Group Financial Statements (Comprehensive)

IFRS 10 establishes a single control model to determine which entities should be consolidated. An investor controls an investee when it has ALL THREE elements:

1. Power over the investee — existing rights that give the investor the current ability to direct the relevant activities (the activities that significantly affect the investee's returns — typically operating and financing decisions)
2. Exposure or rights to variable returns from involvement with the investee — returns can be positive, negative, or both (e.g., dividends, fees, residual interests, exposure to losses)
3. Ability to use power to affect the returns — the link between power and returns (distinguishes a controlling party from an agent)

Assessing power:

• Voting rights: Majority ownership (>50% of voting shares) usually gives control. But also consider:
  • Substantive potential voting rights (share options, warrants, convertibles) — if currently exercisable and substantive, include in assessment
  • Relative size of other holdings — a 35% holding with dispersed other shareholders may give "de facto" control (IFRS 10 accepts this)
  • Voting rights are not relevant (e.g., structured entities/SPEs driven by contractual arrangements, not voting)
• Contractual arrangements: Agreements that give the investor rights to direct relevant activities (e.g., management contracts, franchise agreements, lender's rights over a distressed entity)
• Protective rights (e.g., right to approve capital expenditures above a threshold, right to replace management upon breach) do NOT by themselves give control — they only protect the holder's interest without giving the ability to direct relevant activities

Principal vs agent: If a party has decision-making power but exercises it on behalf of others (acting as an agent), it does NOT control the investee. Indicators of agency: scope of decision-making, rights held by other parties (e.g., kick-out rights), remuneration (whether it reflects services or provides exposure to variability), exposure to variability of returns from other interests.

Reassessment: Control is reassessed when facts and circumstances change — e.g., changes in voting rights, contractual terms, or governance structures.

IFRS 3 requires the acquisition method for all business combinations. Four steps:

Step 1 — Identify the acquirer. The entity obtaining control. Usually (but not always) the larger entity or the entity paying cash/issuing shares as consideration.

Step 2 — Determine the acquisition date. The date the acquirer obtains control (usually the closing date, but could be different if a separate agreement provides for earlier control).

Step 3 — Measure the consideration transferred. At fair value, comprising:

• Cash paid (at fair value — i.e., if deferred, discount to PV)
• Shares issued by the acquirer (at fair value at acquisition date — typically market price × number of shares)
• Contingent consideration — at fair value at acquisition date (e.g., earn-out). Subsequent changes in fair value:
  • If classified as EQUITY (contingent consideration in the form of fixed number of shares) → NOT remeasured; difference on settlement goes to equity
  • If classified as a FINANCIAL LIABILITY (cash, variable number of shares) → remeasured to fair value at each reporting date, changes to P/L
• Deferred consideration (payment in future years) — at PV
• Non-cash consideration (other assets) — at fair value; derecognise with gain/loss if different from carrying amount

Acquisition-related costs (legal fees, advisory fees, due diligence): expensed as incurred — NOT part of consideration. Exception: costs to issue debt or equity instruments are deducted from the debt/equity (IFRS 9 / IAS 32 treatment).

Step 4 — Recognise and measure identifiable assets acquired and liabilities assumed at fair value.

• All identifiable assets and liabilities of the acquiree are recognised at FV at acquisition date — regardless of whether previously recognised by the acquiree
• Intangible assets: Must be recognised separately from goodwill if they are "identifiable" — meeting either:
  • Separability criterion: can be separated from the acquiree (sold, licensed, exchanged), OR
  • Contractual-legal criterion: arises from contractual or other legal rights
• Examples: brands, customer relationships, patents, in-process R&D (which can be recognised at acquisition even if not normally allowed under IAS 38)

Measurement period: If the initial accounting is incomplete, the acquirer reports provisional amounts. Within 12 months of acquisition ("measurement period"), the acquirer retrospectively adjusts the provisional amounts for new information about facts existing at acquisition date. Changes AFTER the measurement period: treat as errors or estimation changes under IAS 8.

Goodwill formula:

Goodwill: Positive figure — the premium paid over FV of identifiable net assets, reflecting expected synergies, assembled workforce, and other unidentifiable benefits. Recognised as an intangible asset. Not amortised — tested annually for impairment (IAS 36). Impairment cannot be reversed.

Bargain purchase: Negative figure (FVNA > consideration + NCI + previously held interest) — a "bargain" for the acquirer. IFRS 3 requires the acquirer to:

1. Re-assess the identification and measurement of acquired assets, liabilities, consideration, and NCI — bargain purchases are rare and may reflect measurement error
2. If the bargain purchase gain is still confirmed, recognise it immediately in P/L on the acquisition date

NCI measurement — accounting policy choice (per transaction):

IFRS 3 allows NCI to be measured using one of two methods at acquisition:

Subsequent NCI: Regardless of initial measurement method, NCI is subsequently adjusted for its share of post-acquisition changes (profit, OCI, dividends paid).

At acquisition, the acquirer must revalue identifiable net assets to fair value — even if the acquiree's own books show them at different values. These fair value (FV) adjustments form part of fair value of net assets (FVNA) and affect both goodwill and post-acquisition profit.

Common FV adjustments:

• Land and buildings: Often revalued upward to current market value
• Plant and machinery: Adjusted to FV
• Inventory: Adjusted to FV (which approximates selling price less selling costs and a reasonable profit margin — typically higher than cost)
• Intangibles not recognised by acquiree: Brands, customer lists, patents recognised at FV
• Contingent liabilities: Recognised at FV if a present obligation exists (IFRS 3 overrides IAS 37 on recognition — no probability test at acquisition)

Effect on subsequent consolidation:

• Depreciable assets (e.g., PPE uplift): The FV uplift is depreciated over the remaining useful life → additional depreciation charge in consolidated P/L (reducing subsidiary profit in the consolidation). Example: FV uplift of £1m on equipment with 10-year remaining life = £100,000 additional depreciation per year.
• Inventory uplift: The FV uplift is consumed when the inventory is sold → additional cost of sales in the period following acquisition (assuming inventory is sold within a few months). After consumption, no further effect.
• Land (non-depreciable): FV uplift remains in FVNA permanently, affecting goodwill but not subsequent P/L (unless sold → extra cost of sales/loss on disposal from the consolidation perspective).
• Intangibles with finite life: Amortised over useful life → additional amortisation in consolidated P/L.

Deferred tax on FV adjustments: FV adjustments usually do NOT change the tax base of the assets/liabilities. So temporary differences arise → deferred tax recognised at acquisition, typically adjusting goodwill (not P/L). The exception for initial recognition of goodwill does NOT exempt the acquisition-date DTL/DTA from recognition — it is recognised and the goodwill is the residual.

Consolidated financial statements present the group as a single economic entity. Therefore all intra-group transactions, balances, income, expenses, and unrealised profits must be eliminated.

1. Intra-group sales and purchases:

• Eliminate the same amount from both revenue and cost of sales in the consolidated SoPL (no net impact on profit)
• Eliminate intra-group receivables and payables in the consolidated SoFP

2. Unrealised profit (URP) in inventory:

• When one group company sells goods to another at a profit, and those goods are still in inventory at year-end, the profit is "unrealised" from the group's perspective
• Adjustment: reduce inventory to its original cost to the group; eliminate the unrealised profit from the seller's retained earnings
• Calculation: Profit element = Sales price × margin on sale OR Sales price × mark-up / (1 + mark-up)
• Whose profit? If the parent sold to the subsidiary (downstream): adjust parent's retained earnings — no NCI effect. If the subsidiary sold to the parent (upstream): adjust subsidiary's retained earnings — NCI bears its share.

3. Unrealised profit on non-current asset (NCA) transfers:

• If one group company sells an NCA to another at a profit:
  • Eliminate the gain on sale from the seller's profit
  • Restate the NCA to its original carrying amount (from the group's perspective) — equivalent to eliminating the selling company's profit
  • Adjust depreciation for the buyer — they are depreciating the inflated amount, so reduce excess depreciation (effectively releasing the URP over the asset's life)

4. Intra-group dividends:

• Dividends paid by a subsidiary to the parent are eliminated — they are an intra-group transaction, not income of the group
• The parent's dividend income (in separate accounts) is eliminated on consolidation. The full profit of the subsidiary (before the dividend) is consolidated, with NCI share attributed to non-controlling shareholders.
• Dividends paid to non-controlling shareholders: reduce NCI

5. Intra-group loans and interest:

• Eliminate the loan receivable (in the lender's books) against the loan payable (in the borrower's books)
• Eliminate the interest income (lender) against interest expense (borrower) — same amount, no net P/L impact

6. Management charges / service fees: Similar to intra-group sales/purchases — eliminate revenue in one company against expense in the other.

When a subsidiary is acquired partway through the year, only the results from the acquisition date onwards are included in the consolidated SoPL (the pre-acquisition results were not yet part of the group).

Approach — time apportionment:

• Unless otherwise stated, assume the subsidiary's revenue, expenses, and profit accrued evenly during the year
• Include in the consolidated SoPL only the post-acquisition portion (e.g., if acquired on 1 July with a December year-end, include 6/12 of the subsidiary's full-year results)
• Any one-off or unusual items disclosed separately are allocated to the period in which they actually occurred

Fair value adjustments time-apportioned:

• Additional depreciation on FV-uplifted PPE: apply for the post-acquisition period only (e.g., 6/12 if acquired at the half-year)
• Inventory uplift: recognised when the inventory is actually sold — typically within a few months of acquisition, so usually fully consumed in the post-acquisition period

Net assets at acquisition (for goodwill calculation):

• Use the subsidiary's net assets at the acquisition date (not the year-end)
• This is found by: opening net assets + post-opening profit up to acquisition date (pro-rated if even accrual assumed)
• Don't forget to add the FV adjustments to calculate FVNA at acquisition

Pre-acquisition and post-acquisition retained earnings: The retained earnings of the subsidiary at acquisition are "locked in" as part of FVNA (affecting goodwill). Only POST-acquisition retained earnings (subsidiary's profit since acquisition, less dividends paid since acquisition, less any FV depreciation/amortisation effects) flow through to the group's retained earnings and NCI.

Structure:

A standard consolidation workings approach uses "schedules" (or "Ws"):

• W1 — Group structure: Shows parent, subsidiary, % owned, acquisition date. Establishes NCI %.
• W2 — Net assets of subsidiary: Columns for "at acquisition" and "at reporting date". Include FV adjustments at acquisition, and FV depreciation/amortisation/inventory consumption up to reporting date. Difference = post-acquisition movement.
• W3 — Goodwill: Consideration + NCI (at FV or proportionate) − FVNA at acquisition = Goodwill. Then consider impairment.
• W4 — NCI (at reporting date): NCI at acquisition + NCI % × post-acquisition movement − NCI share of goodwill impairment (if full goodwill method).
• W5 — Consolidated retained earnings: Parent's own RE + parent's % × post-acquisition movement of subsidiary − parent's share of goodwill impairment − URPs (if downstream) + share of associate post-acq retained earnings.

Line-by-line consolidation:

• Assets and liabilities: Add 100% of the subsidiary's assets and liabilities to 100% of the parent's (regardless of NCI %)
• Add FV adjustments (e.g., extra PPE, recognised intangibles)
• Deduct accumulated "FV depreciation" (from W2)
• Eliminate intra-group receivables/payables
• Deduct URP in inventory (if any)
• Replace "cost of investment in subsidiary" (in parent's books) with "goodwill" (from W3)
• In equity: parent's share capital only, consolidated retained earnings (W5), NCI (W4)