Download Assignment 1 is compulsory and due

1
FAC3704 - SUMMARY
When doing business combination transaction – ask yourself :
 is control obtained?
 identify acquirer
 what is the acquisition date?
 identify and measure consideration transferred
 are there any identifiable assets that don’t appear on the acquiree’s BS e.g. intangible assets?
 are then any identifiable liabilities / contingent liabilities that don’t appear on the
acquiree’s BS? NOT liability if have costs to terminate or relocate subsidiary’s staff or costs incurred to
restructure acquiree. ONLY when there is an obligation to pay the costs!
 are the assets / liabilities all fairly valued in BS?
 are there assets / liabilities that shouldn’t be recognised e.g. intangible assets that
don’t meet the definition?
assets / liabilities that can’t be taken over in the business
combination e.g. existing goodwill / deferred tax of acquiree?
are all items of the consideration transferred at fair value e.g. any deferred payments should be
 are there

shown at present value using market related discount rate
 are there any separate transactions that don’t form part of the business combination
transaction? can’t be recognised as part of the acquisition journal entity but must be accounted for in the
post-acquisition period
Steps :
 identify acquirer
 determine acquisition date
 identify consideration transferred (fair value at acquisition date)
 identifiable assets acquired and liabilities assumed
 measure NCI
 determine goodwill or gain on bargain purchase
 do measurement period adjustments
Assets transferred at market value
Consolidated financials :
 Step 1 – eliminate carrying amount of parent’s investment in each subsidiary and
parent’s portion of equity in each subsidiary
 Step 2 – identify NCI in profit / loss of consolidated subsidiaries
 Step 3 – identify NCI in net assets of the consolidated subsidiaries separately from the
parent’s interest. NCI in net assets is :
 amount of NCI at the date of the original business combination
and
 NCI’s share of changes in equity since date of business combination
 Step 4 – eliminate intragroup balances and transactions (income, expenses, dividends,
profit and losses in assets / inventories)
 Step 5 – no separate director’s reports or auditor’s reports (parent reports must deal
with the whole group)
 Step 6 – must be Consolidated Statement of Cash Flows
REVALUATIONS :

non-depreciable asset - if higher then carrying value then REVALUATION SURPLUS
included in purchase price of subsidiary part of surplus allocated to NCI
2


Must raise deferred tax on revaluated amount and if land then must provide for CGT as well
on amt over tax base cost EVEN if not intending to sell land
depreciable asset not going to be sold – if higher then carrying value then REVALUATION
SURPLUS included in purchase price of subsidiary and depreciation for the group must be
calc’d on revalued amount. Part of surplus AND depreciation allocated to NCI
Must raise deferred tax on revalued amount for difference between carrying amount and tax
base
depreciable asset that is going to be sold – must provide for deferred tax and take into
account CGT as well – so revaluation surplus up to original cost deferred tax is at tax rate
and excess over the original cost must be at CGT rate and tax rate
DEFERRED TAX FROM THE REVALUATION CHARGED IN EQUITY
CGT calc’d on 50% of difference between cost price and selling price. If tax rate = 30% and
CGT = 50% then actual rate of tax is 14%. So :
tax base price to cost price x normal tax rate %
cost price to selling price x normal tax rate x CGT %
In parent revaluation of investment held for sale :
dr
cr
investment in ….
xxxx
mark-to-market reserve
xxxx
deferred tax
xxxx
Must also provide for CGT so deferred tax on fair value adjustment above cost price is normal
tax rate x CGT %.
Goodwill – BS non-current asset
Gain on bargain purchase – IS income as a gain
NCI partial goodwill method – NCI measured at their % interest of the fair value of the assets of
subsidiary
Analysis of shareholder's equity of …..
100%
Total
R
@ acquisition
Share capital
Retained earnings
Goodwill
XXXXX
XXXXX
XXXXX
XXX
Consideration & NCI
XXXXX
….. 75%
@
since
acquisition
acquisition
R
R
XXXXX
XXXXX
XXXXX
XXX
25%
NCI
R
XXXXX
XXXXX
XXXXX
XXXXX
No goodwill for NIC as amount shown for them is purely their ‘partial’
value of the assets of the subsidiary. Doesn’t matter what the amount
paid for the subsidiary was.
All the goodwill is shown as belonging to the parent
Value of the
assets of
subsidiary
NCI full goodwill method – NCI measured at fair value so given portion of goodwill and total value of
NCI portion will be fair value of shares of subsidiary x their % interest
Analysis of shareholder's equity of …..
100%
Total
….. 75%
@
since
acquisition
acquisition
25%
NCI
3
R
R
Goodwill
XXXXX
XXXXX
XXXXX
XXXXX
XXX
XXXXX
XXXXX
XXXXX
XXXXX
XXX
Consideration and NCI @ fair value
XXXXX
@ acquisition
Share capital
Retained earnings
Revaluation surplus
R
R
XXXXX
XXXXX
XXXXX
XXXXX
XXX
XXXXX
XXXXX
Market value
(fair value) of
the shares of
subsidiary
Value of the NCI shown at the market value of the shares of company and
the difference between the acquisition price portion of NCI and the fair
value is shown as goodwill for the NCI
fair value of consideration transferred
+ recognised amt of NCI
+ (if in stages), fair value of any previous equity interest
- fair value of identifiable assets acquired / liabilities assumed
.
if bal is positive = goodwill
if bal is negative = gain from bargain purchase
CONSOLIDATION PROCEDURES
1. Eliminate carrying amount of parent’s investment in subsidiary :
 retained earnings of both added together in BS
 only share capital of parent shown in BS
2. Eliminate intragroup balances and transactions – e.g. income, expenses and dividend.
 bank overdrafts & guarantees
 bills
 dividends of subsidiary
 debentures in group
 sale of asset to or from subsidiary (MUST ADJUST TAX!!) :
o inventories at yr end – unrealised profit
Closing inventory pro-forma consolidation journal :
Unrealised profit – COS / Opening Inventory
s/g pgs
Inventory on Hand
39 & 40
Deferred tax (BS)
Income Tax expense (IS)
o
dr
xxxx
cr
xxxx
xxxx
xxxx
opening inventory – unrealised profit
Opening inventory pro-forma consolidation journal :
Retained Earnings (beginning of the year)
s/g pgs
Unrealised profit – COS / Opening Inventory
39 & 40
Income Tax Expense (IS)
Retained Earnings (beginning of the year)
amount of profit to be reversed = bal of inventory at yr-end x
dr
xxxx
cr
xxxx
xxxx
xxxx
% profit
% profit + 100
reverse previous
closing inventory
journal in following
yr and adjust the
current closing
inventory.
Reversed again
following year.
o
unrealised profit in non-depreciable PPE
Eliminating profit pro-forma consolidation journal :
Profit on sale of property (parent)
PPE (subsidiary)
s/g pgs
Deferred tax (parent)
41 & 42
Income Tax expense (parent)
Profit open bal pro-forma consolidation journal :
Retained Earnings (beginning of the year - parent)
Deferred tax (BS – parent)
xxxx
Income Tax Expense (subsidiary)
o
unrealised profit in depreciable PPE
dr
xxxx
cr
xxxx
xxxx
Parent sells nondepreciable PPE
to subsidiary
xxxx
dr
xxxx
cr
(profit less deferred tax)
xxxx
4
s/g pgs
42 & 44
Eliminating profit pro-forma consolidation journal :
Profit on sale of property (subsidiary)
PPE (parent)
Deferred tax (subsidiary)
Income Tax expense (subsidiary)
dr
xxxx
Profit open bal pro-forma consolidation journal :
Retained Earnings (begin of the yr - subsidiary)
Deferred tax (BS – subsidiary)
Income Tax Expense (parent)
Accumulated depreciation (parent)
Depreciation (parent)
Income Tax Expense (IS - parent)
Deferred Tax (BS – parent)
dr
xxxx
xxxx
cr
Subsidiary sells
depreciable PPE
to parent
xxxx
xxxx
xxxx
cr
(profit less deferred tax)
xxxx
xxxx
xxxx
xxxx
xxxx
Profits / losses from intragroup transactions also eliminate tax temporary differences taken
into account
e.g. if parent bought asset for R 40 000 and sells to subsidiary at R 45 000 then is profit of R 5
000
Subsidiary would depreciate at 20% so would have R 9 000 depreciation per year
If eliminate unrealised profit of R 5 000 then subsidiary must value asset at R 40 000 and
depreciation @ 20% would be R 8 000 per year
So excess depreciation of R 1 000 (R 9 000 – R 8 000) must be written back every year and
this is a way of saying that 1/5th of the unrealised profit is being realised annually.
By the end of the useful life of the asset (after 5 years) the full profit has been realised by
the group (cos 5 years of depreciation written back) and so don’t have to do any more proforma journals.
3. Only parent’s share capital in BS and only parent’s dividends in Statement of Changes in
Equity. Dividends paid or owing to NCI ONLY in NCI column of Stmt of Changes in Equity
4. Consolidate all other items
IMPAIRMENT OF GOODWILL
Partial goodwill method :
dr
xxxx
Impairment loss (P/L)
Goodwill (BS)
cr
xxxx
Full goodwill method :
Impairment loss (P/L)
Goodwill (BS)
Non-controlling interest (BS)
Non-controlling interest (IS)
dr
xxxx
cr
Exam will say if
goodwill is “impaired
BY amt” or impaired
“down TO amt”.
Won’t have
to calc amt!
xxxx
xxxx
xxxx
Impairment to goodwill REDUCES the profit for the year!
Full goodwill method :
Analysis of shareholder's equity of …..
100%
Total
R
….. 75%
@
since
acquisition
acquisition
R
R
25%
NCI
R
Current year
Profit for the year
Impairment of goodwill
XXXXX
XXXXX
XXXXX
(XXX)
(XXX)
(XXX)
XXXXX
XXXXX
XXXXX
5
LOSSES OF SUBSIDIARY
Loss or insolvency @ acquisition – partial goodwill
Analysis of shareholder's equity of …..
….. 75%
@
since
acquisition
acquisition
R
R
100%
Total
R
25%
NCI
R
@ acquisition
Share capital
Accumulated loss
Goodwill
Consideration & NCI
XXXXX
XXXXX
XXX
XXXXX
Since acquisition
Retained earnings
XXXXX
XXXXX
XXXXX
XXXXX
Current year
Profit for the year
Dividends paid
XXXX
(XXX)
(XXX)
(XXX)
XXXXX
XXXXX
XXXXX
XXXXX
XXXX
XXXXX
XXXXX
XXXXX
Impairment of goodwill
Current year
XXXXX
XXXXX
XXXXX
(XXX)
XXXXX
NOTES FOR THE YEAR-ENDED …………. GROUP
1.
Goodwill
R
Carrying amount beginning of year
XXXX
Gross carrying amount
Accumulated impairment losses
XXXX
-
Goodwill impaired during the year
Carrying amount at end of year
(XXX)
XXXXX
Gross carrying amount
Accumulated impairment losses
XXXX
(XXX)
JOURNALS
Analysis of shareholder's equity of …..
100%
Total
R
@ acquisition
Share capital
Retained earnings
Revaluation surplus
Goodwill
Consideration & NCI
XXXXX
XXXXX
XXXXX
XXXXX
XXX
XXXXX
Since acquisition
Retained earnings
XXXXX
….. 75%
@
since
acquisition
acquisition
R
R
XXXXX
XXXXX
XXXXX
XXXXX
XXX
XXXXX
25%
NCI
R
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Journal 2
Journal 3
6
XXXXX
Current year
Profit for the year
Profit for the year
XXXXX
XXXX
Income for preference owners
XXXXX
Dividends paid
XXXXX
XXXXX
(XXX)
(XXX)
(XXX)
XXXXX
XXXXX
XXXXX
Cr
Noncontrolling
Interest
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Pro-forma consolidation journals
Share capital
Journal 2
Retained earnings
Revaluation surplus
Investment in …….
NCI
Goodwill
(elimination of shareholder's equity of ….. at acquisition)
Journal 3 Retained earnings – beginning of the year
NCI (SFP)
(recording of NCI in retained earnings of ……………)
Journal 4
Journal 5
Dr
XXXX
XXXX
XXXX
Journal 4
Journal 5
XXXX
XXXX
NCI (SCI)
XXXXX
NCI (SFP)
(recording of NCI in profit after tax of ………………..)
XXXXX
Other income
NCI (SFP)
XXXXX
XXXXX
Dividends paid
XXXXX
(elimination of intragroup ordinary dividend & recording of NCI therein)
NCI – Statement of Financial Position
XXXXX
……..…………………. GROUP
Consolidated Statement of Changes in Equity for the year ended …..
Balance at …… (previous year-end)
Equity at date of acquisition
Total comprehensive income for the
year / Profit for the year
Dividends declared
Dividends paid
Balance at …… (this year-end)
Attributable to owners of the parent
Share
Preference
Retained
Capital
Share Cap
Earnings
R
R
R
XXXXX
XXXX
XXXXX
Total
R
XXXXX
Noncontrolling
Interest
R
XXXXX
XXXXX
XXXXX
XXXXX
(XXX)
(XXX)
XXXXX
XXXXX
(XXX)
(XXX)
XXXXX
XXXX
(XXXX)
XXXXX
……..…………………. GROUP
Consolidated Statement of Comprehensive Income for the year ended …..
Notes
Revenue
Cost of Sales
R
XXXXXXXXX
(XXXXXXX)
Total
Equity
R
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
7
Gross profit
XXXXXXX
XXXX
(XXXXXX)
(XXXXX)
Other income
Other expenses
Finance charges
Profit before tax
Income tax expense
XXXXXX
(XXXXX)
1
Profit for the year
Other comprehensive income
XXXXXXX
XXXXX
Total comprehensive income for the year
XXXXXXX
Profit attributable to :
Owners of the parent
NCI
XXXXXXX
XXXXX
XXXXXXX
Total comprehensive income attributable to :
Owners of the parent
NCI
XXXXXXX
XXXXX
XXXXXXX
NOTES FOR THE YEAR-ENDED …………. GROUP
1. Profit before tax is made up as follows :
Gross profit
Other income
Other expenses
Finance costs
R
xxxxx
xxxxx
(xxx)
(xxx)
xxxxx
……..…………………. GROUP
Consolidated Statement of Financial Position for the year ended …..
R
ASSETS
Non-current assets
Plant, property & Equipment
Goodwill
Investment
XXXXXX
XXXXXX
XXXX
XXXXX
Current assets
Trade & other receivables
Cash and cash equivalents
XXXXXX
XXXXXX
XXXX
TOTAL ASSETS
(less unrealised profit)
XXXXXXX
R
EQUITY AND LIABILITIES
Total equity
Equity attributable to owners of the parent
Share capital
Retained earnings
NCI
XXXXXX
XXXXXX
XXXX
XXXXX
XXXXX
Total liabilities
XXXXXX
Non-current liabilities
XXXXXX
(including preference shares)
8
Debentures
Long-term loan
Current liabilities
Trade & other receivables
Dividends payable
Bank overdraft
TOTAL EQUITY AND LIABILITIES
XXXX
XXXXX
XXXXXX
XXXX
XXXXX
XXXXX
XXXXXXX
COMPLEX GROUP FINANCIALS
Always draw group with % interest parent holds, retained earnings at the time and the date of acquisition.
Vertical groups – ALWAYS CONSOLIDATED FROM BOTTOM TO TOP taking into account the date of
group was formed (profits for the group only from date last interest was acquired)
Profit for the year :
Profit
Unrealised profit in closing inventory (subsidiary)
Tax effect on unrealised profit
Unrealised profit in closing inventory (parent)
Tax effect on unrealised profit
Goodwill impaired (subsidiary)
Consolidated profit
R
xxxx
(xxx)
xx
(xxx)
xx
xxxx
xxxx
Deferred tax :
Opening balances
Revaluation of land
Deferred tax on unrealised intragroup profit
Closing balance
xxxx
xxx
(xx) .
xxxx
ASSOCIATES
Equity method - @ cost and then adjusted for post-acquisition changes in net assets
Changes in equity from :
 accumulated losses / retained earnings since acquisition to beginning of current period
 profit / loss for current period
 gains or losses in other comprehensive income for current period
LOSSES AND UNREALISED PROFITS AND LOSSES OF INTERCO TRANSACTIONS ONLY
RECOGNISED UNTIL REACH AMOUNT PAID FOR INVESTMENT – AND IF STARTS TO MAKE
PROFIT AGAIN THEN ONLY RECOGNISED AFTER HAS REACHED THE AMOUNT OF THE
ACCUMULATED LOSSES.
PROFITS MADE WHEN ASSOCIATE SELLS TO INVESTOR LIMITED ONLY TO THE VALUE OF THE
INVESTMENT IN THE ASSOCIATE, so if have 25% investment in associated and unrealised profits of
R20000 then only (R 20 000 x 25%) – tax rate % can be shown as reduction of profit in SCI.
Dividends received REDUCE investment in associate.
Goodwill INCLUDED in carrying amount of associate. Not tested for impairment separately, but
WHOLE CARRYING AMOUNT OF ASSOCIATE IS TESTED FOR IMPAIRMENT.
Excess over fair values of assets, liabilities and contingent liabilities EXCLUDED from carrying
amount and is income / profit in the period when investment is acquired.
Goodwill at acquisition of associate :
Share capital of associate
Retained earnings of associate
Revaluation of land
`
Net asset value
% interest of associate x net asset value
Cost price of associate
Goodwill
R
xxxx
xxx
xx .
xxxx
xxx (investor’s share in associate)
(xxx)
xxx .
9
Journal :
Investment in associate (net asset value)
Investment in associate (goodwill)
Bank
(recording of investment in ……)
dr
xxxx
xxx
cr
(profit less deferred tax)
xxx
NOTES FOR THE YEAR-ENDED …………. GROUP
1. Investment in associate
…. group has a 45% interest in an unlisted company ….. Ltd which is in the retail industry.
Carrying amount of investment in associate
Cost of investment
Cumulative post-acquisition reserve
R
xxxxx
xxxxx
xxxxx
Summarised financial information of ……. Ltd
Total assets
xxxxx
Total liabilities
xxx
Revenue
xxxxx
The directors’ valuation of the investment in …… Ltd is R xx xxx
Associate = 20% interest with significant influence over financial and
operating policy decisions, but DOESN’T have control or joint control.
CHANGES IN OWNERSHIP – INCREASE IN INVESTMENT / SUBSIDIARY
Piecemeal acquisition resulting in change in status
Goodwill or gain on bargain purchase ONLY RECOGNISED ON ACQUISITION DATE and NOT any date
afterwards even if additional interest in subsidiary bought.
At acquisition date RECOGNISE INTEREST AT ITS FAIR VALUE THROUGH P / L and recognise
any value adjustments from equity to profit / loss
Piecemeal acquisition resulting in change in degree of control, but NOT in status
(so is still associate, even if have higher interest)
On EVERY date that more interest is obtained, then must adjust goodwill or gain on bargain purchase
in consolidated financials. So NOT only on acquisition date!!
Piecemeal acquisition resulting in change in degree of control, but not status and already
has control (so is still subsidiary but now has higher interest)
Adjust carrying amount of controlling and NCI (including goodwill) with the difference in the interest before
and after the change in ownership.
Recognise this difference directly in equity against retained earnings – DON’T recognise any
additional goodwill or gain on bargain purchase
CHANGES IN OWNERSHIP – DECREASE IN INVESTMENT / SUBSIDIARY
Loss of control and change in status
Carrying amounts of assets and liabilities of subsidiary must be derecognised and goodwill from
acquisition date must be adjusted.
new goodwill = cost of remaining investment’s shares from profits and reserves of the
interest of the shares that are left
IF FULL GOODWILL METHOD USED THEN INCLUDES THE NCI GOODWILL!
Amount received for the shares must be at fair value
Remaining investment must be measured at FAIR VALUE at the DISPOSAL DATE and difference is gain
/ loss in P / L and will be :
 gain / loss on disposed of investment
 fair value adjustment for investment held after the change in ownership
CGT on disposal of shares!!!!
10
If have to change the value of an available for sale financial asset then :
dr
cr
Investment in …. Ltd
xxxx
Mark-to-market reserve
xxxx
Deferred tax
xxxx (must be CGT and normal tax %)
Any investment that is kept in what used to be a subsidiary must be measured at the fair value on the
date that control was lost. Adjustment shown in consolidated P /L for the year.
Decrease in degree control but no change in status (still subsidiary, but less interest held)
DON’T ADJUST GOODWILL for the interest that has been disposed of and other assets or liabilities
aren’t adjusted either.
MUST BE ACCOUNTED FOR AS EQUITY TRANSACTIONS- so only the carrying amounts of the parent
and NCI must be adjusted and difference between fair value of consideration received and adjustment to
NCI carrying amount must be recognised directly in equity in “owners of the parent” section.
gain / loss on disposal of interest = gain / loss on disposal of shares in subsidiary in
SEPARATE financials of parent (either cost or fair value method) - attributable reserves
since acquiring
net asset value at date of disposal = acquisition date net asset value + reserves to date
of disposal
gain / loss on disposal of shares = proceeds from disposal – (portion of equity reserves at
acquisition + portion of the since acquisition equity reserves lost with disposal)
Steps for rights issue :
1. Calc what % the parent’s original ownership was dilute (reduced)
2. decide how the parent reacted to the rights issue of the entity – either parent :
 didn’t react at all
 re-acquired less then the new shares on offer
 re-acquired exactly its number of new shares on offer
 re-acquired full number of shares on offer and also additional rights issue shares it didn’t have
before.
So if parent had 800 of 1000 shares in subsidiary and rights issue is made of 1 share for every 2
shares and all the owners exercised their rights then difference will be :
same as it was
Parent’s original number of shares (800/1000 changed to 800/1500) 53%
before rights issue
New shares (400/1500)
27%
Parent’s equity after rights issue (1200/1500)
80%
So can say that the parent’s equity DROPPED to 53% when rights issue was announced
and then parent had to REPURCHASE the additional 27% to keep it’s equity of 80%
Increase in parent’s interest
If interest of parent increases cos of rights issue then must allocate attributable reserves at the date of the
rights issue and then must be eliminated against the amount paid for the extra shares. Must be allocated
as per the shares held BEFORE the rights issue including NCI.
So if parent had 800 of 1000 shares in subsidiary and rights issue is made of 1 share for every 2
shares and the parent underwrote the rights issue. If NCI only took up 50 of the new shares then
parent will also have 50 extra shares and will be :
extra 3 % shares
Parent’s original number of shares (800/1000 changed to 800/1500) 53%
New shares based on rights issue (400/1500)
27%
Additional shares from rights issue (50/1500)
3%
Parent’s equity after rights issue (1250/1500)
83%
So can say that the parent’s equity DROPPED to 53% when rights issue was announced
and then parent had to REPURCHASE the additional 27% to keep it’s equity of 80%, but
also got additional 3% cos those shares weren’t taken up by NCI
Changes in parent for equity of subsidiary that DOESN’T RESULT IN LOSS OF CONTROL
are equity transactions and so NO GOODWILL, GAIN FROM BARGAIN PURCHASE, GAIN
11
OR LOSS ON RIGHTS ISSUE can be recognised. But if there is a PURCHASE
DIFFERENCE then is EQUITY TRANSACTION (so straight in equity)
PRO-FORMA ADJUSTMENT JOURNALS
dr
@ acquisition pro-forma adjustments
Share capital
Reserves
Assets
Deferred tax on assets
Liabilities / provisions
Deferred tax on liabilities
NCI (B/S)
Investment in subsidiary
Goodwill
Negative goodwill
cr
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Depreciate revalued assets
Accumulated profits
xxxx
Accumulated depreciation
Deferred tax
xxxx
Accumulated profits
xxxx
Additional depreciation on revalued assets
Depreciation expense
xxxx
Accumulated depreciation
Deferred tax
xxxx
Tax expense (IS)
xxxx
NCI share of reserves
Accumulated profits
NCI (BS)
xxxx
NCI share of profits
NCI (IS)
NCI (BS)
xxxx
NCI share of dividends
Dividend income
NCI (BS)
Dividend paid / declared
xxxx
xxxx
xxxx
xxxx
xxxx
(Other Comprehensive Income)
xxxx
xxxx
INTER-COMPANY JOURNALS
dr
Adjustments for Interco loans
Loan payable
Loan receivable
Interest income
Interest expense
Adjustments for Interco sales
Sales
COS / Purchases
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Adjustments for unrealised profit in inventory
Accumulated profits
xxxx
Inventory
Deferred tax
xxxx
Accumulated profits
Inventory
COS / Purchases
cr
xxxx
previous year
xxxx
xxxx
xxxx
this year
12
Tax expense
Deferred tax
xxxx
xxxx
Adjustments for Interco sales of fixed assets
Accumulated profit
xxxx
Fixed asset
Deferred tax
xxxx
Accumulated profits
xxxx
xxxx
Profit on sale of asset
xxxx
Fixed assets
xxxx
Deferred tax
xxxx
Tax expense
xxxx
Adjustments for depreciation for previous years
Accumulated depreciation
xxxx
Accumulated profits
xxxx
Accumulated profits
xxxx
Deferred tax
xxxx
Accumulated depreciation
Depreciation
Tax expense
Deferred tax
previous year
this year
previous year
xxxx
xxxx
xxxx
this year
xxxx
EQUITY ACCOUNTING JOURNALS (ASSOCIATES)
Investment in associate
Invest in associate (goodwill)
Investment at cost
dr
xxxx
xxxx
xxxx
Investment in associate
Profit from associate
xxxx
Dividend income
Investment in associate
xxxx
Investment in associate
Revaluation surplus
xxxx
Unrealised profit made by associate
Accum profit from associate
Inventory
Deferred tax
Accumulated profits
Inventory
Profit from associate
Profit from associate
Deferred tax
Unrealised profit made by investor
Accum profits (COS prev yrs)
Investment in associate
Investment in associate
Accumulated profits
Investment in associate
COS
Investment in associate
Tax expense
cr
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
previous year
xxxx
xxxx
xxxx
xxxx
this year
xxxx
xxxx
xxxx
xxxx
previous year
xxxx
xxxx
xxxx
xxxx
Inter-co sales where associate made the profit
xxxx
this year
13
Accumulated profit
Fixed asset
Deferred tax
Accumulated profits
Subsequent depreciation adjustment
Accumulated depreciation
Accumulated profits
Accumulated profits
Deferred tax
xxxx
Profit from associate
Fixed asset
Deferred tax
Profit from associate
Subsequent depreciation adjustment
Accumulated depreciation
Profit from associate
Profit from associate
Deferred tax
xxxx
xxxx
xxxx
xxxx
previous year
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
this year
xxxx
xxxx
xxxx
xxxx
Inter-co sales where investor made the profit
Accumulated profit
xxxx
Investment in associate
Investment in associate
xxxx
Accumulated profits
Subsequent depreciation adjustment
Investment in associate
xxxx
Accumulated profits
Accumulated profits
xxxx
Investment in associate
Profit on sale of asset
Investment in associate
Investment in associate
Tax expense
Subsequent depreciation adjustment
Investment in associate
Depreciation
Tax expense
Investment in associate
xxxx
xxxx
previous year
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
this year
xxxx
xxxx
xxxx
xxxx
14
STMT OF CASH FLOWS
Direct method
R
Amt calc’d by reconstruction group’s
receivables control account
Cash flow from operating activities :
Cash receives from customers
Cash paid to suppliers and employees
Cash generated from operations
Interest and dividends received
Interest paid
Tax paid
Dividends paid
Net cash from operating activities
Indirect method
xxxxxxx
(xxxx) .
xxxxx
xxx
(xxx)
(xx)
(xx) .
xxx
.
Profit must be adjusted for :
 changes in inventories, receivables and
payables
 non-cash items like :
 depreciation
 provisions
 deferred tax
 unrealised foreign currency gains /
losses
 undistributed profits of associates &
NCIs
 all investing or financing cash flows
R
Cash flow from operating activities :
Profit before tax
xxxxxxx
Adjustments for :
Depreciation
xxxx
Foreign loss exchange
xxxx
Investment income (interest & dividends rec) (xxx)
Interest expense
xxx .
xxxx
Increase in receivables
(xxxx)
Decrease in inventories
xxxx
Decrease in payables
(xxx) .
Cash generated from operations
xxxxx
Interest paid
(xxx)
Income Tax paid (no deferred tax)
(xx) .
Net cash from operating activities
xxx .
Cash effect of tax paid must be in stmt of cash flows
Amt payable @ begin of yr
Amts from IS – tax expense
Amts payable @ end of yr
Tax paid
Amt calc’d by reconstruction group’s profit and
loss account :
 supplier & employee pymts calc’d
 reverse all accrual accounting (i.e. the net
changes in inventories and payables between
the open & close BS dates
Dividends paid by subsidiary only influence NCI
shareholders and portion paid is shown in stmt
of cash flows
Dividends declared by parent – only portion
due to NCI included in BS
R
(xxxxx)
(xxxx)
xxxx
(xx) .
R
Cash flow from investing activities :
Replacement of plant and equipment
Replacement of land and buildings
Additions to plant and equipment
Extensions to land and buildings
Proceeds from sale of plant and equipment
Proceeds from sale of land and buildings
Investment in associate
Cost of sundry investments
Proceeds from sale of sundry investments
Investment in subsidiary :
Net cash cost price of shares
Loan account taken over
Investment in jointly controlled entity
Net cash cost price of shares
Loan account assumed
Proceeds from sale of subsidiary
Net cash proceeds from shares
Loan account disposed of
Net cash from investing activities
(xxx)
(xxx)
(xxx)
(xxx)
xx
xx
(xx)
(xx)
xx
(xx)
(xx)
(xx)
(xx)
xx
xx .
xxx >
Example of analysis of land & buildings
opening and closing balances :
Balance at beginning of yr
Non-cash portion of movement
Revaluation (full amt – pre tax)
Mortgage bond
Interest capitalised
Land owned by new subsidiary
Land owned by subsidiary sold
Land and buildings sold
Land and buildings purchased
.
Balance at end of yr
xx
xx
xx
xx
xx
(xx)
(xx)
xx
(xx)
15
R
Cash flow from financing activities :
Proceeds from long term loans
Long term borrowings redeemed
Short term borrowings negotiated
Short term borrowings redeemed
Shares bought back by parent
Increase in bank overdraft
Proceeds from shares issued to parent shareholders
Proceeds from shares of NCI of subsidiary
Cash cost price of additional interest in subsidiary
Net cash from financing activities
xxx
(xxx)
(xxx)
(xxx)
xx
xx
(xx)
(xx)
xx .
xxx .
Example of analysis of long term
borrowings opening & closing balances :
Balance at beginning of yr
Non-cash portion of movement
Exchange rate losses
Land & buildings (bond purchase)
Plant (finance lease purchase)
Long term borrowings raised
Long term loans redeemed
.
Balance at end of yr
Recon of cash and cash equivalents :
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents @ beginning of year
Cash and cash equivalents @ end of yr
xxxx
(xx)
xxx ..
xxxx
(xx) .
xxx .
Examples of cash movement in the year
Cash received from customers :
Balance @ beginning of yr
Revenue
Balance at end of year
Bank (cash flow)
xxxx
xxx
(xxx)
xxx ..
Cash receipts from customers :
Revenue
xxx
Decrease in trade receivables xxx
Net increase (cash flow)
xxx
..
PPE :
Balance @ beginning of yr
Revenue
Purchases – expansion
Balance at end of year
Purchases – replacement
(cash flow) ..
xxxx
(xx)
xxx
xxxx
(xxx)
Cost of sales
Other expenses (IS)
Depreciation
Profit on sale of PPE
Expenses
Increase in inventory
Increase in payables
Expenses (cash flow)
xxxx
xxx
(xx)
xxx
xxx
xxx
(xxx)
xxx ..
PPE accumulated depreciation :
Balance @ beginning of yr
Sold
Depreciation
Balance at end of year
(xxx)
xx
xxx
xxxx
(xxx)
..
Taxation payable :
Deferred tax :
Balance @ beginning of yr
Balance at end of year
IS current portion (cash flow)
..
Cash paid to suppliers & employees :
(xxx)
xxx
(xx) .
Balance @ beginning of yr
Tax payable (IS)
Deferred tax
Balance at end of year
Bank (cash flow)
..
(xxx)
(xx)
xx
xxxx
(xxx)
Loans raised :
Balance @ beginning of yr
Balance at end of year
Amount raised (cash flow)
..
(xxxx)
xxxx
(xxx)
Inventory :
Dividends paid :
Balance @ beginning of yr
(xxx)
Balance @ beginning of yr
Subsidiary acquired
xxx
xx
xx
xx
xx
xx
(xx)
xx
(xx)
16
Receivables :
Balance @ beginning of yr
Subsidiary acquired
Subsidiary disposed of
Balance at end of year
Net increase (cash flow)
..
Payables :
xxx
xx
(xx)
(xxx)
xxx
Investment in associate :
Balance @ beginning of yr
Share of associate’s profit
Balance at end of year
Bank (cash flow)
..
xxx
xx
(xxx)
xxx
Cash paid to suppliers and employees :
Cost of sales
Other expenses
Increase in inventories
Decrease in payables
Depreciation
Net increase (cash flow)
..
(xxxx)
(xx)
(xx)
(xx)
xxxx
(xxx)
Balance @ beginning of yr
Subsidiary acquired
Subsidiary disposed of
Balance at end of year
Net increase (cash flow)
..
(xxx)
(xx)
xx
xxxx
(xxx)
If purchase of subsidiary is settled by parent issuing shares then no
cash flow and NOT in Cash Flow Statement. But if subsidiary has
cash at time of acquisition then must include :
Cash and cash equivalents held by subsidiary @ acquisition date