
property, plant and equipment purchased was for the expansion of operations.
4 During the year under review, long-term loans amounting to R500 000 were
redeemed.
5 P Ltd has several subsidiaries and associates. During the year under review, the
equity investment in associates was increased; a subsidiary (S Ltd) was acquired,
and the whole interest in subsidiary T Ltd was sold.
Acquisition of subsidiary S Ltd
On 30 June 20.17, P Ltd obtained 80% of the issued shares in S Ltd for R665 000.
On this date, the abridged statement of financial position of S Ltd was as follows:
Land and buildings 225 000
Plant and equipment (fair value) 240 000
465 000
Inventory 250 000
Receivables 495 000
Bank 15 000
R1 225 000
Loans 200 000
Deferred tax 50 000
Payables 175 000
R1 225 000
Disposal of subsidiary T Ltd
On 3 January 20.15, P Ltd obtained 75% of the issued shares in T Ltd for R675 000.
On that date, the owners’ equity of T Ltd was as follows:
Share capital (600 000 shares) R600 000
451
Chapter 16
On 30 September 20.17, P Ltd sold its entire interest in T Ltd for R850 000. Particulars of
the net assets of T Ltd on 30 September 20.17 were as follows:
Cost 450 000
Accumulated depreciation (210 000)
Inventory 180 000
Receivables 420 000
Bank overdraft (30 000)
Payables (120 000)
R1 040 000
Solution 16.4
P LTD GROUP
Note
Cash receipts from customers 3 145 000
Cash paid to suppliers and employees (1 852 500)
Cash generated from operations 1 292 500
Investment income 125 000
Tax paid (30 000 + 370 000 – 45 000) (355 000)
Dividend paid (200 000 + 280 000 – 250 000) (230 000)
Replacement of plant and equipment (550 000)
Additions to land and buildings (680 000)
Additions to plant and equipment (350 000)
Proceeds from sale of plant and equipment 50 000
Proceeds on sale of land and buildings 450 000
Purchase of subsidiary (665 000 – 15 000) 1 (650 000)
Investment in associate (550 000)
Proceeds on sale of subsidiary (850 000 + 30 000) 2 880 000
Net cash used in investing activities (R1 400 000)
Long-term loans repaid (500 000)
Long-term loans raised 680 000
Proceeds from issue of shares 450 000
Net cash from financing activities R630 000
Net decrease in cash and cash equivalents (72 500)
452
Co
onsolidated statement of cash flow
ws
Notes to the statem

ment of cas sh flows
1 Purchhase of sub bsidiary S Ltd
Fair va
alue of asse
ets acquired:
Land and
a building gs (225 00
00)
Plant (240 00
00)
Inventtory (250 00
00)
Receiv vables (495 00
00)
Payab bles 175 00
00
Loan 200 00
00
Deferrred tax 50 00
00
Bank (15 00
00)
(800 00
00)
Non-c
controlling in
nterests 160 00
00
Goodwwill (25 00
00)
Purchase price (665 00
00)
Cash on acquisition 15 00
00
Net ca
ash purchasse price (R650 00
00)
2 Dispoosal of subsidiary T Ltd
L
Land and
a buildinggs 350 00
00
Plant and
a equipm ment 240 00
00
Inventtory 180 00
00
Receivvables 420 00
00
Payabbles (120 00
00)
Bank overdraft
o (30 00
00)
1 040 00
00
Non-ccontrolling in
nterests (260 00
00)
Goodw will –
Profit on sale of shares
s 70 00
00
Proceeds from saale 850 00
00
Bank overdraft
o off subsidiary
y sold 30 00
00
Net ca
ash proceed
ds R880 00
00
Commentt
Note that IAS 7 does s not specifiically require
e the disclos
sure of the non-controllin
n ng
interests and
a goodwill in the purcha ase or dispossal of a subsidiary note to the statemen
nt
of cash flo
ows, but it is regarded
r as u
useful informaation and thus
s disclosed.
453
4
Chapter 16
1
Calculatiions
C1 Net changes
c in
n receivable
es, invento
ory and pay
yables
Inventorry Dr Cr
Subsidiarry acquired 250 000
Subsidiarry disposed of 180 00
00
Net incre
ease (balanccing figure) 200 000
00
R855 000 R855 00
00
Receivab
bles Dr Cr
00
Net incre
00
R1
R 225 000 R1 225 00
00
Payables
s Dr Cr
00
00
Net incre
00
R565 000 R565 00
00
C2 Cash
h received from custo
omers
Sales 3 250 00
00
Net incre
ease in receiivables (105 00
00)
R3 145 00
00
Commentt
If sales are taken up directly in th
he “receivables” reconstru
uction, cash received from
m
customerss can be dete
ermined as the balancing figure.
454

Revenue 3 250 000
Depreciation 370 000
Loss on sale of plant 30 000
Exchange rate loss 150 000
Interest paid 135 000
Investment income 125 000
Equity income of associate 375 000
Profit on sale of land 200 000
Profit on sale of subsidiary 70 000
Expenses (balancing figure) 1 737 500
R4 020 000 R4 020 000
or
Cost of sales (statement of profit or loss and other comprehensive income) 1 250 000
Other expenses (statement of profit or loss and other comprehensive
income) 767 500
Exchange rate loss (150 000)
Profit on sale of subsidiary (850 000 – (1 040 000 × 75%)) 70 000
Profit on sale of land 200 000
Loss on sale of plant (30 000)
Expenses R1 737 500
Expenses (1 737 000)
Net increase in inventory (200 000)
Net increase in payables 85 000
(R1 852 500)
C4 Taxation
Deferred tax Dr Cr
Subsidiary acquired 50 000
Tax expense (balancing figure) 30 000
R205 000 R205 000
Tax payable Dr Cr
Statement of profit or loss and other comprehensive income
(400 000 – 30 000) 370 000
R400 000 R400 000
455
Chapter 16
C5 Plant and equipment purchased

Plant and equipment: Cost Dr Cr
Balance at beginning of year 1 850 000
Subsidiary acquired (fair value) 240 000
Subsidiary disposed of 450 000
Plant sold by individual companies in the group 350 000
Finance lease 300 000
Cash purchases (balancing figure) 900 000
Balance at end of year 2 490 000
R3 290 000 R3 290 000
Plant and equipment: Accumulated depreciation Dr Cr

Depreciation expense 370 000
R1 110 000 R1 110 000
C6 Land and buildings purchased

Land and buildings Dr Cr
Land and buildings sold by individual companies
in the group (450 000 – 200 000) 250 000
R1 555 000 R1 555 000

Loans repaid 500 000
Plant (finance lease) 300 000
Loans raised (balancing figure) 680 000
R2 530 000 R2 530 000
456
C8 Dividends paid
Shareholders for dividends Dr Cr
Dividends declared 280 000
R480 000 R480 000
C9 Investment in associate
Investment in associate Dr Cr
R1 835 000 R1 835 000
16.5 Acquisition of a subsidiary in terms of a non-cash transaction

1 No cash flow takes place when the purchase price of a subsidiary is fully settled by
the issue of shares in the parent. Consequently, the acquisition of the subsidiary
and the issue of the shares, respectively, are not reported as part of investing
activities or financing activities. However, should cash and cash equivalents be
held by a subsidiary at date of acquisition under the particular circumstances, they
would be reported as follows as an investing activity:
Cash and cash equivalents held by a subsidiary at date of acquisition RXXX
2 In the event of a subsidiary being acquired in terms of a non-cash transaction,
details regarding the subsidiary’s assets, liabilities and other relevant information
should once again be provided by way of a note. Should the subsidiary be acquired
partly for cash and partly for the issue of shares in the parent, only the net cash
portion of the purchase price is entered as an investing activity. The note on assets,
liabilities and other relevant information should, however, still be provided.
16.6 An associate becomes a subsidiary and a subsidiary becomes

an associate
1 The acquisition of an additional equity interest in an associate during the current
year that causes the associate to become a subsidiary will:
l cause the acquirer to remeasure its previously held equity interest in the
associate at its acquisition date fair value and recognise the difference in profit or
loss (IFRS 3.42);
l eliminate the carrying amount of the investment in the associate at the
acquisition date; and
l cause the net asset (assets and liabilities valued in terms of IFRS3) of the
subsidiary at date of acquisition, including any accruals since the date of
acquisition, to be entered in the consolidated statement of financial position.
457
Chapter 16
2 The fair value adjustment included in profit or loss does not represent cash flow.
3 The net cash cost price of the additional equity interest in the subsidiary is entered
into the statement of cash flows as part of “investing activities”. Details of the
assets, liabilities, carrying amount of the investment in the former associate, as well
as other relevant information, are provided in a note to the statement of cash flows.
4 In bringing into account the net cash cost price, part of the movements that occurred
in the individual statement of financial position items between the two “statement of
financial position” dates has been entered into the statement of cash flows. The
portion of the movements that has already been entered represents the portion
attributable to the individual assets, liabilities and non-controlling owners’ equity of
the subsidiary at date of acquisition.
5 The disposal of an equity interest in a subsidiary during the current year that causes
the subsidiary to become an associate will:
l at the date of the transaction, create an investment against the carrying amount
in an associate;
l cause the remeasurement of the carrying amount of the abovementioned
investment at the acquisition date fair value, and recognition of the difference in
profit or loss; and
l cause the net assets (assets and liabilities measured at the consolidated
carrying amount) of the subsidiary at date of the transaction to be excluded from
the consolidated statement of financial position.
6 The fair value adjustment included in profit or loss does not represent cash flow.
7 The net cash proceeds from the equity interest disposed of are entered into the
statement of cash flows as part of “investing activities”. Details of the assets,
liabilities, non-controlling owners’ equity, profit/loss on the sale of an interest and the
carrying amount of the resulting investment in the associate are provided in a note
to the statement of cash flows.
8 A portion of the movements that occurred in the individual statement of financial
position items between the two “statement of financial position” dates was entered
into the statement of cash flows when the net cash proceeds were accounted for.
The portion of the movements already entered represents the portion attributable to
the individual assets, liabilities and owners’ equity of the subsidiary on the
transaction date.
458
Associate becomes a subsidiary and a subsidiary becomes

Example 16.5
an associate
The following represent the abridged consolidated statements of the P Ltd Group for
the year ended 31 December 20.17.
P LTD GROUP
20.17 20.16
ASSETS
Non-current assets
Property at valuation 1 008 000 650 000
Plant and equipment
Cost price 2 610 000 1 850 000
Goodwill 97 500 55 000
Investment in associate 400 000 275 000
Investment in unlisted shares 840 000 840 000
4 202 500 2 930 000
Current assets
Inventory 675 000 405 000
1 495 000 1 105 000
Total assets R5 700 500 R4 035 000
Share capital 1 050 000 600 000
Other components of equity 240 000 –
2 342 500 1 077 000
Total equity 2 862 500 1 477 000
Deferred tax 258 000 125 000
Interest-bearing loans 1 840 000 1 898 000
Total non-current liabilities 2 098 000 2 023 000
Current liabilities
Payables 445 000 305 000
Tax due 45 000 30 000
459
Chapter 16
P LTD GROUP
Revenue 3 250 000
Other income (dividend received on listed investments) 60 000
Revaluation surplus 300 000
Other comprehensive income, net of tax 300 000
R1 015 500
R1 315 500
460
P LTD GROUP
Re- Non-
valuation Total controlling
reserve interests
Balance at
1 January 20.17 600 000 – 477 000 1 077 000 400 000 1 477 000
Changes in equity
for 20.17
Issue of shares 450 000 – – 450 000 – 450 000
Associate becomes
a subsidiary – – – – 160 000 160 000
Subsidiary becomes
an associate – – – – (260 000) (260 000)
Dividends declared – – (250 000) (250 000) (30 000) (280 000)
Total comprehensive
Profit for the year – – 825 500 825 500 190 000 1 015 500
Other comprehensive
income – 240 000 – 240 000 60 000 300 000
Balance at
31 December 20.17 R1 050 000 R240 000 R1 052 500 R2 342 500 R520 000 R2 862 500
1 The following items were, amongst others, included in other expenses:
Expenses
Impairment of goodwill R12 500
Income
Profit on sale of plant R30 000
Exchange rate loss on foreign loan R50 000
Profit on sale of property R200 000
Profit on sale of shares in subsidiary R67 000
Fair value adjustments on carrying amounts of investments in
associates after changes in shareholdings R51 000
(R35 000 (S Ltd) + R16 000 (A Ltd))
2 Companies in the group sold plant and equipment for R110 000. Details of the plant
at date of sale were as follows:
Cost R350 000
Accumulated depreciation R270 000
Certain land and buildings of a subsidiary were sold for an amount of R450 000,
whilst another subsidiary, in which P Ltd has an 80% equity interest, revalued its
land and buildings at an amount of R353 000. Attributable deferred tax is R53 000.
461
Chapter 16
3 A portion of the plant and equipment purchased during the year under review, to the
value of R580 000, was used to replace the sold plant. The balance of the property,
plant and equipment purchased was for the expansion of operations. R20 000 is still
due in respect of these purchases, which amount has been included under
payables.
4 During the year under review, long-term loans amounting to R500 000 were
redeemed.
5 P Ltd has interests in several subsidiaries and an associate. During the year under
review, the following changes in interest took place:
l An associate (S Ltd) became a subsidiary due to the purchase of an additional
interest in equity for R345 000. The fair value of the 40% interest previously held
amounted to R355 000 at the date of the change in the shareholding. Assume
that all net assets values were equal to the IFRS 3 values.
l A subsidiary (A Ltd) became an associate due to the sale of an interest in equity
for R538 000. The fair value of the remaining 30% interest held amounted to
R330 000 at the date of the change in the shareholding.
l P Ltd elected to measure the non-controlling interests at their proportionate
share of the acquiree’s identifiable net assets at the acquisition date.
6 The following equity analyses were applied inter alia in the preparation of the given
consolidated financial statements:
(a) Analysis of owners’ equity of S Ltd

P Ltd 40%–80%
Total NCI
At Since
Share capital 487 500 195 000 300 000
567 500 227 000 348 000
Investment in S Ltd R227 000
• Current year:
Profit 1/1/20.17–30/6/20.17 100 000 40 000 60 000
800 000 88 000 480 000
Purchase 200 000 shares 320 000 (320 000)
160 000
Cost price of shares (345 000)
Profit 1/7/20.17–31/12/20.17 150 000 120 000 30 000
R950 000 R208 000 R190 000
P Ltd received dividends amounting to R95 000 from S Ltd while S Ltd was an
associate.
462
(b) Analysis of owners’ equity of A Ltd

P Ltd 75%–30%
Total NCI
At Since
Share capital 200 000 150 000 50 000
300 000 225 000 75 000
Equity represented by goodwill 5 000
Consideration and NCI R230 000
• Current year:
Profit 1/1/20.17–31/3/20.17 140 000 105 000 35 000
1 040 000 555 000 R260 000
Sold 90 000 shares (135 000) (333 000) R468 000
Profit 1/4/20.17–31/12/20.17 250 000 75 000
R1 290 000 R297 000
8 Details of the net assets of S Ltd and A Ltd on the respective dates of the changes
in interest are as follows:
S Ltd A Ltd
30/6/20.17 31/3/20.17
Land and buildings 225 000 350 000
Cost 360 000 450 000
Long-term loans (200 000)
Deferred tax (50 000)
Inventory 250 000 180 000
Bank 15 000 (30 000)
Payables (175 000) (120 000)
R800 000 R1 040 000
463
Chapter 16
Solution 16.5
P LTD GROUP
Note
Cash receipts from customers 3 145 000
Cash paid to suppliers and employees (2 020 000)
Dividends received (60 000 + 95 000) 155 000
Tax paid (30 000 + (400 000 – 30 000(C4)) – 45 000) (355 000)
Dividend paid (200 000 + 280 000 – 250 000) (230 000)
Replacement of plant and equipment (580 000)
Additions to land and buildings (380 000)
Additions to plant and equipment (600 000)
Proceeds from sale of plant and equipment 110 000
Proceeds on sale of land and buildings 450 000
Purchase of subsidiary 1 (330 000)
Proceeds on sale of subsidiary 2 568 000
Net cash used in investing activities (R762 000)
Long-term loans repaid (500 000)
Long-term loans raised 192 000
Proceeds from issue of shares 450 000
Net cash from financing activities R142 000
Net decrease in cash and cash equivalents (60 000)
464
Notes to the statement of cash flows

1 Purchase of subsidiary S Ltd
Fair value of assets acquired:
Land and buildings (225 000)
Plant (240 000)
Inventory (250 000)
Receivables (495 000)
Payables 175 000
Loan 200 000
Deferred tax 50 000
Bank (15 000)
(800 000)
Fair value of investment previously accounted for on the equity method 355 000
Goodwill (345 000 + 160 000 + 355 000 – 800 000) (60 000)
Purchase price (345 000)
Cash on acquisition 15 000
Net cash purchase price (R330 000)
2 Disposal of subsidiary A Ltd
Plant and equipment 240 000
Inventory 180 000
Receivables 420 000
Payables (120 000)
1 040 000
Non-controlling interests (260 000)
Goodwill realised 5 000
Fair value of remaining investment (330 000)
Fair value adjustment on carrying amount of investment in associate
(330 000 – 30/75 (230 000 + 555 000)) 16 000
Profit on sale of shares 67 000
Proceeds from sale 538 000
Bank overdraft on sale 30 000
Net cash proceeds R568 000
465
Chapter 16
1
Calculatiions
C1 Net changes
c in
n receivable
es, invento
ory and pay
yables
Inventorry Dr Cr
00
Net incre
00
R855 000 R855 00
00
Receivab
bles Dr Cr
00
Net incre
00
R1
R 225 000 R1 225 00
00
Payables
s Dr Cr
00
00
e acquired
a 20 00
00
Net incre
00
R565 000 R565 00
00
C2 Cash
h received from custo
omers
Revenue e 3 250 00
00
Net incre
ease in receiivables (105 00
00)
R3 145 00
00
Commentt
If sales are taken up directly in th
he “receivables” reconstru
uction, cash received from
m
customerss can be dete
ermined as the balancing figure.
466

Revenue 3 250 000
Depreciation of assets and impairment of goodwill 382 500
Profit on sale of plant 30 000
Interest paid 135 000
Dividend received – other 60 000
Dividend received – associate 95 000
Profit on sale of property 200 000
Profit on sale of subsidiary 67 000
Fair value adjustments on carrying amounts of investments
in associates 51 000
Expenses (balancing figure) 1 885 000
R3 868 000 R3 868 000
Expenses (1 885 000)

Net increase in inventory (200 000)
Net increase in payables 65 000
(R2 020 000)
C4 Deferred tax expense

Deferred tax Dr Cr
Revaluation of land and buildings 53 000
Tax expense (balancing figure) 30 000
R258 000 R258 000
C5 Plant and equipment purchased

Plant and equipment: Cost Dr Cr
Payables 20 000
Cash purchases (balancing figure) 1 180 000
R3 290 000 R3 290 000
467
Chapter 16
Plant and equipment: Accumulated depreciation Dr Cr

Depreciation expense 370 000
R1 110 000 R1 110 000
C6 Land and buildings purchased

Land and buildings Dr Cr
Land and buildings sold by individual companies in the group 250 000
Revaluation 353 000
R1 608 000 R1 608 000
Investment in associate Dr Cr
Dividend received 95 000
Fair value adjustment 35 000
Investment in S Ltd derecognised 355 000
Investment in A Ltd recognised 330 000
R850 000 R850 000

Loans repaid 500 000
Loans raised (balancing figure) 192 000
R2 340 000 R2 340 000
468
16.7 Financing activities between non-controlling shareholders

and the group
1 Loans from non-controlling shareholders and proceeds from shares issued by
a subsidiary to non-controlling shareholders are entered separately in the
consolidated statement of cash flows as part of financing activities.
2 A share issue to non-controlling shareholders results in a reduction (dilution) of the
parent’s interest in the subsidiary. The inclusion in the consolidated statement of
cash flows of the proceeds from the shares issued to non-controlling shareholders
implies that the following items were brought into account on the date of issue and
should therefore be excluded from the consolidated statement of cash flows:
l the increase in the non-controlling interests (comprising shares and the reserves
transferred to non-controlling shareholders); and
l the change in ownership accounted for as an equity transaction.
3 Notwithstanding the change in ownership accounted for as an equity transaction,
the issue of shares by a subsidiary to non-controlling shareholders only affects the
movements in one statement of financial position item, namely “non-controlling
interest”.
16.8 Acquisition and disposal of an interest in an existing subsidiary

that does not result in a loss of control
1 This paragraph deals with the following two cases in particular :
l the increase in an interest in an existing subsidiary arising from the acquisition of

an additional equity interest for cash; and
l the decrease in an interest in a subsidiary (the investee remains a subsidiary)
arising from the disposal of an equity interest for cash.
2 The expenditure relating to the investment or the proceeds from the sale of the
investment is shown separately as part of financing activities. The inclusion of the
cash cost price/proceeds in respect of the abovementioned changes in interest
implies that the following items were brought into account at date of the transaction
and that they should therefore be excluded from the consolidated statement of cash
flows:
l the change in the non-controlling interests; and
l the change in ownership accounted for as an equity transaction.
3 Notwithstanding the possible change in ownership accounted for as an equity
transaction, the acquisition of an interest in an existing subsidiary, as well as the
disposal of an interest in a subsidiary (to the extent that the investee remains a
subsidiary), only affects the movement in non-controlling shareholders.
Sundry aspects
16.9 Foreign operations
1 The translation of the financial statements of foreign operations gives rise to
exchange rate conversion differences. The question of whether the exchange rate
conversion differences and the changes which occur in the amounts of the assets
and liabilities represent cash flow solely because the exchange rates have changed
now arises.
469
Chapter 16
2 Exchange differences arising from these translations are recognised in other

comprehensive income. The parent’s attributable portion thereof is included in a
reserve known as the foreign currency translation reserve. The portion attributable
to non-controlling shareholders is included in equity as part of the non-controlling
interests.
3 In preparing the statement of cash flows, the exchange differences arising from
currency translations allocated to the foreign currency translation reserve and non-
controlling interests are reversed. A corresponding adjustment is made to a non-
current asset and/or current liability. In this work, the full amount is taken into
account (when analysing the changes that occurred) in “land and buildings”.
16.10 Discontinued operations

1 IFRS 5.33 (c) requires that the net cash flows of discontinued operations attributable
to operating, investing and financing activities shall be disclosed. These disclosures
may be presented either in the notes or in the financial statements. In example 16.6
in this work, the disclosure is presented in the notes.
16.11 Intragroup loans

1 Loans made by a parent to a subsidiary during the normal course of business have
no effect on the group’s cash and cash equivalents. Such intragroup loans are, in
any event, eliminated during the preparation of the consolidated statement of
financial position.
2 However, an existing shareholders’ loan is often taken over on the acquisition of a
subsidiary. In such a case, an outflow of cash takes place in respect of both the
shares and the loan purchased. The purchasing of the shares and the loan are
shown as part of “investing activities”. Details of the loan assumed are also provided
in the note to the statement of cash flows that deals with the acquisition of the
subsidiary. When a loan is sold upon disposal of a subsidiary, the resulting cash
inflow is shown as part of “investing activities”.
470
Example 16.6 Sundry aspects
The following information relates to the Rain Ltd Group for the year ended
31 December 20.16:
RAIN LTD GROUP

20.16 20.15
ASSETS
Non-current assets
Land at valuation 1 941 413 1 632 300
Plant and equipment at cost less accumulated depreciation 2 667 100 2 143 500
Investments in associates 345 000 335 000
Investment in Snow Ltd at fair value – 190 000
Goodwill 52 000 52 000
5 005 513 4 352 800
Current assets
Inventory 960 800 957 200
Trade receivables 1 055 900 1 040 200
Cash and cash equivalents 64 700 66 510
Non-current assets held for sale 72 000 –
2 153 400 2 063 910
Total assets R7 158 913 R6 416 710
Share capital (2 200 000 shares; 2 000 000 shares) 2 307 500 2 000 000
Foreign currency translation reserve – 36 000
Mark-to-market reserve – 65 082
4 279 250 3 143 600
Total equity 4 622 575 3 166 810
Long-term loan – 700 000
Deferred tax 59 538 44 200
Current liabilities
Trade payables 2 438 700 2 444 000
Tax payable 33 900 56 700
Total current liabilities 2 476 800 2 505 700
471
Chapter 16
RAIN LTD GROUP

EXTRACT OF CONSOLIDATED STATEMENT OF PROFIT OR LOSS
Revenue 4 500 200
Share of profit of associates 14 000
PROFIT FOR THE YEAR R1 028 400
R1 028 400
The following additional information has already been taken into account in the
financial statements above.
1 Included in other expenses in the consolidated profit before tax of the Rain Ltd
Group are the following:
Depreciation on plant and equipment R480 000
Unrealised exchange gain on foreign debtors R(127 000)
Realised exchange loss on long-term loan R115 000
Other expenses are furthermore shown net of any other income, reclassification
adjustments and/or profit that may be forthcoming from the additional information
which follows.
2 Investment in Snow Ltd
Rain Ltd acquired 100 000 shares in Snow Ltd on 2 January 20.15 for a cash
amount of R110 000 when the equity of Snow Ltd was as follows:
Share capital (1 000 000 shares) R1 000 000
Rain Ltd purchased another 500 000 shares in Snow Ltd for a cash amount of
R1 225 000 on 1 January 20.16. On this date, Rain Ltd obtained control over
Snow Ltd. The fair value of the plant and equipment (the only asset/liability of
Snow Ltd) was R2 500 000 on that date.
3 Investment in Hail Ltd
Rain Ltd acquired a 60% interest in Hail Ltd on 1 January 20.15. On this date,
Rain Ltd obtained control over Hail Ltd. Hail Ltd is incorporated in Go-Go land and
has a functional currency of FC. No goodwill arose at acquisition date.
Rain Ltd sold its entire interest in Hail Ltd on 1 October 20.16 for R1 366 920. On
this date, Rain Ltd lost control over Hail Ltd. The exchange rate was FC1 = R17,28
on 1 October 20.16.
472
Particulars of the net assets of Hail Ltd at 1 October 20.16 were as follows:
Plant and equipment 105 000
Trade receivables 52 500
FC127 500
An amount of R7 980 regarding the foreign exchange rate gain in the current year
on this investment has been allocated to the non-controlling interests. It may be
assumed that the movement in the foreign currency translation reserve (FCTR) is
attributable to plant and equipment only.
Hail Ltd was the only foreign operation of Rain Ltd.
4 The minutes of the directors’ meeting of Rain Ltd, held on 1 January 20.16, confirm
that the management decision to discontinue the operations of the packaging
department of Rain Ltd was ratified with effect from 1 January 20.16. The decision
was announced on this date. The packaging department specialises in the
distribution of packaging and has always been a material division of Rain Ltd. The
division was separately identifiable for physical, operational and financial reporting
purposes.
The operations of the packaging department were discontinued on 31 August 20.16.
The enforcement of the formal plan to end operations had a material influence on
the packaging department for the period 1 January 20.16 to 31 August 20.16. An
extract of the financial statements, prepared by management for the packaging
department, for the eight months ending 31 August 20.16 was as follows:

FOR THE YEAR ENDED 31 AUGUST 20.16
Revenue 483 000
Loss before tax (417 000)
Taxation relief – current 166 500
LOSS AFTER TAX (R250 500)
STATEMENT OF FINANCIAL POSITION ITEMS AS AT 31 AUGUST 20.16

31/8/20.16 31/12/20.15
Inventory – R370 500
Trade receivables – R579 000
Trade payables – (R393 000)
The above statement of profit or loss and other comprehensive income figures of
the packaging department are included in the applicable profit or loss categories in
the statement of profit or loss and other comprehensive income of Rain Ltd. All
losses incurred by the packaging department are deductible for tax purposes.
473
Chapter 16
5 Finance costs incurred on qualifying equipment amounted to R286 000 during the
20.16 financial year. This interest was incurred on a loan that was acquired specifical-
ly for the acquisition and installation of the equipment, which took a substantial time
to complete. Half of the finance costs incurred is still outstanding and is included in
trade payables at 31 December 20.16. The equipment was installed and ready for
use as intended by management on 31 December 20.16. Interest earned on the
temporary investment of borrowed funds amounted to R146 900 for the year and is
included in other expenses.
6 Rain Ltd classified plant, with a carrying amount of R78 000, as held for sale on
31 December 20.16. This was the only asset classified as such by the group. No
plant or equipment was disposed of during the year.
7 The only companies in the group that own land are Rain Ltd and Ice Ltd, a subsidi-
ary in which Rain Ltd has an 80% interest and control over. Both these companies re-
valued their land during the 20.16 financial year. The land of Ice Ltd increased in
value with R90 000 during 20.16. Neither party disposed of any land during the
year.
8 Rain Ltd declared a dividend of R41 250 for the year ended 31 December 20.16.
9 It may be assumed that no impairment relating to goodwill has taken place.
10 Apart from movements that are clearly evident from the information above, no
disposals or acquisitions of investments took place during the year.
11 Rain Ltd elected to measure non-controlling interests for all acquisitions at the
proportionate share of the net asset value.
12 Cash flows from dividends and interest paid and received are classified as operating
activities.
13 Rain Ltd irrevocably elected to present any subsequent changes in the fair value of
their equity instruments in other comprehensive income in terms of IFRS 9 Finan-
cial Instruments.
14 Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%. Ignore the
effects of value-added tax (VAT) and dividends tax.
474
Solution 16.6
RAIN LTD GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 20.16
Con- Discon-
Total
tinuing tinued
Cash receipts from customers (C1) 2 642 300 1 062 000 3 704 300
Cash payments to suppliers
and employees (C2) (1 879 670) (922 500) (2 802 170)
Cash generated by operations 762 630 139 500 902 130
Interest paid (C3) (246 700) (246 700)
Dividends paid (C9) (50 603) (50 603)
Income taxes paid (C5) (632 557) 166 500 (466 057)
Dividends received (C10) 4 000 4 000
Interest received (given) 146 900 146 900
Net cash from operating activities (R16 330) R306 000 R289 670
Acquisition of property, plant
and equipment
(207 350 [C6] + 236 950 [C7]) (444 300)
Acquisition of subsidiary (given) (1 225 000)
Proceeds on disposal of subsidiary *
(1 366 920 + (30 000 x R17,28)) 1 885 320
Net cash from investing activities R216 020
Proceeds from issue of share capital
(2 307 500 – 2 000 000) 307 500
Loan repaid (700 000 + 115 000) (815 000)
Net cash used in financing activities (R507 500)
Net decrease in cash and cash
equivalents (1 810)
Cash and cash equivalents at
beginning of period 66 510
Cash and cash equivalents at end
of period R64 700
475
Chapter 16
Calculations
C1 Cash receipts from customers

Continuing
Trade receivables – opening balance (1 040 200 – 579 000) 461 200
– closing balance (given) (1 055 900)
Foreign exchange gain (given) 127 000
Revenue (4 500 200 – 483 000) 4 017 200
Disposal of subsidiary (52 500 × R17,28) (907 200)
2 642 300
Discontinued
Trade receivables – opening balance (given) 579 000
Revenue (given) 483 000
R1 062 000

Continuing
Cost of sales (1 925 000 – 246 000) (1 679 000)
Other expenses (874 400 + 146 900 – 654 000) (367 300)
Non-cash items:
Depreciation (non-cash) (given) 480 000
Exchange gain on debtors (non-cash) (given) (127 000)
Exchange loss on long-term loan (financing activity) (given) 115 000
Gain on bargain purchase [1 225 000 + 190 000 – (60% × 2 500 000)] (85 000)
Impairment loss on held for sale asset (non-cash) (78 000 – 72 000) 6 000
Profit on disposal of subsidiary [1 366 920 – (60% × 127 500 × 17,28)] (45 000)
Reclassification adjustment of FCTR [36 000 + (7 980 / 40% × 60%)] (47 970)
Movements in working capital:
Inventory [960 800 – (957 200 – 370 500)] (374 100)
Trade payables – opening balance (2 444 000 – 393 000) (2 051 000)
– closing balance (2 438 700 – 143 000)
(50% of outstanding finance cost) 2 295 700
(R1 879 670)
Discontinued
Cost of sales (given) (246 000)
Other expenses (given) (654 000)
Movements in working capital:
Inventory – opening balance (given) 370 500
Trade payables – opening balance (given) (393 000)
(R922 500)
476
C3 Interest paid
Finance costs (given) (250 600)
Borrowing costs capitalised to plant and equipment
(286 000 – 146 900) (139 100)
Finance costs unpaid at year end (286 000 × 50%) (given) 143 000
(R246 700)
C4 Revaluation surplus of Rain Ltd

Revaluation surplus – opening balance (given) 50 000
– closing balance (given) (115 000)
Revaluation by Ice Ltd
[(90 000 × 80%) – (90 000 × 80% × 80% (CGT rate) × 28%)] 55 872
Post-tax revaluation of Rain Ltd (R9 128)
C5 Income taxes paid

Deferred tax – opening balance (given) (44 200)
– closing balance (given) 59 538
Revaluation by Ice Ltd (90 000 × 80% × 28%) (20 160)
Revaluation by Rain Ltd [9 128 [C4] / (1 – (80% × 28%)) × 80% × 28%] (2 635)
Deferred tax movement included in income tax expense in P/L (7 457)
Continued operations tax expense (435 800 + 166 500) (602 300)
Current tax for the year (609 757)
Tax payable – opening balance (given) (56 700)
(R632 557)
C6 Land – additions
Land – opening balance (given) 1 632 300
Revaluation by Ice Ltd (given) 90 000
Revaluation by Rain Ltd [9 128 [C4]/(1 – (80% × 28%))] 11 763
(R207 350)
C7 Plant and equipment – additions

Plant and equipment – opening balance (given) 2 143 500
Increase in FCTR (7 980 / 0,4) 19 950
Subsidiary acquired (given) 2 500 000
Subsidiary sold (105 000 × R17,28) (1 814 400)
Depreciation (given) (480 000)
Borrowing costs capitalised (C3) 139 100
Plant classified as held for sale (given) (78 000)
(R236 950)
477
Chapter 16
C8 Dividends declared by subsidiaries to NCI

NCI – opening balance (given) (23 210)
Profit for the year (given) (188 000)
FCTR attributable to NCI (given) (7 980)
Revaluation [(90 000 × 20%) – (90 000 × 20% × 80% × 28%)] (13 968)
Subsidiary acquired (2 500 000 × 40%) (1 000 000)
Subsidiary sold (127 500 × R17,28 × 40%) 881 280
(R8 553)
C9 Dividends paid
Shareholders for dividends – opening balance (given) (5 000)
Rain Ltd (given) (41 250)
NCI (C8) (8 553)
(R50 603)
C10 Dividends received

Investments in associates – opening balance (given) 335 000
– closing balance (given) (345 000)
Share of profit of associates (given) 14 000
R4 000
478
Question 16.1
The following information relates to Ronda Ltd, a company with several subsidiaries
and associates:
AS AT 30 JUNE 20.18
20.18 20.17
ASSETS
Non-current assets
Goodwill 103 000 137 000
Investments in associates 600 000 210 000
5 143 500 6 097 000
Current assets
Bank 1 886 000 183 500
2 889 000 1 328 500
Total assets R8 032 500 R7 425 500
Share capital 3 600 000 2 550 000
5 727 500 4 026 000
Total equity 6 863 000 6 547 000
Interest bearing borrowings 400 500 150 000
Deferred tax 391 000 463 000
Current liabilities
Trade payables and accumulated interest 275 000 150 000
Short-term portion of interest bearing borrowings 60 000 50 500
South African Revenue Service 43 000 65 000
Total liabilities 1 169 500 878 500
479
Chapter 16
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS

Revenue 3 120 000
Net operating costs (732 000)
Finance costs paid (24 000)
Income from associates
Share of profit 27 000
PROFIT FOR THE YEAR R871 000
R871 000
1 On 1 March 20.18, Ronda Ltd increased its 70% interest in Matador Ltd to 90%, at a
total cost of R1 000 000. The purchase price was settled partly by issuing 100 000
R1 shares for R700 000. The remainder was paid in cash. At the date of acquisition
of the interest, the net assets of Matador Ltd were as follows:
Property, plant and equipment 5 250 000
Receivables 380 000
Interest-bearing borrowings (430 000)
Trade and other payables (180 000)
R5 000 000
2 Ronda Ltd purchased a 60% interest in Ring Ltd on 1 July 20.16 for R300 000. On
that date, the carrying values of the net identifiable assets approximated their fair
values and the balance sheet of Ring Ltd indicated the following equity:
R450 000
480
On 1 January 20.18, a third of this interest was sold for R160 000. On 1 January
20.18, the fair value of the remaining investment in Ring Ltd was R320 000 and the
carrying amounts of the assets of Ring Ltd were as follows:
Property, plant and equipment 1 300 000
Receivables 300 000
Inventories 150 000
Bank 40 000
Interest bearing borrowings (685 000)
Trade and other payables (170 000)
R675 000
The recoverable amount of goodwill was R27 000 on 30 June 20.17 and R25 500
on 1 January 20.18.
3 On 1 July 20.17, Ronda Ltd entered into a lease agreement. Ronda Ltd did not elect
the simplified accounting treatment for the equipment. In terms of the agreement,
equipment with a cost of R55 000 was leased for a period of five years. The interest
rate is 10% per annum and instalments are payable annually in arrears on 1 July.
4 The following are, inter alia, included in profit before taxation:
Realised exchange loss on interest bearing foreign loan 80 000
Unrealised exchange loss on interest bearing foreign loan 70 000
Bad debts written off 22 000
Impairment of goodwill 8 500
5 Ronda Ltd invested $10 000 in a fixed deposit in the USA on 30 June 20.17. At that
date, the exchange rate was $1 = R6,90. On 30 June 20.18, the exchange rate was
$1 = R9,30.
6 Accept a tax rate of 30%. Ignore capital gains tax and VAT.
Required
Prepare the statement of cash flows of the Ronda Ltd Group for the year ended
30 June 20.18 according to the direct method. No notes are required.
481
Chapter 16
RONDA LTD GROUP

STATEMENT OF CASH FLOWS
Cash receipts from customers (C1) 2 780 000
Cash paid to suppliers and employees (C3) (1 154 500)
Financing cost paid (24 000 – 5 500) (18 500)
Dividends paid (C5) (335 000)
Tax paid (C6) (182 000)
R1 102 000
Cash flows from investment activities
Additions of property, plant and equipment (C7) (290 500)
Purchase of interest in associate (C4) (43 000)
Proceeds from disposal of interest in subsidiary (160 000 – 40 000) 120 000
(R213 500)
Proceeds from long-term borrowings (C8) 740 000
Proceeds from issue of share capital by parent (C9) 350 000
Acquire additional interest in subsidiary [1 000 000 – (100 000 × 7)] (300 000)
R790 000
Net increase in cash and cash equivalents 1 726 500
Exchange rate profit on cash and cash equivalents (C3) 24 000
Cash and cash equivalents beginning of year 183 500
Cash and cash equivalents end of year R1 886 000
Calculations
C1 Cash receipts from clients
Sales 3 120 000
Movement on receivables (34 000)
Opening balance 465 000
Ring Ltd (300 000)
Bad debt (22 000)
Closing balance (483 000)
R2 780 000
482
C2 Owners’ equity of Ring Ltd

(60%–40%)
Total NCI
At Since
At acquisition 450 000 270 000 180 000
Investment 300 000
Goodwill 30 000
Since 225 000 135 000 90 000
Interest disposed of (1/3) (90 000) (45 000) 135 000
Goodwill 30 000
Impairment 20.17 (3 000)
Impairment until 1 January 20.18 (1 500)
25 500
Realised (25 500 × 1/3) (8 500)
R17 000
Profit on disposal of interest

Proceeds 160 000
Equity sold (135 000)
Goodwill realised (8 500)
R16 500
Profit on remeasurement
Fair value (given) 320 000
Carrying amounts (300 000 – (3 000 + 1 500) + 135 000 × 2/3) (287 000)
R33 000
483
Chapter 16

Operating cost (732 000)
Movement on inventories 10 000
Ring Ltd (150 000)
Movement on payables 289 500
Opening balance (150 000)
Ring Ltd 170 000
Accumulated interest (55 000 × 10%) (5 500)
Closing balance 275 000
Non-cash items 406 000

Depreciation 355 000
Goodwill 8 500
Bad debts 22 000
Unrealised exchange rate losses 70 000
Remeasurement profit (C2) (33 000)
Profit on disposal of interest (C2) (16 500)
Reclassification
Realised exchange rate loss 80 000
Exchange rate profit [(6,9 – 9,3) × 10 000] (24 000)
(R1 154 500)
Investment in associate opening balance 210 000
Ring Ltd 320 000
R43 000
C5 Dividends paid
Non-controlling interests opening balance 2 521 000
Interest in profit for year 99 500
Matador Ltd (20% × 5 000 000) (1 000 000)
Ring Ltd (180 000 + 90 000) (C2) (270 000)
Closing balance (1 135 500)
Dividend to non-controlling shareholders 215 000
Dividend paid by Ronda Ltd (2 127 500 – (1 476 000 + 771 500)) 120 000
R335 000
484
C6 Tax paid
Deferred tax opening balance 463 000
Ring Ltd (260 000)
Deferred tax closing balance (391 000)
Total tax expenses 348 000
Current tax 160 000
SARS opening balance 65 000
SARS closing balance (43 000)
R182 000
C7 Additions to property, plant and equipment

Opening balance 5 750 000
Ring Ltd (1 300 000)
Right-of-use asset 55 000
Closing balance (4 440 500)
R290 500
C8 Loan incurred
Opening balance (150 000 + 50 500) 200 500
Lease liability 55 000
Unrealised exchange rate loss 70 000
Realised exchange rate loss 80 000
Ring Ltd (685 000)
Closing balance (400 500 + 60 000) (460 500)
R740 000
C9 Proceeds on share issues

Opening balance (450 000 + 2 100 000) 2 550 000
Issue in exchange for subsidiary 700 000
Closing balance (600 000 + 3 000 000) (3 600 000)
R350 000
C10 Goodwill
Impairment (given) (8 500)
Sell subsidiary Ring Ltd (C2) (25 500)
R103 000
485

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Group Statements Vol. 2

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Group Statements – Volume 2

The acquisition method .............................................................................. 4

Recognising and measuring the identifiable assets acquired,

9.6 Measurement of contingent consideration transferred............................. 25

IFRS 3: BUSINESS COMBINATIONS – SUMMARY

l Date on which control of net assets and operations is

l Use fair value at acquisition date, also for business

l Assets/liabilities recognised separately

l Fair value as at acquisition date

l At proportionate share of net assets, or

l Consideration transferred + non-controlling interests +

l Limited to one year

The acquisition method

Recognising and measuring the identifiable assets acquired, the

Example 9.1 Recognition of identifiable liabilities

2 Classifying or designating identifiable assets acquired and liabilities assumed

Example 9.2 Classification of identifiable assets acquired

Identifiable Not identifiable

Separable Contract/Legal Do not recognise

Separable Contractual or other legal rights

Example 9.3 Recognition of intangible assets

Research and development expenditure

9.3 Measurement principle

Example 9.4 Remeasurement of liability to fair value

On 1 January 20.17 P Ltd acquired a 100% controlling interest in S Ltd. On acquisition

S Ltd Group Difference

Amortised cost 31 December 20.16 R904 904

1 Guidance with respect to measurement of assets with uncertain cash flows

2 Guidance with respect to measurement of assets subject to operating leases

Example 9.5 Fair value of operating lease – Lessor

3 Guidance with respect to measurement of assets that the acquirer intends

Example 9.6 Fair value of items used differently

4 Guidance with respect to measurement of intangible assets

the definition of an intangible asset (incorporating identifiability), rather than on the

5 Guidance with respect to measurement of non-controlling interests

Example 9.7 Measurement of non-controlling interests

9.4 Exceptions to the recognition and measurement principles

Exceptions to the Exceptions to both the Exceptions to the

Contingent liabilities l Deferred tax assets l Reacquired right

1 Exceptions to the recognition principle

Contingent liability IAS 37

No present obligation exists Present obligation exists

Definition of liability not met However, one or more

Example 9.8 Contingent liabilities

2 Exceptions to both the recognition and measurement principles

Example 9.9 Deferred tax

Deferred tax on fair value remeasurements of an asset

Subsequent recognition of deferred tax asset

Example 9.10 Indemnification asset

Leases in which the acquiree is the lessee

Example 9.11 Recognition and measurement of a favourable operating lease

(1) Pmt = 50 000; i = 16%; n = 5; FV = 0 (5) Pmt = 50 000; i = 15%; n = 5; FV = 0

3 Exceptions to the measurement principle

Share-based payment awards

Example 9.12 Non-current assets held for sale

Example 9.13 Measurement of consideration transferred

Example 9.14 Measurement of consideration transferred – Asset

9.6 Measurement of contingent consideration transferred

The obligation to pay contingent consideration should be classified as a financial liability

Example 9.15 Contingent consideration – Financial liability

Example 9.16 Contingent consideration – Asset

On 31 December 20.15 (reporting date) P Ltd acquires an 80% interest in S Ltd at a

Example 9.17 Compensation for reduction in equity instruments