ACCT+401+Session+11_Corporate report.pdf

Corporate reporting

1. 2022/2023 Academic Year
ACCT 401
CORPORATE REPORTING AND
FINANCIAL STATEMENT ANALYSIS
Session 11
Complex Groups

Dr. Emmanuel Tetteh Asare ([email protected])
DR EMMANUEL TETTEH ASARE1
2023/2024 Academic Year

2. 2022/2023 Academic Year
Complex Groups
TOPIC
11
DR EMMANUEL TETTEH ASARE2

3. LEARNING OBJECTIVES
DR EMMANUEL TETTEH ASARESLIDE 3
The key topics to be covered in the session
are as follows:
•Topic One: Vertical group
•Topic Two: D-shaped complex group (Mixed
complex group

4. Further Complications - Complex Group Structures
DR EMMANUEL TETTEH ASARESLIDE 4
Remember the two common types of complex structure
•Vertical group
•Mixed group (“D” shaped groups)

5. Vertical group
•.
DR EMMANUEL TETTEH ASARESLIDE 5
P
70% P controls SS through
its control of S
S
60% SS is the subsidiary of P
SS SS can be referred to as a
sub-subsidiary or indirect subsidiary

6. Status of investments
DR EMMANUEL TETTEH ASARESLIDE 6
Status is always based on control
P
70% P owns 70% of S and
therefore controls it.
S
60% S owns 60% of SS and
therefore controls it.
SS
P controls SS by controlling
S
∴ SS is a subsidiary

7. Status of investments
DR EMMANUEL TETTEH ASARESLIDE 7
Effective interest in the sub-subsidiary SS is
In the above illustration P effectively owns
Effective interest 70% × 60% = 42% of SS.
NCI (100% - 42%) = 58%
This is a useful tool to bring to the consolidation but it is irrelevant in
deciding the status of the investment.

8. Approaches
DR EMMANUEL TETTEH ASARESLIDE 8
2 possible approaches (direct or indirect) to consolidations
involving sub. subsidiaries.
Indirect approach (2 stages)
1. Consolidate SS into S to give the S group accounts.
2. Consolidate the S group into P.
− This technique is too slow for exam purposes when it comes to
dealing with sub subsidiaries. Always use the direct method.
− But it must be used to consolidate sub associates.
3. In practice, consolidated accounts for complex groups are prepared in
indirect approach.

9. Approaches
DR EMMANUEL TETTEH ASARESLIDE 9
Direct Approach
Carry out the consolidation using the effective rate.
P P
70% 70% × 60%
S = 42%
60%
SS
SS
In effect we have changed to
P
P
70%
70% 42%
S
60% S SS
(as a subsidiary)
SS

10. Direct Approach- Technique
DR EMMANUEL TETTEH ASARESLIDE 10
Step 1 Calculate the effective holding.
Step 2 Consolidate as normal subject to 2 important points
Dividends are paid to real shareholders not effective shareholders.
Cost of investment in the sub subsidiary [i.e. that appears in the main
subsidiary’s accounts] is split:
 P’s share is used to calculate goodwill
Cost of investment of S in SS A
Less: cost of indirect non-controlling interest in SS (X)#
Cost of parent ‘s investment in SS B
# cost of investment of S in SS X % share from S by P
 the balance (A – B= X) is reduced the non-controlling interest. (i.e. cost
of indirect non-controlling interest in SS)
Step 3 Proceed with the consolidation as normal.

11. DR EMMANUEL TETTEH ASARESLIDE 11
Illustration 1
Statements of financial position as at 31st December, 2015
P S T
GH¢ GH¢ GH¢
Cost of investment
in S 700
in T 450
Other assets 1,100 900 600
1,800 1,350 600
Share capital 200 100 100
Retained earnings 1,600 1,250 500
1,800 1,350 600
Further information
(a) P bought 70% of S two years ago when S’s retained earnings stood at GH¢500 Later (1 year ago) S bought 60% of T when
T’s retained earnings were GH¢200.
(b) The non-controlling interest is valued at their proportionate share of the subsidiary’s identifiable net assets.
(c) Goodwill to the extent of GH¢112 has been impaired in respect of the holding in S and by GH¢37.8 in respect of the
holding in T.
Required:
Prepare the consolidated statement of financial position of the P group as at 31st December, 2015.

12. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 12
Consolidated statement of financial position as at 31st December,
2015
GH¢
Assets
Goodwill (168 + 151.2) 319.2
Other Assets(1,100 + 900 + 600) 2,600.0
2,919.2
Share capital 200
Retained earnings 2,101.2
Non-controlling interest 618
2,919.2

13. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 13
(W1) Group structure
P P
70%
S 42% NCI 58%
60%
T T
(W2) Net assets summary
S Ltd
At At
consolidation acquisition
Share capital 100 100
Retained earnings
per Q 1,250 500
1,350 600
T Ltd
At At
consolidation acquisition
Share capital 100 100
Retained earnings
per Q 500 200
600 300

14. Cont
DR EMMANUEL TETTEH ASARESLIDE 14
(W3) Goodwill
Cost GH¢ GH¢
Investment in S 700
Investment in T 450
Less: indirect holding adjustments ( 450X 30%)(135)
Share of net assets
70% × 600 (W3) (420)
42% × 300 (W3) (126)
------- -------
280 189
-------- -------
Asset (balance) 168 151.2
Impaired (given) 112 37.8
(W4) Non-controlling interest
GH¢
In S 30% × 1,350 (W2) 405
In T 58% × 600 (W2) 348
S Inc’s non-controlling share of cost of
investment in T (30% × 450) (135)
____
618
____

15. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 15
Consolidated retained earnings
All of P 1,600
Share of S
70% (1,250 − 500) (W2) 525
Share of T
42% (500 − 200) (W2) 126
Goodwill (112 + 37.8)(W3) (149.8)
_______
2,101.2
_______

16. Illustration 2 –full goodwill method
DR EMMANUEL TETTEH ASARESLIDE 16
The following are the statement of financial position at 31st December, 2015
G Ltd A Ltd B Ltd
45,000 shares in A Ltd 65,000
30,000 shares in B Ltd 55,000
Other net assets 80,000 33,00075,000
145,000 88,00075,000
Share capital (GH¢1 shares) 100,000 60,000 50,000
Retained earnings 45,000 28,00025,000
145,000 88,00075,000
The inter-company shareholdings were acquired on 1st January, 2015 when the
retained earnings were GH¢10,000 and GH¢8,000 of A Ltd and B Ltd respectively. At
that date, the fair value of the non-controlling interest in A was GH¢20,000. The fair
value of the total non-controlling interest (direct and indirect) in B was GH¢50,000.
Required:
Prepare the consolidated statement of financial position, assuming any goodwill has
been fully impaired. It is group policy to value the non-controlling interest using the
full goodwill method.

17. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 17
Consolidated statements of financial position as at 31st
December, 2015. GH¢
Other net assets 188,000
Share capital 100,000
Retained earnings 39,938
NCI 48,062
188,000

18. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 18
Working 1
G:
G 75%, NCI 25%
A:
A 60%, NCI 40%
B:
Effective shares = 75% X 60% = 45%
NCI effective shares = 100% - 45% = 55%
Or 40% directly + 25% X 60% = 55% indirectly.

19. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 19
2) Net assets working
Acquisition Balance sheet date
A Ltd
Share capital 60,000 60,000
P&L 10,000 28,000
70,000 88,000
B Ltd
Share capital 50,000 50,000
P&L 8,000 25,000
58,000 75,000

20. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 20
3) Working Goodwill
A Ltd
Purchase consideration 65,000
NCI 20,000
Less: Net assets (70,000)
Goodwill 15,000
Breakdown of Goodwill
•Parent (65,000 – 75% x 70,000) 12,500
•NCI ( 20,000 – 25% X 70,000) 2,500
B Ltd
Purchase consideration 55,000
Less: indirect holding adjustment (55,000 X 25%) (13,750)
NCI 50,000
Less: Net assets (58,000)
Goodwill 33,250
Breakdown of Goodwill
•Parent (41,250 – 58,000 X 45%) 15,150
•NCI ( 50,000 – 58,000 X 55%) 18,100

21. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 21
3) NCI working
A Ltd
25% X 88,000 22,000
Less: NCI of A’s investment
in B Ltd (55,000 X 25%) (13,750)
B Ltd
55% X 75,000 41,250
NCI –Goodwill A 2,500
NCI – Goodwill B 18,100
70,100
Less: impairment of Goodwill
A (15,000 X 25% ) (3,750)
B (33,250 X 55% ) (18,288)

48,062

22. Suggested solution
DR EMMANUEL TETTEH ASARESLIDE 22
W4) Retained Earnings
Retained Earnings of G 45,000
Group share of post-acq. Profits
A ( 18,000 X 75%) 13,500
B (17,00 X 45%) 7,650
Goodwill written off
A ( 15,000 X 75%) (11,250)
B ( 33,250 X 45%) (14,962)
39,938

23. Mixed group structures.
DR EMMANUEL TETTEH ASARESLIDE 23
A
60%
B 25%
30%
C

24. Mixed group structures
DR EMMANUEL TETTEH ASARESLIDE 24
Effective interest of C as follows:
A’s direct interest in C 25%
A’s indirect interest (via B) ( 60% X 30%) 18%
A’s effective interest in C 43%
NCI 57%

25. Illustration 3
DR EMMANUEL TETTEH ASARESLIDE 25
The statements of financial position of three companies are as follows:
Alpha Beta Gamma
GH¢000 GH¢000 GH¢000
Investments 400 120
Assets 1,000 680 350
1,400 800 350
Share capital (GH¢1) 200 100 50
Accumulated profits 800 500 200
1,000 600 250
Liabilities 400 300 100
1,400 800 350

26. Illustration 3
DR EMMANUEL TETTEH ASARESLIDE 26
Alpha acquired a 80% shareholding in Beta for consideration of GH¢350,000
Beta acquired a 60% shareholding in Gamma for consideration of GH¢120,000
Alpha acquired a 20% shareholding in Gamma for consideration of GH¢50,000
All the investments were made at the same date.
At the date of acquisition the carrying values of the assets and liabilities were the same
as the fair values.
Details of the accumulated profits and the fair value of the effective NCI at acquisition
are as follows:
GH¢000 BetaGamma Beta Gamma
Acc. ProfitsGH¢200 GH¢75 Fair value of
the effective
NCI GH¢90 GH¢50
Alpha has a policy of always calculating goodwill at Full, the impairment reviews reveal
no impairment losses are to be recorded. No shares have been issued since the date of
acquisition.
Required
Prepare the consolidated statement of financial position of the Alpha Group.

27. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 27
W1) Group structure
Alpha 80% Beta NCI 20%
Alpha 68% Gamma NCI 32%
Alpha’s effective interest in Gamma
Alpha’s direct interest in Gamma 20%
Alpha’s indirect interest in Gamma ( 80% X 60%) 48%
Alpha’s effective interest in Gamma 68%
Effective NCI in Gamma 32%

28. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 28
W2) indirect holding adjustment
There will be an indirect holding adjustment in respect of Beta’s
investment in Gamma
The NCI in Beta
Beta’s cost of investment in Gamma
20% X GH¢120,000= GH¢24,000

29. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 29
W3) Net assets
BetaGamma
DOA Y.E. DOA Y.E.
GH¢000 GH¢000 GH¢000 GH¢000
Share capital 100 100 50 50
Acc. Profits 200 500 75 200
300 600 125 250
The post acquisition profit of Beta is GH¢300,000
(GH¢600,000 - GH¢300,000)
The post acquisition profits of Gamma is GH¢125,000
(GH¢250,000 – 125,000)

30. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 30
Beta’s gross goodwill GH¢000
Cost of the investment 350
Fair value of the NCI at DOA 90
Less: net assets at DOA (300)
Goodwill 140
Gamma’s gross goodwill
Cost of the investment by Alpha 50
Cost of the investment by Beta 120
Less: the indirect holding adjustment (24)
Fair value of the NCI at DOA 50
Less: net assets at DOA 125
Goodwill 71

31. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 31
W4) NCI
GH¢000
Fair value of Beta at acquisition 90
Fair value of Gamma at acquisition 50
Less: the indirect holdings adjustments (24)
Plus: the NCI% of Beta’s post acq. Profits ( 20% X 300) 60
Plus: the NCI% of Gamma’s post acq. Profits ( 32% X 125) 40
216

32. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 32
W5) Accumulated profits GH¢000
Parent’s accumulated profits 800
Plus the parent’s % of Beta’s post acquisition profits (80% X 300) 240
Plus the parent’s % of Gamma’s post acquisition profits (68% X125)85
1,125

33. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 33
Alpha Group statement of financial position
GH¢000
Goodwill 211
Assets (1,000+ 680+ 350) 2,030
2,241
Share capital (GH¢1) 200
Accumulated profits 1,125
NCI 216
Equity 1,541
Liabilities (400+ 200+ 100) 700
2,241

34. Timing of acquisitions
DR EMMANUEL TETTEH ASARESLIDE 34
What is the date of acquisition of the sub - subsidiary?
This is important for deciding reserves of the date of acquisition.
For the calculation of pre- and post-acquisition profits of SS Ltd.
The date the SS Ltd comes under the control of the P Ltd is either:
1) The date P acquired S if S already holds shares in SS, or
2) If S acquires shares in SS later, then that later date.

35. Illustration 4
DR EMMANUEL TETTEH ASARESLIDE 35
P bought 80% of S at 31st March, 2014. S bought 60% of T on
14th July, 2015
Date of acquisition of T = 14th July, 2015.

36. Illustration 5
DR EMMANUEL TETTEH ASARESLIDE 36
P bought 80% of S at 31st March, 2014. S already owned 60% of
T at 31st March, 2013.
Date of acquisition of T = 31st March, 2014.

37. Consolidated Statement of profit or loss and other comprehensive
income
DR EMMANUEL TETTEH ASARESLIDE 37
 These present no real problem. Calculate the effective rate
and consolidate as normal.
There is one complication.
•If the sub subsidiary has declared a dividend and the main
subsidiary has accounted for its share through profit or loss this
will be part of the subsidiary’s profit before tax.
•It must be eliminated (as a consolidation adjustment) during the
non-controlling interest calculation.

38. Illustration 6
DR EMMANUEL TETTEH ASARESLIDE 38
P S T Consolidated
Operating profit 1,200 600 500 2,300
Dividend receivable
from T − 120* − −
____ ____ ____ ____
1,200 720 500 2,300
Taxation (400) (250) (100) (750)
____ ____ ____ ____
PAT 800 470 400 1,550
Non-controlling interest (W) (278)
____ ____ ____ ____
800 470 400 1,272
____ ____ ____ ____
Extract from SOCIE
Dividends (300) (200) *(200) (300)

39. Suggested Solution
DR EMMANUEL TETTEH ASARESLIDE 39
P P
80%
S 48%
60%
NCI = 52%
T T
Non-controlling interest
In S 20% × (470 − 120) 70
In T 52% ×400 208
278

40. END OF LECTURE ONE
‘It is a long journey, but the best way to complete it is to keep to our
focus and we have just done that’
END
Thank you very much
Dr Emmanuel Tetteh Asare
Office: UGBS 2W8
Email: [email protected]
Mobile/WhatsApp: [phone]
DR EMMANUEL TETTEH ASARESLIDE 40