4 min read

Group Accounting

2019-09-24

What do you purchase (Asset vs Business)?

FRS 103(R) Business Combinations determines if an acquired set of activities and assets is a business;

  • A business includes an input and a substantive process that together significantly contribute to the ability to create output. e.g. special knowledge and skills, (unlike operating pools in real estate, shipping industry).
  • Optional fair values concentration test: concentrated in a single or a group of similar identifiable asset.

Different accounting treatments accordingly;

  • An asset: subject to impairment test.
  • A business: is required to perform purchase price allocation during the consolidation process.

Do you have control?

FRS 110 determines the control concept;

  • Power over the decision-making of relevant process and activities
  • Returns
  • Combination of power and returns (principal vs agent)

Powers -> Substantial rights -> Voting;

  • Majority voting rights
  • Contractual arrangements (among investors)
  • Potential voting rights (options regardless of managment intention)
  • De facto control (many minority investors)
  • Purpose and designed SPV (expectation and motivation)
  • Proof of the power of disposal (run BOD regardless of voting)

Substantial rights;

  • Not protective
  • Possibility of exercising (timing and feasibility)

Am I exempted from consolidation?

  • Immaterial entities
  • Subsidiaries recorded at FVTPL

How to consolidate?

Consolidation process;

  • Convert local GAAP to IFRS in a single financial statements in terms of Recognition, Measurement, and Presentation.
  • Align financial year end (a same reporting date or within 3 months)
  • Currency translation (BS: close rate, PL: average rate, Equity: historical rate, translation reserve, OCI)
  • Consolidation forms.
  • Change consolidation levels (stepup acquisition or disposal)
  • Intra-group transactions (IFRS: buyer tax rate, US: seller tax rate)

Consolidation forms;

  • FRS 109: AFS at cost
  • FRS 111 JO: Give parties rights to specific assets and obligations
  • FRS 28(R) JV: Establish a seperate vehicle via the joint arrangement (no direct access to its assets)
  • FRS 28(R) Associate: Significant influence, proportional consoldiation
  • FRS 110 Subsidiries: Control, 100% consolidation
  • FRS 105 Discontinued Operations:

Purchase price (include both condideration and others, list others as follows);

  • Transaction cost (DR: Expense, CR: Investment, not directly attributable to the acquisition)
  • Contingent payments relating to post-acquisition
  • Indemnification assets (due dilligence risk such as lawsuit, DR: Assets, CR: Provision)
  • Pre-existing relationships (supplier contracts)
  • Re-acquired rights (distribution rights)
  • Leasing contracts
  • Deferred tax

A faces a loss or penalty due to the contract with B. A intends to acquire B to imporve its financial position.

  • Settlement is not done to obtain control over B upon acquisition (settlement recorded in P/L).
  • Pre-existing relationships become an inter-company relationship, and is eliminated upon acquisition (must remove).
  • Acquisition consideration = price - settlement (impact on goodwill)

A granted an exclusive disribution right to B (franchise).

  • The re-acquired right is treated as IA.
  • Settlement in P/L: lower of unfavourable component (6/10 new right vs 6/10 old right) and termination penalty
  • Difference (unfavourable component vs termination penalty) is treated as goodwill
  • Acquisition consideration includes IA and goodwill.

Purchase price allocation (Consideration);

  • Cash
  • Shares
  • Previous interest
  • NCI
  • Fair value of assets (deferred tax)
  • Contigent consideration (Earn-out (Yes): Future, Indemnification (No): Past)
  • Goodwill

Earn-out contingent consideration;

  • Cash settlement: libility at FV (must be included in group FS, FV based on probabilities, movement recoded in P/L)
  • Sahre settlement: initially recorded at FV, subsequently equity without remeasurement.

Share-based payment;

  • Share acquisition: A part of purchase consideration
  • Share incentive: Post-acquisition expenses
  • Replace the exisiting plan (Payment vs Vested, <= Consideration, > P/L as post-combination cost)

How much to consolidate?

Joint operation;

  • % profit sharing in contracts
  • line-by-line accounting based on %
  • intra group transactions elimination

Joint venture;

  • Equity accounting: Investment (dividend, profit), FV assets (depreciation, tax), contingent liabilities, goodwill (impariment).

Associates;

  • Equity accounting

If B, C, D have a joint agreement, C has to prepares using equity accounting too.

Subsidiries;

  • Previously held interest is not remeasured until it becomes a subsidiary
  • AFS to Associate (Dr: Current investment, Cr: Previous equity, Cr: Cash)
  • Associate to Subsidiary (DR: Investment, Cr: P/L, as if sell buy back, then consolidation allocation).
  • Same treatment in the case of disposal.

If Co issues FG to the Bank, Co still has risks and rewards. Thus, Co has to consolidate SPV with 100% NCI.

Loss of control after partial disposal;

  • AFS reserve recycles to P/L (a part of disposal gain)
  • Revaluation reserve recycles to R/E (not disposal gain)
  • Accounting treatment should be same (recognize a full gain).

To read more, please refer to 2017 Under control Applying IFRS 10