advance I and II summary (11111113).pptx

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1. Financial reporting Joint Arrangement(IFRS 11) By Kebrysfaw G.

2. Types of interest (Investment) in other entities Subsidiary Interest Associate Interest Joint Arrangement Financial instrument Ownership >50% 20% - 50% Joint < 20% Accounting Standards IFRS 3 and IFRS 10 IAS 28 IFRS 11 IFRS 9 Accounting Treatment Control = Consolidation Significant influence = Equity method Joint operation = in accordance with relevant IFRSs; Joint venture = equity method. At fair value. Separate financial statements are not required. Joint Arrangement(IFRS 11) Definition (Scope)

3. A joint arrangement is an arrangement over which two or more parties have joint control Joint control? is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control Controlling of the arrangement Collectively ? No Outside the scope of IFRS 11 YES Unanimous consent for the decision required No Outside the scope of IFRS 11 Joint arrangement (IFRS 11) YES In a joint arrangement, no single party controls the arrangement on its own. A party with joint control of an arrangement can prevent any of the other parties, or a group of the parties, from controlling the arrangement. Joint Arrangement(IFRS 11) Definition (Scope)

4. Example 1 . Assume an arrangement has three parties: A has 30per cent of the voting rights in the arrangement and B and C each have 35 per cent. The contractual arrangement between A, B and C specifies that at least 75 per cent of the voting rights are required. Example 2 . Assume that three parties establish an arrangement: A has 40 per cent of the voting rights in the arrangement, B has 30 per cent and C has 30 per cent. The contractual arrangement between A, B and C specifies that at least 75 per cent of the voting rights are required to make decisions about the relevant activities of the arrangement. Example 3 . Assume that Four parties establish an arrangement: A has 50 per cent of the voting rights in the arrangement, B has 20 per cent, C has 20 per cent and D has 10%. The contractual arrangement between A, B and C specifies that at least 85 per cent of the voting rights are required to make decisions about the relevant activities of the arrangement. Joint Arrangement(IFRS 11) Definition (Scope)

5. Joint control Joint Arrangement Joint Venture Joint operation Parties (Joint ventures) have rights to net asset of JA Parties (Joint operators) have rights to asset + obligation for liablity of JA Joint operation is established as unstructured separate form Joint venture established through structured separate form. Legal form of the separate vehicle The terms of the contractual arrangements Is joint arrangement structured through separate vehicle? yes Joint venture Joint operation No joint operation

6. Joint control Joint Arrangement Joint venture Joint operation Equity method Applicable IFRSs Its asset, including its share of any assets held jointly Its liabilities, including its share of any liabilities incurred jointly. Its revenue from the sale of its share of the output arising from joint operation Its expense, including its share of any expense incurred jointly. IAS 28 (Investment in Associate & Joint venture )

7. Joint Ventures Account for their interest in a JV as an investment and is required to account it using equity method. Under the equity method: on initial recognition the investment in a joint venture is recognized at cost Subsequently , the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee & . Carrying amount of the investment decreases when distribution (Dividend) received from an investee and any impairment loss The investor’s share of the investee’s profit or loss is recognized in the investor’s profit or loss. Initial Investment Investment in JV….xx Cash/other assets….xx Net Income Investment in JV….xx Income from JV…….xx Net Loss Loss from JV……...xx Investment in JV…...xx Dividend Dividend Rec./ cash…..……...xx Investment in JV…………..…...xx Equity accounting for a JV ’s losses continues until the investment is reduced to zero. Additional losses may be recognized as a liability if an entity has a legal or constructive obligation or made payments on behalf of the associate or joint venture Recognition of future share of profits only after share of profits equals losses . ACCOUNTING FOR JOINT VENTURE

8. For Arthur and Beatrice personal account January 1 : Investment in ARBE……..400,000 Cash…………..…………400,000.00 December 31 : Investment in ARBE……..150,000.00 Income from ARBE…………150,000.00 December 31 : Dividend receivable………..50,000.00 Investment in ARBE……..50,000.00 Arthur Company and Beatrice Company each invested Br 400,000.00 for a 50% interest in ARBE joint venture on January 1, 2019. At December 31, 2019, ARBE reported a Net Income of Br 300,000.00 and also on December 31, 2019 it declared a dividend of Br 100,000.00. Investment in ARBE 400,000 150,000 50,000 500,000 ACCOUNTING FOR JOINT VENTURE

9. Accounting for Sales Agencies and Branch Operations Advanced Financial Accounting. (Part I of 2) By Kibrysfaw G., Lecturer, IFRS Consultant, Trainer, ….

10. The difference between sales agency and branch The difference between a sales agency and a branch most often has to do with the degree of autonomy A sales agency, sometimes referred to simply as an “agency,” usually is not an autonomous operation but acts on behalf of office By contrast, a branch office usually has more autonomy and provides a greater range of services than a sales agency does, although the degree differs with the individual company . A sales agency is not a self contained business but rather acts only on behalf of home office/ Principal A branch is a self contained business that accts independently but with in the bounds of the business policy which is set by home office

11. Sales agency Branch   Displays merchandise and takes customers’ order but does not carry stock of merchandise to fill customers’ orders. Carries stock of merchandise used to fill customers’ orders (or provides services similar to those provided by the home office)   Customers’ orders are sent to the home Office for approval of credit. Customers remit payments directly to the home office. Grants credit in accordance with the company’s policies, makes normal warranties, fill customers’ order, and makes collections on sales.   Not a separate accounting entity. The only accounting records maintained are cash receipts and cash disbursement books necessarily to account for the revolving fund. The main office maintains records of sales made through the agency and the expenses it incur. A separate accounting entity for internal reporting. It maintains its own complete set of accounting records For external reporting, the branch’s financial statements are combined with the home office’s financial statements   Holds revolving cash fund provided by the home office that is replenished when depleted. Not other cash funds are held. Has its own assets and liabilities and generates its own revenues and incurs its own expenses. Makes periodic remittances to home office subject to company policy The difference between sales agency and branch

12. Cont’d Accounting for a division not operated as a separate corporation is similar to that of branches. Accounting for a division operated as a separate corporation is different from that of branches

13. Accounting for Branch and Home office Reciprocal Ledger Accounts Investment in Branch Account A non-current asset account used by the home office(HO) to record any transactions with the branches. Investment in Branch Account Dr Cr Assets provided to the branch by the HO Assets received from the branch NI reported by the branch NL reported by the branch Home Office ledger account A quasi-ownership equity account used by the branch to record any transactions with the home office. Home Office Ledger Account Dr Cr Assets sent by the branch to the HO or to other branches Assets provided by the HO to the branch NL reported by the branch NI reported by the branch At the end of an accounting period when the branch closes its accounting records, the Income Summary account is closed to the Home Office account.

14. Item On the branch accounting records On the HO accounting records Dr Cr Dr Cr Plant assets acquired by the HO for a branch’s usage Plant Asset HO account Inv’t in Branch account Plant Asset Plant asset is acquired by a branch for its usage HO Cash or liability account Plant asset account: branch Inv’t in branch Expense incurred by HO and allocated to Branches Expense account HO account Inv’t in Branch account Expense account Cont’d Three alternative methods are available to the home office in billing the merchandise shipped to the branches: Billed at home office cost, Billed at a percentage above home office cost ( cost + mark-up ), and Billed at the branch’s retail selling price. Shipment of merchandise to a branch does not constitute a sale because ownership title has not changed.

15. Advantages Disadvantage Billed at the home office cost Widely used because of its simplicity Attributes all gross profits of the business to the branches Billed at a percentage above home office cost Able to allocate a reasonable gross profit to the home office Branch NI understated and the ending inventories overstated Billed at the branch’s retail selling price Increase internal control over inventories at branches No gross profit assigned to the branches Cont’d

16. Example I Assume that Garad PLC bills merchandise to Hawassa Branch at home office cost and that Hawassa Branch maintains complete accounting records and prepares financial statements. Both the home office and the branch use the perpetual inventory system . Equipment used at the branch is carried in the home office records. Expenses, such as advertising and insurance, incurred by the home office on behalf of the branch, are billed to the branch. Transactions and events during the first year (2013) of operations of Hawassa Branch are summarized below: Cash of Br.1,000 was forwarded by the home office to Hawassa Branch . Home Office Accounting Records Journal Entries: Hawassa Branch Accounting Records Journal Entries: Inv’t in HB……………..……. 1,000 Cash…………………..…. 1,000 Cash……………….............. 1,000 Home Office……………..…. 1,000 2. Merchandise with a home office cost of Br.60,000 was shipped by the home office to Hawassa Branch . Investment in H B…. 60,000 Inventories……. 60,000 Inventories…............. 60,000 Home Office……… 60,000

17. Cont’d 3. Equipment was acquired by Hawassa Branch for Br.500, to be carried in the home office accounting records. (Other plant assets for Hawassa Branch generally are acquired by the home office.) Equipment- H B ……..500 Home Office…… 500 Investment in H B …..……... 500 Cash………………..… 500 4. Credit sales by Hawassa Branch amounted to Br.80,000; the branch’s cost of the merchandise sold was Br.45,000 None A/R…… 80,000 CGS……. 45,000 Sales………………... 80,000 Inventories……….. 45,000 5. Collections of trade accounts receivable by Hawassa Branch amounted to Br.62,000 5. None Cash…………...... 62,000 A/Receivable…………… 62,000

18. 6. Payments for operating expenses by Hawassa Branch totaled Br.20,000. None Op/Expenses…….. 20,000 Cash…………….. 20,000 7 . Cash of Br.37,500 was remitted by Hawassa Branch to the home office. Cash……….. 37,500 Home Office…… 37,500 Investment in HB... 37,500 Cash……………… 37,500 8. Operating expenses incurred by the home office and charged to Hawassa Branch totaled Br.3,000 Investment in HB…. 3,000 Op/Expenses…..…….. 3,000 Op/Expenses…… 3,000 Home Office………. 3,000 Cont’d

19. Two Reciprocal Ledger Accounts ( prior to adjusting and closing entries ): Date Explanation Debit Credit Balance 2013 Cash sent to branch Merchandise billed to branch at HO cost Equipment acquired by branch, carried in home office accounting records Cash received from branch Operating expenses billed to branch 1,000 60,000 3,000 500 37,500 1,000 Dr 61,000 Dr 60,500 Dr 23,000 Dr 26,000 Dr Investment in Hawassa Branch Home Office Date Explanation Debit Credit Balance 2013 Cash received from HO Merchandise received from HO Equipment acquired Cash sent to HO Operating expenses billed by HO 500 37,500 1,000 60,000 3,000 1,000 Cr 61,000 Cr 60,500 Cr 23,000 Cr 26,000 Cr To review the operating results and financial position of the branch, management of the enterprise may prepare a separate income statement and balance sheet.

20. Accounting for Sales Agencies and Branch Operations Advanced Financial Accounting. (Part 2 of 2) By Kibrysfaw G., Lecturer, IFRS Consultant, Trainer, ---

21. Combined financial Statements for Home Office and Branch (for external use) Combined financial statements should be prepared for external users . A starting point in preparation of a combined balance sheet would be the adjusted trial balances of the home office and of the branch. The reciprocal ledger accounts are eliminated because they have no significance when the branch and home office report as a single entity. In preparing the combined financial statements, the following accounts should be eliminated: Reciprocal ledger accounts Any intra-company profits or losses Any receivables and payables between the home office and the branch (or between two branches). The rest of accounts are just summed together for the combined financial statements.

22. Working Paper for Combined financial Statements A working paper for combined financial statements has three distinct purposes: To eliminate any intra-company profits or losses , To eliminate the reciprocal accounts , & To combine ledger accounts balances for like revenues, expenses, assets, and liabilities. Elimination Entry Home office account……….26,000 Investment in Hawassa branch…………26,000

23. Working Paper for Combined financial Statements

24. Combined Financial Statements -Example I Garad PLC Income Statement For Year Ended December 31, 2013 $87,000 Net Income 113,000 Operating expenses $200,000 Gross margin on sales 280,000 Cost of goods sold $480,000 Sales Garad PLC Statement of Retained Earnings For Year Ended December 31, 2013 $117,000 Retained earnings, end of year 40,000 Less: Dividends $157,000 Subtotal 87,000 Add: Net income $70,000 Retained earnings, beginning of year

25. Garad PLC Balance Sheet December 31, 2013 $287,000 Total assets 140,000 (10,000) Less: Accumulated depreciation $150,000 Equipment 60,000 Inventories 57,000 Trade accounts receivable (net) $30,000 Cash Assets $287,000 Total liabilities & stockholders’equity 267,000 117,000 Retained earnings $150,000 Common stock, Br.10 par, 15,000 shares authorized, issued, and outstanding Stockholders’ equity $20,000 Trade accounts payable Liabilities Liabilities & Stockholders’ Equity

26. Cont.… HO: Adjusting and Closing Entries: Hawassa Branch : Closing Entries: None Sales……………….. 80,000 CGS…….............................. 45,000 Op/Expenses…………………. 23,000 Income Summery……… …..12,000 Investment- H B ….. 12,000 Income Summery….. 12,000 Income- H B ….............. 12,000 Home Office……………….. 12,000 Income: HB…………. 12,000 None Income Summery……… 12,000 Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/2013 ( Perpetual Inventory System ):

27. Example II: Billing of Merchandise to Branches at Prices above Home Office Cost Similar information as in the previous example, except that the home office bills merchandise shipped to Hawassa branch at 50% markup of the cost, or 33 1/3 % of billed price. Thus, the shipment of merchandise costing $60,000 will be recorded at the home office and branch as follows: Investment- H B ….. 90,000 Inventory……….. 90,000 Inventories…..…............. 60,000 Home Office…………….. 90,000 AFOVI……………….……... 30,000 Thus, the balances of both the Investment in Hawassa Branch account and Home Office account will be $56,000, instead of $26,000 due to the inventory mark up of $30,000 . When the home office bills merchandise shipments to branches at prices above home office cost, preparation of working paper for combined financial statement is facilitated by an analysis of the flow of merchandise to a branch , such as the following for Hawassa Branch of Garad PLC.

28. 22,500 45,000 67,500 Cost of goods sold 7,500 15,000 22,500 Less: Ending inventories 30,000 60,000 90,000 Add: Shipments from home office 30,000 60,000 90,000 Beginning inventories Markup Home Cost Billed Price CGAS

29. Cont…

30. Home Office Adjusting and Closing Entries Income- HB………................ 10,500 Investment in HB……………… 10,500 To record net loss reported by branch AFOVI- HB………….. 22,500 Realized Gross Profit- HB…............. 22,500 To reduce allowance to amount by which ending inventories of branch exceed cost. Realize Gross Profit: HB…………… 22,500 Income: HB…………............................... 10,500 Income Summary………....................... 12,000 To close branch net loss and RGP to Income Summary ledger account (Income tax effects are disregarded.) Branch Closing Entries -The closing entries for the branch at the end of 2013 are as follows: Sales………………………....80,000 Income Summary………..10,500 Cost of Goods Sold…………..67,500 Operating Expenses………….23,000 To close revenue and expense ledger accounts Home Office………………..........10,500 Income Summary………………10,500 To close the net loss in the Income Summary account to the Home Office account

31. Cont.…. After posting the above entries, the account balance for the following accounts is: Investment in HB =45,500(debit)* AFOVI- HB =7,500(credit)** Realized Gross Profit: HB = 0 Income: HB = 0 * Balance prior to the above entries equals Br.56,000. Br.56,000- 10,500 (net loss of the branch reduces the debit balance of the Investment account) = Br.45,500. ** Br.30,000-22,500 = Br.7,500. When a periodic inventory system is adopted, inventory account cannot be used for the shipments of merchandise between the home office and the branch. Accounts such as “ Shipments to Branch ” (used by the home office) and “ Shipments from Home Office ” (used by the branch) are used.

32. Advanced Financial Accounting By Kibrysfaw Tutor (IFRS consultant & trainer, lecture, PhD candidate) [phone]

33. Accounting profit/loss Profit or loss for the period before deducting tax expense. (IFRS) Taxable profit/loss The profit (loss) for a period, determined in accordance with applicable tax rules on which income taxes are payable + Expense recognized but not deductible for tax purpose - Expense not recognized but deductible for tax purpose -income recognized, but not under tax law + income not recognized, but included under tax law Current income tax The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period Taxable profit/loss Tax rate Tax expense *** Tax payable *** DEFINITION OF IMPORTANT TERMS

34. Differences permanent Differences Temporary Differences Are differences that will remain unsolved period after period. Eg - donation, entertainment deference- Entities shall deduct or add back permanent differences from accounting profit in order to determine taxable profit Differences between the carrying amount of an asset or liability in the statement of financial position and its tax base R econciled through periods Entities shall deduct or add back permanent differences from accounting profit in order to determine taxable profit & Result in differed tax Warranty expense, Depreciation expense Cont’d

35. The Government specifies that: Ethio telecom must each year pay a tax = 30% of taxable profit for the year taxable profit is determined in accordance with IFRS adjusted for specified expenses that are excluded from the calculation of taxable income ( ie donations and entertainment) If the determination of taxable business income results in a loss in a tax period, that loss may be set off against taxable income in the next five (5) tax periods, earlier losses being set off before later losses. Ethio telecom determines, accounting profit in accordance with IFRS: profit for 2014 to be 900,000 (donation expense = 100,000) loss for 2015 to be 400,000 (entertainment expense =100,000) Cont’d

36. Income tax The aggregate amount included in the determination of net profit or loss for the period in respect of current tax and deferred tax Current income tax Deferred income tax Substance Base Timing payable to tax office Accounting measure Taxable profit/loss Temporary Difference Current period Future period Deferred income tax Income tax payable or recoverable in future periods in respect of the temporary differences , unused tax losses and unused tax credits Temporary difference Tax rate Cont’d

37. Differed income tax: Temporary differences carrying amount Tax Base CA> TB CA < TB Taxable Temporary differences Differed tax Liability Deductible Temporary differences Differed tax Asset Differed tax expense ** Differed tax liability ** Differed tax Asset ** Differed tax Income ** carrying amount Tax Base CA<TB CA> TB Taxable Temporary differences Differed tax Liability Deductible Temporary differences Differed tax Asset Differed tax expense ** Differed tax liability ** Differed tax Asset ** Differed tax Income ** Asset Liability

38. A company Purchased an asset Costing $1,500. At the end of 2014 the carrying amount is $1,000. The cumulative depreciation for tax purpose is $900 and the current tax rate is 25% Carrying amount of the asset = 1,000 Tax base of the Asset = $1,500,00- 900 = 600 Temporary Difference = 1,000- 600 = 400 Since Carrying amount of the asset is greater than its tax base the temporary difference is Taxable temporary Difference (Differed tax liability) DTL = Temporary Difference x Tax rate = 400 * 0.25 = 100 Example 1

39. Xyz co Recognized a liability of $10,000 for accrued Product warranty costs on 31 December 2013. these product warranty costs will not be deductible for tax purpose Until the entity pays claims . The tax rate is 30% Example 2 Carrying amount of the Liability = 1,0000 Tax base of the Asset = $0 Temporary Difference = 10,000- 0 = 10,000 Since Carrying amount of the Liability is greater than its tax base the temporary difference is Deductible temporary Difference (Differed tax Asset) DTA = Temporary Difference x Tax rate = 10,000 * 0.3 = 10,000

40. AGRICULTURE (IAS 41) AGRICULTURE 42 Advanced Financial Accounting By Kibrysfaw Tutor

41. Agricultural activity is the management by an enterprise of the biological transformation of biological assets for sale, into agricultural produce or into additional biological assets. Biological assets. Living plants and animals. Agricultural produce. The product of the entity’s biological assets, for example, milk and coffee beans. Biological transformation. Relates to the processes of growth , degeneration , and production that can cause changes of quantitative or qualitative nature in a biological asset. Biological transformation leads to various different outcomes. Asset changes: Growth : increase in quantity and/or quality Creation of new assets: Production : producing separable non-living products Procreation : producing separable living animals Definitions of Key Terms (in accordance with IAS 41)

42. Types of Biological Assets 44 Biological Assets Bearer Biological Asset Consumable Biological Asset Produces IAS 41 IAS 16, except produces growing thereon Bearer biological assets: Bearer plants are defined in IAS 41as a plant that meets all the following criteria: It is used in the production or supply of agricultural produce It is expected to bear produce for more than one period It is not intended to be sold as a living plant or harvested as agricultural produce, except for incidental scrap sales (i.e. for firewood at the end of the plants productive life).

43. Types of Biological Assets (cont’d) 45 Consumable biological assets: Biological assets which do not meet all of the above requirements. All animals IAS 41does not apply to: Land related to agricultural activity (see IAS 16 Property, Plant and Equipment and IAS 40 Investment Property). Bearer plants related to agricultural activity (see IAS 16). However, IAS 41 applies to the produce on those bearer plants. Government grants related to bearer plants (see IAS 20 Accounting for Government Grants and Disclosure of Government Assistance). Intangible assets related to agricultural activity (see IAS 38 Intangible Assets). Harvested agricultural produce (IAS 2, Inventory) . However, it does apply to produce growing on bearer plants.

44. Example Entity A raises cattle, slaughters them at its abattoirs and sells the carcasses to the local meat market. Which of these activities are in the scope of IAS 41?   The cattle are biological assets while they are living . When they are slaughtered , biological transformation ceases and the carcasses meet the definition of agricultural produce. Hence, Entity A should account for the live cattle in accordance with IAS 41 and the carcasses as inventory in accordance with IAS 2 Inventories.   2. An entity on adoption of IAS 41 has reclassified forest as biological assets. The total value of the group’s forest assets is $2 million comprising Freestanding trees …………$1,700 Land under trees………………... 200 Roads in forests …………………..100  Required Show how the forests would be classified in the financial statements.

45. The forests would be classified as Biological assets ……………….…………….….$1,700 Noncurrent asset-land …………….………....….….200 Noncurrent assets—other tangible assets…..…....100 Example An entity should recognize a biological asset or agricultural produce when : (a) The enterprise controls the asset as a result of past events; (b) It is probable that the future economic benefits will flow to the enterprise; and (c) The fair value or cost can be measured reliably .   Reconition

46. Measurement Any biological asset should be measured initially and at each balance sheet date, at its fair value less estimated point-of-sale costs The only exception to this is where the fair value cannot be measured reliably. Agricultural produce should be measured at fair value less estimated point-of-sale costs at the point of harvest. According to IAS 41, agricultural produce can always be measured reliably. Point-of-sale costs include brokers’ and dealers’ commissions, any levies by regulatory authorities and commodity exchanges, and any transfer taxes and duties.

47. Consumable Biological Assets Bearer Biological assets(IAS16) At initial recognition Measured together with any agricultural produce attached (i.e., one unit of account) Measured at fair value less costs to sell Measured separately from any agricultural produce attached (i.e., two units of account) Measured at cost accumulated until maturity Subsequent measurement requirements Measured together with the agricultural produce until the point of harvest (i.e., one unit of account until the point of harvest) Measured at the end of each reporting period at fair value less costs to sell, with changes recognised in profit or loss Measured at: Cost, less any subsequent accumulated depreciation and impairment. Fair value at each revaluation date, less any subsequent accumulated depreciation and impairment . Recognition & Measurement: Biological Assets

48. Consumable Biological Assets Bearer Biological assets At the end of each reporting period prior to harvest Measured together with the bearer plant Measured at fair value less costs to sell, with changes recognised in profit or loss as the produce grows Measured separately from the bearer plant at fair value less costs to sell At the point of harvest Measured separately from the bearer plant at fair value less costs to sell Measured separately from the bearer plant at fair value less costs to sell Recognition & Measurement: Biological Assets

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50. Financial Reporting Advanced Financial Accounting By Kibrysfaw G. [phone]

51. Business combinations are events or transactions in which two or more business enterprises, or their net assets, are brought under common control. A transaction or other event is a business combination if : The assets acquired and liabilities assumed constitute a business . If the asset acquired are not a business, it must be accounted for as an asset acquisition. Business consists of Input, process and output Business combination

52. Combined Enterprise : The accounting entity that results from a business combination. Constituent Companies: The business enterprises that enter into a combination. Combinor : A constituent company entering into a combination whose owners as a group ends up with control of the ownership interests in the combined enterprise. The term acquirer, parent and combinor can be used interchangeably. Combinee : a constituent company other than the combinor in a business combination. The term acquired, acquiree , subsidiary and combinee can be used interchangeably. XYZ CO. (an oil and gas exploration and production company) acquires a mineral interest from ABC CO, on which it intends to perform exploration activities to determine if reserves exist. The mineral interest is an unproven property and there have been no exploration activities performed on the property. It is not a BC. E&P Co A acquires a property similar to that in Example above, except that oil and gas production activities are in place. The target’s employees are not part of the transferred set. E&P Co A will take over the operations by using its own employees. It is a BC.

53. There are three types of business combinations: Horizontal Combination, Vertical Combination, and Conglomerate Combination: 1. Horizontal Combination: is a combination involving enterprises in the same industry. E.g. assume combination of Ethio flour and Sun flour. 2. Vertical Combination: A Combination involving an enterprise and its customers or suppliers. It is a combination involving companies engaged in different stages of production or distribution. It is classified into two: Backward Vertical Combination – combination with supplier and Forward Vertical Combination – combination with customers. E.g. : A Tannery Company acquiring a Shoes Company - Forward 3. Conglomerate (Mixed) Combination: is a combination involving companies that are neither horizontally nor vertically integrated. It is a combination between enterprises in unrelated industries or markets.

54. The Three common methods for carrying out a business combination are: ABC Company ABC Company XYZ Company 1. Statutory Merger 2. Statutory Consolidation ABC Company EFG Company XYZ Company 3. Acquisition of Common Stock ABC Company ABC Company XYZ Company XYZ Company Control Parent S ubsidiary

55. Growth Synergy Economies of scale Better management 5. Diversification 6. New market 7. Tax advantage control 8. Monopolistic ambition Acquisition Method This standard requires to use the acquisition method to account for a business combination transaction. It involves four steps :

56. IFRS 10 shall be used to identify the acquirer—the entity that obtains control of another entity , i.e. the acquiree . Date on which the acquirer obtains control The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values (NCI) at the acquisition date can be measured using : fair value; or NCI’s proportion of the group values of the subsidiary’s net assets NCI is arise when one company controls another company less than 100%. It is also referred as Minority Interest.

57. Sometimes NCI is calculated through Implied value . Implied value = Acquisition cost / % of controlling interest NCI = Implied value-Acquisition cost For example, If Com. A acquired 80% of Com. B at Br. 800,000. Find the NCI: Implied value= Br. 800,000/ 0.8 = Br. 1,000,000.00 NCI = Br. 1,000,000-Br. 800,000 = Br. 200,000.00 Good will vs negative good will Acquisition cost(Implied value) FV of net identifiable asset IS IT GREATER THAN ZERO? YES NO Good will Gain on bargain purchase Capitalize as an asset Annual impairment review (test) Present under P & L

58. If the acquisition cost(Implied value) exceed the fair value of net identifiable asset, then we recognize as goodwill. If the fair value of net identifiable asset exceed the acquisition cost(Implied value), then we recognize as Negative goodwill(Gain on bargain purchase). 1. Determination of Cost of Acquisition The cost of a combine on a BC accounted for by Acquisition method is the total of The amount of consideration paid by the combiner, The present value of Any contingent consideration that is determinable on the date of the business combination A. Amount of Consideration: This is the total amount of Cash paid, The Current fair value of other assets distributed, The present value of debt securities issued & The Current fair value (Market) value of equity security issued by the combiner.

59. Investment in Subsidiary………………….xx Cash/other assets………………………………………………………………xx Bond Payable………………………………………………………………………..xx Common stock……………………………………………………………………...xx Additional paid in capital in excess of par value…………………xx B. Contingent Consideration: Relates to an additional amount paid by the parent to the shareholders of subsidiary if certain conditions are met. It recorded at fair value. Investment in subsidiary……………xx Contingent Consideration………………xx Acquisition cost = Amount of consideration + Contingent consideration Implied value = Acquisition cost + Non Controlling Interest or (AC/% of acquisition)

60. Merger expenses and issuance costs are not allowed to be capitalized as acquisition cost 1. Direct combination costs: Associated with completing the business combination (Legal, Accounting, Consulting, Appraisal and Finder`s fee). Merger Expense………………xx Cash……………………………………xx 2. Stock Issuance Cost: When the parent issues stock in conjunction with a BC, any stock issuance costs, such as underwriter fee and exchange fee. Additional paid in capital in excess of par…………….xx Cash………………………………………………………………………xx 2. Fair value of Net Identifiable Asset (FVNIA): FVNIA = Fair value of Asset-Fair value of Liabilities

61. 1. Entity A pays $78,000 to acquire 75% of the voting interest in Entity B when the fair value of Entity B’s identifiable assets less the fair value of Entity B’s liabilities and contingent liabilities is $100,000. The fair value of NCI is Br 26,000. Is the goodwill in the business combination an asset of the group? Choose one of: 1) Yes; or 2) No. If yes, what is the economic value of the goodwill to the group? Implied Value = 78,000 + 26,000 = 104,000 or Implied Value = 78,000/0.75 = 104,000 Goodwill = 104,000-100,000 = 4,000 Example 2. P com acquired S com on Dec. 31/2017 with the following balances: The carrying amount of Assets are Br 440,000. The carrying amount of liabilities are Br 140,000. The fair value of assets are Br 500,000. The fair value of liabilities are Br 170,000. On Dec.31/2017 P com issued 50,000 shares of its Br 5(CFV of Br 8) CS for all the net asset of S. Issuance and out of pocket costs are Br 40,000 and Br 25,000, respectively .

62. Journal Entries: 1. Investment in S…..(8*50,000)…...........….400,000 Common Stock…(5*50,000)…………………….……………250,000 Additional Paid in capital in excess of par…..………..150,000 2. Merger Expense……………………………………………………25,000 Additional Paid in capital in excess of par…...…….40,000 Cash…………………………………………………………….65,000 Goodwill Calculation Acquisition Cost = Br 400,000 FVNIA = Fair Value of Asset – Fair Value of Liability = Br 500,000 – Br 170,000 = Br 330,000 Goodwill = AC-FVNIA = Br 400,000 – Br 330,000 = Br 70,000.

63. Journal Entries: 1. Investment in Set…((100,000*13) + 50,000)…….1,350,000 Common Stock…(100,000*10)……………………1,000,000 Additional Paid in Capital in Excess of Par… ………300,000 Cash………………………..…………………………..50,000 2. Merger Expense……………………………………180,000 Additional Paid in Capital in Excess of Par………...120,000 Cash………………………………………………..…….300,000 Goodwill calculation Acquisition cost = Br 1,350,000 FVNIA = Fair Value of Asset – Fair Value of Liability = (60,000 + 500,000 + 450,000 + 300,000 + 250,000) – (180,000 + 240,000) = 1,560,000 – 420,000 = 1,140,000 Goodwill = AC-FVNIA = Br 1,350,000 – Br 1,140,000 = Br 210,000.

64. IFRS 10- ADVANCED FINANCIAL ACCOUNTING BY: KIBRYSFAW G IFRS 10 Consolidation on Date of Acquisition PART ONE

65. Group Account /Consolidation IAS 27 Separate financial statement IAS 28 Investment in Associate IFR 3 Business Combination IFRS 10 Consolidation IFRS 11 Joint arrangement Processing separate financial statement (investor) Accounting for associates equity method Define business combination Recognition measurement GW,NCI, Identifiable. A &L control consolidated financial statement Procedures Investment entities joint control Joint operation Joint venture IFRS 12 Disclosure of interest in other intities

66. = Entity that controls one or more subsidiaries Control Subsidiary = entity that is controlled by another entity Group = parent + subsidiaries Significant influence 20%+ Associate (IAS 28) = Entity over which an investor has significant influence Joint control Joint arrangement (IFRS 11) = arrangement of which two Or more parties have joint control = consolidation (IFRS 10)

67. 70 NO YES YES NO NO Joint Venture Joint Operation YES

68. Control An investor control an investee when: Is exposed or has the right to variable returns Has the ability to affect these returns Through its power over the investee Power Existing rights that give the current ability to affect the relevant activities of the investee Consolidated financial statement Are the financial statements of a group presented as those of a single economic entity. An investor need not have absolute power to control an investee Cont…

69. Exemptions from consolidation Exemption is allowed if and only if all of the following items are fulfilled T he parent is it self a wholly- owned subsidiary or it is a partially owend sub. Of another entity & its other owners, have been informed about , and do not object to, the parent not presenting CFs I ts securities are not publicly traded It is not in the process of issuing securities in public securities markets The ultimate or intermediate parent publishes CFSs that comply with IFRSs ACCOUNTING REQUIREMENT Consolidation requires Uniform Accounting policy and uniform accounting period among the groups If there is no uniform accounting policy or period Adjustment is needed When the fiscal periods of parents and its subsidiaries differ, We prepare CFS for and as of the end of the parent`s fiscal period If the difference in fiscal period is not in excess of three months, it usually is accepted to use the subsidiary`s statement for its fiscal year for consolidation.

70. Consolidation procedures Step1 Step 2 Step3 Combine like items of assets, labilities, equities, expenses, incomes and ash flows of the parent with these of subsidiaries Offset (Eliminate ) carrying amount of parent’s investment in subsidiary parent’s portion of equity of each subsidiary Offset (Eliminate ) items related to intra group transactions Cont… The elimination is not entered in either the parent company’s or the subsidiary’s accounting records; it is only a part of the working paper for preparation of the consolidated balance sheet Are the financial statements of a group presented as those of a single economic entity CFS of Equity includes Parent`s Equity balance and Non Controlling Interest A parent shall present NCI in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

71. Intercompany receivable (payable) Intercompany payable (receivable) Against Advances to subsidiary (from subsidiary) Advances from parent (to parent) Against Interest revenue (interest expense) Interest expense (interest revenue) Against Dividend revenue (dividends declared) Dividends declared (dividend revenue) Against Management fee received from subsidiary Management fee paid to parent Against Sales to subsidiary (purchases of inventory from subsidiary) Purchases of inventory from parent (sales to parent) Against Parent’s Accounts Subsidiary’s Accounts Investment in subsidiary Equity accounts Against Intercompany Accounts to Be Eliminated

72. Sample Elimination and Adjustment Entry Subsidiary`s Common Stock…………………………………………………….xx Subsidiary`s Additional Paid in capital in excess of Par………..xx Subsidiary`s Retained Earning…………………………………………………xx Payable to Parent………………………………………………………………………xx Increase in Fair Value of Assets………………………………………………..xx Decrease in Fair Value of Liabilities………………………………………….xx Goodwill……………………………………………………………………………………….xx Investment in Subsidiary…………………………………………xx Non Controlling Interest………………………………………….xx Receivable from Subsidiary……………………………………xx Increase in Fair Value of Liabilities………………………..xx Decrease in Fair Value of Assets……………………………xx Reciprocal ledger account (Subsidiary`s Equity Account) Inter company transaction Increase in Asset and Decrease in Liability in terms of FV of Sub. Excess of AC (IV) Over FVNIA

73. Consolidation at date of acquisition Advanced Financial Accounting CONSOLIDATED FINANCIAL STATEMENT PART TWO BY : Kibrysfaw G IFRS 10

74. Consolidation procedures Step1 Step 2 Step3 Combine like items of assets, labilities, equities, expenses, incomes and ash flows of the parent with these of subsidiaries Offset (Eliminate ) carrying amount of parent’s investment in subsidiary parent’s portion of equity of each subsidiary Offset (Eliminate ) items related to intra group transactions Cont… The elimination is not entered in either the parent company’s or the subsidiary’s accounting records; it is only a part of the working paper for preparation of the consolidated balance sheet Are the financial statements of a group presented as those of a single economic entity CFS of Equity includes Parent`s Equity balance and Non Controlling Interest A parent shall present NCI in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

75. Sample Elimination and Adjustment Entry Subsidiary`s Common Stock…………………………………………………….xx Subsidiary`s Additional Paid in capital in excess of Par………..xx Subsidiary`s Retained Earning…………………………………………………xx Payable to Parent………………………………………………………………………xx Increase in Fair Value of Assets………………………………………………..xx Decrease in Fair Value of Liabilities………………………………………….xx Goodwill……………………………………………………………………………………….xx Investment in Subsidiary…………………………………………xx Non Controlling Interest………………………………………….xx Receivable from Subsidiary……………………………………xx Increase in Fair Value of Liabilities………………………..xx Decrease in Fair Value of Assets……………………………xx Reciprocal ledger account (Subsidiary`s Equity Account) Inter company transaction Increase in Asset and Decrease in Liability in terms of FV of Sub. Excess of AC (IV) Over FVNIA

76. Assume that on January 1, 2013, P Company acquired all the outstanding stock of S Company for cash of $160,000. What journal entry would P Company make to record the shares of S Company acquired? On January 1, 2013 current fair values of S Company’s identifiable assets and liabilities were the same as their carrying amount Investment in S Com……...160,000 Cash………………………..160,000

77. Goodwill Calculation Goodwill = Acquisition Cost – Fair Value of Net Identifiable Asset(FVNIA) FVNIA= Fair Value of Assets – Fair Value of Liabilities FVNIA =(40,000 + 100,000 + 80,000 + 40,000) - (100, 000) = Br 260,000 – Br 100,000 = Br 160,000 Goodwill = $ 160,000 – $ 160,000 = $ 0.00 Cont… Elimination and Adjustment Common stock (S) 100,000 Additional Paid in capital (S) 20,000 Retained earnings (S) 40,000 Investment in S Company 160,000 This is a work paper-only entry .

78. There is no question of control of a wholly owned subsidiary . Thus, as an illustration assume that on December 31, 2002, PALM Corporation issued 10,000 shares of its 10 par common stock (current fair value Br 50 a share) to shareholder of STARR Company for all the outstanding Br 5 par common stock of Starr . There was no contingent consideration . Costs of issuing common stock of the business combination paid by Palm Corp on December 31, 2002 consisted of the following; Costs of issuing common stock……… 35,000 Assume also that the combination qualified for Acquisition accounting. Starr Company was to continue its corporate existence as a wholly owned subsidiary of Palm Corporation . Both companies had a December 31 fiscal year and use the same accounting policies. Income tax rate for both companies was 40%. Financial statements of the two companies as of December 31, 2002 Prior to combination are presented below follow:

79. On Dec, 31, 2002 current fair values of Starr Company’s identifiable assets and liabilities were the same as their carrying amount, except for the following 3 assets: Fair Values: Inventories Br 135,000 Plant assets (net) Br 365,000 Patent (net) Br 25,000   Costs related to Acquisition of Subsidiary Investment in Starr Com…(10,000shares*Br. 50/share)……...500,000 Common Stock………(10,000shares*Br. 10/share)…..………100,000 Additional paid in capital in Excess of Par…………………………400,000 Costs related to Issuance of Shares Additional paid in capital in Excess of Par…………………………35,000 Cash……………………………………………………………………………35,000

80. Since the Financial Statements are Given Prior to combination, We Should Adjust some items that are affected by Business Combination. Cash BB … 100,000 35,000 EB ….Br 65,000 Investment in Starr EB …… Br 500,000 Common Stock BB…300,000 100,000 EB….Br 400,000 Additional Paid in capital in excess of Par BB…50,000 400,000 35,000 EB… Br 415,000 Goodwill Calculation Goodwill = Acquisition Cost – Fair Value of Net Identifiable Asset(FVNIA) FVNIA= Fair Value of Assets – Fair Value of Liabilities FVNIA =(40,000 + 135,000 + 70,000 + 365,000 + 25,000) - (25,000 + 10, 000 + 115,000) = Br 635,000 – Br 150,000 = Br 485,000 Goodwill = Br 500,000 – Br 485,000 = Br 15,000  

81. Elimination and Adjustment Entry Common Stock…………………………………………………………..200,000 Additional Paid in Capital in Excess of Par………………….58,000 Retained Earning………………………………………………………..132,000 Payable to Palm……..….………………………………………………..25,000 Inventory…………………………………………………………………….25,000 Plant Asset………………………………………………………………….65,000 Patent……………………………………………………………………………5,000 Goodwill……………………………………………………………………….15,000 Investment in Starr………………………………………………….500,000 Receivable from Starr.……..………………………………..………25,000

82. To illustrate the consolidation techniques for a Acquisition type business combination involving a partially owned subsidiary, assume the following facts: On December 31,2003 Post Corporation issued 66,500 shares of its Br 1 par common stock (Current fair value Br 20 a share ) to stockholders of Sage C ompany in exchange for 38,000 of the 40,000 outstanding shares of Sage’s Br 10 par common stock. Thus Post acquired 95% of the interest in Sage (38/40). There was no contingent consideration. Cost of issuing shares of the combination paid in cash by Post on December 31, 2003 were as follows: Cost of issuing shares 72,750 The Fair value of Non Controlling Interest is Br 70,000. Financial statements of the two companies before the combination are as follows:

83. On Dec, 31, 2003 current fair values of Sage company’s identifiable assets and liabilities were the same as their carrying amount, except for the following assets: Fair Values Inventories Br 526,000 Plant assets (net) Br 1,290,000 Leasehold Br 30,000 Costs related to Acquisition of Subsidiary Investment in Starr Com…(66,500shares*Br. 20/share)……...1,330,000 Common Stock………(66,500shares*Br. 1/share)….………….66,500 Additional paid in capital in Excess of Par…………………………1,263,500 Costs related to Issuance of Shares Additional paid in capital in Excess of Par…………………………72,750 Cash……………………………………………………………………………72,750

84. Since the Financial Statements are Given Prior to combination, We Should Adjust some items that are affected by Business Combination. Cash BB …2 00,000 72,750 EB …Br 127,250 Investment in Starr EB … Br 1,33 0,000 Common Stock BB….1,000,000 66,500 EB….Br 1,066 ,500 Additional Paid in capital in excess of Par BB…550,000 1,263,500 72,750 EB… Br 1,740 ,750 Goodwill = Implied Value – Fair Value of Net Identifiable Asset(FVNIA) Implied Value = Acquisition Cost + Fair Value of Non Controlling Interest Implied Value = Br 1,330,000 + Br 70,000 = Br 1,400,000 Or Implied Value = Acquisition Cost/ % of Controlling Interest =Br 1,330,000/0.95 = Br 1,400,000 FVNIA= Fair Value of Assets – Fair Value of Liabilities FVNIA =(Br 100,000 + 526,000 + 215,000 + 1,290,000 + 30,000) - (Br 16,000 + 930, 000) = Br 2,161,000 – Br 946,000 = Br 1,215,000 Goodwill = Br 1,400,000 – Br 1,215,000 = Br 185,000

85. Elimination and Adjustment Common Stock…………………………………………………………..400,000 Additional Paid in Capital in Excess of Par………………..235,000 Retained Earning………………………………………………………..334,000 Inventory……………………………………………………………………..26,000 Plant Asset………………………………………………………………….190,000 Leasehold Land……………………………………………………………30,000 Goodwill……………………………………………………………………...185,000 Investment in Starr………………………………………………….1,330,000 Non Controlling Interest…………………………………………..…70,000

86. The investment account and related subsidiary’s stockholders’ equity have been eliminated and the subsidiary’s net assets substituted for the investment account. Consolidated assets and liabilities consist of the sum of the parent and subsidiary assets and liabilities in each classification. Consolidated stockholders’ equity is the same as the parent company’s stockholders’ equity. Consolidated Retained Earnings = Parent’s Retained Earnings Consolidated Stockholders’ Equity = Parent’s Stockholders’ Equity (if 100% Subsidiary) Consolidated Stockholders’ Equity = Parent’s Stockholders’ Equity + Non Controlling Interest (if < 100% Subsidiary)

87. Foreign activity ( imports or exports), the prices of which are stated in a foreign currency Loans payable or receivable in a foreign currency Transaction in foreign currency Foreign operation

88. Foreign currency transactions of a company denominated in other currencies must be restated to Functional currency / presentation currency before they can be recorded in the company’s books and included in its financial statement Foreign currency transactions Initial recognition (Transaction date) A foreign currency transaction shall be recorded, on the functional currency, by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

89. Exchange Rate is the ratio of exchange of two currencies. Exchange Difference is resulting from translating a given number of units of one currency in to another currency. Two Methods of Reporting Exchange Rates 1. Direct Exchange Rate (DER): is the number of local currency units (LCUs) needed to acquire one foreign currency unit (FCU). From the viewpoint of a Ethiopian entity: Br – equivalent value 1 FCU Example : On January 1, 2020, an Ethiopian based company can purchase one Dollar for Br 30 . Br 30 1 $ DER = = Br 30/$

90. 2. Indirect Exchange Rate (IER): is the reciprocal of the direct exchange rate. It is the number of Foreign currency units (FCUs) needed to acquire one Local currency unit (LCU). From the viewpoint of a Ethiopian entity: 1 FCU Br – equivalent value Example : On January 1, 2020, an Ethiopian based company can purchase one Dollar for Br 30 . $1 Br 30 IER = = $ 0.034/ Br

91. Factors to be consider during determining Functional Currency:- Sales prices for goods and services are denominated and settled. The currency of competitive forces and regulations. the currency that mainly influences labor, material and other costs. Factors that provide evidence of an entity’s functional currency: the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are generated. currency in which receipts from operating activities are usually retained.

92. Note: When the above indicators are mixed and the functional currency is not obvious, management uses its judgment to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions once determined, the functional currency is not changed unless there is a change in those underlying transactions, events and conditions.

93. Reporting at the ends of subsequent reporting periods At the end of each reporting period:

94. On October 1, 2010, ABC Company, an Ethiopian Company, acquired goods from Martin, an American company, for $2,000,000.00. ABC prepared Financial Statement at year end on December 31, 2010. Settlement of the payables was made on April 1, 2011. Spot rates October ….........…..1$ = Br 30 December 31......…1$ = Br 34 April 1…………………..1$ = Br 32

95. ABC October 1 Purchase/Inventory……..Br 60,000,000.00 Account Payable………Br 60,000,000.00 ($2,000,000 * Br 30/$ = Br 60,000,000) December 31 Loss on Foreign Exchange Transaction …….Br 8,000,000.00 Account Payable………………………………….Br 8,000,000 ($2,000,000 * Br 34/$ = Br 68,000,000) April 1 Account Payable……….Br 4,000,000.00 Gain on Foreign Exchange Transaction…..Br 4,000,000.00 Account Payable………..Br 64,000,000.00 Cash……………………………………………Br 64,000,000.00 ($2,000,000 * Br 32/$ = Br 64,000,000.00)

96. Suppose ethio telecom buys a large consignment of goods from a supplier in Egypt. The order is placed on 1 April and the agreed price is 124,250 Egypt Dollar. At the time of delivery the rate of foreign exchange was Birr 1.00 to 3.50 Egypt Dollar. Required Show the initial recognition What will the entries be if the exchange rate is 3.55 when payment is made on may 1?.

97.  Initial recognition- ethio telecom will recognize the purchase using its functional currency (Birr) by applying the spot exchange rate when the purchase was made (Birr 1.00 to 3.50 Egypt Dollar)   Inventory account (124,250 ÷ 3.5)....................Br 35,500 Payables account.........................................Br 35,500   When ethio telecom comes to pay the supplier, it needs to obtain some foreign currency. By this time, however, if the rate of exchange has altered to 3.55 to 1, the cost of raising €124,250 would be (÷ 3.55) 35,000. The company would need to spend only 35,000 to settle a debt for inventories 'costing' 35,500. Since it would be administratively difficult to alter the value of the inventories in the company's books of account, it is more appropriate to record a profit on conversion of 500. Account Payable..................................Br 500 Gain on Foreign Exchange Transaction...................Br 500 Account Payable.............................Br 35,000 Cash...........................Br 35,000

98. Translating to foreign operation Assets (including good will ) and liabilities are translated using closing rate Income and expense translated using historical rate (average rate) The exchange difference in translating foreign operation should be reported under OCI