IFRS 3 & IAS 27 revised 2008 - Consolidation of financial statements

Revision of IFRS 3 in year 2008 has mean significant changes to :-

a. new restrictions on what expenses can form part of the acquisition cost
b. revisions of the treatment of contingent consideration, now it is recognised in the purchase consideration on the fair value & expected value basis. Previously, it will only be recognised if the amount to be paid is probable to happen.
c. measurement of the NCI (previously known as Minority Interest) , and the knock-on effect it has on the consolidated goodwill. (Step 3)
d. considerable guidance on recognising and measuring the identifiable assets and liabilities of the acquired subsidiary
e. accounting for step acquisitions

Steps taken in consolidating statement of comprehensive income statement & financial position:-

Step 1 : Determine the group structure, to determine whether you are dealing with subsidiary or associates.

Direct + indirect interests in an acquiree > 50% = subsidiary
20% > 50% = associates

An investment is considered as a subsidiary when there is more than 50% of direct and indirect interest, and the parent has the voting right in the meeting to make decision.

An investment is considered as an associate when there is a significant influence and between 20% to 50% (not more than 50%) of interests in the entity invested.

Step 2 : Calculate the Net current assets of subsidiary as at acquisition date and reporting date.

Share capital x
(+) Share premium x
(+) Reserves x
(+) Fair value adjustments (Note 1) x

Note 1 : All assets and liabilities of subsidiary are valued on the basis of fair value, that is market value.

Step 3 : Goodwill calculation
Subsequent to the revision of IFRS 3 on 2008, there are some changes to the calculation. The goodwill will be treated similar to the other asset and liabilities, that is 100% basis. Previously, goodwill are calculated by proportionate ("net") basis, which is called as the "old method". Revision of IFRS 3 on 2008 introduced the "new method" which is known as the "full goodwill" method.

"Old method" - NCI% x fair value of the net assets of the subsidiary at the acquisition date
"New method" - Fair value of NCI at date of acquisition (It could be Market value of share x no. of shares hold by NCI)

First we need to determined the purchase consideration, that is cost of investment. Under previous IFRS 3, purchase consideration including other cost of acquisition such as legal cost or cost of share issued. However, subsequent to the revision of IFRS 3 on 2008, cost of acquisition are NOT allowed to be included in the purchase consideration. It should be expensed in the period.

Purchase consideration (AT FAIR VALUE)
Cash x
(+) Shares (at market value) x
(+) Deferred consideration (discounted at present value) x
(+) Contingent consideration (at expected value) x

Calculation of goodwill :-
Fair value of parent's holding % (purchase consideration) x
(+) Fair value of NCI % (market value of shares x no. of shares) x
(-) Fair value of subsidiary's net assets @ acquisition date ( x )

Step 4 : NCI (previously known as Minority Interest)
In consistent with the "new method" that is calculation of goodwill on a full basis, there is a new method to calculate NCI.

NCI calculation
Fair value of NCI (goodwill and net assets) @ acquisition date x
(+) NCI % of post acquisition retained earnings x
(-) NCI% of unrealised profits (inventory or non-current assets)-Note 2 ( x )


Note 2 : It will be substracted by proportion of NCI % only and if ONLY the inventory are sold by subsidiary to parents, as the unrealised profits are included in Subsidiary's retained earnings. If parent sell to subsidiary, there is no need to make adjustment in NCI.


Step 5 : Group retained earnings
Parent company retained earnings (100%) x
(+) For each subsidiary : Parent % x post acquisition profit x
(-) Adjustment for unrealised profits (Note 3) ( x )
(-) Goodwill impairment ( x )

Note 3 : In conjunction with Note 2, unrealised profits could only happened when one entity in the group sell inventory or non-current assets to another entity in the group at a marked up profit, with portion of goods still left in the inventory. As it is treated as a group, there are deemed no profit gained, as the inventory still remained, and the profits that marked up are unrealised. Therefore, adjustment need to be made in order to reflect the real profit in the group.

The adjustment needs to be made to adjust the unrealised profit is as follows:-

If parent sell to subsidiary :-
Dr. Group retained earnings (100%) x
Cr. Inventory x

If subsidiary sell to parent :-
Dr. Group retained earnings (Parent %) x
Dr. NCI (NCI's %) x
Cr. Inventory x

The group reserves include the group's share of the post acquisition profits of each subsidiary. Pre-acquisition profits cannot be included in group reserves as they have been dealt with in the net assets working which leads to the calculation of goodwill.


Basically, this is the summary of consolidation of financial statements (IFRS 3)


First day class : 13.07.2010