Group Statements Vol 2

Group Statements – Volume 2
Seventeenth edition
Group Statements – Volume 2
Seventeenth edition
CS Binnekade
MCom(Taxation)(Pret) CA(SA)
Associate Professor of Accounting
University of South Africa
ZR Koppeschaar
DCom(Acc)(Pret) CA(SA)
N Stegmann
DCom(RAU)
University of Johannesburg
J Rossouw
MAcc(UFS) CA(SA)

University of the Free State
C Wright
MCom(Forensic Acc) (Potchefstroom) CA(SA)
Senior Lecturer of Accounting
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First edition 1975, Reprinted 1976
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Preface
The purpose of this book is to set out the principles and conceptual issues of
consolidated financial statements as based on International Financial
Reporting Standards (IFRSs). It focuses on the principles of control and
consolidation techniques in preparing consolidated financial statements for a
group of entities. Furthermore, the accounting treatment of an investor’s
interests in associates and joint arrangements is covered in Volume 2 of this
work.
Group Statements focuses on providing detailed explanatory application

examples of the following IFRSs:
• IAS
27
Separate Financial Statements;
• IFRS
Business Combinations;
• IFRS
10
Consolidated Financial Statements;
• IAS
28
Investments in Associates and Joint Ventures; and
• IFRS 12 Disclosure of Interests in Other Entities (by providing limited

disclosure examples of some core aspects).
The text includes numerous illustrative and practical examples which expand
on the principles and conceptual issues of the standards above and related
aspects of other IFRSs. The approach of the book is to primarily make use of
the analysis of owners’
equity in table format, but extensive use is also made of consolidation

journal entries. In addition, the worksheet approach is applied up to the end
of chapter 4. The text makes use of commentary to explain important
concepts. Disclosure requirements for the consolidated financial statements
are illustrated and taxation issues are also addressed to the extent that
deferred tax is applicable to certain accounting areas.
The book is aimed at:
• undergraduate and postgraduate university students registered for financial

accounting modules;
• members and students of professional bodies such as the South African

Institute of Chartered Accountants (SAICA), the South African Institute of
Professional Accountants (SAIPA), the Institute of Certified Professional
Accountants (CPA), etc.; and
• practicing accountants and preparers of consolidated financial statements.
LexisNexis Passplus is still included for Volume 1 of this work. PassPlus is

an electronic assessment tool which allows students to continuously assess
their own understanding of, and progress through the textbook. All PassPlus
questions are automatically and immediately graded by the system, which
allows students to receive their feedback instantly. PassPlus also affords
lecturers the opportunity to use the system for continuous assessment
purposes, without adding any additional marking to their own workload. The
most beneficial way for students to use PassPlus is to work v
Preface
through each chapter in the textbook and then complete the accompanying
questions to test their progress.
During the latter part of 2017, the SAICA finalised its “syllabus overload”
review and some aspects were excluded or moved to an “awareness level”
for the sake of SAICA’s professional assessment (the Initial Test of
Competence (ITC)). The major aspects thus affected relating to Group
Statements are as follows:
• investment
entities;
• some aspects relating to the identification of a business combination and

the acquirer;
• pre-existing relationships and reacquired rights in a business combination;
• some aspects relating to determining control (such as delegated power,

principal/
agent consideration; control of specified assets);
• vertical groups (less detailed emphasis);
• subsidiaries classified as held for sale and subsidiaries acquired with a

view to resale;
• share buy-backs and rights issues of subsidiaries leading to loss of control

or step acquisition;
• joint operation accounting;
• parent recognising its investment in investees at fair value/under the equity

method in its separate financial statements (the update of this work focused
on the parent carrying the investment at cost);
• group
reorganisations;
• changes in interests in associate (but still an associate); and

• associates held for sale.
This work was updated to still include a brief discussion of some of these
aspects (where relevant), but without very detailed explanatory examples
thereof. Volume 2 was mostly affected by these changes.
We trust that users of this publication will find it beneficial.
THE AUTHORS
November 2017
vi
Contents
Page
9 IFRS 3 Business combinations – Advanced aspects

......................................
10 IFRS 10 Consolidated financial statements – Control

.....................................
41
11 Investments in associates and joint ventures

..................................................
59
12 Interests in joint arrangements

........................................................................
149
13 Changes in ownership of subsidiaries through buying or selling shares

.........
167
14 Changes resulting from the issue of additional shares by investees
and other changes in ownership .....................................................................
283
15 Foreign operations
..........................................................................................
373
16 Consolidated statement of cash flows

.............................................................
433
vii
IFRS 3
Business combinations
– Advanced aspects
Introduction
9.1
Overview of the topic ..............................................................................
The acquisition method ..............................................................................
4
Recognising and measuring the identifiable assets acquired,
the liabilities assumed and any non-controlling interests
in the acquiree
9.2 Recognition
principle
................................................................................
Example
9.1:
Recognition
of
identifiable liabilities ..................................
Example 9.2:
Classification of identifiable assets acquired ....................
Example 9.3:
Recognition of intangible assets .......................................
9.3 Measurement
principle
.............................................................................
10
Example 9.4:
Remeasurement of liability to fair value ............................
11
Example 9.5:
Fair value of operating lease – Lessor ............................
12
Example 9.6:
Fair value of items used differently ...................................
13
Example 9.7:
Measurement of non-controlling interests.........................
15
9.4
Exceptions to the recognition and measurement principles .....................
15
Example
9.8:
Contingent
liabilities .........................................................
17
Example
9.9:
Deferred
tax .....................................................................
17
Example
9.10:
Indemnification asset ........................................................
18
Example 9.11:
Recognition and measurement of a favourable
operating lease .................................................................
20
Example 9.12:
Non-current assets held for sale .......................................
22
Consideration transferred
9.5
Measurement of consideration transferred ..............................................
23
Example 9.13:
Measurement of consideration transferred .......................
23
Example 9.14:
Measurement of consideration transferred – Asset ..........
24
Chapter 9
9.6
Measurement of contingent consideration transferred .............................
25
Example 9.15:
Contingent consideration – Financial liability ....................
26
Example
9.16:
Contingent
consideration – Asset .....................................
29
Example 9.17:
Compensation for reduction in equity instruments ............
29
Measurement period
9.7
Measurement period adjustments ............................................................
30
Example 9.18:
Measurement period and adjustment to goodwill .............
31
Example 9.19:
Measurement period adjustment – Non-controlling
interest measured at proportionate share .........................
32
Example 9.20:
Measurement-period adjustment – Non-controlling
interest measured at fair value .........................................
34
Self-assessment question
Question 9.1
.....................................................................................
36
IFRS 3 Business combinations – Advanced aspects IFRS 3: BUSINESS

COMBINATIONS – SUMMARY
Acquisition method
Identify the acquirer and account for
l Entity that obtains control is acquirer
business combination transaction
l Separate related transactions and apply other IFRS
separately from related transactions
standards
l Date on which control of net assets and operations is
Date of acquisition
transferred to the acquirer
l Use fair value at acquisition date, also for business
combination achieved in stages
Consideration related to business
l Costs directly attributable not part of business

combination
combination
l Contingent
consideration
l Assets/liabilities recognised separately
l Basic recognition: Meet definitions in Conceptual
Recognition of identifiable assets
Framework
and liabilities
l Classifying or designating
l Exceptions
l Fair value as at acquisition date
Initial measurement at fair value
l Market values or valuation techniques
of identifiable assets and liabilities
l Exceptions
l At proportionate share of net assets, or
Non-controlling interests
l At fair value
l Consideration transferred + non-controlling interests +

FV of previously-held interest at date of acquisition (only step acquisition) –
Net assets acquired and measured in
accordance with IFRS 3 = Goodwill/(bargain purchase
Goodwill/bargain purchase gain
gain)
l Goodwill: Recognise as asset, subsequent impairment
test
l Bargain gain: Reassess all items; if still gain, recognise at acquisition date
in profit or loss
l Limited to one year
l Provisional values recognised if accounting incomplete
l Provisional fair values adjusted retrospectively
l Also recognise assets and liabilities that previously were Measurement

period
not recognised even though they existed
l Facts and circumstances existing at acquisition date
should be considered
l Correction of error if it becomes known after
measurement period
Disclosure
Chapter 9
Introduction
9.1 Overview of the topic
The basic principles and the disclosure requirements of IFRS 3 Business

Combinations are discussed in chapter 2 of Volume 1.
IFRS 3 establishes very important principles on how the acquirer recognises

and measures the following in its records:
l the assets acquired and liabilities assumed;
l the non-controlling interests in the acquiree;
l the goodwill acquired in a business combination or the gain from a bargain

purchase; and
l adequate disclosure of information relating to the business combination, in

order to provide useful information for decision making to the user of the
financial statements.
In this chapter more advanced aspects are discussed relating to the

recognition and measurement of the identifiable assets acquired, the
liabilities assumed and any non-controlling interests in the acquiree, as well
as the consideration transferred and measurement period. It is also important
to remember that business combinations refer to the acquisition of a business
(a subsidiary or the acquisition of assets and liabilities that constitute a
business as defined in IFRS 3). This chapter focuses on the acquisition of a
subsidiary. For guidance on the acquisition of assets and liabilities that
constitute a business, refer to chapter 2 of Volume 1.
Comment
Also refer to chapter 8 of Volume 1 which addresses the accounting of a

business combination achieved during instead of at the beginning of the
financial reporting period.
The acquisition method

In terms of the acquisition method the goodwill or a gain from a bargain
purchase is calculated as follows:
Identifying the acquirer
Chapter 2.4 of Volume 1
Determining the acquisition date
Chapter 9.5 and 9.6 of Volume 2
Plus
Less
Total net assets (identifiable assets
Chapter 9.2–9.4 of Volume 2
acquired less liabilities assumed)
Equals
Goodwill/gain from a bargain purchase
IFRS 3 Business combinations – Advanced aspects
Recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interests in the acquiree

9.2 Recognition
principle
IFRS 3 determines that the acquirer shall recognise, separately from

goodwill, the identifiable assets acquired, the liabilities assumed and any
non-controlling interests in the acquiree at the acquisition date.
1 Recognition
conditions
Firstly, to be recognised, the identifiable assets and liabilities acquired and

assumed must meet the definition of an asset or liability as defined in the
Conceptual Framework. For this reason, future planned costs to be
incurred by the acquirer will not meet the definition of a liability as at the
date of acquisition, as there is no present obligation to incur these costs at
this date. These costs will therefore only be recognised after the date of
acquisition, when an obligation to pay arises.
Secondly, to be recognised, the identifiable assets and liabilities acquired

and assumed must be part of what the acquirer and acquiree exchanged in
the business combination transaction and not the result of separate
transactions. Guidance is provided in IFRS 3 as to what forms part of a
business combination transaction – this guidance is addressed in chapter
2.10.
Thirdly, the acquirer’s application of the recognition principle and

conditions may result in some assets and liabilities being recognised in the
business combination that the acquiree had previously not recognised as
assets and liabilities in its pre-acquisition financial statements. This would
be the case especially where the acquirer recognises, for example, certain
intangible assets (e.g. brand names, customer relationships, etc.) at the
acquisition date where these items were not recognised as intangible assets
by the acquiree as they were internally generated by the acquiree. IFRS 3 has
introduced some new principles, especially in respect of intangible assets in
accordance with IAS 38. These are dealt with below.
Example 9.1
Recognition of identifiable liabilities
On 1 April 20.18 P Ltd acquired 90% of the shares of S Ltd. From that date
P Ltd had control over S Ltd as per the definition of control in accordance
with IFRS 10. On 1 April 20.18, S Ltd had correctly recognised a liability of
R350 000 in respect of a breach of contract that was previously filed against
the entity. Furthermore, on 1
April
20.18 P
Ltd was planning to restructure the operations of S
Ltd. The
restructuring costs were estimated at R240 000. Ignore any tax

consequences.
As part of the business combination on 1 April 20.18, P Ltd shall recognise

the identifiable liability for the breach of contract amounting to R350 000.
However, on 1
April
20.18 there is no present obligation for the restructuring provision. The

restructuring is rather a result of the business combination. P Ltd will only
recognise the provision for the restructuring of R240 000 in the period after
the business combination.
Chapter 9
This will give rise to the following pro forma consolidation journal entry (*):
Dr
Cr
R
1 April 20.18
Equity at acquisition (SCE)
350 000
Liability (SFP)
350 000
Remeasurement of plant to fair value
Comment
When remeasuring assets and liabilities of the acquiree to fair value on the
acquisition date in terms of IFRS 3, the pro forma remeasurement can be
recorded in any equity account of the acquiree. For ease of reference, the
authors refer to “equity at acquisition”. The specific equity account used is
not important, as at acquisition date the entire equity balance of the acquiree
(including any remeasurements) will be eliminated in the main elimination
journal, against the “investment in subsidiary”
recorded in the separate accounting records of the acquirer.
(*) A pro forma journal entry is a journal entry that is not processed in the
separate financial statements of the acquirer or the individual financial
statements of the acquiree, but processed for the purposes of drawing up
consolidated financial statements. Pro forma journal entries therefore only
adjusts the consolidated financial statements and are processed to give effect
to IFRS 3 requirements and to eliminate intragroup transactions and balances
in accordance with IFRS 10.
2 Classifying or designating identifiable assets acquired and liabilities

assumed in a business combination
The acquirer shall classify or designate the identifiable assets at the
acquisition date acquired and liabilities assumed to facilitate the subsequent
application of other IFRSs.
These designations or classifications shall be made on the basis of

contractual terms, economic conditions, the acquirer’s operating or
accounting policies and other pertinent conditions as they exist at the
acquisition date.
Two exceptions to this rule exist:
l the classification of a lease contract in which the acquiree is the lessor as

either an operating lease or a finance lease in accordance with IFRS 16
Leases; and l the classification of a contract as an insurance contract in
accordance with IFRS 4
Insurance Contracts.
The above contracts will be classified on the basis of the contractual terms
and other factors at the inception of the contract (or, if the terms of the
contract have been modified in a manner that would change the
classification of the contract, at the date of the modification, which may be
the acquisition date).
Example 9.2
Classification of identifiable assets acquired
On 1 January 20.19 P Ltd acquired a 75% interest in S Ltd. From that date P
Ltd had control over S Ltd as per the definition of control in accordance with
IFRS 10. On this date S Ltd also had, amongst others, the following assets
and contracts: l For the past few years, S Ltd has been leasing a building to P
Ltd. S Ltd classified the building as investment property as the building was
held for rental income.
IFRS 3 Business combinations – Advanced aspects l On 1 January 20.13 (six

years before the business combination) S Ltd entered into a lease agreement
to lease equipment to X Ltd. The lease term was seven years and the
economic life of the equipment was estimated to be eight years. S Ltd
correctly classified the lease as a finance lease at the inception of the lease,
as substantially all the risks and rewards incidental to ownership passed to S
Ltd (this may be evident from the fact that the lease term (seven years) was
for a major part of the economic life (eight years) of the asset (7/8 = 88%)).
In accounting for the business combination of S
Ltd, P
Ltd may classify the
above-mentioned assets and contract as follows:
l P Ltd is occupying the building of S Ltd. Therefore, from the date of the
business combination, the building will be owner-occupied. For the
combined entity, the building shall be classified as property, plant and
equipment in accordance with IAS 16 Property, Plant and Equipment
instead of investment property.
l The lease will still be classified as a finance lease (based on the contractual
terms at the inception of the contract) even though the remaining lease term
(one year) may not be a major part of the remaining economic life (which is
two years).
3 Guidance with respect to recognition of intangible assets IAS 38

Intangible Assets provides extensive guidance about the acquisition of an
intangible asset as part of a business combination (refer to IAS 38.33 to .43).
The main principles are summarised below.
The fair value of an intangible asset at initial recognition is its acquisition

date fair value. This fair value reflects market expectations about the
probability that the future economic benefits embodied in the asset will flow
to the entity. In other words, the entity expects there to be an inflow of
economic benefits, even if there is uncertainty about the timing or amount of
the inflow. Therefore, the probability-recognition criterion per IAS 38.21(a)
is always considered to be satisfied for intangible assets in a business
combination.
Intangible assets shall therefore be recognised separately from goodwill, if
they are identifiable. IAS 38 defines the concept of identifiability, and these
principles must therefore also be applied to the recognition of intangible
assets at the acquisition date in a business combination.
In accordance with IAS 38, an intangible asset is identifiable if it meets

either the separability criterion or the contractual-legal criterion. An
intangible asset that meets the contractual-legal criterion is identifiable even
if the asset is not transferable or separable from the acquiree or from other
rights and obligations.
An intangible asset that is not individually separable from the acquiree or

combined entity, and does not meet the contractual-legal criterion meets the
separability criterion if it is separable in combination with a related contract,
identifiable asset or liability.
The separability criterion means that an acquired intangible asset is

capable of being separated or divided from the acquiree and sold,
transferred, licensed, rented or exchanged (individually or together with a
related contract, identifiable asset or liability).
An acquired intangible asset meets the separability criterion if there is

evidence of exchange transactions for that type of asset or an asset of a
similar type, even if those transactions are infrequent and regardless of
whether the acquirer is involved in them.
The contractual-legal criterion is met when the intangible asset arises from
contractual or other legal rights.
Chapter 9
The acquirer will subsume (absorb) into goodwill the value of all intangible
assets that are not identifiable and all other assets that do not qualify as
assets at the acquisition date. This is consistent with the principle in IAS
38.68(b).
The recognition of intangible assets in accordance with IFRS 3 can be
summarised as follows:
Intangible assets
Identifiable
Not identifiable
Separable
Contract/Legal
Do not recognise
Recognise separately
Recognise separately
Included in
from goodwill
from goodwill
goodwill
The following intangible assets, that could be acquired in a business

combination, are usually considered identifiable:
Identifiable intangible assets
Separable
Contractual or other legal rights
Marketing-related intangible assets
Trademarks, trade names, etc.

Customer-related intangible assets
Customer lists and non-contractual
Order or production backlog, customer
customer relationships
contracts and related customer relationships
Artistic-related intangible assets (if protected by copyright)
Plays, operas, etc.
Books, magazines, newspapers and other
literary works
Musical works such as compositions, etc.
Pictures and photographs
Video and audio visual material
continued
IFRS 3 Business combinations – Advanced aspects Separable
Contractual or other legal rights
Contract-based intangible assets
Licensing, royalty, etc.
Advertising, construction, etc.
Lease agreements (whether the acquiree is

the lessee or the lessor)
Construction permits
Franchise agreements
Broadcast rights
Service contracts
Beneficial employee contracts
(from the perspective of the employer)
Use rights, for example water, air, etc.
Technology-based intangible assets
Unpatented technology
Patented technology
Databases (if not protected by copyright)
Databases (if protected by copyright)
Trade secrets, such as secret formulas,
Trade secrets, such as secret formulas,
processes and recipes
processes and recipes (if legally protected)
(if not legally protected)
Computer software and mask works
(if protected by patent or copyright)

Comment
Refer to IFRS 3.IE18–.IE44 for a detail discussion of the above mentioned

identifiable intangible assets.
Example 9.3
Recognition of intangible assets
On 1 January 20.19 P Ltd acquired a 100% interest in S Ltd. From that date
with IFRS 10. On 1 January 20.19 S Ltd had, amongst others, the following
assets: Carrying
Fair
amount
value
Licences and registered patent
R50 000
R62 000
Internally generated trademark
R34
000
Internally generated customer lists (subject to
confidentiality agreements and cannot be disposed of)
–
R18 000
Assembled workforce
R13 000
Goodwill R60
000
In-process research
R29 000
Chapter 9
The licences, patent and trademark are identifiable as they arise from
contractual or other legal rights. These items are recognised as intangible
assets at fair value (R62 000 and R34 000 respectively) as part of the
business combination.
As the confidentiality agreements prohibit the disposal/exchange of

information contained in the customer lists, the lists do not meet the
separability criterion and are not recognised separately from goodwill.
These intangible assets also do not arise from contractual/legal rights.
The assembled workforce does not meet the definition of an asset as it is not
controlled (S Ltd does not have a contract with the collection of employees
as a whole). The assembled workforce cannot be sold separately and does
not meet the separability criterion. Therefore, the assembled workforce is
not separately recognised as an intangible asset. The value placed on the
assembled workforce is therefore subsumed into goodwill.
The goodwill of R60 000 arose due to a previous business combination. The
goodwill is not an identifiable intangible asset as it is not separable nor
contract/legal. The value placed on the goodwill is therefore also subsumed
into the goodwill that will be accounted for by P Ltd.
The in-process research is separately identifiable as it can be sold

separately and is therefore recognised as an intangible asset, separately from
goodwill, at its fair value of R29 000.
Research and development expenditure
It was indicated above that it is possible for an acquirer to recognise some

assets and liabilities that the acquiree had not previously recognised as assets
and liabilities in its pre-acquisition financial statements. The in-process
research in the example above is an illustration thereof. Furthermore, IAS 38
provides specific guidance on the treatment of research and development
expenditure. Research or development expenditure that: l relates to an in-
process research or development project acquired separately or in a business
combination and recognised as an intangible asset; and l is incurred after the
acquisition of that project;
shall be recognised as an expense when incurred if it is research expenditure

or development expenditure that does not satisfy the criteria for recognition
as an intangible asset, and included in the carrying amount of the acquired
in-process research or development project if it is development expenditure
that satisfies the criteria for recognition as an intangible asset per IAS 38.57.
9.3 Measurement
principle
The acquirer shall measure the identifiable assets acquired and liabilities
assumed at their acquisition date fair values. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, i.e.
acquisition date.
10
Example 9.4
Remeasurement of liability to fair value
On 1 January 20.17 P Ltd acquired a 100% controlling interest in S Ltd. On

acquisition date, S Ltd’s liabilities included 10 000 7% debentures of R100
each, issued on 1 January 20.16 to Z Ltd. The debentures are redeemable at
nominal value on 31 December 20.20 and interest is payable annually in
arrears. On 1 January 20.16 the applicable discount rate was 10% and on 1
January 20.18 the applicable discount rate reduced to 9%. Ignore any tax
consequences.
On 1 January 20.17 the assets acquired and liabilities assumed of S Ltd

should be measured at fair value.
S Ltd already accounted for the debentures in its individual accounting

records according to IFRS 9. Therefore, the pro forma consolidation journal
entries will account for the difference between the carrying amount of the
debentures in S Ltd’s individual financial statements and the fair value as
calculated in accordance with IFRS 3.
S Ltd
Group
Difference
Fair value 1 January 20.16
(1)886 276
Finance costs
(2)88 628
Debenture payment
(70 000)
Amortised cost 31 December 20.16
R904 904
Carrying value/Fair value 1 January 20.17
904 904
(3)935 206
30 302
Finance costs
(5)90 490
(4)84 169
(6 321)
Debenture payment
(70 000)
(70 000)
Amortised cost 31 December 20.16
R925 394
R949 375
R23 981
(1)
Pmt = 70 000; i = 10%; n = 5; FV = 1 000 000
(2)
886 276 × 10%
(3)
Pmt = 70 000; i = 9%; n = 4; FV = 1 000 000
(4)
935 206 × 9%
(5)
904 904 × 10%
The pro forma consolidation journal entry at the date of acquisition will be
as follows: Dr
Cr
1 January 20.17
30 302
Lease liability (SFP)
30 302
Remeasurement of debentures
The following consolidation journal entry will be required at the reporting
date (31 December 20.17):
Dr
Cr
Debentures (SFP)
6 321
Finance costs (P/L)
6 321
Adjustment of finance costs for 20.17
11
Chapter 9
Comment
Income and expenses of the subsidiary are based on the amounts of the
assets and liabilities recognised in the consolidated financial statements at
the acquisition date. For example, depreciation expense recognised in profit
or loss after the acquisition date is based on the fair values of the related
depreciable assets recognised in the consolidated financial statements at the
acquisition date.
1 Guidance with respect to measurement of assets with uncertain cash

flows The effects of uncertainties about future cash flows should be reflected
in the acquisition date fair value of assets and liabilities, on the acquisition
date. All acquired assets and assumed liabilities are measured on acquisition
date at fair values, and thus shall not be subject to a separate valuation
allowance in respect of cash flows that are deemed uncollectible at the
acquisition date. For example, the fair value of receivables acquired as part
of a business combination will be determined based on the expected cash
flows, timing thereof and the appropriate discount rate. A separate valuation
allowance (allowance for credit losses) will not be recognised because the
discount rate already accounts for any uncertainties.
2 Guidance with respect to measurement of assets subject to operating

leases in which the acquiree is a lessor
The acquisition date fair value of an asset, which is subject to an operating

lease in which the acquiree is a lessor, should take into account the terms of
the operating lease. This means that the lessor shall not recognise a separate
asset or liability if the terms of the operating lease in which the acquiree is
the lessor are either favourable or unfavourable when compared to market
terms.
Example 9.5
Fair value of operating lease – Lessor
P Ltd acquires a 100% interest in S Ltd on 1 January 20.15. From that date P
IFRS 10. S Ltd owns a plant, with a carrying amount of R3 750 000, that is
leased to Z Ltd in terms of an operating lease, at an annual rental of R550
000 (a market-related rental is R450 000 per annum). The remaining period
of the lease is 10 years, while the remaining useful life of the plant is 25
years. The estimated fair value of the plant, based on a market-related rental
for 25 years, is equal to R5 million. Assume that the present value of the
favourable component of the lease contract with Z Ltd amounts to R560 000.
Ignore any tax consequences.
When accounting for the business combination, the plant should be

recognised at its total fair value of R5 560 000 (R5 000 000 + R560 000).
This will give rise to the following pro forma consolidation journal entry: Dr
Cr
R
1 January 20.15
Plant (SFP) (5 560 000 – 3 750 000)
1 810 000
1 810 000
Remeasurement of plant to fair value
12
IFRS 3 Business combinations – Advanced aspects For group purposes, the

subsequent depreciation of the plant should be based on R5 560 000. As the
favourable component of R560 000 of the plant will realise over the
remaining lease period of 10 years (refer to IAS 16.44), it would be
appropriate to depreciate this component over 10 years, while the remainder
of the asset should be depreciated over 25 years. The annual depreciation
will therefore amount to R256 000
[(5 000 000/25) + (560 000/10)] from a group perspective. In its individual
financial statements S Ltd will account for depreciation of R150 000 (3 750
000/25).
On 31 December 20.15 (reporting date) the following consolidation journal

is required: Dr
Cr
R
31 December 20.15
Depreciation (P/L) (256 000 – 150 000) 106
000
Accumulated depreciation (SFP)
106 000
Additional depreciation for 20.15
3 Guidance with respect to measurement of assets that the acquirer

intends not to use or use in a way that is different from the way other
market participants would use them
To protect its competitive position, or for other reasons, the acquirer may
intend not to use an acquired non-financial asset, or it may not intend to use
the asset according to its highest and best use. However, the acquirer shall
measure the fair value of the non-financial asset assuming its highest and
best use by market participants in accordance with the appropriate valuation
technique in accordance with IFRS 13 Fair Value Measurement.
Example 9.6
Fair value of items used differently
P Ltd acquires a 100% interest in S Ltd and has control over S Ltd as per the
definition of control in accordance with IFRS 10. S Ltd owns export licences
to export goods globally. The fair value of the global export licenses is
determined to be R900 000.
However, P Ltd intends to export only to Africa and determines the fair
value of the license to export to Africa only, at R390 000. Ignore any tax
consequences.
At the acquisition date, S Ltd also had an in-process research project with a
fair value of R140 000. P Ltd does not intend to continue with the research.
P Ltd does not intend to use the export license or in-process research
according to its highest and best use. Nevertheless for the business
combination, the export licences will be measured at R900 000 and the in-
process research project at R140 000. An impairment loss may probably be
recognised in the period after the business combination.
4 Guidance with respect to measurement of intangible assets If an asset

acquired in a business combination is separable or arises from contractual or
other legal rights (i.e. is identifiable as discussed above), sufficient
information exists to reliably measure the fair value of the asset. Thus, the
reliable-measurement criterion per IAS 38.21(b) is always considered to be
satisfied for intangible assets acquired in a business combination. It is
therefore clear that the emphasis lies on the satisfaction of 13
Chapter 9
the definition of an intangible asset (incorporating identifiability), rather

than on the recognition criteria, as the latter are considered to be satisfied in
a business combination as explained.
The fair value of an intangible asset would be the price that would be
received to sell an asset in an orderly transaction between market
participants at the acquisition date.
Quoted market prices provide the most reliable estimate of the fair value of
an intangible asset. If such market prices are not available, the price of the
most recent similar transaction may provide a basis from which to measure
the fair value of the intangible asset, provided no significant changes have
occurred from the date of the most recent similar transaction to the
acquisition date.
If no active market exists for an intangible asset, valuation techniques may

be used to determine the fair value of intangible assets.
5 Guidance with respect to measurement of non-controlling interests

The non-controlling interests, if any, shall be measured by the acquirer in
one of two ways, i.e. either:
l at fair value; or
l at the non-controlling interests’ proportionate share of the acquiree’s
identifiable net assets (i.e. not taking into account the fair value of the non-
controlling interests but basing the non-controlling interests on the net asset
value of the entity instead).
The measurement choice is only available for present ownership interests

(e.g. ordinary shares) which entitle their holders to a proportionate share of
the entity’s net assets in the event of liquidation. All other components of
non-controlling interests must be measured at fair value. If non-controlling
interests include preference shares the preference shares shall be measured
at fair value unless the preference shareholders are entitle to a proportionate
share of the entity’s net assets in the event of liquidation.
The choice between the two methods of measuring non-controlling interests

is not part of the accounting policy of the acquirer and can be exercised for
each separate business combination.
If the acquirer measures non-controlling interests at fair value at the

acquisition date, this value can sometimes be based on the market prices for
the equity shares not held by the acquirer. Where market prices are not
available for these equity shares, the fair value shall be determined by the
acquirer using other valuation techniques. It is very possible that the fair
value of the acquirer’s interest in the acquiree and the fair value of the non-
controlling interests in the acquiree on a per-share basis will differ due to the
inclusion of a control premium in the per-share fair value of the acquirer’s
interest in the acquiree, or a discount, for the lack of control, included in the
per-share fair value of the non-controlling interests in the acquiree.
The amount assigned to the non-controlling interests is included in the

calculation of goodwill or the gain from a bargain purchase arising from the
The acquirer’s choice of the measurement basis of non-controlling interests

for ordinary shares will therefore influence the resultant goodwill or the gain
from a bargain purchase.
14
Example 9.7
Measurement of non-controlling interests
The equity of N Ltd consists of 100 000 ordinary shares and 10 000
preference shares.
The preference shares give their holders the right to a preferential dividend
before the payment of any dividend to the ordinary shareholders. On
liquidation of N Ltd, the preference shareholders are entitled to receive their
initial investment back before the remainder of the net assets are distributed
to the ordinary shareholders. The preference shareholders do not have any
further rights on liquidation. On 1 January 20.19 the ordinary and preference
shares were trading at R34 and R15 each respectively. On 1 January 20.19 P
Ltd acquired a 60% interest in N Ltd at a cost of R2,2 million. From that
date P Ltd had control over N Ltd as per the definition of control in
accordance with IFRS 10. P Ltd was willing to pay more than R34 per share
in order to gain control (60 000 shares × R34 = R2,04 million). The fair
value of the identifiable net assets of N Ltd amounts to R3,3 million at the
acquisition date.
P Ltd can elect to measure the 40% present ownership interest at its fair
value. Non-controlling interests will then amount to R1,51 million (40 000
shares × R34 plus 10 000
shares × R15); OR,
P Ltd can elect to measure the 40% present ownership interest at its share of
N Ltd’s identifiable net assets. Non-controlling interests will then amount to
R1,47 million (40%
× R3,3 million plus 10 000 shares × R15).
9.4 Exceptions to the recognition and measurement principles
IFRS 3 provides the following exceptions to the recognition and

measurement principles:
Exceptions
Exceptions to the
Exceptions to both the
Exceptions to the
recognition
recognition and
measurement
principle
measurement principles
principle
Contingent liabilities
l Deferred tax assets
l Reacquired right
and liabilities
l Share-based
l Employee benefits
payment awards
l Indemnification
l Non-current assets
assets
held for sale
l Leases in which the
acquiree is the
lessee
15
Chapter 9
1 Exceptions to the recognition principle
A contingent liability is defined in accordance with IAS 37 Provisions,

Contingent Liabilities and Contingent Assets as:
la
possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or l a
present obligation that arises from past events but is not recognised because
it is either not probable that future economic benefits will be required to
settle the obligation or the amount of the obligation cannot be measured with
sufficient reliability (i.e. the definition of a liability is satisfied, but one or
both of the recognition criteria is not satisfied).
However, a contingent liability assumed in a business combination shall be

recognised by the acquirer at the acquisition date if:
l it is a present obligation that arises from past events; and l its fair value
can be reliably measured.
The contingent liability is therefore recognised by the acquirer, even if it is

not probable that an outflow of economic benefits will be required to settle
the obligation.
Contingent liability IAS 37
No present obligation exists
Present obligation exists
Definition of liability not met
However, one or more
(possible obligation)
recognition criteria not met
Do not recognise
If fair value can be reliably
met, recognise contingent
liability i.t.o IFRS 3
16
Example 9.8
IFRS 10. At this stage a claim for damages was filed against S Ltd for
damages caused by the company. S Ltd was defending the claim and its
lawyers were of the opinion that there was only a remote possibility that the
claim would succeed. Although the claim represents a present obligation (i.e.
S Ltd was responsible for damages caused), S Ltd did not recognise the
liability in its individual financial statements as the possibility of the outflow
of economic benefits was remote (i.e. not probable). The fair value of the
contingent liability was estimated at R45 000 at the acquisition date. Ignore
any tax consequences.
P Ltd would have taken this contingent liability into account in considering
the fair value of the identifiable net assets of S
Ltd and in determining the amount of the
consideration for the business combination. In accounting for the business

combination, P Ltd will therefore recognise the contingent liability at R45
000 in the combined entity at the acquisition date.
2 Exceptions to both the recognition and measurement principles

Deferred tax
A deferred tax asset or liability arising from the acquisition of the assets and
assumption of the liabilities in the business combination shall be recognised
and measured by the acquirer in accordance with IAS 12 Income Taxes. It is
important to note that the initial recognition exemption in respect of deferred
tax does not apply to temporary difference that arose from a business
combination. A deferred tax liability or asset is therefore recognised on all
temporary differences. The potential tax effects of temporary differences and
carry-forwards of an acquiree that exist at the acquisition date or arise as a
result of the acquisition shall also be recognised and measured in accordance
with IAS 12.
Example 9.9
Deferred tax
Deferred tax on fair value remeasurements of an asset
The date of the business combination of P Ltd and S Ltd is 1 March 20.19.
On this date the carrying amount of the plant of S Ltd was R700 000 and the
tax base was R600 000. The tax rate is 28%. S Ltd recognised a deferred tax
liability of R28 000 in respect of this plant. On 1 March 20.19 the fair value
of the plant was R730 000.
For the purpose of the business combination, the plant will be recognised at
its fair value of R730 000. The remeasurement of R30 000 (R730 000 –
R700 000) is recognised as equity at acquisition. An adjustment of R8 400
(R30 000 × 28%) is also recognised for the deferred tax liability.
Details of the deferred tax calculation are as follows:
Carrying
Tax
Temporary Deferred
Adjust-
amount
base
difference tax liability
ment
Balance on
1 January 20.19
R700 000
R600 000 R100 000
R28 000
Business combination
R730 000
R600 000
R130 000
R36 400
R8 400
17
Chapter 9
Subsequent recognition of deferred tax asset
P Ltd acquired a 100% interest in S Ltd on 1 December 20.18. On this date S

Ltd had an assessed loss of R500 000. S Ltd did not recognise a deferred tax
asset, as there was no certainty regarding future taxable income and thus no
tax asset was recognised in the consolidated financial statements.
On 31 December 20.19 (reporting date) S Ltd assessed that future taxable

profit should be sufficient to recover the total benefit of the assessed loss of
R500 000. Assume a tax rate of 28%.
On 31 December 20.19 S Ltd will recognise a deferred tax asset of R140 000
(R500 000 × 28%) in S Ltd’s individual financial statements. No

consolidation journals are required in respect of this deferred tax asset. S Ltd
recognised the deferred tax asset (SFP) and the benefit thereof (P/L), which
is also the correct treatment in the consolidated financial statements.
Employee benefits
The acquirer shall recognise and measure a liability or asset related to the
acquiree’s employee benefit arrangements in accordance with IAS 19
Employee Benefits.
Indemnification assets
The seller in the business combination (i.e. the acquiree) may contractually
indemnify the acquirer for the outcome of a contingency or uncertainty
related to all or part of a specific asset or liability. For example, a seller may
guarantee that an acquirer’s liability will not exceed a specified amount. As
a result, the acquirer obtains an indemnification asset. The acquirer shall
recognise the indemnification asset at the same time it recognises the
indemnified item, and measures the indemnification asset on the same basis
as the indemnified item, subject to the need for a valuation allowance for
uncollectible amounts. If the indemnified asset or liability is therefore
recognised at fair value on the acquisition date, the indemnification asset
will also be recognised at fair value on the acquisition date. If the
indemnification asset is measured at fair value, the uncertainty about future
cash flows because of collectability is included in the fair value and a
separate valuation allowance for uncollectible amounts is not necessary.
If an indemnification asset relates to an item that is an exception to the

recognition or measurement principles, for example a contingent liability
that is not recognised at the acquisition date as its fair value cannot be
reliably measured, or an item that is not measured at the acquisition date fair
value, e.g. an employee benefit liability, the indemnification asset shall be
recognised and measured using assumptions consistent with those used to
recognise and measure the indemnified item.
Example 9.10
Indemnification asset
P Ltd acquires a 60% interest in S Ltd on 1 July 20.15 from Q Ltd. From that
date P Ltd had control over S Ltd as per the definition of control in
accordance with IFRS 10. On this date S Ltd is also involved in a court case
in terms of which S Ltd may be liable to pay damages amounting to R2,5
million for violating Z Ltd's patent rights. Although S Ltd's lawyers are of
the opinion that the patent rights were indeed violated, there is a possibility
that the court's ruling may be in S Ltd's favour. It is therefore not possible to
predict the outcome of the court case on 1 July 20.15. Should the ruling not
be in S Ltd's favour, Q Ltd agrees contractually to reimburse S Ltd for 60%
of the damages 18
IFRS 3 Business combinations – Advanced aspects payable to Z Ltd. The

fair value of the potential liability to pay damages to Z Ltd amounts to R500
000 at 1 July 20.15. Ignore any tax consequences.
From S Ltd's perspective, the court case represents a contingent liability, as
there is a present obligation to pay damages (patent rights were violated), but
the outflow of future economic benefits is not probable (court's ruling
uncertain). Although S Ltd does not recognise this contingent liability in its
individual financial statements, it should be recognised in the consolidated
financial statements at acquisition date at fair value when accounting for the
business combination. As the indemnified liability is recognised at
acquisition date at fair value, the indemnification asset should also be
recognised at acquisition date at fair value (note that S Ltd will not recognise
this indemnification asset in its individual financial statements at acquisition
date, as it represents a contingent asset at that date).
The following consolidation journal will be required at acquisition date: Dr
Cr
1 July 20.15
200 000
Indemnification asset (SFP) (500 000 × 60%) 300
000
Recognised contingent liability (SFP)
500 000
Recognition of contingent liability and indemnification asset
If there are indications at the end of the reporting period (31 December
20.15) that the claim will succeed and the amount of the claim is estimated
at R2 million, S Ltd will raise a provision of R2 million in its individual
financial statements, as the outflow of economic benefits are now probable.
S Ltd will then also recognise a reimbursement asset of R1,2 million (2
million × 60%). For consolidation purposes the liability should be measured
at the higher of R500 000 (amount initially recognised) and R2 million
(amount recognised in accordance with IAS 37) – therefore R2 million,
while an indemnification asset of R1,2 million should also be recognised. As
the individual financial statements of S Ltd already include the provision and
the reimbursement asset, it will be necessary to reverse the liability of R500
000 and indemnification asset of R300 000 recognised at acquisition date.
The following additional consolidation journal is required: Dr
Cr
31 December 20.15
Recognised contingent liability (SFP)
500 000
Indemnification asset (SFP)
300 000
Other expenses (law suit) (P/L)
200 000
Reversal of contingent liability and indemnification asset 19
Chapter 9
Comment
The effect of the above two consolidation journals is that the P Ltd Group
recognises a liability of R500 000 and an asset of R300 000 on 1 July 20.15,
which are then adjusted to R2 million and R1,2 million respectively at 31
December 20.15. The adjustment of R600 000 is included in profit or loss
and consists of the net expense of R800 000
(2 million – 1,2 million) recognised by S Ltd when the provision and

reimbursement asset was raised, less the above adjustment of R200 000 on
31 December 20.15.
Leases in which the acquiree is the lessee
The acquirer shall recognise right-of-use assets and lease liabilities for leases
identified in accordance with IFRS 16 in which the acquiree is the lessee,
except for: l leases for which the lease term ends within 12 months of the
acquisition date; or l leases for which the underlying asset is of low value (as
described in IFRS 16).
The acquirer shall measure the lease liability at the present value of the
remaining lease payments (as defined in IFRS 16) as if the acquired lease
were a new lease at the acquisition date. The acquirer shall measure the
right-of-use asset at the same amount as the lease liability, adjusted to reflect
favourable or unfavourable terms of the lease when compared with market
terms.
Example 9.11
Recognition and measurement of a favourable operating lease
IFRS 10. On 1 January 20.18, S Ltd signed a lease agreement as lessee in
respect of a specific building situated in a prime business area with Z Ltd.
The lease agreement stated that the lease payment of R50 000 per annum
was payable in arrears and, at the inception of the lease, S Ltd's incremental
borrowing rate was 16%. On 1 January 20.19 the remaining lease term was
five years, a market-related lease payment for similar buildings was R58 000
per annum and S Ltd's incremental borrowing rate reduced to 15%. Ignore
any tax consequences.
At acquisition date (1 January 20.19) P Ltd shall firstly measure the lease
liability and right-of-use asset at R167 608, calculated as Pmt = 50 000; i =
15%; n = 5; FV = 0 (the present value of the remaining lease payments as if
the acquired lease were a new lease at the acquisition date).
Comment
A favourable component to the lease agreement arises from the favourable

terms of the lease agreement. The annual instalment payable by S Ltd is only
R50 000, while a market-related instalment amounts to R58 000.
Secondly, P Ltd will adjust the value of the right-of-use asset to reflect the
favourable terms of the lease when compared with market terms. The
favourable component of the lease equals R26 817 (Pmt = (58 000 – 50
000); i = 15%; n = 5; FV = 0). Therefore, the fair value of the right-of-use
asset will be R194 425 (R167 608 + R26 817).
20
Comment
The fair value of the right-of-use asset can also be calculated as the present
value of the market-related instalments of R58 000 discounted at 15% (Pmt
= 58 000; i = 15%; i = 5; FV = 0).
S Ltd already accounted for the lease agreement in its individual accounting
records according to IFRS 16. Therefore, the pro forma consolidation journal
entries will account for the difference between the carrying amount of the
lease liability and right-of-use asset in S Ltd’s accounting records and the
fair value as calculated in accordance with IFRS 3.
S Ltd
Group
Difference
Lease liability 1 January 20.19
(1)163 715
(5)167 608
3 893
Finance costs
(2)26 194
(6)25 141
(1 053)
Lease instalment
(50 000)
(50 000)
Lease liability 31 December 20.19
R139 909
R142 749
R2 840
Right-of-use asset 1 January 20.19
(3)153 531
(7)194 425
40 894
Depreciation
(4)(30 706)
(8)(38 558)
(8 179)
Right-of-use asset 31 December 20.19
R122 825
R155 867
R32 715
(1) Pmt = 50 000; i = 16%; n = 5; FV = 0
(5) Pmt = 50 000; i = 15%; n = 5; FV = 0
(2) 163 715 × 16%
(6) 167 608 × 15%
(3) (Pmt = 50 000; i = 16%; n = 6; FV = 0) × 5/6
(7) Pmt = 58 000; i = 15%; i = 5; FV = 0
(4) 184 237/6
(8) 194 425/5
The pro forma consolidation journal entry at the date of acquisition will be
as follows: Dr
Cr
R
R
1 January 20.19
Right-of-use asset (SFP) (194 425 – 153 531) 40
894
Lease liability (SFP) (167 608 – 163 715)
3 893
37 001
Remeasurement of lease
The following consolidation journal entry will be required at the reporting

date (31 December 20.19):
Dr
Cr
Depreciation (P/L)
8 179
Right-of-use asset (SFP)
8 179
Financial liability (SFP)
1 053
Finance costs (P/L)
1 053
Adjustment of depreciation and finance costs for 20.19
21
Chapter 9
3 Exceptions to the measurement principle
Reacquired rights
The acquirer can reacquire a right that it had previously granted to the
acquiree, such as the right to use one or more of the acquirer’s recognised or
unrecognised assets. This right is recognised separately from goodwill. An
example is the acquisition of the right to use its trade name under a franchise
agreement that the acquirer had previously granted to the acquiree.
Share-based payment awards
The acquirer shall measure a liability or an equity instrument related to the

replacement of an acquiree’s share-based payment awards with share-based
payment awards of the acquirer in accordance with the method in IFRS 2
Share-based Payment. This method is called the “market-based measure”
of the award. Refer to IFRS 3.B56–.B62 and
.IE61–.IE71 for detailed guidance and illustrations.
Assets held for sale
The acquirer shall measure an acquired non-current asset held for sale (or
disposal group held for sale) at the acquisition date in accordance with IFRS
5 Non-current Assets Held for Sale and Discontinued Operations at fair
value less costs to sell (refer to IFRS 5.15–.18).
Example 9.12
Non-current assets held for sale
S Ltd classified a machine as held for sale on 31 March 20.15, when the
carrying amount of the machine amounted to R250 000 and the fair value
less costs to sell amounted to R275 000. P Ltd acquired an 80% interest in S
Ltd on 31 May 20.15, when the machine’s fair value less costs to sell
amounted to R287 500. From this date P Ltd had control over S Ltd as per
the definition of control in accordance with IFRS 10. At the reporting date
(30 June 20.15), the machine’s fair value less costs to sell decreased to R280
000. Ignore any tax consequences.
In the individual financial statements of S Ltd the machine should be

measured on 31 March 20.15 at the lower of its carrying amount (R250 000)
and its fair value less costs to sell (R275 000), i.e R250 000. When
accounting for the business combination on 31 May 20.15, the machine
should be measured in the consolidated financial statements at its fair value
less costs to sell of R287 500.
The following consolidation journal is required:
Dr
Cr
31 May 20.15
Non-current assets held for sale (SFP) (287 500 – 250 000) 37
500
37 500
Remeasurement of non-current asset held for sale

At the end of the reporting period the machine should be remeasured to the
lower of its carrying amount and fair value less costs to sell. In the
individual financial statements of S Ltd no adjustment is required –
measured at the lower of the carrying amount (R250 000) and fair value less
costs to sell (R280 000). In the consolidated financial 22
IFRS 3 Business combinations – Advanced aspects statements the machine

should be measured at the lower of R287 500 (carrying amount) and R280
000 (fair value less costs to sell). An impairment loss of R7 500
should thus be recognised in the consolidated financial statements.
The following consolidation journal is required:
Dr
Cr
30 June 20.15
Impairment loss (P/L)
7 500
Non-current asset held for sale (SFP) (287 500 – 280 000)
7 500
Remeasurement of non-current asset held for sale
9.5 Measurement of consideration transferred
The consideration transferred in a business combination should be measured

at fair value determined at acquisition date. The consideration is calculated
as the sum of the fair values of:
l the assets transferred by the acquirer (cash, property, plant and equipment,
investments, businesses or subsidiaries of the acquirer);
l the liabilities incurred by the acquirer (settlement of the purchase price at a

future date); and
l the equity interests issued by the acquirer (ordinary shares, preference

shares and options).
The carrying amount of assets and liabilities transferred as part of

consideration may be different from their fair values at acquisition date. If
so, the acquirer should remeasure the transferred assets or liabilities to their
fair values as at the acquisition date and should then recognise the resulting
gains or losses, if any, in profit or loss.
Example 9.13
Measurement of consideration transferred
IFRS 10. The purchase price was settled as follows:
l A cash payment of R1 750 000 on 1 January 20.15.
l The issue of 10 000 shares on 15 January 20.15. The fair value of these
shares amounted to R350 000 on 1 January 20.15 and R385 000 on 15
January 20.15.
l The transfer of land, with a carrying amount of R525 000. The fair value of
the land amounted to R700 000 on 1 January 20.15 and R787 500 on 31
January 20.15, when the transfer of the land was formally registered.
l As P Ltd did not have sufficient cash reserves, it was agreed that the
outstanding amount of R1 225 000 will be paid on 31 December 20.16. The
fair value of this liability amounted to R1 050 000 on 1 January 20.15.
23
Chapter 9
The fair value of the consideration transferred will amount to R3 850 000 (1
750 000
(cash) + 700 000 (land) + 350 000 (shares) + 1 050 000 (liability)). The fair
value of the land and shares should be determined at the acquisition date (1
January 20.15). The requirement to measure liabilities at fair value
necessitates the calculation of the present value whenever settlement of the
purchase consideration is deferred (the difference between the present value
(R1 050
000) and the amount payable
(R1 225 000) should be accounted for as interest paid over two years, using
the effective interest method). The transfer of land will result in a gain of
R175 000
(700 000 – 525 000) being recognised in profit or loss.
The journal entry to account for the acquisition of S Ltd in the separate
financial statements of P Ltd as well as in the consolidated financial
statements will be as follows:
Dr
Cr
Investment in S Ltd (SFP)
3 850 000
Bank (SFP)
1 750 000
Share capital (SCE)
350 000
1 050 000
Property, plant and equipment (Land) (SFP)
525 000
Gain on transfer of land (P/L)
175 000
Recognising the acquisition of S Ltd
Comment
In the above example the land was transferred to the former owners of the
acquiree. If, however, the transferred assets or liabilities remain within the
combined entity after the business combination, for example, because the
assets or liabilities were transferred to the acquiree, and, therefore, the
acquirer retains control of them, the assets and liabilities should be measured
at their carrying amounts immediately before the acquisition date and no
gain or loss should be recognised. This will happen, for example, if the
acquirer obtains its interest in the acquiree directly from the acquiree instead
of its shareholders (the acquiree issues shares to the acquirer in exchange for
the transfer of an asset).
Example 9.14
Measurement of consideration transferred – Asset

S Ltd was incorporated on 1 January 20.15, on which date it issued all of its
authorised share capital to P Ltd in exchange for land owned by P Ltd. From
that date P Ltd had control over S Ltd as per the definition of control in
accordance with IFRS 10. The land had a carrying amount of R1 125 000 in
the accounting records of P Ltd and a fair value of R1 575 000 at that date.
The journal entry to account for the acquisition of S Ltd in the separate
financial statements of P Ltd is as follows:
Dr
Cr
1 125 000
1 125 000
Recognising the acquisition of S Ltd
24
IFRS 3 Business combinations – Advanced aspects As P Ltd retained control

of the land transferred to S Ltd, a gain on the transfer of the land may not be
recognised in P Ltd's separate financial statements.
The journal entry to account for the issue of the shares in the individual
financial statements of S Ltd is as follows:
Dr
Cr
1 575 000
Share capital (SCE)
1 575 000
Issuing of shares
S Ltd has issued shares worth R1 575 000 in exchange for land worth R1
575 000. In accordance with IAS 16.16 the land should be measured at its
purchase price, which is R1 575 000.
In the consolidated financial statements, it would not be appropriate to

recognise a gain on the transfer of the land, as P Ltd retained control of the
land. In addition, the land should be recognised in the consolidated financial
statements at its previous carrying amount of R1 125 000 and not at the fair
value of R1 575 000.
The following consolidation journal entry should be processed:
Dr
Cr
Share capital of S Ltd (SCE)
450 000
450 000
Reversal of intragroup profit
An acquirer sometimes obtains control of an acquiree without transferring

consideration. Examples can include:
l The acquiree repurchases a sufficient number of its own shares, for an

existing investor (the acquirer) to obtain control.
l Minority veto rights lapse that previously kept the acquirer from
controlling an acquiree in which the acquirer held the majority voting rights.
l The acquirer and acquiree agree to combine their businesses by contract

alone.
If the business combination is achieved by contract alone, the acquirer shall

account for the equity interests held by other parties as non-controlling
interests in the consolidated financial statements. Refer to example 14.13 for
an example on the accounting treatment of obtaining control through an
agreement.
9.6 Measurement of contingent consideration transferred
The acquirer may agree to transfer additional equity interests, cash, or other
assets to the former owners of the acquiree after the acquisition date,
provided that specified events occur, for example if certain profit levels are
reached – this is referred to as contingent consideration. Contingent
consideration is defined as an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree as part of the
exchange for control of the acquiree if specified future events occur or
conditions are met. The fair value of this contingent consideration as at
acquisition date should be included in the fair value of the total consideration
that the acquirer transfers in exchange for the acquiree (the fair value of the
contingent consideration reflects the probability that it will be paid).
25
Chapter 9
The obligation to pay contingent consideration should be classified as a

financial liability or as equity, based on the definitions of an equity
instrument and financial liability contained in IAS 32. If the obligation is not
classified as equity or a financial liability, it should be classified as a liability
in terms of other standards. When measuring the fair value of contingent
payments, the acquirer's agreement to make contingent payments is the
obligating event that requires the recognition of a liability at acquisition date.
Contingent consideration may also give the acquirer the right to the return of
previously transferred considerations if specified future events occur or
conditions are met, for example where a portion of the purchase price will be
repaid if profits fall below a certain level. Contingent considerations
receivable should be taken into account when measuring the total
consideration relating to the business combination. This will be accounted
for as a reduction in the total consideration transferred and the fair value
thereof will reflect the probability that it will be received. The right to
receive this contingent consideration should be classified as an asset.
Subsequent changes may occur in the fair value of the assets and liabilities
recognised for consideration receivable or payable. If these changes result
from additional information obtained after the acquisition date regarding
circumstances that already existed at acquisition date, the financial
statements should be corrected retrospectively, provided the adjustment is
made within one year from acquisition date. This is referred to as a
measurement period adjustment. Changes in fair value, resulting from events
that occurred only after the acquisition date, such as share price and profit
targets being met, are not regarded as measurement period adjustments and
are not accounted for retrospectively. Instead, these changes in fair value are
accounted for as follows:
l Contingent consideration classified as equity is not remeasured. When the

amount is settled, the settlement is accounted for within equity.
l Contingent consideration classified as a financial asset or liability within

the scope of IFRS 9 should be measured to fair value at each reporting date.
Any gains or losses will be recognised in profit or loss in the period after the
l Contingent consideration classified as an asset or liability not within the

scope of IFRS 9 should also be measured to fair value at each reporting date.
Any gains or losses will be recognised in profit or loss in the period after the
Comment
It should be noted that most contingent consideration obligations are

financial instruments, and many are derivatives, as the value of the
obligation changes, no initial net investment is required and settlement is at a
future date.
Example 9.15
Contingent consideration – Financial liability
IFRS 10. At 1 January 20.15 the fair value of the identifiable net assets of S
Ltd amounted to R375 000, while the fair value of the 40% non-controlling
interests amounted to 26
IFRS 3 Business combinations – Advanced aspects R125 000 (the non-

controlling interests in the acquiree is measured at fair value). The purchase
price was settled as follows:
l R500 000 in cash;
l P Ltd also agreed to pay the previous owners of S Ltd an additional amount
of R75 000 in cash if the earnings of S Ltd increases by more than 10% per
year for two consecutive years. On 1 January 20.15 the fair value of this
obligation is estimated at R57 500 (taking into account the probability of
meeting the earnings target, as well as the time value of money).
On 31 December 20.15 (reporting date), the earnings of S Ltd have increased

by 11%.
As the probability of payment increases, and as a result of the payment being
one period closer, the fair value of the liability is R65 000 on 31 December
20.15.
On 31 December 20.16 the earnings of S Ltd has increased by 12% and P

Ltd is obligated to pay the additional consideration of R75 000.
P Ltd recognised the equity investment in S Ltd in its separate records using
the cost price method.
In its separate financial statements, P Ltd will process the following journal
entry on 1 January 20.15:
Dr
Cr
557 500
Bank (SFP)
500 000
Financial liability at fair value through profit or loss (SFP) 57 500
Recognising contingent consideration as part of the
consideration transferred for the business combination
On 31 December 20.15, the financial liability is remeasured to fair value: Dr
Cr
R
Fair value adjustment (P/L)
7 500
Financial liability at fair value through profit or loss (SFP) (65 000 – 57 500)
7 500
Fair value adjustment of the financial liability for
contingent consideration
On 31 December 20.16 the following journal entries will be required:
Dr
Cr
J1
10 000
Financial liability at fair value through profit or loss
(SFP) (75 000 – 65 000)
10 000

J2
Bank (SFP)
75 000
Settlement of the contingent consideration
27
Chapter 9
The following pro forma consolidation journal entry will be required to

eliminate the at acquisition equity of S Ltd:
Dr
Cr
At acquisition equity (SCE)
375 000
Goodwill (SFP) [(557 500 + 125 000) – 375 000]
307 500
557 500
Non-controlling interests (SCE/SFP)

125 000
Elimination of at acquisition equity
If the contingent consideration will be settled by the issuing of P Ltd’s shares

(equal to R75 000), the amount will still be classified as a financial liability.
This is so because IAS 32 requires contracts that will be settled in a variable
number of the entity's own shares to be classified as a financial liability.
Assuming that P Ltd’s share price is R12,50 on this date, all the journal
entries will remain the same, except for the entry to be processed on 31
December 20.16 by P Ltd, which will be as follows:
Dr
Cr
J1
10 000
Financial liability at fair value through profit or loss
(SFP) (75 000 – 65 000)
10 000
J2

Share capital (SCE)
75 000
If the parties agreed that P Ltd will settle the contingent consideration by
issuing 6 000
shares, the amount will be classified as equity. This is because IAS 32

requires contracts that will be settled in a fixed number of the entity's own
shares to be classified as equity. Equity instruments are not remeasured in
accordance with IAS 32. In such a case, P Ltd will process the following
journal entry on 1 January 20.15: Dr
Cr
557 500
Bank (SFP)
500 000
Equity (SCE) (contract to issue shares)
57 500
Recognising contingent consideration as part of the
consideration transferred for the business combination
On 31 December 20.16, the following journal entry will be required: Dr
Cr
R
Equity (SCE) (contract to issue shares)
57 500
Share capital (SCE)
57 500
28
Example 9.16
Contingent consideration – Asset
On 31 December 20.15 (reporting date) P Ltd acquires an 80% interest in S

Ltd at a cost of R2,5 million. From that date P Ltd had control over S Ltd as
per the definition of control in accordance with IFRS 10. In terms of the
purchase agreement, 6% of the selling price amount will be repaid by the
sellers to P Ltd if the profits of S Ltd fall below R500 000 per annum in any
of the next two years. Ignore any tax consequences.
At the acquisition date, an estimate should be made of the fair value of the
contingent consideration (the amount that may be received from the sellers).
The fair value should take into account the time value of money, as well as
the probability that the amount will be received. If it is assumed that the fair
value of this receivable is R25 000 (low fair value as it is expected that
profits will exceed R500 000 per annum), the fair value of the total
consideration will amount to R2,475 million (2,5 million – 25 000).
On 31 December 20.15, the following journal entry will be required: Dr

Cr
2 475 000
Financial asset (SFP)
25 000
Bank (SFP)
2 500 000
Recognising the consideration transferred to acquire
an 80% interest in S Ltd
If expectations at acquisition date are that the profit targets will be reached
but, due to an increase in interest rates subsequent to acquisition date there is
a downward trend in the economy, resulting in the targets not being met, the
fair value of the consideration should not be adjusted retrospectively.
Instead, the difference between the initial fair value of R25 000 and the
amount received of R150 000 (6% × R2,5 million) should be recognised in
profit or loss.
Comment
If, after the acquisition date, information is obtained which confirms that the
sellers of the interest in S Ltd supplied fraudulent profit forecasts to P Ltd
during negotiations and that, based on the correct information as at
acquisition date, the profits of S Ltd will definitely not exceed R500 000 per
annum, the fair value of the consideration transferred should be adjusted
retrospectively, by restating comparatives as the fraudulent information
meets the definition of a prior period error in accordance with IAS 8.
Example 9.17
Compensation for reduction in equity instruments
On 1 January 20.15 P Ltd acquires a 60% interest in S Ltd by issuing 10 000

shares with a fair value of R25 each as settlement of the purchase price.
From that date P Ltd had control over S Ltd as per the definition of control
in accordance with IFRS 10. P Ltd undertakes to issue additional shares if
the fair value of its shares decreases within the first year after acquisition of
S Ltd. On 1 January 20.15 expectations are that the share price of P Ltd will
increase in future and therefore the fair value of the potential obligation to
issue additional shares amounts to R15 000. However, the share price of 29
Chapter 9
P Ltd dropped during December and on 31 December 20.15 (reporting date)

the fair value of P Ltd's shares amounted to R15 each. Ignore any tax
consequences.
The fair value of the consideration transferred is R265 000 and consists of
the fair value of the 10 000 shares issued on 1 January 20.15, amounting to
R250 000 (10 000 × 25) as well as the fair value of the contingent
consideration of R15 000. The obligation to issue additional shares if the
share price decreases represents a financial liability, as the number of shares
issued depends on the extent of the reduction in the share price.
When the value of the shares decreases on 31 December 20.15, additional

shares need to be issued.
The following journal entries will appear in the separate financial accounts
of P Ltd:
Dr
Cr
R
J1
1 January 20.15
265 000
Share capital (SCE) (25 × 10 000)
250 000
15 000
Fair value of consideration transferred
J2
31 December 20.15
Fair value adjustment (P/L) (((25 – 15) × 10 000) – 15 000) 85
000
85 000
Remeasurement of financial liability to fair value
J3
100 000
Share capital (SCE)

100 000
Settlement of liability
Measurement period
9.7 Measurement period adjustments
In the sections above, it was indicated that the acquirer needs to identify and
recognise all the assets and liabilities of the acquiree. Furthermore, the fair
value of the various assets, liabilities, non-controlling interests,
consideration, etc., needs to be obtained.
From a practical point of view, one should bear in mind that all these
requirements are very time-consuming. The measurement period in IFRS 3
therefore allows the acquirer some leeway to finalise all the required
procedures to complete the accounting of the business combination properly.
If the initial accounting for the business combination is incomplete at the

end of the reporting period in which the combination transaction occurs, the
acquirer shall report provisional amounts in its financial statements for the
items for which the accounting is incomplete.
During the measurement period, the acquirer shall retrospectively adjust the
provisional amounts recognised at the acquisition date to reflect new
information obtained about facts and circumstances that existed at the
acquisition date that, if known, would have affected the measurement of the
amounts recognised at the acquisition date.
During the measurement period, the acquirer shall also recognise additional
assets and liabilities if new information is obtained about facts and
circumstances that existed at the acquisition date that, if known, would have
resulted in the recognition of those assets and liabilities at the acquisition
date.
30
IFRS 3 Business combinations – Advanced aspects The measurement period

ends as soon as the acquirer receives the information it was seeking about
facts and circumstances that existed at the acquisition date or learns that
more information is not obtainable. However, the measurement period shall
not exceed more than one year from the acquisition date.
The effect of the above principle is that goodwill is subsequently adjusted

for such changes due to the fact that the changes resulting from new
information are processed retrospectively, as if the information had existed
at the acquisition date. This results in a fairer presentation of the goodwill
(or gain from a bargain purchase) at the acquisition date.
It is very important to note that not all information obtained in the

measurement period will result in changes to the provisional amounts at the
acquisition date. The acquirer should apply professional judgement to ensure
that the new information reflects the circumstances that existed at the
acquisition date and not those that arose thereafter.
The shorter the time period between the estimate of the provisional amount
at the acquisition date and the receipt of additional information about the
provisional amount in the measurement period, the more likely the new
information will relate to a circumstance that existed at the acquisition date.
The opposite is also true.
After the measurement period ends, the acquirer shall revise the accounting
for a business combination only to correct an error in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
Example 9.18
Measurement period and adjustment to goodwill
The date of the business combination of P Ltd and S Ltd is 1 December

20.18. P Ltd acquired a 55% interest in S Ltd. By the end of the reporting
period of the group (31 December 20.18), P Ltd determined the fair value of
the identifiable net assets (excluding plant) to be R2,4 million. The plant was
provisionally valued at R600 000.
The business combination was effected through the transfer of R1,5 million
in cash and through the transfer of another investment to the seller. The other
investment was provisionally valued at R300 000.
The non-controlling interests are measured at its proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
By 31
December
20.18 the goodwill arising from the business combination at 1 December

20.18 was provisionally calculated as follows:
Consideration transferred (R1,5 million + R300 000)
1 800 000
Non-controlling interests [45% × (R2,4 million + R600 000)]
1 350 000
3 150 000
Less: Net identifiable assets acquired (R2,4 million + R600 000) (3 000 000)
Goodwill (provisional)
R150 000
During March 20.19 P Ltd obtained the final valuation reports from an
expert. The fair value of plant on 1 December 20.18 was R650 000, while
the fair value of the investment transferred was R290 000. Furthermore, P
Ltd did not identify any additional assets acquired or liabilities assumed as at
1 December 20.18.
31
Chapter 9
The final goodwill from the business combinations at 1 December 20.18 will
be calculated as follows:
Consideration transferred (R1,5 million + R290 000)
1 790 000
Non-controlling interests [45% × (R2,4 million + R650 000)]
1 372 500
3 162 500
Less: Net identifiable assets acquired (R2,4 million + R650 000) (3 050 000)
Goodwill (final)
R112 500
The amount for goodwill, as presented in the consolidated statement of

financial position as at 31 December 20.18, will therefore be retrospectively
adjusted by R37 500
(i.e. R150 000 – R112 500) to reflect the true goodwill of R112 500 as at the
date of the acquisition (1 December 20.18).
The consolidation journal will be as follows:
Dr
Cr
1 December 20.18

3 000 000
Goodwill (SFP) (balancing)
150 000
1 350 000
1 800 000
At acquisition elimination journal of S Ltd
The provisional amounts used for the valuation of the plant and the
investment transferred will be retrospectively adjusted to the final valuation
amounts in the subsequent financial period. Consolidation journals are
repeated every year and therefore the final valuation amounts will be used
in the 20.19 elimination journal.
Dr
Cr
31 December 20.19
3 050 000
112 500
1 372 500
1 790 000
Measurement period adjustment – Non-controlling interests
Example 9.19
measured at proportionate share
P Ltd acquired an 80% interest in S Ltd on 1 December 20.15 for R1 750

000. From that date P Ltd had control over S Ltd as per the definition of
control in accordance with IFRS 10. The net assets (excluding machinery) of
S Ltd had a fair value of R1,5 million.
At that date the machinery of S Ltd had a remaining useful life of five years
and carrying amount of R500 000. P Ltd sought an independent appraisal for
the machinery owned by S Ltd, which was only finalised during March
20.16. Initially the value of the 32
IFRS 3 Business combinations – Advanced aspects machinery was estimated

at R600 000, but the appraisal indicated a fair value of R675 000 (the
difference in fair value related to circumstances that existed at acquisition
date). The financial statements of P Ltd for the reporting period ended 31
December 20.15 were issued on 28 February 20.16.
The non-controlling interests are measured at their proportionate share of S

Ltd’s identifiable net assets.

When preparing the consolidated financial statements for the reporting
period ended 31 December 20.15, a value of R600 000 will be assigned to
the machinery.
The consolidation journals for 20.15 will be as follows:
Dr
Cr
J1 Machinery
(SFP)
(600 000 – 500 000) 100
000
100 000
Remeasurement of machinery to provisional fair
value
J2
Equity at acquisition (SCE) (1 500 000 + 600 000)
2 100 000
70 000
(2 100 000 × 20%) 420
000
1 750 000
Elimination of investment against equity at
acquisition
J3 Depreciation
(P/L)
(100 000/5 × 1/12) 1
667
1 667
Additional depreciation for 20.15 due to fair value
remeasurement
J4
Non-controlling interests (SCE/SFP) (1 667 × 20%)
333
Non-controlling interests (P/L)
333
Non-controlling interests in additional depreciation
for 20.15
The provisional amount used for the machinery will be corrected in the
20.16 financial statements by means of a retrospective adjustment, as the
amount is finalised within 12 months from the acquisition date.
The consolidation journal entries for 20.16 will therefore be as follows: Dr
Cr
J1 Machinery
(SFP) (675 000 – 500 000) 175
000
175 000
Remeasurement of machinery to final fair value
continued
33
Chapter 9
Dr
Cr
R
R
J2
2 175 000
10 000
Non-controlling interests (SCE/SFP) (2 175 000 × 20%)
435 000
1 750 000
acquisition
J3
Retained earnings (SCE) (175 000/5 × 1/12) 2
917
2 917
remeasurement
J4
Non-controlling interests (SCE/SFP) (2 917 × 20%) 583
Retained earnings (SCE)
583
for 20.15
J5
Depreciation for 20.16 (P/L) (175 000/5) 35
000
35 000
remeasurement
J6
000
Non-controlling interests for 20.16 (P/L)
7 000
for 20.16
Measurement-period adjustment – Non-controlling interests

Example 9.20
measured at fair value
P Ltd acquired an 80% interest in S Ltd on 1 December 20.15 for R1 750

000. From that date P Ltd had control over S Ltd as per the definition of
control in accordance with IFRS 10. The net assets (excluding machinery) of
S Ltd had a fair value of R1 500 000.
At that date the machinery of S Ltd had a remaining useful life of five years
and carrying amount of R500 000. P Ltd sought an independent appraisal for
the machinery owned by S Ltd, which was only finalised during March
20.16. Initially the value of the plant was estimated at R600 000, but the
appraisal indicated a fair value of R675 000 (the difference in fair value
related to circumstances that existed at acquisition date).
The financial statements of P Ltd for the reporting period ended 31

December 20.15
were issued on 28 February 20.16.
The non-controlling interests at acquisition date are measured at a fair value

of R440 000.
When preparing the consolidated financial statements for the year ended 31
December 20.15, a value of R600 000 will be allocated to the plant.
34
IFRS 3 Business combinations – Advanced aspects The consolidation

journals for 20.15 will be as follows:
Dr
Cr
J1 Machinery
(SFP)
(600 000 – 500 000) 100
000
100 000
Remeasurement of machinery to provisional fair
value
J2
2 100 000
90 000
440 000
1 750 000
acquisition
J3 Depreciation
(P/L)
(100 000/5 × 1/12) 1
667
1 667
remeasurement
J4
Non-controlling interests (SCE/SFP) (1 667 × 20%)
333
333
for 20.15
The provisional amount used for the machinery will be corrected in the
20.16 financial statements by means of a retrospective adjustment, as the
amount is finalised within 12 months from the acquisition date.
The consolidation journal entries for 20.16 will therefore be as follows: Dr

Cr
J1 Machinery
(SFP) (675 000 – 500 000) 175
000
175 000
Remeasurement of machinery to final fair value
J2
2 175 000
15 000
440 000
1 750 000
acquisition
J3
Retained earnings (SCE) (175 000/5 × 1/12) 2
917
2 917
remeasurement
continued
35
Chapter 9
Dr
Cr
J4
583
for 20.15
J5
Depreciation for 20.16 (P/L) (175 000/5) 35
000
35 000
remeasurement
J6
000
Non-controlling interests for 20.16 (P/L)
7 000
Non-controlling
interests
in additional depreciation
for 20.16
Comment
The pro forma fair value remeasurement and elimination journal entries
(Journal 1 and 2) could also have been combined into one journal:
Dr
Cr
R
1 December 20.15
Machinery (SFP)
175 000
2 000 000
15 000
1 750 000
Non-controlling interests (SFP/SCE)
440 000
Elimination journal entry at acquisition
Question 9.1
P Ltd is a new company listed on the JSE Limited. The company primarily
invests in a number of diversified subsidiaries. All the companies in the
group have a 30 September reporting period. P Ltd acquired an 87% holding
in S Ltd on 1 October 20.19 from X Ltd. From that date P Ltd had control
over S Ltd as per the definition of control in accordance with IFRS 10. The
purchase agreement stipulated that the 87% interest in S Ltd must be settled
as follows:
l A cash payment of R12 million was made to X Ltd on 1 October 20.19.
l An amount of R30 million will be paid to X Ltd on 30 September 20.25.
l P Ltd transferred land to X Ltd. The land has a fair value of R50 million
and a carrying amount of R42 million on 1 October 20.19. The fair value
increased to R55 million on 15 October 20.19 when transfer was formally
registered with the Deeds Office.
36
IFRS 3 Business combinations – Advanced aspects l An additional amount

of R10 million will be paid in cash to X Ltd on 31 March 20.23
if the profits generated by S
Ltd during the period 1 October
20.19 to
31 March 20.23, increase by 150% above the current level. The probability
of this at 1 October 20.19 is 45%. The fair value of this obligation, taking
into account the probability and time value of money, is R3 198 066.
l P Ltd issued 200 000 call options on its own shares to X Ltd on 1 October
20.19.
The options entitle X Ltd to take up 200 000 ordinary shares in P Ltd on 30
September 20.20 at an exercise price of R7 per share. If the share price of P
Ltd drops before or on 31 March 20.20, additional options will be issued to
X Ltd in order to maintain the original value of the options issued.
l An amount of R100 000 was paid to an attorney for the valuation of S Ltd’s
assets.
These costs were included in the cash amount of R12 million paid by P Ltd.
The abridged statement of financial position of S Ltd as at 1 October 20.19

was as follows:
Equity
Share capital (10 000 000 shares)
5 000 000
Reserves
55 957 000
Total equity
R60 957 000
The net asset value of S Ltd is considered to be fairly valued with the
exception of the following:
l S Ltd has owner-occupied property, consisting of land and buildings, with

the following relevant information on the 1 October 20.19:
Carrying
Fair
Residual
Cost
amount
value
value
Land
R19 million
R19 million
R25 million
Buildings
R32 million
R28 million
R44 million
R36 million
It is the accounting policy of both P Ltd and S Ltd to account for property,
plant and equipment using the cost price model in accordance with IAS 16
Property, Plant and Equipment.
l At acquisition S Ltd is facing legal action from Y Ltd due to a deal that
went sour.
The amount of the claim is R5 million. The legal advisors of S Ltd are of the
opinion that there is a 30% chance that the claimant will be successful with
its case. After talks with their legal team S Ltd is contemplating taking out
insurance to cover the claim. An independent insurer has quoted a once-off
premium of R750 000. The SARS will not allow any deductions relating to
the claim or the once-off premium.
l The success of S Ltd is largely due to its workforce. Their staff has been
trained by the best to be the best. P Ltd has taken note of this, and it is as a
crucial reason for acquiring S Ltd. S Ltd has determined that to replace their
current workforce would cost R6 million (P Ltd accept this as the fair value).
l Another reason why P Ltd was interested in S Ltd is their huge customer
data base. The attorney determined the fair value of the customer data base
at R5 million. It can be assumed that customer data bases are frequently
exchanged.
S Ltd has signed confidentiality agreements with all its customers preventing
them from exchanging information with third parties.
37
Chapter 9
Additional information
l Unless stated otherwise, assume a fair pre-tax market-related rate of 10%

per annum, compounded annually.
l P Ltd elected to measure non-controlling interests at fair value on

acquisition date.
l P Ltd recognised the equity investment in S Ltd in its separate records

using the cost price method.
l Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
l The following information relates to P Ltd:
Fair value of P Ltd shares (per share)
1 October 20.19
R15
31 March 20.20
R14,20
Fair value of call options to X Ltd (per option)
1 October 20.19
R6
31 March 20.20
R5,30
l The following information relates to S Ltd:
Fair value of S Ltd shares (per share)
1 October 20.19
R9
Required
(a) Prepare the journal entry to account for the acquisition of S Ltd, as
required in the separate financial statements of P Ltd on 1 October 20.19, in
accordance with IFRS 3 Business Combinations.
(b) Prepare the at acquisition consolidation journal entry that is required on 1

October 20.19, in order to include S Ltd in the consolidated financial
statements of the P Ltd Group. Journals should also include applicable items
which have no value and deferred tax calculation for applicable items.
Round off to the nearest rand.
Suggested solution 9.1
(a) Journal entry in the separate financial statements of P Ltd Dr
Cr
1 October 20.19
Investment in S Ltd (SFP) (balancing) 83 232
284
Valuation expenses (P/L)

100 000
Bank (SFP)
12 000 000
Liability (SFP) (C1)
16 934 218
Land (SFP)
42 000 000
Gain on land transferred (P/L)
8 000 000
Contingent consideration liability (SFP)
3 198 066
Options (SCE) (C2)
1 200 000
Recognise the acquisition of S Ltd
38
Comment
The consideration transferred may include assets of the acquirer that have
carrying amounts that differ from their fair values at the acquisition date. If
so, the acquirer shall remeasure the transferred assets or liabilities to their
fair values and recognise the resulting gains or losses in profit or loss.
However, sometimes the transferred assets remain within the combined
entity after the business combination and the acquirer therefore retains
control of them. In this situation, the acquirer shall measure those assets at
their carrying amounts immediately before the acquisition date and shall not
recognise a gain or loss.
(b) Consolidation journal entry in the consolidated financial statements

of the P Ltd Group
Dr
Cr
1 October 20.19
Share capital (SCE)
5 000 000
55 957 000
Land (SFP) (C3.1)
6 000 000
Buildings (SFP) (C3.2)
16 000 000
Contingent liability (SFP)
750 000
Intangible asset (SFP) – Workforce

–
Intangible asset (SFP) – Customer data base
Deferred tax (SFP) (C4)
5 600 000
18 325 284
Investment in S Ltd (SFP) (Part (a))
83 232 284
Non-controlling interests (SCE/SFP) (C5)
11 700 000
Calculations
C1 Liability – Deferred settlement
FV=30 000 000; i=10%; n=6; Pmt=0; PV=16 934 218
C2 Equity instrument – Share options
200 000 × 6 = 1 200 000
C3 Owner-occupied property
Land Building
Fair value 1 October 20.19

25 000 000
44 000 000
Carrying amount 1 October 20.19
19 000 000
28 000 000
Fair value remeasurement
6 000 000
16 000 000
(C3.1)
(C3.2)
39
Chapter 9
C4 Deferred tax
Carrying
Tax
Temporary Deferred tax
amount
base
difference
Land – Fair value

remeasurement
6 000 000
6 000 000
(*)1 344 000
Building – Fair value
remeasurement
Carrying amount to cost
4 000 000
4 000 000
1 120 000
Cost to residual
4 000 000
4 000 000
(*)896 000
Above residual
8 000 000
–
8 000 000
2 240 000
16 000 000
16 000 000
4 256 000
Contingent liability
750 000
750 000
5 600 000
(*) Will be realised at the capital gains tax rate
C5 Non-controlling interests
10 000 000 × 13% × 9 = 11 700 000
40
10
IFRS 10
Consolidated financial statements
– Control
Introduction
10.1
Overview of the topic ...............................................................................
43
10.2 Investment
entities
...................................................................................
43
Example
10.1:
Investment entities ..........................................................
45
Control
...............................................................................................................
45
10.3
Purpose and design of the investee .........................................................
46
Example 10.2:
Purpose and design of the investee ................................
47
10.4
Power of an investee ...............................................................................

47
Example
10.3:
Substantive rights ............................................................ 49
Example
10.4:
Protective rights ..............................................................
50
Example 10.5:
Majority of voting rights without power ............................
51
Example 10.6:
Power without a majority of voting rights .........................
52
Example
10.7;
Potential
voting rights ......................................................
53
10.5
Exposure to variable returns from an investee ........................................
54
10.6
Link between power and variable returns ................................................
54
Example 10.8:
Investor acting as agent or principal ................................
55
10.7
Unconsolidated structured entities ...........................................................
56
10.8
Summary of control assessment ..............................................................
56
Question 10.1
........................................................................................................
57
41
IFRS 10 Consolidated financial statements – Control
Introduction
The objective of IFRS 10 Consolidated Financial Statements is to

establish principles for the presentation and preparation of consolidated
financial statements.
To meet the above objective, the standard:
l requires a parent entity to present consolidated financial statements; l

defines the principle of control, and establishes control as the basis for
consolidation;
l set out how to apply the principle of control to identify whether an investor
controls an investee and therefore must consolidate the investee;
l sets out the accounting requirements for the preparation of consolidated

financial statements; and
l defines an investment entity and sets out an exception to consolidating

particular subsidiaries of an investment entity.
The presentation and preparation of consolidated financial statements are

dealt with in Volume 1, chapter 1 and chapter 3 to 8, respectively.
Investment entities will be briefly dealt with under chapter 10.2 below and
the principles of control will be summarised and illustrated in the remainder
of this chapter. IFRS 10 contains detailed guidance for the application of the
principles of control and should also be consulted.
The definition and principle of control is also important when applying

IFRS 3 Business Combinations as a business combination is defined in
IFRS 3 as a transaction or other event in which an acquirer obtains control of
one or more businesses. The business combination definition thus comprises
mainly two core aspects, namely “control” and
“business”. Although “business” is defined in IFRS 3, control is only

addressed in IFRS 10.
10.2 Investment
entities
IFRS 10 specifically states that investment entities are excluded from the
requirement to prepare consolidated financial statements. Investment entities
are defined as an entity that:
l obtains funds from one or more investors for the purpose of providing
those investor(s) with investment management services;
l commits to its investor(s) that its business purpose is to invest funds solely
for capital appreciation, investment income, or both; and
l measures and evaluates the performance of substantially all of its

investments on a fair value basis.
Investment entities also have the following typical characteristics that should
be considered when assessing if an entity is an investment entity: l the entity
has more than one investment;
l the entity has more than one investor;
l the entity has investors that are not related parties of the entity; and l the
entity has ownership interests in the form of equity or similar interests.
43
Chapter 10
If an entity is classified based on the above definition and typical

characteristics as an investment entity:
l the entity is not required to assess control in terms of IFRS 10; l the entity
is not required to apply IFRS 3 Business Combinations; and l the entity is
not required to consolidate its subsidiaries.
Instead the entity will measure their investments in subsidiaries at fair value
through profit or loss in accordance with IFRS 9 Financial Instruments.
If the circumstances and facts indicate that there were changes to one or
more of the elements that make up the definition of an investment entity, or
to the typical characteristics of an investment entity, the investor should
reconsider the investment entity classification. Any change in the status of
the investment entity classification shall be accounted for prospectively from
the date at which the change in status occurred.
IFRS 12 requires an investment entity to disclosure the following: l the fact

that the entity is classified as an investment entity; l significant judgements
and assumptions the entity has made in determining that it is an investment
entity;
l if the investment entity does not have one or more of the typical
characteristics of an investment entity, it shall disclose its reasons for
concluding that it is nevertheless an investment entity;
l for each unconsolidated subsidiary:
• the subsidiary’s name;
• the principal place of business (and country of incorporation if different

from the principal place of business) of the subsidiary; and
• the proportion of ownership interest held by the investment entity and, if

different, the proportion of voting rights held;
l the nature and extent of any significant restrictions on the ability of an

unconsolidated subsidiary to transfer funds to the investment; l any current
commitments or intentions to provide financial or other support to an
unconsolidated subsidiary;
l if, during the reporting period, an investment entity or any of its

subsidiaries has, without having a contractual obligation to do so, provided
financial or other support to an unconsolidated subsidiary the entity shall
disclose:
• the type and amount of support provided to each unconsolidated

subsidiary; and
• the reasons for providing the support;
l the terms of any contractual arrangements that could require the entity or
its unconsolidated subsidiaries to provide financial support to an
unconsolidated, controlled, structured entity, including events or
circumstances that could expose the reporting entity to a loss;
l if during the reporting period an investment entity or any of its

unconsolidated subsidiaries has, without having a contractual obligation to
do so, provided financial or other support to an unconsolidated, structured
entity that the investment entity did not control, and if that provision of
support resulted in the investment entity controlling the structured entity, the
investment entity shall disclose an explanation of the relevant factors in
reaching the decision to provide that support.
44
Example 10.1
Investment entities
P Ltd was established to manage retirement funds of various public and

private sector pension funds. The company has two main investors being the
Government Pension Fund and Invest Pension Fund. P Ltd prepares
quarterly reports which are sent to investors and used internally to measure
performance. These reports typically include information about the return on
investment and fair value movements of the investments made by P Ltd. The
commission earned by P Ltd is also based on the quarterly reports. P Ltd’s
investments consist mainly of equity investments of various local companies
listed on the JSE Ltd. For one of these equity investments, S Ltd, P Ltd
holds a 62% controlling interest.
P Ltd was established to manage retirement funds. P Ltd also uses fair value
measurement to gauge their performance and invests in various local
companies. P Ltd has more than one investment, more than one investor, it
does not appear if the parties are related and P Ltd invests in equity. P Ltd
therefore meets the definition of an investment entity.
P Ltd shall thus not consolidate S Ltd, but will instead measure the
investment in a subsidiary at fair value through profit or loss in accordance
with IFRS 9 Financial Instruments.
Comment
IFRS 10.B85A–.B85W provides detail guidance on the assessment of an
investment entity.
Control
In terms of IFRS 10 Consolidated Financial Statements an entity that is a

parent shall present consolidated financial statements. A parent is defined as
an entity that controls one or more entities. Therefore, an investor, regardless
of the nature of its involvement with the investee, shall determine whether it
is a parent by assessing whether it controls the investee. An investor
controls an investee when the investor is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee (IFRS 10
Appendix A). The definition can be illustrated as follows: Link
between
Exposure to
Power
power and
Control
variable returns
(chapter 10.4)
returns
(chapter 10.5)
(chapter 10.6)
Taking into account the purpose and design of the investee (chapter 10.3)
45
Chapter 10
Comment
It is important to note that all three elements of control must be present in a

scenario before control over an investee can be achieved. If any one of the
elements are not satisfied, the control assessment can be ceased because
control is not present.
An investor should continuously assess if it still controls an investee. If the

circumstances and facts indicate that there were changes to one or more of
the three elements of control, as indicated above, the investor should
consider if control over an investee was perhaps obtained or lost.
Comment
It may even happen that an investor gains or loses power over an investee
without any action taken by the investor. For example, an investor can gain
power over an investee because decision-making rights held by another party
or parties that previously prevented the investor from controlling an investee
have lapsed.
Two or more investors cannot jointly be regarded as the parent of an

investee. If two or more investors collectively control (act together to direct
the relevant activities) an investee, none of the investors individually
controls the investee. Each investor would account for its interest in the
investee in accordance with other relevant IFRSs, such as IFRS 11 Joint
Arrangements, IAS 28 Investments in Associates and Joint Ventures or
IFRS 9 Financial Instruments.
10.3 Purpose and design of the investee
The purpose and design of the investee impacts the determination of control.
Although the purpose and design of the investee is not an element of the
control definition, it is the primary consideration when accessing control. An
investor shall consider the purpose and design of the investee in order to
identify:
l the
relevant
activities;
l how decisions about the relevant activities are made;
l who has the current ability to direct those activities; and l who receives
returns from those activities.
Comment
The assessment may be straightforward, for example if an investee, in the

absence of additional arrangements that alter decision-making, is controlled
by means of equity instruments for instance shares. The equity instruments
give the holder proportionate voting rights. The party who is able to exercise
voting rights sufficient to determine the investee’s operating and financing
policies will control the investee and should therefore prepare consolidated
financial statements. In other cases the assessment may be more complex
and the other elements of control should also be considered in assessing
control.
46
Example 10.2
Purpose and design of the investee
S Ltd was incorporated exclusively to manage the debtors of a commercial

bank, P Ltd.
The only assets of S Ltd are the debtors. When the purpose and design of S
Ltd are considered, it is determined that the only relevant activity is
managing the debtors upon default. The party that has the ability to manage
the defaulting debtors has power over S Ltd, irrespective of whether any of
the debtors are currently recoverable or not.
10.4 Power of an investee

The assessment of power can be explained by the following decision tree:
The investor has power
over the investee
Identify the
relevant
Yes
activities of the
investee.
Does the
Are the voting
The investor
How are the
investor hold
Through voting
Yes rights substantive No
does not
more than ½
relevant
rights
and not merely
control the
activities of the
of the voting
protective?
investee
investee
rights?
directed?
No
Yes
Is there a contractual arrangement with other
investors? Or
Through a
Is there a contractual arrangement to direct
contractual
relevant activities? Or
agreeement
Does voting rights provide the investor the
practical ability to direct the relevant activites
unilaterally? Or
Are there potential voting rights to consider?

An investor has power over an investee when the investor has existing
rights that give it the current ability to direct the relevant activities
(activities that significantly affect the investee’s returns) of the investee.
1 Existing
rights
Power arises from rights. The rights that may give an investor power can
differ between investees. Rights that, either individually or in combination,
can give an investor power include:
l voting rights or potential voting rights of an investee; l rights to appoint,

reassign or remove members of an investee’s key management personnel
who have the ability to direct the relevant activities; l rights to appoint or
remove another entity that directs the relevant activities; l rights to direct the
investee to enter into, or veto any changes to transactions for the benefit of
the investor; and
l other rights for instance decision-making rights specified in a management

contract that give the holder the ability to direct the relevant activities.
In the absence of additional arrangements that alter decision-making, control

is simply determined by voting rights. The party that is able to exercise
voting rights (power) sufficient to determine the investee’s operating and
financial policies (relevant activities), controls the investee.
47
Chapter 10
Comment
Refer to chapter 1 (Volume 1) for examples of different group structures.
For the purpose of assessing power, an investor shall only consider

substantive rights and rights that are not protective (refer to point 3 and 4
respectively, below).
2 Relevant
activities
It is important to note that the investor should have control over the relevant
activities of the investee. IFRS 10 defines relevant activities, as activities of
the investee that significantly affect the investee’s returns. This implies that
the investor, who ultimately can direct the relevant activities, would control
the investee. Activities that, depending on the circumstances, can be relevant
activities include:
l selling and purchasing of goods or services;
l managing financial assets during their life;
l selecting, acquiring or disposing of assets;
l researching and developing new products or processes; and l determining a

funding structure or obtaining funding.
Comment
Refer to example 10.4 and 10.5 for examples of relevant activities.
3 Substantive
rights
An investor’s rights over an investee’s relevant activities should be

considered when assessing control. Only substantive rights may lead to
control. A right is substantive when the holder of the right has the practical
ability to exercise that right relating to an investee. The investor should also
consider the nature of the investee’s relationship with other parties when
determining if the rights are substantive. Factors that could impact if a right
is substantive or not include:
l Whether there are any barriers that prevent the holder from exercising the
rights, for example, financial penalties that would prevent or deter the holder
from exercising its rights.
l When the exercise of rights requires the agreement of more than one party,
or when the rights are held by more than one party, whether a mechanism is
in place that provides those parties with the practical ability to exercise their
rights collectively if they choose to do so. The lack of such a mechanism is
an indicator that the rights may not be substantive. The more parties that are
required to agree to exercise the rights, the less likely it is that those rights
are substantive.
l Whether the party or parties that hold the rights would benefit from the
exercise of those rights, for example, the holder of potential voting rights in
an investee shall consider the exercise or conversion price of the instrument.
To be substantive, rights also need to be exercisable when decisions about

the direction of the relevant activities need to be made. Usually, to be
substantive, the rights need to be currently exercisable, However, sometimes
rights can be substantive, even though the rights are not currently
exercisable.
48
Comment
Potential voting rights (refer below) are also only considered when those
rights are substantive.
Example 10.3
Substantive rights
On 1 April 20.18 P Ltd acquired an option to acquire the majority of shares

in S Ltd. The option will be settled on 25 April 20.18. In terms of S Ltd’s
memorandum of incorporation, policies over the relevant activities can be
changed only at special or scheduled shareholders’ meetings. This includes
the approval of material sales of assets as well as the making or disposing of
significant investments. The next scheduled shareholders’ meeting is in three
months. Shareholders that individually or collectively hold at least 5% of the
voting rights can call a special meeting to change the existing policies over
the relevant activities, but a requirement to give notice to the other
shareholders means that such a meeting cannot be held for at least 30 days.
P Ltd is considered to have the practical ability to settle the option. The
option will only be settled in 25 days. However, the existing shareholders are
unable to change the existing policies over the relevant activities because a
special meeting cannot be held for at least 30 days, at which point the option
will have been settled. There are also no barriers preventing P Ltd from
settling the option.
On 1 April 20.18 P Ltd’s option is a substantive right that gives P Ltd the
current ability to direct the relevant activities even before the option is
settled. Therefore, P Ltd has rights that are essentially equivalent to the
majority shareholder in S Ltd.
Comment
If however the exercise price of the option is substantively more than the
current share price of S Ltd, the option would not be a substantive right as P
Ltd would not benefit from exercising the right.
4 Protective
rights
Substantive rights exercisable by other parties can prevent an investor from

controlling the investee to which those rights relate. As long as the rights are
not merely protective, substantive rights held by other parties may prevent
the investor from controlling the investee even if the rights give the holders
only the current ability to approve or block decisions that relate to the
relevant activities.
IFRS 10 defines protective rights as rights designed to protect the interest of

the party holding those rights without giving that party power over the entity
to which those rights relate. Examples of protective rights include:
l a lender’s right to restrict a borrower from undertaking activities that could

significantly change the credit risk of the borrower to the detriment of the
lender; l the right of a party holding a non-controlling interest in an investee
to approve capital expenditure greater than that required in the ordinary
course of business, or to approve the issue of equity or debt instruments;
l the right of a lender to seize the assets of a borrower if the borrower fails to
meet specified loan repayment conditions.
49
Chapter 10
Example 10.4
Protective rights
P Ltd holds a 55% interest in S Ltd and another shareholder B Ltd holds the
remaining 45%. The shareholders agreement between P Ltd and B Ltd states
that B Ltd is responsible for the day to day running of S Ltd and approval
from P Ltd will only be required if S Ltd required additional funding. The
terms of the shareholders agreement can only be changed with the approval
of both parties.
P Ltd holds more than half of the voting rights of S Ltd. P Ltd has the right
to restrict S Ltd from undertaking activities that could significantly change
the credit risk (through additional funding) of S Ltd to the detriment of P
Ltd. Another entity, B Ltd, has existing rights that provide them with the
right to direct the relevant activities of S Ltd. P Ltd can also not change the
shareholders agreement without the approval of B Ltd. Thus although P Ltd
holds the majority of the voting rights of S Ltd, it only holds protective
rights and does not have power over S Ltd.
Comment
Because protective rights are designed to protect the interests of their holder
without giving that party power over the investee to whom those rights
relate, an investor that holds only protective rights cannot have power or
prevent another party from having power over an investee.
The difference between substantive rights and protective rights is important

and often confused. The difference can be summarised as follows:
5 Franchises
A franchise agreement for which the investee is the franchisee often gives
the franchisor rights that are designed to protect the franchise brand.
Franchise agreements typically also give franchisors some decision-making
rights with respect to the operations of the franchisee.
However, it is necessary to distinguish between having the current ability to

make decisions that significantly affect the franchisee’s returns and having
the ability to make 50
IFRS 10 Consolidated financial statements – Control decisions that protect

the franchise brand. The franchisor does not have power over the franchisee
if other parties have existing rights that give them the current ability to direct
the relevant activities of the franchisee. For example, the shareholders of an
investee will have power over the business (relevant activities) of the
franchisee and run the business to maximise profits. In doing so, the
franchisee will have to follow some rules meant to protect the franchise
brand in terms of the franchise agreement.
6 Power through majority of voting rights
An investor has power over an investee if the following requirements are

met: l the
investor
holds
more than half of the voting rights of an investee; l the voting rights are
substantive; and
l voting
rights
direct the relevant activities (refer to chapter 10.4, point 2) of the investee
or the voting right may appoint the majority of the executive management of
the investee.
Example 10.5
Majority of voting rights without power
S Ltd was incorporated by the local municipality to install prepaid water and
electricity meters at residential properties. P Ltd, a manufacturer of prepaid
water and electricity meters acquired a 60% interest in S Ltd from the
municipality. The shareholders agreement between the municipality and P
Ltd stipulates the following terms: l Each share entitles the holder to one
vote.
l The board of directors will comprise of two nominees of P Ltd and the
municipality each.
l S Ltd will purchase all the meters from P Ltd at a fixed price. The fixed
price can only be changed with the approval of the municipality.
l The municipality will determine the selling and installation price of the
meters.
In general P Ltd will be regarded as having power over S Ltd, as P Ltd own
60% (each share entitle the holder to one vote) of the total voting rights,
which constitutes the majority of the voting rights. However, although P Ltd
owns the majority of the voting rights, the shareholders agreement stipulate
the municipality will determine the selling and installation price of the
prepaid meters and will have to approve any change into the input cost of S
Ltd’s inventory. These activities are deemed to be the relevant activities, as
they significantly affect the returns of S Ltd; therefore, the relevant activities
are directed by the municipality through the shareholders agreement. P Ltd
does not have the power of S Ltd as it does not have the power to direct the
relevant activities that significantly affects the returns of S Ltd.
Comment
Power over the investee can therefore not be automatically assumed if the
investor merely owns more than 50% of the shares in an investee. Other
factors should also be considered to determine control over an investee.
51
Chapter 10
7 Power without a majority of voting rights ( de facto power) An investor

can have power with less than a majority of the voting rights of an investee,
for example, through:
l a contractual arrangement between the investor and other vote holders, for
example a contractual arrangement might ensure that the investor can direct
enough other vote holders on how to vote to enable the investor to make
decisions about the relevant activities;
l rights arising from other contractual arrangements, for example a
contractual arrangement in combination with voting rights may be sufficient
to give an investor the current ability to direct the relevant activities of the
investees; l voting rights, if the voting rights provides the investor the
practical ability to direct the relevant activities unilaterally; or
l potential voting rights (refer to point 8 below); or
l a combination of the above.
When assessing whether an investor’s voting rights are sufficient to give it

power, all facts and circumstances should be considered. The size of the
investor’s holding of voting rights relative to the size and dispersion of
holdings of the other vote holders is important, as the more voting rights an
investor holds, the more likely the investor is to have existing rights enabling
it to direct relevant activities. An investor is also more likely to have the
current ability to direct relevant activities, where a lot of parties are needed
to act together to outvote the investor.
Example 10.6
Power without a majority of voting rights
S Ltd has 1 million shares in issue and each ordinary share entitles the holder
to one vote at shareholders’ meetings. S Ltd’s operating and financial
policies are determined by the company’s Board of Directors. All the
directors of S Ltd are appointed by the shareholders at annual general
meetings by simple majority vote.
Details of voting rights represented at the annual general meetings of S Ltd’s

shareholders are as follows:
Annual general meeting held on
31 May 20.14
31 May 20.13 31
May
20.12
Voting rights represented,
in person or by proxy
90%
92%
87%
On 1 January 20.15 P Ltd acquired 49% of the shares of S Ltd in the open
market. The remaining shares were widely held by shareholders holding less
than 1% each of the share capital.
The relevant activities of S Ltd are the operational and financial activities of
the company. Changes through the operational and financial policies will
affect the investee’s returns. From the information provided it is evident that
the board of directors make the operating and financial decisions and in turn
they direct the relevant activities of S Ltd. Directors are appointed by the
shareholders by a simple majority vote on shareholder meetings. Therefore,
a majority shareholder vote (>50%) at meetings would enable the
appointment of the directors and implicitly gain power over the relevant
activities of S Ltd. However, no single investor holds the majority of the
voting rights.
52
IFRS 10 Consolidated financial statements – Control Nonetheless, P Ltd’s

shareholding of 49% is significant in relation to the other shareholders and
based on past attendance of the shareholders meetings, P Ltd has
significantly more voting rights than any other vote holder.
Attendance at shareholders’ meetings reveals that during the last three years,
on average no more that 90% of shareholders were present at the shareholder
meetings.
Therefore, any shareholder who holds more than 45% (50% of the 90%
voting rights at a shareholders’ meeting) of the voting rights would be
considered to have the majority vote. As P Ltd acquired 49% of the shares of
S Ltd, P Ltd will be deemed to have power over S Ltd even without holding
the majority of the voting rights.
Comment
IFRS 10.B39–.B46 provides detail guidance on assessing power when the

investor does not own a majority of voting rights.
8 Potential voting rights
Potential voting rights should also be considered in assessing power, if the

rights are substantive (see point 3 above). This will include potential voting
rights of the investee held by the investor or other parties. Potential voting
rights are rights to obtain voting rights of an investee, such as those arising
from convertible instruments, options, or forward contracts.
When considering potential voting rights, an investor shall consider the

purpose and design of the instrument, as well as the purpose and design of
any other involvement with the investee. This includes an assessment of the
various terms and conditions of the instrument as well as the investor’s
apparent expectations, motives and reasons for agreeing to those terms and
conditions.
Example 10.7
Potential voting rights
P Ltd owns 42% of the issued share capital of S Ltd. S Ltd issued share
capital consist of 1 000 shares and each share qualifies for one vote. P Ltd
also holds 400 convertible debentures in S Ltd. The convertible debentures
are convertible at any time at the discretion of the holder. Two debentures
are convertible into one share and the debentures are currently convertible.
If the debentures are converted S Ltd’s issued share capital will increase to 1
200
shares and P Ltd’s investment in S Ltd will increase to 620 shares (420
previously owned shares and 200 converted shares). P Ltd will therefore
own 52% (620/1200) of S Ltd.
For that reason, P Ltd has power over S Ltd even though the convertible
debentures have not yet been converted as P Ltd’s potential voting power of
52% constitutes more than half of the total voting power (assuming there are
no other contractual agreements or rights that dictate otherwise).
Comment
When consolidating S Ltd, the present ownership interest should be used to

allocate the equity of S Ltd between the controlling and non-controlling
interests, thus 42% to P Ltd and 58% to the non-controlling shareholders.
53
Chapter 10
10.5 Exposure to variable returns from an investee
The second component of the definition of control is that an investor should

be exposed, or have rights to variable returns from its involvement with the
investee. An investor is exposed to variable (not fixed) returns from its
involvement with the investee when the investor’s returns from its
involvement have the potential to vary as a result of the investee’s
performance. Variable returns can be only positive, only negative or both
positive and negative.
Examples of returns include:
l dividends, other distributions of economic benefits from an investee and

changes in the value of the investor’s investment in that investee; l
remuneration for servicing an investee’s assets or liabilities, fees and
exposure to loss from providing credit or liquidity support, residual interests
in the investee’s assets and liabilities on liquidation of that investee, tax
benefits, and access to future liquidity that an investor has from its
involvement with an investee; l returns that are not available to other interest
holders, for example, an investor might use its assets in combination with the
assets of the investee, such as combining operating functions to achieve cost
savings, sourcing scarce products, limiting some operations or assets, or to
enhance the value of the investor’s other assets.
Comment
Although only one investor can control an investee, more than one party can
share in the returns of an investee, for example, holders of non-controlling
interests can share in the profits or distributions of an investee. The investor
who controls the investee has the power to influence the performance of the
investee (through its decisions regarding the relevant activities) which will
result in variable returns to the controlling investor and other investors.
10.6 Link between power and variable returns
An investor controls an investee if the investor not only has power over the
investee, and exposure to variable returns from its involvement with the
investee, but also has the ability to use its power to use its power to affect
the investor’s returns from its involvement with the investee. There must be
a connection between the power and variable returns.
Agent classification
An investor may use its power over the investee itself, or it may appoint an
agent to exercise its power on its behalf. When an investor with decision-
making rights assesses whether it controls an investee, it shall determine
whether it is a principal or an agent.
An agent is a party that acts on behalf of and for the benefit of another party
namely 54
the principal. The difference between an agent and a principal can be

illustrated as follows:
Power:
Exposure to
Variable returns
Principal
decision-making
variable returns
for own benefit
rights
Variable
Power:
Exposure to
returns for
Agent
decision-making
variable returns
other party's
rights
benefit
Important to note is that a decision-maker is not regarded as an agent simply

because other parties can benefit from the decisions that it makes. An agent
does not control the investee when it exercises its decision-making authority
and therefore will not have to present consolidated financial statements.
Control still lies with the principal on whose behalf the agent is acting.
The agent/principal assessment is crucial for investment managers who

make investment decisions on behalf of investors in exchange for a fee. A
decision-maker should consider their relationship with the investee and other
parties involved with the investee in determining whether the decision-
maker is acting in the capacity of an agent. The following factors should all
be considered in the assessment: l the scope of the decision-maker’s
authority over the investee; l the rights held by other parties;
l the remuneration to which the decision-maker is entitled; and l the

decision-maker’s exposure to variability of returns from other interests that it
holds in the investee.
Comment
IFRS 10 provides detail additional guidance on the factors that should be

considered in accessing agent/principal relationship (IFRS 10.B60–.B72).
Example 10.8
Investor acting as agent or principal
P Ltd, a fund manager markets and manages an investment fund that

provides investment opportunities to a number of investors. P Ltd (decision-
maker) must make decisions in the best interests of all investors and in
accordance with the fund’s governing agreements. Nonetheless, P Ltd has
wide decision-making discretion. P Ltd also receives a market-based fee for
its services equal to 1% of the assets under its management and 20% of all
the fund’s profits if a specified profit level is achieved. The fees are
proportionate to the services provided. P Ltd can also be dismissed by
investors with a majority vote.
P Ltd must make decisions in the best interests of all investors. P Ltd is paid
fixed and performance-related fees that are proportionate to the services
provided. In addition, the remuneration aligns the interests of the fund
manager with those of the other investors (the fund manager’s fee is based
on the fund’s performance). Although P Ltd does have decision-making
powers over the fund, it does so under the governing agreement as set up by
the investors. P Ltd can also be removed as decision-maker by 55
Chapter 10
the investors if they are not satisfied with the fund’s performance. P Ltd is
acting as an agent and therefore does not control the fund.
If P Ltd also has a significant investment in the fund, it can be argued that P
Ltd is exposed to variable returns that may arise from the activities of the
fund. Together with P Ltd’s decision-making authority it may be concluded
that P Ltd does control the fund.
10.7 Unconsolidated structured entities
A structured entity is an entity that has been designed so that voting or

similar rights are not the dominant factor in deciding who controls the entity,
for example when the voting rights relate to administrative tasks only and
the relevant activities are directed by means of contractual arrangements
(IFRS12.B21). An unconsolidated structured entity would therefore be a
structured entity that is not controlled (nor consolidated) by the investor.
Examples of structured entities include securitisation vehicles, asset-backed
financings and some investment funds.
Entities that have an interest in an unconsolidated structured entity shall

disclose information that enables the users of the financial statements to: l
understand the nature and extent of its interest in the unconsolidated
structured entity; and
l evaluate the nature of, and changes, in the risks associated with its interest
in the inconsolidated structured entity.
Comment
Refer to IFRS 12.B21–.B26 for a detailed explanation of unconsolidated

structured entities as well as the disclosure requirements.
10.8 Summary
of
control
assessment
The control assessment can be illustrated as a follows:
56
Question 10.1
Beta Ltd grows coffee beans and supplies coffee beans exclusively to Alpha
Ltd.
Alpha Ltd acquired a 50% shareholding (each share entitles a shareholder to

one vote) in Beta Ltd from Mr B, the sole shareholder.
Mr B and Alpha Ltd signed the purchase agreement on 1 January 20.15. In

terms of the purchase agreement, Alpha Ltd will have the right to appoint
staff and key management personnel of Beta Ltd.
On the date of acquisition, Beta Ltd’s equity consisted of the following:

Ordinary share capital
R150 000
Convertible non-cumulative preference shares
R30 000
Retained earnings
R340 000
The unlisted convertible preference shares were issued on 1 August 20.10
and are mandatorily convertible into 50 000 Beta Ltd ordinary shares on 31
July 20.16. The preference shares are not convertible prior to that date. The
holders of the preference shares do not have voting rights except on matters
that directly affect their rights. The preference shares had a fair value of R1,2
million on 30 September 20.15. The company’s founder, Mr B, has held the
preference shares since 1 August 20.10.
Required
Discuss, with reasons, whether Beta
Ltd is a subsidiary of Alpha
Ltd as at
30 September 20.15.
A subsidiary is an entity that is controlled by another entity (IFRS 10.App

A).
Alpha Ltd, as the investor, has to determine whether it is a parent by

assessing whether it controls the investee, Beta Ltd (IFRS 10.5).
An investor controls an investee when the investor is exposed, or has rights,

to variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee.
Power
An investor has power over an investee when the investor has existing rights
that give it the current ability to direct the relevant activities (IFRS 10.10).
Examples of rights that, either individually or in combination, can give an

investor power include but are not limited to:
(a) rights in the form of voting rights (or potential voting rights of an
investee); and (b) rights to appoint, reassign or remove members of an
investee’s key management personnel who have the ability to direct the
relevant activities (IFRS 10.B15).
Potential voting rights:
When assessing whether Alpha Ltd’s voting rights are sufficient to give it
power over Beta Ltd, all facts and circumstances should be considered,
including potential voting 57
Chapter 10
rights held by others. For a potential voting right to be substantive, the

holder must have the practical ability to exercise that right.
At 30 September 20.15 Mr B held potential voting rights in the form of the

convertible preference shares. However, these were not substantive on 30
September 20.15 as it is not currently exercisable and therefore the
convertible preference shares can be ignored.
Protective voting rights:
In evaluating whether rights give an investor power over an investee, the

investor shall also assess whether its rights, and rights held by others, are
protective rights (IFRS 10.B26).
Because protective rights are designed to protect the interests of their holder
without giving that party power over the investee, an investor that holds only
protective rights cannot have power or prevent another party from having
power over an investee.
Mr B’s preference shares are protective rights as he can only vote on matters
that directly affect his rights as a preference shareholder and are therefore
the preference shares are not included in the assessment of control over Beta
Ltd.
Rights in the form of voting rights:

Alpha Ltd owns 50% of the voting rights of Beta Ltd, which does not
constitute the majority voting rights. Therefore, Alpha Ltd does not have
power over Beta Ltd based on its voting rights alone.
Rights to appoint members of an investee’s key management personnel: An

investor can have power even if it holds less than a majority of the voting
rights of an investee through rights arising from other contractual
arrangements (IFRS 10.B38).
Based on the purchase agreement, Alpha Ltd has a contractual right to

appoint key management personnel.
In light of all of the above, Alpha Ltd does have power over Beta Ltd.
Exposure to variable returns
Alpha Ltd has exposure to variable returns by means of the dividends

received from the shares owned in Beta Ltd.
Link between power and returns
Alpha Ltd has existing rights (voting rights and rights to appoint key
management personnel) through which it is exposed to variable returns
(dividends).
Conclusion
The voting rights and contractual agreement, together with the exposure to
variable returns and the ability to affect the amount of the returns, results in
Alpha Ltd having control over Beta Ltd. Beta Ltd is a subsidiary of Alpha
Ltd.
58
11
Investments in associates
and joint ventures

Introduction
11.1 Background
..............................................................................................
62
11.2 Significant
influence
.................................................................................
62
Accounting for investments in associates in the separate
financial statements of the investor ......................................................
63
Accounting for investments in associates
in the consolidated financial statements of the investor
11.3 Equity
method
..........................................................................................
63
Application of the equity method
11.4
Equity method procedures .......................................................................

65
Example 11.1a: Application of the equity method ......................................
67
Example 11.1b: Fair value adjustment at acquisition date .........................
69
Example
11.2:
Revaluation surplus of an associate ..................................
71
Example 11.3:
Attributable loss of an associate .......................................
76
Example 11.4:
Elimination of unrealised profit in inventories
(investor company sells to associate) ...............................
80
Example 11.5:
(associate sold to investor company) ...............................
86
Example 11.6:
Elimination of unrealised profit in equipment
(investor sells to associate) ..............................................
92
Example 11.7:
(associate sells to investor company) ...............................
98
Example 11.8:
Associates in a horizontal group .......................................
104
Example 11.9:
Investment in an associate which itself is a parent ...........
109
Example 11.10: Investment in associate by a partially-owned subsidiary ..
113
11.5
Classification as held for sale ..................................................................
116
11.6 Impairment
losses
....................................................................................
117
11.7
Discontinuing the use of the equity method .............................................
119
11.8 Disclosure
................................................................................................
119
59
Chapter 11
Piecemeal acquisition of interests in investees
11.9
Changes in ownership interest .................................................................
121
Example 11.11: Piecemeal acquisition whereby the status
of an investment changes to that of an associate
(significant influence is obtained) .....................................
121
Example
11.12:
Acquisition
of
additional interest .......................................
126
Disposal of interests in an investee
Example 11.13: Disposal of the entire interest in an associate
(significant influence is lost)..............................................
130
Example 11.14: Partial disposal of an interest in an associate –
Loss of significant influence (associate becomes
IFRS 9 investment ............................................................
136
Self-assessment questions
Question 11.1 Basic equity accounting/interest received

...................................
140
Question 11.2 Basic equity accounting/reporting dates differ

.............................
145
60
Investments in associates and joint ventures INVESTMENTS IN
ASSOCIATES (IAS 28)
Definitions
Accounting
treatment
Associate
Equity method = Cost + Changes in equity
An entity over which the investor has
since acquisition
significant influence and that is neither a
Cost
subsidiary nor an interest in a joint venture.
l Recognised initially at cost.
Equity method
l Goodwill part of cost of investment.
Investment initially recognised at cost and
l Consider effect of revaluations or fair
adjusted thereafter for the since acquisition
value adjustments.
change in the investor’s share of net assets
l Recognise excess in profit or loss.

of the investee. The profit or loss of the
Changes in equity
investor includes the investor’s share of the
l Recognise share of profit of associate,
profit or loss of the investee. The other
adjust:
comprehensive income of the investor
• depreciation or amortisation;
includes the investor’s share of the other
• cumulative preference dividends;
comprehensive income of the investee.
• intragroup profits and losses.
Significant influence
l Recognise share of other comprehensive
The power to participate in the financial and
income of associate.
operating policy decisions of the investee but
l Consider recognition of impairment loss.
is not control or joint control over those
l Share of losses of associate:

policies.
• carrying amount of the investment
Presume significant influence if investor
limited to Rnil;
holds 20% or more of the voting power.
• include other long-term interests that
Evidenced in the following ways:
will not be settled in foreseeable
l Representation on board of directors;
future;
l Participation in policy-making processes;
• recognise subsequent profits only after
l Material transactions between parties;
they exceed unrecognised losses.
l Interchange of managerial personnel;
l Provision of essential technical
information.
Consider potential voting rights, held by
investor and by other entities, that are
currently exercisable or convertible.

Other issues
Separate financial statements
l Accounting policies – use uniform
An investment in an associate should be
policies.
accounted for as follows:
l Reporting dates – if different:
l Account for investment at cost; or
• associate prepares financial
l In terms of IFRS 9.
statements at investor’s reporting date
or
• if impracticable, use available financial
statements, adjusted for significant
transactions (not more than 3 months’
difference).
l Discontinue equity method – if no longer
significant influence:
• measure retained investment at fair
value; recognise profit or loss;

• account for investment in terms of
IFRS 9.
61
Chapter 11
Introduction
11.1 Background
IAS 28 Investments in associates and joint ventures (issued May 2011)

prescribes the accounting treatment for associates as well as joiint ventures.
Comment
The examples in this chapter refer only to associates, but they would be
equally applicable if the investee was a joint venture, since the equity
method is applied
identically to associates and joint ventures.
An associate is an entity in which the investor has siignificant influence.
From the above definition of an associate, it is clear that significant

influence is an important concept for the identification of an associate. IAS
28.4 defines significant influence as the power to participate in the financial
and operating policy decisions of the investee, but is not control or joint
control of those policies.
11.2 Siignificant influence
If an investor holds, directly or indirectly, through subsidiaries or joint

ventures, 20% or more of the voting power of the investee, it is presumed
that the investor does have significant influence unless it can be clearly
demonstrated that this is not the case.
Conversely, if the investor holds, directly or indirectly, throu ugh

subsidiaries or joint
ventures, less than 20% of the voting power of the investee, it is presumed
that the investor does not have significant influence, unless such influence
can be clearly demonstrated. A substantial or majority ownership by another
investor does not necessarily preclude an investor from having significant
influence.
The existence of significant influence is usually evidenced in one or more

of the following ways:
l representation on the board of directors or equivalent governing body of the

investee; l participation in policy-making processes, includiing participation
in decisions about dividends or other distributions;
l material transactions between the investor and the investee; l interchange of

managerial personnel;
l provision of essential technical information.
Potential voting rights
An entity may own share warrants, share call options, debt or equity
instruments that are convertible into ordinary shares that h
have the pottential, if exercised or converted, to
give the entity additional voting power or reduce another party’s voting
power over the financial and operating policies of another entity, and should
thus be considered in establishing whether an investor has control or
significant influence over an investee (this is called potential voting rights).
All presently exercisable or presently convertible instruments held by the

investor or other shareholders are taken into account when assessing whether
significant influence exists. The combined interests of the parent and the
subsidiaries are considered in assessing significant influence. However, the
interests that joint ventures and 62
Investments in associates and joint ventures
associates in the group hold are not taken into account. Potential voting
rights that are exercisable or convertible only at a future date or only upon
the occurrence of a future event are also not brought into the assessment.
The facts and circumstances surrounding the potential voting rights
instruments should be considered in the assessment. However, the intention
of management and the financial capability to exercise or convert are not
taken into consideration (IAS 28.7–8).
Comment
P Ltd holds 15% of the issued ordinary share capital of A Ltd, but also has
an option to acquire a further 10% of A Ltd’s ordinary share capital. As P
Ltd potentially owns 25% of
the voting rights, it is assumed thatt P Ltd has significant influence over A
Ltd, provided that the option is presently exercisable, resulting in A Ltd
being an associate of P Ltd.
However, when A Ltd’s results, assets and liabilities are equity accounted
for, only the 15% existing interest will be taken into account and not the
potential interest of 25%.
Instruments containing potential voting rights are accounted for as financial

instruments in terms of IFRS 9 Financial Instruments.
Accounting for investments in associates in the separate financial
statements of the investor

An investment in an associate that is included in the separate financial
statements of an investor should be accounted for in accordance with IAS
27.10: l carried at cost; or
l accounted for in accordance with IFRS 9 Financial Instruments.
When an investment in an associate, or a portion thereof, meets the criteria

to be classified as held for sale, it will be accounted for in accordance with
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations .
Any retained portion that has not been classified as held for sale, will be
equity accounted for. After disposal any retained portion will be accounted
for in accordance with IFRS 9 Financial Instruments , unless the retained
interest continues to be an associate, in which case it will still be equity
accounted for.
An investor that has investments in associates ma
ay not issue consolidated financial
statements because it does not have subsidiaries. It is appropriate that such

an investor provide the same information about its investments in associates
as those enterprises that issue consolidated financial statements.
Accounting for investments in associates in the consolidated
financial statements of the investor
11.3 Equity method
An investment in an associate must be accounted for in accordance with the

equity method in the consolidated financial statements, except when (IAS
28.17): l The
exception in IFRS 10 allowing a parent that also has an investment in an

associate not to prepare consolidated financial statements, applies; or 63
Chapter 11
l All four conditions apply, namely:

• the investor is a wholly-owned subsidiary of another entity, or the investor
is a partially-owned subsidiary of another entity and the non-controlling
shareholders have no objection against not applying the equity method; and
• the debt and equity instruments of the investor are not traded in a public
market; and
• the investor is not in the process of filing its financial statements with a
securities commission in order to issue the instruments in a public market;
and
• the ultimate or any intermediate parent of the investor prepares

consolidated financial statements.
l If the investment in an associate is held directly or indirectly by a venture

capital organisation, a mutual fund, a unit trust or similar entity, the entity
may elect to measure the investment at fair value through profit or loss in
accodance with IFRS
9 Financial Instruments . When the entity has an investment in an

associate, a portion of which is held by a venture capital organisation,
mutual fund, unit trust or similar entity, this treatment still applies, regardless
of whether this entity excercises significant influence over that portion of the
investment. If the entity makes this election, the equity method must still be
applied by the entity to the remaining portion of the investment not held by a
venture capital organisation or similar entity.
According to the equity method the investment is initially recorded at cost

and after the date of acquisition, increases or decreases are recorded by
including the following: l the proportionate share of the profit or loss of the
investor in the investee after the date of acquisition;
l distributions received from the investee;
l the portion of prior year adjustments in the investee since the date of
acquisition; and
l adjustments to the carrying amount due to changes to the proportionate

interest of the entity in the investee, flowing from changes to the equity
interest of the investee not included in profit or loss – such as the revaluation
of property, plant and equipment after the acquisition date, which is
recognised in other comprehensive income (IAS 28.10).
The equity method therefore involves the inclusion of only the investment in
the associate in the consolidated statement of financial position and only the
investor’s share of profit and other comprehensive income in the
consolidated statement of profit or loss and other comprehensive income.
The associate’s individual assets, liabilities, income and expenses are not
separately included in the consolidated financial statements.
64
OVERVIEW – APPLICATION OF THE EQUITY METHOD
Equity method procedures
l Goodwill/Gain from a bargain
purchase
l Other comprehensive income
Classification as held for sale
l Contribution of non-monetary asset
l Treatment of reserves
l Cumulative preference shares
Impairment losses
l Reporting dates/Accounting policies
l Losses of an associate
l Intragroup transactions
Discontinuing the equity method
l Deferred tax implications
l Associates in horizontal/vertical
groups
Disclosure
Changes in ownership interest
l Piecemeal acquisition
l Disposal of interest
11.4 Equity method procedures
An investment in an associate is accounted for under the equity method from

the date on which it falls within the definition of an associate. The basic
principles and procedures that apply in the preparation of consolidated
financial statements also apply in the application of the equity method. In
particular, in the application of the equity method:
l an owners’ equity analysis is used as basic calculation; l where necessary,

individual assets and liabilities of the associate are revalued on the
acquisition date;
l the excess of the cost of the investment over the investor’s share in the fair
value of the net assets of the associate on the acquisition date is recognised
as goodwill.
It is however not recognised as a separate asset, but is rather reflected in the

cost of the investment. Goodwill is therefore effectively included in the
carrying amount of the investment;
l the excess of the investor’s share in the fair value of the net assets of the
associate over the cost of the investment on the acquisition date is
recognised as a gain from a bargain purchase. This is done by taking this
gain from a bargain purchase into 65
Chapter 11
account in calculating the share of profit of associate in the period in which

the investment is acquired; and
l unrealised profits or losses on intragroup transactions are eliminated.
1 Goodwill and gain from a bargain purchase on acquisition Where the

purchase price of the shares in an associate exceeds the portion of the
identifiable net assets acquired at fair value, and this is not attributable to a
particular asset(s), it is recorded as goodwill in accordance with IFRS 3
Business Combinations. Conversely, if the portion of identifiable net assets
at fair value exceeds the purchase price of shares in the associate, a gain
from a bargain purchase at acquisition will be recognised.
Goodwill that relates to an associate is included in the carrying amount of

the investment, and is not amortised. As the goodwill is an integral part of
the investment, it cannot be recognised separately, nor assessed separately
for the purposes of recognising impairment. Instead, the entire carrying
amount of the investment should be tested, if there are indications of
impairment.
A gain from a bargain purchase on acquisition is recognised in the profit

or loss section of the statement of profit or loss and other comprehensive
income as part of the share of profit from the associate. The initial
investment is increased by the gain from a bargain purchase at acquisition to
equal the entity’s share of the investee’s net asset value on the date of
acquisition.
Fair value adjustments at acquisition
All the identifiable assets and liabilities of an associate should be measured

at fair value at the date of acquisition (similar to the acquisition of a
subsidiary). If the fair values differ from the carrying amounts, fair value
adjustments will have to be made. These fair value adjustments affect the
carrying amount of assets and liabilities at the acquisition date and
consequentially the amount of goodwill (or gain from a bargain purchase)
recognised.
When fair value adjustments are recognised at acquisition date, the

investee’s profits after acquisition date may need to be adjusted, for
example, additional depreciation may need to be recognised or a profit on
the sale of an asset may need to be adjusted.
2 Other comprehensive income
Not all changes in equity of an associate or joint venture are recognised in

profit or loss.
Some changes, for example revaluations of property, plant and equipment, as

well as fair value adjustments on financial assets subsequently measured at
fair value through other comprehensive income, are recognised in other
comprehensive income. The entity must recognise its share of these changes
in other comprehensive income in its own statement of profit or loss and
other comprehensive income (to the extent that it has not been recognised at
date of acquisition). They must be presented in the line-item share of other
comprehensive income of associate in the consolidated statement of profit
or loss and other comprehensive income (IAS 28.27).
3 Contribution of a non-monetary asset
When an investor contributes a non-monetary asset to an associate in

exchange for an equity interest in that entity, the profit or loss from this
contribution is recognised in the investor’s financial statements only to the
extent of the other investors’ interests in the 66
Investments in associates and joint ventures associate. However, if the

contribution lacks commercial substance and no other assets have been
received, no profit or loss is recognised (IAS 28.30).
When an investor receives, in exchange for its own non-monetary asset, a

monetary or dissimilar non-monetary asset over and above the equity interest
in the associate, the entity will recognise in full in profit or loss the portion
of the gain or loss on the non-monetary contribution relating to those assets
(IAS 28.31).
Example 11.1a
STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Ltd
A Ltd
Group
Profit
188 000
100 000
Dividends received from A Ltd
12 000
Profit before tax
200 000
100 000
Income tax expense

(94 000)
(50 000)
PROFIT FOR THE YEAR
106 000
50 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
R106 000
R50 000
Total comprehensive income attributable to:
Owners of the parent
91 000
50 000
15 000
R106 000
R50 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
Retained
earnings
P Ltd
A Ltd
Group
Balance at 1 January 20.17
79 000
70 000
Changes in equity for 20.17
Dividends
(50 000)
(30 000)
Total comprehensive income for the year:
Profit for the year
91 000
50 000
Balance at 31 December 20.17
R120 000
R90 000
67
Chapter 11
1 On 1 January 20.12, P Ltd acquired a 40% equity interest in A Ltd for R84
000.
Since the acquisition date, P Ltd has exercised significant influence over the
financial and operating decisions of A Ltd. At the date of the acquisition of
the 40%
equity interest in A Ltd, A Ltd had share capital of R195 000. At that stage,
the reserves of A Ltd consisted of retained earnings of R15 000.
2 In the above draft consolidated statement of profit or loss and other

comprehensive income and draft consolidated statements of changes in
equity, the results of A Ltd are accounted for according to the cost method.
Solution 11.1a
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
Profit
188 000
Share of profit of associate
20 000
Profit before tax
208 000
Income tax expense (P)

(94 000)
PROFIT FOR THE YEAR
114 000
R114 000
99 000
15 000
R114 000
P LTD GROUP
EXTRACT FROM CONSOLIDATED STATEMENT OF CHANGES

IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (79 000(P) + 22 000(A))
101 000
Dividends (50
000)
Profit for the year
99 000
Balance at 31 December 20.17 (Test: 120 000(P) + 30 000(A)) R150 000
68
Comment
The investment in the associate will appear in the consolidated statement of

financial position at an amount of R114 000 (84 000 + 30 000) at 31
December 20.17.
Calculations
C1 Analysis of owners’ equitty of A Ltd
P Ltd 40%
Total
At
Since
i At acquisition (01/01/20.12)
Share
capital
195 000
78 000
Retained earnings
15 000
6 000
210 000
84 000
Investment in A Ltd
(84 000)
ii Since acquisition
• To beginning of current year (20.12 – 20.16)
Retained earnings (70 000 – 15 000)
55 000
22 000
• Current year (20.17)
Profit
for the year
50 000
20 000
Dividends
(30 000)
(12 000)
R285 000
R30 000
C2 Pro forma consolidation journal entries
Dr
Cr
J1 Investment in A Ltd (SFP)
42 000
Share of profit of associate (P/L)
20 000
Retained earnings – Beginning of year (SCE)
22 000
J2 Dividend income (P/L)
12 000
Investment in A Ltd (SFP)

12 000
Example 11.1b
Fair value adjustment at acquisition date
Assume the same information as in example 11.1a. All the assets and
liabilities of A Ltd were fairly valued on 1 January 20.12, except for
machinery that was undervalued with R25 000 (after taking into account
28% tax). The machinery had a remaining useful life of eight years.
69
Chapter 11
Solution 11.1b
Calculations
P Ltd 40%
Total
At
Since
Share
capital
195 000
78 000
Retained earnings
15 000
6 000
Revaluation surplus (machinery)
25 000
10 000
235 000
94 000
Investment in A Ltd
(84 000)
Gain
from a bargain purchase
10 000
• To beginning of current year (20.12–20.16)
Retained earnings
(70 000 – 15 000 – (25 000/8 × 5)(depreciation))

39 375
15 750
Profit
for the year (50 000 – (25 000/8))
46 875
18 750
Dividends
(30 000)
(12 000)
R291 250
R22 500
Dr
Cr
10 000

10 000
34 500
18 750
15 750
J3 Dividend income (P/L)
12 000
12 000
Comment
The gain from a bargain purchase was recognised in profit or loss in 20.12
and would therefor impact on the opening balance of retained earnings in
20.17.
The investment in the associate will appear in
n the consolidated statement of financial
position at an amount of R116 500 (84 000 + 10 000 + 22 500) at 31

December 20.17.
70
Investments in associates and joint ventures 4 Treatment of the reserves of

an associate
l Transfers to and from reserves via the statement of changes in equity
of the associate
If a subsidiary makes a transfer to a reserve in the statement of changes in

equity during the current year, it is customary to transfer the portion of the
transfer attributable to the shareholding of the investor to the specific reserve
in the consolidated statement of changes in equity. If an associate makes a
transfer to a reserve, the transfer is treated in a manner similar to transfers
made by subsidiaries. This transfer reflects the fact that the investor
influences the policy and operating decisions of the associate.
l Revaluation of the assets of an associate since acquisition If the assets of

an associate are revalued after the acquisition of the investment, the
attributable portion of the revaluation surplus that is created must be
recognised within other comprehensive income in the consolidated
statements of the investor, and the carrying amount of the investment must
be increased by the amount of the investor’s share in the revaluation surplus
of the associate. The portion of the revaluation that has already been taken
into account in the investor’s original cost of the investment is not taken into
consideration.
Any surplus that was paid on the acquisition date must, as far as possible, be
allocated to the assets of the associate on the date of acquisition. If a
depreciable asset was revalued in this manner, the accompanying adjustment
to the depreciation expense must be set off in the calculation of the share of
profit of the associate. The above treatment is in accordance with the basic
viewpoint that the consolidation process and the equity method are based on
the same procedures and principles.
Example 11.2
Revaluation surplus of an associate
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER

20.17
P Ltd
A Ltd
Group
ASSETS
Property, plant and equipment
250 000
150 000
Investment in A Ltd (40 000 shares at cost)
50 000
Inventories
350 000
140 000
Total assets
R650 000
R290 000
EQUITY AND LIABILITIES
Share capital (250 000/100 000 shares)
250 000
100 000
Retained earnings
300 000
120 000
Other components of equity (revaluation surplus)
– 30
000
50 000
Deferred tax liability
– 20
000
Long-term loans
50 000
20 000
Total equity and liabilities
R650 000
R290 000
71
Chapter 11
STATEMENTS OF PROFIT OR LOSS AND OTHER


P Ltd
A Ltd
Group
Profit
378 000
150 000
Dividends received
4 000
Profit before tax
382 000
150 000
Income tax expense
(152 000)
(60 000)
PROFIT FOR THE YEAR
230 000
90 000
Other comprehensive income
Items that will not be reclassified to profit or loss

Revaluation of land
30 000
Other comprehensive income for the year, net of tax
30 000
R230 000
R120 000
Profit attributable to:
215 000
90 000
15 000
R230 000
R90 000

215 000
120 000
15 000
R230 000
R120 000
Retained
earnings
P Ltd
A Ltd
Group
100 000
40 000
Dividends
(15 000)
(10 000)
Profit for the year
215 000
90 000
R300 000
R120 000
1 On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A

Ltd when the retained earnings of A Ltd amounted to R10 000. Since that
date, P Ltd exercises significant influence over the financial and operating
policy decisions of A Ltd.
2 The revaluation surplus of A Ltd arose on 31 December 20.17 when the

land was revalued.
72
Investments in associates and joint ventures Solution 11.2
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT

31 DECEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment (P)

250 000
Investment in associate (50 000 + 56 000) 106
000
356 000
Current assets
Inventories (P)
350 000
Total assets R706
000
Equity attributable to owners of the parent
Share capital
250 000
Retained earnings 344
000
12 000
606 000
50 000
Total equity
656 000
Non-current liabilities
Long-term loans
50 000
Total equity and liabilities R706
000
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31

DECEMBER 20.17
Profit (P)
378 000
36 000
Profit before tax
414 000
(152 000)
PROFIT FOR THE YEAR

262 000
Share of other comprehensive income of associate
12 000
12 000
R274 000
247 000
15 000
R262 000
259 000
15 000
R274 000
73
Chapter 11
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Revalu-
Non-
Share
Retained
Total
tion
Total
controlling
capital
earnings
equity
surplus
interests
Balance at
1 Jan 20.17
250 000
* 112 000
362 000
35 000
397 000
Changes in
equity for
20.17
Dividends
– (15
000)
– (15
000)
– (15
000)
Total
comprehensive
income for the

year
Profit for the year
– 247
000
247 000
15 000
262 000
Other
comprehensive
income
12 000
12 000
12 000
Balance at
31 Dec 20.17
R250 000 @ R344 000

R12 000 R606 000
R50 000 R656 000
100 000(P) + 12 000 = 112 000
@ Test: 300 000(P) + 44 000(A) = 344 000
Calculations
C1 Analysis of owners’ equity of A Ltd
Total
P Ltd 40%
At
Since
i At acquisition
Share capital
100 000
40 000
Retained earnings
10 000
4 000
110 000
44 000
Investment in A Ltd
(50 000)
Goodwill
(6
000)
• To beginning of current year
Retained
earnings
(40 000 – 10 000)
30 000
12 000
• Current year
Profit for the year
90 000
36 000
Dividends
(10 000)
(4 000)
Revaluation surplus
30 000
12 000
R250 000
R12 000 RS
R44 000 RE
74
Investments in associates and joint ventures C2 Pro forma consolidation

journal entry
Dr
Cr
J1
Investment in A Ltd (SFP)(12 000 + 44 000) 56
000
36 000
(OCI)
12 000
Retained
earnings
– Beginning of year (SCE)
12 000
Dividend income (P/L)
4 000
5 Cumulative preference shares
When applying the equity method, only the income attributable to equity or
ordinary shares is included. Preference shares can be classified either as
equity or as a financial liability. If an associate has issued cumulative
preference shares which are classified as equity, the current dividend payable
on these shares should be deducted when determining the income or loss
attributable to the ordinary shareholders, irrespective of whether such
dividends have been declared. If the preference shares are classified as a
financial liability, the dividends are regarded as interest and would therefore
have already been recognised as an expense in the calculation of the
associate’s profit for the year (IAS 28.37).
6 Reporting dates/Accounting policies
l Non-coterminous year ends
The investor uses the most recent available financial statements of the
associate in applying the equity method; they are usually drawn up to the
same date as the financial statements of the investor.
When financial statements with a different reporting date are used,

adjustments are made for the effects of any significant events or transactions
that occur between the date of the associate’s financial statements and the
date of the investor’s financial statements. The difference may not be more
than three months. When the difference is more than three months, the
associate prepares, for the use of the investor, statements as at the same date
as the financial statements of the investor (IAS 28.33–34).
l Different accounting policies
The investor’s financial statements are usually prepared using uniform

accounting policies for like transactions and events in similar circumstances.
In cases where an associate uses accounting policies other than those
adopted by the investor for like transactions and events in similar
circumstances, appropriate adjustments have to be made to the associate’s
financial statements when they are used by the investor in applying the
equity method (IAS 28.35).
7 Losses of an associate
If an associate suffers a loss during a financial year, the carrying amount of

the investment is reduced according to the equity method by the investor’s
attributable portion of the loss. If the attributable portion of the loss exceeds
the carrying amount of the investment, the write-off must be limited to the
investor’s net investment in the associate.
75
Chapter 11
The investor’s net investment in the associate includes the carrying amount
of the investment in equity and other long-term interests of the associate
such as loans to the associate. However, items for which settlement has been
planned and will take place in the foreseeable future, for instance long-term
loans for which security has been provided and trade payables, are not
included.
If the associate consequently makes a profit, the equity method should only
be resumed as soon as the investor’s attributable portion of the profit
exceeds the losses that were not previously recognised.
If the investor has guaranteed certain of the company’s debts, the possibility
exists that a greater loss may be suffered. In this case, an additional
provision should be created for the amount of the loss. (IAS 28.38–39).
Example 11.3
Attributable loss of an associate

20.17
Ltd
A Ltd
Group
ASSETS
440 000
35 000
Investment in A Ltd – 40 000 ordinary shares at cost
50 000
– 10 000 preference shares at cost
10 000
Inventories
300 000
150 000
Total assets
R800 000
R185 000
400 000
100 000
6% non-redeemable preference shares (20 000 shares)
– 20
000
Retained earnings
300 000
65 000
100 000
Total equity and liabilites
R800 000
R185 000
Ltd
A Ltd
Group
PROFIT FOR THE YEAR
300 000
200 000
R300 000
R200 000
260 000
200 000
40 000
R300 000
R200 000
76
Investments in associates and joint ventures EXTRACT FROM

STATEMENTS OF CHANGES IN EQUITY
Retained
earnings
Ltd
A Ltd
Group
140 000
(135 000)
Dividends (100
000)
Profit for the year
260 000
200 000
R300 000
R65 000
On 1 January 20.13, P Ltd acquired 40% of the issued share capital of A Ltd
when the retained earnings of A Ltd amounted to R25 000. On the same
date, P Ltd also acquired a 50% interest in the 6% non-redeemable non-
cumulative preference share capital at R10 000. Since that date, P Ltd has
exercised significant influence over the financial and operating policy
decisions of A Ltd.
Solution 11.3
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
440 000
Investment in associate (50 000 + 16 000 + 10 000) 76
000
516 000
Current assets
Inventories (P)
300 000
Total assets R816
000
Share capital
400 000
Retained earnings
316 000
716 000
Non-controlling interests 100
000
Total equity
816 000
000
77
Chapter 11
P LTD GROUP
Profit (P)
300 000
76 000
PROFIT FOR THE YEAR
376 000
R376 000
336 000
40 000
R376 000
P LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (140 000(P) – 60 000(A)) 80 000
Dividends
(100 000)
Profit for the year
336 000
Balance at 31 December 20.17 (Test: 300 000(P) + 16 0
000(A))
R316 000
Comment
The carrying amount of the investment is compiled as follows:
l Cost
50 000
l Cumulative since acquisition equity
16 000
• Retained earnings up to beginning of the current year
(60 000)
• Profit for the current year
76 000
l Investment in preference shares
10 000
R76 000
78
Calculations
P Ltd 40%
Total
At
Since
i At acquisition
Share
capital
100 000
40 000
Retained earnings
25 000
10 000
125 000
50 000
Investment in A Ltd
(50 000)
• To beginning of current year:
Retained earnings (135 000 + 25 000)
(160 000)
(64 000)
Correction
(4 000)
4 000
• Current year
Profit
for the year
200 000
80 000
Correction
4 000
(4 000)
R165 000
R16 000
Comment
Take note that P Ltd’s attributable losses up to the beginning of the current
year are
limited to the net investment in A Ltd, namely the cost of R50 000 plus the
investment in preference shares of R10 000. The surplus of R4 000 is
analysed in the “At” column for control purposes.
In the current year, the first R4 000 of the profit is employed against the R4
000
attributable losses that were not recognised in previous years.
Dr
Cr
R
J1 Retained earnings – Beginning of the year (SCE)
60 000
Investment (ordinary shares) (SFP
P)
50 000
Investment (preference shares) (SFP)
10 000
J2 Investment (ordinary shares) (SFP)
66 000
Investment (preference shares) (SFP)
10 000
76 000
8 Intragroup transactions
Unrealised intragroup profits may arise as a result of:
l sales by the investor to the associate, or
l sales by the associate to the investor.
IAS 28.28 requires the elimination of unrealised profits and losses on

intragroup transactions where an associate is one of the parties (similar
manner to that of the elimination of unrealised profits on intragrroup
transactions where a subsidiary is one of 79
Chapter 11
the parties). The difference is however that only the percentage of interest in
the associate must be eliminated. Where an associate is accounted for by use
of the equity method, unrealised profits and losses arising from transactions
between an investor (or its consolidated subsidiaries) and associates should
be eliminated to the extent of the investor’s interest in the associate.
Balances such as receivables, payables, loans to and loans from associates

are not eliminated as the individual line items of the associate are not
reflected in the equity accounted financial statements. Income and expense
items such as interest received, interest paid and management fees items are
also not eliminated.
Where an associate is accounted for by using the equity method, unrealised

profits and losses resulting from upstream and downstream transactions
between an entity (or its consolidated subsidiaries) and associates should be
eliminated to the extent of the entity’s interest in the associate (IAS 28.28).
However, when downstream transactions provide evidence of an impairment
of the transferred asset, the unrealised losses
should be recognised in full by the investor. When upstream transactions

provide evidence of a reduction of an impairment of the transferred asset, the
investor shall recognise its share in the losses (IAS 28.29).
Example 11.4
(investor company sells to associate)

20.17
Ltd
A Ltd
Group
ASSETS
250 000
150 000
54 000
Inventories
346 000
140 000
Total assets
R650 000
R290 000
250 000
100 000
Retained earnings
300 000
140 000
– 50
000
50 000
Long-term loans
50 000
R650 000
R290 000
80
Investments in associates and joint ventures STATEMENTS OF PROFIT

OR LOSS AND OTHER COMPREHENSIVE INCOME
Ltd
A Ltd
Group
Revenue
800 000
320 000
Cost of sales
(400 000)
(160 000)
Gross profit
400 000
160 000
Other income (dividend received)
4 000
Other expenses
(22 000)
(10 000)
Profit before tax
382 000
150 000
Income tax expense
(152 000)
(60 000)
PROFIT FOR THE YEAR
230 000
90 000
Revaluation of land
50 000
50 000
R230 000
R140 000
215 000
90 000
15 000
–
R230 000
R90 000
215 000
140 000
15 000
R230 000
R140 000
Retained
earnings
Ltd
A Ltd
Group
100 000
60 000
Dividends
(15 000)
(10 000)
Profit for the year
215 000
90 000
R300 000
R140 000

Ltd when the retained earnings of A Ltd amounted to R10 000. At that stage,
all the assets and liabilities of A Ltd were deemed to be fairly valued. Since
1 January 20.13, P Ltd has been exercising significant influence over the
financial and operating policy decisions of A Ltd.
81
Chapter 11
land was revalued.
3 Since 1 January 20.16, P Ltd has been selling inventories to A Ltd at a

profit of 50%
on cost. Included in the inventories of A Ltd on 31 December 20.16 is R15

000 in respect of such inventories at the cost for A Ltd. Included in the
inventories of A Ltd on 31 December 20.17 is R30 000 in respect of such
inventories at the cost for A Ltd. Total sales of P Ltd to A Ltd amounted to
R100 000.
4 Assume a tax rate of 28%.
Solution 11.4
P LTD GROUP
ASSETS
Non-current assets
250 000
Investment in associate (54 000 + 72 000 – 2 000(J2) + 2 000(J3) – 4

000(J5)) 122
000
Deferred tax (560(J2) – 560(J4) + 1 120(J6)) 1
120
373 120
Current assets
Inventories (P)
346 000
Total assets R719
120
Share capital
250 000
Retained earnings
349 120
20 000
619 120
Non-controlling interests (P)
50 000
Total equity
669 120
Long-term loans
50 000
120
82
Investments in associates and joint ventures P LTD GROUP
Revenue (800 000(P) + 6 000(J3) – 12 000(J5))
794 000
Cost of sales (400 000(P) + 4 000(J3) – 8 000(J5)) (396
000)
Gross profit
398 000
Other expenses (P)
(22 000)
36 000
Profit before tax
412 000
Income tax expense (152 000(P) + 560(J4) – 1 120(J6)) (151
440)
PROFIT FOR THE YEAR
260 560
20 000
20 000
R280 560
245 560
15 000
R260 560

265 560
15 000
R280 560
83
Chapter 11
P LTD GROUP

IN EQUITY
Non-
Revalu-
Share
Retained
control-
Total
ation
Total
capital
earnings
ling
equity
surplus
interests
Balance at
1 Jan 20.17
250 000
* 118 560
368 560
35 000
403 560
Changes in
equity for
20.17
Total
comprehensive
income for the
year:
Profit for the year
245 560
245 560
15 000
260 560
Other
comprehensive
income
– 20
000 20 000
20 000
Dividends
(15 000)
(15 000)
–
(15 000)
Balance at
31 Dec 20.17
R250 000
@R349 120 R20 000 R619 120
R50 000 R669 120
* 100
000 + 20 000 – 1 440(J2) = 118 560
@ Test: 300 000(P) + 52 000(A) – 1 440(J2) + 6 000(J3)
– 4 000(J3) – 560(J4) – 12 000(J5) +
8 000(J5) +1 120(J6) = 349 120
Comment
The carrying amount of the investment in the associate is compiled as

follows:
l Cost
54 000
72 000
20 000
32 000
• Revaluation surplus
20 000
l Unrealised profit eliminated in closing inventories
(4 000)
R122 000
84
Investments in associates and joint ventures Calculations
Total
P Ltd 40%
At
Since
i At acquisition
Share capital
100 000
40 000
Retained earnings
10 000
4 000
110 000
44 000
Investment in A Ltd
(54 000)
Goodwill
(R10
000)
Retained
earnings (60 000 – 10 000)
50 000
20 000
• Current year
Profit for the year
90 000
36 000
Dividends
(10 000)
(4 000)
Revaluation surplus
50 000
20 000
R290 000
R52 000 RE
R20 000 RS
Dr
Cr
J1
72 000
Revaluation surplus (OCI)
20 000

36 000
Retained
earnings
– Beginning of the year (SCE)
20 000
4 000
Bringing to book of associate
J2
1 440
Deferred tax (SFP) (2 000 × 28%)
560
Investment in associate (SFP)(15 000 × 50/150 × 40%) 2
000
Correction of retained earnings at the beginning
of the year
J3
Cost of sales (P/L)(15 000 × 100/150 × 40%)) 4
000
Investment in associate (SFP)(15 000 × 50/150 × 40%)
2 000
Revenue
(P/L)(15 000 × 40%)
6 000
Realisation of unrealised profit in opening
inventories of A Ltd
J4
Income tax expense (P/L)(2 000 × 28%) 560
Deferred tax
(SFP)
560
Tax implication of realisation of unrealised profit
in opening inventories of A Ltd
continued
85
Chapter 11
Dr
Cr
R
R
J5 Revenue
(P/L)(30 000 × 40%) 12
000
Cost of sales (P/L)(30 000 × 100/150 × 40%)
8 000
Investment in associate (SFP) [(30 000 – 20 000) × 40%] 4
000
Elimination of unrealised profit in closing
J6
Deferred tax (SFP)
1 120
Income tax expense (P/L)(4 000 × 28%)
1 120
Tax implication of unrealised profit in closing
Example 11.5
(associate sold to investor company)

20.17
Ltd
A Ltd
Group
ASSETS
250 000
150 000
54 000
Inventories
346 000
140 000
Total assets
R650 000
R290 000

250 000
100 000
Retained earnings
300 000
140 000
– 50
000
50 000
Long-term loan
50 000
R650 000
R290 000
86


P
Ltd
A Ltd
Group
Revenue
800 000
320 000
Cost of sales
(400 000)
(160 000)
Gross profit
400 000
160 000
Other income (dividends received)
4 000
Other expenses
(22 000)
(10 000)
Profit before tax

382 000
150 000
Income tax expense
(152 000)
(60 000)
PROFIT FOR THE YEAR
230 000
90 000
Revaluation of land
50 000
50 000
R230 000
R140 000

215 000
90 000
15 000
R230 000
R90 000
215 000
140 000
15 000
R230 000
R140 000
EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY
Retained
earnings
P Ltd
A Ltd
Group
100 000
60 000
Dividends
(15 000)
(10 000)
Profit for the year
215 000
90 000
R300 000
R140 000
87
Chapter 11


land was revalued.
3 Since 1 January 20.16, A Ltd has been selling inventories to P Ltd at a

profit of 50%
on cost. Included in P Ltd’s inventories on 31 December 20.16 is R15 000 in

respect of such inventories at the cost for P Ltd. Included in the inventories
of P Ltd on 31/12/20.17 is R30 000 in respect of such inventories at the cost
for P Ltd. Total sales of A Ltd to P Ltd amounted to R100 000.
Solution 11.5
P LTD GROUP
ASSETS
Non-current assets
250 000

000
Deferred tax (J5)
1 120
377 120
Current assets
Inventories (346 000(H – 4 000(J4))
342 000
Total assets R719
120
Share capital
250 000
Retained earnings
349 120
20 000
619 120
000
Total equity
669 120
Long-term loans
50 000
120
88
Revenue (P)
800 000
Cost of sales (P)
(400 000)
Gross profit
400 000
Other expenses (P)
(22 000)
(36 000(J1) + 2 000(J2) – 560(J3) – 4 000(J4) + 1 120(J5)) 34 560
Profit before tax
412 560
(152 000)
PROFIT FOR THE YEAR
260 560
20 000
20 000
R280 560
245 560
15 000
R260 560
265 560
15 000
R280 560
89
Chapter 11
P LTD GROUP
Reval-
Non-
Share
Retained
Total
uation
Total
controlling
capital
earnings
equity
surplus
interests
Balance at
1 Jan 20.17
250 000
* 118 560
368 560
35 000
403 560
Changes in
equity for
20.17
Dividends
–
(15 000)
(15 000)
(15 000)
Total
comprehen-
sive income for
the year:
Profit for the year
245 560
245 560
15 000
260 560
Other
comprehen-
sive income
–
– 20
000 20 000
20 000
Balance at
31 Dec 20.17
R250 000
@R349 120 R20 000 R619 120
R50 000 R669 120
* 100
000 + 20 000 – 2 000(J2) + 560(J3) = 118 560
@ 300 000(P) + 52 000(A) – 4 000(J4) + 1 120(J5) = 349 120
Comment
The carrying amount of the investment in the associate is compiled as

follows: l Cost
54 000
72 000
20 000
32 000
20 000
R126 000
90
Total
P Ltd 40%
At
Since
i At acquisition
Share capital
100 000
40 000
Retained earnings
10 000
4 000
110 000
44 000
Investment in A Ltd
(54 000)
Goodwill
(R10 000)
50 000
20 000
• Current year
Profit for the year
90 000
36 000
Dividends
(10 000)
(4 000)
Revaluation surplus
50 000
20 000
R290 000
R52 000 RE
R20 000 RS
Dr
Cr
J1
72 000
Retained
earnings – Beginning of the year (SCE)
20 000
20 000
36 000
4 000
J2
2 000
2 000
Elimination of unrealised profit in opening
inventories of P Ltd (15 000 × 50/150 × 40%)
J3
560
Retained
earnings
560
Tax implication of unrealised profit in opening
inventories of P Ltd (2 000 × 28%)
J4
4 000
Inventories (SFP)
4 000
Elimination of unrealised profit in closing
inventories of P Ltd (30 000 × 50/150 × 40%)
J5
Deferred tax (SFP)
1 120
1 120
Tax implication of unrealised profit in closing
inventories of P Ltd (4 000 × 28%)
91
Chapter 11
Example 11.6
(investor sells to associate)

20.17
P
Ltd
A Ltd
Group
ASSETS
250 000
150 000
54 000
Inventories
346 000
140 000
Total assets
R650 000
R290 000
250 000
100 000
Retained earnings
300 000
140 000
– 50
000
50 000
Long-term loans
50 000
R650 000
R290 000

Ltd
A Ltd
Group
Revenue
800 000
320 000
Cost of sales
(400 000)
(160 000)
Gross profit
400 000
160 000
4 000
Other expenses
(22 000)
(10 000)
Profit before tax
382 000
150 000
Income tax expense

(152 000)
(60 000)
PROFIT FOR THE YEAR
230 000
90 000
Revaluation of land
50 000
50 000
R230 000
R140 000
215 000
90 000
15 000
R230 000
R90 000
215 000
140 000
15 000
R230 000
R140 000
92

Retained
earnings
P
Ltd
A Ltd
Group
100 000
60 000
Dividends
(15 000)
(10 000)
Profit for the year
215 000
90 000
R300 000
R140 000


land was revalued.
3 On 1 January 20.15, P Ltd sold equipment to A Ltd at a profit of 50% on

cost (for
Ltd). The equipment is still included in the equipment of A Ltd on
31 December 20.17. Depreciation is provided at 20% per annum on the cost

of the equipment. The cost of the equipment in the books of A Ltd was R15
000.
93
Chapter 11
Solution 11.6
P LTD GROUP
ASSETS
Non-current assets
250 000
Investment in associate (54 000 + 72 000 – 1 200(J2) + 400(J3)) 125 200

Deferred tax (336(J2) – 112(J4)) 224
375 424
Current assets
Inventories (P)
346 000
Total assets R721
424
Share capital
250 000
Retained earnings
351 424
20 000
621 424
000
Total equity
671 424
Long-term loans
50 000
424
94
Revenue (P)
800 000
Cost of sales (P)
(400 000)
Gross profit
400 000
Other expenses (22 000(P) – 400(J3)) (21
600)
36 000
Profit before tax
414 400
Income tax expense (152 000(P) + 112(J4))
(152 112)
PROFIT FOR THE YEAR
262 288
20 000
20 000
R282 288
247 288
15 000
R262 288
267 288
15 000
R282 288
95
Chapter 11
P LTD GROUP

IN EQUITY
Non-
Reval-
Share
Retained
control-
Total
uation
Total
capital
earnings
ling
equity
surplus
interests
Balance at
1 Jan 20.17
250 000
* 119 136
– 369
136
35 000 404
136
Changes in
equity for 20.17
Dividends
–
(15 000)
– (15
000)
– (15
000)
Total
comprehensive
income for the
year:
Profit for the year
247 288
– 247
288
15 000 262
288
Other
comprehensive
income
–
– 20
000 20
000
– 20
000
Balance at
31 Dec 20.17
R250 000 @ R351 424 R20
000 R621
424 R50 000 R671 424
* 100
000 + 20 000 – 864(J2) = 119 136
@ 300
000(P) + 52 000(A) – 684(J2) + 400(J3) – 112(J4) = 3
351 424
Comment
The carrying amount of the investment in associate is compiled as follows:
l Cost
54 000

72 000
20 000
32 000
20 000
l Unrealised profit included in the closing balance of equipment (800)
R125 200
96
P Ltd 40%
Total
At
Since
i At acquisition
Share capital
100 000
40 000
Retained earnings
10 000
4 000
110 000
44 000
Investment in A Ltd
(54 000)
Goodwill
(R10 000)
50 000
20 000
• Current year
Profit for the year
90 000
36 000
Dividends
(10 000)
(4 000)
Revaluation surplus
50 000
20 000
R290 000
R52 000 RE
R20 000 RS
Dr
Cr
J1
72 000
Retained
20 000
20 000
36 000
4 000
J2
(1 200 – 336) 864
Deferred
tax
(SFP)
(1 200 × 28%) 336
Investment in associate (SFP) ((15 000 × 50/150 × 40%
= 2 000) – (2 000 × 20% = 400) – 400)
1 200
of the year in respect of unrealised profit included
in the equipment of A Ltd

J3
Investment in associate (SFP)
400
Depreciation (P/L)
400
Realisation of unrealised profit in the current year
through depreciation
J4
Income tax expense (P/L) (400 × 28%) 112
Deferred tax
(SFP)
112
in the current year
97
Chapter 11
Example 11.7
(associate sells to investor company)

20.17
P
Ltd
A Ltd
Group
ASSETS
250 000
150 000
54 000
Inventories
346 000
140 000
Total assets
R650 000
R290 000
250 000
100 000
Retained earnings
300 000
140 000
– 50
000
50 000
Long-term loan
50 000
Total liabilities
R650 000
R290 000

Ltd
A Ltd
Group
Revenue
800 000
320 000
Cost of sales
(400 000)
(160 000)
Gross profit
400 000
160 000
4 000
Other expenses
(22 000)
(10 000)
Profit before tax
382 000
150 000
Income tax expense
(152 000)
(60 000)
PROFIT FOR THE YEAR
230 000
90 000
Revaluation of land
50 000
50 000
R230 000
R140 000
215 000
90 000
15 000
R230 000
R90 000
215 000
140 000
15 000
R230 000
R140 000
98

Retained
earnings
P
Ltd
A Ltd
Group
100 000
60 000
Dividends
(15 000)
(10 000)
Profit for the year
215 000
90 000
R300 000
R140 000


land was revalued.
3 On 1 January 20.15, A Ltd sold equipment to P Ltd at a profit of 50% on

cost (for A
Ltd). The equipment is still included in the equipment of P
Ltd on
31 December 20.17. Depreciation is provided at 20% per annum on the cost

of the equipment. The cost of the equipment to P Ltd was R15 000.
99
Chapter 11
Solution 11.7
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (250 000 – 1 200(J2) + 400(J3)) 249
200

000
Deferred tax (336(J2) – 112(J4)) 224
375 424
Current assets
Inventories (P)
346 000
Total assets R721
424
Share capital
250 000
Retained earnings
351 424
20 000
621 424
000
Total equity
671 424
Long-term loan
50 000
424
100

OTHER

DECEMBER 20.17
Revenue
800 000
Cost of sales
(400 000)
Gross profit
400 000
Other expenses
(22 000)
Share of profit of associate (36 000(J1) + 400(J3) – 112(J4)) 36 288

Profit before tax
414 288
Income tax expense
(152 000)
PROFIT FOR THE YEAR
262 288
20 000
20 000
R282 288
247 288
15 000
R262 288
267 288
15 000
R282 288
P LTD GROUP

IN EQUITY
Non-
Reval-
Share
Retained
control-
Total
uation
Total
capital
earnings
ling
equity
surplus
interests
Balance at
1 Jan 20.17
250 000
* 119 136
369 136
35 000
404 136
Changes in
equity for 20.17
Dividends
(15 000)
(15 000)
(15 000)
Total
comprehensive
income for the
year:
Profit for the year
247 288
247 288
15 000
262 288
Other
comprehensive
income –
20 000
20 000
20 000
Balance at
31 Dec 20.17
R250 000 # R351 424 R20 000
R621 424
R50 000 R671 424
100 000 + 20 000 – 864(J2) = 119 280
# 300 000(P) + 52 000(A) – 864(J2) + 400(J3) – 112(J4) = 351 424
101
Chapter 11
Comment
The carrying amount of the investment in associate is compiled as follows:
l Cost
54 000
72 000
20 000

32 000
20 000
R126 000
Calculations
P Ltd 40%
Total
At
Since
i At acquisition
Share
capital
100 000
40 000
Retained earnings
10 000
4 000
110 000
44 000
Investment in A Ltd
(54 000)
Goodwill
(R10 000)
Retained earnings
s (60 000 – 10 000)
50 000
20 000
• Current year
Profit
for the year
90 000
36 000
Dividends
(10 000)
(4 000)
Revaluation surplus
50 000
20 000
R290 000
R52 000 RE
R20 000 RR
102

journal entries
Dr
Cr
J1
72 000
Retained
20 000
20 000
36 000
4 000
J2
Retained earnings – Beginning of year (SCE)(1 200 – 336) 864
Deferred tax (SFP) ((2 000 - 800) × 28%)
336
Equipment – Cost (SFP)(15 000 × 50/150 × 40%)
2 000
Accumulated depreciation on equipment (SFP)
(2 000 × 20% × 2 years)
800
of the year in respect of unrealised profit included
in the equipment of P Ltd
J3
Accumulated depreciation on equipment (SFP)
400
400
Realisation of unrealised profit in the current year
through depreciation
J4
Share of profit of associate (P/L) (400 × 28%) 112
Deferred
tax
(SFP)
112
in the current year
9 Deferred tax implications as a result of the application of the equity

method Income tax arising from investments in associates is accounted for
in accordance with IAS 12 Income Taxes.
Temporary differences arise when the carrying amount of the investment in

the associate (namely the investor’s portion of the net assets of the investee,
including goodwill) is no longer the same as the tax base (which is often the
cost) thereof. Such differences may arise in various circumstances, for
example: l the existence of undistributed profits of the associate; and l a
reduction in the carrying amount of an investment in an associate to its
recoverable amount (i.e. an impairment loss).
In consolidated financial statements, there may be a difference between the

investment in the associate compared to the amount of the investment in the
separate financial statements of the investor, if the investor carries the
investment in its separate financial statements at cost or a revalued amount.
An entity should recognise a deferred tax liability for all taxable temporary
differences that relate to investments in associates, except to the extent that
both the following conditions have been met:
l the investor can control the timing of the write-back of the temporary
difference; and
l it is probable that the temporary difference will not be written back in the
foreseeable future.
103
Chapter 11
An investment in an associate can be recovered in one of two ways: l the

receipt of dividends from the associate; or
l the sale of the investment in the associate.
Section 10(1)( k) of the Income Tax Act 58 of 1962 stipulates that any
dividend received by or accrued to any person is exempt. The receipt of
dividends from the associate can therefore not lead to taxable temporary
differences.
The sale of an investment in an associate will lead to a capital profit which

will be taxed at the capital gains tax rate. A deferred tax liability will have to
be created and the deferred tax liability must be calculated as the difference
between the carrying amount of the investment in the associate and the tax
base thereof (usually the cost of the investment) multiplied by the capital
gains tax rate. The deferred tax liability should not be created at the normal
tax rate.
An entity should recognise a deferred tax asset for all deductible temporary
differences arising from investments in associates to the extent that, and only
to the extent that, it is probable that:
l the temporary difference will be written back in the foreseeable future; and
l taxable income will be available against which the temporary difference
may be utilised.
In deciding whether a deferred tax asset should be recognised for deductible

temporary differences that bear relation to investments in associates, an
entity considers the guidance set out in IAS 12.
10 Associates in horizontal/vertical groups
Associates in horizontal groups
Where an investor has more than one associate, the results of the associates
are grouped together in the consolidated financial statements.
Example 11.8
Associates in a horizontal group

20.17
Ltd
A Ltd
Z Ltd
Group
ASSETS
315 000
150 000
250 000
50 000
Investment in Z Ltd (50 000 shares at cost)
85 200
Inventories
349 800
250 000
200 000
Total assets
R800 000
R400 000
R450 000
Share capital (200 000/100 000/250 000 shares)
200 000
100 000
250 000
Retained earnings
500 000
300 000
200 000
100 000
R800 000
R400 000
R450 000
104

Ltd
A Ltd
Z Ltd
Group
Profit
315 000
255 000
170 000
16 000
Profit before tax
331 000
255 000
170 000
Income tax expense
(131 000)
(105 000)
(70 000)
PROFIT FOR THE YEAR
200 000
150 000
100 000
TOTAL COMPREHENSIVE INCOME
FOR THE YEAR
R200 000
R150 000
R100 000
150 000
150 000
100 000
50 000
R200 000
R150 000
R100 000

Retained
earnings
P Ltd
A Ltd
Z Ltd
Group
400 000
180 000
120 000
Dividends paid: 31 December 20.17
(50 000)
(30 000)
(20 000)
Profit for the year
150 000
150 000
100 000
R500 000
R300 000
R200 000

Ltd, when the retained earnings of A Ltd amounted to R20 000. Since the
acquisition date, P Ltd has been exercising significant influence over the
financial and operating decisions of A Ltd.
2 On 30 June 20.17, P Ltd acquired 20% of the issued share capital of Z Ltd
for R85 200. Since the acquisition date, P Ltd has been exercising significant
influence on the financial and operating decisions of Z Ltd.
3 Z Ltd’s profit for 20.17 accrued evenly, with the exception of R2 000
included in income tax expense, which arose during the second half of the
year.
105
Chapter 11
Solution 11.8
P LTD GROUP
ASSETS
Non-current assets
315 000
Investment in associates (50 000 + 85 200 + 112 000 + 5 800) 253 000
568 000
Current assets
Inventories (P)
349 800
Total assets
R917 800
Share capital
200 000
Retained earnings
617 800
817 800
100 000
Total equity
917 800
R917 800
P LTD GROUP
Profit
315 000
Share of profit of associate (60 000 + 9 800)
69 800
Profit before tax
384 800
Income tax expense
(131 000)
PROFIT FOR THE YEAR
253 800
R253 800

203 800
50 000
R253 800
106

IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (400 000(P) + 64 000(A)) 464 000
Dividends (50
000)
Profit for the year
203 800
Balance at 31 December 20.17 (Test: 500 000(P) + 112 000(A) + 5 800(Z))

R617 800
Calculations
P Ltd 40%
Total
At
Since
i At acquisition
Share capital
100 000
40 000
Retained earnings
20 000
8 000
120 000
48 000
Investment in A Ltd
(50 000)
Goodwill
(R2
000)
Retained
earnings
(180 000 – 20 000)
160 000
64 000
• Current year
Profit for the year
150 000
60 000
Dividends
(30 000)
(12 000)
R400 000
R112 000
107
Chapter 11
C2 Analysis of owners’ equity of Z Ltd

P Ltd 20%
Total
At
Since
i At acquisition
Share capital
250 000
50 000
Retained
earnings
(120 000 + 51 000*)
171 000
34 200
421 000
84 200
Investment in Z Ltd
(85 200)
Goodwill
(R1
000)
• Current year
Profit up to 31/12/20.17
49 000*
9 800
Dividends
(20 000)
(4 000)
R450 000
R5 800
* Profit
split:
Before acquisition date = (100 000 + 2 000) × 6/12 = 51 000
After acquisition date = [(100 000 + 2 000) × 6/12] – 2 000 = 49 000
Associates in vertical groups
Basically, three cases may occur:
l the associate is itself a parent; or
l the investment in the associate is held by a partially-owned subsidiary, or l

the investment in the associate is held by another associate of the parent.
1 The associate itself is a parent

Where the associate itself is a parent, the consolidated statements of the
associate should be used to account for the results of the associate according
to the equity method in the consolidated financial statements of the investor.
Consider the following group: P Ltd, which also has various subsidiaries,
owns 40% of the issued ordinary shares of A Ltd, which in turn owns 80%
of the issued ordinary shares of S Ltd. The interest of A Ltd in the owners’
equity of S Ltd must be analysed. The analysis is then used to calculate the
consolidated owners’ equity of A Ltd and to analyse P Ltd’s interest therein.
108
Example 11.9
Investment in an associate which itself is a parent

20.17
Ltd
A Ltd
S Ltd
Group
ASSETS
250 000
92 000
250 000
50 000
Investment in S Ltd (80 000 shares at cost)
208 400
Inventories
400 000
99 600
50 000
Total assets
R700 000
R400 000
R300 000
Share capital (100 000 shares)
100 000
100 000
100 000
Retained earnings
400 000
300 000
200 000
200 000
R700 000
R400 000
R300 000

Ltd
A Ltd
S Ltd
Group
Profit
660 000
322 000
168 000
8 000
8 000
Profit before tax
668 000
330 000
168 000
Income tax expense
(268 000)
(130 000)
(68 000)
PROFIT FOR THE YEAR
400 000
200 000
100 000
FOR THE YEAR
R400 000
R200 000
R100 000
300 000
200 000
100 000
100 000
R400 000
R200 000
R100 000
P
Ltd
A Ltd
S Ltd
Group
150 000
120 000
110 000
(50 000)
(20 000)
(10 000)
Profit for the year
300 000
200 000
100 000
R400 000
R300 000
R200 000
109
Chapter 11

Ltd for R50 000, when the retained earnings of A Ltd amounted to R20 000.
Since the acquisition date, P Ltd has been exercising significant influence
over the financial and operating decisions of A Ltd.
2 On 30 June 20.17, A Ltd acquired 80% of the issued share capital of S Ltd
for R208 400.
3 S Ltd’s profit for 20.17 accrued evenly, with the exception of R1 000
included in income tax expense, which arose during the second half of the
year.
Solution 11.9
P LTD GROUP
ASSETS
Non-current assets
250 000

640
424 640
Current assets
Inventories (P)
400 000
Total assets R824
640
Share capital
100 000
Retained earnings
524 640
624 640
000
Total equity
824 640
640
110
P LTD GROUP
Profit (P)
660 000
Share of profit of associate (15 840 + 76 800)
92 640
Profit before tax
752 640
(268 000)
PROFIT FOR THE YEAR
484 640
R484 640
384 640
100 000
R484 640
P LTD GROUP

IN EQUITY
Retained
earnings
Balance at 1 Janaury 20.17 (150 000(P) + 40 000(A)) 190 000
Dividends
(50 000)
Profit for the year
384 640
Balance at 31 December 20.17 (Test: 400 000(P) + 124 640(A)) R524 640
Comment
Take note that the equity method is applied to the consolidated statement of
profit or loss and other comprehensive income of A Ltd. In most cases, the
consolidated
financial statements of A Ltd will be available and can consequently be

employed directly in the equity accounting of A Ltd.
111
Chapter 11
Calculations
C1 Analysis of owners’ equity of S Ltd
A Ltd 80%
Non-
Total
controlling
At Since
interests
Share capital
100 000
80 000
20 000
Retained
earnings
(110 000 + 50 500)
160 500
128 400
32 100
260 500
208 400
52 100
Investment in S Ltd
(208 400)
Current
year:
Profit up to 31/12/20.17
49 500
39 600
9 900
Dividends
(10 000)
(8 000)
(2 000)
R300 000
R31 600
R60 000
P Ltd 40%
Total
At
Since
Share capital
100 000
40 000
Retained earnings
20 000
8 000
120 000
48 000
Investment in A Ltd
(50 000)
Goodwill
(R2
000)
Retained
earnings
(120 000 – 20 000)
100 000
40 000
• Current year:
Profit for the year
S Ltd
39 600
15 840
Ltd
(200 000 – 8 000)
192 000
76 800
Dividends
(20 000)
(8 000)
R431 600
R124 640
112
Investments in associates and joint ventures 2 The investment in the

associate is held by a partially-owned subsidiary Consider the following
group: P Ltd owns 80% of the issued shares of S Ltd, which in turn owns
40% of the issued shares of A Ltd. For the purposes of the preparation of the
consolidated statements of P Ltd, S Ltd’s interest in A Ltd’s owners’ equity
will be analysed. The analysis is then used to calculate the consolidated
owners’ equity of S Ltd and to analyse P Ltd’s interest therein.
Example 11.10
Investment in associate by a partially-owned subsidiary

20.17
Ltd
S Ltd
A Ltd
Group
ASSETS
220 000
235 000
80 000
Investment in S Ltd (80 000 shares at cost)
80 000
– 65
000
Inventories
200 000
300 000
120 000
Total assets
R500 000
R600 000
R200 000
Share capital (200 000/100 000/100 000 shares)
200 000
100 000
100 000
Retained earnings
200 000
500 000
100 000
100 000
R500 000
R600 000
R200 000

P
Ltd
S Ltd
A Ltd
Group
Profit
100 000
330 000
85 000
40 000
4 000
Profit before tax
140 000
334 000
85 000
Income tax expense
(40 000)
(134 000)
(35 000)
PROFIT FOR THE YEAR
100 000
200 000
50 000
FOR THE YEAR
R100 000
R200 000
R50 000
80 000
200 000
50 000
20 000
R100 000
R200 000
R50 000
113
Chapter 11
Retained
earnings
Ltd
S Ltd
A Ltd
Group
150 000
350 000
60 000
(30 000)
(50 000)
(10 000)
Profit for the year
80 000
200 000
50 000
R200 000
R500 000
R100 000
1 P Ltd acquired 80% of the issued share capital of S Ltd at incorporation of

S Ltd.
2 S Ltd acquired 40% of the issued share capital of A Ltd on 1 January

20.17. Since the acquisition date, S Ltd has been exercising significant
influence over the financial and operating decisions of A Ltd.
Solution 11.10
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (220 000 + 235 000) 455
000
000
536 000
Current assets
Inventories (200 000 + 300 000) 500
000
Total assets
R1 036 000
Share capital: R1 ordinary shares
200 000
Retained earnings
612 800
812 800
Non-controlling interests (100 000(given) + 123 200(S)) 223 200
Total equity
1 036 000
R1 036 000
114

OTHER

DECEMBER 20.17
Profit (100 000 + 330 000)
430 000
20 000
Profit before tax
450 000
Income tax expense (40 000 + 134 000) (174
000)
PROFIT FOR THE YEAR
276 000
R276 000

212 800
Non-controlling interests (20 000(given) + 43 200(S))
63 200
R276 000
P LTD GROUP

CHANGES IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (150 000(P) + 280 000(S)) 430 000
Dividends (30
000)
Profit for the year
212 800
Balance at 31 December 20.17 (Test: 200 000(P) + 412 800(S)) R612 800
Calculations

S Ltd 40%
Total
At
Since
i At acquisition
Share capital
100 000
40 000
Retained earnings
60 000
24 000
160 000
64 000
Investment in A Ltd
(65 000)
Goodwill
(R1
000)
• Current year:
Profit for the year
50 000
20 000
Dividends
(10 000)
(4 000)
R200 000
R16 000
115
Chapter 11
P Ltd 80%
Non-
Total
controlling
At
Since
interest
i At acquisition
Share capital
100 000
80 000
20 000
Investment in A Ltd
(80 000)
Retained earnings
350 000
280 000
70 000
• Current year
Profit
– S Ltd (200 000 – 4 000)
196 000
156 800
39 200
Equity
profit
– A Ltd
20 000
16 000
4 000
Dividends
(50 000)
(40 000)
(10 000)
R616 000
R412 800
R123 200
3 The investment in the associate is held by an associate of the parent A

parent may own shares in an associate which itself also owns shares in
another associate. Consider the following group: P Ltd owns 80% of the
issued ordinary shares of S Ltd, and also owns 40% of the issued ordinary
shares of A Ltd, which in turn owns 30% of the issued ordinary shares of
AA Ltd. A mechanical application of the 20%
criterion allows P Ltd to use the equity financial statements of A Ltd (i.e.
that already includes the investment in AA Ltd in accordance with the equity
method) for the purposes of the preparation of consolidated statements. The
equity accounting of associates in which the parent owns indirect interests
through other associates must be approached with caution, since the
influence by the parent over the financial and operating decisions of the
eventual associate may be so diluted that equity accounting of the associate
is inappropriate.
11.5 Classification as held for sale
If an entity decides to sell an investment in an associate, or a portion of an

investment, and it meets the criteria contained in IFRS 5, the investment
becomes a non-current asset held for sale, and is accounted for in accordance
with IFRS 5 Non-current Assets Held For Sale and Discontinued
Operations (IAS 28.20).
Refer to chapter 14.10 for associates classified as held for sale.
116
11.6 Impairment
losses
After equity accounting for the investment, the entity applies the
requirements of IAS 39
Financial Instruments , to determine whether there is any indication of

impairment of the net investment in the associate. The entity also uses IAS
39 to determine whether an additional impairment loss should be recognised
for the entity’s interest in the associate that does not constitute part of the net
investment.
Since goodwill forms part of the carrying amount of the investment in the
associate and is not recognised separately, it is not tested separately for
impairment in accordance with IAS 36. If, by applying the requirements of
IAS 39, there is an indication of possible impairment of the investment in the
associate, the entire carrying amount of the investment will be tested for
impairment in accordance with IAS 36, by comparing the recoverable
amount (greater of value in use and fair value less costs of disposal) to the
carrying amount of the investment. The impairment loss is not allocated to
any asset, including goodwill, that forms part of the carrying amount of the
investment.
In determining the value in use of the investment, an entity estimates: l its

share of the present value of the estimated future cash flows expected to be
generated by the investee as a whole, including the cash flows from the
operations of the investee and the proceeds on the ultimate disposal of the
investment; or l the present value of the estimated future cash flows expected
to arise from dividends to be received from the investment and from the
ultimate disposal of the investment.
The recoverable amount of an investment in an associate is assessed for each

individual associate, unless an individual associate does not generate cash
inflows from continuing use that are largely independent of those from other
assets of the reporting entity (IAS 28.40–42).
117
Chapter 11
Comment
P Ltd acquired a 25% interest in A Ltd on 1 January 20.18 at a cost of R250

000. P Ltd
has significant influence over A Ltd.
The carrying amount of the investment was as ffollows on 31 December

20.19:
Cost of investment
250 000
Share in retained earnings – to 31 December 20.18 (200 000 × 25%) 50 000

Share of profit of associate for the year ended 31 December 20.19
(100 000 × 25%)
25 000
Carrying amount of the investment
R325 000
The significant decrease in profit for the year ended 31 December 20.19
occurred as a result of a declining market (there are indications of
impairment present in respect of the investment). P Ltd’s financial advisor
estimated that A Ltd will pay an annual dividend of R90 000 to its
shareholders in future. A fair dividend return rate for an entity with a similar
risk and growth profile is 10%.
The recoverable amount of the investment (25% interest) on 31 December

20.19 is as follows:
Expected annual dividend (90 000 × 25%)
R22 500
Fair dividend return rate
10%
Recoverable amount – capitalised dividend (22 500/0,10)
R225 000
The impairment loss on the investment is as follows:
Carrying amount of investment
325 000
Recoverable amount
(225 000)
Impairment loss (recognised in proffit or loss)
R100 000
Journal entry
31 December 20.19
Dr
Cr
Impairment loss (P/L)
R100 000
R100 000
The impairment loss of R100 000 on the investment in the associate is

reversed against the investment in the associate in subsequent periods to the
extent that the recoverable amount of the investment increases. Assume the
recoverable amount increases to R275 000 on 31 Dece
ember 20.20:
Recoverable amount 20.19
225 000
Recoverable amount 20.20
275 000
Reversal of impairment loss
R50 000
Journal entry
31 December 20.20
Dr
Cr
R50 000
Reversal of impairment loss (P/L)
R50 000
118
11.7 Discontinuing the use of the equity method
An investor should discontinue the use of the equity method from the date
that it ceases to be an associate as follows (IAS 28.22):
l If the investment becomes a subsidiary, the investment must be accounted

for in accordance with IFRS 3 Business Combinations, or IFRS 10
Consolidated Financial Statements .
l If the retained interest in the former associate is a financial asset, it must be

measured at fait value in accordance with IFRS 9 Financial Instruments ,
which will be deemed its fair value on initial recognition of the financial
asset. On the date that an investment ceases to be an associate, the investor
will measure the retained investment at fair value. The difference between
the following must be recognised in profit or loss:
• the fair value of the retained interest plus any proceeds from the disposal of
the equity accounted investment; and
• the carrying amount of the equity accounted investment on the date that
significant influence was lost.
l If the equity method is discontinued or if the current interest in the

associate is reduced and the entity continues to apply the equity method, all
amounts, or a proportionate part thereof, previously recognised in other
comprehensive income relating to the investment, will be accounted for on
the same basis as would have been required if the related assets or liabilities
were disposed of. This means that if an amount that was recognised in other
comprehensive income would be reclassified to profit or loss on disposal of
the related assets or liabilities, the entity would reclassify the gain or loss
from equity via other comprehensive income to profit or loss when the
equity method is discontinued.
l If an investment in an associate becomes an investment in a joint venture or

vice versa, the entity will continue to apply the equity method and retained
earnings will not be remeasured.
11.8 Disclosure
The disclosure requirements for joint arrangements and associates are set out
in IFRS 12 Disclosure of Interests in Other Entities (IFRS 12.20–23)
(refer to chapter 12 for joint arrangements).
An entity is required to disclose information that will enable users of

financial statements to evaluate the nature, extent and financial effects of its
interests in associates, including the nature and effect of its contractual
relationship with other investors with significant influence, as well as the
nature of and changes in the risks associated with its interests in associates.
An entity must disclose information about significant adjustments and

assumptions made in determining if the entity has significant influence over
another entity (this may also include disclosure of assumptions and
judgements made to determine that no significant influence is excercised,
although the entity holds more than 20% of the voting rights of the investee,
or vice versa, where an investor does excercise significant influence,
although it holds less than 20% of the voting rights).
119
Chapter 11
The following information must be disclosed separately for each associate

that is material to the reporting entity:
l the name of the associate;
l the nature of the entity’s relationship with the associate; l the principal
place of business (and country of incorporation, if applicable or different);
and
l the proportion of ownership interest or participating share and if different,

the proportion of voting rights held.
The following information must be disclosed for every associate that is

material to the reporting entity:
l whether the investment in the associate is measured using the equity

method or at fair value;
l summarised financial information of the associate (obtained from the

financial statements, the total amount and not only the investor’s share
thereof), including dividends received, non-current and current assets, non-
current and current liabilities, revenue, profit or loss from continuing and
discontinued operations, other comprehensive income and total
comprehensive income;
l if the equity method is applied, the fair value of investments in associates

for which there are published price quotations;
l if the equity method is applied, the amounts in the financial statements of

the associate must be adjusted by fair value adjustments at acquisition and
adjustments for differences in accounting policy;
l if the equity method is applied, a reconciliation must be provided between

the summarised financial information and the carrying amount of the interest
in the associate; and
l if the interest is measured at fair value or if the associate does not prepare
IFRS
financial statements, the summarised financial information may be prepared

on the basis of the associate’s financial statements.
The following information must be disclosed for associates which are

individually immaterial to the reporting entity (it must be disclosed in total
for all associates which are individually immaterial):
l the carrying amount in total of all individually immaterial associates that

were equity accounted for; and
l summarised financial information of the associate, including profit or loss

from continuing and discontinued operations, other comprehensive income
and total comprehensive income.
The following must also be disclosed:
l the nature and extent of any significant restrictions on the associate’s ability
to transfer funds to the entity;
l if the reporting periods of the entity and the associate differ, the reporting
period of the associate should be mentioned, as well as the reason for the use
of different reporting periods;
120
Investments in associates and joint ventures l the unrecognised share of

losses of an associate, both for the current period and cumulatively;
l any contingent liabilities incurred relating to interests in associates in

accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets , which must be seperately disclosed.
Piecemeal acquisition of interest in investees
11.9 Changes in ownership interest

1 Acquisition of additional shares whereby the investee becomes an
associate
Where the equity method is applied for the first time, since significant
influence has now been secured, for instance because of the acquisition of
additional shares or the conclusion of a shareholders’ agreement, the
investor’s share of since acquisition equity (i.e. profit or loss) is accounted
for as follows:
l The investor’s share of the retained earnings (i.e. profit or loss) of the
associated company, from the date on which the investee becomes an
associate, is included in the current period’s profit or loss in the investor’s
financial statements as share of profit of associate.
Piecemeal acquisition whereby the status of an investment
Example 11.11
changes to that of an associate
(significant influence is obtained)
On 31 December 20.13, the following information relating to P Ltd and A

Ltd is available:

20.13
Ltd
and sub-
sidiaries
A Ltd
(consoli-
dated)
ASSETS
250 000
150 000
Investment in A Ltd
(40 000 shares at fair value; consideration R162 500)
240 000
Inventory
487 500
450 000
Total assets
R977 500
R600 000
250 000
100 000
Mark-to-market reserve
60 140
Retained earnings
600 000
500 000
50 000
Deferred tax
17360
R977 500
R600 000
121
Chapter 11
EXTRACT FROM STATEMENT OF PROFIT OR LOSS
P Ltd
and
subsidiaries
A Ltd
(consoli-
dated)
Revenue
800 000
300 000
Cost of sales
(300 000)
(150 000)
Income tax expense
(50 000)
(30 000)
PROFIT FOR THE YEAR
450 000
120 000
Fair value adjustment on investment

9 312
9 312
R459 312
R120 000
400 000
120 000
50 000
R450 000
R120 000
409 312
120 000
50 000
R459 312
R120 000
Retained
earnings
Ltd
and
subsidiaries
A Ltd
(consoli-
dated)
300 000
380 000
Profit for the year
400 000
120 000
Dividends (100
000)
R600 000
R500 000
122
Investments in associates and joint ventures Additional information
1 P Ltd acquired 15% of A Ltd’s issued share capital on 31 December 20.12

for R15 000. This interest did not enable P Ltd to exercise significant
influence over A Ltd.
2 P Ltd acquired a further 25% of A Ltd’s issued share capital for R147 500
on 30 November 20.13, from which date P Ltd exercised significant
influence over the financial and operating decisions of A Ltd. The fair value
of the previously held 15% interest on this date was R88 000.
3 A Ltd’s profit was earned evenly throughout the period.
4 P Ltd recognised all fair value adjustments on the investment in A Ltd

through other comprehensive income using a mark-to-market reserve in its
separate financial statements. The cumulative fair value gain on 1 January
20.13 amounted to R65 500.
5 On each date of purchase, the identifiable assets and liabilities of A Ltd

were regarded to be fairly valued.
6 Assume a company tax rate of 28% and that capital gains tax is recognised
at 80%
thereof.
Solution 11.11
P LTD GROUP
ASSETS
Non-current assets
250 000
Investment in associate (88 000 + 147 500 + 500 + 4 000) 240
000
490 000
Current assets
Inventory (P)
487 500
Total assets R977

500
Share capital
250 000
Retained earnings
661 148
911 148
50 000
Total equity
961 148
Liabilities
Deferred tax (17 360 – 1 008(J1))
16 352
Total liabilities
16 352
500
123
Chapter 11
P LTD GROUP

OTHER

DECEMBER 20.13
Revenue
800 000
Cost of sales
(300 000)
Gross profit
500 000
Share of profit of associate (4 000 + 500)
4 500
Profit before tax
504 500
Income tax expense
(50 000)
PROFIT FOR THE YEAR
454 500

Fair value adjustment on investment
(88 000 – (15 000 + 65 500) = 7 500 – (7 500 × 28% × 80%))
5 820
5 820
R460 320
404 500
Non-controlling interests (other subsidiaries)
50 000
454 500
410320
50 000
R460 320
P LTD GROUP
Mark-
Non-
Share
Retained
to-
con-
Total
Total
capital
earnings
market
trolling
equity
reserve
interests
Balance at
1 January 20.13
250 000
300 000
*50 828
600 828
# – 600
828
Changes in equity
for 20.13
Dividends
– (100 000)
(100 000)
– (100
000)
Total
comprehensive
income for the
year:
Profit for the year
404 500
5 820
410 320
50 000
460 320
Transfers
56 648
(56 648)
Balance at
31 Dec 20.13
R250 000 R661 148
– R911 148
R50 000 R961 148
50 000 – 50 000 (current year) = Nil
65 500(given) – (65 500 × 28% × 80%) = 50 828
124
C1 Analysis of owners’ equity in A Ltd
P Ltd 40%
Total
At
Since
i At acquisition of additional interest
Share capital
100 000
40 000
Retained
earnings
((500 000 – (120 000/12))
490 000
196 000
590 000
236 000
Gain from a bargain purchase
(500)
Consideration
(88 000 + 147 500)
R235 500
Current year:
Profit: 1/12/20.13–31/12/20.13 (1)
10 000
4 000
R600 000
R4 000
(1) 120 000 × 1/12 = 10 000 (accrued evenly)
Dr
Cr
J1
Mark-to-market reserve (OCI)
3 492
Deferred
tax
(SFP)
(4 500 × 28% × 80%)
1 008
Investment in A Ltd (SFP) (240 000 – 88 000 – 147 500)
500
Pro forma reversal of fair value adjustments
in respect of investment in A Ltd at group level
J2
Mark-to-market reserve (SCE)
56 648
56 648
Fair value gain realised at deemed disposal of
investment when obtain significant influence
J3
500
500
Recognise gain from a bargain purchase
J4

4 000
4 000
Equity accounting of the investment in A Ltd
at group level
125
Chapter 11
Example 11.12
Acquisition of additional interest
A Ltd acquired a 15% equity interest in B Ltd on 1 March 20.14 for R150
000. The consideration was paid in cash. In terms of the acquisition contract
A Ltd have the unconditional right to exercise options that will allow A Ltd
to obtain a further 10%
equity stake. The options however must be exercised before 28 February

20.16.
B Ltd had the following financial information:
1/03/20.14 28/02/20.15 28/02/20.16
500 000
500 000
500 000
Retained earnings
200 000
300 000
250 000
100 000
120 000
120 000
Total equity
R800 000
R920 000
R870 000
Fair value B Ltd *
R1 100 000
R1 000 000
* This fair value represents the fair value of the shares of B Ltd.
On 31 August 20.14 B Ltd sold machinery, with a carrying amount of R50

000, to A Ltd for R60 000. A Ltd paid the R60 000 amount in cash. The
remaining useful life of the machinery at the date of sale was 5 years with a
residual value of Rnil. A Ltd’s accounting policy is to depreciate machinery
over the remaining useful life. A Ltd recognised the asset and depreciation
for the year based on R60 000 (purchased amount). No other entries were
processed by A Ltd in respect of this transaction.
1 Ignore any tax implications for the purpose of this question.
2 Assume that the identifiable assets and assumed liabilities on 1 March

20.14 and 28 February 20.15 were carried at fair value.
3 A Ltd Group’s accounting policy for investments in associates is to

account for the investments in terms of the equity method in accordance with
IAS 28.
4 It is the policy of A Ltd to classify investments in associates in its own

financial statements at “Fair value through profit or loss”.
5 A Ltd has classified the option in B Ltd as financial instruments at “Fair

value through profit or loss”. The fair value gain on the options amounted to
R30 000 on 28 February 20.15. The options represent derivatives in terms of
IFRS 9.
6 Both A Ltd’s and B Ltd’s reporting dates are 28 February.
126
Assume that A Ltd has exercised their options on 1 March 20.15 at a cost of
R50 000
and consequently obtained the additional 10% equity interest. The R50 000
was paid in cash.
Pro forma consolidation journal entries
Dr
Cr
R
28 February 20.16
At acquisition
J1 Retained
earnings
– Opening balance (SCE)
15 000
((1 100 000 × 15%) – 150 000 (initial cost))
15 000
Elimination of fair value adjustment
Since acquistion
J2
18 000
Retained earnings (SCE) ((300 000 – 200 000) × 15%) 15
000
((120 000 – 100 000) × 15%)
3 000
Intragroup transaction
J3
Retained earnings (SCE) (C3)
1 350
Accumulated depreciation (SFP) (C3)
150
Machinery (SFP) (C3)
1 500
Adjustment to ensure that the consolidated retained
earnings at the beginning of 20.16 agree with the
end of 20.15.
J4 Accumulated
depreciation
(SFP)
300
Share of profit of associate (P/L) (C3)
300
Realisation of intragroup profit
Current year
J5

5 000
Investment in associate (SFP) (C4)
5 000
Elimination of fair value adjustment
J6
Investment in associate (SFP) (C1)
12 000
12 000
Gain on option
J7
Share of loss of associate (P/L)
12 500
((250 000 – 300 000) × 25%)
12 500
A Ltd’s share of the loss of the current year
127
Chapter 11
Control check for the journals

Total equity – B Ltd on 28/02/20.16 (500 000 + 250 000 + 120 000)
870 000
Equity interest at 25% held by A Ltd (870 000 × 25%)
217 500
Goodwill at initial acquisition of 15%
((500 000 + 200 000 + 100 000) ×15%) – 150 000 (Cost price) 30 000
Unrealised profit (intragroup profit) made on sale of machinery (C2) (1 500)
Realised profit in 20.15 (C3)
150
Realised profit in 20.16 (C3)
300
Total value of investment in B Ltd
R246 450
Reconciliation with group statement
Cost price of initial acquisition
150 000
Cost price of options
80 000
Bargain purchase gain recognised in profit or loss on options (C1) 12 000
Since acquisition reserves

18 000
Loss of associate for 20.16
(12 500)
Remaining unrealised profit at end of 20.16 (1 500 – 450)
(1 050)
Total value of investment in B Ltd as per journals
R246 450
Assume that A Ltd sold the right to the options for the additional 10% equity
on the 1 March 20.15 at its fair value of R30 000. A Ltd therefor loses
significant influence over B Ltd and should discontinue the equity method.
The investment is then accounted for under IFRS 9 (See IAS 28.22b).
Dr
Cr
1 March 20.15: Same journal as J1 to J3 above
28 February 20.16
J4
Investment in B Ltd (SFP)
168 000

(carrying amount = cost of R150 000 and since
acquisition equity of R18 000 (J2)
168 000
Investment in associate becomes an ordinary
investment as a result of the sale of options
J5
3 000
Investment in B Ltd (SFP)
((1 100 000 ×15%) – 168 000)
3 000
Fair value adjustment
J6
3 000
3 000
Mark-to-market reserve realised transferred to
retained earnings
128
C1 Gain on bargain purchase price as a result of the exercise of the

option Total equity for B Ltd on 01/03/20.15 (500 000 + 300 000 + 120 000)
920 000
10% Equity interest gained on execution of option by A Ltd (920 000 ×

10%) 92 000
Amount paid for options (C5)
80 000
Gains from a bargain purchase (92 000 – 80 000)
R12 000
OR the “Gain from a bargain purchase” can be calculated as follows: Interest

after option exercise
260 000
l Net
asset
value
(920 000 × 25%)
230 000
l Goodwill on 15% acquisition
[(500 000 + 200 000 + 100 000) × 15%] – 150 000(cost price) 30 000
Interest before option exercise
(168 000)
l Net
asset
value
(920 000 × 15%)
138 000
l Goodwill on 15% acquisition
30 000
Additional cash outflow (cost of options) (C5)
80 000
R12 000
C2 Sale of machinery
Consideration received by B Ltd
60 000
Carrying amount of machinery for B Ltd
(50 000)
Profit made on the sale of machinery
10 000
15% of the profit pertains to intragroup (15% × 10 000)
1 500
C3 Realisation of unrealised profit through depreciation Unrealised
profit (intragroup profit) (C2)
1 500
Realised over 5 years (useful life) (1 500/5) 300
Thus realised for 20.15 (6 months) (300 × 6/12) 150
Thus realised for 20.16 (1 year)
300
C4 Investment in the books of A Ltd
Carrying amount of investment at 28 February 20.15
(fair value of R1 100 000 × 15%)
165 000
Cost of addition purchase
80 000
Fair value gain for the year (balancing)
5 000
Carrying amount of investment at 28 February 20.16
(fair value of R1 000 000 × 25%)
R250 000
129
Chapter 11
Comment
When an investor acquires an additional interest in an existing associate, it is

dealt with as follows:
l The cost price of the additional shares acquired is added to the carrying
amount of the investment.
The
additional equity obtained (at carrying amount) is compared to the purchase

price thereof to determine whether goodwill or a bargain gain arose with the
additional purchase.
l The increased equity interest (after the acquisition of the additional shares)
is used to calculate the investor’s interest in the equity profit or loss accrued
after the acquisition of the additional interrest.
2 Disposal of the entire interest in an associate
The same principles apply when significant influence over an associate, or

joint control over a jointly controlled entity, is relinquished. The example
hereafter deals with an associate where IAS 28.18 is applicable. The total
interest in the associate is disposed of and the retained investment in the
former associate is therefore carried at Rnil.
Disposal of the entire interest in an associate
Example 11.13
(significant influence is lost)

20.17
P Ltd
and sub-
sidiaries
A Ltd
(consoli-
dated)
ASSETS
400 000
100 000
Inventory
100 000
150 000
Total assets
R500 000
R250 000
200 000
100 000
Retained earnings
200 000
150 000
100 000
R500 000
R250 000
130
Investments in associates and joint ventures STATEMENT OF PROFIT

P Ltd
and sub-
sidiaries
A Ltd
(consoli-
dated)
Revenue
300 000
200 000
Cost of sales
(112 000)
(100 000)
Gross profit
188 000
100 000
Other income (gain on disposal of shares)
16 000
Profit before tax
204 000
100 000
Income tax expense
(94 000)
(50 000)
PROFIT FOR THE YEAR
110 000
50 000
R110 000
R50 000
80 000
50 000
30 000
R110 000
R50 000
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY
Retained
earnings
Ltd
and sub-
sidiaries
A Ltd
(consoli-
dated)
150 000
125 000
Profit for the year
80 000
50 000
Dividends (31 December 20.17)
(30 000)
(25 000)
R200 000
R150 000
1 P Ltd acquired 40% of the issued share capital of A Ltd on 1 January 20.13
for R50 000, when the retained earnings of A Ltd amounted to R10 000. P
Ltd exercised significant influence over the financial and operating policies
of A Ltd from that date.
2 On 30 June 20.17, P Ltd disposed of its entire interest in A Ltd for R66
000.
3 A Ltd’s profit after tax for the six months ended 30 June 20.17 amounted
to R25 000.
131
Chapter 11
4 The disposal of the interest in the associate did not comply with the
requirements of IFRS 5 Non-current Assets Held for Sale and
discontinued operations up to the date of disposal of the interest.
5P
Ltd measures investments in associates at cost in its separate financial

statements.
6 Ignore
taxation.
Solution 11.13
P LTD GROUP
ASSETS
Non-current assets
400 000
400 000
Current assets
Inventory
100 000
Total assets
R500 000
Share capital
200 000
Retained earnings
200 000
400 000
100 000
Total equity
500 000
R500 000
132

Revenue
300 000
Cost of sales
(112 000)
Gross profit
188 000
Other expenses (loss on disposal of interest (J1))
(40 000)
Share of profit of associate (J1)
10 000
Profit before tax
158 000
Income tax expense
(94 000)
PROFIT FOR THE YEAR
64 000

R64 000
34 000
Non-controlling interests (given)
30 000
R64 000
34 000
Non-controlling interests (given)
30 000
R64 000
P LTD GROUP
Non-
Share
Retained
Total
Total
controlling
capital
earnings
equity
interests
Balance at
1 January 20.17
200 000 * 196 000
396 000
! 70 000
466 000
Changes in equity
for 20.17
Dividends
(30 000)
(30 000)
– (30
000)
Total comprehensive
income for the year:
Profit for the year
34 000
34 000
30 000
64 000
Balance at
31 December 20.17
R200 000 R200 000 R400 000
R100 000 R500 000
= 150 000(P) + 46 000(A) = 196 000
= balancing figure, as the comparative information was not given to

calculate opening balance 133
Chapter 11
Calculations
P Ltd 40%–0%
Total
At
Since
i At acquisition
Share capital
100 000
40 000
Retained earnings
10 000
4 000
110 000
44 000
Investment in A Ltd
(50 000)
Retained
earnings (125 000 – 10 000)
115 000
46 000
• Current year:
Profit:
1/1/20.17–30/6/20.17 (given)
25 000
10 000
250 000
56 000
Disposal of entire interest
(44 000)
(56 000)
R250 000
C2 Calculation of gain/(loss) on disposal of interest in associate Proceeds

on disposal of interest
66 000
Historic cost of interest disposed of
(50 000)
Gain on disposal in P Ltd’s separate records (66 000 – 50 000) 16 000
Since acquisition reserves disposed of
Retained earnings (46 000 + 10 000)
(56 000)
Loss on disposal of interest in group context
(R40 000)
The calculation can also be done as follows (IAS 28.18):
Proceeds on disposal of interest
66 000
Fair value
N/A
Carrying amount on date of disposal (50 000 + 56 000(*))
(106 000)
Loss on disposal of interest in group context
(R40 000)
(*) The R56 000 represents P Ltd’s interest in the since acquisition reserves
of A Ltd by which the investment in A Ltd has been adjusted upwards in
terms of the equity method.
C3 Pro forma consolidation journal entry
Dr
Cr
J1
Gain on disposal of interest (P/L)

(Reverse P Ltd’s gain on disposal)
16 000
Loss on disposal of interest (P/L)
(establish loss in group context)
40 000
10 000
Retained earnings – Beginning of period (SCE)
46 000
Gain correction at group level and equity accounting
of associate
134
Comments
The gain from the disposal of interest of R16 000 according to the separate
records of P Ltd is therefore effectively replaced, on applying the equity
method, by a loss on disposal of interest of R40 000 (i.e. R16 000 – R56
000).
3 Partial disposal of an interest in an associate

l If the retained interest in the former associate is a financial asset, it must be
measured at fair value, which will be deemed its fair value on initial
recognition of the financial asset, in accordance with IFRS 9 Financial
Instruments.
l On the date that an investment ceases to be an associate, the investor will

measure the retained investment at fair value. The difference between:
• the fair value of the retained interest plus any proceeds from the disposal of
the equity accounted investment; and
• the carrying amount of the equity accounted investment on the date that
significant influence was lost, must be recognised in profit or loss.
l If
the equity method is discontinued or if the current interest in the associate is

reduced and the entity continues to apply the equity method, all amounts, or
a proportionate part thereof relating to the investment previously recogn
nised in other
comprehensive income will be accounted for on the same basis as would

have been required if the investee had directly disposed of the related assets
or liabilities (IAS 28.22(c)). This means that if an amount that was
recognised in other comprehensive income would be reclassified to profit or
loss on disposal of the related assets or liabilities, the entity would reclassify
the gain or loss from equity via other comprehensive income to profit or loss
when the equitty method is discontinued.
135
Chapter 11
Partial disposal of an interest in an associate – Loss of
Example 11.14
significant influence (associate becomes IFRS 9

investment)
EXTRACT OF STATEMENTS OF FINANCIAL POSITION OF A

LTD
01/01/20.14 31/12/20.15 30/06/20.16 31/12/20.16
Share capital
600 000
600 000
600 000
600 000
Retained earnings
180 000
270 000
315 000
360 000
Revaluation surplus
225 000
276 600
276 600
276 600
258 000
296 700
309 600
335 400
R1 263 000
R1 443 300
R1 501 200
R1 572 000
for R525 000. P Ltd exercised significant influence over the financial and
operating policies of A Ltd from that date.
2 On 30 June 20.16, P Ltd disposed of a 35% interest in A Ltd for R615 000.
The remaining 5% interest had a fair value of R112 500 on 30 June 20.16
and R165 000
on 31 December 20.16. A Ltd classified the investment as a financial asset at

fair value through other comprehensive income.
3 A Ltd’s profit after tax for the six months ended 30 June 20.16 amounted
to R45 000
(earned evenly during the year).
4P
Ltd measures investments in associates at cost in its separate financial

statements.
5 The revaluation surplus relates to land. It is the policy of P Ltd to realise
the revaluation surplus on the disposal of the land. The mark-to-market
reserve relates to fair value gains on financial assets at fair value through
other comprehensive income. It is the policy of P Ltd to transfer these gains
to retained earnings on the disposal of the financial assets.
6 P Ltd included the following items in its separate financial statements for
20.16: l Financial asset at fair value through other comprehensive income
R165 000; l Gain on disposal of investment in associate R155 625 (615 000
– (525 000 ×
35/40));
l Mark-to-market reserve R52 500 (165 000 – 112 500);
l Day one gain (P/L) R46 875 ((112 500 – (525 000 x 5/40)).
7 Ignore
taxation.
136
P LTD GROUP
EXTRACT FROM CONSOLIDATED STATEMENT OF FINANCIAL

POSITION
20.16 20.15
ASSETS
Non-current assets
Investment in associate
– 597
120
Financial asset
165 000
20.15: 525 000 + 20 640 + 15 480 = 597 120
20.16: Fair value (given)
The following items relating to only A Ltd will be included in the

consolidated statement of changes in equity:
P LTD GROUP

CHANGES IN EQUITY
Reval-
Mark-to-
Retained
uation
market
earnings
surplus
reserve
36 000
20 640
15 480
Profit for the year
125 220
*57 660
Transfers from revaluation surplus
20 640
(20 640)
Transfer from mark-to-market reserve
20 640
(20 640)
R202 500
R52 500
* 5 160(J2) + 52 500(J7) = 57 660
137
Chapter 11
Calculations
P Ltd 40%–35%
Total
At
Since (RE)
(MtM;RS)
Share capital
600 000
240 000
Retained earnings
180 000
72 000
Revaluation surplus
225 000
90 000
258 000
103 200
1 263 000
505 200
Goodwill
19
800
Consideration
525 000
Retained
earnings (1)
90 000
36 000
Revaluation surplus (2)
51 600
20 640 RS
Mark-to-market reserve (3)

38 700
15 480 MtM
Profit:
1/1/20.16–30/6/20.16 (4)
45 000
18 000
Mark-to-market reserve (5)
12 900
5 160 MtM
1 501 200
525 000
54 000
20 640 RS
20 640 MtM
Disposal of 35% (8);(C2)
(459 375)
(83 370)
Transfer to retained earnings
20 640 (20 640) RS

Transfer to retained earnings
20 640 (20 640) MtM
R1 501 200 *R65 625
*R11 910
(1) (270 000 – 180 000);
(2) (276 600 – 225 000)
(3) (296 700 – 258 000);
(4) (315 000 – 270 000)
(5) (309 600 – 296 700);
(6) (360 000 – 315 000)
(7) (335 400 – 309 600);
(8) (525 000 × 35/40)
* Carrying amount of remaining interest: 65 625 + 11 910 = 77 535
Fair value adjustment: Fair value – Carrying amount = 112 500 – 77 535 =
34 965
C2 Calculation of gain/(loss) on disposal of interest in associate Proceeds

on disposal of interest
615 000
Cost of interest disposed of (525 000 × 35/40) (459
375)
Gain on disposal in P Ltd’s separate records
155 625
Less: Since acquisition reserves disposed of ((1 501 200 – 1 263 000) ×
35%) 83 370
Gain on disposal of interest (group context)
R72 255
The calculation can also be done as follows:
615 000
Consolidated net asset value (1 501 200 × 35%)
(525 420)
Goodwill (19 800 × 35/40)
(17 325)
Gain on disposal of interest (group context)
R72 255
138

journal entries
Dr
Cr
R
R
J1
72 120
36 000
Revaluation surplus (SCE)
20 640
15 480
Recognition of opening equity
J2
23 160
18 000
(OCI)
5160
Recognition of profit and other comprehensive

income (01/01/20.16–30/06/20.16)
J3
Gain on sale of shares (separate) (P/L)
155 625
Gain on sale of shares (consolidated) (P/L)
72 255
83 370
Recognition of consolidated gain on disposal of 35%
interest in associate
J4
20 640
20 640
41 280
Transfer to retained earnings on date of disposal
J5
Gain on mark-to-market reserve (OCI) (given)

52 500
Day one gain (P/L)
46 875
99 375
Elimination of mark-to-market adjustment
in separate financial statements
J6
Investment in A Ltd (SFP) (C1)
34 965
34 965
Fair value adjustment for the group on 30 June 20.16
J7
Investment in A Ltd (SFP) (165 000 – 112 500) 52
500
Gain on mark-to-market reserve (OCI)
52 500
Fair value adjustment for the group on
31 December 20.16
139
Chapter 11
Question 11.1
Basic equity accounting/interest received
The profit-or-loss section of the draft consolidated statements of profit or

loss and other comprehensive income and an extract from the consolidated
statements of changes in equity of P Ltd and its subsidiaries and A Ltd and
subsidiaries for the 20.17 financial year are as follows:

Ltd
A Ltd
Group
Group
Revenue
5 873 000
1 857 000
Cost of sales
(4 600 000) (1 539 000)

Gross profit
1 273 000
318 000
Interest received
15 000
Gain from sale of land
100 000
Dividends received
14 000
Interest paid
(30 000)
Profit before tax
1 302 000
388 000
Income tax expense
Current
(390 000)
(106 000)
Deferred
(90 000)
(34 000)
PROFIT FOR THE YEAR
822 000
248 000
R822 000
R248 000
798 000
218 000
24 000
30 000
R822 000
R248 000

Retained
earnings
Ltd
A Ltd
Group
Group
1 149 000
242 000
Dividends paid
(235 000)
(56 000)
Profit for the year
798 000
218 000

R1 712 000
R404 000
140
Investments in associates and joint ventures Additional information
1 A Ltd’s issued share capital consists of 150 000 shares of R1 each. The
company is situated in Cape Town.
2 A Ltd revalues its buildings annually on 31 August. The revaluation

surplus (after tax at 28%) had arisen as follows:
31 August 20.15
20 000
31
August 20.16
20 000
31
August 20.17
10 000
Revaluation surplus on 31 August 20.17
R50 000
3 On 1 September 20.15, P Ltd acquired 22 500 shares in A Ltd, a

manufacturer of musical instruments, for R50 000, when A Ltd’s
consolidated retained earnings amounted to R100 000. Since 1 September
20.15, P Ltd also has an option to take up another 10 000 shares in A Ltd.
The option has been exercisable at any time since 1 September 20.15, but P
Ltd has not exercised it as of yet. On 31 December 20.17, the shares in A
Ltd traded at R4,10.
4 On 1 September 20.15, A Ltd issued R100 debentures to the amount of

R150 000.
At this date, half of the debentures were taken up by P Ltd; the other half
was taken up by other shareholders. The interest received and paid by P Ltd
and A Ltd respectively relates to these debentures. The debentures bear a
market-related interest rate.
5 The profit from sale of land relates to a farm sold by A Ltd to P Ltd. It was
a transaction negotiated under extreme conditions and the profit is of a
capital nature.
6 Included in P Ltd’s profit before tax are the following items: Secretarial
services rendered by an external person
R20 000
Directors’
remuneration
– for services as directors
R100 000
7 The carrying amounts of A Ltd’s assets and liabilities as at 31 December

20.17 are the following:
Non-current assets
R1 561 100
Current assets
R438 900
R1 300 000
Current liabilities
R96 000
8 Assume a normal tax rate of 28% and that 80% of capital gains are taxable.
9 The balance of non-controlling interests in the P Ltd Group’s consolidated

statement of financial position as at 31 December 20.16 amounted to R110
000.
Required
(a) Prepare the consolidated statement of profit or loss and other

comprehensive income and consolidated statements of changes in equity of
the P Ltd Group for the year ended 31 December 20.17;
(b) Indicate the components that the carrying amount of the investment in
associate on 31 December 20.17 are compiled of; and
(c) Prepare the following notes in the consolidated financial statements of

the P Ltd Group for the year ended 31 December 20.17 (ignore comparative
amounts): l Profit before tax;
l Investment in associate.
141
Chapter 11
Part (a)
P LTD GROUP

Revenue (P)
5 873 000
Cost of sales (P)
(4 600 000)
Gross profit
1 273 000
Other income (14 000 + 15 000 – 8 400)
20 600
Share of profit of associate (32 700(C1) – 15 000 + 3 360(C2)) 21 060
Profit before tax
1 314 660
Income tax expense
Current (P)
(390 000)
Deferred (P)
(90 000)
PROFIT FOR THE YEAR
834 660
1 500
1 500
R836 160
810 660
24 000
R834 660
812 160
24 000
R836 160
142
Revalu-
Non-
Retained
ation
controlling
Total
earnings
surplus
interests
# 1 170 300
3 000
110 000 1 283 300
Dividends (P)
(235 000)
–
(235 000)
Total comprehensive income
for the year:
Profit for the year
810 660
24 000
834660
–1
500
1 500
* R1 745 960
@ R4 500
R134 000 1 882 960
# 1 149 000(P) + 21 300(C1) = 1 170 300

*
Test: 1 712 000(P) + 45 600(C1) – 15 000 + 3 360(C2) = 1 745 960
@ Test: 0(P) + 4 500(C1) = 4 500
Part (b)
The carrying amount of the investment is compiled as follows: l Cost
50
000
l Cumulative since acquisition equity 50
100
• Retained earnings to beginning of the current year
21 300
• Profit for the current year (32 700 – 8 400)
24 300
• Revaluation
surplus
500
# R100 100
# Test: 50 000(cost) + 45 600(retained earnings C1) + 4 500(revaluation

surplus C1) = 100 100
Part (c)
1 Profit before tax
Profit before tax is stated after taking into account the following expenses: l
Secretarial services
R20 000
l Directors’ remuneration – for services as director
R100 000
143
Chapter 11
2 Investment in associate
P Ltd owns a 15% interest in the manufacturing company, A Ltd. A Ltd is

incorporated in South Africa and its principal place of business is Cape
Town. The interest is equity accounted for.
Summarised financial information of associate
Non-current assets
1 561 100
Current assets
438 900
1 300 000
Current liabilities
96 000
Revenue
1 857 000
Profit for the year
248 000
248 000
Reconciliation to the carrying amount of the investment Net assets of

associate
604 000
15% interest in net assets of associate
90 600
Plus: Goodwill at acquisition
9 500
Carrying amount of investment in associate
100 100
Fair value of investment in associate
The fair value of the investment in the associate is R92 250
(R4,10 × 22 500 shares)
Calculations

P Ltd 15%
Total
At
Since
Share capital
150 000
22 500
Retained earnings
100 000
15 000
Revaluation surplus
20 000
3 000
270 000
40 500
Investment in A Ltd
(50 000)
Goodwill
(R9
500)
Revaluation surplus
20 000
3 000
142 000
21 300
• Current year:
Revaluation surplus
10 000
1 500
Profit for the year
218 000
32 700
Dividends
(56 000)
(8 400)
R604 000
45 600 RE
4 500 RS
144
Investments in associates and joint ventures C2 Journals in respect of

unrealised profit
Dr
Cr
J1
15 000
Land (SFP) (100 000 × 15% = 15 000)
15 000
J2
Deferred tax (SFP) (15 000 × 28% × 80%)
3 360
3 360
Question 11.2
Basic equity accounting/reporting dates differ

On 1 January 20.13, P Ltd purchased 40% of the issued share capital of A
Ltd for R65 000. On this date, the retained earnings of R70 000 were the
only reserve of A Ltd.
Except for land, which was undervalued by R5 000, all the assets of A Ltd
were fairly valued. A Ltd’s share capital consisted of 100 000 shares of R1
each. P Ltd exercises significant influence over the financial and operating
decisions of A Ltd.
The following represents the statements of profit or loss and other

comprehensive income and an extract from the statements of changes in
equity of the two companies for the relevant periods:

Ltd
A Ltd
Group
30/9/20.17
31/12/20.17
Revenue
1 000 000
850 000
Cost of sales
(880 000)
(710 000)
Gross profit
120 000
140 000
8 000
Profit before tax
128 000
140 000
Income tax expense
(60 000)
(70 000)
PROFIT FOR THE YEAR
68 000
70 000
Revaluation of land
10 000
Income tax relating to other comprehensive income
(1 500)
8 500
R68 000
R78 500
63 000
70 000
5 000
R68 000
R70 000

63 000
78 500
5 000
R68 000
R78 500
145
Chapter 11
Retained
earnings
Ltd
A Ltd
Group
30/9/20.17
31/12/20.17
260 000
150 000
Dividends paid (30 June 20.17)
(15 000)
(20 000)
Profit for the year
63 000
70 000
R308 000
R200 000
1 The reporting date of P Ltd is 31 December and that of A Ltd is 30

September.
2 Since the acquisition date, the investment in A Ltd has been accounted for
according to the equity method in the consolidated financial statements.
3 The revaluation surplus arose during June 20.17 when A Ltd revalued its
land.
Deferred tax on revaluations of land is recognised at the capital gains tax

rate of 15% (namely half of the normal tax rate of 30%).
4 During November 20.17, A Ltd suffered a loss of R30 000 when a

warehouse burned down. This is regarded as a significant event.
5 The balance of non-controlling interests in the P Ltd Group’s consolidated
statement of financial position as at 31 December 20.16 amounted to R75
000.
6 Assume a normal tax rate of 28% and that 80% of capital gains are taxable.
Required
(a) Prepare the consolidated statement of profit or loss and other

comprehensive income and consolidated statement of changes in equity of
the P Ltd Group which account for the results of A Ltd according to the
equity method; and (b) Calculate the investment in the associate as it will
appear in the consolidated statement of financial position at 31 December
20.17. Also show the compilation thereof.
146
Investments in associates and joint ventures Suggested solution 11.2
Part (a)
P LTD GROUP
Revenue (P)
1 000 000
Cost of sales (P)
(880 000)
Gross profit
120 000
Share of profit of associate (C1)
16 000
Profit before tax
136 000
(60 000)
PROFIT FOR THE YEAR
76 000
1 552
1 552
R77 552
71 000
5 000
R76 000
72 552
5 000
R77 552
P LTD GROUP
Non-
Retained
Revaluation controlling
Total
earnings
surplus
interests
# 296 552
–
75 000
371 552
Dividends (P)
(15 000)
(15 000)
for the year:
Profit for the year
71 000
5 000
76 000
–1
552
–
1 552
* R352 552
R1 552
R80 000
R434 104
# 260 000(P) + 32 000 + 4 552(C1) = 296 552
308 000(P) + 40 000 + 4 552(C1) = 352 552
147
Chapter 11
Part (b)
The carrying amount of the investment in associate is compiled as follows: l

Cost
65
000
l Cumulative since acquisition equity 46
104
• Retained earnings to beginning of the current year (32 000 + 4 627) 36
552
• Profit for the current year (16 000 – 8 000)
8 000
• Revaluation
surplus
552
# R111 104
# Test: 65 000(cost) + 40 000(retained earnings C1) + 1 552(revaluation

surplus C1) + 4 627 (bargain purchase C1) = 111 104
Calculation
P Ltd 40%
Total
At
Since
Share capital
100 000
40 000
Retained earnings
70 000
28 000
Revaluation surplus (2)
3 880
1 552
173 880
69 552
Investment in A Ltd
(65 000)
R4 552
Retained earnings (1)
80 000
32 000
• Current year:
Profit for the year (70 000 – 30 000)
40 000
16 000
Revaluation surplus (3)#

3 880
1 552
Dividends
(20 000)
(8 000)
R277 760
R40 000 RE
R1
552 RS
(1) 150 000 – 70 000 = 80 000
(2) 5 000 – (5 000 × 28% × 80%) = 3 880
(3) (10 000 – 5 000 #) = 5 000 – (5 000 × 28% × 80%) = 3 880
A Ltd revalued its land by R10 000 in its own financial statements, but P Ltd
had already revalued the land of A Ltd by R5 000 at date of acquisition of
the interest in A Ltd.
148
12
Interests in joint arrangements
Basic concepts
12.1
Description of basic concepts ..................................................................
151
12.2
Types of joint arrangements ....................................................................
151
Classification of joint arrangements .....................................................
152
12.3
Structure of the joint arrangement ...........................................................
153
12.4
Legal form of the separate vehicle ...........................................................
153
12.5
Terms of the contractual arrangement .....................................................
154
12.6
Other facts and circumstances ................................................................
154
Accounting for joint arrangements

12.7 Joint
operations
........................................................................................
156
12.8 Joint
ventures
...........................................................................................
156
Disclosure ........................................................................................................
157
Examples
Example 12.1:
Basic approach – Joint arrangement in a separate entity ........
158
Example 12.2:
Joint operation not structured in a separate entity ....................
164
149
Basic concepts
12.1 Description of basic concepts
IFRS 11 Joint Arrangements focuses on investments where an investor can

exercise
joint control, in contrast to control that is established between a parent and a

subsidiary in terms of IFRS 10 Consolidated Financial Statements.
A joint arrangement is an arrangement where two or more parties exercise

joint control that is the contractually agreed sharing of control. This means
that the unanimous consent of the parties sharing control is required for all
decisions about the relevant activities.
A joint arrangement is classified as follows:
l assess if collective control of an arrangement exists; and l then assess if the

contractual arrangement gives two or more parties joint control.
Collective control of an arrangement exists when all the parties must act
together to direct the activities that significantly affect the returns of the
arrangement. If collective control exists, it must be assessed whether joint
control exists.
Joint control is the contractually agreed sharing of control over an

arrangement, which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control. An entity must
assess whether all the parties have joint control of the arrangement. No
single party can control the arrangement individually.
Control is not defined in IFRS
11. In accordance with IFRS 10 Consolidated
Financial Statements an investor controls an investee when it is exposed or

has rights to variable returns from its involvement with that investee and has
the ability to affect those returns through its power of the investee.
An arrangement can be a joint arrangement even though not all of its parties
have joint control of the arrangement. Therefore, there are parties exercising
joint control of an arrangement and other parties participating in the
arrangement. An entity must apply its judgement to assess whether all of the
parties jointly control an arrangement.
12.2 Types of joint arrangements
A joint arrangement is an arrangement of which two or more parties have

joint control.
IFRS 11 identifies two types of joint arrangements: a joint operation and a

joint venture. The following characteristics are present in both: l two or
more parties are bound by a contractual arrangement; and l the contractual
arrangement establishes joint control.
A contractual arrangement is often in writing in the form of a formal

contract or minutes of discussions between parties. When the joint
arrangement is structured through a separate vehicle, the contractual
arrangement or some aspects thereof will be incorporated in the articles,
charter or by-laws of this entity. A separate vehicle is a separately
identifiable financial structure, including separate legal entities or entities
151
Chapter 12
recognised by statute, regardless of whether those entities have a legal

personality.
The contractual arrangement deals with the following:
l the purpose, activities and duration of the joint arrangement; l the

appointment of the board of directors or similar governing body of the joint
arrangement;
l the decision-making process: the matters requiring decisions from the

parties, the voting rights of the parties and the required level of support for
those matters. This process establishes joint control of the arrangement;
l capital or other contributions required of the parties; and l the sharing of

production, revenues, expenses or profit or loss of the joint arrangement.
A joint operation is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the assets and obligations for the
liabilities relating to the arrangement. Those parties are called joint
operators.
A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement.
Those parties are called joint venturers.
Is it a joint arrangement?
Does the contractual arrangement give the parties
(or a group of parties) all control of the arrangement
collectively?
No
Ļ Yes
Outside the
scope of
Do the decisions about the relevant activities
IFRS 11
require the unanimous consent of all the parties
(not a joint
that collectively control the arrangement?
No
arrangement)
Ļ Yes
Joint arrangement
Classification of joint arrangements
The classification of a joint arrangement depends upon the rights and

obligations of the parties to the arrangement. An entity must consider the
following in order to classify a joint arrangement:
l the structure of the joint arrangement;
l when a joint arrangement is structured through a separate vehicle:
• the legal form of the separate entity;
• the terms of the contractual arrangement; and
• other facts and circumstances, if applicable.
152
Sometimes a framework agreement exists that contains the general terms for
one or more activities, which sets out that the parties establish different joint
arrangements for specific activities that form part of the same agreement.
Even though those joint arrangements are governed under the same
framework agreement, they may be classified as different types of
arrangements if the rights and obligations differ.
Therefore, joint operations and joint ventures can co-exist when different
activities are undertaken by the parties that form part of the same framework
agreement.
12.3 Structure of the joint arrangement

Joint arrangements can either be structured through a separate vehicle, or
not.
A joint arrangement which is not structured through a separate vehicle can

only be classified as a joint operation. In such cases the contractual
arrangement establishes the rights and obligations of the parties, for
example, where the parties agree to manufacture a product together, with
each party being responsible for a specific task by using its own resources
and incurring its own liabilities. The contractual arrangement can also
specify how the revenues and expenses are to be shared. Another example is
where the parties to a joint arrangement might agree to share and operate an
asset together. The contractual arrangement establishes the parties’ rights to
the jointly operated asset and how the output or revenue earned from the
asset and the operating costs are shared between the parties. In such a case,
each joint operator accounts for its assets and liabilities used for the specific
task or its share of the jointly operated asset in its financial statements, as
well as its share of the revenues and expenses according to the contractual
arrangement.
A joint arrangement in which the assets and liabilities are held in a separate
vehicle can be classified either as a joint operation or a joint venture,
depending on the rights and obligations of the parties. The legal form of the
separate vehicle, the terms of the contractual arrangement and other facts
and circumstances must be considered to assess whether the parties either
have rights to the assets and obligations for the liabilities of the arrangement
(i.e. a joint operation), or they have rights to the net assets of the
arrangement (i.e. a joint venture).
12.4 Legal form of the separate vehicle
The legal form of the separate vehicle is considered in the initial assessment
of the parties’ rights to the assets and obligations for the liabilities held in the
separate vehicle.
When the joint arrangement is structured through a separate vehicle, the

legal form causes the separate vehicle to be considered in its own right, that
is the assets and liabilities held in the separate vehicle, are the assets and
liabilities of the separate vehicle and not those of the parties. In such a case
the assessment of the rights and obligations indicates that the arrangement is
a joint venture.
However, the terms agreed by the parties in the contractual arrangement, as

well as other facts and circumstances, can override the initial assessment of
the rights and obligations as was determined by the legal form.
An arrangement can only be classified as a joint operation when the

assessment of the rights and obligations as determined by the legal form,
indicate no separation between the parties and the separate vehicle. Thus the
assets and liabilities of the separate vehicle are the assets and liabilities of
the parties.
153
Chapter 12
12.5 Terms of the contractual arrangement
In many cases the rights and obligations agreed to by the parties in the
contractual arrangement are consistent, or do not conflict, with the rights and
obligations that determined the legal form of the separate vehicle in which
the arrangement has been structured.
In other cases, the parties use the contractual arrangement to reverse or

modify the rights and obligations as determined by the legal form of the
separate vehicle.
When the contractual arrangement specifies that the parties have rights to the
assets and obligations for the liabilities of the arrangement, the arrangement
is classified as a joint operation and other facts and circumstances do not
need to be considered for classification purposes.
12.6 Other facts and circumstances
Even though the fact that the legal form and the contractual arrangement
may indicate that it is a joint operation, other facts and circumstances may: l
give the parties rights to substantially all the economic benefits relating to
the arrangement; and
l cause the arrangement to depend on a continuous basis on the parties for
settling its liabilities.
In such a case the arrangement is classified as a joint operation.
When the activities of the arrangement are designed to provide output to the
parties, it is an indication that the parties have rights to substantially all the
economic benefits of the assets of the arrangement. Parties to such
arrangements often ensure their access to the output of the arrangement by
preventing sales to third parties. The effect of such an arrangement is that the
liabilities incurred by the arrangement, is settled only by the cash flow
received from the parties through their purchases of the output. When the
parties are the only source of cash flow contributing to the continuity of the
operations, this indicates that the parties have an obligation for the liabilities
of the arrangement and thus such an arrangement is classified as a joint
operation.
154
Classification of a joint arrangement structured through a separate

vehicle Does the legal form of the
separate vehicle give the
Legal form of
parties rights to the assets,
the separate
Yes
and obligations for the
vehicle
liabilities, relating to the
arrangement?
No
Do the terms of the
contractual arrangement
Terms of the
specify that the parties
Yes
contractual
have rights to the assets,
arrangement
and obligations for the
liabilities, relating to the
arrangement?
No
Joint
operation
Have the parties designed
the arrangement so that:
Yes
Its activities primarily
aim to provide the
parties with an output
(i.e. the parties have
rights to substantially all
of the economic benefits
Other facts and
of the assets held in the
circumstances
separate vehicle); and
l It depends on the
parties on a continuous
basis for settling the
liabilities relating to the
activity conducted
through the
arrangement?
No
Joint venture
155
Chapter 12
12.7 Joint
operations
A joint operator includes its interest in a joint operation in its own

accounting records and accounts for its interest in its separate financial
statements and, if applicable, in its consolidated financial statements
according to its share in the joint operation. This includes:
l its assets, including its share of any assets held jointly; l its liabilities,
including its share of any liabilities incurred jointly; l its share of the revenue
from the sale of its share of the output from the joint operation, as well as its
share of the revenue from the sale of the output by the joint operation; and
l its expenses, including its share of any expenses incurred jointly.
A party participating in a joint operation but who does not have joint control,
shall account for its interest in the arrangement in the same way as described
above, if the party has rights to the assets and obligations for the liabilities of
the arrangement.
If such a party does not have rights to the assets and obligations form the
liabilities of the arrangement, the interest will be accounted for in
accordance with IFRS 9 Financial Instruments .
12.8 Joint
ventures
A joint venturer shall account for its interest in a joint venture by applying
the equity method in accordance with IAS 28 Investments in Associates
and Joint Ventures.
The equity method is an accounting method in terms of which the interest in

a joint venture is initially recorded at cost and is subsequently adjusted for
the venturer’s share of the post-acquisition share of net assets of the joint
venture (refer to chapter 11, Investments in associates, for a detailed
discussion and explanation of the equity method).
If a party only participates in a joint arrangement and does not have joint
control, the interest in the arrangement must be accounted for in accordance
with IFRS 9 Financial Instruments .
Joint arrangement
Accounting treatment
Joint operation
Joint venture
Separate
Recognise own assets,
l Cost or
financial statements
liabilities and transactions,
l Financial asset
including its share of those
(IFRS 9)
incurred jointly
Consolidated
Recognise own assets,
Equity method (IAS 28)
liabilities and transactions,
including its share of those
incurred jointly
156
Comment
The interest in a joint operation is recognised in an entity’s separate

financial statements. Consequently there is no difference in what is
recognised in the entity’s
separate financial statements and the entity’s consolidated financial

statements.
Disclosure
The disclosure requirements for joint arrangements and associates are set out
in IFRS 12 Disclosure of Interests in Other Entities (IFRS12.20–23).
An entity must disclose information to enable users of the financial

statements to evaluate the nature, extent and financial effects of interests in
joint arrangements, including the nature and effects of contractual
relationships with other investors with joint control, as well as the nature of
and changes in the risks associated with these investments.
An entity must disclose information about significant adjustments and

assumptions made in determining:
l if the entity has joint control of an arrangement or significant influence

over another entity; and
l the type of joint arrangement (i.e. a joint operation or joint venture) if the
arrangement was structured through a separate vehicle.
The following disclosure requirements are applicable specifically to joint

arrangements that are both joint operations and joint ventures The
following information must be disclosed separately for each joint
arrangement (which includes joint operations and joint ventures) that is
l the name of the joint arrangement;
l the nature of the entity’s relationship with the joint arrangement; l the
principal place of business (and country of incorporation, if applicable or
different); and
l the proportion of ownership interest or participating share and if different,

the proportion of voting rights held.
The following disclosure requirements are applicable specifically to joint

ventures
The following information must be disclosed for every joint venture that is
l whether the investment in the joint venture is measured using the equity
method or at fair value;
l summarised financial information of the joint venture (obtained from the

financial statements, the total amount and not only the investor’s share
thereof), including dividends received, non-current and current assets, non-
current and current liabilities, revenue, profit or loss from continuing and
discontinued operations, other comprehensive income and total
comprehensive income;
157
Chapter 12
l in addition, for every material joint venture, cash and cash equivalents,
financial current and non-current liabilities (excluding trade and other
creditors and provisions), depreciation and amortisation, interest income,
interest expense and income tax expense;
l if the equity method is applied, the fair value of investments in joint

ventures for which there are published price quotations;
l if the equity method is applied, the amounts in the financial statements of

the joint venture must be adjusted by fair value adjustments at acquisition
and adjustments for differences in accounting policy;
l if the equity method is applied, a reconciliation must be provided between

the summarised financial information and the carrying amount of the interest
in the joint venture; and
l if the interest is measured at fair value or if the joint venture does not
prepare IFRS
financial statements, the summarised financial information may be prepared

on the basis of the joint venture’s financial statements.
The following information must be disclosed for joint ventures which are
individually immaterial to the reporting entity. It must be disclosed in total
and separately for all joint ventures which are individually immaterial:
l the carrying amount in total of all individually immaterial joint ventures

that were equity accounted for; and
l summarised financial information of the joint venture, including profit or
loss from continuing and discontinued operations, other comprehensive
income and total comprehensive income.
The following must also be disclosed:
l the nature and extent of any significant restrictions on the joint venture’s
ability to transfer funds to the entity;
l if the reporting periods of the entity and the joint venture differ, the
reporting period of the joint venture should be mentioned, as well as the
reason for the use of different reporting periods;
l the unrecognised share of losses of a joint venture, both for the current
period and cumulatively;
l commitments that the entity has relating to its joint ventures, which must be
separately disclosed from any commitments mentioned above; and l any
contingent liabilities incurred relating to interests in joint ventures in
accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets which must be separately disclosed.
Examples
Example 12.1
Basic approach – Joint arrangement in a separate entity
On 2 January 20.15, P Ltd acquired 40% of the issued shares of J (Pty) Ltd
for R100 000. On this date, the shareholders’ equity of J (Pty) Ltd consisted
of the following:
200 000
000
R250 000
158
P Ltd exercises joint control over the financial and operating policy
decisions of J (Pty) Ltd in terms of a joint arrangement.
Assume a normal tax rate of 28% and that 80% of capital gains are taxable.
The abridged consolidated financial statements of P Ltd and its subsidiaries,

as well as the abridged financial statements of J (Pty) Ltd for the year ended
31 December 20.17, are shown below.

20.17
P Ltd
J (Pty)
Group
Ltd
ASSETS
750 000
300 000
Investment in J (Pty) Ltd: (80 000 shares at cost)
100 000
–
Inventories
750 000
200 000
Total assets
R1 600 000
R500 000
Share capital
500 000
200 000
Retained earnings
700 000
200 000
150 000
Long-term loans
250 000
100 000

R1 600 000
R500 000

P Ltd
J (Pty)
Group
Ltd
Profit
800 000
600 000
Dividends received from J (Pty) Ltd
120 000
Profit before tax
920 000
600 000
Income tax expense
(320 000)
(240 000)
PROFIT FOR THE YEAR
600 000
360 000
R600 000
R360 000
550 000
360 000
50 000
R600
000
R360 000
159
Chapter 12

Retained earnings
P Ltd Group J (Pty) Ltd
Balance at 1 January 20.17 400
000
140 000
Dividends paid
(250 000)
(300 000)
Profit for the year
550 000
360 000
R700 000
R200 000
The joint arrangement will be accounted for as follows:
(i) Assume that, after considering all the requirements, the joint arrangement
is classified as a joint operation. The contractual arrangement specifies that
all revenues, expenses, assets and liabilities are allocated according to the
respective interests held by the operators.
(ii) The joint arrangement is classified as a joint venture.

Solution 12.1
(i) Joint operation
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (750 000(P) + 120 000(J))
870 000
Current assets
Inventories (750 000(P) + 80 000(J))
830 000
Total assets
R1 700 000
Share capital
500 000
Retained earnings
760 000
1 260 000
150 000
Total equity
1 410 000
Long-term loans (250 000(P) + 40 000(J))
290 000
R1 700 000
160
P LTD GROUP
Profit before tax (800 000(P) + 240 000(J))
1 040 000
Income tax expense (320 000(P) + 96 000(J)) (416
000)
PROFIT FOR THE YEAR
624 000
R624 000
574 000
50 000
R624 000
P LTD GROUP

IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (400 000(P) + 36 000(J)) 436
000
Ordinary dividends (P)
(250 000)
Profit for the year
574 000
Balance at 31 December 20.17 (Test: 700 000(P) + 60 000(J))
R760 000
Comment
There is no difference in recognising the joint operation in the entity’s

separate financial
statements and the entity’s consolidated financial statements. In the above

example the joint operation is shown in the consolidated financial statements
as a result of other interests held by the parent (the given information
included non-controlling interests).
161
Chapter 12
(ii) Joint venture
P LTD GROUP
ASSETS
Non-current assets
750 000
Investment in joint venture (100 000 + 60 000)
160 000
910 000
Current assets
Inventories (P)
750 000
Total assets
R1 660 000
Share capital
500 000
Retained earnings
760 000
1 260 000
150 000
Total equity
1 410 000
Long-term loans (P)
250 000
R1 660 000
P LTD GROUP
Profit (P)
800 000
Share of profit of joint venture
144 000
Profit before tax
944 000
(320 000)
PROFIT FOR THE YEAR
624 000
R624 000
574 000
50 000
R624 000
162
P LTD GROUP

IN EQUITY
Retained
earnings
Balance at 1 January 20.17 (400 000(P) + 36 000(J)) 436
000
Dividends (P)
(250 000)
Profit for the year (550 000 + 24 000)

574 000
Balance at 31 December 20.17 (Test: 700 000(P) + 60 000(J))
R760 000
Calculations
C1 Analysis of owners’ equity of J (Pty) Ltd
P Ltd 40%
Total
At
Since
i At acquisition
Share
capital
200 000
80 000
Retained
earnings
50 000
20 000
250 000
100 000
Investment in J (Pty) Ltd (cost)
(100 000)
Retained
earnings
(140 000 – 50 000)
90 000
36 000
• Current year
Profit for the year
360 000
144 000
Dividends
paid
(300 000)
(120 000)
R400 000
R60 000
Dr
Cr
J1
Investment in joint venture (SFP)
60 000
Dividends received (P/L) (given)
120 000
Retained
earnings
((140 000 – 50 000) × 40%)
36 000
Share of profit of joint venture (P/L)
144
000
Accounting for the joint venture according to the
equity method
163
Chapter 12
Example 12.2
Joint operation not structured in a separate entity
P Ltd has various farming activities. On 1 January 20.16, P Ltd entered into
the following contractual agreement with Z Ltd:
l Z Ltd will be the only supplier of P Ltd’s wheat to customers for the
following two years. Z Ltd will market and distribute the wheat. Z Ltd will
acquire the necessary equipment to distribute the wheat at its own cost and
also make use of its own assets.
l P Ltd will continue to use its own equipment and existing employees to
produce the wheat. These employees and equipment are also used in P Ltd’s
other farming activities. P Ltd is responsible for all expenses relating to the
production of the wheat.
l Z Ltd incurs all expenses on the retail side. All income from the sale of
wheat will be collected by Z Ltd and then shared in the ratio 50:50 between
Z Ltd and P Ltd (the profit of the joint operation is also shared in this ratio).
l Once the wheat inventory has been transferred to Z Ltd, the inventory (and
any accounts receivable resulting from the sales) belongs to the operators
jointly.
This arrangement is not structured through a separate entity.
The information for the joint operation for the year ended 31 December
20.16 is as follows (no settlement between the joint operators had occurred):
R
Revenue from sales
2 250 000
Gross production cost
1 275 000
Retail and distribution costs
600 000
Closing inventory (P Ltd)
165 000
Closing inventory (Z Ltd)
172 500
Accounts receivable (31 December 20.16)
322 500
Solution 12.2
Journal entries (P Ltd)
Dr
Cr
J1
Inventory (SFP)
1 275 000
Bank (SFP)
1 275 000
Cost of production
J2
Joint operation receivable (SFP) (1 275 000 – 165 000)
1 110 000
Inventory (SFP)
1 110 000
Inventory transferred to joint operation
continued
164
Dr
Cr
J3
Cost of sales (P/L) ((1 110 000 – 172 500 + 600 000) × 50%) 768
750
Joint operation receivable (SFP)
356 250
Revenue
(P/L)
(2 250 000 × 50%)
1 125 000
Share of profit from joint operation
J4
Inventory (SFP) (joint operation) (172 500 × 50%) 86
250
Accounts receivable (SFP) (joint operation) (322 500 ×
161 250
50%)
Joint operation receivable (SFP)
247 500
Recognise joint operation inventory and receivable
Journal entries (Z Ltd)
Dr
Cr
R
R
J1
Joint operation payable (SFP)
600 000
Bank (SFP)
600 000
Cost of distribution
J2 Bank
(SFP)
(2 250 000 – 322 500)
1 927 500
1 927 500
Revenue received in cash
J3
Cost of sales (P/L) ((1 110 000 – 172 500 + 600 000) × 50%) 768
750
356 250
Revenue
(P/L) (2 250 000 × 50%)
1 125 000
Share of profit from joint operation
J4
Inventory (SFP) (joint operation) (172 500 × 50%) 86
250
Accounts receivable (SFP) (joint operation) (322 500 ×
161 250
50%)
247 500
Recognise joint operation inventory and receivable
165
13
Changes in ownership of subsidiaries
through buying or selling shares
Introduction
13.1
Methods of change in ownership .............................................................
170
Acquisition of interests in subsidiaries
13.2
Methods of step-acquisition .....................................................................
171
13.3
Acquisition of an additional interest in an existing subsidiary ..................
171
Example 13.1a: Acquisition of a further interest in an existing subsidiary
where the subsidiary remains a subsidiary
(there is no change in status) (NCI is measured
at its proportionate share of the acquiree’s identifiable
net assets at the acquisition date) ..................................
172
Example 13.1b: Acquisition of a further interest in an existing subsidiary
where the subsidiary remains a subsidiary
(there is no change in status) (NCI is measured
at fair value at the date of acquisition). ............................
181
13.4
Acquisition of an additional interest whereby the investee

(investment) becomes a subsidiary .........................................................
187
Example 13.2:
Acquisition of a further interest where the investment
becomes a subsidiary (NCI is measured at fair value
at the date of acquisition). ..............................................
189
13.5
Acquisition of an additional interest whereby an associate becomes
a subsidiary ..............................................................................................
196
Example 13.3:
Acquisition of a further interest where an associate
becomes a subsidiary (control is obtained)
(NCI is measured at its proportionate share
of the acquiree’s identifiable net assets
at the acquisition date). ..................................................
198
Disposal of interests in a subsidiary
13.6
Basic approach on disposal of an interest ...............................................
205
167
Chapter 13
13.7
Partial disposal of an interest in a subsidiary where control is not lost ....
207
Example 13.4a: Partial disposal of an interest in a subsidiary with no
change in the status as the subsidiary remains a
subsidiary (control is not lost) (NCI is measured at its
proportionate share of the acquiree’s identifiable net
assets at the acquisition date) ........................................
208
Example 13.4b: Partial disposal of an interest in a subsidiary with no
subsidiary (control is not lost) (NCI is measured at fair
value at the date of acquisition). .....................................
219
13.8
Loss of control with partial disposal of a subsidiary, with a simple

investment retained ..................................................................................
224
Example 13.5:
Partial disposal of a subsidiary (loss of control) and an
investment retained (NCI is measured at their
assets at the acquisition date). .......................................
228
13.9
Partial disposal of an interest in a subsidiary, whereby it becomes
an associate .............................................................................................
237
Example 13.6:
Partial disposal of an interest in a subsidiary resulting
in a change in status as the subsidiary becomes an
associate (a loss of control by the parent occurs) (NCI is
measured at its proportionate share of the acquiree’s
identifiable net assets at the acquisition date) .................
237
13.10
Loss of control and intragroup sale of assets ..........................................
249
Example 13.7:
Loss of control over a subsidiary with previous
intragroup profits on the sale of depreciable assets .........
250
13.11
Changes of interest in complex groups ...................................................
261
Question 13.1
........................................................................................................
262
Question 13.2
........................................................................................................
270
Question 13.3
........................................................................................................
275
168
Changes in ownership of subsidiaries through buying or selling shares

Acquisitions
Disposals
Increased interest in existing
Partial disposal of interest in existing
subsidiary
subsidiary
l Transaction with owners
l Transaction with owners
l Change in the relative interests of the
l Change in the relative interests of the
owners recognised directly in equity
owners recognised directly in equity
NCI at
NCI
at
NCI at
NCI at
proportionate
proportionate
fair value
fair value
share
share
Investment becomes subsidiary
Disposal of subsidiary
l Constitutes a business combination
l Loss of control
l Remeasure previously held equity
l Derecognise net assets, goodwill and
interest to fair value and recognise
NCI of subsidiary and recognise gain
remeasurement in profit or loss or
or loss
other comprehensive income as
l Treat any amounts in OCI of subsidiary
appropriate
as if underlying assets were sold
l Treat cumulative fair value
l Remeasure retained interest to fair
adjustments on investment as if
value and recognise gain or loss

investment was sold
Associate becomes subsidiary
Subsidiary becomes associate
l Equity-accounting for associate
l Loss of control
l Constitutes a business combination
l Derecognise net assets, goodwill and
l Remeasure previously held equity
NCI of subsidiary and recognise gain
interest from carrying amount to fair
or loss
value and recognise remeasurement
l Treat any amounts in OCI of subsidiary
in profit or loss
as if underlying assets were sold
l Treat any amounts in OCI of
l Remeasure retained equity interest to
associate as if underlying assets
fair value and recognise gain or loss
were sold
l Equity-accounting for associate
Changes of interest in complex
Subsidiary held for sale
groups
l (End of chapter 14)
l Integrated revision example
169
Chapter 13
Introduction
13.1 Methods of change in ownership
Changes in ownership in an investee can occur in the following

circumstances: l piecemeal acquisition of interests in an investee from other
owners; l disposal of interests in an investee to other owners;
l as a result of the issue of additional shares by an investee; l as a result of a

buy-back of shares by an investee; and l as a result of other events such as
obtaining or losing control through a contract with other owners.
In previous chapters, it was accepted that:
l the parent acquired control over the subsidiary as a result of a single

purchase of shares or as a result of the issue of shares to the parent upon
incorporation of the subsidiary; and
l the parent’s interest in the subsidiary remained unchanged throughout the

entire period covered by the financial report.
This assumption was adopted in order not to obscure the basic aspects
involved in the preparation of consolidated financial statements.
It may nevertheless happen that control is obtained not in a single purchase,
but by means of successive share purchases, or that various changes in the
nature and extent of ownership of the parent in, or influence of the parent
over, the investee could have taken place.
It is important to note that any acquisition of control over a business would

constitute a business combination in terms of IFRS 3. Disclosure of the
business combination should be made in terms of IFRS 3.59–63 and B64–
B67. In this chapter the business combination would be achieved in stages
and the following information should, in particular, be disclosed (IFRS
3.B64(p)):
l the acquisition-date fair value of the equity interest in the acquiree held by
the acquirer immediately before the acquisition date;
l the amount of any gain or loss recognised as a result of re-measuring to fair

value the equity interest in the acquiree held by the acquirer before the
business combination; and
l the line item in the statement of profit or loss and other comprehensive
income in which that gain or loss is recognised.
The issues arising in the preparation of consolidated financial statements of a

group when changes occur in the nature and extent of ownership of the
parent in a subsidiary are discussed in this chapter. This chapter only deals
with: l changes in ownership of subsidiaries; where
l the
parent
buys or sells shares of the subsidiary.
Changes in the ownership of associates and joint ventures through buying or

selling shares of the associate and joint ventures were addressed in the
chapter on investments in associates and joint ventures (see chapter 11). The
next chapter of this work deals with other changes (e.g. rights issues,
buyback, etc.) in the ownership of investees (see chapter 14).
170
13.2 Methods
of
step-acquisition
There are various ways in which interests can be acquired on a piecemeal

basis: l acquisition of an additional interest in an existing
subsidiary/associate/joint venture (i.e. there is no change in status of the
investee); and l acquisition of an additional interest in an entity, with the
result that the entity becomes a subsidiary/associate/joint venture (i.e. a
change in status).
It was mentioned that this chapter only deals with subsidiaries and that
changes in associates and joint ventures through share purchases are
addressed in the chapter on associates and joint ventures (chapter 11).
13.3 Acquisition of an additional interest in an existing subsidiary
1 IFRS
10.23
states
that
changes in a parent’s ownership interest in a subsidiary that do not result

in a loss of control are accounted for as equity transactions (i.e. transactions
with owners in their capacity as owners). It should be borne in mind that
non-controlling interests are also classified as equity (IFRS 10.22).
Furthermore, the consolidated carrying amounts of the parent’s and non-
controlling interests must be adjusted to reflect the change in their relative
interests in the subsidiary. This change shall be recognised directly in
equity and is attributable to the owners of the parent. This means that no
gain or loss should be recognised in the consolidated profit or loss.
The acquisition by the parent of additional shares in an existing subsidiary

which it already controls, is not a business combination (obtaining
control). This transaction does not result in additional goodwill being
recognised and does not affect the measurement of the subsidiary’s assets
and liabilities, as would be the case for a business combination. This means
that no change in the carrying amount of the subsidiary’s assets (including
goodwill) or liabilities are recognised. The transaction only changes the
parent’s and non-controlling relative interests in the subsidiary.
2 IFRS 10.B96 states that the amount to be recognised in equity would be

the difference between the amount by which the non-controlling interests
are adjusted and the fair value of the consideration paid or received. This
adjustment in the amount of the non-controlling interests will be affected by
the initial measurement of the non-controlling interests at the date of the
business combination (at its proportionate share of the acquiree’s identifiable
net assets or at fair value), which is illustrated in the examples below.
There may arguably be various approaches to calculate the adjustment to the

non-controlling interests. It is important to note the IFRIC has considered the
issue of the reallocation of the equity represented by goodwill between the
non-controlling and controlling interests after a change in a parent’s
ownership interest where control is not lost. The IFRIC has recommended
that the IASB should address this issue (and other related issues) as part of
their IFRS 3 post-implementation review. Refer to the IFRIC Update
September 2010 and the IASB Update May 2011 for more detail.
171
Chapter 13
During the IASB’s post-implementation review of IFRS

3 they regarded the
measurement of the non-controlling interests as a “low” significance for

future steps to be taken. Until a final conclusion has been reached, this work
follows the approach that the equity represented by goodwill is only re-
attributed between the parent and the non-controlling interests if any
goodwill was initially recognised in respect of the non-controlling interests
(i.e. NCI measured at fair value) (also see comment (b) to the analysis in
example 13.1b). Under this approach the subsidiary basically consists of two
separate asset pools: one asset pool in respect of all the other net assets
(excluding goodwill); and goodwill (which may be recognised only in
respect of the parent’s interest or for both the parent’s and the non-
controlling interests’). Also refer to chapter 3.7 for an additional discussion
in this regard.
3 Disclosure of the change in a parent’s ownership interest in a subsidiary

that did not result in a loss of control should be made in terms of IFRS 12
Disclosure of Interests in Other Entities. The parent shall disclose
information that enables users of the consolidated financial statements to
evaluate the consequences of such changes (IFRS 12.10(b)(iii)). In meeting
this requirement the parent shall present a schedule that shows the effect on
the equity attributable to owners of the parent of any changes in its
ownership interest in a subsidiary that did not result in a loss of control
(IFRS 12.18).
Acquisition of a further interest in an existing subsidiary
where the subsidiary remains a subsidiary (there is no change
Example 13.1a
in status) (NCI is measured at its proportionate share of the
acquiree’s identifiable net assets at the acquisition date)
The following are the draft condensed financial statements of P Ltd and
subsidiary S Ltd at 30 June 20.19:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.19

P Ltd
S Ltd
ASSETS
Investment in S Ltd at cost:
90 000 shares purchased on 1/7/20.17
97 000
30 000 shares purchased on 31/12/20.18
40 000
Inventory
106 000
182 500
Total assets
R243 000
R182 500
200 000
150 000
Retained earnings
43 000
32 500
R243 000
R182 500
172

FOR THE YEAR ENDED 30 JUNE 20.19
P Ltd
S Ltd
Revenue
200 000
100 000
Cost of sales
(157 000)
(58 000)
Gross profit
43 000
42 000
Dividend received
6 000
Profit before tax
49 000
42 000
Income tax expense
(14 000)
(11 500)
PROFIT FOR THE YEAR
35 000
30 500
––
R35 000
R30 500

Retained earnings
P Ltd
S Ltd
Balance at 1 July 20.18
18 000
12 000
Profit for the year
35 000
30 500
Dividends: 30/9/20.18
(10 000)
(10 000)
Balance at 30 June 20.19
R43 000
R32 500
1 S Ltd became a subsidiary of P Ltd on 1 July 20.17, on which date the

credit balance on its retained earnings amounted to R9 000. On this date, P
Ltd acquired 90 000 shares in S Ltd at a cost of R97 000.
2P
Ltd elected to measure the non-controlling interests at the non-controlling

interests’ proportionate share of the acquiree’s identifiable net assets at the
acquisition date.
3 On the date of the business combination, the assets and liabilities of S Ltd
were regarded to be a fair reflection in terms of the requirements of IFRS 3.
4 P Ltd classified the investment in S Ltd at cost in its separate financial

statements.
5 On 31/12/20.18, P Ltd acquired another 30 000 shares in S Ltd from the

other shareholders at a cost of R40 000.
6 The profit of S Ltd was earned evenly during the current year ended 30
June 20.19.
7 The company tax rate is 28% and CGT (capital gains tax) is calculated at
80%
thereof.
173
Chapter 13
Comments
a The date of the business combination is 1 J
July 20.17. At that date the assets and
liabilities of S Ltd were regarded to be fairly measured in terms of IFRS 3.

Therefore, no remeasurements of any item were needed. However, if the
assets and liabilities were not fairly valued, remeasurements may have been
needed as were explained in chapter 9.
b The acquisition of the 30 000 shares at 31/12
2/20.18 does not constitute a business
combination as P Ltd already had control over S Ltd. The transaction was
between
equity participants and the effec
ct of the transaction should be recognised within
equity in the consolidated financial statements.
Solution 13.1a
The consolidated financial statements of P Ltd and itts subsidiary S Ltd are
prepared as follows:
P LTD GROUP
AS AT 30 JUNE 20.19
ASSETS
Non-current assets
Goodwill
1 600
Current assets
Inventory (106 000(P) + 182 500(S))
288 500
Total assets
R290 100
Share capital
200 000
Retained earnings
60 150
Other components of equity (changes in ownership)
(6 550)
253 600
36 500
Total equity
290 100
R290 100
174
Changes in ownership of subsidiaries through buying or selling shares P
LTD GROUP
Revenue (200 000(P) + 100 000(S))
300 000
Cost of sales (157 000(P) + 58 000(S))
(215 000)
Gross profit (43 000(P) + 42 000(S))
85 000
Income tax expense (14 000(P) + 11 500(S))
(25 500)
PROFIT FOR THE YEAR
59 500
Other comprehensive income for the year
R59 500
Owners of the parent(#)

50 350
Non-controlling interests (6 100 + 3 050)(#)
9 150
R59 500
Owners of the parent(#)
50 350
Non-controlling interests (6 100 + 3 050)(#)
9 150
R59 500
(#) The same as profit for the year, as there is no other comprehensive
income in the example.
P LTD GROUP
Non-
Changes
Share
Retained
con-
Total
in
Total
capital
earnings
trolling
equity
ownership
interests
Balance at
1 July 20.18
200 000 * 19 800
219 800
! 64 800
284 600
Changes in
equity for
20.19
Total
comprehensive
income
for the year:
Profit for the
year
– 50
350
50 350
9 150
59 500
Dividends
– (10
000)
(10 000)
(4 000)
(14 000)
Purchase of
interest
––
(6 550)
(6 550)
(33 450)
(40 000)
Balance at
30 June 20.19 R200 000 R60 150
(R6 550)
R253 600
R36 500
R290 100
18 000 + 1 800(S) = 19 800
63 600 + 1 200 = 64 800
175
Chapter 13
P LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Changes in ownership in subsidiary:
During the current year, P Ltd acquired an additional 20% interest in S Ltd,
an existing subsidiary. This resulted in an amount of R6
550 being
recognised in equity as presented in the consolidated statement of changes in

equity. Details of the transaction between the equity participants are as
follows:
Fair value of the consideration paid
40 000
Decrease in the non-controlling interests
(33 450)
Adjustment to equity attributable to owners of the parent
R6 550
Comments
IFRS 12.18 requires that an entity shall present a schedule that shows the
effects on the
equity attributable to owners of the parent of any changes in its ownership

interest in a subsidiary that do not result in a loss of control. Other
disclosures relating to the group and the subsidiary are also required in terms
of IFRS 12, but are not illustrated in chapter 13 and 14 in detail.
Calculations
The basic consolidation procedures comprise:
l elimination of common items;
l elimination of intragroup items; and

l the
consolidation of the remaining items.
In this chapter, the shorter method is used to perform the basic consolidation
procedures (i.e. no worksheet is drawn up). The pro forma consolidation
journal entries are also shown to provide a complete picture.
176
Changes in ownership of subsidiaries through buying or selling shares C1

Analysis of the owners’ equity of S Ltd
P Ltd 60%–80%
Total
NCI
At
Since
Share capital
150 000
90 000
60 000
Retained earnings
9 000
5 400
3 600
159 000
95 400
63 600
Equity represented by
goodwill –– Parent
1 600
1 600
Consideration and NCI
160 600
97 000
63 600
Retained earnings
(12 000 – 9 000) 3
000
1 800
1 200
• Current year:
Profit:
1/7/20.18–31/12/20.18
(30 500 × 6/12) 15
250
9 150
6 100
Dividend: 30/9/20.18
(10 000)
(6 000)
(4 000)
168 850
4 950
66 900
Further
acquisition
(66 900 (NCI) × 20/40 = 33 450)
33 450
(33 450)
Changes in ownership (equity)
(per IFRS 10.23)

6 550
40 000
33 450
Profit:
1/1/20.19–30/6/20.19
(30 500 × 6/12) 15
250
12 200
3 050
R184 100
R17 150
R36 500 (*)
(*) Note that, due to the inclusion of the goodwill of R1 600 (relating to the
parent only) in the total equity column, this amount will no longer equate to
exactly 20% of the total equity column.
177
Chapter 13
Comments
a The analysis represents a chronological exposition of the events that affect
the
owners’ equity in the subsidiary.
b The profit of the current period is allocated to two periods, namely the
periods before and after the change in owners’ equity. Special attention must
be paid to the treatment of the subsidiary’s dividend declared/paid, which
relates to a specific date and must therefore be allocated to the correct period
– in this example to the period before the acquisition of additional shares by
the parent.
c The amount for the change in ownership recognised in equity can be

calculated as
follows (see IFRS 10.B96) (from the perspective of the NCI): Fair value of
the consideration received by NCI
40 000
Amount by which the non-controlling interests are adjusted (reserves

acquired by parent from NCI) (66 900 × 20/40 = 33 450) (33 450)
NCI after transaction ((168 850 – 1 600GW) × 20%)
33 450
NCI before transaction ((168 850 – 1 600GW) × 40%)
(66 900)
Amount to be recognised directly in equity
R6 550
The
approach in terms of IFRS 10.B96 that the difference between the change in
the non-controlling interests and the amount paid o
or received is to be recognised in equity
is also clear from journal 5 below.
It
is
important to understand the ra
ational of the calculation of the change in ownership.
The non-controlling shareholders sold 50% of their interest in the subsidiary

to the parent. The carrying amount of the NCI is therefore reduced by 50%,
being R33 450.
The parent paid R40 000 for this equity and, as such, the difference of R6
550 is recognised within equity as a transaction between the equity
participants.
d The amount for the change in ownership recognised in equity can be

calculated as
follows (see IFRS 10.B96) (from the perspective of the parent): Fair value
of the consideration paid by the parent
(40 000)
Increase in parent’s interest/amount by which the non-controlling interests

are adjusted (reserves acquired from NCI)
33 450
Parent’s interest after transaction
((168 850 – 1 600GW) × 80%) + 1 600GW)
135 400
Parent’s interest before transaction

((168 850 – 1 600GW) × 60%) + 1 600GW)
(101 950)
(R6 550)
C2 Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32
Consideration transferred at acquisition date: IFRS 3
3.32(a)(i)
97 000
Amount of non-controlling interests: IFRS 3.32(a)(ii) (159 000 × 40%) 63

600
160 600
Net of the identifiable assets acquired and liabilities assumed at acquisition

date: IFRS 3.32(b)
(159 000)
Goodwill (parent)
R1 600
178

Dr
Cr
R
R
J1
Share capital (SCE)
150 000
9 000
97 000
Non-controlling interests (SFP/SCE) 63
600
Goodwill (SFP) (parent only)
1 600
Main elimination journal entry at acquisition date
J2
1 200
200
Non-controlling interests’ portion of retained
earnings since acquisition to beginning of current

year
J3
6 100
100
Non-controlling interest’s portion of current year’s
profit (1/7/20.18–31/12/20.18, i.e. before additional
acquisition)
J4
Dividend received (P/L)
6 000
000
Dividend paid (SCE)
10 000
Elimination of intragroup dividend
J5
33 450
Changes in ownership (equity) (SCE) (IFRS 10.23)
6 550
40 000
Acquisition of a further 20% interest in S Ltd
eliminated
J6
3 050
050
Non-controlling interests’ portion of current year’s
profit (1/1/20.19–30/6/20.19, i.e. after additional
acquisition)
C4 Test of consolidated equity
P Ltd (200 000 + 43 000)
243 000
S Ltd (Retained earnings per analysis) 17
150
R260 150
Consolidation adjustments (refer to pro forma consolidation journal entries) l
Recognise change in ownership (in terms of IFRS 10.23)
(6 550)
l Recognise non-controlling interests
36 500
Consolidated equity
R290 100
179
Chapter 13
C5 Detailed calculation of allocation of equity
Attributable
Attributable
Total
to parent
to NCI
Equity of subsidiary before change
represented by:
168 850
101 950
66 900
Other net assets
167 250
100 350
66 900
Goodwill
1 600
1 600
Change in ownership represented by:
33 450
(33 450)
Other net assets reallocated
33 450
(33 450)
Goodwill relinquished
N/A
N/A
Equity of subsidiary after change

represented by:
168 850
135 400
33 450
Other net assets
167 250
133 800
33 450
Goodwill
1 600
1 600
Comments
a No
fair
value adjustment was made to the non-controlling interests at the acquisition
date as P Ltd elected to measure the non-controlling interests at their

proportionate share of the acquiree’s identifiable net assets at the acquisition
date. Refer to IFRS 3.19.
b This example is not a business combination achieved in stages (i.e. a step-

acquisition) as defined in IFRS 3.41 and .42, as P Ltd obtained control at the
date of the first share purchase (i.e. the acquisition of the 60% interest).
Since S Ltd immediately became a subsidiary, no remeasurement of
previously held equity interest in S Ltd is required as per IFRS 3.42.
c IFRS
10.23 requires that changes in a parentt’s owners’ equity in a subsidiary that

do not result in a loss of control (which is the case in this example) are
accounted for as equity transactions (i.e. transactions with owners in their
capacity as owners). In this chapter, these equity transactions will be
referred to as “changes in ownership”
as can be seen in the journal entries and the statement of changes in equity.
IFRS 10
is not specific about the exact equity category to be used for this transaction.
The authors are of the opinion that a separate equity category should be
used, because the transaction is regarded as equity by IFRS 10 and
specifically transactions with owners in their capacity as owners. Some are
of the opinion that the transaction should be accounted for within retained
earnings, which is also an acceptable alternative.
d In volume 1 of this work (chapter 3.3), it was indicated that the investment
in the subsidiary (in the parent’s record
ds) represents a claim against the net assets of the
subsidiary as represented by its equity. As a result it should be eliminated in

the consolidated financial statements (i.e. an elimination of common items in
terms of IFRS 10.B86(b)). As a result of the journals entries above, the
investment is indeed eliminated: Investment of R137 000 (given) – R97 000
(J1) – R40 000 (J5) = Rnil.
e The two separate asset pools and the allocation of these asset pools
between the
parent and the non-controlling interests are clearly evident from Calculation
5 above.
180
Changes in ownership of subsidiaries through buying or selling shares The

following example is used to contrast the measurement of the non-
controlling interests at fair value at the acquisition date, to the
measurement thereof at their proportionate share of the acquiree’s
identifiable net assets (as the example above).
Acquisition of a further interest in an existing subsidiary
where the subsidiary remains a subsidiary (there is no
Example 13.1b
change in status) (NCI is measured at fair value at the date of
acquisition)
Assume the same information as in example 13.1a, except that P Ltd elected
to measure non-controlling interests at fair value at the date of acquisition.
The fair value of the non-controlling interests was R64 200 at the acquisition
date (when P Ltd obtained control over S Ltd).
Solution 13.1b
The consolidated statement of profit or loss and other comprehensive income

is the same as in part (a) of this example. The rest of the consolidated
financial statements are prepared as follows:
P LTD GROUP
AS AT 30 JUNE 20.19
ASSETS
Non-current assets
Goodwill (parent and NCI)
2 200
Current assets
Inventory (106 000(P) + 182 500(S))
288 500
Total assets
R290 700
Share capital
200 000
Retained earnings
60 150
(6 250)
253 900
36 800
Total equity
290 700

R290 700
181
Chapter 13
P LTD GROUP
Changes
Non-
Share
Retained
in
con-
Total
Total
capital
earnings
owner-
trolling
equity
ship
interests
Balance at
1 July 20.18
200 000
* 19 800
219 800
! 65 400
285 200
Changes in
equity for
20.19
Total
comprehensive
income for
the year:
Profit for the year
50 350
–
50 350
9 150
59 500
Dividends
(10 000)
(10 000)
(4 000)
(14 000)
Purchase of
interest –
(6 250)
(6 250)
(33 750)
(40 000)
Balance at
30 June
20.19
R200 000
R60 150
(R6 250) R253 900
R36 800
R290 700
18 000 + 1 800(S) = 19 800
63 600 + 600 (represented by goodwill) + 1 200 (interest in RE) = 65 400
P LTD GROUP
During the current year, P Ltd acquired an additional 20% interest in S Ltd,
an existing subsidiary. This resulted in an amount of R6
250 being
recognised in equity as presented in the consolidated statement of changes in

equity. Details of the transaction between the equity participants are as
follows:
Fair value of the consideration paid
40 000
Decrease in the non-controlling interests
(33 750)
R6 250
182

Calculations
C1 Analysis of the owners’ equity of S Ltd
P Ltd 60%–80%
Total
NCI
At
Since
Share capital
150 000
90 000
60 000
Retained earnings
9 000
5 400
3 600
159 000
95 400
63 600
goodwill – Parent and NCI
(comment (a))
2 200
1 600
600
161 200
97 000
64 200
Retained earnings
(12 000 – 9 000)
3 000
1 800
1 200
• Current year:
Profit:
1/7/20.18–31/12/20.18
15 250
9 150
6 100
(10 000)
(6 000)
(4 000)
169 450
4 950
67 500
Further
acquisition
(67 500 (NCI) × 20/40 = 33 750)
33 750
(33 750)
(per IFRS 10.23)
6 250
40 000
33 750
Profit: 1/1/20.19–30/6/20.19
15 250
12 200
3 050
R184 700
R17 150
R36 800 (*)
(*) This amount will not be 20% of the total equity of S Ltd as the goodwill
(at the acquisition date) that was included in the equity at acquisition date is
not in the same proportion to owners’ equity at the acquisition date.
183
Chapter 13
Comments
a Since NCI is now measured at fair value, th
he goodwill arising at acquisition date is

treated as an asset of the subsidiary, i.e. equity also increases by that same
amount (R2 200) at acquisition in order for the accounting equation to stay
in balance, as follows:
EQUITY =
ASSETS LESS LIABILITIES
+ 2 200 =
+2
200 (goodwill)
This
amount is seen in the total equity column. The net equity therefore
represents the goodwill contributed of R2 200.
b The amount for the change in ownership recognised in equity can be

calculated as
the consideration received by NCI
40 000

acquired by parent from NCI and goodwill re-attributed)
(67 500 × 20/40 = 33 750)
(33 750)
NCI after transaction ((169 450 – 2 200GW) × 20% + (600GW × 20/40)) 33

750
NCI before transaction ((169 450 – 2 200GW) × 40% + (600GW × 40/40))

(67 500)
Amount recognised directly in equity
R6 250
Through the parent’s acquisition of another 20% interest in the subsidiary,

20% of the net asset value (excluding goodwill) ((169 450 – 2 200) × 20% =
33 450) was transferred from the non-controlling interests to the parent’s
interest. Furthermore, the non-controlling owners relinquished some of the
goodwill (600 × 20/40 = 300) that was attributable to them to the parent.
This resulted in a decrease of the non-controlling interests of R33 750 (33
450 + 300).
Take
note that the amount for goodwill in the consolidated financial statements is
not adjusted. It is the equity, represented by the goodwill that is re-attributed
between the equity participants (parent and NCI).
As
was explained in chapter 13.3 above, this work follows the approach that the
non-controlling owners relinquished some of the goodwill that was
attributable to them to the parent.
c The
amount for the change in ownership recognised in equity can be calculated

as
(40 000)
Increase in parent’s interest / amount by which the non-controlling interests

are adjusted (reserves acquired from NCI)
33 750
Parent’s interest after transaction ((169 450 – 2 200GW) × 80%) + 1 600
135 700
own GW + 300GW from NCI)
((169 450 – 2 200GW) × 60%) + 1 600 own GW)
(101 950)
(R6 250)
C2 Proof of calculation of go
oodwill of S Ltd in terms of IFRS 3.32
3.32(a)(i)
97 000
Amount of non-controlling interests: IFRS 3.32(a)(ii)
64 200
161 200

date: IFRS 3.32(b)
(159 000)
R2 200
184

The pro forma consolidation journal entries are the same as in example
13.1a, except for those indicated below.
Dr
Cr
J1
Share capital (SCE)
150 000
9 000
Goodwill (parent and NCI) (SFP)
2 200
97 000
64 200

J5
33 750
Changes in ownership (equity) (SCE) (IFRS 10.23)
6 250
40 000
Acquisition of a further 20% interest in S Ltd
eliminated
C4 Test of consolidated equity
P Ltd (200 000 + 43 000)
243 000
S Ltd (RE per analysis)
17 150
R260 150
Consolidation adjustments
(refer to pro forma consolidation journal entries)
l Recognise gain from a bargain purchase in retained earnings –
l Recognise change in ownership (in terms of IFRS 10.23)
(6 250)
l Recognise non-controlling interests
36 800
Consolidated equity
R290 700
Attributable
Attributable
Total
to parent
to NCI
Equity of subsidiary before change
represented by:
169 450
101 950
67 500
Other net assets
167 250
100 350
66 900
Goodwill
2 200
1 600
600
33 750
(33 750)
33 450
(33 450)
300
(300)
represented by:
169 450
135 700
33 750
Other net assets
167 250
133 800
33 450
Goodwill 2 200
1 900
300
185
Chapter 13
Comments
a In this example (compared to example 13.1a), the non-controlling interests

at the
acquisition date are measured at the acquisition-date fair value, as P Ltd

elected to measure the non-controlling interests at fair value. Refer to IFRS
3.19.
b The goodwill recognised from the perspective of the non-controlling

interests, as a result of the measurement of the non-controlling interests at
fair value, should be
taken into account in adjusting the carrying amount of the non-controlling

interests to reflect the change in their relative interest in the subsidiary.
4 If an increase in the parent’s interest has taken place, the analysis of the
subsidiary’s owners’ equity also separately reflects this increase in interest
in every consolidation thereafter. This is done to
o ensure that changes in ownership

(which are regarded as transactions with owners) are determined separately,
and transfers to and from the non-controllin
ng interests are correctly taken into account at
the relevant dates. With reference to example 13.1a, the appropriate sections
of S Ltd’s analysis of owners’ equity with a view to the consolidation on 30
June 20.20
(end of the next reporting period) will be as follows:
Analysis of the owners’ equitty of S Ltd
P Ltd 60%–80%
Total
NCI
At
Since
Share capital
150 000 90
000
60
000
Retained earnings
9 000 5
400
3
600
159 000 95
400
63
600
goodwill – Parent
1 600
1 600
160 600 97
000
63
600
The
period: 1/7/20.17–31/12/20.18
Retained earnings (aggregated)
8 250
950 3
300
168 850
66
900
Purchase of shares (20%)
33 450
(33
450)
6 550
40 000
33
450
The
period: 1/1/20.19–30/6/20.19
Retained earnings
15 250
12
200 3
050
• Current year: detail for that year
5A
change in the degree of control usually means that the profit and items of
other comprehensive income of the subsidiary involved must, for the current
period, be allocated between two periods, i.e. the periods
s before and since the change in
degree of control. As indicated earlier, the retained earnings of a subsidiary

are dealt with in the analysis of owners’ equity by accounting for the
constituent elements thereof, namely profit and dividends.
186
Changes in ownership of subsidiaries through buying or selling shares l

Profit
The allocation is generally done evenly on the assumption that profit is

earned evenly during the period, except where the operations of the
subsidiary clearly reflect fluctuations or unique items. Certain items arising
from the consolidation process must also first be accounted for before such
allocation can be made, for example, the allocation of the preference
dividend of the subsidiary or the increased depreciation of the subsidiary
resulting from a pro forma remeasurement of a depreciable asset of the
subsidiary at acquisition date.
Unrealised profit resulting from regular sales of inventories by the subsidiary
to the parent, should, in general, be treated as follows:
• Unrealised profit at the beginning of the period realises in the period

before the change in degree of control.
• Unrealised profit at the date of the change in degree of control realises in

the period since (after) the change in interest.
l Dividends
Dividends are allocated to the relevant period (before or after the change in
interest), based on the date on which the dividend was declared by the
subsidiary (and no longer at the discretion of the entity – refer to IFRIC 17).
l Items of other comprehensive income
Items of other comprehensive income are usually the result of fair value
movements or the remeasurement of asset or liabilities. These items are
allocated to the relevant period (before or after the change in interest), based
on when the fair value movements occurred or when the assets or liabilities
were remeasured.
13.4 Acquisition of an additional interest whereby the investee
(investment) becomes a subsidiary
1 In the previous chapters, it was repeatedly emphasised that: l the

acquisition date is an important point in time; and l the periods before and
after the acquisition date are important time phases in the preparation of
consolidated financial statements.
IFRS 3 Business Combinations defines the acquisition date as the date on

which the acquirer effectively obtains control over the acquiree. An
investor may have had a simple investment in an entity (say 15%, without
significant influence or control), and later obtained an additional interest in
the entity, resulting in obtaining control. In accounting for such a business
combination, the investor would effectively derecognise the previously held
investment at its fair value, and then account for the business combination
in terms of IFRS 3 (refer to chapters 2 and 9 for more detail).The accounting
for a business combination achieved in stages is prescribed in IFRS 3.41 and
.42, and paragraphs BC384–BC389 in the basis for conclusions supporting
IFRS 3.
2 IFRS 3 establishes the acquisition date as the single measurement date for
all assets acquired, liabilities assumed and any non-controlling interests in
the acquiree (refer to chapters 2 and 9 for detail). The obtaining of control
therefore triggers remeasurement of all the identifiable net assets of the
subsidiary and the 187
Chapter 13
recognition of goodwill (if any). In a business combination achieved in

stages, the acquirer furthermore remeasures its previously held equity
interest in the acquiree at its acquisition-date fair value, and recognises the
resulting gain or loss, if any, in profit or loss or other comprehensive income,
as appropriate (refer to IFRS 3.42).
In prior reporting periods, the acquirer may have recognised changes in the
fair value of its equity interest in the acquiree in other comprehensive
income (e.g.
because the parent elected to do so in accordance with IFRS 9 Financial

Instruments). If so, the amount that was previously recognised in other
comprehensive income shall be recognised as if the acquirer had disposed
directly of the previously held equity interest. This may require the acquirer
(in the consolidated financial statements) to transfer the amount in the mark-
to-market reserve to retained earnings (IFRS 9.B5.7.1) on the date that
control is obtained over the acquiree. This would, for example, occur when
a simple investment that was previously measured at “fair value through
other comprehensive income” now becomes a subsidiary over which control
is exercised in the current year. Thus, all the fair value adjustments on the
equity investment that were previously recognised in a mark-to-market
reserve (i.e. other comprehensive income) before control was obtained, will
be transferred within equity (in the consolidated financial statements) when
control over the subsidiary is obtained.
The IASB motivated the approach above by concluding that a change from
holding a non-controlling investment in an entity to obtaining control of that
entity, is a significant change in the nature of and economic circumstances
surrounding that investment. That change warrants a change in the
classification and measurement of that investment. Once it obtains control,
the acquirer is no longer the owner of a non-controlling investment (asset) in
the acquiree. The acquirer, therefore, ceases its accounting for an investment
(asset) and begins reporting in its consolidated financial statements the
underlying assets, liabilities and results of the operations of the acquiree. In
a business combination achieved in stages, the acquirer basically
derecognises its investment asset in an entity in its consolidated financial
statements when it achieves control (refer to IFRS 3.BC384–389). The
above approach is therefore similar to disposing an equity investment and
then buying a controlling interest in a subsidiary through a business
combination.
3 Full
disclosure of the business combination is made in terms of IFRS 3. For a

business combination achieved in stages, the following information should
in particular be disclosed:
l the acquisition-date fair value of the equity interest previously held; l the
amount of any gain or loss recognised as a result of remeasuring the
abovementioned interest to fair value; and
l the line item in which the gain or loss was recognised.
188
Acquisition of a further interest where the investment becomes
Example 13.2
a subsidiary (NCI is measured at fair value at the date of
acquisition)
The following are the draft condensed financial statements of P Ltd and
subsidiary S Ltd at 31 December 20.19:

20.19
P Ltd
S Ltd
ASSETS
400 000
505 500
Investment in S Ltd (fair value of previously held interest of R54 000 plus
additional consideration of R216 000)
270 000
Total assets
R670 000
R505 500
150 000
100 000
10 864
Retained earnings
506 000
405 500
Deferred tax
3 136
R670 000
R505 500

P Ltd
S Ltd
Revenue
700 000
600 000
Cost of sales
(280 000)
(240 000)
Gross profit
420 000
360 000
Other expenses
– (90
000)
Profit before tax
420 000
270 000
Income tax expense
(120 000)
(81 000)
PROFIT FOR THE YEAR
300 000
189 000
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Mark-to-market reserve (fair value adjustment to investment) 4 000
–
Income tax relating to items that will not be reclassified (896)
3 104
R303 104
R189 000
189
Chapter 13
Mark-to-
Retained earnings
market
reserve
P Ltd
S Ltd
P Ltd

7 760
206 000
216 500
Profit for the year
300 000
189 000
3 104
Dividends: None
R10 864
R506 000
R405 500
1 P Ltd bought 15 000 shares in S Ltd on 1 January 20.17 for R40 000.
2 S Ltd became a subsidiary of P Ltd on 1 March 20.19, when P Ltd bought

another 60 000 shares in S Ltd for R216 000.
3 P Ltd elected to measure non-controlling interests at fair value at the date

of acquisition. The fair value of the non-controlling interests was R90 000 at
the acquisition date (when P Ltd obtained control over S Ltd).
4 On the date of the business combination, the assets and liabilities of S Ltd
were regarded to be a fair reflection in terms of the requirements of IFRS 3.
5 P Ltd classified the investment in S Ltd at cost after it became a subsidiary.

Before S Ltd became a subsidiary, P Ltd classified the investment under
IFRS 9 in its separate financial statements and recognised fair value
adjustments in the mark-to-market reserve (other comprehensive income).
Details of the 15% investment are as follows:
Number
Fair value
Fair value
Fair value
of shares
on 1/1/20.17
on 1/1/20.19
on 1/3/20.19
15 000
R40 000
R50 000
R54 000
6 The profit of S
Ltd was earned evenly during the current year ended
31 December 20.19.
80%
thereof.
190

Solution 13.2
The consolidated financial statements of P Ltd and its subsidiary S Ltd are
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (400 000(P) + 505 500(S)) 905
500
Goodwill
12 000
Total assets R917
500
Share capital
150 000
Retained earnings
634 989
784 989
129 375
Total equity
914 364
Liabilities
Deferred tax
3 136
500
191
Chapter 13
P LTD GROUP
Revenue (700 000(P) + 600 000(S) – 100 000 (J2)) or (700 000(P) + 600
000 × 10/12 (S))
1 200 000
Cost of sales (280 000(P) + 240 000(S) – 40 000 (J2))
or (280 000(P) + 240 000 × 10/12 (S))
(480 000)
Gross profit (420 000(P) + 360 000(S) × 10/12)
720 000
Other expenses (90 000(S) – 15 000 (J2)) or (90 000 × 10/12 (S)) (75
000)
Profit before tax
645 000
Income tax expense
(120 000(P) + 81 000(S) – 13 500 (J2)) or (120 000(P) + 81 000 × 10/12 (S))
(187 500)
PROFIT FOR THE YEAR
457 500
Mark-to-market reserve (fair value adjustment to investment) (before the

business combination)
4 000
Income tax relating to items that will not be reclassified (896)
3 104
R460 604
418 125
Non-controlling interests (#)
39 375
R457 500
Owners of the parent (418 125 (profit) + 3 104 (OCI))
421 229
Non-controlling interests (#)
39 375
R460 604
(#) The same as profit for the year, as the non-controlling interests do not
share in the other comprehensive income in this example.
192

LTD GROUP
Mark-to-
Non-
Share
Retained
Total
market
Total
controlling
capital
earnings
equity
reserve
interests
Balance at
1 Jan 20.19
150 000
206 000
* 7 760
363 760
– 363
760
Changes in
equity for
20.19
Acquisition of
subsidiary
! 90 000 90
000
Total
comprehensive
income for the
year:
Profit for the year
418 125
418 125
39 375 457
500
Other
comprehensive
income
3 104
3 104
3 104
Transfer (J1)
10 864
(10 864)
Balance at
31 Dec 20.19
R150 000
R634 989
– R784 989
R129 375 R914
364
* (50
000 – 40 000) × 77.6% = 7 760
! 87
000
+ 3 000(represented by goodwill) = 90 000
Comments
The amounts in the marrk-to-market reserve can be explained as follows:
Opening balance after tax (50 000 – 40 000) × 77,6%
7 760
Recognised in other comprehensive income for the year:
3 104
Movement for the period 1/1/20.19 – 28/2/20.19, after tax
(54 000 – 50 000) × 77,6%
3 104
Movement for the period 1/3/20.19 – 31/12/20.19 – investment in subsidiary

was now held at “cost” and there were no subsequent
remeasurements
Transferred to retained earnings on the date of acquisition, after tax (54 000
– 40 000) × 77,6% as if the investment was disposed of (10 864)
(IFRS 3.42)
Closing balance
Rnil
193
Chapter 13
Calculations
P Ltd 15%–75%
Total
NCI
At
Since
Share
capital
100 000
75 000
25
000
Retained earnings at acquisition
248 000
186 000
62
000
As
at
beginning of year
216 500
Profit
for the period 1/1/20.19–
28/2/20.19 (189 000 × 2/12)
31 500
348 000
261 000
87
000
Equity represented by goodwill
– Parent and NCI
12 000
9 000
3 000
360 000
270 000
90
000
Consideration paid for additional
shares purchased
216 000
Fair
value of equity interest
previously held
54 000
• Current year:
Profit:
1/3/20.19–31/12/20.19
(189 000 × 10/12)
157 500
118 125 39
375
Dividend: None
–
R517 500
R118
125 R129 375
Comments
a The retained earnings at acquisition of S Ltd comprises of the balance at

the beginning of the year and the net profit for first two months up to the
date of the business combination. Refer to chapter 8 dealing with interim
acquisition of a
subsidiary (i.e. acquisition of control during the current year) for more detail
in this regard.
b The consideration for the business combination (gaining of control over S

Ltd) comprises of the amount paid for the additional shares and the fair
value of the equity
interest previously held. In terms of IFRS 3.4
42, P Ltd should remeasure its previous
investment of 15 000 shares to the fair value of R54 000 at the date of
acquisition.
3.32(a)(i)
216 000
90 000
Acquisition-date fair value of acquirer’s previously held equity interest in
the acquiree: IFRS 3.32(a)(iii)
54 000
360 000

date: IFRS 3.32(b)
(348 000)
R12 000
194

Dr
Cr
J1
((54 000 – 40 000) × 77,6%) (comment (b)) 10
864
10 864
Transfer of fair value adjustments previously
recognised in mark-to-market reserve (OCI) to
retained earnings with remeasurement of equity
interest previously held, at group level
J2
Share capital (SCE)
100 000
Retained
earnings – Opening balance (SCE)
(comment (c)) 216
500
Goodwill (SFP) (parent and NCI)
12 000
Revenue
(P/L)
(comment (c)) (600 000 × 2/12) 100
000
Cost of sales (P/L) (comment (c)) (240 000 × 2/12) 40
000
Other expenses (P/L) (comment (c)) (90 000 × 2/12)

15 000
Income tax expense (P/L) (comment (c)) (81 000 × 2/12)
13 500
Investment in S Ltd (SFP) (54 000 + 216 000)
270 000
000
J3
39 375
375
profit (1/3/20.19–31/12/20.19 i.e. after additional
acquisition)
195
Chapter 13
Comments
aS
Ltd only became a subsidiary on 1 March 20.19. Thereafter, P Ltd elected to
measure its investment in the subsidiary at cost in its separate financial

statements and there were no further remeasurements to fair value after this
date.
b In terms of IFRS 3.42, P Ltd should first reme
easure its previous investment of 15 000
shares to the fair value of R54 000 at the date of acquisition as is indicated in
the analysis above. Furthermore, P Ltd already recognised the resulting fair
value adjustments with the remeasurement in other comprehensive income
under IFRS 9 in its separate financial statements. Then, for the group, the
cumulative fair value gains previously recognised in the marrk-to-market
reserve (OCI) is transferred to retained earnings on the date of acquisition.
IFRS 3 basically treats the previously held
investment as being disposed of at fair value and a new subsidiary acquired

at fair value. Note that there are no tax consequences as there is no actual
sale (only deemed disposal for the sake of the group’s consolidated financial
statements).
The
cost of the original investment was R40 000. The fair value of this
investment on 1 March 20.19 was R54 000, which resulted in a cumulative
gain of R14 000 before tax. The after tax amount of R10 864 is transferred
within equity, similar to the accounting treatment as if the investment would
have been derecognised (IFRS 9.B5.7.1).
c To
prepare the consolidated financial statements, the financial statements of S

Ltd are combined (consolidated) with the financial statements of P Ltd (i.e.
adding every line item in the financial statements of S Ltd to that of P Ltd).
This implies that the whole amount (i.e. for the full year) of all items of
profit or loss is added to that of P Ltd. S Ltd was not a subsidiary of P Ltd
for the first two months and the profit earned during
these two months should not form part of the profit or loss for the group and
should be eliminated from the group’s profit or loss. The profits for the first
two months are actually part of the reserves at the acquisition date and
should be eliminated as such in accounting for the business combination.
Refer to chapter 8 dealing with interim acquisition of a subsidiary (i.e.
acquisition of control during the current year) for more detail in this regard.
d Full
disclosure of the business combination should be made in terms of IFRS

3.59–63
and B64–B67. Of particular interest to this example is the disclosure of the

acquisition-date fair value of the equity interest in the acquiree held by the
acquirer immediately
before the acquisition date (being
g R54 000) and the amount of the gain recognised as
a result of remeasuring to fair value the equity interest in the acquiree held
before the business combination (being the transfer of the cumulative gain of
R10 864 within equity – see journal 1).
13.5 Acquisition of an additional interest whereby an associate becomes
a subsidiarry
1 The
section above dealt with a business combination achieved in stages where

the acquirer obtains an additional interest in an existing investee. The status
of the investment changed from a simple investment to an investment in a
subsidiary. The same principles and disclosure requirements will also be
applicable where an associate or joint venture becomes a subsidiary.
2 An investor may have obtained an interest in an investee whereb by

significant
influence is exerted. Where the acquirer then obtains an additional interest in

an associate, whereby control is obtained, the business combination should
be accounted for in terms of IFRS 3.41 and .42. With regards to an associate
or joint venture that becomes a subsidiary durin
ng the current period, the following consolidation
procedures will be relevant:
196
Changes in ownership of subsidiaries through buying or selling shares l up to

the acquisition date, the investment in the associate or joint venture should
be accounted for in terms of the equity method (note that all investments in
associates and joint ventures must be accounted for in terms of the equity
method, unless one of the exceptions in IAS 28.17 applies, in which case the
investment will be measured in terms of IFRS 9 Financial Instruments); l
where the investor/parent accounted for the investment in the associate, joint
venture and subsidiary in accordance with IFRS 9 at fair value in its
separate financial statements, any fair value adjustments must be reversed
upon consolidation (an investment in an associate, joint venture or
subsidiary may be accounted for at cost (which is arguably the most
common approach in South Africa) or in accordance with IFRS
9 in the investor’s separate financial
statements – refer to IAS 28.44 and IAS 27.10);
l the previously held equity interest in the acquiree should be remeasured at

its acquisition-date fair value and the resulting gain or loss, if any,
recognised in profit or loss directly (as if the interest in the associate or joint
venture was disposed of and a controlling interest purchased (IFRS 3.42) –
then follow IAS 28.22 for the deemed disposal of the associate or joint
venture); l in terms of the equity method, the investor may have recognised
its share of items recognised in other comprehensive income of the
associate or joint venture. If so, these amounts that were previously
recognised in other comprehensive income shall be recognised as if the
acquirer had disposed directly of the previously held equity interest (as any
asset). Depending on the nature of underlying assets remeasured or revalued
in other comprehensive income, some of these items will be reclassified
from other comprehensive income to profit or loss (e.g., the foreign currency
translation reserve – refer to chapter 16), and some items will only be
transferred within equity (e.g., the revaluation surplus on property, plant and
equipment and the mark-to-market reserve on equity investments (if so
elected) transferred to retained earnings); l remeasurement of identifiable
net assets in terms of IFRS 3 (see chapters 2
and 9), where applicable;
l elimination of common items at the acquisition date and the recognition

and measurement of any goodwill or bargain gain and non-controlling
interests (it should be noted that the retained earnings that will be eliminated
at the acquisition date, would comprise of the opening balance at the
beginning of the year and the net profit for the period of the current year
(various line items in the statement of profit or loss and other comprehensive
income before the acquisition date – similar to the interim acquisition of a
subsidiary that was addressed in chapter 8); and
l applying basic consolidation principles after the acquisition date.
197
Chapter 13
Acquisition of a further interest where an associate
becomes a subsidiary (control is obtained) (NCI is
Example 13.3

identifiable net assets at the acquisition date)
On 31 December 20.12 the following summarised financial information

relating to P Ltd and other wholly-owned subsidiaries (consolidated) and S
Ltd is supplied: SUMMARISED FINANCIAL INFORMATION
Ltd
and sub-
sidiaries
S Ltd
(consoli-
dated)
DEBITS
50 000
9 000
8 000 shares purchased on 1/1/20.11 (consideration)
8 000

7 500
Inventory
144 500
31 000
Cost of sales (*)
8 000
3 000
Income tax expense (*)
2 000
1 000
R220 000
R44 000
CREDITS
150 000
20 000
Retained earnings: 1/1/20.12
50 000
4 000
Revaluation surplus
1 000
Sundry liabilities (including deferred tax)
9 000
Revenue (*)
20 000
10 000
R220 000
R44 000
(*) Accrued/incurred
evenly
1P
Ltd acquired 8
000 shares in S
Ltd at the incorporation of S
Ltd on
1 January 20.11. On 30 April 20.12, P Ltd purchased a further 5 000 shares

in S Ltd from the non-controlling owner, thereby obtaining control over the
voting rights of S Ltd.
2 At the acquisition date (i.e. the date on which P Ltd obtained control of S
Ltd), the assets and liabilities of S Ltd were regarded as a fair reflection in
terms of the requirements of IFRS 3. The acquisition-date fair value of P
Ltd’s previously held equity interest was R11 100.
3 P Ltd elected to measure the non-controlling interests at their proportionate

share of the acquiree’s identifiable net assets at the acquisition date.
4 P Ltd accounts for all investments in associates in accordance with the

equity method in its consolidated financial statements, as none of the
exceptions in IAS 28.17 apply.
198
Changes in ownership of subsidiaries through buying or selling shares 5 On

31 December 20.11 S Ltd revalued its land and recognised a surplus of R1
000
(after tax) in the revaluation surplus (OCI) in its individual financial

statements. It is the policy of the group to realise the revaluation surplus
when the asset is sold.
6 P Ltd measures the investment in S Ltd at cost in terms of IAS 27.10(a) in

its separate financial statements.
80%
thereof.
Solution 13.3
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (50 000(P) + 9 000(S))
59 000
Goodwill (parent)
1 050
60 050
Current assets
Inventory (144 500(P) + 31 000(S)) 175
500
Total assets R235
550
Share capital
150 000
Retained earnings
65 700
215 700
Non-controlling interests (10 850(S))
10 850
Total equity
226 550
Liabilities (9 000(S))
9 000
550
199
Chapter 13
P LTD GROUP
Revenue (20 000(P) + 10 000(S) – 3 333(J5))
26 667
Cost of sales (8 000(P) + 3 000(S) – 1 000(J5))
(10 000)
Gross profit
16 667
Other income (remeasurement gain) (J3)
300
800
Profit before tax
17 767
Income tax expense (2 000(P) + 1 000(S) – 333(J5)) (2
667)
PROFIT FOR THE YEAR
15 100
R15 100
13 700
Non-controlling interests (last eight months of current period) (J6) 1 400
R15 100
13 700
R15 100
P LTD GROUP
Revaluati
Non-
Share
Retained
Total
on
Total
controlling
capital
earnings
equity
surplus
interests
Balance at
1 Jan 20.12
150 000
* 51 600
# 400
202 000
– 202
000
Changes in
equity for
20.12
Acquisition of
subsidiary –
–––
9 450
9 450
Transfers
400 (400)
–
Total
comprehensive
income for
the year:
Profit for the year
13 700
13 700
1 400
15 100
Balance at
31 Dec 20.12
R150 000
R65 700
– R215 700
R10 850
R226 550
50 000(P) + 1 600(S) = 51 600
# 400(S)
200

Calculations
C1 Analysis of the owners’ equity of S Ltd – as associate
P Ltd 40%
Total
NCI
At
Since
i Date of first purchase
Share capital
20 000
8 000
12 000 *
Retained
earnings
–
–
20 000
8 000
12 000 *
Consideration
000
ii Since date of first purchase
Retained
earnings (4 000 – 0)
4 000
1 600 RE
2 400 *
Revaluation surplus
1 000
400 RS
600 *
• Current year:
Profit: 1/1/20.12–30/4/20.12
(6 000 × 4/12 = 2 000 (accrued evenly))
2 000
800 RE
1 200 *
27 000
2 800
16 200 *
Associate becomes a subsidiary
Derecognise associate
(IFRS 3.BC384)
(27 000)
(8 000) (2 800)
Transfer between reserves
400 RE
(400 RE – 400 RS) (comment (d))
(400)RS
–
–
See comment (c)
RE = retained earnings; RS = revaluation surplus
201
Chapter 13
C1 Analysis of the owners’ equity of S Ltd – as subsidiary
P Ltd 65%
Total
NCI
At
Since
i At acquisition (30 April 20.12)
Share capital
20 000
13 000
7 000
Retained earnings at beginning of year

4 000
2 600
1 400
Profit for the current year before
acquisition 2
000
1 300
700
Revaluation surplus
1 000
650
350
Total equity acquired
27 000
17 550
9 450
Equity represented by goodwill – Parent
1 050
1 050
–
28 050
18 600
9 450
Consideration paid for additional shares
purchased (25%)
7 500
Fair value of equity interest previously
held (40%) (comment (b)
11 100
Profit: 1/5/20.12–31/12/20.12
(6 000 × 8/12 = 4 000 (accrued evenly))
4 000
2 600 RE
1 400
R32 050
R2 600 RE R10 850
RE = retained earnings
202
Comments
a The retained earnings at acquisition of S Ltd comprises of the balance at

the
beginning of the year and the net profit for the first four months up to the
date of the business combination. Refer to J5 and comment (c) to the journal
entries.
b The consideration for the business combination (gaining of control over S

Ltd) comprises of the amount paid for the additional shares and the fair
value of the equity interest previously held. In terms of IFRS 3.42, P Ltd
should re-measure its equity interest previously held (i.e. investment in
associate) to the fair value of R11 100 at the date of acquisition. Note that
the carrying amount of the investment in S Ltd (previously held equity
interest) at the acquisition date (in the consolidated financial statements) is
R10 800 (i.e. R8 000 (cost) + R1 600 (share in retained earnings) + R400
(share in revaluation surplus) + R800 (current-period share of profit
of associate)). The investment is remeasured to R11 100 and a

remeasurement gain of R300 (11 100 – 10 800) is recognised in the
consolidated financial statements – refer to J3 below. This is the same
treatment as if the associate (with carrying amount of R10 800) was sold at
its fair value of R11 100.
In
this
example, all the assets and liabilities of S Ltd were regarded as fairly valued
at the date of the business combination and no adjustment to the individual
assets and liabilities in terms of IFRS 3 was needed. Refer to self-assessment
question 1 where this was indeed the case.
c Before
30 April 20.12 (the acquisition date), S Ltd is only an associate of P Ltd and
the non-controlling interests are not recognised as such. These amounts (*)
are given for information purposes only as S Ltd only became a subsidiary at
the
acquisition date and the non-controlling interests are then recognised. In this
example, the non-controlling interests are measured at their proportionate
share of the acquiree’s identifiable net assets at the
e acquisition date as R9 450 (27 000 ×
35%). IFRS 3.B64(o)(i) only requires disclosure of the amount of the non-
controlling interests in the acquiree recognised at the acquisition date (i.e.
R9 450).
d In terms of IFRS 3.42 and IAS 28.22(c), any amount previously

recognised in other comprehensive income (i.e. the revaluation su
urplus) shall be recognised on the same
basis as would be required if the acquirer had disposed directly of the

previously held equity interest. In terms of IAS 16.41, a revaluation surplus
may be transferred directly to retained earnings when the asset is
derecognised. Also see J4 below.
Consideration transferred at acquisition date: IFRS 3.32(a)(i) 7 500
Amount of non-controlling interests:
IFRS 3.32(a)(ii) (27 000 × 35%) or (16 200 × 35/60)
9 450
the acquiree: IFRS 3.32(a)(iii) (given)
11 100
28 050

date: IFRS 3.32(b)
(27 000)
Goodwill (parent)
R1 050
203
Chapter 13
Dr
Cr
J1
Investment in S Ltd (associate) (SFP) (comment (a))
2 000
1 600
400
Accounting for investor’s interest in reserves
of associate at the beginning of the year
J2
Investment in S Ltd (associate) (SFP) (comment (a))
800
Share of profits of associate (P/L)
800
Accounting for investor’s share of current year’s
profit (1/1/20.12–30/4/20.12 i.e. before additional
acquisition) of associate
J3
Investment in S Ltd (associate) (SFP) (comment (b))
300
Other income (remeasurement gain) (P/L)
300
Accounting for remeasurement gain on equity
interest previously held
J4
Revaluation surplus (SCE) (comment (d) above)
400
400
Transfer of revaluation surplus to retained earnings
with business combination
J5
Share capital (SCE)
20 000
Retained
earnings – Opening balance (SCE)
(comment (c))
4 000
1 000
Goodwill (SFP) (parent)
1 050
Revenue (P/L) (comment (c)) (10 000 × 4/12)
3 333
Cost of sales (P/L) (comment (c)) (3 000 × 4/12)

1 000
Income tax expense (P/L) (comment (c)) (1 000 × 4/12) 333
Investment in S Ltd (SFP) (now subsidiary)
(8 000 + 2 000 + 800 + 300 + 7 500) or (11 100 + 7 500)
18 600
450
J6
1 400
400
profit (1/5/20.12–31/12/20.12 i.e. after additional
acquisition)
204
Comments
a Journal
1 and 2 are typical journal entries for the accounting of associates in terms of
the equity method (see chapter 11 for detail).
b Journal 3 represent the adjustme
ent of the equity interest previously held to fair value,
with the recognition of the remeasurement gain in the consolidated financial

statements in terms of IFRS 3.42.
c To
prepare the consolidated financial statements, the financial statements of S

Ltd are combined (consolidated) to the financial statement of P Ltd (i.e.
adding every line item in the financial statement of S Ltd to those of P Ltd).
profit or loss is added to that of P Ltd. S Ltd was not a subsidiary of P Ltd
for the first four months and the profit earned during
these four months should not form part of the profit or loss for the group and
should be eliminated from the group’s profit or loss. The profits for the first
four months are actually part of the reserves at the acquisition date and
should be eliminated as such in accounting for the business combination.
Refer to chapter 8 dealing with interim acquisition of a subsidiary (i.e.
acquisition of control during the current year) for more detail in this regard.
d Full
disclosure of the business combination should be made in terms of IFRS

3.59–63
and B64–B67. Of particular intterest to this example, is the disclosure of the

acquisition-date fair value of the equity interest in the acquiree held by the
acquirer
immediately before the acquisition date (being R11 100) and amount of the
gain recognised as a result of remeas
suring to fair value the equity interest in the acquiree
held before the business combination (being the gain of R300 included in the
line item for “other income”).
13.6 Basic approach on disposal of an interest
1 The
disposal of interests in a subsidiary (whether entirely or partially) b by a

parent is
materially similar to the disposal of an
ny other asset by the parent. The transaction
consists of the following components:
l the recognition of the asset received for the dissposal (e.g. cash proceeds); l
derecognition of the carrying amount of the asset disposed of from the asset
account (e.g. the investment held in another entity is derecognised); and l
recognition of any gain or loss on disposal (either in profit or loss or directly
in equity, depending on whether control has been lost).
2 In
the separate financial statements of the parent, the gain or loss on the
disposal of the shares is calculated in accordance with the cost method or
fair value method (depending on the accounting policy applied by the
parent for the measurement of investments in subsiidiaries in its separate
financial statements –
IAS 27.10). This policy decision will affect the accounting for the disposal
of a parent’s interest in a subsidiary:
l If the parent has accounted for the investmennt in the subsidiary in its
separate financial statements at cost, the gain or loss on the disposal of its
interest is calculated purely as the difference between the proceeds from the
disposal of the shares and the historic cost price of the shares disposed of.
The gain or loss is
recognised in profit or loss.
205
Chapter 13
Comments
This work focusses on the investment in a subsidiary, associate or joint

venture carried at cost in the parent’s/investor’s separate financial
statements, as it is arguably the
most common approach applied by companies in South Africa.
l If the parent has accounted for the investmennt in the subsidiary in its
separate financial statements in accordance with IFRS 9 the investment
would be measured at fair value at any given time. The parent ma ay choose
to remeasure
the investment to fair value through other comprehensive income (refer to

IFRS 9.5.7.5). If the parent elected this alternative, it can furthermore choose
to transfer the cumulative fair value adjustments recognised in other
comprehensive income, to retained earnin
ngs when the investment is sold
(IFRS 9.B5.7.1).
3 However, for the group (consolidated), the disposal of the parent’s

interest will be dealt with differently. In the group context, the disposal of
the shares comprises a disposal of:
l an attributable interest in the net assets (i.e. equity) of the subsidiary as at

the date of the transaction; as well as
l a proportionate portion of the goodwill or gain from a bargain purchase

(the latter will form part of the equitty recognised since the acquisition date).
It is apparent that, with reference to the “at-acquisition section” of the

analysis of owners’ equity of a subsidiary, the cost price of the shares is
equal to the fair value of the attributable net assets (equity) as at the
acquisition date plus (or minus) the goodwill (or gain from a bargain
purchase). Consequently, the following applies: l gaain/loss on disposal of
shares in a subsidiary per the separate financial statements of the parent
(calculated in accorda
ance with the cost method)
less
l attributable reserves earned since acquisition (which evidences an

increase/
decrease in the net asset value since acquisition date) now given up due to
the disposal of the shares
equals
l gaain/loss on disposal of interest in group context (refer to comment (g) to

the analysis in example 13.4a).
Comments
Net asset value as at the acquisition date plus reserves to date of disposal
equal the
net asset value as at the date of the disposal.
4 The
accounting treatment of the parent’s disposal of an interest in the subsidiary

depends on whether control over the subsidiarry is lost or not. IFRS 10
contains detailed requirements for both cases and these requirements are
discussed and illustrated in the sections below. IFRS
S 10.23 would be applicable in the case where
control is not lost, and IFRS 10.25 where control iis lost.
206
13.7 Partial disposal of an interest in a subsidiary where control
is not lost
1 IFRS 10.23 states that changes in a parent’s owners’ equity in a

subsidiary that do not result in a loss of control are accounted for as
equity transactions (i.e.
transactions with owners in their capacity as owners). It should be borne in

mind that non-controlling interests are also classified as equity (IFRS 10.22).
Furthermore, the consolidated carrying amounts of the parent’s and non-

controlling interests must be adjusted to reflect the change in their relative
interests in the subsidiary. This change in the relative interests of the owners
shall be recognised directly in equity and is attributable to the owners of the
parent. This means that no gain or loss should be recognised in profit or loss
where a parent disposes some of its interest in a subsidiary without losing
control (i.e. the subsidiary remains a subsidiary of the parent, but the
parent’s interest in the subsidiary declined).
This transaction only changes the parent’s and non-controlling shareholders’
relative interests in the subsidiary and is therefore recognised only within

equity.
This means that no change in the carrying amount of the subsidiary’s assets
(including goodwill) or liabilities is recognised.
2 When a parent sells a portion of its investment in a subsidiary (but retains

control), the parent would recognise a gain or loss on the disposal in its
separate statement of profit or loss and other comprehensive income (if
the investment was carried at cost) or as a transfer within equity in its
separate statement of changes in equity (if the investment was accounted
for in accordance with IFRS 9). This gain or loss or the transfer within
equity will be reversed upon consolidation.
The amount for the consolidated gain or loss for the group may be different
from that of the parent and must be recognised directly in equity. In
preparing the consolidated financial statements, the adjustment to the non-
controlling interests (reflecting the change in their relative interest in the
equity of the subsidiary) will also need to be reflected in the consolidated
statement of changes in equity. This approach will also be evident from the
pro forma consolidation journal entries in the example below (see journal 4).
3 IFRS 10.B96 states that the amount to be recognised in equity would be

the difference between the amount by which the non-controlling interests is
adjusted and the fair value of the consideration paid or received. This
adjustment in the amount of the non-controlling interests will be affected by
the initial measurement of the non-controlling interests at the date of the
business combination (at their proportionate share of the acquiree’s
identifiable net assets or at fair value – see comment (f) to the analysis in
example 13.4a for more detail), which is illustrated in the examples below.
It was mentioned in chapter 13.3 above that the approach for calculating the
adjustment to the non-controlling interests is based on the view that the
subsidiary basically consists of two separate asset pools: one asset pool in
respect of all the other net assets (excluding goodwill); and goodwill. With a
partial sale of an interest in a subsidiary by the parent (without losing
control), the equity represented by the other net assets will always be re-
attributed between the parent and the non-controlling interests based on their
new ownership’ interests. The equity 207
Chapter 13
represented by goodwill will only be re-attributed between the parent and the
non-controlling interests if goodwill was initially measured in respect of the
non-controlling interests (i.e. the non-controlling interests were initially
measured at fair value). This approach is illustrated in calculation 4 of the
following two examples.
4 Disclosure of a schedule that shows the effect on the equity, attributable

to owners of the parent of any changes in its ownership interest in a
subsidiary that did not result in a loss of control, should be made in terms of
IFRS 12.18. Refer to paragraph 13.3 of this chapter for more detail.
Partial disposal of an interest in a subsidiary with no change
in the status as the subsidiary remains a subsidiary (control
Example 13.4a
is not lost) (NCI is measured at its proportionate share of the
The following represents the condensed financial statements of P Ltd and its
subsidiary at 31 December 20.15:

20.15
P Ltd
S Ltd
ASSETS
Inventory
70 000
100 000
Bank
63 150
60 000
Investment in S Ltd: 6 000 shares at cost (R40 000 – R10 000) 30 000
Total assets
R163 150
R160 000
90 000
10 000
Replacement reserve (comment (a))
120 000
Retained earnings
73 150
30 000
R163 150
R160 000
208

P Ltd
S Ltd
Revenue
100 000
80 000
Cost of sales
(67 000)
(56 000)
Gross profit
33 000
24 000
Other income (profit on sale of shares)
25 000
Profit for the year before tax
58 000
24 000
Income tax expense
(14 850)
(9 000)
PROFIT FOR THE YEAR
43 150
15 000
R43 150
R15 000

Retained earnings
P Ltd
S Ltd
30 000
15 000
Profit for the year
43 150
15 000
R73 150
R30 000
1 P Ltd acquired its 80% interest (8 000 shares) in S Ltd on 1 January 20.11
for R40 000. On that date S Ltd’s equity consisted of the following: Share
capital
R10 000
Replacement reserve
R30 000
Retained earnings
R5 000

share of the acquiree’s identifiable net assets at the acquisition date. On the
date of the business combination, the assets and liabilities of S Ltd were
regarded to be a fair reflection in terms of the requirements of IFRS 3.

statements.
209
Chapter 13
4 On
30 June 20.15 P Ltd disposed of 2 000 of the shares in S Ltd for R35 000
(fair value). P Ltd accounted for the cash proceeds from the disposal of the
interest as follows in its separate financial statements:
Dr
Cr
R
J1
Bank (SFP)
35 000
10
000
(2 000/8 000 shares × R40 000 cost)
Profit on sale of shares (P/L)
25
000
Recording proceeds and profit on partial disposal
of investment
J2 Income tax expense (P/L)
5 600
SARS tax payable/Bank (SFP)
600
(25 000 × 80% × 28%)
Capital gains tax (current tax) payable on disposal
of shares
5 The
disposal of the interest in the subsidiary did not comply with the criteria of
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
until the date of disposal.
6 The
profit of S Ltd was earned evenly during 20.15.
7S
Ltd
made no transfer to/from the replacement reserve during the current year.
8 The
company tax rate is 28% and CGT is calculated at 80% thereof.
Comments
a Although the Companies Act does not require specific reserves to be

created, it is
assumed that a company may well create any reserve by choice (as a transfer
within equity, i.e. from retained earnings to a reserve). In this example, it
was assumed that S Ltd created a replacement reserve in the past to replace
assets that were fully depreciated during the current period, in the next year.
The reserve is merely used to illustrate the effect of a partial sale of an
interest in a subsidiary on other reserves (other than retained earnings).
b There are various ways in which the partiial disposal of the investment
can be recognised in the investor’s separate financial statements. When share
disposals take place, the separate financial statements of the parent may
contain an item such as a
“suspense account” to which the p

proceeds on disposal have been provisionally credit-
ed (and not as was done in note 4 of this example). If this is the case, the
separate financial statements of the parent (P Ltd) must first be corrected by
some actual correcting journal entries (i.e. not pro forma consolidation
journal entries) to achieve the entries indicated in note 4 above.
210

Solution 13.4a
In this example, P Ltd retained control over S Ltd, even though it sold some
of its interest in S Ltd to the non-controlling interests. P Ltd therefore
combines its financial statements and those of S Ltd (as a subsidiary) line by
line by adding together like items of assets, liabilities, equity, income and
expenses (IFRS 10.B86(a)). Thereafter, the normal consolidation principles
will be followed to eliminate common items and to recognise any non-
controlling interests and goodwill.
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent only)
4 000
Current assets
Inventory (70 000(P) + 100 000(S)) 170
000
Bank (63 150(P) + 60 000(S))
123 150
293 150
Total assets R297
150
Share capital
90 000
Retained earnings
84 650
Other components of equity (54 000 + 4 500)
58 500
233 150
64 000
Total equity
297 150
150
211
Chapter 13
P LTD GROUP
Revenue (100 000(P) + 80 000(S)) 180
000
Cost of sales (67 000(P) + 56 000(S))
(123 000)
Gross profit
57 000
Other income (no gain on disposal of interest is recognised here) (25

000(P) – 25 000(J4)) –
Profit before tax
57 000
(23 850)
PROFIT FOR THE YEAR

33 150
R33 150
28 650
Non-controlling interests (1 500 + 3 000) (#)
4 500
R33 150
28 650
Non-controlling interests (1 500 + 3 000) (#)
4 500
R33 150
(#) The same as profit for the year, as there is no other comprehensive
income in the example.
212
LTD GROUP
Changes
Re-
Re-
Non-
Share
in
tained
place-
con-
Total
Total
capital
owner-
earn-
ment
trolling
equity
ship
ings
reserve
interests
Balance at
1 Jan 20.15
90 000
– * 38 000
72 000
200 000 ! 29 000
229 000
Changes in
equity for
20.15
Total
compre-
hensive
income for
the year:
Profit for the

year
28 650
28 650
4 500
33 150
Transfer from
replacement
reserve
18 000 (18 000)
Disposal of
interest
–
4 500
4 500
30 500
35 000
Balance at
31 Dec 20.15 R90 000
R4 500 R84 650 R54 000 R233 150 R64 000 R297 150
30 000(P) + 8 000(S) = 38 000
9 000(at) + 2 000(RE) + 18 000(RR) = 29 000
P LTD GROUP
During the current year, P Ltd sold a 20% interest in S Ltd, an existing
subsidiary, without losing control over S Ltd. This resulted in an amount of
R4 500 being recognised in equity as presented in the consolidated statement
of changes in equity. Details of the transaction between the equity
participants are as follows:
Fair value of the consideration received

35 000
Increase in the non-controlling interests
(30 500)
R4 500
213
Chapter 13
Calculations
P Ltd 80%–60%
Total
NCI
At
Since
Share capital
10 000
8 000
2 000
Replacement reserve
30 000
24 000
6 000
Retained earnings
5 000
4 000
1 000
45 000
36 000
9 000
– Parent
4 000
4 000
49 000
40 000
9 000
Retained
earnings
(15 000 – 5 000) 10
000
8 000 RE 2
000
Replacement
reserve
(120 000 – 30 000) 90
000
72 000 RR 18
000
• Current year:
Profit: 1/1/20.15–30/6/20.15
(15 000 × 6/12) 7
500
6 000 RE 1
500
156 500
14 000 RE
30 500
72
000 RR
Disposal of 2 000 shares (1)
(3 500) RE
(comment (b)) (9
000)
(18 000) RR 30
500
156 500
61 000
Profit: 1/7/20.15–31/12/20.15
(15 000 × 6/12) 7
500
4 500 RE 3
000
R164 000
R15 000 RE
R64 000
R54 000 RR
RE = Retained earnings
RR = Replacement reserve
(1) 36 000 × 20/80 = 9 000 AT
(8 000 + 6 000) × 20/80 = 3 500 RE
72 000 × 20/80 = 18 000 RR
30 500(NCI) × 40/20 = 61 000 – 30 500(existing) = 30 500(equity acquired

from parent) 214

Comments
a The parent’s interest in S Ltd changed from 80% (8 000/10 000 shares) up
to
30 June 20.15 to 60% (6 000/10 000 shares) thereafter.
b Note that as control is not lost in this example, there is no need to

remeasure the retained investment in the subsidiary to fair value at the date
the interest is disposed of. IFRS 10.25(b) therefore does not apply. It should
also be borne in mind that IFRS 10.23 states that changes in a parent’s
owners’ equity in a subsidiary that do not result in a loss of control are
accounted for as equity transactions (i.e.
transactions with owners in their capacity as owners).

calculated as
follows (see IFRS 10.B96) (from the perspec
ctive of the NCI):
Fair value of the consideration paid by NCI
(35 000)

acquired from parent – see below))
30 500
61 000
NCI before transaction ((156 500 – 4 000GW) × 20%)
(30 500)
(R4 500)
The
approach in terms of IFRS 10.B96 that the difference between the change in
the non-controlling interests and the amount paid or received is to be
recognised in equity
is also clear from J4 below. The entries made by the parent against the
investment (R10 000) and the profit on the sale of the shares (R25 000) are
reversed and the principles of IFRS 10.B96 are applied.

calculated as
follows (see IFRS 10.B96) (from the perspec

ctive of the parent):
Fair value of the consideration received by the parent
35 000
Decrease in parent’s interest/amount by which the non-controlling interests

are adjusted (reserves sold to NCI)
(30 500)
Parent’s interest after transaction
((156 500 – 4 000GW) × 60%) + 4 000GW)
95 500
((156 500 – 4 000GW × 80%) + 4 000GW)
(126 000)
R4 500
The
amount for the change in ownership recognised in equity can also be

calculated
as follows (from the perspective of the parent):
35 000
Equity relinquished to NCI

(30 500)
Historic fair value of shares disposed of (excluding goodwill) (comment (f))

((40 000 cost – 4 000 goodwill) × 20/80)
(9 000)
Attributable post-acquisition equity disposed of:
Retained earnings ((8 000 + 6 000) × 20/80)
(3 500)
Replacement reserve (72 000 × 20/80)
(18 000)
Amount to be recognised directly in equity (in group context) R4 500
continued
215
Chapter 13
e Alternatively, the amount can also be calculated as follows: Proceeds on

disposal of interest
35 000
Attributable net assets disposed (excluding goodwill)
((156 500 – 4 000) × 20%)
(30 500)
Goodwill relinquished (not realised as control not lost and not transferred as
NCI did not share in any goodwill at acquisition) (comment (f))
–
f In this example, goodwill was only recognised in respect of the parent as

the non-controlling interests were not measured at fair value on the
acquisition date.
Therefore, the non-controlling interests did not share in any of the goodwill
recognised. Furthermore, IFRS 10.BCZ168 indicates that no changes should
be made to goodwill in respect of a disposal of interest where control is
maintained (i.e.
not lost). As this applies to this particular example, goodwill of R4 000

should be maintained in the consolidated financial statements of the parent
company until such time that control is relinquished and the full amount
remains attributable to the parent.
The calculation of the gain on disposal (at group level) should therefore
incorporate
the fact that goodwill is not transferred to the non-controlling interests. This
is done by using the historic fair value of the assets and liabilities obtained
with the original business combination (acquisition) and not the purchase
price which includes the goodwill amount.
As was explained in chapter 13.3 above, this work follows the approach that
the parent only relinquishes some of the goodwill that was attributable to it,
to the non-controlling owners if goodwill was initially also recognised in
respect of the non-controlling interests (NCI was measured at fair value at
the date of the business combination).
g The group’s gain on the partial disposal of the interest can also be
calculated from (or
reconciled to) the parent’s entries as recognised in its separate financial

statements, as follows:
Parent’s profit on sale of shares
25 000
Adjustments to be made at group level:
Add back goodwill included in cost of investment above, not to be

transferred within the group (IFRS 10.BCZ168) (comment (f))
(4 000 × 20/80)
1 000
Deduct parent’s interest in since-acquisition reserves disposed of (3 500 RE

+ 18 000 RR)
(21 500)
9 000
49 000

date: IFRS 3.32(b)
(45 000)
Goodwill (parent)
R4 000
216

Dr
Cr
J1
Share capital (SCE)
10 000
Replacement reserve (SCE)
30 000
5 000
4 000
40 000
9 000
J2

2 000
18 000
20 000
Allocation of non-controlling interests’ portion
of retained earnings and replacement reserve
J3
1 500
1 500
of current year’s profit
J4
Investment in S Ltd (SFP) (comment (b)) 10
000
25 000
Changes in ownership (equity) (SCE)

4 500
30 500
Pro forma correction of group gain on disposal
to separate equity category to give effect to the
requirements of IFRS 10.23
J5
Replacement reserve (SCE) (72 000 × 20/80)
18 000
Retained earnings: Transfer from replacement
reserve (SCE)
18 000
Transfer of replacement reserve due to disposal
of owners’ equity (comment (c))
J6 Non-controlling interests (P/L)
3 000
3 000
of current year’s profit

217
Chapter 13
Comments
a The parent accounted for its investment in the subsidiary at cost and there
were no
fair value adjustments in the separate financial statements of P Ltd.
b J4 firstly reverses the entries made by the parent with the sale of some
shares (the parent credited the investment with the partial cost of R10 000
and recognised the profit of R25 000). Then the group’s adju
ustments in respect of the change in
ownership are recognised in accordance with IFRS 10.23 and B96. The
parent’s balance for the investment in the subsidiary is effectively cancelled
(balance is Rnil) after all the pro forma consolidation journal entries
(Investment of R30 000(given) –
R40 000(J1) + R10 000(J4) = Rnil).
c From the analysis and comment (g) above, it is clear that the parent
effectively disposed of a portion of its interest in the replacement reserve of
S Ltd (20/80 ×
72 000 = R18 000) (i.e. loss of reserves attached to the shares disposed of).
J5 is needed to reflect this loss of a portion of the reserve. It is also clear
from the analysis
that the closing balance for the replacement reserve should be R54 000 and
not R72 000. This transfer to retained earnings will also be made from any
other reserve (e.g. revaluation surplus, or mark-to-market reserve) that the
subsidiary may have had.
d J4
reverses the entries made by the parent with the sale of the shares, but note
that the actual current tax (capital gains tax) pa
aid by the parent, is not reversed. This
payment has indeed been made to the South African Revenue Services,
irrespective of the group’s adjustments and cannot be reversed. Some experts
are of the opinion that this tax expense should, however, be moved to equity
as the group’s adjustment
is made to equity. The journal entry would be to debit the “change in

ownership (equity)” and to credit the “income tax expense (P/L)”. However,
this has not been done in this work as the authors are of the opinion that the
tax expense rather relates to the parent’s sale of the shares, than to the
group’s adjustment of its owners’ equity interests (between the parent and
the non-con
ntrolling interests).
Attributable Attributable
Total
to parent
to NCI
Equity of subsidiary before change repre-
sented by:
156 500
126 000
30 500
Other net assets
152 500
122 000
30 500
Goodwill
4 000
4 000
(30 500)
30 500
(30 500)
30 500
N/A
N/A

represented by:
156 500
95 500
61 000
Other net assets
152 500
91 500
61 000
Goodwill
4 000
4 000
218
Changes in ownership of subsidiaries through buying or selling shares The

following example is used to contrast the measurement of the non-
controlling interests at fair value at the acquisition date, to the
measurement thereof at their proportionate share of the acquiree’s
identifiable net assets (as the example above).
Partial disposal of an interest in a subsidiary with no change
in the status as the subsidiary remains a subsidiary (control
Example 13.4b
is not lost) (NCI is measured at fair value at the date of ac-

quisition)
Assume the same information as in example 13.4a, except that P Ltd elected
to measure non-controlling interests at fair value at the date of acquisition.
The fair value of the non-controlling interests was R9 900 at the acquisition
date (when P Ltd obtained control over S Ltd).
Solution 13.4b
The consolidated statement of profit or loss and other comprehensive income

is the same as in part (a) of example. The rest of the consolidated financial
statements are prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
4 900
Current assets
Inventory (70 000(P) + 100 000(S)) 170
000
Bank (63 150(P) + 60 000(S))
123 150
293 150
Total assets R298

050
Share capital
90 000
Retained earnings
84 650
Other components of equity (54 000 + 3 500)
57 500
232 150
65 900
Total equity
298 050
050
219
Chapter 13
P LTD GROUP

Changes
Re-
Non-
Re-
Share
in
place-
con-
Total
tained
Total
capital
owner-
ment
trolling
equity
earnings
ship
reserve
interests
Balance at
1 Jan 20.15
90 000
– * 38 000
72 000
200 000 ! 29 900
229 900
Changes in
equity for
20.15
Total
compre-
hensive
income for
the year:
Profit for the
year
– 28
650
28 650
4 500
33 150
Transfer from
replacement
reserve
18 000 (18 000)
Disposal of
interest
3 500
–
3 500
31 500
35 000
Balance at
31 Dec 20.15 R90 000
R3 500 R84 650 R54 000 R232 150 R65 900 R298 050
30 000(P) + 8 000(S) = 38 000
9 900(at) + 2 000(RE) + 18 000(RR) = 29 900
P LTD GROUP
During the current year, P Ltd sold a 20% interest in S Ltd, an existing
subsidiary, without losing control over S Ltd. This resulted in an amount of
R3
500 being recognised in equity as presented in the consolidated statement of

changes in equity. Details of the transaction between the equity participants
are as follows:
Fair value of the consideration received
35 000
Increase in the non-controlling interests

(31 500)
R3 500
220

Calculations
P Ltd 80%–60%
Total
NCI
At
Since
Share capital
10 000
8 000
2 000
Replacement reserve
30 000
24 000
6 000
Retained earnings
5 000
4 000
1 000
45 000
36 000
9 000
– Parent and NCI
4 900
4 000
900
49 900
40 000
9 900
Retained
earnings
(15 000 – 5 000)
10 000
8 000 RE
2 000
Replacement
reserve
(120 000 – 30 000) 90
000
72 000 RR 18
000
• Current year:
Profit: 1/1/20.15–30/6/20.15
(15 000 × 6/12) 7
500
6 000 RE 1
500
157 400
14 000 RE
31 400
72
000 RR
Disposal of 2 000 shares (1)
(9 000)
(3 500) RE
31 500
(comment (b))
(1 000)
(18 000) RR
157
400
62 900
Profit: 1/7/20.15–31/12/20.15
(15 000 × 6/12) 7
500
4 500 RE
3 000
R164 900
R15 000 RE
R65 900
R54 000 RR
RR = Replacement reserve
(1) 36 000 × 20/80 = 9 000 AT
4 000 × 20/80 = 1 000 Goodwill (comment (d))
(8 000 + 6 000) × 20/80 = 3 500 RE
72 000 × 20/80 = 18 000 RR
NCI: 9 000 + 1 000 + 3 500 + 18 000 = 31 500(equity acquired from parent)
221
Chapter 13
Comments
a The amount for the change in ownership recognised in equity can be

calculated as
the consideration paid by NCI
(35 000)

acquired from parent – see below)
31 500
NCI after transaction ((157 400 – 4 900GW) × 40%) + (900 initial GW of

NCI) + (4 000 GW of parent × 20/80) relinquished to NCI)
62 900
NCI before transaction ((157 400 – 4 900GW) × 20%) +
(900 initial GW of NCI))
(31 400)
(R3 500)
Through the parent’s disposal of 20% of the interest in the subsidiary (being
20/80 =
25% of the parent’s interest), 20% of the net asset value (excluding
goodwill) ((157 400 – 4 900) × 20% = 30 500) was transferred from the
parent’s interest to the
non-controlling interests. Furthermore, the parent relinquished some of its

own goodwill (4 000 × 20/80 = 1 000) to the non-controlling owners. This
resulted in an increase of the non-controlling interests of R31 500 (30 500 +
1 000).
b The amount for the change in ownership recognised in equity can be

calculated as
of the consideration received by the parent
35 000
Decrease in parent’s interest / amount by which the non-controlling interests

are adjusted (reserves sold to NCI)
(31 500)
Parent’s interest after transaction ((157 400 – 4 900GW) × 60%) +
4 000GW – (4 000 GW of parent × 20/80))
94 500
((156 500 – 4 000GW × 80%) + 4 000GW)
(126 000)
R3 500
The
amount for the change in ownership recognised in equity can also be

calculated
as follows (from the perspective of the parent):
35 000
(31 500)
Historic fair value of shares disposed of (including goodwill) (comment (d))

(40 000 cost × 20/80)
(10 000)
Retained earnings ((8 000 + 6 000) × 20/80)

(3 500)
Replacement reserve (72 000 × 20/80)
(18 000)
c Alternatively, the amount can also be calculated as follows: Proceeds on

35 000
Attributable net assets disposed (excluding goodwill)
((157 400 – 4 900) × 20%)
(30 500)
Goodwill relinquished (as NCI also shared in the goodwill) (comment (d)) (4
000 × 20/80)
(1 000)
continued
222
Changes in ownership of subsidiaries through buying or selling shares d In

this example, goodwill was recognised in respect of the parent and the non-
controlling interests (by being measured at fair value on the acquisition
date).
Therefore, the non-controlling did share in the goodwill recognised.

Furthermore, IFRS 10.BCZ168 indicates that no changes should be made to
goodwill in respect of a disposal of interest where control is maintained (i.e.
not lost). As this is the case in this particular example, goodwill of R4 900
should be maintained in the consolidated financial statements of the parent
company until such time that control is relinquished.
However, R3 000 (4 000 – 1 000 relinquished) of the goodwill is now

attributable to the parent and R1 900 (900 initial + 1 000 from parent) is now
attributable to the non-
controlling interests. The calculation of the gain on disposal (at group level)
should therefore incorporate the fact that goodwill is indeed transferred to
the non-controlling interests. This is done by using the purchase price of the
investment, which includes the goodwill number.
As was explained in chapter 13.3 above, this work follows the approach that
the parent does relinquish some of the goodwill that was attributable to it, to
the non-controlling owners if goodwill was initially also recognised in
respect of the non-controlling interests (NCI was measured at fair value at
the date of the business combination).
e The group’s gain on the partial disposal of the interest can also be
calculated from (or
reconciled to) the parent’s entries as recognised in its separate financial

statements, as follows:
Parent’s profit on sale of shares
25 000
Adjustments to be made at group level:
Deduct parent’s interest in since-acquisition reserves disposed
of (3 500 RE + 18 000 RR)
(21 500)

9 900
49 900

date: IFRS 3.32(b)
(45 000)
R4 900
223
Chapter 13
The pro forma consolidation journal entries are the same as in example
13.4a, except for those indicated below.
Dr
Cr
J1
Share capital (SCE)
10 000
30 000
5 000
4 900
40 000
9 900
J4
Investment in S Ltd (SFP) (comment (b)) 10
000
25 000
3 500
31 500
Pro forma correction of group gain on disposal to
separate equity category to give effect to the
requirements of IFRS 10.23
Attributable Attributable
Total
to parent
to NCI
Equity of subsidiary before change repre-
sented by:
157 400
126 000
31 400
Other net assets
152 500
122 000
30 500
Goodwill
4 900
4 000
900
(31 500)
31 500
(30 500)
30 500
Goodwill relinquished (4 000 × 20/80)
(1 000)
1 000
Equity of subsidiary after change represent-
ed by:
157 400
94 500
62 900
Other net assets
152 500
91 500
61 000
Goodwill
4 900
3 000
1 900
13.8 Loss of control with partial disposal of a subsidiary, with a simple
investment retained
This section of the work deals with a loss of control and IFRS 10.25–26 and
B97–B99
should be consulted in this regard.
1 IFRS 10.25 and B98 states that if a parent loses control of a subsidiary, it
(in the consolidated financial statements):
l derecognises the assets (including any goodwill) and liabilities of the

subsidiary at their carrying amounts on the date when control is lost; 224
Changes in ownership of subsidiaries through buying or selling shares l

derecognises the carryinng amount of any non-controlling interests in the
former subsidiary on the date when control is lost (including any
components of other comprehensive income attributable to them);
l recognises:
• the fair value of the consideration received, if any, from the transaction,
event or circumstances that resulted in the loss of control; and
• if the transaction that resulted in the loss of control involves a distribution

of shares of the subsidiary to owners in their capacity as owners, that
distribution;
l recognises anny investment retained in the former subsidiary at its fair
value on the date when control is lost;
l reclassifies to profit or loss, or transfers directlly to retained earningss if

required in accordance with other IFRSs, the amounts from other
comprehensive income as if the parent had directly disposed of that
subsidiary (refer to IFRS 10.B99); and l recognises anny resulting difference
as a gain or loss in profit or loss attributable to the parent.
Comments
a As indicated above, the carrying amounts of goodwill and non-controlling

interests
are derecognised. This applies irrespective of whether the non-controlling

interests (which effects the measurement of goodwill) were measured at fair
value or at their proportionate share of the acquiree’s identifiable net assets
at the date of acquisition, in terms of IFRS 3.19.
b The process listed above (in terrms of IFRS 10.B98) can easily be used to
calculate
the group’s profit or loss on the loss of control of the subsidiary.
2 This
treatment reflects that a loss of control is a significant economic event that

changes the nature of the investment (refer to IFRS 10.BCZ180–183). It
also indicates that the loss of control over a subsidiarry represents a loss of
control over the assets and liabilities of the subsidiary and that a new
investment (if any) in the former subsidiary is acquired.
Any investment that is retained in the former subsidiary (i.e. after the loss
of control) should be measured at its fair value on the date when control is
lost.
Any gain or loss arising from such remeasurement should be recognised

directly in profit or loss of the group. Note that this principle also applies to
the loss of significant influence or joint control where the retained interest is
a financial asset (IAS 28.22(b)) (refer to IAS 28.BC29 for more information
in this regard).
IFRS
10.25(b) further states that, on the loss of control of a subsidiary, any

investment retained in the former subsidiary shall be accounted for in
accordance with other IFRSs from the date when control is lost (e.g. IFRS 9
Financial Instruments or IAS 28 Investments in Associates and Joint
Ventures). The fair value of any investment retained in the former
subsidiary at the date when control is lost shall be regarded as the fair value
on initial recognition of a financial asset in accordance with IFRS 9
Financial Instruments or, when appropriate, the cost on initial recognition
of an investment in an associate or joint venture.
225
Chapter 13
3 In
its
separate financial statements the parent will recognise a gain or loss on the
disposal of the shares or will transfer an appropriate amount from the mark-
to-market reserve to retained earnings, depending on whether the investment
in the subsidiary was measured at cost or in accordance of IFRS 9 (at fair
value through other comprehensive income). Refer to paragraph 13.6 of this
chapter for more detail in this regard. The entries made in the parent’s
separate financial statements will be reversed upon consolidation and the
consolidated profit or loss will be accounted for, as indicated above.
IAS 27 and IFRS 10 are not clear on how any retained investment should
be accounted for after the partial sale in the separate financial statements of
the parent. If the retained investment only represents a simple investment
(with no control, joint control, or significant influence), it should be
accounted for as a financial asset under IFRS 9 and initially be measured at
fair value. If the parent had measured the investment in the former
subsidiary at cost, it is assumed that the remeasurement to fair value should
be recognised in profit or loss (similar to a
“day 1” gain – refer to IFRS 9.B5.1.2A(a)). If the parent had measured the
investment in the former subsidiary at fair value under IFRS 9, that fair
value would merely represent the initial measurement of the financial asset.
4 Should control over a subsidiary be lost during the course of the

financial reporting period, the following applies with respect to the
consolidated statement of financial position and statement of profit or loss
and other comprehensive income: l Consolidated statement of financial
position
The consolidated statement of financial position as at the financial reporting

date contains the assets and liabilities of the parent as well as the assets and
liabilities of companies which, at the financial reporting date, are in fact
subsidiaries of the parent. Consequently, a subsidiary disposed of in its
entirety during the current financial period is not included at all in the
consolidated statement of financial position at the consolidation date.
l Consolidated statement of profit or loss and other comprehensive

income The consolidated statement of profit or loss and other
comprehensive income contains the income and expenses and other
comprehensive income of:
• the parent;
• the subsidiaries that were subsidiaries for the whole term of the year under
consideration; and
• the appropriate portion of the income and expenses and other

comprehensive income of subsidiaries that were subsidiaries only for a part
of the year (for the period that the parent controlled the subsidiary) under
consideration.
The operating results of subsidiaries acquired during the reporting period are
consequently included in the consolidated statement of profit or loss and
other comprehensive income as from the date of acquisition, whilst the
results of a subsidiary disposed of are included up to the date of disposal.
226

Comment
As a starting point to the consolidation, it is important to note that the

financial
statements of a subsidiary disposed of before the reporting date will not be

combined (i.e. added together) to those of the parent. The amounts in
respect of the post-acquisition reserves of the subsidiary need be journalised
into the consolidated statement of profit or loss and other comprehensive
income and statement of changes in equity for the period while the
subsidiary was controlled by the parent. This approach is clearly evident in
journal 4 below. However, a different approach may be followed and this is
contrasted in the example below.
5 Disclosure of a loss of control should be made in terms of IFRS 12

Disclosure of Interests in Other Entities. The parent shall disclose
information that enables users of the consolidated financial statements to
evaluate the consequences of losing control of a subsidiary during the
reporting period (IFRS 12.10(b)(iv)). The following information should be
disclosed (IFRS 12.19):
l the total gain or loss with the loss of control;
l the portion of this gain or loss attributable to measuring any investment

retained in the former subsidiary at its fair value at the date of the loss; and l
the line item(s) in profit or loss inn which the gain or loss is recognised (if
not presented separately).
6 Given the requirements of IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations, it should be noted that in the period preceding
the disposal of a subsidiary, the latter will most probably meet the
requirements of IFRS 5 for classification as a non-current asset held for sale
in the consolidated financial statements of the parent company. This would
entail classifyin ng the assets
of the subsidiary as held for sale on the face of the statement of financial
position in a single line item, as well as separately classifyin
ng and disclosing the liabilities and
equity items of the subsidiary directly relating to non-current assets held for
sale.
The subsidiary held for sale will most probably also qualify as a component
of an entity which is a major line of business or a separate geo ographical
segment, and
may therefore qualify for separate presentation and disclosure as a

discontinued operation in terms of IFRS 5. This aspect is specifically dealt
with later at the end of chapter 14 and is, for the sake of simplicity, not taken
into account at this stage.
7 The
inclusion of the results of a subsidiary disposed of up to the date of disposal

ensures that the part of the results of the subsidiary for the current financial
period over which the parent exercised control, is reflected in the
consolidated statement of profit or loss and other comprehensive income. It
also ensures that the consolidated retained earnin
ngs at the beginning of the financial period correspond to the consolidated

retained earnings at the end of the previous year for consistency and
comparabilitty purposes. In the execution of the consolidation procedures,
the inclusion of the results of a subsidiary disposed of to the date of
disposal is achieved by dividing the ga
ain on disposal of shares in a subsidiary (under the cost model) as

reflected in the separa
ate financial statements of the parent, where

applicable, into the component elements thereof, and then incorporating
these elements in the consolidated statement of profit or loss and other
comprehensive income accordingly. The component elements are the
following: l the parent’s share in the retained eearnings since acquisition
and other reserves of the subsidiary disposed of to the beginning of the
current year plus
227
Chapter 13
l the parent’s share in the subsidiary’s profit for the current year to the date
of disposal
plus
l the gain (loss) on disposal of the interest in group context (as discussed
earlier)
equals
l the gain (loss) on disposal of shares as reflected in the separate records of

the parent under the cost model.
8 The following example illustrates the use of this approach on the

consolidation of the financial statements of a group where control over a
subsidiary was lost during the course of a year.
Partial disposal of a subsidiary (loss of control) and an
investment retained (NCI is measured at their proportionate
Example 13.5
acquisition date)
The following are the abridged trial balances of P Ltd and S Ltd on 31
December 20.14:
P Ltd
S Ltd
CREDITS
50 000
6 000
Retained earnings (at 1/1/20.14)
6 000
1 600
Mark-to-market reserve (at 31/12/20.14)
((1 230 – 1 200) × 77,6%) 23
Deferred tax
((1 230 – 693) × 80% × 28%) (R1 rounding adjustment) or (114 + 7) 121
Revenue (*)
8 000
2 000
Profit on the sale of shares (P/L)

3 293
Remeasurement gain on retained investment (after tax) (P/L) 507
R67 944
R9 600
DEBITS
Bank
60 447
8 000
Cost of sales (*)
4 800
1 400
1 467
200
Investment in S Ltd: 600 shares at fair value
1 230
R67 944
R9 600
(*) Accrued/incurred evenly (irrespective of the sale of the shares)

1 P Ltd purchased 4 500 shares in S Ltd on 1 January 20.12 for R5 200,

when the retained earnings of the latter amounted to R400. P Ltd disposed of
3 900 of these shares on 30 June 20.14 for R7 800.
228
Changes in ownership of subsidiaries through buying or selling shares 2 P

Ltd elected to measure the non-controlling interests at their proportionate
3 P Ltd accounted for the investment in S Ltd (as a subsidiary) at cost in its
separate financial statements.
4 After the loss of control, P Ltd classified the investment in S Ltd as a

financial asset under IFRS 9 in its individual financial statements and P Ltd
recognised fair value adjustments in the mark-to-market reserve (other
comprehensive income). Fair value adjustments are recognised monthly. P
Ltd elected to present the other comprehensive income net after tax in the
statement of profit or loss and other comprehensive income (IAS 1.91(a)).
The fair value per share of S Ltd on the various dates was as follows:
On 30 June 20.14
R2,00
On 31 December 20.14
R2,05
5 The disposal of the subsidiary does not comply with the criteria of IFRS 5
Non-current Assets Held for Sale and Discontinued Operations until the
date of disposal.
6 The
subsidiary
does
not represent a separate major line of business or geographical area of the

group.
7 A company tax rate of 28% applies and CGT is calculated at 80% thereof.
The actual journal entries to recognise the partial sale of the share
investment in the separate financial statements of the parent will be: Dr
Cr
J1 Bank
(SFP)
(3 900 × R2,00 per share) 7
800
Investment in S Ltd (SFP) (3 900/4 500 × R5 200)
4 507
3 293
Recording proceeds and profit on partial disposal
of investment
J2
Income tax expense (P/L) (3 293 × 80% × 28%) 738
SARS
tax
payable/Bank (SFP)
738
of shares
The remaining investment is still recognised at cost of R693 (600/4 500 ×

R5 200). This investment should now be classified as a financial asset and
must initially be measured at fair value (IFRS 9.5.1.1). It is assumed that the
initial remeasurement to fair value should be recognised in profit or loss.
The subsequent remeasurements to fair value (from R1 200 to R1 230) are
recognised in other comprehensive income (mark-to-market reserve) in
terms of the company’s accounting policy.
229
Chapter 13
The actual journal entries to recognise the initial remeasurement of the

share investment in the individual financial statements of the parent will
be: Dr
Cr
R
R
J3 Investment in S Ltd (SFP)
((600 shares × R2,00) – (600/4 500 × R5 200))
507
Remeasurement gain on retained investment (P/L)
507
(comment (b))
Remeasurement gain on retained investment
J4 Income tax expense (P/L) (507 × 80% × 28%)
114
Deferred tax (SFP)
114
Tax effect of remeasurement to fair value
Comment
a In this example the parent elected to account for the investment in the
subsidiary at cost in its separate financial statements. Refer to self-
assessment question 3 where the investment in the subsidiary is accounted
for under IFRS 9 in the parent’s separate financial statements.
b The
treatment of the remeasurement gain is not explicitly explained in IAS 27. In

this example, the initial remeasurement of the investment from the
remaining cost to fair value after control was lost, was recognised in profit or
loss in line with the general requirements of a financial assets in terms of
IFRS 9.5.1.1 and IFRS 9.B5.1.2A.
Solution 13.5
The consolidated financial statements of P Ltd and its subsidiaries in respect

of the year ended 31 December 20.14, are prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Investment at fair value (1 230(P)) or (600 shares × R2,05) 1 230
Current assets
Bank (60 447(P))
60 447
Total assets
R61 667
Share capital
50 000
Retained earnings
11 647
Mark-to-market reserve ((1 230 – 1 200) × 77,6%)

23
61 670
Total equity
61 670
Liabilities
Deferred tax ((1 230 – 1 200) × 80% × 28%) or (121 – 114)
R61 667
230

LTD GROUP
Revenue (8 000(P) + 1 000(J1))
9 000
Cost of sales (4 800(P) + 700(J1)) (5
500)
Gross profit
3 500
Other income (gain on disposal of interest)
2 750
Profit before tax
6 250
Income tax expense (1 467(P) – 114(J2) + 100(J1))
(1 453)
PROFIT FOR THE YEAR
4 797
Other comprehensive income, net of tax:
Mark-to-market reserve (fair value adjustment on investment) ((1 230 – 1

200) × 77,6%)
23
23
R4 820

4 747
Non-controlling interests (50(J1)) 50
R4 797
Owners of the parent (4 747 + 23)
4 770
Non-controlling interests (50(J1)) 50
R4 820
231
Chapter 13
P LTD GROUP
Mark-to-
Non-
Share
Retained
Total
market
Total
controlling
capital
earnings
equity
reserve
interests
Balance at
1 Jan 20.14
50 000
* 6 900
56 900
1 900
58 800
Changes in
equity for
20.14
Total
comprehensive
income for the
year:
Profit for the year
4 747
4 747
50
4 797
Other compre-
hensive
income
23
23
23
Loss of control
over subsidiary
(1 950) (1
950)
Balance at
31 Dec 20.14
R50 000
R11 647
R23
R61 670
R61 670
*6
000(P) + 900(S) = 6 900
P LTD GROUP
Loss of control over subsidiarry:

During the current year, P Ltd sold a 65% interest in S Ltd (parent’s
controlling 75%
interest reduced to a simple investment of 10% in S Ltd) and lost control

over S Ltd. This resulted in a total amount of R2 750 being included in the
line item of “Other income” in profit or loss. Included in this amount is
R367 that relates to the measuring of the retained investment to its fair value.
P Ltd now does not have control, joint control or significant influence over S
Ltd and accounts for its investment as a financial asset at fair value through
other comprehensive income.
Comment
a Due
to
the disposal of the interest held in S Ltd by P Ltd, the non-controlling

interests are derecognised. This is because S Ltd is no
o longer a subsidiary of P Ltd (control is
relinquished).
b IFRS 12.19 requires that an entity shall disclose the gain or loss (gain of
R2 750) with the loss of control over a subsidiary. Furthermore, the entity
should disclose the portion of that gain or loss attributable to measuring any
investment retained in the former subsidiary at its fair value at the date when
control is lost (being R367). The line item (being other income) in profit or
loss in which the gain or loss is recognised (if not presented separately)
should also be d
disclosed.
232
Calculations
Although control over the subsidiary was relinquished durin ng the current
financial
period, it is essential to analyse the equity of this subsidiary up to the date

of disposal. The detail in the analysis of owners’ equitty makes it possible to
break down the gain on disposal of interest in S Ltd into the three
components contained therein, i.e.:
l the
gain in group context;
l profits attributable since acquisition of the subsidiary to the beginning of

the period in which the subsidiary was disposed of; and
l attributable profit of the subsidiary for the period in which it was disposed
of.
Comment
These three components (together with the reversal of the parent’s entries in
its separate financial statements) are also clearly evident in journal 1 below.
P Ltd 75%–10%
Total
NCI
At
Since
Share capital
6 000
4 500
500
Retained earnings
400
300
100
6 400
4 800
600
– Parent
400
400
6 800
5 200
600
Retained earnings (1 600 – 400)
1 200
900
300
• Current year:
Profit: 1/1/20.14–30/6/20.14
((2 000 – 1 400 – 200) × 6/12)
200
150
50
Total
equity (represented by other net
assets of R7 800 and goodwill of R400)
8 200
1 050
1 950
Derecognise assets (including good-
(4 800)
will), liabilities and NCI (IFRS 10.B98)
(8 200)
(400)
(1 050) (1
950)
233
Chapter 13
1 600
6 800

date: IFRS 3.32(b)
(6 400)
Goodwill (parent)
R400
C3 Pro forma consolidation journal entries – S Ltd
Dr
Cr
J1
3 293
507
Non-controlling
interests (P/L)
50
Cost of sales (P/L) (comment (d)) (1 400 × 6/12) 700
Income tax expense (P/L) (comment (d)) (200 × 6/12) 100
Gain on disposal of interest (group context) (P/L)
(comment (b))
2 750
Retained
earnings
900
Revenue
(P/L)
(comment (d)) (2 000 × 6/12)
000
Consolidation of subsidiary S Ltd and recognition
of disposal of interest at group level
J2 Deferred
tax
(SFP)
114
Income tax expense (P/L) (507 × 80% × 28%)
114
Reversal of tax effect on remeasurement gain as in
parent’s individual financial statements
J3
Non-controlling interests (SFP/SCE) (derecognised)
1 950
Non-controlling
interests (SFP/SCE)
(opening balance in equity)
1 900
(current year’s interest in profit)
50
Accounting for various line items of non-controlling
interests in equity for S Ltd
234

Comments
a The
fair value adjustments to the investment iin S Ltd were as follows: Fair value
of remaining investment at 30 June 20.14 (600 × R2,00) 1 200
Fair value adjustment to end of current year
30
Fair value at end of current year (600 × R2,05)
R1 230
b If a parent loses control, as is the case with S Ltd here, the gain or loss on
disposal of the interest would be calculated as follows using IFRS 10.B98:
Derecognise assets (including goodwill) and liabilities on date control is lost
(7 800 other net assets + 400 goodwill)
(8 200)
Derecognise non-controlling interests
1 950
Carrying amount of P Ltd’s interest in S Ltd lost
(6 250)
Recognise consideration received
7 800
Fair value of investment retained (600 shares × R2,00)
1 200
Gain (consolidated) recognised in profit or loss
R2 750
The total gain should effectively be presented as a gain on the disposal of an

interest in the subsidiary and a remeasurement gain on remeasuring the
retained investment to fair value (IFRS 12.19). These items could be
calculated as follows: Carrying amount of interest sold (65/75 × R6 250
(above))
(5 417)

7 800
Profit on disposal
R2 383
Carrying amount of interest retained (10/75 × R6 250 (above)) (833)
1 200
Remeasurement gain
R367
c By means of the relevant amounts (as contained in the analysis of the

ownership interest of S Ltd), the gain on the disposal of the shares in S Ltd
can be analysed as follows:
7 800
Historic cost of shares disposed of (5 200 × 3 900/4 500)
(4 507)
At-acquisition equity disposed off (4 800 × 65/75)
(4 160)
Goodwill realised (only for the parent company) (400 × 65/75) (347)
Gain on disposal of interest per separate records of P Ltd 3 293
Attributable post-acquisition retained earnings disposed of ((900 + 150)) ×

65/75)
(910)
Profit on disposal
2 383
Plus remeasurement of retained investment to fair value
(1 200 – ((4 800 × 10/75) + (1 050 × 10/75)) + (400 × 10/75)) or (1 200 –

((net asset value of 7 800 × 10%) + (400 × 10/75)) 367
Consolidated gain on disposal of the interest
R2 750
Or
7 800
Attributable net assets disposed of (net asset value of R7 800 × 65%) (5 070)
Profit on disposal
2 383
Remeasurement of retained investment to fair value
367
R2 750
continued
235
Chapter 13
Care should be taken not to confuse the proceeds of R7 800 with the net
asset value of the subsidiary of R7 800 at the date of the loss of control. It is
purely coincidence that the amounts are the same.
d In the consolidation, the financial statements of S Ltd are not combined

(i.e. added together) with those of P Ltd as S Ltd is not a subsidiary of P Ltd
at the end of the reporting period. The amounts in respect of S Ltd are
accounted for by means of J1
(i.e. these amounts have to be journalised into the consolidated statement

of profit or loss and other comprehensive income and the consolidated
statement of changes in equity for the period while S Ltd was a
subsidiary).
e The investment in S Ltd is, after the loss of control, treated as a simple
investment (at fair value through other comprehensive income). The
investment account should therefore be equal to the fair value of R1 230 (see
comment (a)). The mark-to-market reserve should reflect the fair value gain
after the loss of control, being R23 ((1 230 –
1 200) × 77,6%), while the deferred tax balance should be R7 ((1 230 – 1
200) × 80%
× 28%) as is included in the consolidated statement of financial position.
Alternative pro forma consolidation journal entries for sale of interest
Dr
Cr
J1

900
Retained
earnings
900
Accounting for retained earnings at the beginning
of the year
J2
150
Revenue
(P/L)
(2 000 × 6/12)
000
Cost of sales (P/L) (1 400 × 6/12)
700
Income tax expense (P/L) (200 × 6/12)
100
Non-controlling
interests (P/L)
50
Accounting for profit of subsidiary for the year
J3
3 293
507
3 800
Reversal of parent’s entries for profit on sale of
shares and remeasurement of retained investment
J4
2 383
2 383
Recognition of gain at group level
J5

367
Gain on disposal of interest (remeasurement
of retained investment to fair value) (P/L)
367
Recognition of gain at group level from
remeasurement of retained investment to fair value
236
13.9 Partial disposal of an interest in a subsidiary, whereby it becomes
an associate
This section of the work is similar to the section above and also deals with a
loss of control over a subsidiary. The requirements of IFRS 10.25–26 and
B97–B99 are also applicable. The section above addressed the scenario
where the entire interest in a subsidiary was disposed of. This section deals
with the scenario where control over the subsidiary is lost, but an interest is
retained whereby significant influence is exercised.
Therefore, the subsidiary now becomes an associate (or joint venture). In

this scenario specific attention should be placed on the following
consolidation procedures: l in accounting for the loss of control over the
subsidiary, any investment retained in the former subsidiary should be
recognised at its fair value on the date when control is lost;
l this implies that a remeasurement gain or loss should be recognised as part

of the profit or loss with the disposal of the interest in the subsidiary; l after
control is lost the investment in the associate (or joint venture) should be
accounted for under the equity method in terms of IAS 28.
Partial disposal of an interest in a subsidiary resulting in a

change in status as the subsidiary becomes an associate (a
Example 13.6
loss of control by the parent occurs) (NCI is measured at its
proportionate share of the acquiree’s identifiable net assets
at the acquisition date)
The following represents the condensed financial statements of P Ltd (with

some subsidiaries already consolidated) and A Ltd (that should still be
accounted for in the consolidated financial statements) at 31 December
20.17:

20.17
P Ltd and
subsidiaries
A Ltd
(consolidated)
ASSETS
500 000
70 000
Investment in A Ltd – 40 000 shares at cost
51 000
–
Equity investments at fair value through other
comprehensive income
25 477
Inventory
369 000
109 200
Total assets
R920 000
R204 677
400 000
100 000
Retained earnings
420 000
99 200
–4
250
(60 000 opening balance + 40 000 current year)
100 000
Deferred tax
–1
227
R920 000
R204 677
237
Chapter 13

P Ltd and
sub-
sidiaries
A Ltd
(consoli-
dated)
Revenue
671 000
111 200
Cost of sales
(210 000)
(36 000)
Gross profit
461 000
75 200
35 000
10 000
Profit before tax
506 000
75 200
Income tax expense
(146 000)
(24 000)
PROFIT FOR THE YEAR
360 000
51 200
Mark-to-market reserve (fair value adjustment on investment)
3 286
Income tax relating to items that will not be reclassified
(736)
2 550
R360 000
R53 750

320 000
51 200
40 000
R360 000
R51 200
320 000
53 750
40 000
R360 000
R53 750
238

Retained earnings
P Ltd
Mark-to-
and
market
sub-
reserve
sidiaries
A Ltd
A Ltd
(consoli-
dated) –
parent
1 700
150 000
73 000
Change in equity for 20.17
Profit for the year
–
320 000
51 200
2 550
Dividend paid: 31/12/20.17
(50 000)
(25 000)
R4 250
R420 000
R99 200
for R102 000, when the retained earnings of A Ltd amounted to R25 000.

3 On 31 March 20.17 P Ltd disposed of 40 000 shares in A Ltd for R86 000.
P Ltd has exercised significant influence over the financial and operating
policy decisions of A Ltd since that date. The fair value of the remaining
investment by P Ltd in A Ltd was R80 000 at the date of disposal of the
interest.
4 P Ltd accounted for the investment in A Ltd at cost in its separate financial
statements (in terms of IAS 27.10 and IAS 28.44).
5 The disposal of the interest in the subsidiary did not comply with the
criteria of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations until the date of disposal thereof.
6 The subsidiary does not represent a separate major line of business or

geographical area of the group.
7 A Ltd’s profit and tax for 20.17 accrued evenly. The fair value gain on the
equity investments at fair value through other comprehensive income of A
Ltd only relates to the period after 1 April 20.17.
8 The company tax rate is 28% and CGT is calculated at 80% thereof.
239
Chapter 13
Comments
a The separate financial statements of P Ltd already include the gain on the
partial disposal of its investment in A Ltd
d. The gain was calculated as follows:
Proceeds
86 000
Cost price of portion sold (40 000/80 000 shares × R102 000) (51 000)
Gain on disposal
R35 000
b The separate financial statements of P Ltd also already include the tax
payable on this gain of R7 840 (35 000 × 80% × 28%).
Solution 13.6
The consolidated financial statements, incorporating the results of A Ltd (as

a subsidiary before the partial sale and in accordance with the equity method
thereafter), are prepared as follows.
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (P and other subsidiaries)
500 000
(51 000(remaining cost) + 29 000(J1) + 16 380(J4) – 10 000(J5)) or (80

000(fair 86 380
value of retained investment after loss of control) + 6 380(since))
586 380
Current assets
Inventory (P and other subsidiaries)
369 000
Total assets
R955 380
Share capital
400 000
Retained earnings
454 360
1 020
855 380
Non-controlling interests (in respect of other subsidiaries)
100 000
R955 380
240

LTD GROUP

Revenue (671 000(P) + 27 800(A)(J1))
698 800
Cost of sales (210 000(P) + 9 000(A)(J1)) (219
000)
Gross profit (461 000(P) + 18 800(A))
479 800
14 000
15 360
Profit before tax
509 160
Income tax expense (146 000(P) + 6 000(A)(J1))
(152 000)
PROFIT FOR THE YEAR
357 160

Share of other comprehensive income of associates (comment (a)) 1 020
1 020
R358 180
Owners of the parent (balancing)
314 600
Non-controlling interests (40 000(other) + 2 560(A)(J1))
42 560
R357 160
Owners of the parent (314 600 profit + 1 020 OCI)
315 620
Non-controlling interests (40 000(other) + 2 560(A)(J1))
42 560
R358 180
241
Chapter 13
P LTD GROUP
Non-
Mark-to-
Share
Retained
con-
Total
market
Total
capital
earnings
trolling
equity
reserve
interests
Balance at
1 Jan 20.17
400 000 * 188 400
1 360
589 760 ! 94 940
684 700
Changes in equity
for 20.17
Dividends
– (50
000)
– (50
000)
– (50
000)
Total
comprehensive
income for the
year:
Profit for the year
314 600
314 600
42 560
357 160
Other comprehen-
sive income
1 020
1 020
1 020
Transfer with dis-
posal of interest
in A Ltd
1 360
(1 360)
Disposal of interest
in A Ltd and
derecognition of
non-controlling
interests ((J3) and

comment (b))
(37 500)
(37 500)
Balance at
31 Dec 20.17
R400 000 R454 360
R1 020 R855 380 R100 000 R955 380
150 000(P) + 38 400(J1) = 188 400
Other: 100 000 end – 40 000 current year = 60 000 opening balance plus A
Ltd: 25 000 + 9 600 +
340 = 94 940
P LTD GROUP
Loss of control over subsidiary:

During the current year, P Ltd sold a 40% interest in S Ltd (half of its 80%
interest) and lost control over S Ltd. This resulted in a total amount of R14
000 being included in the line item of “other income” in profit or loss.
Included in this amount is R4 000 that relates to the measuring of the
retained investment to its fair value. P Ltd now has significant influence over
S Ltd and accounts for its interest in the associate by applying the equity
method.
242

Comments
a In terms of the Guidance on implementing IAS 1 Presentation of

Financial Statements, the share of other comprehensive income of
associates is the amount attributable to the parent (i.e. the after tax and non-
controlling interests in the associate).
b Upon
the loss of control by P Ltd, A Ltd is no longer a subsidiary of the parent P

Ltd and non-controlling interests to the amount of R37 500 (113 500 – 76
000) are derecognised from the consolidated financial statements of P Ltd.
This results in a final amount of R100 000 in respect of the non-controlling
interests being recognised in the consolidated financial statements of P Ltd,
which relates to the other subsidiaries of P Ltd.
c IFRS
12.19 requires that an entity shall disclose the gain or loss (gain of R14 000)
with the loss of control over a subsidiary. Furthermore, the entity should
disclose the portion of that gain or loss attributable to measuring any
investment retained in the former subsidiary at its fair value (being R4 000)
at the date when control is lost. The line item (being other income) in profit
or loss in which the gain or loss is recognised (if not presented separately)
should also be d
disclosed.
Calculations
C1 Analysis of the owners’ equity of A Ltd – as subsidiary
P Ltd 80%
Total
NCI
At
Since
i At acquisition
Share capital
100 000
80 000
20 000
Retained earnings
25 000
20 000
5 000
125 000
100 000
25 000
Equity
represented by goodwill
– Parent
2 000
2 000
127 000
102 000
25 000
Retained earnings
s (73 000 – 25 000)
48 000
38 400 RE 9
600
1 700
1 360 MtM 340
• Current year:
Profit: 1/1/20.17–31/3/20.17
(51 200 × 3/12)
12 800
10 240 RE 2
560
189 500
48 640 RE
37 500
1 360 MtM
50 000
Derecognise assets (including
goodwill), liabilities and NCI (189 500) (102 000)
(50 000)
(37 500)
(IFRS 10.B98)
Transfer of mark-to-market
(1 360) MtM
reserve (IFRS 10.B99) (J2)
1 360 RE
RE = Retained earnings; MtM = Mark-to-market reserve
243
Chapter 13
C1 Analysis of the owners’ equity of A Ltd – as associate
P Ltd 40%
Total
NCI
At
Since
i At acquisition
Recognise remaining interest at fair
value
200 000
80 000
n/a
• Current year:
Profit: 1/4/20.17–31/12/20.17
(51 200 × 9/12)
38 400
15 360 RE
n/a
2 550
1 020 MtM
n/a
Dividend
(25 000)
(10 000) RE
n/a
R215 950
R5 360 RE
n/a
R1 020 MtM
RE = Retained earnings; MtM = Mark-to-market reserve
C2 Proof of calculation of goodwill of A Ltd in terms of IFRS 3.32
25 000
127 000

date: IFRS 3.32(b)
(125 000)
Goodwill (parent)
R2 000
Dr
Cr
J1
Investment in A Ltd (SFP) (80 000 fair value – cost of
R51 000 in separate financial statements of P Ltd)
29 000
Gain on disposal of interest (P) (P/L)

35 000
Cost of sales (P/L) (36 000 × 3/12) (comment (a))
9 000
Non-controlling interests (P/L) (first 3 months)
(comment (a))
2 560
Income tax expense (P/L) (24 000 × 3/12) (comment (a)) 6
000
Revenue (P/L) (111 200 × 3/12) (comment (a))
27
800
38 400
Mark-to-market reserve – Beginning of year (SCE)
1 360
10 000
(Remeasurement gain) (IFRS 10.25)
4 000
Consolidation of subsidiary for first three months
and recognition of disposal of interest
continued
244
Dr
Cr
J2 Mark-to-market
reserve
(SCE)
(comment (c)) 1
360
1 360
Transfer of mark-to-market reserve to retained
earnings on loss of control over subsidiary in terms
of IFRS 10.B99
J3
37 500
Non-controlling interests (SFP/SCE) (opening
balance in equity) (25 000 at + 9 600 RE + 340 MtM)
34 940
Non-controlling
interests (SFP/SCE)
(current year’s interests in profit)
2 560
interests in equity for A Ltd (comment (j))
J4
Investment in A Ltd (as associate) (SFP)
16 380
15 360
(MtM) (OCI)
1 020
Accounting for P Ltd’s share of equity of associate

for current year (last nine months)
J5
Other income
(dividend received from A Ltd as in P Ltd) (P/L)
10 000
Investment in A Ltd (as associate) (SFP)
10 000
Elimination of dividend received from associate –
IAS 28.10
245
Chapter 13
Comments
a Note that A Ltd was only a subsidiary of P Ltd for the first three months
of the current year. Since A Ltd was not a subsidiary of P Ltd at the
reporting date, A Ltd’s individual financial statements will not be combined
with those of the parent (P Ltd) as a starting point for consolidation. This
means that the results for A Ltd (for the period that it was a subsidiary of P
Ltd) would have to be journalised into the consolidation, as is seen in the
pro forma consolidation journal entry above.
bP
Ltd disposed of 40 000 shares in A Ltd and lost control over A Ltd. The
gain or loss on the disposal of the interest would be calculated as follows
using IFRS 10.B98:

(187 500 other net assets + 2 000 goodwill) (IFRS 10.B98(a)) (189 500)
Derecognise non-controlling interests (IFRS 10.B98(a))
37 500
Net asset value (attributable to parent) derecognised
(152 000)
Fair value of consideration received recognised (i.e. cash received)
(IFRS 10.B98(b))
86 000
Recognise fair value of investment in former subsidiary retained (IFRS

10.B98(b))
80 000
Net gain on disposal of interest (group context)
(IFRS 10.B98(d)) attributable to the owners of the parent R14 000

(above)) (76 000)
86 000
Profit on disposal
R10 000
Carrying amount of interest retained (40/80 × R152 000 (above)) (76 000)
Fair value of investment retained (given)
80 000
Remeasurement gain
R4 000
The amount of R14 000 comprises R4
000 in respect of the fair value
remeasurement of the retained interest (refer to (d) below), plus R10 000
arising from the R86 000 received for equity of R76 000 that was disposed
of (refer to (e) below). These two amounts (R4 000 and R10 000) were
presented separately in J1
for illustration purposes. Note that both these amounts should be disclosed
separately in terms of IFRS 12.19.
c With
the loss of control over a subsidiary, any amount previously recognised in

other comprehensive income, should be reclassified to profit or loss, or
transferred directly to retained earnings if required in accordance with other
IFRSs (refer to IFRS 10.B98(c) and B99).
d Remeasurement of investment retained in terms of IFRS 10.25(b): Fair

value of retained 40% investment in former subsidiary (given) (IFRS
10.25(b))
80 000
Carrying amount of retained 40% investment in former subsidiary ((102 000
× 40/80) + (50 000 × 40/80)(analysis)) or
(152 000(comment (b)) × 40/80)
(76 000)
Remeasurement (gain) to be recognised in profit or loss (BCZ182) (refer to

J1)
R4 000
continued
246
Changes in ownership of subsidiaries through buying or selling shares e By

means of the relevant amounts (as contained in the analysis of the ownership
interest of A Ltd), the gain on disposal of shares in A Ltd can be analysed as
follows: Proceeds on disposal of interest
86 000
Historic cost of shares disposed of (102 000 × 40/80)
(51 000)
At-acquisition equity disposed of (100 000 × 40/80)
(50 000)
Goodwill realised (2 000 × 40/80)
(1 000)
Attributable post-acquisition reserves disposed of
((48 640 RE × 40/80) + (1 360 MtM × 40/80)

(25 000)
Gain from equity relinquished
10 000
Remeasurement of investment retained (refer to (d) above)
4 000
Total consolidated gain on disposal of the interest
R14 000
The gain of R10 000 from the equity relinquished to NCI can also be
calculated as follows:
86 000
Attributable net assets disposed of
(75 000)
(net asset value of R187 500 × 40%)
Goodwill realised (only for the parent company) (2 000 × 40/80) (1 000)
Consolidated gain on disposal of interest
R10 000
It is important to note that only the goodwill relating to the parent company
(i.e.
R2 000) is realised in respect of A Ltd. The goodwill relating to the non-

controlling interests, if any (none in this example) are not realised in the
consolidated financial statements of P Ltd, as this amount already relates to
the non-controlling interests and should therefore not be transferred to it
again.
f To obtain continuity between the amounts of the current and previous

periods’
consolidated statements of profit or loss and other comprehensive income,

the gain of R35 000 (per the separate financial statements of the parent) is
included in the current period’s consolidated statement of profit or loss and
other comprehensive income and the consolidated statement of changes in
equity, as follows: Included in opening consolidated retained earnings at the
beginning of the period
38 400
Included in opening consolidated mark-to-market reserve at the beginning of

the period
1 360
Included in profit for the current period (*) as various line items 10 240
50 000
Group’s net gain in the consolidated statement of profit or loss and other
comprehensive income (see comment (b) above)
14 000
Adjustment of carrying amount of the investment in associate to fair value

(see comment (h) below).
(29 000)
Gain on disposal of interest per separate records of P Ltd R35 000
This approach is also evident from J1 above where the investment in A Ltd
is increased with R29 000 (fair value of R80 000 less cost price of R51 000
still contained in the separate financial statements of P Ltd), the amount of
profit per P Ltd is reversed and replaced by the parent’s portion of the
retained earnings and mark-to-market reserve at the beginning of the period,
the various line items in profit or loss and the group’s profit on the loss of
control over the subsidiary.
continued
247
Chapter 13
g The R10 240(*) is taken up in the consolidated statement of profit or loss

and other comprehensive income by adding R12 800 to the profit of the
group, and by adding (thereafter) R2 560 to the non-controlling interests.
h The calculation of the group’s profit or loss on the loss of control over a
subsidiary includes the measurement of the investment in the former
subsidiary retained, at fair value (IFRS 10.25(b)). In this example, the
carrying amount of the investment in A Ltd, after the sale of the 40 000
shares, is reflected in P Ltd as R51 000 (remember that the financial
statements of P Ltd are the starting point for consolidation –
IFRS 10.B86(a)). The fair value of the investment retained is R80 000. An
adjustment of R29 000 (80 000 – 51 000) is therefore needed to correctly
account for the investment at fair value on the date of the disposal of the
interest. In contrast to example 13.5 above, this adjustment was not needed
as the parent had already remeasured the retained investment to its fair value
in its separate financial statements. A comparison table of the pro forma
consolidation journal entries for example 13.5 (investment retained is a
simple investment measured at fair value) and example 13.6 (investment
retained is an associate that is still measured at cost) is given below.
i The question arises whether any deferred tax adjustment is needed on the
abovementioned remeasurement gain. Note that P Ltd already accounted for
the actual tax expense from the sale of the shares in its separate financial
statements. Some are of the opinion that this remeasurement changes the
temporary differences on the investment and that deferred tax should then be
recognised (4 000 × 80% × 28% =
896). However, this remeasurement is in respect of P Ltd’s equity interest
retained in the net assets of A Ltd. Equity is by definition (in terms of the
Conceptual Framework) always an after-tax amount. The fair value of the
investment retained now becomes the initial investment in an associate. In
terms of the equity method, only the investor’s share of the net assets of the
investee is added to the investment (net assets would be the amount after
tax). Similar to the approach that no deferred tax is recognised for changes in
the investment in an associate for accounting for the investor’s share of the
profit (after tax) of the associate, no deferred tax is recognised in respect of
this remeasurement gain in this work.
j All entries in J3 are made against the same ledger account with no net
effect. Thus, it may be argued that J3 is not needed. J3 only assists in
preparing the various line items for the non-controlling interests in A Ltd in
the consolidated statement of changes in equity.
248

Comparison table for loss of control:
LOSS OF CONTROL:
PARENT’S SEPARATE FINANCIAL STATEMENTS AND

CONSOLIDATION
Subsidiary becomes IFRS 9 investment
Subsidiary becomes associate
Parent’s separate financial statements:
Parent’s separate financial statements:
l Parent elected to measure investment in l Parent elected to measure

investment in subsidiary at cost (IAS 27).
subsidiary at cost (IAS 27).

l Parent sold part of its share investment l Parent elected to measure
investment in and remainder of investment (no control,
associate at cost (IAS 27) (i.e. what
significant influence or joint control)
remains of the initial cost after partial
must then be measured at fair value on
sale; no requirement to remeasure to
initial recognition (IFRS 9.5.1.1).
fair value).
Sale transaction (example 13.5):
Sale transaction (example 13.6):
Dr Bank
R7 800
Dr Bank
R86 000
Cr Investment
R4 507
Cr Investment
R51 000
Cr Profit on sale (P/L)
# R3 293
Cr Profit on sale (P/L)
# R35 000
Remeasurement of retained investment to No remeasurement of retained

investment fair value:
to fair value.
Dr Investment
R507
Cr Remeasurement (P/L)
# R507
Consolidated financial statements:
Consolidated financial statements:
l Retained investment to be remeasured l Retained investment to be

remeasured to fair value for purpose of the group
to fair value for purpose of the group
(IFRS
10.B98). The “investment” in
(IFRS
10.B98). The “investment” in
parent’s separate financial statements is
parent’s separate financial statements is
already at fair value of R1 200 coming

still at “remaining cost” coming into the
into the consolidation (parent plus
consolidation (parent plus subsidiary)
subsidiary) and no pro forma journal en-
and a pro forma journal is needed to
try is needed against the investment-
adjust the remaining cost of R51 000 to
account.
the fair value of R80 000.
l The parent’s “profit” and “remeasure- l The parent’s “profit” (as indicated
by #) ment” (as indicated by #) must be re-must be replaced by the group’s
profit
placed by the group’s profit (in terms of
(in terms of IFRS 10.B98) and as such
IFRS
10.B98) and as such are
are eliminated.
eliminated.
Pro forma journals:
Pro forma journals:
Dr Profit on sale (P/L) #

R3 293
Dr Profit on sale (P/L) #
R35 000
Dr Remeasurement (P/L) #
R507
Dr Remeasurement (P/L)
n/a
Dr Investment (SFP)
n/a
Dr Investment (SFP)
R29 000
Cr Group’s profit (P/L)
R2 750
Cr Group’s profit (P/L)
R14 000
And all the other line items...
And all the other line items...
13.10 Loss of control and intragroup sale of assets
The consolidation adjustments in respect of intragroup sale of assets were

discussed in chapter 5 of this work. It was emphasised that all unrealised
intragroup profits should be eliminated in full until the asset is sold to parties
outside the group. Furthermore, it was indicated that the unrealised
intragroup profit on depreciable assets also realises through the process of
depreciation/amortisation while the asset is being used. Should 249
Chapter 13
the partially-owned subsidiary sell assets to another entity in the group, the
relevant portion of the unrealised gain should be allocated to the non-
controlling interests in the subsidiary. When the unrealised gain is again
realised, the relevant portion is once again allocated to the non-controlling
interests in the subsidiary.
On the loss of control over a subsidiary, the parent-subsidiary relationship

ceases to exist. The parent no longer controls the subsidiary’s individual
assets and liabilities.
Therefore, the group derecognises all the individual assets, liabilities and
equity related to that subsidiary. It follows that the underlying assets and
liabilities of the subsidiary are effectively sold to parties outside the group.
When a parent loses control over a subsidiary, any unrealised intragroup
profit is regarded as being realised from the group’s perspective and it is
recognised in full (irrespective of whether the parent retains an investment in
the former subsidiary – this approach is similar to realising the amounts
previously recognised in other comprehensive income in full with the loss of
control over a subsidiary). All unrealised intragroup profits will thus be
realised with a loss of control over a subsidiary that is regarded as a business
(as defined) (IFRS 10.B99A).
Loss of control over a subsidiary with previous intragroup
Example 13.7
profits on the sale of depreciable assets
The following represents the condensed financial statements of P Ltd (with

some subsidiaries already consolidated) and S Ltd (that should still be
accounted for in the consolidated financial statements) at 31 December
20.17:
20.17
P Ltd and
subsidiaries
S Ltd
(consolidated)
ASSETS
600 000
70 000
Patents
60 000
Investment in S Ltd at cost
Bank
413 488
109 200
Total assets
R1 013 488
R239 200
400 000
100 000
Retained earnings
483 488
119 200
(60 000 opening balance + 40 000 current year)
100 000
Total liabilities
30 000
20 000
R1 013 488
R239 200
250

P Ltd and
subsidiaries
S Ltd
(consoli-
dated)
Revenue
671 000
111 200
Cost of sales
(210 000)
(36 000)
Gross profit
461 000
75 200
118 000
Profit before tax

579 000
75 200
Income tax expense
(155 512)
(24 000)
PROFIT FOR THE YEAR
423 488
51 200
R423 488
R51 200
Profit and total comprehensive income attributable to:
383 488
51 200
40 000
–
R423 488
R51 200
Retained earnings
P Ltd
and
subsidiaries
S Ltd
(consoli-
dated) –
parent
150 000
93 000
Change in equity for 20.17
Profit for the year
383 488
51 200
(50 000)
(25 000)
R483 488
R119 200
1 P Ltd acquired 80% of the issued share capital of S Ltd on 1 January 20.13
for R102 000, when the retained earnings of S Ltd amounted to R25 000.

251
Chapter 13
3 On
1
January 20.16 S Ltd sold an item of plant to P Ltd at a profit of R10 000.
The remaining useful life of the plant at that date was five years with no
residual value.
The plant is depreciated on the straigh
ht-line basis.
4 On
January 20.16 P Ltd sold a patent to S Ltd at a profit of R9 000. The patent
is amortised evenly over three years.
5 On
31 March 20.17 P Ltd disposed of all its shares in S Ltd for R220 000.
6P
Ltd accounted for the investment in S
Ltd at cost in its separate financial
statements.
7 The
disposal of the interest in the subsidiary did not comply with the criteria of
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
until the date of disposal thereof.
8 The
subsidiary does not represent a separate major line of business or

geographical area of the group.
9S
Ltd’s profit and tax for 20.17 accrued evenly.
Comments
a The separate financial statements of P Ltd already include the gain on the
disposal of its investment in S Ltd. The gain was calculated as follows:
Proceeds
220 000
Cost price
(102 000)
Gain on disposal
R118 000
b The separate financial statements of P Ltd also already include the tax
payable on this gain of R26 432 (118 000 × 80% × 28%).
c This
examples assumes that adjustments made to the depreciation and

amortisation in respect of the intragroup profit from the plant and patent sold
between the two companies in the same group, will affect the cost of sales
line item as these costs form part of the production cost of inventory. Neither
company had inventory on hand at the reporting date, therefore the full
adjustment is made to cost of sale (nothing to inventory) as all the inventory
produced has already been sold.
252
Solution 13.7
The consolidated financial statements, incorporating the results of S Ltd (as

a subsidiary before the sale), are prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
600 000
600 000
Current assets
Bank (P and other subsidiaries)
413 488
Total assets
R1 013 488
Share capital
400 000
Retained earnings
483 488
883 488
Non-controlling interests (in respect of other subsidiaries) 100 000
Total equity
983 488
Liabilities
Total liabilities
30 000
R1 013 488
P LTD GROUP
Revenue (671 000(P) + 27 800(S)(J1))
698 800
Cost of sales (210 000(P) + 8 500(S)(J1) - 750(P)(J3))
(217 750)
Gross profit
481 050
Other income (gain on disposal of interest) (60 860(J1) + 5 250(J3)) 66 110
Profit before tax
547 160
Income tax expense
(155 512(P) + 6 140(S)(J1) + 2 100(S)(J1) + 210(P)(J3) + 1 470(J3)) (165

432)
PROFIT FOR THE YEAR
381 728
R381 728
Profit and total comprehensive income attributable to:
Owners of the parent (balancing)
338 016
Non-controlling interests (40 000(other) + 2 632(S)(J1) + 1 080(S)(J1)) 43

712
R381 728
253
Chapter 13
P LTD GROUP
Non-con-
Share
Retained
Total
trolling Total equity
capital
earnings
interests
Balance at 1 Jan 20.17
400 000 * 195 472
595 472
! 97 448
692 920
Dividends
(50 000)
(50 000)
– (50
000)
for the year:
Profit for the year
338 016
338 016
43 712
381 728
Disposal of interest in S Ltd
and derecognition of non-
controlling interests (J2)
(41 160)
(41 160)
Balance at 31 Dec 20.17

R400 000 R483 488 R883 488 R100 000
R983 488
150 000(P) + 49 792(J1) – 4 320(J3) = 195 472
Other: 60 000 opening balance plus S Ltd: 25 000 + 12 448 = 97 448
P LTD GROUP
During the current year, P Ltd sold its entire 80% interest in S Ltd and lost
control over S Ltd. This resulted in a total amount of R66 110 being included
in the line item of “other income” in profit or loss. This amount does not
include any amount that relates to the measuring of the retained investment
to its fair value.
The loss of control over S Ltd resulted in previously unrealised gains on the
disposal of plant (by S Ltd to P Ltd) to an amount R4 320 and patent (by P
Ltd to S Ltd) to an amount of R3 780 being realised and attributable to the
parent.
254

Calculations
P Ltd 80%
Total
NCI
At
Since
i At acquisition
Share capital
100 000
80 000
20 000
Retained earnings
25 000
20 000
5 000
125 000
100 000
25 000
– Parent
2 000
2 000
–
127 000
102 000
25 000
Retained earnings (93 000 – 25 000 –
((10 000 - 2 000) × 72%))
62 240
49 792 RE
12 448
(comment (d))
• Current year:
Profit: 1/1/20.17–31/3/20.17
((51 200 × 3/12) + 500 – 140
13 160
10 528 RE
2 632
((comment (b))
202 400
60 320 RE
40 080
Derecognise assets (including
goodwill), liabilities and NCI
(202 400)
(102 000)
(60 320)
(40 080)
(IFRS 10.B98)
25 000
127 000
date: IFRS 3.32(b)
(125 000)
Goodwill (parent)
R2 000
255
Chapter 13
Dr
Cr
J1
(no adjustment needed as P Ltd sold all its shares in S Ltd)
Gain on disposal of interest (P) (P/L) (comment (a) above) 118 000
Cost of sales (P/L) ((36 000 × 3/12) – 500) (comment (b)) 8
500
(comment (a))
2 632
Income tax expense (P/L)
((24 000 × 3/12) + 140) (comment (b))
6 140
27
800
49 792
Gain on disposal of subsidiary (group context) (P/L)
(comment (f))
60 860
Income tax expense (P/L) (7 500 × 28%) (comment (f)) 2
100
Non-controlling interests (P/L) (5 400 × 20%) (comment (f)) 1 080
J2
(40 080 (analysis) + 1 080 realisation of intragroup profit (J1)) 41

160
balance in equity) (25 000 at + 12 448)
37 448
Non-controlling interests (SFP/SCE) (current year’s
interests in profit)
3 712
(2 632 (analysis) + 1 080 realisation of intragroup profit (J1)) Accounting

for various line items of non-controlling
J3
Retained earnings (opening balance of parent) (SCE)
((9 000 – 3 000) × 72%) (comment (e))
4 320
Cost of sale (amortisation) (P/L)
(9 000/3 years × 3/12) (comment (e))
750
Income tax expense (P/L) (750 × 28%) (comment (e)) 210
(comment (e))
5 250
Income tax expense (P/L) (5 250 × 28%) (comment (e)) 1
470
Elimination of unrealised intragroup gain and
realisation of remaining unrealised intragroup gain
with loss of control over subsidiary
256

Alternative pro forma consolidation journal entries Alternative journal
entries for J1 and J2 could also be as follows (first without the unrealised
profit and the unrealised profit separately):
Dr
Cr
J1.1 Investment in S Ltd (SFP) (not adjustment needed as P Ltd sold all its
shares in S Ltd)
Gain on disposal of interest (P) (P/L) (comment (a) above) 118
000
Cost of sales (P/L) (36 000 × 3/12) (comment (a))
9 000

(comment (a)) (51 200 × 3/12 × 20%)
2 560
Income tax expense (P/L) (24 000 × 3/12) (comment (a))
6 000
27
800
54
400
((93 000 – 25 000) × 80%)
(comment (g))
53 360
J1.2 Retained earnings (opening balance of subsidiary
attributable to parent) (SCE)
4 608
((10 000 – 2 000) × 72%) × 80%) (comment (d))

Non-controlling interests (opening balance of subsidiary)
(SCE) (5 760 × 20%) (comment (d)) 1
152
Accumulated depreciation (SFP) (comment (d)) 2
000
Deferred tax (SFP)
((10 000 – 2 000) × 28%) (comment (d))
2 240
Plant (SFP) (P)
10 000
Elimination of unrealised intragroup gain included in
plant and recognition of portion realised to the
beginning of the current year through depreciation,
after tax
J1.3 Accumulated depreciation (SFP)
(10 000 / 5 years × 3/12) (comment (d))
500
500
Income tax expense (P/L) (500 × 28%) (comment (d)) 140

Deferred tax (SFP)
140
Non-controlling interests (P/L) ((500 – 140) × 20%)
72
72
Recognition of portion of unrealised intragroup gain
realised in first three months with related tax effect
and non-controlling interests
continued
257
Chapter 13
Dr
Cr
J1.4 Plant (SFP) (P)
10 000
Accumulated depreciation (SFP) (2 000(J1.2) + 500(J1.3))

2
500
7 500
Income tax expense (P/L) (7 500 × 28%)) 2
100
Deferred tax (SFP) ((2 240(J1.2) – 140(J1.3))
100
Non-controlling interests (P/L) ((7 500 – 2 100) × 20%)
(comment (d)) 1
080
1 080
Realisation of remaining unrealised intragroup gain
J2
(40 080 (analysis) + 1 080 realisation of intragroup profit) 41 160

balance in equity) (25 000 at + ((93 000 – 25 000) × 20%)) 38 600
interests in profit) (51 200 × 3/12 × 20%)
2 560
Alternative journal entries for J3 could also be as follows (first dealing with
the unrealised profit and then realising it with the loss of control):
Dr
Cr
J3
Retained earnings (opening balance of parent) (SCE)
((9 000 – 3 000) × 72%) (comment (e))
4 320
Accumulated
amortisation
(SFP)
(comment (e)) 3
000
Deferred
tax
(SFP)
((9 000 – 3 000) × 28%) (comment (e))
1 680
Patent (SFP) (S)
9 000
Elimination of unrealised intragroup gain included in
patent and recognition of portion realised to the
beginning of the current year through amortisation,
after tax
J4
Accumulated amortisation (SFP)
(9 000 / 3 years × 3/12) (comment (e))
750
750
Income tax expense (P/L) (750 × 28%) (comment (e)) 210
Deferred
tax
(SFP)
210
Recognition of portion of unrealised intragroup gain
realised in first three months with related tax effect
J5
Patent (SFP) (S)
9 000
Accumulated amortisation (SFP) (3 000(J3) + 750(J4))
750
5 250
Income tax expense (P/L) (5 250 × 28%)) 1
470
Deferred tax (SFP) ((1 680(J3) – 210(J4))
470
Realisation of remaining unrealised intragroup gain

258

Comments
a Note that S Ltd was only a subsidiary of P Ltd for the first three months
of the current year. Since S Ltd was not a subsidiary of P Ltd at the reporting
date, S Ltd’s individual financial statements will not be combined with
those of the parent (P Ltd) as a starting point for consolidation. This means
that the results for S Ltd (for the period that it was a subsidiary of P Ltd)
would have to be journalised into the consolidation, as is seen in the pro
forma consolidation journal entry (J1) above.
b The
adjustment to depreciation of R500 (R10 000/5 years = R2 000 × 3/12 =

R500) (comment (d)) and the tax effect thereof of R140 (R500 × 28%) that
relates to the intragroup sale of plant are already included in the analysis of S
Ltd. Separate pro forma consolidation journal entries to account for this is
not needed as the adjusted retained earnings and profit per the ana
alysis (as adjusted for the intragroup
transaction) is journalised into the consolidation. The line items of S Ltd are
not combined to those of the parent and, therefore, the unrealised gain
cannot be eliminated as it would normally be done (as in chapter 5 of this
work).
c With the loss of control over a subsidiary, any unrealised intragroup profits
are effectively realised as the subsidiary is effectively sold in full to parties
outside the group. The parent-subsidiary relationship ends and all individual
assets and liabilities of the subsidiary are effectively derecognised from the
group (i.e. not included in the consolidated statement of financial position).
The realisation of intragroup profits with the sale of the subsidiary should
therefore form part of the consolidated gain or loss with the loss of control.
See comment (g) where the realisation of this is added to the group’s profit
with the loss of control.
d The unrealised profit from the sale of the plant by S Ltd to P Ltd (note
that these adjustments are effectively included in the analysis of the equity of
S Ltd as S Ltd was the selling entity and the unrealised profit relates to the
subsidiary’s financial statements) is as follows:
Initial unrealised profit (given)
10 000
Realised through depreciation during 20.16 (10 000/5 years) (2 000)
Balance at beginning of current year
8 000
Realised through depreciation during 20.17 (10 000/5 years × 3/12) (500)
Balance realised with the loss of control
7 500
Tax effect (× 28%)
(2 100)
Amount after tax
5 400
Amount attributable to the non-controlling interests (× 20%) (1 080)
Amount attributable to the parent
R4 320
e The
unrealised profit from the sale of the patent by P Ltd to S Ltd (note that
these adjustments are not included in the analysis of the equity of S Ltd as P
Ltd was the selling entity and the unrealised profit relates to the parent’s
financial statements) is as follows:
Initial unrealised profit (given)
9 000
Realised through amortisation during 20.16 (9 000/3 years) (3 000)
Balance at beginning of current year
6 000
Realised through amortisation during 20.17 (9 000/3 years × 3/12) (750)
Balance realised with the loss of control
5 250
Tax effect (× 28%)
(1 470)
Amount after tax
3 780
Amount attributable to the non-controlling interests (N/A)
Amount attributable to the parent
R3 780
continued
259
Chapter 13
f P Ltd disposed of all its shares in S Ltd and lost control over S Ltd. The
gain or loss on the disposal of the interest can still be calculated using the
steps in IFRS 10.B98
(as was done in the preceding examples), but adjustments should also be
made for the realisation of intragroup profits. Furthermore, attention
should be given to the various line items that relate to the consolidated gain
or loss. The calculation in terms of IFRS 10.B98 results in the consolidated
gain or loss on the loss of the control over the subsidiary, attributable to the
owners of the parent (i.e. after tax and after the non-controlling interests).
However, the realisation of the intragroup profits would also have a tax
effect (separate line item) and it may affect the non-controlling interests in
profit or loss (separate line item) if the unrealised intragroup profit relates to
a partially-owned subsidiary.
The calculation of the consolidated gain or loss on the loss of the control
over the subsidiary, attributable to the owners of the parent, are as follows:

(200 400 other net assets + 2 000 goodwill) (IFRS 10.B98(a)) (202 400)
40 080
Net asset value (attributable to parent) derecognised
(162 320)
Fair value of consideration received recognised (i.e. cash received)
(IFRS 10.B98(b))
220 000

10.B98(b))
0
Net gain on disposal of interest (group context)
(IFRS 10.B98(d)) attributable to the owners of the parent
R57 680
(In J1 above as: 60 860 – 2 100 – 1 080 (comment (d) = 57 680, with the
tax and non-controlling interests in respect of the realisation of the
intragroup profits as separate line items)
(The realisation of the unrealised gain from the sale of the plant by
S Ltd to P Ltd (see comment (d)) (after tax) is effectively included in this
amount.)
Plus the realisation of the unrealised gain from the sale of the patent by P
Ltd to S Ltd (see comment (e)) (after tax)
3 780
(In J3 above as: 5 250 – 1 470 = 3 780)
Total net gain on disposal of interest (group context)
(IFRS 10.B98(d)) attributable to the owners of the parent (after tax) R61 460
The total gain on the disposal of the subsidiary will be presented as
follows in the profit or loss:
(60 860(J1)(S) + 5 250(J3)(P)
66 110
Income tax expense (2 100(J1)(S) + 1 470(J3)(P))

(3 570)
Profit after tax
62 540
Non-controlling interests (comment (d))
(1 080)
Total gain on disposal of interest (group context)
(IFRS 10.B98(d)) attributable to the owners of the parent (after tax) R61 460
continued
260
Alternative calculation:
Gross
Tax
NCI
Parent
Gain on disposal (without unrealised
profit) (J1.1)
53 360
N/A
53 360
Realisation of profit on plant
(comment (d))
7 500
(2 100)
(1 080)
4 320
Amounts recognised in J1 above
60 860
(2 100)
(1 080)
57 680
Realisation of profit on patent (J3)
(comment (e))
5 250
(1 470)
N/A
3 780
Total gain on disposal of interest
attributable to the owners of the

parent
R66 110 (R3 570) (R1 080) R61 460
* = Refer to comment (i) to example 13.6 for the discussion on the tax effect
on the gain on the disposal of the subsidiary. Also keep in mind that the
actual tax paid by the parent on the disposal of the share investment has
already been recognised by the parent. Refer to comment (b) to the
information given in this example.
g The gain on the disposal of the subsidiary can also (as an alternative) be
calculated as follows:
220 000
Carrying amount of parent’s interest in subsidiary lost
(166 640)
Consolidated carrying amount of subsidiary (without the elimination of the

unrealised profit)
(205 800)
(R100 000 share capital + R93 000 retained earnings at beginning of year +
R12 800 (R51 200 × 3/12) profit for first three months) Portion attributable
to non-controlling interests (205 800 × 20%) 41 160
Goodwill of parent derecognised
(2 000)
Gain on disposal of interest without unrealised profit
53 360
Unrealised profit from sale of the plant (comment (d) above) attributable to
the parent, after tax
4 320
57 680
Unrealised profit from sale of the patent (comment (e) above) attributable to
the parent, after tax
3 780
Total gain on disposal of interest attributable to the owners of the

parent, after tax
R61 460
h The other alternatives for the calculation of the group’s gain on the
disposal of the interest as outlined in the preceding examples may also be
applicable in this example, but were not repeated here. There are arguably
other alternatives to the journal entries as well.
13.11 Changes of interest in complex groups
In the case of changes of interest in complex groups, no new principles

apply. The complexity of the problems which may be encountered here
simply requires a very careful application of the principles that have been
dealt with in this chapter (as well as those in the next chapter).
261
Chapter 13
Question 13.1
On 1 January 20.17, the first day of the financial year, P Ltd held a 35%
ownership interest in S Ltd. On 31 March 20.17, P Ltd acquired a further
ownership interest of 20% in S Ltd from other shareholders for R200 000. P
Ltd accounted for its initial investment in S Ltd in its consolidated financial
statements in terms of the equity method, as significant influence was
exercised over the financial and operating policies of S Ltd from the date of
purchase of the initial interest. From the date of acquisition of the second
interest in S Ltd, P Ltd had control S Ltd.
The following information applies to the year ended 31 December 20.17:

DRAFT STATEMENTS OF PROFIT OR LOSS
P Ltd and
other
subsidiaries
S Ltd
(consoli-
dated)
R’000
R’000
Revenue
11 825
1 200
Cost of sales
(6 450)
(700)
Gross profit
5 375
500
60
Other income (interest received)
30
Depreciation on non-manufacturing assets
(425)
Finance costs
(40)
Other expenses
(1 000)
(80)
Profit before tax

4 040
380
Income tax expense (1
470)
(150)
PROFIT FOR THE YEAR (*)
R2 570
R230
1 750
230
820
R2 570
R230
(*) There is no “other comprehensive income” relevant to this statement of

profit or loss and other comprehensive income.
262
Retained
earnings
P Ltd and
other
subsidiaries
S Ltd
(consoli-
dated)
R’000
R’000
3 420
420
Profit for the year
1 750
230
Dividend paid: 31 December 20.17

(700)
(100)
R4 470
R550
1 P Ltd acquired its 35% interest in S Ltd some time ago for R175 000
(equalling its proportion of the net asset value of S Ltd) when S Ltd’s
retained earnings amounted to R150 000. Since then, S Ltd has not issued
any new shares.
2 S Ltd’s major asset is land. S Ltd revalued this property in its individual
financial statements just before P Ltd acquired its 35% interest, and credited
the revaluation surplus by R100 000 (after tax). The land, presented in S
Ltd’s statement of financial position at R800 000, is not depreciated. It is the
policy of the group to realise the revaluation surplus when the asset is sold.
S Ltd revalued the land on 1 January 20.17 and credited the revaluation
surplus with R172 500 (after tax).
3 The fair value of P Ltd’s previously held equity interest in S Ltd was R350
000 at the date on which P Ltd obtained control over the financial and
operating policies of S Ltd (i.e. the acquisition date). No goodwill or gain
from bargain purchase arose with the business combination and S Ltd’s net
assets were regarded as fairly stated in terms of the requirements of IFRS 3
Business Combinations.
4 S Ltd’s net income was earned evenly throughout the current reporting
period.

6 P Ltd measures the investment in S Ltd at cost in its separate financial
statements in terms of IAS 27.10(a) and IAS 28.44.
7 Assume that the opening balance of the non-controlling interests of P Ltd

and other subsidiaries at 1 January 20.17 was R1 million.
263
Chapter 13
Required
Prepare the consolidated statement of profit or loss and other comprehensive

income and consolidated statement of changes in equity (column for share
capital is not required) of the P Ltd Group for the year ended 31 December
20.17. Notes are not required.
P LTD GROUP
Revenue (11 825 000(P) + (1 200 000 × 9/12)(S))
12 725 000
Cost of sales (6 450 000(P) + (700 000 × 9/12)(S))
(6 975 000)
Gross profit
5 750 000
Other income
(60 000 (dividends) + 30 000 (interest)(P) – 55 000 (dividends of S)) 35
000
Other expenses (425 000(P) + 1 000 000 (P) + (80 000 × 9/12)(S)) (1 485
000)
Finance cost (40 000 × 9/12)(S) (30
000)
Share of profit of associate (57 500 × 35%)(S)
20 125
Profit before tax
4 290 125
Income tax expense (1 470 000(P) + (150 000 × 9/12)(S))
(1 582 500)
PROFIT FOR THE YEAR
2 707 625
Share of other comprehensive income of associate (C1) (comment (b)) 60

375
Income tax relating to other comprehensive income
–
R2 768 000
1 810 000
Non-controlling interests (820 000(P) + 77 625(C1))
897 625
R2 707 625
Owners of the parent (1 810 000 + 60 375)
1 870 375
Non-controlling interests (897 625 (as above))
897 625
R2 768 000
264

LTD GROUP
Revalu-
Non-
Retained
Total
ation
Total
controlling
earnings
equity
surplus
interests
Balance at
1 January 20.17
# 3 514 500
3 514 500 ^ 1 000 000
4 514 500
Changes in equity
for 20.17
Dividends
(700 000)
–
(700 000)
(45 000)
(745 000)
Total comprehensive
Profit for the year
1 810 000
1 810 000
897 625
2 707 625
Other comprehensive
income
– 60 375
60 375
60 375
Transfers
60 375 (60 375)
–
–
Acquisition of
subsidiary
450 000
450 000
Balance
31 December 20.17 $ R4 684 875
– R4 684 875 R2 302 625 R6 987 500
3 420 000(P) + 94 500(S) = 3 514 500
4 470 000(P) + 175 000 (since acquisition as associate) + 39 875 (since

acquisition as subsidiary)
= 4 684 875
Povided in question’s information
265
Chapter 13
Calculations
C1 Analysis of the owner’s equity of S Ltd – as associate
P Ltd 35%
Total
NCI
At
Since
i At date of first purchase
Share capital (comment (a))
250 000
87 500
Retained earnings
150 000
52 500
Revaluation surplus (given)
100 000
35 000
500 000
175 000
n/a
Consideration
(R175
000)
ii Since date of first
purchase
Retained
earnings
(420 000 – 150 000)
270 000
94 500 RE n/a
• Current year:
1/1/20.17–31/3/20.17
Profit
(230 000 × 3/12)
57 500
20 125 RE
n/a
Revaluation
surplus
(comment (b))
172 500
60 375 RS n/a
(350 000/35%)
1 000 000
175 000
n/a
Associate becomes a
subsidiary (comment (c))
(1 000 000)
(175 000)
(175 000)
Transfer between reserves
(60 375 RE – 60 375 RS)
60 375 RE
(comment (d)) –
(60 375) RS n/a
–
–
RE = Retained earnings (SCE); RS = Revaluation surplus (SCE) 266

Analysis of the owner’s equity of S Ltd – as subsidiary
P Ltd 55%
Total
NCI
At
Since
i At acquisition
Share capital
250 000
137 500
112 500
Retained earnings at
beginning of year
420 000
231 000
189 000
Profit for current year before
acquisition (230 000 × 3/12)
57 500
31 625
25 875
Revaluation
surplus
(100 000 + 172 500)
272 500
149 875
122 625
1 000 000
550 000
450 000
goodwill – Parent
–
Consideration
(comment (e))
and NCI
1 000 000
R550 000
450 000
1/4/20.17–31/12/20.17:
Profit
(230 000 × 9/12)
172 500
94 875 RE
77 625
Dividend paid
(100 000)
(55 000) RE
(45 000)
NCI
(comment (f))
R1 072 500
R39 875 RE
R482 625
RE = Retained earnings (SCE); RS = Revaluation surplus (SCE)
267
Chapter 13
Comments
a Since the investment is acquired at R175 000, which represents 35% of the
net
assets on the date of first purchase (as given in the question), the R87 500
(i.e.
250 000 share capital × 35%) may be deduced as the balancing amount in
the “At”
column and 87 500/35% leaves R250 000 in the “Total” column.
b With this revaluation of the land at the beginning of the current year, S Ltd
is an
associate of P Ltd and P Ltd therefore shares in the other comprehensive

income of the associate amounting to R60 375 (refer to IAS 28.10).
cP
Ltd’s previously held ownership interest in S Ltd has a fair value of R350
000
(information given) at the date of the business combination. Therefore, no
fair value
adjustment has to be processed in this regarrd in terms of IFRS 3.42, as the

equity-accounted carrying amount of tthe investment at this date is also
R350 000 (i.e.
R175 000 (cost) + R175 000 (earnings and OCI since first purchase)).
d In terms of IFRS 3.42, any amount that was previously recognised in other
comprehensive income (i.e. the revaluation surplus) shall be recognised on
the same
basis as would be required if the acquirer had disposed directly of the

previously held equity interest. In terms of IAS 16.41, a revaluation surplus
may be transferred directly to retained earnings when the asset is
derecognised.
e The
consideration for the business combination effectively consists of R350 000

(fair
value of previously held interest (given)) + R200 000 (consideration for

additional 20%) = R550 000.
f The
NCI is equal to exactly 45% of the total equity of R1 072 500 in this
example, as there is no goodwill or gain from a bargain purchase that arose
at any stage, which
would have been included in the analysis of ownership interest; thereby

causing the NCI to not equal its ownership in
nterest in the total equity exactly.
C2 Proof of calculation of purchasing difference of S Ltd in terms of

IFRS 3.32
3.32(a)(i)
200 000
450 000

the acquiree: IFRS 3.32(a)(iii) (given)
350 000
1 000 000

date: IFRS 3.32(b)
(1 000 000)
Difference
268

Dr
Cr
J1
Investment in S Ltd (associate) (SFP)
94 500
94 500
Accounting for investor’s interest in reserves
of associate at the beginning of the year
J2
20 125
20 125
profit (before additional acquisition) of associate
J3
60 375
(OCI) (172 500 × 35%)
60 375
Accounting for investor’s share of revaluation

of land of associate
J4
Revaluation reserves (SCE) (share of other
comprehensive income of associate
(OCI) accumulated in equity)
60 375
60
375
Transfer of revaluation surplus to retained earnings
with business combination
J5
Share capital (SCE)
250 000
Retained earnings: opening balance (SCE)
420 000
Revaluation
reserve
(SCE)
(100 000 + 172 500) 272

500
Revenue
(P/L)
(1 200 000 × 3/12)
300 000
Cost of sales (P/L) (700 000 × 3/12)
175
000
Other expense (P/L) (80 000 × 3/12)
20
000
Finance
cost
(P/L)
(40 000 × 3/12)
10
000
Income tax expense (P/L) (150 000 × 3/12)
37
500
(350 000 + 200 000)
550 000
450 000
J6
77 625
Non-controlling interests (SFP)
77 625
profit after additional acquisition
J7
55 000
45 000
Dividend paid (SCE)
100 000
Elimination of intragroup dividend and correction
of non-controlling interests
269
Chapter 13
Question 13.2
P Ltd is listed on the JSE Ltd. P Ltd's financial director approached you to
help him with the preparation of the consolidated financial statements of the
P Ltd group for the financial year ended 31 December 20.19.
The following abridged draft financial statements of P Ltd and S Ltd, in

which P Ltd has an interest, are presented to you:

20.19
P Ltd
S Ltd
ASSETS
110 000
42 000
19 800
1 200 shares purchased on 1 January 20.15 for R4 800

400 shares purchased on 30 June 20.19 for R15 000
Current assets
28 000
35 000
Total assets
R157 800
R77 000
6 000
2 000
Retained earnings
123 275
68 000
Total liabilities including deferred tax
28 525
7 000
R157 800
R77 000

P Ltd
S Ltd
Gross profit
5 000
6 000
Dividend received
1 600
Profit before tax
6 600
6 000
Income tax expense
(1 400)
(1 680)
PROFIT FOR THE YEAR
5 200
4 320
––
R5 200
R4 320
270

Retained
earnings
P Ltd
S Ltd
120 075
65 680
Profit for the year
5 200
4 320
Dividends: 31 December 20.19
(2 000)
(2 000)
R123 275
R68 000
1 P Ltd acquired 1 200 of the issued ordinary shares (60% interest) in S Ltd
on 1 January 20.15 for R4 800, on which date its retained earnings amounted
to R4 000. On this date the directors of P Ltd fair-valued all the identifiable
assets and liabilities as required by IFRS 3 Business Combination . The
following is relevant and the fair value adjustment is material:
The plant and machinery had a carrying amount of R20 000 and a fair value
of R22 500. All S Ltd’s plant and machinery was purchased on 1 January
20.9 and was depreciated on a straight-line basis over 10 years. On 1 January
20.15 there was no change in the remaining useful life of four years with no
residual value. The fair value adjustment was not recorded in the books of S
Ltd.
2 On 30 June 20.19, P Ltd purchased a further 400 ordinary shares (20%

interest) for R15 000 in S Ltd from other shareholders.
3 P Ltd elected to measure the non-controlling interests at fair value at the

date of acquisition. On 1 January 20.15 the fair value of the non-controlling
interests was R3 300 (when P Ltd obtained control over S Ltd).
statements.
5 The profit of S Ltd was earned evenly during the current year.
6 S Ltd purchases some of its inventories from P Ltd at cost plus 25%. S Ltd
had the following inventories, which were bought from P Ltd, on hand at: 31
December 20.18
R15 000
31 December 20.19
R10 000
Inventory usually realises within three months.
80%
thereof.
Required
Prepare the consolidated financial statements of the P Ltd Group for the year
ended 31 December 20.19. Notes are not required.
271
Chapter 13
P LTD GROUP
ASSETS
Non-current assets
300
Property, plant and equipment (110 000(P) + 42 000(S))
152 000
Current assets (28 000(P) + 35 000(S) – 2 000 unrealised inventory) 61 000
Total assets
R213 300
Share capital
6 000
Retained earnings
159 187
(942)
164 245
14 090
Total equity
178 335
Total liabilities (28 525 (P) – 560 (on inventory) + 7 000(S))
34 965
R213 300
P LTD GROUP
Gross profit
(5 000(P) + 6 000(S) + 3 000(opening inventory) – 2 000(closing inventory))

12 000
Income tax expense (1 400(P) + 1 680(S) + 840 – 560)
(3 360)
PROFIT FOR THE YEAR
8 640
R8 640

7 344
Non-controlling interests (864 + 432)
1 296
R8 640
7 344
Non-controlling interests (864 + 432)
1 296
R8 640
272

LTD GROUP
Non-
Changes
Share
Retained
con-
Total
in owner-
Total
capital earnings
trolling
equity
ship
interests
Balance at
1 January 20.19
6 000 * 153 843
159 843 ! 27 252
187 095
Changes in equity
for 20.19
Total comprehensive
Profit for the year
–7
344
–
7 344
1 296
8 640
Dividends
– (2
000)
(2 000)
(400)
(2 400)
Purchase of interest
(942)
(942) (14 058)
(15 000)
Balance at
31 December 20.19
R6 000 R159 187

(R942) R164 245 R14 090 R178 335
120 075(P) + 35 928(S) – 2 160(opening inventory, after tax) = 153 843
3 300 + 23 952 = 27 252
273
Chapter 13
Calculations
P Ltd 60% – 80%
Total
NCI
At
Since
Share capital
2 000
1 200
800
Retained earnings
4 000
2 400
1 600
Revaluation
surplus
(2 500 × 72%)
1 800
1 080
720
7 800
4 680
3 120
– Parent and NCI
300
120
180
8 100
4 800
3 300
Retained earnings
(65 680 – 4 000 – 1 800 extra depreciation
as a result of fair value adjustment of PPE
at acquisition for 4 years)
59 880
35 928
23 952
• Current year:
Profit:
1/1/20.19–30/6/20.19
(4 320 × 6/12)
2 160
1 296
864
70 140
37 224
28 116
Further
acquisition
(28 116(NCI) × 20/40)
14 058
(14 058)
(per IFRS 10.23)
942
15 000
14 058
Profit:
1/7/20.19–31/12/20.19
2 160
1 728
432
Dividend: 31/12/20.19
(2 000)
(1 600)
(400)
R70 300
R37 352
R14 090
274
Question 13.3
Comment
This question is similar to example
e 13.5, but the investment in the subsidiary is here
accounted for under IFRS 9 (and not at cost). The question therefore
facilitates comparison between the methods of accounting
g for the investment in the subsidiary in
the parent’s separate financial statements.
The following are the abridged trial balances of P Ltd and S Ltd on 31
December 20.14:
P Ltd
S Ltd
CREDITS

50 000
6 000
Retained earnings (at 1/1/20.14)
6 000
1 600
Retained earnings: Transfer from mark-to-market reserve
2 555
Mark-to-market reserve (at 31/12/20.14) ((1 230 – 693) × 77,6%) 417
Deferred tax ((1 230 – 693) × 80% × 28%)
120
Revenue (*)
8 000
2 000
R67 092
R9 600
DEBITS
Bank
60 447
8 000
Cost of sales (*)
4 800
1 400
615
200
Investment in S Ltd: 600 shares at fair value
1 230
R67 092
R9 600
(*) Accrued/incurred evenly (irrespective of the sale of the shares)

1P
Ltd
purchased 4 500 shares in S Ltd on 1 January 20.12 for R5 200, when the
retained earnings of the latter amounted to R400. P Ltd disposed of 3 900 of
these shares on 30 June 20.14 for R7 800.
2P
Ltd
elected to measure the non-controlling interests at their proportionate share
of the acquiree’s identifiable net assets at the acquisition date.
3P
Ltd
classified the investment in S Ltd under IFRS 9 in its separate financial

statements and recognised fair value adjustments in the mark-to-market
reserve (other comprehensive income). Fair value adjustments are
recognised monthly.
P Ltd chose to present the other comprehensive income net after tax in the
statement of profit or loss and other comprehensive income (IAS 1.91(a)).
The fair value per share of S Ltd on the various dates was as follows: On
January 20.14
R1,90
On
30 June 20.14
R2,00
On
31 December 20.14
R2,05
275
Chapter 13
4 The disposal of the subsidiary does not comply with the criteria of IFRS 5
Non-current Assets Held for Sale and Discontinued Operations until the
date of disposal.
5 The
subsidiary
does
not represent a separate major line of business or geographical area of the

group.
Required
Prepare the pro forma consolidation journal entries to consolidate S Ltd into
the financial statements of the P Ltd group for the year ended 31 December
20.14. Notes are not required.
Pro forma consolidation journal entries – S Ltd
Dr
Cr
J1
Mark-to-market reserve opening balance (SCE)
(3 350 × 77,6%) (comment (a))
2 600
Deferred
tax
(SFP)
(3 350 × 80% × 28%) 750
3 350
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
J2 Mark-to-market
reserve
(OCI)
((450 + 30) × 77,6%)
(comment (e))
372
Deferred
tax
(SFP)
((450 + 30) × 80% × 28%) 108
480
Reversal of fair value adjustment on investment

and tax effect in S Ltd for current year at group level J3
Retained earnings (SCE) (comment (c)) 2
555
((3 900 × R2) – 4 507 (cost of shares sold) × 77,6%)
2 555
Reversal of parent’s entry for transfer for transfer
within equity with sale of shares
J4
Income tax expense (P/L) (comment (c)) 738
Deferred
tax
(SFP)
(3 293 × 80% × 28%)
738
Reversal of parent’s entry for deferred tax with sale
of shares
continued
276
Changes in ownership of subsidiaries through buying or selling shares Dr

Cr
J5
Investment in S Ltd (SFP) (3 350(J1) + 450(J2)
(see comment (a) read with comment (e)) or
3 800
((600 x 2 fair value) – (1 230 given – 3 350(J1) – 480 (J2) (see comment (f))
Non-controlling
interests (P/L)
50
Cost of sales (P/L) (comment (d)) (1 400 × 6/12) 700
Income tax expense (P/L) (comment (d)) (200 × 6/12) 100
(comment (b))
2 750
Retained
earnings
900
Revenue
(P/L)
(comment (d)) (2 000 × 6/12)
000
Consolidation of subsidiary S Ltd and recognition
of disposal of interest at group level
J6
1 950
Non-controlling
interests (SFP/SCE)
(opening balance in equity)
1 900
(current year’s interest in profit)
50
J7
Investment in S Ltd (SFP) (1 230 – 1 200) 30
Mark-to-market reserve (OCI) (30 × 77,6%) (rounded)
23
Deferred
tax
(SFP)
(30 × 80% × 28%) (rounded)
Recognition of fair value increase on retained
investment for period after sale of interest
(comment (e))
277
Chapter 13
Comments
a The
fair value adjustments to the investment in S Ltd were as follows: Cost of

investment (4 500 shares)
5 200
Fair value adjustment to beginning of current year
3 350
Fair value at beginning of current year (4 500 × R1,90)
8 550
Fair value adjustment to 30 June 20.14
450
Fair value at 30 June 20.14 (4 500 × R2,00)
9 000
Carrying amount of shares sold (3 900 × R2,00)
(7 800)
Fair value of remaining investment
1 200
Fair value adjustment to end of current year
30
Fair value at end of current year (600 × R2,05)
R1 230
b If a parent loses control, as is the case with S Ltd here, the gain or loss on
the disposal of the interest would be calculated as follows using IFRS
10.B98: Derecognise assets (including goodwill) and lliabilities on date
control is lost (7 800 other net assets + 400 goodwill)
(8 200)
Derecognise non-controlling interests

1 950
Carrying amount of P Ltd’s interest in S Ltd lost
(6 250)
7 800
1 200
R2 750

(above))
(5 417)
7 800
Profit on disposal
R2 383
Carrying amount of interest retained (10/75 × R6 250 (above)) (833)
1 200
Remeasurement gain
R367
continued
278
Changes in ownership of subsidiaries through buying or selling shares c By

means of the relevant amounts (as contained in the analysis of the ownership
interest of S Ltd), the gain on disposal of shares in S Ltd can be analysed as
follows: Proceeds on disposal of interest
7 800
Historic cost of shares disposed of (5 200 × 3 900/4 500)
(4 507)
At-acquisition equity disposed of (4 800 × 65/75)
(4 160)
(P Ltd would have recognised this gain as an after tax transfer from the
mark-to-market reserve of R2 555 (3 293 × 77,6%) to retained earnings and
a reversal of deferred tax of R738 (3 293 × 80% × 28%).
These entries are again reversed upon consolidation – see J3 and J4.)
Attributable post-acquisition retained earnings disposed of ((900 + 150)) ×
65/75)
(910)
2 383
Plus remeasurement of retained investment to fair value

(1 200 – ((4 800 × 10/75) + (1 050 × 10/75) + (400 × 10/75)) or (1 200 –
((net asset value of 7 800 × 10%) + (400 × 10/75)) 367
R2 750
Or
7 800
Attributable net assets disposed of (net asset value of R7 800 × 65%) (5 070)
Profit on disposal
2 383
Remeasurement of retained investment to fair value
367
R2 750
Care should be taken not to confuse the proceeds of R7 800 with the net
asset value of the subsidiary of R7 800 at the date of the loss of control. It is
purely coincidence that the amounts are the same.
d In the consolidation, the financial statements of S Ltd are not combined

(i.e. added together) with those of P Ltd as S Ltd is not a subsidiary of P Ltd
at the end of the reporting period. The amounts in respect of S Ltd are
accounted for by means of J5
(i.e. these amounts have to be journalised into the consolidated statement

of profit or loss and other comprehensive income and the consolidated
statement of changes in equity for the period while S Ltd was a
subsidiary).
e In J1 and J2 the total fair value adjustment on the investment was reversed,
similar to the approach in the examples in the chapter. In J7 the fair value
adjustment after the partial sale of the investment is again accounted for on
the investment to illustrate the group’s treatment of the fair value
adjustments. As an alternative, the R30 fair value gain after 30 June 20.14
could not have been included in the reversal in J2 and J7 would then not be
needed.
f After the loss of control, the investment in S Ltd is treated as a simple

investment (at fair value through other comprehensive income). The
investment account should therefore be equal to the fair value of R1 230 (see
comment (a)). The mark-to-market reserve should reflect the fair value gain
after the loss of control, being R23 (see J7).
These balances should remain after all the consolidation journals, as follows:
Investment in S Ltd: 1 230(given) – 3 350(J1) – 480(J2) + 3 800(J5) +
30(J7) = 1 230
Mark-to-market reserve: 417(given) – 2 600(J1) – 372(J2) + 2 555(J3) +

23(J7) = 23
279
Chapter 13
Alternative pro forma consolidation journal entries for sale of interest
Dr
Cr
J5
900
Retained
earnings
900
Accounting for retained earnings at the beginning
of the year
J6
150
Revenue
(P/L)
(2 000 × 6/12)
000
Cost of sales (P/L) (1 400 × 6/12)
700
Income tax expense (P/L) (200 × 6/12)
100
Non-controlling
interests (P/L)
50
Accounting for profit of subsidiary for the year
J7
2 383
2 383
Recognition of gain at group level
J8
367
Gain on disposal of interest (remeasurement
of retained investment to fair value) (P/L)
367
Recognition of gain at group level from
remeasurement of retained investment to fair value
Calculations

P Ltd 75%–10%
Total
NCI
At
Since
Share capital
6 000
4 500
1 500
Retained earnings
400
300
100
6 400
4 800
1 600
– Parent
400
400
6 800
5 200
1 600
Retained
earnings
(1 600 – 400)
1 200
900
300
• Current year:
Profit:
1/1/20.14–30/6/20.14
((2 000 – 1 400 – 200) × 6/12)
200
150
50
Total equity (represented by other net
assets of R7 800 and goodwill of R400)
8 200
1 050
1 950
Derecognise
assets
(including
(4 800)
(IFRS 10.B98)
(8 200)
(400)
(1 050)
(1 950)
280
Proof of calculation of goodwill of S Ltd in terms of IFRS 3.32
1 600
6 800

date: IFRS 3.32(b)
(6 400)
Goodwill (parent)
R400
281
14
Changes resulting from the issue
of additional shares by investees
and other changes in ownership
Introduction
.....................................................................................................
285
Changes in subsidiaries .............................................................................
286
Issue of shares
14.1
Issue of capitalisation shares ...................................................................
286
Example 14.1:
Capitalisation issue giving rise to fractional dealings ........
286
14.2
Rights issue by a subsidiary ....................................................................
287
Example 14.2:
Illustrative example of the entries by the subsidiary
and the parent with a rights issue ..................................
288
Example 14.3:
Rights issue by subsidiary with no change in relative
interests (there is no loss of control with the rights issue)
and no change in status as the subsidiary remains a
subsidiary (NCI is measured at its proportionate share
of the acquiree’s identifiable net assets at the
acquisition date).............................................................
288
Example 14.4:
Illustrative example of a parent’s owners’ equity
increasing after a rights issue (i.e. the parent takes
up more than its proportionate share of the new shares
on offer in the rights issue) .............................................
295
Example 14.5:
Rights issue by a subsidiary resulting in an increase
of the interest of the parent (control is not lost in the
rights issue) and the status does not change as the
subsidiary remains a subsidiary (NCI is measured at its
296
Example 14.6:
Rights issue by a subsidiary resulting in a decrease
of the interest of the parent (control is not lost in the
rights issue) and the status does not change as the
subsidiary remains a subsidiary (NCI is measured at

fair value at the acquisition date) ....................................
303
283
Chapter 14
Buy-back of shares
14.3
Buy-back of shares by a subsidiary .........................................................
311
Example 14.7:
Simple illustration of a share buy-back. ...........................
312
Example 14.8:
Buy-back of shares by a subsidiary with no change in
relative interests (there is no loss of control) (NCI is
identifiable net assets at the acquisition date) .................
314
Example 14.9:
status as an increase in the parent’s interest occurs

(there is no loss of control) and the subsidiary remains
a subsidiary (NCI is measured at its proportionate share
of the acquiree’s identifiable net assets at the
323
Example 14.10: Buy-back of shares by a subsidiary where there is no
subsidiary (there is no loss of control) and a decrease
in the parent’s interest occurs due to the share buy-back
(NCI is measured at fair value at the acquisition date) .....
331
Other changes in ownership
14.4
Share-based payments of a subsidiary ....................................................
340
Example 14.11: Issue of new shares by a subsidiary in terms of a
share-based payment transaction resulting in a
decrease of the interest of the parent (control is not lost)
and the status does not change as the subsidiary
remains a subsidiary (NCI is measured at its

340
14.5
Loss of control through expiry of an agreement and obtaining control
through an agreement ..............................................................................
347
Example 14.12: Loss of control over a subsidiary on expiry of agreement
(NCI is measured at fair value at the acquisition date) .....
348
Example 14.13: Obtaining control through an agreement where an
associate becomes a subsidiary (NCI is measured
at its proportionate share of the acquiree’s identifiable
net assets at the acquisition date) .................................... 354
14.6
Accounting for a change in investment entity status ................................
360
Changes in associates and joint ventures .........................................
360
14.7
Accounting for other changes in the net assets of an associate ..............
360
IFRS 5 and investments held for sale ...................................................
362
14.8 Important
definitions
.................................................................................
362
14.9
Applying IFRS 5 in the consolidated financial statements .......................
363
14.10
Associates classified as held for sale ......................................................
365
Question 14.1
........................................................................................................
366
284
Changes resulting from the issue of additional shares by investees Changes

resulting from the issue of additional shares by investees and other
changes in ownership
Same principles for changes in interest as in previous chapter, for the
following transactions:
Capitalisation
issue
Rights issue by subsidiary
Rights issue by associate
No change in parent’s interest
Increase in parent’s interest
Decrease in parent’s interest
Buy-back of shares by subsidiary
No change in parent’s interest
Buy-back of shares by associate
Loss of significant influence
Loss of control through expiry
Share-based payment by
of an agreement and obtaining control

subsidiary
through an agreement
Introduction
The preceding chapter dealt with changes in the ownership of subsidiaries

which primarily came about as a result of an action by the investor, i.e. an
acquisition of additional shares or a disposal (or partial disposal) of
interests in a subsidiary. This chapter deals mainly with the appropriate
consolidation procedures that occur when an investee issues additional
shares or buys back shares and other changes in ownership.
The issue of additional shares can occur by way of a new issue, a

capitalisation issue or a rights issue.
It is important to note that the concepts and procedures followed for the
accounting treatment of changes in the parent’s/investor’s interest in a
subsidiary/associate/joint venture in this chapter are similar to those covered
in the preceding chapters and the same accounting principles will be
applied. Furthermore, the same presentation and disclosure requirements
should be adhered to as were discussed and illustrated in the preceding
chapters. The presentation and disclosure examples of the preceding chapters
are thus equally applicable to this chapter. These aspects are thus not
repeated in this chapter.
285
Chapter 14
Changes in subsidiaries
Issue of shares
14.1 Issue of capitalisation shares
If authorised to do so by its memorandum of incorporation, a company may

use its retained earnings and other reserves to issue fully paid up
capitalisation shares instead of distributing a cash dividend. A capitalisation
share dividend is merely a book entry executed by transferring reserves or
retained earnings to share capital. This amounts to a capitalisation of
retained earnings or other reserves.
The amount thus capitalised represents reserves of the group and must be
disclosed as such. The same principle applies should the investment be
realised at any point in time. In the consolidation worksheet, the
capitalisation issue is merely reversed as a consolidation adjustment before
the analysis of the owners’ equity of the subsidiary is prepared. The total
equity of the subsidiary to be analysed still remains the same, although the
individual composition of the equity differs from the composition before the
capitalisation issue.
The issue of capitalisation shares by a company to its owners does not

normally result in a change in the percentage owners’ equity of the various
owners. Thus, a capitalisation issue by a partially-owned subsidiary will
normally be taken up by its parent and the non-controlling interests in
proportion to their existing ownership before the capitalisation issue.
From the point of view of the investor, the receipt of capitalisation shares,
regardless of whether the investment is in a subsidiary or not, is merely
recorded by means of a memorandum entry, as a capitalisation issue is not
regarded as income. An important fact, which must be borne in mind on
consolidation after such a capitalisation issue, is that the issue does not
normally change the pro rata interest in the investee.
Fractional dealings in shares
A change in the proportionate owners’ equity could, however, come about as

a result of fractional dealings in shares, as illustrated below.
Example 14.1
Capitalisation issue giving rise to fractional dealings
The following are the abridged statements of financial position of P Ltd and
its subsidiary S Ltd immediately before the issue of capitalisation shares by
S Ltd: STATEMENTS OF FINANCIAL POSITION
P Ltd
S Ltd
ASSETS
Inventory
160 000
110 000
Investment in S Ltd: 45 000 shares at cost price
120 000
Total assets
R280 000
R110 000
Share capital
(200 000/60 000 shares before the capitalisation issue) 200
000
60 000
Retained earnings
80 000
50 000
Total assets and liabilities
R280 000
R110 000
286
Changes resulting from the issue of additional shares by investees

1 The non-controlling interests in S Ltd consist of 2 500 persons each

holding six shares (i.e. 15 000 shares). S Ltd makes a capitalisation issue on
the basis of one share for each five shares held (i.e. 1:5 = 3 000 additional
shares to the non-controlling shareholders). Each of the non-controlling
owners will thus be entitled to 11/5 shares. Although shares cannot be held
in fractions, the memorandum of incorporation of a company usually
authorise the directors to deal in the fractional shares in such cases. Assume
that the directors of S Ltd decide in the present case to sell the fractional
shares concerned (i.e. 2 500 × 1/5 = 500 shares) to P Ltd, in which case the
interest of the parent (P Ltd) in S Ltd will change from 75% to 75,7%
(54 500/72 000 shares), as follows:
Shares held before capitalisation issue
45 000
Capitalisation issue (45 000/5)
9 000
Shares purchased as fractional shares
500
Shares held after the capitalisation issue
54 500
The purchase of the 500 shares is dealt with in the same way as the purchase
of any additional interest in a subsidiary, the specific procedures depending
on whether it gives rise to control, a loss of control, or neither.
14.2 Rights issue by a subsidiary
A rights issue of shares takes place when the right to apply for the shares
(which are issued to obtain cash funds) is at first only granted to existing
owners of a company, in proportion to their existing ownership. The existing
owners can then either decide to exercise their rights and thus acquire further
shares in the company, or in the case of renounceable rights issues, sell their
rights to apply for additional shares to someone else.
In the case of a parent/subsidiary relationship, the parent, as controlling

owner, frequently underwrites the rights issue of a subsidiary. If all the
owners exercise their rights to take up all the shares offered to them, the
relative interests of all the owners remain exactly the same. The parent’s
relative interest could however increase if the parent takes up more shares
than those originally allocated to it (e.g. due to underwriting the rights issue
where the parent had to take up those shares that were not taken up by the
other owners).
In instances where the parent desires to dilute its owners’ equity in a

subsidiary, it can undertake not to take up its full share of the rights issue.
The parent can even relinquish its rights in favour of a particular investor
whom the parent would like to see become involved in the group. Both these
actions will result in the relative interest of the parent being diminished
(diluted).
1 No change in parent’s interest
If the parent and the non-controlling owners take up all of their respective
rights fully, there is no change in the relative ownership in the subsidiary.
The new shares issued as a result of the rights issue, however, have an equal
claim on the reserves of the subsidiary as the existing issued shares. On the
same basis, the new equity arising from the rights issue accrues to all the
issued shares in the same proportion as is held by every owner directly after
the rights issue.
287
Chapter 14
Illustrative example of the entries by the subsidiary and the
Example 14.2
parent with a rights issue
P Ltd has held 120 000 of S Ltd’s 150 000 issued shares (80%) since 20.17.
S Ltd made a rights issue on 30 June 20.19 of 1 share for every 3 shares
held. All the owners exercised their rights.
The following actual journal entry will be processed in the individual

financial statements of S Ltd:
Dr
Cr
Bank (SFP) (50 000 shares × R2 per share)
100 000
Share capital (SCE)
100 000
Rights issue of shares
The following actual journal entry will be processed in the separate

financial statements of P Ltd:
Dr
Cr
80 000
Bank (SFP) (40 000 shares × R2,00 per share) 80
000
Additional investment in shares of S Ltd
Comment
Similar journals will be processed by the parent (P Ltd) and the subsidiary (S
Ltd) in the next few examples on rights issues, but are not repeated there.
Rights issue by subsidiary with no change in relative
interests (there is no loss of control with the rights issue)
Example 14.3
and no change in status as the subsidiary remains a
subsidiary (NCI is measured at its proportionate share of the
The following represents the abridged financial statements of P Ltd and its
subsidiary S Ltd on 31 December 20.19:

20.19
P Ltd
S Ltd
ASSETS
Inventory
354 000
415 000
Investment in S Ltd: 160 000 shares at cost (150 000 + 80 000) 230 000
Total assets
R584 000
R415 000
300 000
250 000
Retained earnings
284 000
165 000
R584 000
R415 000
288

P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
16 000
Profit before tax
216 000
100 000
Income tax expense
(80 000)
(40 000)
PROFIT FOR THE YEAR
136 000
60 000
R136 000
R60 000
Retained
earnings
P Ltd
S Ltd

164 000
125 000
Profit for the year
136 000
60 000
(16 000)
(20 000)
R284 000
R165 000
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R150 000
when the equity of S Ltd consisted of the following:
150 000
000
R180 000
2 P Ltd elected to measure non-controlling interests at their proportionate

3 S Ltd made a rights issue on 30 June 20.19 of 1 share for every 3 shares
held previously, at R2,00 per share. All the owners of S Ltd took up their
rights in proportion to their existing owners’ equity.
4 S Ltd’s profit after tax for 20.19 accrued evenly.
5 P Ltd accounts for the investment in S Ltd at cost in its separate financial
statements.
289
Chapter 14
Comment
The journal entries of the parent (P Ltd) and the subsidiary (S Ltd) were
illustrated in the preceding example. These journals must be reversed upon
consolidation as common items should be eliminated. This reversal is done
in J5 below, after which the adjustment to the non-controlling interests and
the change of ownership, if any, are recognised in equity (IFRS 10.B96).
Solution 14.3
P LTD GROUP
ASSETS
Non-current assets
6 000
Current assets
Inventory (354 000(P) + 415 000(S))
769 000
Total assets
R775 000
Share capital
300 000
000
83 000

000
P LTD GROUP
Revenue (500 000(P) + 300 000(S))
800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
Gross profit before tax
300 000
(120 000)
PROFIT FOR THE YEAR
180 000
R180 000

168 000
Non-controlling interests (6 000 + 6 000)
12 000
R180 000
168 000
12 000
R180 000
290
Changes resulting from the issue of additional shares by investees P LTD

GROUP
Non-
Share
Retained
con-
Total
Total
capital
earnings
trolling
equity
interests
300 000
* 240 000
540 000
55 000
595 000
Dividends
(16 000)
(16 000)
(4 000)
(20 000)
Total comprehensive
Profit for the year:
168 000
168 000
12 000
180 000
Rights issue (comment (a))
20 000
20 000
Balance at
31 December 20.19
R300 000 # R392 000 R692 000
R83 000 R775 000
164 000(P) + 76 000(S) = 240 000
#
Test: 284 000(P) + 108 000(S) = 392 000
Comment
a No reserves in respect of the rights issue are allocated to the parent in the
statement of changes in equity as the share capital belonging to the parent
have been eliminated against the consideration paid for the additional shares
acquired by the parent (investment made by P Ltd) (refer to J5). However,
the NCI increased by R20 000 in the process, as these owners contributed
R20 000 in cash to the group.
291
Chapter 14
Calculations
P Ltd 80%
Total
NCI
At
Since
Share capital
150 000
120 000
30 000
Retained earnings
30 000
24 000
6 000
180 000
144 000
36 000
– Parent
6 000
6 000
186 000
150 000
36 000
Retained
earnings
(125 000 – 30 000)

95 000
76 000
19 000
• Current year:
Profit:
1/1/20.19–30/6/20.19
(60 000 × 6/12)
30 000
24 000
6 000
Dividend
(20 000)
(16 000)
(4 000)
Owners’ equity before rights issue
291 000
84 000
57 000
Rights issue (30/6/20.19)
Shares
issued
(250 000 – 150 000)
100 000
80 000
20 000
391 000
77 000
Profit:
1/7/20.19–31/12/20.19
30 000
24 000
6 000
R421 000
R108 000
R83 000
292

Comments
a P Ltd’s percentage owners’ equity in S Ltd can be calculated as follows: To
30/6/20.19 (120 000/150 000 shares in issue)
80%
Since 1/7/20.19 (160 000/200 000 shares in issue)
80%
Consequently,
there
is no loss of control and IFRS 10.23 is thus applicable. The parent’s interest
in the subsidiary did not change (remained 80%) and the parent paid exactly
the same amount (R80 000) as the increase in the parent’s total equity
interest (R80 000). Therefore, there is no gain or loss on a change in
ownership to be recognised directly in equity.
b The profit and the dividend are analysed up to the date of the change in
ownership.
c The exact amount paid by P Ltd and the non-controlling shareholders for
the shares taken up by them respectively (i.e. the amounts paid for the
increase in the total equity for the rights issue) is analysed in the “At” and
“Non-controlling interest”
columns. This approach then resembles the pro forma consolidation journal
entry (see J5) to account for the rights issue and any change in ownership. It
is accepted that there may be different possible methods to incorporate a
rights issue in the analysis. However, the analysis remains only a tool
(calculation) to assist in the consolidation procedure. An alternative
approach for the calculations for a rights issue in the analysis is given in
examples 14.5 and 14.6, which may also be applicable to the other examples
in this chapter.

calculated as follows (see IFRS 10.B96):
Fair value of the consideration paid by NCI for new shares issued to them
(20 000)
Amount by which the non-controlling interests are adjusted 20 000
NCI after rights issue ((391 000 – 6 000GW) × 20%)
77 000
NCI before rights issue ((291 000 – 6 000GW) × 20%)
(57 000)
e The amount for the change in ownership recognised in equity can be

calculated as
(80 000)
80 000
Parent’s interest after rights issue
((391 000 – 6 000GW) × 80%) + 6 000GW)
314 000
Parent’s interest before rights issue
((291 000 – 6 000GW) × 80%) + 6 000GW)
(234 000)
36 000
186 000

date: IFRS 3.32(b)
(180 000)
Goodwill (parent)
R6 000
293
Chapter 14
Dr
Cr
J1 Share
capital (SCE) 150

000
Retained
earnings (SCE)
30 000
Goodwill (SFP) (parent only) 6
000
36 000
150 000
Main elimination journal entry
J2 Retained
earnings – Beginning of year (SCE) 19
000
19 000
of retained earnings
J3 Non-controlling interests (P/L) 6
000
6 000
of current year’s profit before the rights issue
J4
16 000
000
Dividend paid (SCE)
20 000
J5 Share
capital (SCE) 100
000
20 000
80 000
Elimination of rights issue transaction

J6 Non-controlling interests (P/L) 6
000
6 000
of current year’s profit after the rights issue
2 Increase in parent’s interest
Should the interest of the parent increases as a result of the rights issue, the
attributable reserves at the date of the rights issue must be allocated to the
new parcel of shares, so that it can be eliminated against the consideration
transferred for those shares. The reserves so allocated are yielded by the
owners’ equity of the parent prior to the rights issue as well as by the non-
controlling owners.
294
Illustrative example of a parent’s owners’ equity increasing
after a rights issue (i.e. the parent takes up more than its
Example 14.4
proportionate share of the new shares on offer in the rights
issue)
P Ltd held 120 000 of S Ltd’s 150 000 issued shares since 20.17. S Ltd made
a rights issue on 30 June 20.19 of 1 share for every 3 shares held and P Ltd
underwrote the rights issue. The non-controlling owners of S Ltd took up
only 4 000 shares, with the result that P Ltd had to take up 46 000 shares
instead of just the 40 000 that it was entitled to originally (based on its
original share ownership).
The increase in P Ltd’s interest from 80% to 83% can be analysed as

follows: Original parcel of shares (120 000/150 000 to 120 000/200 000)
60%
New parcel of shares (46 000/200 000)
23%
P Ltd’s new owners’ equity after the rights issue (166 000/200 000) 83%
As a result, a part of the reserves which pertained to P Ltd’s original owners’

equity as well as to that of the non-controlling interests should be allocated
to the new parcel of shares.
The above scenario may be treated as:
(a) A dilution of the original 80% owners’ equity to 60% due to the rights
issue; and (b) a re-purchase of 20% owners’ equity diluted (i.e. lost) in
respect of the original parcel of shares; and
(c) a purchase of an additional 3% owners’ equity not held before.
Note that in this scenario, IFRS 10.23 should be read very carefully. The
paragraph states that changes in the owners’ equity of a subsidiary that do
not result in the loss of control are accounted for as equity transactions (i.e.
transactions with owners in their capacity as owners). Broadly interpreted,
this means that no goodwill, gain from a bargain purchase, or gain or loss on
a rights issue may be recognised, but any such purchase difference, where
control was not lost in the rights issue, shall be accounted for as an equity
transaction (i.e. directly in equity). As in the examples in the previous
chapter, this equity adjustment, if any, will be done against “changes in
ownership”
directly in equity. Some are of the opinion that this adjustment may also be
processed directly to retained earnings, which is also an acceptable
alternative.
295
Chapter 14
Rights issue by a subsidiary resulting in an increase of the
interest of the parent (control is not lost in the rights issue)
Example 14.5
and the status does not change as the subsidiary remains
a subsidiary (NCI is measured at its proportionate share of
the acquiree’s identifiable net assets at the acquisition date)
subsidiary S Ltd at 31 December 20.19.

20.19
P Ltd
S Ltd
ASSETS
Inventory
342 000
415 000
Total assets
R584 000
R415 000
300 000
250 000
Retained earnings
284 000
165 000
R584 000
R415 000

P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
16 000
Profit before tax
216 000
100 000
Income tax expense
(80 000)
(40 000)
PROFIT FOR THE YEAR
136 000
60 000
–
R136 000
R60 000
296

Retained
earnings
P Ltd
S Ltd
164 000
125 000
Total comprehensive income for the year
Profit for the year
136 000
60 000
–
–
(16 000)
(20 000)
R284 000
R165 000
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R150 000
150 000
000
R180 000
2 On 30 June 20.19 S Ltd made a rights issue of 1 share for every 3 shares
previously held, at R2.00 per share.
3 The rights issue was taken up as follows:
Number of shares
4 000
P Ltd
46 000

statements.

297
Chapter 14
Solution 14.5
P LTD GROUP
ASSETS
Non-current assets
6 000
Current assets
Inventory (342 000(P) + 415 000(S))

757 000
Total assets
R763 000
Share capital
300 000
Retained earnings
392 900
(450)
692 450
70 550
Total equity
763 000
R763 000
P LTD GROUP

Revenue (500 000(P) + 300 000(S))
800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
300 000
(120 000)
PROFIT FOR THE YEAR
180 000
R180 000
168 900

11 100
R180 000
168 900
11 100
R180 000
298

GROUP
Changes
Non-
Share
Retained
in
control-
Total
Total
capital
earnings
owner-
ling
equity
ship
interests
Balance at
1 Jan 20.19
300 000
* 240 000
540 000 § 55 000
595 000
Changes in
equity for 20.19
Dividends
(16 000)
–
(16 000)
(4 000)
(20 000)
Total
comprehensive
income for the
year:
Profit for the year
– 168
900
168 900
11 100
180 000
Rights issue
(450)
(450)
8 450
8 000
Balance at
31 Dec 20.19
R300 000 # R392 900
(R450) R692 450 R70 550 R763 000
164 000(P) + 76 000(S) = 240 000
# 284 000(P) + 108 900(S) = 392 900
§ 36 000 + 19 000 = 55 000
Calculations
P Ltd 80%–83%
Total
NCI
At
Since
Share
capital
150 000
120 000
30 000
Retained earnings
30 000
24 000
6 000
180 000
144 000
36 000
– Parent
6 000
6 000
186 000
150 000
36 000
• To beginning of current year :

Retained
earnings (125 000 – 30 000)
95 000
76 000
19 000
• Current year:
Profit:
1/1/20.19–30/6/20.19
(60 000 × 6/12)
30 000
24 000
6 000
(20 000)
(16 000)
(4 000)
Owners’
equity before rights issue
291 000
84 000
57 000
Shares issued
100 000
92 000
8 000
(450)
450
391 000
65 450
Profit:
1/7/20.19–31/12/20.19
30 000
24 900
5 100
R421 000
R108 900
R70 550
299
Chapter 14
Comments

30/6/20.19 (120 000/150 000 shares in issue)
80%
Since 1/7/20.19 (166 000/200 000 issued shares)
83%
Consequently, there is no loss of control. However, there is a change in the

ownership interest that should be recognised directly in equity in terms of
IFRS 10.23.
b The exact amount paid by P Ltd and the non-controlling shareholders for
the shares taken up by them respectively is analysed in the “At” and “Non-
controlling interest”
columns. This approach then resembles the pro forma consolidation journal
entry (see J5) to account for the rights issue and any change in ownership.
An alternative approach for the calculations for a rights issue in the analysis
is given below, which may also be applicable to the other examples in this
chapter.

calculated as follows (see IFRS 10.B96) (from the perspective of the NCI):
Fair value of the consideration paid by NCI for new shares issued to them (8
000)
NCI after rights issue ((391 000 – 6 000GW) × 17%)
65 450
NCI before rights issue ((291 000 – 6 000GW) × 20%)

(57 000)
R450
The NCI decreased by 3% in this example (from 20% to 17%). Thus the
NCI ceded 3% of its equity to P Ltd’s new parcel of shares. Also remember
that, due to the fact that goodwill was not calculated for the NCI in this
example, there is no equity that is represented by goodwill that should be
reattributed to the parent. Thus, the calculation can also be performed as
follows:
000)
Previous equity interest held relinquished (57 000 × 3/20) (8 550)
Increased equity attributable to NCI as a result of the rights issue (100 000 ×
17%)
17 000
R450
d The amount for the change in ownership recognised in equity can also be
calculated as follows (from the perspective of the parent):
Fair value of the consideration paid by the parent for new shares issued (92
000)
Increase in P Ltd owners’ equity through rights issue:
91 550
Owners’ equity held by P Ltd before rights issue
(((291 000 – 6 000GW) × 80%) + 6 000GW)
(234 000)
Owners’ equity held by P Ltd after rights issue
(((391 000 – 6 000GW) × 83%) + 6 000GW)
325 550
(R450)
continued
300
Changes resulting from the issue of additional shares by investees The

amount of R450 is the amount paid in excess of the carrying amount of the
interest acquired, being R91 550.
Goodwill
is
excluded from total owners’ equity in the calculation above since, although
it forms part of total owners’ equity, it does not represent 100% of goodwill,
but only the parent’s portion. This is due to the non-controlling interests
being measured at their proportionate share of the acquiree’s identifiable net
assets at the acquisition date. Refer to self-assessment question 1 where the
NCI is measured at fair value, and goodwill is then reattributed to the parent.
e The difference of R450 results from 6 000 new shares additionally taken
up by P Ltd as the issue price is higher than the net asset value of the shares
after the issue ((R385 000/200 000 shares – R2,00) × 6 000 shares).
f When the interest of the parent increases (e.g., 80% – 83%) as a result of a
rights issue, no gain or loss on the rights issue, additional goodwill, or gain
from a bargain purchase can be recognised in terms of IFRS 10.23. Instead,
any difference between the consideration paid for the shares and the increase
in owners’ equity is attributed to changes in ownership directly in equity as
is indicated above.
C1.1 Alternative approach for the rights issue in the analysis P Ltd
80%–83%
Total
NCI
At
Since
291 000
84 000
57 000
Shares issued (83%:17%)
100 000
83 000
17 000
Transfer from NCI (57 000 × 3/20)
8 550
(8 550)
391 000
91 550
450
92 000
65 450
36 000
186 000

date: IFRS 3.32(b)
(180 000)
Goodwill (parent)
R6 000
301
Chapter 14

Dr
Cr
J1
Share capital (SCE)
150 000
30 000
6 000
36 000
150 000
J2
19 000

19 000
Allocation of non-controlling interests’ portion of
retained earnings
J3
6 000
6 000
current year’s profit before rights issue
J4
16 000
4 000
Dividend paid (SCE)
20 000
J5
Share capital (SCE)

100 000
Changes in ownership (SCE)
450
Non-controlling interests (SFP/SCE) (8 000 + 450)
450
Investment in S Ltd (SFP) (46 000 × R2,00)
92
000
J6
5 100
5 100
current year’s profit after rights issue
3 Reduction in interest of the parent
Should the parent’s interest decrease (without losing control) as a result of a

rights issue, a part of the reserves that was attributed to the previous owners’
equity must be transferred from the parent’s owners’ equity to the non-
controlling interests.
302
Rights issue by a subsidiary resulting in a decrease of the
interest of the parent (control is not lost in the rights issue)
Example 14.6
and the status does not change as the subsidiary remains a
subsidiary (NCI is measured at fair value at the acquisition
date)

20.19
P Ltd
S Ltd
ASSETS
Inventory
434 000
415 000
Investment in S Ltd: 120 000 shares at cost
150 000
–
Total assets
R584 000
R415 000
300 000
250 000
Retained earnings
284 000
165 000
R584 000
R415 000

P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
16 000
Profit before tax
216 000
100 000
Income tax expense
(80 000)
(40 000)
PROFIT FOR THE YEAR
136 000
60 000
–
–
R136 000
R60 000
303
Chapter 14
Retained
earnings
P Ltd
S Ltd
164 000
125 000
Profit for the year
136 000
60 000
(16 000)
(20 000)
R284 000
R165 000
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17, when the
equity of S Ltd consisted of the following:
150 000
000
R180 000
The fair value of the non-controlling interests amounted to R36 600 (i.e. 30
000
shares × R1,22 per share) at the acquisition date.
2 On 30 June 20.19, S Ltd made a rights issue of 1 share for every 3 shares
held previously, at R2,00 per share.
3 All shares available in terms of the rights issue were taken up by the non-
controlling interests. P Ltd did not participate in the rights issue at all.

statements.
6 P Ltd elected to measure the non-controlling interests at their fair value at

the acquisition date.
304
Changes resulting from the issue of additional shares by investees Solution

14.6
P LTD GROUP
ASSETS
Non-current assets
6 600
Current assets
Inventory (434 000(P) + 415 000(S))
849 000
Total assets R855
600
Share capital
300 000
Retained earnings
386 000
1 500
687 500
168 100
600
P LTD GROUP
Revenue (500 000(P) + 300 000(S))

800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
Gross profit
300 000
Other income
Profit before tax
300 000
(120 000)
PROFIT FOR THE YEAR
180 000
R180 000
162 000
18 000
R180 000
162 000
18 000
R180 000
305
Chapter 14
P LTD GROUP
Changes
Non-
Share
Retained
in
Total
Total
controlling
capital
earnings
owner-
equity
interests
ship
Balance at
1 Jan 20.19
300 000
* 240 000
540 000
!55 600
595 600
Changes in
equity for
20.19
Dividends
– (16
000)
(16 000)
(4 000)
(20 000)
Total
compre-
hensive
income for
the year:
Profit for the
year
162 000
162 000
18 000
180 000
Rights issue
–
1 500
1 500
98 500
100 000
Balance at
31 Dec
20.19
R300 000 # R386 000
R1 500
R687 500 R168 100
R855 600
164 000(P) + 76 000(S) = 240 000
36 600 + 19 000 = 55 600
# 284 000(P) + 102 000(S) = 386 000
306

Calculations
P Ltd 80%–60%
Total
NCI
At
Since
Share capital
150 000
120 000
30 000
Retained earnings
30 000
24 000
6 000
180 000
144 000
36 000
– Parent and NCI

6 600
6 000
600
186 600
150 000
36 600
Retained
earnings
(125 000 – 30 000)
95 000
76 000
19 000
• Current year:
Profit:
1/1/20.19–30/6/20.19
(60 000 × 6/12)
30 000
24 000
6 000
(20 000)
(16 000)
(4 000)
291 600
84 000
57 600
Shares issued
100 000
100 000
1 500
(1 500)
391 600
84 000
156 100
Profit:
1/7/20.19–31/12/20.19
30 000
18 000
12 000
R421 600
R102 000
R168 100
307
Chapter 14
Comments

30/6/20.19 (120 000/150 000 shares in issue)
80%
60%

IFRS 10.23.
b The exact amount paid by P Ltd (Rnil) and the non-controlling

shareholders for the shares taken up by them respectively is analysed in the
“At” and “Non-controlling interest” columns. This approach then resembles
the pro forma consolidation journal entry (see J5) to account for the rights
issue and any change in ownership – see below. An alternative approach for
the calculations for a rights issue in the analysis is given below, which may
also be applicable to the other examples in this chapter.

(100 000) Amount by which the non-controlling interests are adjusted 98
500
NCI after rights issue ((391 600 – 6 600GW) × 40%) + (600 initial GW of
NCI) + (6 000 GW of parent × 20/80) relinquished to NCI)
156 100
NCI before rights issue ((291 600 – 6 600GW) × 20%+ (600 initial GW
of NCI))
(57 600)
(R1 500)
Fair value of the consideration paid by the parent for new shares issued
Increase in P Ltd owners’ equity through rights issue (including goodwill

reattributed):
1 500
(((291 600 – 6 600GW) × 80%) + 6 000GW)

(234 000)
((391 600 – 6 600GW) × 60%) + 6 000GW - (6 000 GW of parent ×
20/80) relinquished to NCI)
235 500
R1 500
Note in this case that the equity represented by the goodwill amount now
forms part of the calculations. This is because the NCI is measured at its fair
value at the acquisition date and therefore goodwill is measured for all
owners. With the change in the ownership interest as a result of the right-
issue, P Ltd effectively relinquished some of its goodwill to the non-
controlling interests. This approach is explained in more detail in chapter
13.3.
308
Changes resulting from the issue of additional shares by investees C1.1

Alternative approach for the rights issue in the analysis
P Ltd 80%–60%
Total
NCI
At
Since
291 600
84 000
57 600
Shares issued (60%:40%) (1)
100 000
39 000
21 000
40 000
Transfer to NCI (2)
(36 000)
(21 000)
57 000
Goodwill reattributed to NCI (3)
(1 500)
1 500
391 600
1 500
(1 500)

–
156 100
(1) 100 000 × 60% (thus new ownership interest) = 60 000; allocated 39 000
and 21 000
Although the parent did not take up any shares, it is nonetheless still entitled
to a portion of the new equity because of its existing ownership interest in
the ratio of ownership interest after the rights were exercised. This “bonus”
serves as compensation for the equity lost (ceded) to the non-controlling
interests.
(2) 144 000 × 20/80 = 36 000; 84 000 × 20/80 = 21 000
(3) 6 000 × 20/80 = 1 500
Comments
A gain (R1 500) results from the parent’s new ownership interest, as the
parent’s new attributable equity (R60 000) is higher than the equity and
goodwill ceded to the non-controlling interests (R36 000 + R21 000 + R1
500 = R58 500). This gain is to be treated in terms of IFRS 10.23 – i.e. taken
directly to equity, as the parent (P Ltd) does not relinquish control over S
Ltd. Although P Ltd’s interest decreased from 80% to 60%, its actual
ownership interest increased with R1 500.
36 600
186 600

date: IFRS 3.32(b)
(180 000)
R6 600
309
Chapter 14
Dr
Cr
J1
Share capital (SCE)
150 000
30 000
6 600
36 600

150 000
J2
19 000
19 000
retained earnings
J3
6 000
6 000
J4
16 000

4 000
Dividend paid (SCE)
20 000
J5
Share capital (SCE)
100 000
Non-controlling interests (SFP/SCE) (100 000 – 1 500)
98 500
1 500
J6
12 000
12 000
4 Obtaining or losing control as a result of a rights issue by subsidiary In

the previous examples, the rights issues of the subsidiary did not result in a
loss of control. In terms of IFRS 10.23 such transactions between equity
participants are recognised within equity. In some instances, a rights issue by
an investee (e.g. an associate or joint venture) may lead to the investor
gaining control. In such case the investor would treat the acquisition of the
subsidiary as a business combination.
The same principles (refer to IFRS 3) would be followed as was discussed in

chapter 9
and chapter 13 (e.g., in cases where the associate or joint venture would
become a 310

subsidiary). A rights issue of a subsidiary may also lead to the parent losing
control over the subsidiary. The same principles (refer to IFRS 10.25 and
B98) would be followed as was discussed in chapter 13 (e.g. where the
subsidiary would become an associate).
Buy-back of shares
14.3 Buy-back of shares by a subsidiary
Entities sometimes buy back their issued share capital from the existing
owners to avoid issuing new shares or to avoid amending their authorised
share capital. These shares might be required by the entity for issue in
employee-share participation schemes, for share-based payment transactions
in terms of IFRS 2 Share-based Payment, or for many more similar
transactions.
This section is not as complex as the section dealing with rights issues. This
is because the parent receives cash back from the subsidiary for the shares
bought back by the subsidiary and is not “reimbursed” by means of “new
equity” in terms of a rights issue for giving up reserves. A gain or loss on the
share buy-back for the group should, however, still be calculated under
certain circumstances. This is done by applying the method used in the
previous chapter. It should still be borne in mind that those share buy-back
transactions leading to a change in ownership but not resulting in the loss
of control should be treated as equity transactions (i.e. transactions with
owners in their capacity as owners) in terms of IFRS 10.23. Furthermore, it
should be noted that where there is a loss of control due to a share buy-back
transaction, such loss of control is regarded as a significant event in terms of
IFRS 10.BCZ180–183, and in most cases leads to the remeasurement, at fair
value, of the remaining investment in the investee in terms of IFRS 10.25(b).
Note that this principle also applies to the loss of significant influence or
joint control where the retained interest is a financial asset (IAS 28.22(b)).
The situation is similar to the principles dealt with under the disposal of an
interest in an entity as was illustrated in the previous chapter.
The following summarises the approach:
l Share buy-back with no loss of control:
gain or loss to be treated as equity transaction (i.e. changes in ownership)

and no remeasurement of remaining investment at the date of the share buy-
back; l Share buy-back with no loss of significant influence or joint control:
gain or loss to be recognised as gain or loss on share buy-back in profit or
loss and no remeasurement of remaining investment at the date of the share
buy-back; l Share buy-back with a loss of control, significant influence or
joint control: gain or loss recognised as gain or loss on share buy-back in
profit or loss in terms of IFRS 10.25(b) and IAS 28.22(b). Any remaining
investment is remeasured at fair value at the date of loss of control,
significant influence or joint control; and l Share buy-back in which investor
obtains control, significant influence or joint control:
the previously held investment is measured at its fair value (IFRS 3.42 and
IAS 28.26). The acquisition of control is accounted for as a business
combination (goodwill or gain from a bargain purchase is recognised).
311
Chapter 14
The journal entry processed in the separate financial statements of the

parent is similar to a normal journal entry to recognise the disposal of an
equity investment (i.e.
shares in another company) in the accounting records. The parent’s entries
for the sale of shares in another company depend on the accounting policy
adopted for the treatment of its investment in a subsidiary, an associate or
joint venture (i.e. at cost or in accordance with IFRS 9 – see chapter 13.7):
l Investment is measured at cost:
The parent debits the bank account with the cash received and credits the
investment with the historical cost price of the shares bought back. The
difference between these two items constitutes a gain or loss on share buy-
back which is recognised in profit or loss (this is the gain/loss in the parent’s
separate financial statements and will not be the same as the gain/loss at
group level).
l Investment is measured in accordance with IFRS 9: If the fair value

method is used to measure the investment in the separate financial
statements of the parent, it is assumed (for this chapter) that the parent will
remeasure its investment to fair value through other comprehensive income.
The investment would then be remeasured to fair value (taking the
consideration received for the shares bought back into account). The parent
debits the bank account with the cash received and credits the investment
with this fair value of the shares bought back. The parent then transfers the
cumulative fair value adjustments on these shares (after tax) from the mark-
to-market reserve (if this policy was chosen) to another equity item
(assumed to be the retained earnings).
The journal entry arising in the parent’s separate financial statements will
be reversed upon consolidation where control was not lost or obtained and
the true fair value of the shares bought back by the investee will be taken
into account (similar to the journal entry when the parent disposes of an
interest in a subsidiary, where the parent’s initial gain/loss on disposal or the
transfer within equity, is replaced by the correct gain/loss on disposal at
group level, which takes into account the equity and/or reserves relinquished
in the transaction).
The shares bought back by an investee (subsidiary, associate of joint

venture) are referred to as “treasury shares” in terms of IAS 32.33–.34.
When an entity reacquires its own equity shares, those shares shall be
deducted from equity (share capital and retained earnings). No gain or loss
on the buy-back of shares shall be recognised in profit or loss in the entity’s
separate financial statements. The amount of treasury shares held is
disclosed separately either in the statement of financial position, statement of
changes in equity or in the notes, in accordance with IAS 1. Disclosure in
accordance with IAS 24 Related Party Disclosures is also required if the
entity reacquires its own shares from related parties (e.g. the parent).
Example 14.7
Simple illustration of a share buy-back
Assume the equity of S Ltd is composed as follows at 31 December 20.18:

R’000
Share capital (100 000 shares issued at R1,50 each at incorporation) 150
Retained earnings 2
000
2 150
312
Changes resulting from the issue of additional shares by investees On 31

December 20.18, S Ltd buys back 10 000 shares from its parent (P Ltd) at a
cash price of R20.00 per share. P Ltd paid R3,00 per share when it invested
in 50 000
shares of S Ltd on 1 January 20.12. The company tax rate is 28% and CGT
is calculated at 80% thereof.
Solution 14.7
(a) P Ltd measures the investment in S Ltd at cost in its separate financial
statements in terms of IAS 27.
The
actual journal entry to recognise the share buy-back in the separate
financial statements of the parent will be:
Dr
Cr
J1 Bank
(SFP)
(10 000 × R20,00 per share)
200 000
Investment at cost price (SFP)
(10/50 × (50 000 × R3,00 per share)) 30
000
Gain on share buy-back (P/L)
170 000
Recording proceeds and profit on sale of shares
J2
Income tax expense (P/L) (170 000 × 80% × 28%)
38 080
SARS
tax
payable/Bank (SFP)
38 080
of shares
(b) P Ltd measures the investment in S Ltd in accordance with IFRS 9 in its
separate financial statements (per choice in terms of IAS 27).
P Ltd remeasures its investment to R1 000 000 (50 000 shares × R20)
through other comprehensive income and recognises the related deferred tax.
The actual journal entry to recognise the share buy-back in the separate
financial statements of the parent will be:
Dr
Cr
J1 Bank
(SFP)
(10 000 × R20,00 per share) 200
000
Investment at fair value (SFP)
200 000
Recording proceeds on sale of shares
J2
Income tax expense (P/L) (170 000 × 80% × 28%) 38
080
SARS
tax
payable/Bank (SFP)
38 080
of shares
J3
(10 000 × (R20 – R3) × 77,6%) 131
920
131 920
Transfer of cumulative gains within equity
on portion of investment sold
J4 Deferred
tax
(SFP)
(170 000 × 80% × 28%) 38

080
38 080
Movement in deferred tax on investment
derecognised
313
Chapter 14
Comment
All these respective journal entries by the parent (except for the cash
received and the entry to recognise the current tax payable) must be reversed
upon consolidation, where control of a subsidiary is not obtained or lost (i.e.
the subsidiary remains a subsidiary after the share buy-back).
The journal entry in the individual financial statements of the investee (S

Ltd) will depend on the way in which the investee utilises its reserves to buy
back the shares (mostly due to tax reasons which are beyond the scope of
this work).
In the above-mentioned example, the actual journal entry to recognise the

share buyback in the individual financial statements of the investee is: Dr
Cr
Share capital (SCE) (10 000/100 000 × R150 000 share capital) 15 000
Retained earnings (SCE) (balancing)
185 000
Bank (SFP) (10 000 × R20,00 per share)
200 000
Recording of share buy-back transaction
1 No change in parent’s interest
The only new principle in this section is the recognition of the journal entry
by the investee to adjust its own equity in respect of the buy-back
information. Note that the debits per the journal entry (as above) are
processed in the total column of the analysis of ownership interest. This is
logical, as the investee is reducing its own equity by the amount of the share
capital bought back, as well as the premium (additional amount over and
above share capital) paid on the buy-back of the shares, which is funded
from other reserves (e.g. retained earnings). Once again, these adjustments
have to be allocated to the parent and the non-controlling interests.
relative interests (there is no loss of control) (NCI is
Example 14.8
The following are the abridged financial statements of P Ltd and its

20.19
P Ltd
S Ltd
ASSETS
Inventory
484 000
265 000
Investment in S Ltd at cost (220 000 – 44 000)
176 000
Total assets
R660 000
R265 000
300 000
200 000
Retained earnings
360 000
65 000
R660 000
R265 000
314
P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
Other income (gain on buy-back of shares)
76 000
16 000
–
Profit before tax
292 000
100 000
Income tax expense
(80 000)
(40 000)
PROFIT FOR THE YEAR
212 000
60 000
R212 000
R60 000
Retained earnings
P Ltd
S Ltd
164 000
125 000
Profit for the year
212 000
60 000
Dividend paid: 31 May 20.19
(16 000)
(20 000)
Buy-back of shares
(100 000)
R360 000
R65 000
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17 for R220 000,

250 000
000
R280 000
2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 each. The
shares were bought back proportionally from all owners, i.e. 24 000 shares
were bought back from P Ltd, while the remaining 6 000 shares were bought
back from the non-controlling interests.
315
Chapter 14
3 S Ltd’s profit and tax accrued as follows for 20.19:
1/1/20.19 to 1/7/20.19 to
Total
30/6/20.19 31/12/20.19
Profit before tax
100 000
52 000
48 000
Tax
(40 000)
(22 000)
(18 000)
R60 000
R30 000
R30 000
4 P Ltd accounted for the investment in S Ltd at cost in its separate financial
statements.

6 Ignore any tax consequences for S Ltd in respect of the share buy-back.
From the information provided, it is evident that the following actual journal
entry was processed in the separate financial statements of P Ltd: Dr Cr
RR
Bank (SFP) (24 000 shares × R5,00 per share) 120
000
Investment in S Ltd (SFP) (1)
44 000
Gain on buy-back of shares (P/L)
76 000
(1) 24 000/120 000 × 220 000 = 44 000 or 176 000 × 24 000/96 000
From the information provided, it is also evident that the following actual
journal entry was processed in the individual financial statements of S Ltd:
Dr Cr
RR
Share capital (SCE) (30 000/150 000 shares × R250 000)
50 000
100 000
Bank
(SFP)
(30 000 shares × R5 per share)
150
000
Comment
These journals must be reversed upon consolidation of the parent (P Ltd) and
the subsidiary (S Ltd), as the share buy-back represents an intragroup
transaction between P Ltd and S Ltd at group level as S Ltd is a subsidiary
of P Ltd. This reversal (i.e. elimination of common items) is done in J6
below, after which the adjustment to non-controlling interests and the change
of ownership, if any, are recognised in equity (IFRS 10.B96).
316
Changes resulting from the issue of additional shares by investees Solution

14.8
The consolidated financial statements of P Ltd and its subsidiary S Ltd for
the year ended 31 December 20.19 will be prepared as follows:
P LTD GROUP
ASSETS
Current assets
Inventory (484 000(P) + 265 000(S))
749 000
Total assets
R749 000
Share capital (P)
300 000
Retained earnings (360 000(P) – 76 000(J6) profit reversed + 4 000(J1) gain

from a bargain purchase + 108 000(S) analysis) 396
000
696 000
53 000
Total equity
749 000

R749 000
P LTD GROUP
Revenue (500 000(P) + 300 000(S))
800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
300 000
(120 000)
PROFIT FOR THE YEAR
180 000
R180 000

168 000
12 000
R180 000
168 000
12 000
R180 000
317
Chapter 14
P LTD GROUP
Non-
Share
Retained
con-
Total
Total
capital
earnings
trolling
equity
interests
Balance at
1 January 20.19
300 000 * 244 000
544 000
! 75 000
619 000
Changes in equity
for 20.19
Dividends
(16 000)
(16 000)
(4 000)
(20 000)
Total comprehensive
income
for
the
year:
Profit for the year
168 000
168 000
^ 12 000
180 000
Share buy-back (@)
– $ (30 000)
(30 000)
Balance at
31 December 20.19
R300 000 R396 000 R696 000

R53 000 R749 000
164 000(P) + 76 000(S) + 4 000(bargain gain) = 244 000
56 000 + 19 000 = 75 000
6 000(before buy-back) + 6 000(after buy-back) = 12 000
$ 6 000 shares × R5 = 30 000 (see analysis)
@ See comment below
Comments
The share capital and retained earnings affected by the share buy-back in
respect of the parent (P Ltd), have all been eliminated on a pro-forma basis
at group level as the share buy-back transaction represents an intragroup
transaction between the parent (P Ltd) and the subsidiary (S Ltd). The
parent’s interest in the subsidiary did not change (remained 80%) and there
is no gain or loss on a change in ownership to be recognised directly in
equity.
318

Calculations
P Ltd 80%
Total
NCI
At
Since
Share capital
250 000
200 000
50 000
Retained earnings
30 000
24 000
6 000
280 000
224 000
56 000
– Parent
(4 000)
(4 000)

276 000
220 000
56 000
Retained
earnings
(125 000 – 30 000)
95 000
76 000
19 000
• Current year:
Profit:
1/1/20.19–30/6/20.19 (given)
30 000
24 000
6 000
(20 000)
(16 000)
(4 000)
381 000
84 000
77 000
Share buy-back
Share capital and retained earnings
utilised (100 000 + 50 000)
(150 000) (120 000)
(30 000)
231 000
47 000
Profit:
1/7/20.19–31/12/20.19 (given)
30 000
24 000
6 000
R261 000
R108 000
R53 000
319
Chapter 14
Comments

30/6/20.19 (120 000/150 000 shares in issue)
80%
Since 1/7/20.19 ((120 000 – 24 000)/(150 000 – 30 000) shares in issue)

80%
No change in ownership interest or loss of control is evident.
b The exact amount received by P Ltd and the non-controlling shareholders

for the shares bought back from them respectively is analysed in the “At”
and “Non-controlling interest” columns. P Ltd received R120 000 (24 000
shares × R5) and NCI received R30 000 (6 000 shares × R5). This approach
then resembles the pro forma consolidation journal entry (see J6) to account
for the buy-back and any change in ownership. The alternative approach for
the calculations for a rights issue in the analysis may also be applicable to
the examples on buy-back of shares in this chapter.

Fair value of the consideration received by NCI for shares bought back (6
000 shares × R5)
30 000
Amount by which the non-controlling interests are adjusted (30 000)
NCI after buy-back ((231 000 + 4 000) × 20%)
47 000
NCI before buy-back ((381 000 + 4 000) × 20%)
(77 000)
Fair value of the consideration received by parent for shares bought back (24
000 shares × R5)
120 000
Decrease in P Ltd owners’ equity through buy-back:
(120 000)
Owners’ equity held by P Ltd before buy-back ((381 000 + 4 000) × 80%)
(308 000) Owners’ equity held by P Ltd after buy-back ((231 000 + 4 000) ×
80%) 188 000
C2 Proof of calculation of gain from a bargain purchase in terms of

IFRS 3.32
56 000
276 000

date: IFRS 3.32(b)
(280 000)
Gain from a bargain purchase (parent)
(R4 000)
320
Changes resulting from the issue of additional shares by investees C3 Pro

forma consolidation journal entries
Dr
Cr
J1
Share capital (SCE)
250 000
30 000
220 000
(gain from a bargain purchase)
4 000
56 000
J2
19 000
19 000
J3
6 000
6 000
of current year’s profit before buy-back
J4
16 000
4 000
Dividend paid (SCE)
20 000
J5
6 000
6 000
of current year’s profit after buy-back
J6
30 000
Investment in S Ltd (reverse over-elimination)
44 000
Other income (gain on buy-back) (P)(P/L)
76 000
Share capital (SCE)
50 000

100 000
Elimination of share buy-back transaction
321
Chapter 14
Comments
a Note that pro forma consolidation journal entries are processed in

chronological order. The historic cost price of the investment in S Ltd (as per
P Ltd’s separate financial statements) is only R176 000 after the recognition
of the share buy-back.
The investment in S Ltd at R220 000 (in J1) is therefore “over-eliminated”

in order to determine the gain from the bargain purchase and to keep the
amount for the gain constant as at the acquisition date. J6 therefore
subsequently corrects the over-elimination caused by J1.
Thus the following happens to the investment in S Ltd on consolidation:

176 000 (given) – 220 000(J1) + 44 000(J6) = Rnil.
b J6 is the journal entry that deals with the buy-back of the shares. Note that
the debit processed by P Ltd (R120 000) in its separate financial statements
is not reversed, as the cash value received for the shares does not change due
to consolidation. The cost of the shares bought back (per P Ltd’s separate
financial statements) is replaced by the fair value of the shares bought back
(in the group), thereby accounting for the changes in ownership account in
respect of the buy-back at group level.
The credit side of the journal entry re-establishes the share capital and
retained earnings due to the chronological order in which the journal entries
take place (as explained previously).
Remember that S Ltd reduced (debited) the share capital and the retained
earnings
by means of an actual journal entry (as discussed above) in its individual

financial statements. This leaves, for example, a share capital of R200 000
(250 000 – 50 000
= R200 000 as given in the statement of financial position of S Ltd) flowing

into the consolidation. “At-acquisition” information (that cannot
subsequently change because of the effect that such a change would have on
goodwill/gain from a bargain purchase at acquisition) dictates that share
capital of R250 000 be debited (refer to J1). Yet only R200 000 flowed into
the consolidation from S Ltd. Thus the share capital has been over-
eliminated and J6 must therefore be processed to correct this over-
elimination.
Thus the following happens to the share capital of S Ltd on consolidation:

200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.
2 Increase in parent’s interest
A parent’s percentage interest in an existing subsidiary may increase as a

result of the share buy-back. Where the subsidiary remains a subsidiary
(parent is not obtaining control), the buy-back transaction by both the parent
and subsidiary will effectively be reversed upon consolidation and the effect
of the transaction will be recognised within equity in the consolidated
financial statements (IFRS 10.23).
322
Buy-back of shares by a subsidiary with no change in status
as an increase in the parent’s interest occurs (there is no
Example 14.9
loss of control) and the subsidiary remains a subsidiary

(NCI is measured at its proportionate share of the acquiree’s

20.19
P Ltd
S Ltd
ASSETS
Inventory
484 000
265 000
166 667
Total assets
R650 667
R265 000
300 000
200 000
Retained earnings
350 667
65 000
R650 667
R265 000

P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
Other income (gain on the buy-back of shares)
66 667
16 000
Profit before tax
282 667
100 000
Income tax expense
(80 000)
(40 000)
PROFIT FOR THE YEAR
202 667
60 000
R202 667
R60 000
323
Chapter 14
Retained
earnings
P Ltd
S Ltd
164 000
125 000
Profit for the year
202 667
60 000
(16 000)
(20 000)
Buy-back of shares
(100 000)
R350 667
R65 000
250 000
000
R280 000
2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 per share. 20
000 of these shares were bought back from P Ltd, while the other 10 000
were bought back from the non-controlling interests.
3 S Ltd’s profit before tax and tax accrued as follows for 20.19: 1/1/20.19 to
1/7/20.19 to
Total
30/6/20.19 31/12/20.19
Profit before tax

100 000
52 000
48 000
Tax
(40 000)
(22 000)
(18 000)
R60 000
R30 000
R30 000
statements.

entry was processed in the separate financial statements of P Ltd: Dr
Cr
Bank (SFP) (20 000 shares × R5,00 per share)

100 000
Investment in S Ltd (SFP)(1)
33 333
66 667
(1) 20 000/120 000 × 200 000 = 33 333
324
Changes resulting from the issue of additional shares by investees From the
information provided, it is also evident that the following actual journal
entry was processed in the individual financial statements of S Ltd: Dr Cr
RR
50 000
100 000
150
000
Comment
These journals must be reversed (i.e. elimination of common items) upon
consolidation of the parent (P Ltd) and the subsidiary (S Ltd), as the share
buy-back represents an intragroup transaction between P Ltd and S Ltd at
group level.
Solution 14.9
The consolidated financial statements of P Ltd and subsidiary S Ltd for the
year ended 31 December 20.19 will be prepared as follows:
P LTD GROUP
ASSETS
Current assets
Inventory (484 000(P) + 265 000(S))
749 000
Total assets
R749 000
Share capital (P)
300 000
Retained earnings (350 667(P) – 66 667(J6) profit reversed + 24 000(J1)

gain from a bargain purchase + 109 000(S) analysis)
417 000
(12 167)
704 833
44 167
Total equity
749 000
R749 000
325
Chapter 14
P LTD GROUP
Revenue (500 000(P) + 300 000(S))
800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
Gross profit
300 000
Other income (no gain on buy-back is recognised here)
Profit before tax
300 000
(120 000)
PROFIT FOR THE YEAR
180 000
R180 000
169 000
11 000
R180 000

169 000
11 000
R180 000
P LTD GROUP
Changes
Non-
Share
Retained
in
con-
Total
Total
capital
earnings
owner-
trolling
equity
ship
interests
Balance at
1 January 20.19
300 000 * 264 000
564 000
! 75 000
639 000
Changes in equity
for 20.19
Dividends
(16 000)
(16 000)
(4 000)
(20 000)
Total comprehensive
income for the
year:
Profit for the year
169 000
169 000
11 000
180 000
Share buy-back
(12 167)
(12 167) # (37 833)
(50 000)
Balance at
31 Dec 20.19
R300 000 R417 000 (R12 167) R704 833
R44 167 R749 000
*
164 000(P) + 76 000(S) + 24 000(gain from a bargain purchase) = 264 000
56 000 + 19 000 = 75 000
# 10 000 shares × R5 = 50 000; 50 000 – 12 167 = 37 833 or 77 000 – 39

167 = 37 833 (see analysis) 326

Calculations
P Ltd 80%–83,33%
Total
NCI
At
Since
Share
capital
250 000
200 000
50 000
Retained earnings
30 000
24 000
6 000
280 000
224 000
56 000
– Parent
(24 000)
(24 000)
256 000
200 000
56 000
Retained earnings
(125 000 – 30 000)
95 000
76 000
19 000
Current
year:
• Profit: 1/1/20.19–30/6/20.19
(given)
30 000
24 000
6 000
(20 000)
(16 000)
(4 000)
361 000
84 000
77 000
Share buy-back
Share capital and retained
earnings utilised (100 000 + 50 000)
(comment (b))
(150 000)
(100 000)
(50 000)
(12 167)
12 167
211 000
39 167
Profit: 1/7/20.19–31/12/20.19
30 000
25 000
5 000
R241 000
R109 000
R44 167
327
Chapter 14
Comments

30/6/20.19 (120 000/150 000 shares in issue)
80%
83,33%
Consequently there is no loss of control. However, there is a change in the

IFRS 10.23. The parent’s ownership interest in the subsidiary increased as
the subsidiary bought back fewer shares from the parent company than from
the other owners (i.e. the buy-back does not take place in the same
proportion as the existing ownership).

for the buy-back and any change in ownership. An alternative approach for
the calculations for the buy-back of shares in the analysis is given below,
which may also be applicable to the other examples in this chapter.

000 shares × R5)
50 000
NCI after buy-back ((211 000 + 24 000) × 16,667%)
39 167
NCI before buy-back ((361 000 + 24 000) × 20%)
(77 000)
R12 167
000 shares × R5)
100 000
(112 167)
Owners’ equity held by P Ltd before buy-back ((361 000 + 24 000) × 80%)
(308 000) Owners’ equity held by P Ltd after buy-back
((211 000 + 24 000) × 83,33%)
195 833
(R12 167)
328
Changes resulting from the issue of additional shares by investees C1.1

Alternative approach for the buy-back of shares in the analysis
P Ltd 80%–83,33%
Total
NCI
At
Since
Owner’s equity before buy-back

361 000
84 000
77 000
Share buy-back
Equity reduced with buy-back
(83,33:16.67%)
(150 000) (125 000)
(25 000)
Transfer from NCI (77 000 × 3,33/20)
12 833
(12 833)
211 000 (112 167)
12 167
Consideration received and NCI
(100 000)
39 167
C2 Proof of calculation of gain from a bargain purchase in terms of

IFRS 3.32

56 000
256 000

date: IFRS 3.32(b)
(280 000)
Gain from a bargain purchase (parent)
(R24 000)
Dr
Cr
J1
Share capital (SCE)
250 000
30 000
200 000
(gain from a bargain purchase)

24 000
56 000
Main elimination journal entry at the acquisition
date
J2
19 000
19 000
Allocation on non-controlling interests’ portion
J3
6 000
6 000
J4
16 000
4 000
Dividend paid (SCE)
20 000
continued
329
Chapter 14
Dr
Cr
J5
5 000
5 000

J6
Non-controlling interests (SFP/SCE) (50 000 – 12 167) 37
833
Investment in S Ltd (reverse over-elimination) 33
333
Gain on share buy-back (P)(P/L)
66 667
12 167
Share capital (SCE)
50 000
100 000
Comments


in order to determine the gain from the bargain purchase and to keep the
amount for the gain constant as at the acquisition date. J6 therefore
subsequently corrects the over-elimination caused by J1.
Thus the following happens to the investment in S
Ltd on consolidation:
166 667 (given) – 200 000(J1) + 33 333(J6) = Rnil.
earnings

(250 000 – 50 000

elimination.

200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.
330
Changes resulting from the issue of additional shares by investees 3

A parent’s percentage interest in an existing subsidiary may decrease as a

result of the share buy-back. Where the subsidiary remains a subsidiary
(control is not lost), the buyback transaction by both the parent and
subsidiary will effectively be reversed upon consolidation and the effect of
the transaction will be recognised within equity in the consolidated financial
statements (IFRS 10.23).
Buy-back of shares by a subsidiary where there is no change
in the status as the subsidiary remains a subsidiary (there is
Example 14.10
no loss of control) and a decrease in the parent’s interest
occurs due to the share buy-back (NCI is measured at fair
value at the acquisition date)

20.19
P Ltd
S Ltd
ASSETS
Inventory
484 000
265 000
184 000
Total assets
R668 000
R265 000
300 000
200 000
Retained earnings
368 000
65 000
R668 000
R265 000

P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
Other income (gain on buy-back of shares)
84 000
16 000
Profit before tax
300 000
100 000
Income tax expense

(80 000)
(40 000)
PROFIT FOR THE YEAR
220 000
60 000
R220 000
R60 000
331
Chapter 14
Retained
earnings
P Ltd
S Ltd

164 000
125 000
Profit for the year
220 000
60 000
(16 000)
(20 000)
Buy-back of shares
(100 000)
R368 000
R65 000
250 000
000
R280 000
The fair value of the NCI was R60 000 at the date of acquisition.
2 On 30 June 20.19, S Ltd bought back 30 000 shares at R5,00 per share. 28
000 of these shares were bought back from P Ltd, while the remaining 2 000
shares were bought back from the non-controlling interests.
3 S Ltd’s profit before tax and tax accrued as follows for 20.19: 1/1/20.19 to
1/7/20.19 to
Total
30/6/20.19 31/12/20.19
Profit before tax
100 000
52 000
48 000
Tax
(40 000)
(22 000)
(18 000)
R60 000
R30 000
R30 000
statements.

entry was processed in the separate financial statements of P Ltd: Dr
Cr
Bank (SFP) (28 000 shares × R5,00 per share)
140 000
Investment in S Ltd (SFP)(1)
56 000
84 000
(1) 28 000/120 000 × 240 000 = 56 000, or 28 000/92 000 × 184 000 = 56
000
332
Changes resulting from the issue of additional shares by investees From the
information provided, it is also evident that the following actual journal
entry was processed in the individual financial statements of S Ltd: Dr Cr
RR
50 000
100 000
150
000
Comment
These journals must be reversed (i.e. elimination of common items) upon

consolidation of the parent (P Ltd) and the subsidiary (S Ltd), as the share
buy-back represents an intragroup transaction between P Ltd and S Ltd at
group level.
Solution 14.10
The consolidated financial statements of P Ltd and subsidiary S Ltd for the
year ended 31 December 20.19 will be prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent and NCI) (comment (a))
20 000
Current assets
Inventory (484 000(P) + 265 000(S)) 749
000
Total assets
R769 000
Share capital (P) 300
000
Retained earnings
(368 000(P) – 84 000(J6) profit reversed + 107 000(S) analysis) 391
000
11 500
702 500
66 500
Total equity
769 000
R769 000
333
Chapter 14
Comment
Note that goodwill is not realised, as control is not relinquished by the parent
(P Ltd) in this example. Goodwill is however reattributed proportionately to
the NCI in this example, because of the decrease in the ownership interest of
the parent (P Ltd) and the NCI being measured at fair value at the acquisition
date (i.e. goodwill was calculated for the NCI and for the parent (P Ltd)). In
the previous examples, this was not the case, and goodwill was not
reattributed from P Ltd to the NCI as the NCI was not measured at fair value
at the acquisition date (meaning that goodwill was not calculated for all
owners at the acquisition date).
P LTD GROUP
Revenue (500 000(P) + 300 000(S))
800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
300 000
Other income (no gain on buy-back is recognised here)
Profit before tax
300 000
(120 000)
PROFIT FOR THE YEAR
180 000
Other comprehensive income –
R180 000
167 000
13 000
R180 000

167 000
13 000
R180 000
334

GROUP
Changes
Non-
Share
Retained
in
Total
Total
controlling
capital
earnings
owner-
equity
interests
ship
Balance at
1 Jan 20.19
300 000 # 240 000
540 000
! 79 000
619 000
Changes in
equity for
20.19
Dividends
– (16
000)
(16 000)
(4 000)
(20 000)
Total
comprehensive
income for the
year:
Profit for the year
– 167
000
167 000 @ 13 000
180 000
Share buy-back
11 500
11 500 * (21 500)
(10 000)
Balance at
31 Dec 20.19
R300 000 R391 000
R11 500 R702 500

R66 500
R769 000
# 164 000(P) + 76 000(S) = 240 000
60 000 + 19 000 = 79 000
@ 6 000(before buy-back) + 7 000(after buy-back) = 13 000
10 000 + 11 500 = 21 500(see analysis)
335
Chapter 14
Calculations
P Ltd 80%–76,67%
Total
NCI
At
Since
Share
capital
250 000
200 000
50 000
Retained earnings
30 000
24 000
6 000
280 000
224 000
56 000
– Parent and NCI
20 000
16 000
4 000
300 000
240 000
60 000
Retained earnings
(125 000 – 30 000)
95 000
76 000
19 000
• Current year:
Profit:
1/1/20.19–30/6/20.19
30 000
24 000
6 000
(20 000)
(16 000)
(4 000)
405 000
84 000
81 000
Share buy-back
Share capital and retained
earnings utilised
(100 000 + 50 000) (comment (b))
(150 000)
(140 000)
(10 000)
11 500
(11 500)
255 000
59 500
Profit: 1/7/20.19–31/12/20.19
30 000
23 000
7 000
R285 000
R107 000
R66 500
336

Comments
30/6/20.19 (120 000/150 000 shares in issue)
80%

76,67%

IFRS 10.23. The parent’s ownership interest in the subsidiary decreased as
the subsidiary bought back more shares from the parent company than from
the other owners (i.e. the buy-back does not take place in the same
proportion as the existing ownership).

for the buy-back and any change in ownership.

000 shares × R5)
10 000
NCI after buy-back ((255 000 – 20 000GW) × 23,33%) + (4 000 initial GW

of NCI) + (16 000 GW of parent × 3,33/80) relinquished to NCI) 59 500
NCI before buy-back ((405 000 – 20 000GW) × 20%) + (4 000 initial GW of

NCI)
(81 000)
(R11 500)
The amount for the change in ownership recognised in equity can also be
000 shares × R5)
140 000
(128 500)
Owners’ equity held by P Ltd before buy-back
(((405 000 – 20 000GW) × 80%) + 16 000GW)
(324 000)
Owners’ equity held by P Ltd after buy-back
(((255 000 – 20 000GW) × 76,67%) + 16 000GW – (16 000 GW of 195 500
parent × 3,33/80) relinquished to NCI)
R11 500
Note in this case that the equity represented by the goodwill figure now
owners. With the change in the ownership interest as a result of the buy-
back, P Ltd effectively relinquished some of its goodwill to the non-
337
Chapter 14
60 000
300 000

date: IFRS 3.32(b)
(280 000)
R20 000
Dr
Cr
J1
Share capital (SCE)
250 000
30 000
20 000
240 000
60 000
Main elimination journal entry at the acquisition
date
J2
19 000
19 000
J3
6 000
6 000
J4
16 000
4 000
Dividend paid (SCE)
20 000
J5
7 000
7 000
J6
Non-controlling interests (SFP/SCE) (10 000 + 11 500) 21
500
Investment in S Ltd (SCE) (reverse over-elimination)
56 000
Other income (gain on share buy-back) (P)(P/L)
84 000
Share capital (SCE)
50 000
100 000
11 500
338
Comments


in order to determine the goodwill and to keep the amount for the goodwill
constant as at the acquisition date. J6 therefore subsequently corrects the
over-elimination caused by J1.
Thus the following happens to the investment in S

Ltd on consolidation:
184 000 (given) – 240 000(J1) + 56 000(J6) = Rnil.
earnings

(250 000 – 50 000

elimination.

200 000 (given) – 250 000(J1) + 50 000(J6) = Rnil.
4 Obtaining or losing control as a result of a share buy-back In the

previous examples, the share buy-back of the subsidiary did not result in a
loss of control. In terms of IFRS 10.23 such transactions between equity
participants are recognised within equity. In some instances, a rights issue by
an investee (e.g. an associate or joint venture) may lead to the investor
gaining control. In such case the investor would treat the acquisition of the
subsidiary as a business combination. The same principles (refer to IFRS 3)
would be followed as was discussed in chapter 9 and chapter 13 (e.g., in
cases where the associate or joint venture would become a subsidiary). A
share buy-back of a subsidiary may also lead to the parent losing control
over the subsidiary. The same principles (refer to IFRS 10.25 and B98)
would be followed as was discussed in chapter 13 (e.g. where the subsidiary
would become an associate).
339
Chapter 14
14.4 Share-based payments of a subsidiary
In terms of a typical share-based payment transaction a subsidiary may grant

shares or options to its employees. When the new shares are issued to the
employees, the total number of issued shares will increase, but the number of
shares held by the parent will stay the same. This will lead to a decline in the
parent’s equity interest in the subsidiary, which should be accounted for by
applying the same principles as was illustrated previously.
Issue of new shares by a subsidiary in terms of a share-
based payment transaction resulting in a decrease of the
interest of the parent (control is not lost) and the status does
Example 14.11
not change as the subsidiary remains a subsidiary (NCI is


20.19
P Ltd
S Ltd
ASSETS
Inventory
434 000
415 000
150 000
Total assets
R584 000
R415 000
300 000
270 000
Retained earnings
284 000
145 000
R584 000
R415 000

P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
16 000
–
Profit before tax
216 000
100 000
Income tax expense
(80 000)
(40 000)
PROFIT FOR THE YEAR
136 000
60 000
––
R136 000
R60 000
340

Retained
earnings
P Ltd
S Ltd
164 000
105 000
Profit for the year
136 000
60 000
(16 000)
(20 000)
R284 000
R145 000
1 P Ltd acquired 120 000 shares in S Ltd on 1 January 20.17, when the
equity of S Ltd consisted of the following:
150 000
000
R180 000
2 On 1 January 20.18 S Ltd granted options to its employees conditional

upon one year’s service. The vesting date was 31 December 20.18. The
exercise price was set at R2.00 per share. On 31 December 20.18, 50 000
options vested and S Ltd recorded R20 000 in equity in terms of IFRS 2
Share-based Payment.
3 On 30 June 20.19 the employees of S Ltd exercised all their options. S Ltd
passed the following journal entry:
Dr Cr
Bank (SFP) (50 000 options × R2,00 each)
100 000
Share-based payment reserve (transfer within equity)
20 000
Share capital
120 000
Issue of shares after employees exercised their options 4 S Ltd’s profit

after tax for 20.19 accrued evenly.
statements.
341
Chapter 14
Solution 14.11
P LTD GROUP
ASSETS
Non-current assets
Goodwill (parent)
6 000
Current assets
Inventory (434 000(P) + 415 000(S))
849 000
Total assets R855
000

Share capital
300 000
000
19 000
689 000
166 000
000
P LTD GROUP
Revenue (500 000(P) + 300 000(S))
800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
Gross profit
300 000
Other income
Profit before tax
300 000
(120 000)
PROFIT FOR THE YEAR
180 000
R180 000
162 000
18 000
R180 000
162 000
18 000
R180 000
342

GROUP
Changes
Non-
Share
Retained
in
Total
Total
controlling
capital
earnings
owner-
equity
interests
ship
Balance at
1 Jan 20.19
300 000
* 224 000
524 000
! 71 000
595 000
Changes in
equity for
20.19
Dividends
(16 000)
(16 000)
(4 000)
(20 000)
Total compre-
hensive
income for the
year:
Profit for the year
– 162
000
162 000
18 000
180 000
Options exer-
cised and new
issue
19 000
19 000
$ 81 000
100 000
Balance at
31 Dec 20.19
R300 000 # R370 000
R19 000 R689 000 R166 000 R855 000
164 000(P) + 60 000(S) = 224 000
36 000 + 15 000 + 20 000 = 71 000
284 000(P) + 86 000(S) = 370 000
$ See
J6
343
Chapter 14
Calculations
P Ltd 80%–60%
Total
NCI
At
Since
Share capital
150 000
120 000
30 000
Retained earnings
30 000
24 000
6 000
180 000
144 000
36 000
– Parent
6 000
6 000
–
186 000
150 000
36 000
Retained
earnings
(105 000 – 30 000)
75 000
60 000
15 000
Share-based payment
(comment (b))
20 000
– 20
000
• Current year:
Profit:
1/1/20.19–30/6/20.19
(60 000 × 6/12)
30 000
24 000
6 000
(20 000)
(16 000)
(4 000)
291 000
68 000
73 000
Options exercised (30/6/20.19)
Shares issued
120 000
120 000
Equity transferred
(20 000)
(20 000)
(comment (d) and (e))

19 000
(19 000)
391 000
68 000
154 000
Profit:
1/7/20.19–31/12/20.19
30 000
18 000
12 000
R421 000
R86 000
R166 000
344

Comments

30/6/20.19 (120 000/150 000 shares in issue)
80%
60%
Consequently there is no loss of control. However, there is a change in the
IFRS 10.23.
b S Ltd granted options to its employees in terms of the share-based payment

transaction. These options (equity) are not held by the parent (P Ltd) and are
therefore analysed in the column for the “non-controlling interests”. These
options represent other equity instruments held only by the employees (not
the parent).
Similar to the treatment of preferences shares (refer to chapter 6 of this

work), a separate analysis could have been prepared for these equity
instruments.
c The exact amount paid by P Ltd (Rnil) and the non-controlling

shareholders for the shares taken up by them respectively is analysed in the
“At” and “Non-controlling interest” columns. This approach then resembles
the pro forma consolidation journal entry (see J6) to account for the issue of
shares and any change in ownership – see below.

(R100 000 cash)
(100 000)
154 000
NCI before transaction ((291 000 – 6 000GW – 20 000) × 20% +
(20 000 share-based payment))
(73 000)
(R19 000)
e The amount for the change in ownership recognised in equity can also be
Fair value of the consideration paid by the parent for new shares issued
Increase in P Ltd owners’ equity through new issue:
19 000
Owners’ equity held by P Ltd before issue
(((291 000 – 6 000GW – 20 000) × 80%) + 6 000GW)
(218 000)
Owners’ equity held by P Ltd after issue
(((391 000 – 6 000GW) × 60%) + 6 000GW)
237 000
R19 000
345
Chapter 14
C1.1 Alternative approach for analysis
P Ltd 80%–60%
Total
NCI
At
Since
Owner’s equity before share issue
291 000
68 000
73 000
Options exercised (30/6/20.19)
Equity transferred
(20 000)
(20 000)
Changes in ownership:
– Equity relinquished (1)
(36 000)
(17 000)
53 000
– Compensation by sharing
in new equity (2)
120 000
55 000
17 000
48 000
391 000
19 000
(see comment below)
(19
000)
R154 000
(1) 144 000 × 20/80 = 36 000; 68 000 × 20/80 = 17 000
(2) 120 000 × 60% (thus new ownership interest) = 72 000; allocated 55 000
and 17 000
Although the parent did not take up any shares, it is nonetheless still entitled
to a portion of the new equity because of its existing ownership interest in
the ratio of ownership interest after the issue of the new shares (i.e. 60:40).
This “bonus” serves as compensation for the equity lost (ceded) to the non-
Comment
A gain (R19 000) results from the parent’s new ownership interest, as the
parent’s new attributable equity (R72 000) is higher than the equity ceded to
the non-controlling interests (R36 000 + R17 000 = R53 000). This gain is to
be treated in terms of IFRS 10.23 – i.e. taken directly to equity, as the parent
(P Ltd) does not relinquish control over S Ltd. Although P Ltd’s interest
decreased from 80% to 60%, its actual ownership interest increased with
R19 000.
36 000
186 000

date: IFRS 3.32(b)
(180 000)
Goodwill (parent)
R6 000
346
Changes resulting from the issue of additional shares by investees C3 Pro

forma consolidation journal entries
Dr
Cr
J1
Share capital (SCE)

150 000
Retained
earnings (SCE)
30 000
6 000
36 000
150 000
J2
15 000
15 000
retained earnings
J3
Share-based payment reserve – Beginning of year

(SCE) 20
000
20 000
Allocation of non-controlling interests’ portion of the share-based

payment recognised in equity
J4
6 000
6 000
current year’s profit before options exercised
J5
16 000
4 000
Dividend paid (SCE)
20 000

J6
Share capital (SCE)
120 000
Share-based payment reserve
(transfer within equity) (SCE)
20 000
(120 000 – 20 000 – 19 000) 81
000
19 000
Elimination of option exercised and new shares
issued, resulting in change in ownership interest
12 000
12 000
current year’s profit after new issue
14.5 Loss of control through expiry of an agreement and obtaining

control through an agreement
There may be various circumstances in which a parent may control a

subsidiary in terms of IFRS 10. Control can, for example, exist when the
parent owns half or less of the voting power of an entity but enjoys power
over more than half of the voting rights by virtue of an agreement with other
investors (IFRS 10.11). IFRS 3.43–.44 also stipulates that a business
combination (gaining control) can be effected without the transfer of any
consideration and/or by virtue of an agreement.
347
Chapter 14
A parent may lose control of a subsidiary with or without a change in

absolute or relative ownership levels. Loss of control can result from the sale
of an ownership interest to other parties (see chapter 13) or by other means,
such as when a subsidiary, for example, issues new shares to other parties
(see previous sections of this chapter).
Loss of control can also occur in the absence of a transaction. It may, for
example, occur on the expiry of an agreement that previously allowed an
entity to control a subsidiary (also see IFRS 10.BCZ180).
Loss of control over a subsidiary on expiry of agreement
Example 14.12
(NCI is measured at fair value at the acquisition date)
P Ltd had control over S Ltd through an agreement with other shareholders.

20.19
P Ltd
S Ltd
ASSETS
Inventory
725 000
300 000
55 000
Total assets
R780 000
R300 000
300 000
100 000
Retained earnings
480 000
200 000
R780 000
R300 000

P Ltd
S Ltd
Revenue
600 000
400 000
Cost of sales
(250 000)
(300 000)
Profit before tax
350 000
100 000
Income tax expense
(170 000)
(50 000)
PROFIT FOR THE YEAR
180 000
50 000
––
R180 000
R50 000
348

Retained
earnings
P Ltd
S Ltd
300 000
150 000
Profit for the year
180 000
50 000
R480 000
R200 000
1 P Ltd acquired 30 000 shares in S Ltd on 1 January 20.17, when the equity
of S Ltd consisted of the following:
Share capital
100 000
000
R180 000
statements.

the acquisition date. The fair value of the non-controlling interests at the
acquisition date was R130 000.
4 On 1 January 20.17, P Ltd signed an agreement with one of the other

shareholders (with 25% interest) whereby P Ltd became entitled to control
its vote at a shareholders’ meeting. P Ltd was not an agent of the other
shareholder and did not act on his behalf. P Ltd thus gained control over S
Ltd as P Ltd has 55% of the voting rights.
5 This agreement expired on 31 December 20.19. From this date P Ltd no

longer enjoyed control over S Ltd. The fair value of the investment by P Ltd
in S Ltd was R95 000 at the date when control was lost. After 31 December
20.19 P Ltd accounts for its investment in S Ltd as an associate.
349
Chapter 14
Solution 14.12
P LTD GROUP
ASSETS
Non-current assets
Goodwill
Investment in associate (55 000(cost) + 40 000(J1)) 95
000
95 000
Current assets
Inventory (725 000(P)) 725
000
Total assets
R820 000
Share capital
300 000
000
000
P LTD GROUP
Revenue (600 000(P) + 400 000(S))
1 000 000
Cost of sales (250 000(P) + 300 000(S))
(550 000)
Gross profit
450 000
Other income (gain on loss of control)
4 000
Profit before tax
454 000
Income tax expense (170 000(P) + 50 000(S)) (220
000)
PROFIT FOR THE YEAR
234 000
R234 000
199 000
35 000
R234 000
199 000
35 000
R234 000
350

GROUP
Non-
Share
Retained
control-
Total
Total
capital
earnings
ling
equity
interests
300 000
* 321 000
621 000
179 000
800 000
Total comprehensive
Profit for the year
199 000
199 000
35 000
234 000
Control over subsidiary lost
– (214 000) (214 000)

Balance at
31 December 20.19
R300 000 # R520 000 R820 000
– R820 000
300 000(P) + 21 000(S) = 321 000
Test: 480 000(P) + 40 000(S) = 520 000
Calculations
P Ltd 30%
Total
NCI
At
Since
Share capital
100 000
30 000
70 000
Retained earnings
80 000
24 000
56 000
180 000
54 000
126 000
– Parent and NCI
5 000
1 000
4 000
185 000
55 000
130 000
Retained
earnings
(150 000 – 80 000)
70 000
21 000
49 000
• Current year: Profit
50 000
15 000
35 000
305 000
36 000
214 000
Derecognition of assets (including
(IFRS 10.B98(a))
(305 000)
(55 000)
(36 000)
(214 000)
–
–
351
Chapter 14
C1 Analysis of the owners’ equity of A Ltd – as associate
P Ltd 30%
Total
NCI
At
Since
i At acquisition
value
316 667
95 000
n/a

130 000
185 000

date: IFRS 3.32(b)
(180 000)
R5 000
Dr
Cr
J1
Investment in S Ltd (SFP) (95 000 fair value – cost of
R55 000 in separate financial statements of P Ltd)
40 000
Gain on disposal of interest (P)(P/L)
Cost of sales (P/L) (comment (a))
300 000
Non-controlling interests (P/L) (full year) (comment (a)) 35

000
Income tax expense (P/L) (comment (a))
50 000
Revenue (P/L) (comment (a))
400
000
21 000
(Remeasurement gain) (IFRS 10.25))
4 000
Consolidation of subsidiary for full year and recogni-
tion of loss of control
J2 Non-controlling interests (SFP/SCE) (derecognised) 214
000
(opening balance in equity) (130 000 + 49 000)
179 000
(Current year’s interest in profit)
35 000
352

Comments
a Note that S Ltd was a subsidiary of P Ltd for the full year. Since S Ltd was
not a subsidiary of P Ltd at the reporting date, S Ltd’s separate financial
statements will not be combined with those of the parent (P Ltd) as a starting
point for consolidation.
This means that the results for S Ltd would have to be journalised into the
consolidation, as is seen in the pro forma consolidation journal entry above.
b Even though P Ltd did not dispose of any shares in S Ltd, it lost control
over S Ltd through expiry of the agreement by which P Ltd controlled S Ltd.
The gain or loss on the disposal of the interest would be calculated as
follows, using IFRS 10.B98: Derecognise assets (including goodwill) and
liabilities on date control is lost (300 000 other net assets + 5 000 goodwill)
(IFRS 10.B98(a)) (305 000)
214 000
Net asset value attributable to parent derecognised
(91 000)
Fair value of consideration received recognised (i.e. cash received) (IFRS
10.B98(b))

10.B98(b))
95 000
Net gain on disposal of interest (group context) (IFRS 10.B98(d))
attributable to the owners of the parent
R4 000
The amount of R4 000 only comprises the fair value remeasurement of the
retained interest, because P Ltd did not dispose of any shares in S Ltd c
Remeasurement of investment retained in terms of IFRS 10.25: Fair value of
retained 30% investment in former subsidiary (given) (IFRS 10.25(b))
95 000
Carrying amount of retained 30% investment in former subsidiary (55 000 +

36 000) (analysis))
(91 000)
Remeasurement (gain) to be recognised in profit or loss (refer to J1) R4 000
d To obtain continuity between the amounts of the current and previous

periods’
consolidated statements of profit or loss and other comprehensive income,

the gain of R0 (per the separate financial statements of the parent) is
included in the current period’s consolidated statement of profit or loss and
other comprehensive income and the consolidated statement of changes in
equity, as follows: Included in opening consolidated retained earnings at the
beginning of the period
21 000
Included in profit for the current period (*) as various line items 15 000
36 000
Group’s net gain in the consolidated statement of profit or loss and other
comprehensive income (comment (b) above)
4 000
Adjustment of carrying amount of the investment to fair value (40 000)
Gain on disposal of interest per separate records of P Ltd Rnil
This approach is also evident from J1 above where the investment in S Ltd is
increased with R40 000 (fair value of R95 000 less cost price of R55 000
still contained in the separate financial statements of P Ltd), the amount
profit according to P Ltd is reversed (Rnil in this example) and replaced by
the parent’s portion of the retained earnings at the beginning of the period,
the various line items in profit or loss and the group’s profit on the loss of
control over the subsidiary.
e The R15 000(*) is taken up in the consolidated statement of profit or loss

and other comprehensive income by adding R50 000 to the profit of the
group, and by adding (thereafter) R35 000 to the non-controlling interests.
353
Chapter 14
Obtaining control through an agreement where an associate
becomes a subsidiary (NCI is measured at its proportionate
Example 14.13

acquisition date)
On 31 December 20.12 the following summarised financial information

relating to P Ltd and other subsidiaries (consolidated) and S Ltd is supplied:
SUMMARISED FINANCIAL INFORMATION AS AT 31 DECEMBER
20.12
Ltd
and sub-
sidiaries
S Ltd
(consoli-
dated)
DEBITS
57 500
9 000
8 000
Inventory
144 500
31 000
Cost of sales (*)
8 000
3 000
2 000
1 000
R220 000
R44 000
CREDITS
150 000
20 000
Retained earnings: 1/1/20.12
50 000
5 000
Sundry liabilities (including deferred tax)
9 000
Revenue (*)
20 000
10 000
R220 000
R44 000
(*) Accrued/incurred
evenly
1P
Ltd acquired 8
000 shares in S
Ltd at the incorporation of S
Ltd on
1 January 20.11. On 30 April 20.12, P Ltd signed an agreement with one of

the other shareholders whereby P Ltd can exercise another 30% of the voting
rights at a meeting. P Ltd is not an agent of the other shareholder and does
not act on his behalf. P Ltd thereby obtained control of S Ltd in terms of
IFRS 10.
2 At the acquisition date (i.e. the date on which P Ltd obtained control of S
Ltd), the assets and liabilities of S Ltd were regarded as a fair reflection in
terms of the requirements of IFRS 3, except for land for which the fair value
was R548 more than its carrying amount. The acquisition-date fair value of
P Ltd’s previously held equity interest was R11 100.

4 P Ltd accounts for all investments in associates in accordance with the
equity method in its consolidated financial statements, as none of the
exceptions in IAS 28.13 applies.
354
Changes resulting from the issue of additional shares by investees 5 P Ltd

measures the investment in S Ltd at cost in its separate financial statements.
Solution 14.13
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (57 500(P) + 9 000(S) + 548 (J4)) 67 048
Goodwill (parent)
130
67 178
Current assets
Inventory (144 500(P) + 31 000(S)) 175
500
Total assets R242
678
Share capital
150 000
Retained earnings
64 700
214 700
Non-controlling interests (S) 18
855
Total equity
233 555
Liabilities (9 000(S) + 123 (J4))
9 123
678
355
Chapter 14
P LTD GROUP
Revenue (20 000(P) + 10 000(S) – 3 333(J5))
26 667
Cost of sales (8 000(P) + 3 000(S) – 1 000(J5))
(10 000)
Gross profit
16 667
Other income (remeasurement gain) (J3)
300
800
Profit before tax
17 767
Income tax expense (2 000(P) + 1 000(S) – 333(J5)) (2
667)
PROFIT FOR THE YEAR
15 100

–
R15 100
12 700
R15 100
12 700
R15 100
P LTD GROUP
Non-
Share
Retained
Total
Total
controlling
capital
earnings
equity
interests
Balance at
1 January 20.12
150 000
* 52 000
202 000
– 202
000
Changes in equity
for 20.12
Acquisition
of subsidiary
–
16 455
16 455
Total comprehensive
Profit for the year
12 700
12 700
2 400
15 100
Balance at
31 December 20.12
R150 000
R64 700
R214 700
R18 855
R233 555
50 000(P) + 2 000(S) = 52 000
356
Calculations
C1 Analysis of the owners’ equity of S Ltd – as associate
P Ltd 40%
Total
NCI
At
Since
i Date of first purchase
Share capital
20 000
8 000
n/a
Retained
earnings
20 000
8 000
n/a
Consideration
8 000
ii Since date of first purchase
Retained
earnings (5 000 – 0)
5 000
2 000
n/a
• Current year:
Profit: 1/1/20.12–30/4/20.12
(6 000 × 4/12 = 2 000(accrued evenly))
2 000
800
n/a
27 000
2 800
n/a
Associate becomes a subsidiary
(27 000)
(8 000)
(2 800)
n/a
P Ltd 40%
Total
NCI
At
Since
i At acquisition (30 April 20.12)
Share capital
20 000
8 000
12 000
Retained earnings at beginning of year
5 000
2 000
3 000
Profit for current year before acquisition
2 000
800
1 200
Revaluation
surplus
(548 × 77,6%) 425
170
255
27 425
10 970
16 455
– Parent
130
130
–
27 555
11 100
16 455
Profit: 1/5/20.12–31/12/20.12
(6 000 × 8/12 = 4 000(accrued evenly))
4 000
1 600
2 400
R31 555
R1 600 R18 855
357
Chapter 14
Comments
a The retained earnings at acquisition of S Ltd as a subsidiary comprises of

the balance at the beginning of the year and the net profit for the first four
months up to the date of the business combination.
b This is a business combination (obtained control through an agreement) in

which no consideration was transferred (IFRS 3.33 and B46). The
consideration for the business combination is therefore replaced by the fair
value of the equity interest previously held. In terms of IFRS 3.42, P Ltd
should remeasure its equity interest previously held (i.e. investment in
associate) to the fair value of R11 100 at the date
of acquisition. Note that the carrying amount of the investment in S Ltd
(previously held equity interest) at the acquisition date (in the consolidated
financial statements) is R10 800 (i.e. R8 000 (cost) + R2 000 (share in
retained earnings) + R800 (current-period share of profit of associate)). The
investment is remeasured to R11 100 and a remeasurement gain of R300
(11 100 – 10 800) is recognised in the consolidated financial statements –
refer to journal 3 below.
Consideration transferred at acquisition date: IFRS 3.32(a)(i) now replaced

by the acquisition-date fair value of acquirer’s previously held equity interest
in the acquiree:
11 100
16 455
27 555

date: IFRS 3.32(b)
(27 425)
Goodwill (parent)
R130
Dr
Cr
R
R
J1
Investment in S Ltd (associate) (SFP) (comment (a)) 2
000
2 000
Accounting for investor’s interest in reserves of
associate at beginning of current year
J2
Investment in S Ltd (associate) (SFP) (comment (a)) 800
800
profit (1/1/20.12–30/4/20.12 i.e. before the business
combination) of associate
J3
Investment in S Ltd (associate) (SFP) (comment (b)) 300
Other income (remeasurement gain) (P/L)
300
Accounting for remeasurement gain on equity

interest previously held
continued
358
Changes resulting from the issue of additional shares by investees Dr
Cr
J4 Land
(SFP)
548
Equity at acquisition (548 × 77,6%) 425
Deferred
tax
(548 × 80% × 28%) 123
Revaluation of land to the acquisition date fair value
J5
Share capital (SCE)
20 000
Retained earnings: opening balance (SCE)
(comment (c)) 5
000
Equity at acquisition
425
130
Revenue
(P/L)
(comment (c)) (10 000 × 4/12)
3 333
Cost of sales (P/L) (comment (c)) (3 000 × 4/12)
1 000
Income tax expense (P/L) (comment (c))
(1 000 × 4/12)
333
(8 000 + 2 000 + 800 + 300)
11 100
16 455

J6
2 400
2 400
profit (1/5/20.12–31/12/20.12 i.e. after the business
combination)
Comments
a Journal 1 and 2 are typical journal entries for the accounting of associates
in terms of the equity method (see chapter 11 for detail).
b Journal 3 represent the adjustment of the equity interest previously held to

fair value, with the recognition of the remeasurement gain in the
consolidated financial statements in terms of IFRS 3.42.
c To prepare the consolidated financial statements, the financial statements

of S Ltd are combined (consolidated) to the financial statement of P Ltd (i.e.
adding every line item in the financial statement of S Ltd to those of P Ltd).
profit or loss is added to that of P Ltd.
S Ltd was not a subsidiary of P Ltd for the first four months and the profit
earned during those four months should not form part of the profit or loss for
the group and should be eliminated from the group’s profit or loss. The
profits for the first four months are actually part of the reserves at the
acquisition date and should be eliminated as such in accounting for the
359
Chapter 14
14.6 Accounting for a change in investment entity status
An investment entity (as defined) (see chapter 10.2) may have control over
another entity, but is excluded from the requirement to prepare consolidated
financial statements. Instead, the investment in a subsidiary will be measured
at fair value through profit or loss. A change in the status of an investment
entity should be accounted for as follows:
1 An entity ceases to be an investment entity
When an entity ceases to be an investment entity, it shall follow the same

principles as were discussed previously in this and the preceding chapter: l
apply IFRS 3 to any subsidiary that was previously measured at fair value
through profit or loss (i.e. account for it as a business combination); l the
date of the change of status shall be the deemed acquisition date; l the
previously held interest shall be deemed disposed of; l use the fair value of
the subsidiary at the deemed acquisition date as the transferred deemed
consideration when measuring any goodwill or gain from a bargain purchase
that arises from the deemed acquisition; and
l consolidate the subsidiary from the date of the change of status.
2 An entity becomes be an investment entity
When an entity becomes an investment entity, it shall again follow the same
principles as were discussed previously:
l it shall cease to consolidate its subsidiaries at the date of the change in

status; and l account for the loss of control of those subsidiaries at that date.
Changes in associates and joint ventures
14.7 Accounting for other changes in the net assets of an associate
The current version of IAS 28 Investments in Associates and Joint

Ventures does not specifically address other changes in the net assets of an
investee (e.g. issuing of new shares). The standard only stipulates the
treatment of items in profit or loss, and other comprehensive income of the
associate or joint venture under the equity method.
The IASB embarked on a project to address the accounting treatment of

other changes in the net assets of an associate or joint venture under the
equity method. In November 2012, the IASB published an Exposure Draft
Equity Method: Share of Other Net Asset Changes to amendment IAS
28. The proposed accounting treatment was that an investor should
recognise, in the investor’s equity, its share of the changes in the net assets
of the investee that are not recognised in profit or loss or other
comprehensive income of the investee, and that are not distributions
received (i.e.
the other net asset changes). Furthermore, the investor shall reclassify to
profit or loss the cumulative amount of equity that the investor had
previously recognised when the investor discontinues the use of the equity
method. However, a considerable number of respondents to the ED
disagreed with the IASB’s proposal.
The Interpretations Committee (IFRIC) observed that, under the equity

method, the investor accounts for the share of the other net asset changes in
the carrying amount of its investment if such changes arise. A change in the
carrying amount of the investment 360
Changes resulting from the issue of additional shares by investees caused by

the other net asset changes is an increase or decrease in the investor’s assets
and is not related to contributions from, or distributions to, equity
participants.
Consequently, the IFRIC noted that, from an investor’s perspective, other net
asset changes of an investee meet the definition of income and expenses as
set out in the Conceptual Framework. In addition, the IFRIC noted that the
other net asset changes represent performance of the investor’s investments.
Furthermore, the IFRIC observed that the other net asset changes of the
investee are economically similar to direct acquisitions or disposals of
investments and thus they should be accounted for similarly.
During the process, the IFRIC upheld its original proposal to the IASB as in
June 2012
and proposed that:
l where an investor‘s ownership interest in the investment is reduced,

whether directly or indirectly, the impact of the change should be accounted
for as a partial disposal and recognised in profit or loss of the investor; and
l where an investor’s ownership interest in the investment increases, whether
directly or indirectly, the impact of the change should be accounted for as an
incremental purchase of the investment and be recognised at cost.
However, the members of the IASB could not reach an agreement on the
correct accounting treatment for other changes in the net assets of an
associate or joint venture under the equity method and abandoned the project
to amend IAS 28 (refer to the IASB Update of May 2014). To date, the
specific treatment of such changes is not clear. The brief discussion below
generally follows the approach that share issues or a buy-back of shares by
an associate or joint venture are treated similarly to a partial sale or an
incremental purchase of an interest in the investee as proposed by the IFRIC
(see above).
1 Rights issue by an associate
When an associate makes a rights issue, as in the case of a subsidiary, the

relative interest of the owners in the associate will only change if all the
owners do not take up their proportionate rights. Nevertheless, if the
percentage interest of the investor changes as a result of the rights issue, the
carrying amount of the investment accounted for under the equity method
must be adjusted accordingly. Although IFRS 3
and IAS 28 do not provide specific guidance relating to the piecemeal

acquisition of associates, it seems that the purchase price of the additional
interest acquired is added to the existing carrying amount for the associate
under the equity method. The amount that has been added to the existing
carrying amount should still be split between goodwill/gain from a bargain
purchase and the additional interest in the net assets of the associate at the
date of the increase in the associate.
When the percentage interest in the associate increases as a result of the
rights issue, the carrying amount of the interest in the associate at the date of
the rights issue is merely increased by the amount of the additional payment
made to acquire such increased interest. Any amount in respect of goodwill
is already included in the carrying amount of the investment in the associate.
Any gain from a bargain purchase is recognised in profit or loss of the
investor.
In a rights issue where the investor does not take up any new shares (which
effectively may lead to a reduction in the investor’s share in the net assets of
the associate) it seems appropriate to recognise a gain or loss in profit or
loss. This approach is similar to a partial sale of an interest in an associate.
361
Chapter 14
When the percentage interest in the associate decreases as a result of the

rights issue, a potential loss arises as a consequence of the fact that P Ltd’s
attributable reserves in A Ltd decrease. P Ltd is compensated for this loss by
the other owners, who effectively contributed most, if not all, of the equity
(shares issued) in the rights issue, and P Ltd obtains its share of the new
equity having given less or no consideration in return. The difference
between the attributable equity ceded and the attributable equity obtained is
a gain or loss on the rights issue in cases where the investor made no
additional investment. The carrying amount of the investment in the
associate must be increased or decreased as a result of the change in the
investor’s interest in the associate.
2 Buy-back of shares by an associate
The accounting treatment is arguably similar to the buy-back of shares by a

subsidiary in chapter 14.3. It is also similar to the sale of an interest in an
associate as discussed in chapter 11. The investor would recognise a gain or
loss on the shares bought back by the associate and the carrying amount of
the investment in the associate would be reduced accordingly.
The following summarises the proposed approach:

l Share buy-back with no loss of significant influence or joint control: gain
or loss to be recognised as gain or loss on share buy-back in profit or loss
and no remeasurement of remaining investment at the date of the share buy-
back; and
l Share buy-back with a loss of significant influence or joint control where

the retained interest is a financial asset:
gain or loss recognised as gain or loss on share buy-back in profit or loss

in terms of IAS 28.22(b). Any remaining investment is remeasured at fair
value at the date of loss of significant influence.
IFRS 5 and investments held for sale
The preceding chapters ignored the implication of IFRS 5 on the sale of an

interest in a subsidiary or associate/joint venture. This section does not aim
to provide a comprehensive overview of the principles contained within
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
but only those sections from IFRS 5 that have a direct impact on the
preparation of consolidated financial statements will be addressed. It is
recommended that IFRS 5 be consulted directly in conjunction with this
section of the work.
14.8 Important
definitions
Disposal group
A disposal group is a group of assets (both non-current and current) to be

disposed of by sale or otherwise, together as a group in a single transaction.
The liabilities associated with those assets will be included in the
transaction. The disposal group will include goodwill acquired in a business
combination if the group is a cash-generating unit to which goodwill has
been allocated. A disposal group can also be an operation within a cash-
generating unit with or without goodwill acquired.
362
Discontinued operation
A discontinued operation is a component of an entity that either has been

disposed of, or is classified as held for sale and:
l represents a separate major line of business or geographical area of

operations; and
l is part of a single co-ordinated plan to dispose of a separate major line of

business or geographical area of operations; or
l is a subsidiary acquired exclusively with a view to resale.
14.9 Applying IFRS 5 in the consolidated financial statements
A subsidiary held for sale refers to a situation where the parent is planning to
dispose of its interest in the subsidiary (i.e. selling the investment) but not
by disposing of the individual assets and liabilities of that subsidiary (for the
latter, refer to chapter 14).
Subsidiaries held for sale shall still be included in the consolidated financial
statements of the parent and are not exempt from consolidation. A parent
that is committed to a sale plan involving loss of control of a subsidiary
shall classify that subsidiary as held for sale when the criteria set out above
are met, even if the parent will retain a non-controlling interest in its former
subsidiary after the sale.
The effect of IFRS 5 is that the subsidiary held for sale is still consolidated
in the consolidated financial statements, but the assets and liabilities of the
subsidiary are classified as a disposal group that is held for sale and are
presented separately in the consolidated financial statements.
1 Subsidiaries classified as held for sale subsequent to the acquisition

date The classification of a subsidiary as held for sale subsequent to the
acquisition date has the following implications on the consolidation process:
l The assets of the subsidiary will not be classified as held for sale in the
individual financial statements of the subsidiary, as it is not the subsidiary
that is planning to sell its assets; it is the parent that plans to sell its interest
in the subsidiary whereby control over the subsidiary will be lost. The
subsidiary (in its individual financial statements) will keep on accounting for
its assets and liabilities under the relevant accounting standards, ignoring
IFRS 5 (i.e. depreciate the items of property, plant and equipment and
measure deferred tax with reference to the tax consequences flowing from
using the assets).
l The parent will classify its investment in subsidiary (in the separate
financial statements of the parent) as held for sale. If the parent kept the
investment at cost, it shall now be measured in accordance with IFRS 5 at
the lower of the carrying amount of the investment and the fair value less
costs to sell. If the parent accounted for the investment in accordance with
IFRS 9, the measurement will not change as such investments are scoped out
from the measurement provisions of IFRS 5 (see IFRS 5.5(c)).
l Any adjustments to the carrying amount of the non-current asset held for
sale in the parent’s separate financial statements (impairment or fair value
adjustments) will need to be reversed upon consolidation so that the
investment is at the amount of initial recognition before the consolidation
process can begin.
363
Chapter 14
l The deferred tax balance relating to the investment in the subsidiary held
for sale should reflect the tax consequences from selling the investment in
the subsidiary.
The tax consequence for the parent would normally be the capital gain or
loss on disposing of the shares (investment) in the subsidiary at its carrying
amount.
Deferred tax should therefore be measured at the effective capital gains tax
rate (currently 80% × 28%). It should be borne in mind that the individual
assets of the subsidiary will not be sold and there is no need to change the
measurement of the deferred tax on the individual assets and liabilities in the
individual financial statements of the subsidiary itself.
l The subsidiary would continue to recognise depreciation or amortisation

on specific assets in its individual financial statements (as explained above).
For consolidation purposes, any depreciation or amortisation recognised by
the subsidiary after it was classified as held for sale (in the consolidated
financial statements) should be reversed as the group has classified the assets
as held for sale.
l The assets, liabilities and any amount previously recognised in other

comprehensive income of the subsidiary held for sale, should be presented
separately as held for sale in the consolidated statement of financial
position (this implies that the assets, liabilities and items of other
comprehensive income of the subsidiary should not be consolidated on a
line-by-line basis; the consolidation may perhaps be described as a three-line
consolidation).
l The assets and liabilities of the subsidiary would be the disposal group held
for sale and the disposal group must be measured at the lower of the
consolidated carrying amount and the fair value less costs to sell.
l The group may need to recognise an impairment loss (in profit or loss) in
measuring the disposal group at fair value less costs to sell. The impairment
loss should first be allocated against any goodwill recognised in respect of
this subsidiary and thereafter allocated to other assets measured according to
IFRS 5
(refer to IFRS 5.23 and IAS 36.104). This allocation to the various assets is
needed as IFRS 5 requires disclosure of the major classes of assets classified
as held for sale. The impairment of any goodwill may need to be allocated
between the parent and the non-controlling interests in terms of Appendix C
of IAS 36.
2 Subsidiaries acquired exclusively with a view to resale A subsidiary

acquired exclusively with a view to resale would immediately meet the
definition of a discontinued operation in terms of IFRS 5 and the results of
the subsidiary will be presented as a discontinued operation line item in the
statement of profit or loss and other comprehensive income. By nature, all
the assets and liabilities of the subsidiary will be classified as held for sale.
The classification of a subsidiary as acquired exclusively with a view to

resale at the acquisition date has the following implications on the
consolidation process: l The assets of the subsidiary will not be classified as
held for sale in the individual financial statements of the subsidiary, as it is
not the subsidiary that is planning to sell its assets; it is the parent that plans
to sell its interest in the subsidiary whereby control over the subsidiary will
be lost. The subsidiary (in its individual financial statements) will keep on
accounting for its assets and liabilities under the relevant accounting
standards, ignoring IFRS 5 (i.e. depreciate the items of property, plant and
equipment and measure deferred tax with reference to the tax consequences
flowing from using the assets).
364
Changes resulting from the issue of additional shares by investees l The

parent will classify its investment in subsidiary (in the separate financial
statements of the parent) as a non-current asset held for sale on the
acquisition date. The investment will be measured on initial recognition at
the lower of its carrying amount had it not been so classified (e.g., cost) and
fair value less costs to sell. Accordingly, it shall be measured at fair value
less costs to sell. The parent’s intention is to sell the shares of the subsidiary
and therefore the fair value less cost to sell referred to on initial recognition
refers to the fair value less cost to sell of the shares and not to that of all the
individual net assets. This could result in an impairment recognised on initial
recognition.
l Any subsequent adjustments to the carrying amount of the non-current

asset held for sale (i.e. the share investment) in the parent’s separate
financial statements (impairment or fair value adjustments) will need to be
reversed upon consolidation so that the investment is at the amount of initial
recognition before the consolidation process can begin.
l In the consolidated financials the disposal group (i.e. the subsidiary as a

whole with all its assets and liabilities) is measured as fair value less cost to
sell on acquisition date, with reference to the fair value of the subsidiary’s
shares. This value is compared to the net asset value of the subsidiary and
any impairment is recognised in the subsidiary’s retained earnings and the
assets of the disposal group held for sale.
l The normal consolidation procedures should then be followed whereby all

the line items of the subsidiary are added to that of the parent.
l The liabilities of the subsidiary are measured in terms of their respective

standards and transferred to liabilities directly associated with the assets of
the disposal group held for sale. Next the assets of the subsidiary will be
transferred to the assets of the disposal group held for sale.
l At the reporting date the disposal group held for sale must be remeasured to
the lower of the consolidated carrying amount and the fair value less costs to
sell of the subsidiary’s shares.
l The subsidiary would continue to recognise depreciation or amortisation on

specific assets in its individual financial statements (as explained above). For
consolidation purposes, any depreciation or amortisation recognised by the
subsidiary should be reversed as the group has classified the assets as held
for sale.
l The results (profit or loss) of the subsidiary will be presented as a

discontinued operation in the statement of profit or loss and other
comprehensive income. This line item will be made up of the profit after tax
of the subsidiary as well as any subsequent impairment recognised in the
consolidated financial statements. All profit or loss line items will be
transferred to the profit/loss for the period from discontinued operations.
14.10 Associates classified as held for sale
If an entity decides to sell an investment in an associate, or a portion of an

investment, and it meets the criteria contained in IFRS 5, the investment
becomes a non-current asset held for sale, and is accounted for in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations (IAS 28.20).
365
Chapter 14
Any retained portion of an investment in an associate that has not been

classified as held for sale should be accounted for using the equity method
(until the disposal of the portion that was classified as held for sale). After
the disposal takes place, the retained portion of the investment should be
accounted for in accordance with IFRS 9 Financial Instruments unless the
retained investment continues to be an associate, in which case the equity
method should be used.
In instances where the investment in the associate no longer complies with

the criteria for classification as held for sale, the equity method is applied
and the financial statements are adjusted retrospectively, as if the investment
had never been carried as held for sale (IAS 28.21).
Question 14.1
subsidiary S Ltd at 31 December 20.19.

20.19
P Ltd
S Ltd
ASSETS
Inventory
342 000
415 000
–
Total assets
R584 000
R415 000
300 000
250 000
Retained earnings
284 000
165 000
R584 000
R415 000

P Ltd
S Ltd
Revenue
500 000
300 000
Cost of sales
(300 000)
(200 000)
Gross profit
200 000
100 000
16 000
Profit before tax
216 000
100 000
Income tax expense
(80 000)
(40 000)
PROFIT FOR THE YEAR
136 000
60 000

––
R136 000
R60 000
366

Retained
earnings
P Ltd
S Ltd
164 000
125 000
Profit for the year
136 000
60 000

–
(16 000)
(20 000)
R284 000
R165 000
1 On 1 January 20.17 P Ltd acquired 120 000 shares in S Ltd for R150 000
150 000
000
R180 000
The fair value of the non-controlling interests at the acquisition date

amounted to R1,22 per share, amounting to R36 600 in total (30 000 shares
× R1,22 per share).
2 On 30 June 20.19 S Ltd made a rights issue of 1 share for every 3 shares
held previously, at R2,00 per share.
3 The rights issue was taken up as follows:

Number of shares
4 000
P Ltd
46 000

statements.

Required
Prepare the consolidated financial statements of the P Ltd group for the year
ended 31 December 20.19. Notes are not required.
367
Chapter 14
Comment
This question is similar to example 14.5, but the NCI is measured at fair
value at the acquisition date. The question therefore facilitates comparison
between the methods of measuring NCI for accounting for the change in
ownership where the parent’s interest increases as a result of a rights issue.
P LTD GROUP
ASSETS
Non-current assets
6 600
Current assets
Inventory (342 000(P) + 415 000(S))
757 000
Total assets
R763 600
Total equity
Share capital
300 000
Retained earnings
392 900

(360)
692 540
71 060
R763 600
368

GROUP
Revenue (500 000(P) + 300 000(S))
800 000
Cost of sales (300 000(P) + 200 000(S))
(500 000)
300 000
(120 000)
PROFIT FOR THE YEAR

180 000
R180 000
168 900
11 100
R180 000
168 900
11 100
R180 000
P LTD GROUP

Changes
Non-
Share
Retained
in
con-
Total
Total
capital
earnings
owner-
trolling
equity
ship
interests
Balance at
1 January 20.19
300 000
* 240 000
–
540 000 § 55 600
595 600
Changes in equi-
ty for 20.19
Dividends
– (16
000)
(16 000)
(4 000)
(20 000)
Total
comprehensive
income for the
year:
Profit for the year
– 168
900
168 900
11 100
180 000
Rights issue
(360)
(360)
8 360
8 000
Balance at
31 Dec 20.19
R300 000 # R392 900
(R360) R692 540 R71 060 R763 600
164 000(P) + 76 000(S) = 240 000
# 284 000(P) + 108 900(S) = 392 900
§ 36 000 + 19 000 + 600(goodwill relating to NCI) = 55 600
369
Chapter 14
Calculations
P Ltd 80%–83%
Total
NCI
At
Since
Share capital
150 000
120 000
30 000
Retained earnings
30 000
24 000
6 000
180 000
144 000
36 000
– Parent and NCI

6 600
6 000
600
186 600
150 000
36 600
Retained
earnings
(125 000 – 30 000)
95 000
76 000
19 000
• Current year:
Profit:
1/1/20.19–30/6/20.19
(60 000 × 6/12)
30 000
24 000
6 000
(20 000)
(16 000)
(4 000)
Owners’ equity before rights
issue
291 600
84 000
57 600
Shares issued
100 000
92 000
8 000
(360)
360
391 600
65 960
Profit:
1/7/20.19–31/12/20.19
30 000
24 900
5 100
R421 600
R108 900
R71 060
Comments

30/6/20.19 (120 000/150 000 shares in issue)
80%
83%

IFRS 10.23.
b The exact amount paid by P Ltd and the non-controlling shareholders for
the shares taken up by them respectively is analysed in the “At” and “Non-
controlling interest”
columns. This approach then closely resembles the pro forma consolidation
journal entry (see J5) to account for the rights issue and any change in
ownership.
000)
NCI after rights issue ((391 600 – 6 600GW) × 17%) + (600GW × 17/20))
65 960
NCI before rights issue ((291 600 – 6 600GW) × 20%+ (600GW × 20/20))
(57 600) Amount to be recognised directly in equity
R360
continued
370
Changes resulting from the issue of additional shares by investees The NCI
decreased by 3% in this example (from 20% to 17%). Thus, the NCI ceded
3% of its equity to P Ltd’s new parcel of shares. Also remember that, since
goodwill was calculated for the NCI (because NCI was measured at fair
value at the acquisition date), there is equity represented by goodwill that
was ceded to the parent in this example. Thus the calculation can also be
performed as follows: Fair value of the consideration paid by NCI for new
shares issued to them (8 000)
Previous equity interest held relinquished (including goodwill) (57 600 ×

3/20)
(8 640)
Increased equity attributable to NCI as a result of the rights issue (100 000 ×
17%)
17 000
R360
Fair value of the consideration paid by the parent for new shares issued (92
000)
Increase in P Ltd’s owners’ equity through rights issue (including goodwill

reattributed):
91 640
(((291 600 – 6 600GW) × 80%) + 6 000GW)
(234 000)
(((391 600 – 6 600GW) × 83%) + 6 000GW)
325 550
Goodwill relating to NCI now transferred to parent (600 × 3/20) 90
(R360)
The amount of R360 is the amount paid in excess of the carrying amount of
the interest acquired, being R91 640.
Note in this case that the equity represented by the goodwill amount now
owners. This means that the goodwill is treated as part of the assets of the
subsidiary and therefore also the equity of the subsidiary. In this case, the
inclusion of the goodwill as part of the assets of the subsidiary resulted in the
change in ownership declining from R450
(example 14.5) to R360. This is because an additional R90 equity (i.e. R600
× 3/20) was transferred to the parent (P Ltd) from the non-controlling
interests at the date of the rights issue. The amount that P Ltd therefore
“overpaid” was R90 less than example 14.5.
e The difference of R360 results from 6 000 new shares additionally taken
up by P Ltd as the issue price is higher than the net asset value of the shares
after the issue (((R385 000/200 000 shares – R2.00) × 6 000 shares) +
(600GW × 3/20)).
f When the interest of the parent increases (e.g., 80% – 83%) as a result of a
rights issue, no gain or loss on the rights issue, additional goodwill, or gain
from a bargain purchase can be recognised in terms of IFRS 10.23. Instead,
any difference between the consideration paid for the shares and the increase
in owners’ equity is attributed to changes in ownership directly in equity as
indicated above.
371
Chapter 14
36 600
186 600

date: IFRS 3.32(b)
(180 000)
R6 600
Dr
Cr
J1
Share capital (SCE)
150 000
30 000
6 600
36 600
150 000
J2
19 000
19 000
retained earnings
J3
6 000
6 000
J4
16 000
4 000
Dividend paid (SCE)
20 000
J5
Share capital (SCE)
100 000
360
Non-controlling
interests (SFP/SCE) (8 000 + 360)
360
Investment in S Ltd (SFP) (46 000 × R2.00)
92
000
J6
5 100
5 100

372
15
Foreign operations
Introduction
.....................................................................................................
375
Important definitions
15.1 Foreign
operation
.....................................................................................
375
15.2 Functional
currency
..................................................................................
375
15.3 Presentation
currency
..............................................................................
376
15.4
Spot exchange rate ..................................................................................
377
15.5 Closing
rate
..............................................................................................
377
15.6 Monetary
item
..........................................................................................
377
15.7
Net investment in a foreign operation ......................................................
377
Translation from the functional currency to the presentation
currency
15.8
Translation of financial statements to the presentation currency .............
378
15.9
Translation of a foreign operation ............................................................

380
Example 15.1
Basic conversion of the financial statements
of a foreign subsidiary ....................................................
381
Example 15.2
The impact of goodwill and IFRS 3 fair value
remeasurements on foreign operations ...........................
391
15.10
Foreign operation and reporting entity have different reporting dates .....
399
15.11
Net investment in a foreign operation ......................................................
399
Example 15.3
Loan to subsidiary as part of the net investment
in a foreign operation ........................................................
400
15.12
Foreign operations – Associates and joint ventures ................................
403
Example
15.4
Foreign
operation – Associate ..........................................
403
15.13
Disposal of a foreign operation ................................................................
405
Example 15.5
Disposal of a foreign operation resulting in a loss of
control (NCI is measured at fair value at the
407
Example 15.6
Partial disposal of an interest in a foreign subsidiary
with no change in the status as the subsidiary remains
a subsidiary (control is not lost) (NCI is measured at its

415
Question 15.1
........................................................................................................
424
373
Foreign operations
Introduction
An entity may carry on foreign activities in two ways. It may have individual
transactions in foreign currencies, or it may have foreign operations. In
addition, an entity may also decide to present its financial statements in a
foreign presentation currency.
IAS 21 The Effects of Changes in Foreign Exchange Rates prescribes

how to include individual foreign currency transactions, as well as the
financial results of foreign operations, in the financial statements of an
entity. The standard also prescribes the translation of a set of financial
statements into a presentation currency other than its functional currency.
This chapter focuses on the following two aspects of IAS 21: l how to
include the financial results of foreign operations in the financial statements
of the reporting entity; and
l how to translate financial statements into a presentation currency.
15.1 Foreign
operations
IAS 21.08 defines a foreign operation as an entity that is a subsidiary,
associate, joint arrangement or branch of a reporting entity the activities of
which are based or conducted in a country or currency other than those of
the reporting entity. Many South African undertakings have branches,
subsidiaries, associates and/or joint arrangements in other countries.
It is also important to note that a foreign operation is not only an entity that
is situated in a country other than the country of the reporting entity. It is
clear from the definition that a foreign operation is either:
l an entity that conducts its activities in a country other than the country of
the reporting entity; or
l conducts its activities in a currency other than the currency of the reporting
entity.
This could therefore result in a scenario where a South African reporting

entity has a foreign operation that is situated in South Africa which has a
functional currency different from that of the reporting entity. The term
“functional currency” is defined below.
15.2 Functional
currency
IAS 21.08 defines a functional currency as the currency of the primary

economic environment in which the entity operates. The primary economic
environment in which an entity operates is normally the one in which it
primarily generates and expends cash.
According to IAS 21.09, an entity considers the following primary factors

when determining its functional currency:
l The currency
• that mainly influences sales prices for goods and services (this will often be
the currency in which sales prices for its goods and services are denominated
(quoted) and settled); and
• of the country whose competitive forces and regulations mainly determine
the sales prices of its goods and services.
375
Chapter 15
l The currency that mainly influences labour, material and other costs of
providing goods or services (this will often be the currency in which such
costs are denominated and settled).
According to IAS 21.10, the following factors may also provide evidence of
an entity’s functional currency:
l the currency in which funds from financing activities (i.e. issuing debt and
equity instruments) are generated; or
l the currency in which receipts from operating activities are usually

retained.
According to IAS 21.11, the following additional factors are considered

when determining the functional currency of a foreign operation, and
whether its functional currency is the same as that of the reporting entity (the
reporting entity in this context being the entity that has the foreign operation
as its subsidiary, branch, associate or joint arrangement): l whether the
activities of the foreign operation are carried out as an extension of the
reporting entity’s activities, rather than being carried out with a significant
degree of autonomy (independence). An example of the former is when the
foreign operation only sells goods imported from the reporting entity and
remits the proceeds to it. An example of the latter is when the operation
accumulates cash and other monetary items, incurs expenses, generates
income and arranges borrowings, all substantially in its local currency;
l whether transactions with the reporting entity constitute a high or a low

proportion of the foreign operation’s activities;
l whether cash flows from the activities of the foreign operation directly
affect the cash flows of the reporting entity and are readily available for
remittance to it; and l whether cash flows from the activities of the foreign
operation are sufficient to service existing and normally expected debt
obligations without funds being made available by the reporting entity.
When the above indicators give a mixed result, and the functional currency
is not obvious, management uses its judgement to determine the functional
currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions. Management gives priority to
the primary indicators in IAS 21.09 before considering the indicators in IAS
21.10 and IAS 21.11, which are designed to provide additional supporting
evidence to determine an entity’s functional currency.
An entity’s functional currency reflects the underlying transactions, events

and conditions that are relevant to it. Accordingly, once determined, the
functional currency is not changed unless there is a change in those
underlying transactions, events and conditions.
The functional currency of an entity is not a free choice and must be

carefully determined.
15.3 Presentation
currency
IAS 21.08 defines presentation currency as the currency in which the

financial statements are presented.
376
Foreign operations
The presentation currency of an entity is a free choice, in contrast to the

functional currency (as indicated above).
15.4 Spot exchange rate
The spot exchange rate is the exchange rate for immediate delivery.
15.5 Closing
rate
The closing rate is the spot exchange rate at the end of the reporting period.
15.6 Monetary
item
A monetary item is defined as units of currency held and assets and

liabilities to be received or paid in a fixed or determinable number of units of
currency. Examples of monetary items will include:
l pensions and other employee benefits to be paid in cash; l provisions that

are to be settled in cash; and
l cash dividends that are recognised as a liability.
The following are examples of non-monetary items:
l amounts prepaid for goods and services;
l goodwill;
l intangible assets;
l inventory;
l property, plant and equipment; and
l provisions that are to be settled by the delivery of a non-monetary asset.
15.7 Net investment in a foreign operation
An entity may have a monetary item that is receivable from or payable to a

foreign operation. An item for which settlement is neither planned nor likely
to occur in the foreseeable future is, in substance, a part of the reporting
entity’s net investment in that foreign operation. Such monetary items may
include long-term receivables or loans.
They do not include trade receivables or trade payables.

currency
IAS 21 requires the following approach in respect of the preparation of

financial statements in another currency than the functional currency: l Each
entity (whether stand-alone, an entity with foreign operations or a foreign
operation itself) determines its functional currency in terms of the principles
discussed in chapter 15.2 above.
l An entity translates foreign currency items (i.e. implying individual

transactions that did not take place in the functional currency of the entity)
into its functional currency and treats the translation in terms of IAS
21.20–.37 and .50.
377
Chapter 15
l All entities forming part of the reporting entity should be included in the
financial statements of the reporting entity. The financial results should be
included in the financial statements of the reporting entity in the same
presentation currency as that of the reporting entity, which could of course
be any currency/currencies.
l Should the entity to be included in the reporting entity have a different

functional currency than the presentation currency of the reporting entity, the
results of the entity will be translated in terms of the principles discussed in
chapter 15.8 below.
l Furthermore, any stand-alone entity that prepares financial statements (or

an entity preparing separate financial statements in terms of IAS 27
Separate Financial Statements) may present its financial statements in any
currency. If the presentation currency selected differs from the functional
currency of that entity, the financial statements in the functional currency
shall also be translated into the presentation currency selected using the
principles discussed in chapter 15.8.
15.8 Translation of financial statements to the presentation currency

The profit or loss, other comprehensive income and financial position of an
entity shall be translated into a different presentation currency using the
following procedures: l assets and liabilities (including comparatives) shall
be translated at the closing rate at the date of the statement of financial
position; l income and expenses (including comparatives) shall be translated
at the exchange rate applicable at the date of the transaction. For practical
reasons an average exchange rate for the period is often used to translate
income and expense items.
However, if exchange rates fluctuate significantly, the use of the average rate
for a period would be inappropriate; and
l all resulting exchange differences shall be recognised as a separate

component of equity (commonly referred to as the foreign currency
translation reserve (FCTR)) in other comprehensive income.
These exchange differences are not recognised in profit or loss, because the
changes in exchange rates have little or no direct effect on the present and
future cash flows from operations. The exchange differences simply resulted
from translating income and expenses at the actual exchange rates and assets
and liabilities at the closing rate, as well as the fact that the opening net
assets are translated at the current closing rate that differs from the closing
rate previously used to translate the balances in the previous period.
Equity is defined by the Conceptual Framework as the residual interest in

the assets of an entity after deducting all its liabilities. However, the
individual items of equity shall be translated at various different rates of
exchange, depending on the category of equity. The following procedure in
translating equity is typically used: l Share capital is translated at the
exchange rates that existed at the date of issue of the shares.
l Income and expense items are translated at the actual rate of exchange or
the average rate that existed during the financial reporting period in which
they arose.
Therefore, the same principle will apply to retained earnings.

l Reserves that arose on specific dates (e.g., revaluation surpluses) are
translated at the spot exchange rates that existed on the date the reserves
arose.
378
Foreign operations
When translating the financial statements of the reporting entity from its
functional currency to the presentation currency, it is important to keep the
accounting equation in mind.
The following example illustrates the above:
The financial results of X Ltd, a South African stand-alone entity with a

functional currency of US Dollar (USD) and a chosen presentation currency
of South African Rand (ZAR), are as follows at 31 December 20.18:
ASSETS USD
$100
Share capital
20
Retained earnings accumulated in 20.17
40
Profit for 20.18
30
Total equity
90
Long-term liability
10
$100
Applicable exchange rates
USD1,00 = ZAR
At inception (spot exchange rate)
3,00
Average rate for the 20.17 financial year
4,00
Average rate for the 20.18 financial year
5,00
31 December 20.18 (closing rate at reporting date)
6,50
The translated results of X Ltd on 31 December 20.18 are therefore as

follows: ASSETS ZAR
Property, plant and equipment (USD100 × ZAR6,50) 650
Share capital (USD20 × ZAR3,00)
60
Retained earnings accumulated in 20.17 (USD40 × ZAR4,00)

160
Profit for 20.18 (USD30 × ZAR5,00)
150
Foreign currency translation reserve (FCTR) (balancing figure) 215
Total equity 585
Long-term liability (USD10 × ZAR6,50)
65
R650
379
Chapter 15
Proof of foreign currency translation reserve balance
As discussed above, equity is the residual interest in the assets of an entity

after deducting all its liabilities. Therefore, total equity shall also be
translated to the presentation currency using the closing rate as assets and
liabilities are translated using the closing rate. As a result the foreign
currency translation reserve balance can also be calculated by analysing only
the equity section of the statement of financial position:
ZAR
Share capital (USD20 × ZAR3,00)
60
Retained earnings accumulated in 20.17 (USD40 × ZAR4,00) 160
Profit for 20.18 (USD30 × ZAR5,00) 150
370
Total equity should be (USD90 × ZAR6,50) 585
Thus, the foreign currency translation reserve balance is
R215
Comment
It is important to remember that all items in the financial statements should

be translated at an exchange rate that best approximates the value of that
item on the reporting date.
Assets and liabilities should therefore be translated at the closing rate on the
reporting date. Share capital is translated at the spot exchange rate at the
share issue date.
Retained earnings, income and expense items accrued over time and are
therefore translated at the average exchange rates during the financial
reporting period in which they arose.
15.9 Translation of a foreign operation
Many reporting entities comprise a number of individual entities (e.g., a

group is made up of a parent and one or more subsidiaries). Various types of
entities, whether members of a group or otherwise, may have investments in
associates or joint arrangements.
They may also have branches. It is necessary for the results and financial
position of each entity included in the reporting entity to be translated from
the functional currencies of the individual entities into the presentation
currency of the reporting entity’s financial statements.
When the results and financial position of a foreign operation are translated
from the functional currencies of the individual entities into the presentation
currency (so that the foreign operation can be included in the financial
statements of the reporting entity by consolidation or the equity method) the
applicable procedures discussed earlier in chapter 15.8 should be applied in a
similar way. In addition, the following principles should also be applied:
l Although total owners’ interest is converted at the closing rate, certain
components of owners’ interest are translated at the historical exchange rate.
l Items of owners’ interest at acquisition are translated at the historical spot

exchange rate applicable when the equity interest was acquired. This
conversion basis ensures that the goodwill or gain from a bargain purchase is
determined once and for all and that it does not change in future, purely
because exchange rates subsequently changed.
380
Foreign operations
l Increases in components of owners’ interest since acquisition to the

beginning of the current period are converted at the presentation currency
equivalent at the time at which these increases appeared in the previous
period’s conversion trial balance. This approach is essential to ensure that
the consolidated balances at the beginning of the current period agree with
the consolidated balances at the end of the previous period.
l Any goodwill arising on the acquisition of a foreign operation, and any

IFRS 3 fair value remeasurements to the carrying amounts of assets and
liabilities arising on the acquisition of that foreign operation, shall be treated
as assets and liabilities of the foreign operation. Thus, they shall be
expressed in the functional currency of the foreign operation and shall be
translated at the closing rate annually. This principle is illustrated in example
15.2.
l Common items between the parent and the foreign operation (for example,
dividends received/paid) are converted at the actual exchange rate applicable
to these items on the respective dates that they arose.
l Transfers to reserves for the current period by the foreign operation are
converted at the closing rate.
The cumulative amount of the exchange differences is presented in a

separate component of equity (the foreign currency translation reserve) until
disposal of the foreign operation.
When the exchange differences relate to a foreign operation that is
consolidated but not wholly-owned, accumulated exchange differences
arising from translation and attributable to non-controlling interests are
allocated to, and recognised as part of, non-controlling interests in the
consolidated statement of financial position.
After the translation of the results and financial position of a foreign

operation into the presentation currency in terms of chapter 15.8, and taking
into account the above, the incorporation of the results and financial position
of a foreign operation with those of the reporting entity follows normal
consolidation procedures, for example, the elimination of intragroup
balances and intragroup transactions of a subsidiary.
Basic conversion of the financial statements of a foreign
Example 15.1
subsidiary
1 P Ltd is a South African company and has the South African Rand (ZAR)
as its functional currency.
2 P Ltd acquired 80% of the issued shares of S Ltd, a foreign entity with FC
as its functional currency, at the incorporation of the latter on 1 January
20.11. From this date P Ltd had control over S Ltd in accordance with IFRS
10. The reporting date of the group is 31 December.
3 P Ltd recognised the equity investment in S Ltd in its separate records

4 The P Ltd group of companies elected to measure the non-controlling

interest at its proportionate share of the acquiree’s identifiable net assets at
5 Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
381
Chapter 15
The following are the abbreviated trial balances of P Ltd and S Ltd for each
of the financial periods 20.11, 20.12 and 20.13:
20.11 20.12 20.13
P LTD
Assets
Investment in S Ltd
80 000
80 000
80 000
Inventory
120 000
147 500
182 500
R200 000
R227 500
R262 500
Equity
100 000
100 000
100 000
Retained earnings: beginning of the period
75 000
100 000
127 500
Profit for the current period
25 000
27 500
25 000
Dividends received from S Ltd
– 10
000
R200 000
R227 500
R262 500
S LTD
Assets
Trade receivables
FC120 000
FC145 000
FC165 000
Equity
100 000
100 000
100 000
Retained earnings: beginning of the period
20 000
45 000
Profit for the current period
20 000
25 000
30 000
Dividend paid
– (10
000)
FC120 000
FC145 000
FC165 000
Comment
FC represents the foreign currency unit concerned.
Applicable exchange rates
FC1,00 = ZAR
1/1/20.11 1,00
Average for period 20.11
1,05
31/12/20.11 1,11
1,18
31/12/20.12 1,25
1,28
31/12/20.13 1,33
382
Foreign operations
Solution 15.1
The consolidated financial statements of P Ltd and its foreign subsidiary will
be drafted as follows for each of the periods concerned:
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER
20.11 20.12 20.13
ASSETS
Current assets
Trade receivables
253 200
328 750
401 950
Total assets
R253 200
R328 750
R401 950
Share capital
100 000
100 000
100 000
Retained earnings
116 800
167 900
223 620
Other components of equity
9 760
24 600
34 440
226 560
292 250
358 060
26 640
36 250
43 890
Total equity
253 200
328 750
401 950
R253 200
R328 750
R401 950
P LTD GROUP
EXTRACT FROM CONSOLIDATED STATEMENT OF PROFIT OR

LOSS
AND OTHER COMPREHENSIVE INCOME FOR THE YEAR

ENDED 31 DECEMBER
20.11 20.12 20.13
PROFIT FOR THE YEAR
46 000
57 000
63 400
Items that may be reclassified
subsequently to profit or loss:
Exchange differences arising on translating
foreign operations
12 200
18 550
12 300
Other comprehensive income for the year,
net of tax
12 200
18 550
12 300
FOR THE YEAR
R58 200
R75 550
R75 700
41 800
51 100
55 720
4 200
5 900
7 680
R46 000
R57 000
R63 400
51 560
65 940
65 560
6 640
9 610
10 140
R58 200
R75 550
R75 700
383
Chapter 15
Comments
a Exchange differences arising on translating foreign operations are

presented at 100% (i.e. not net of non-controlling interest) in the statement
of profit or loss and
other comprehensive income.
b The non-controlling interests in total comprehensive income can be

reconciled as follows:
20.11
20.12
20.13
Profit for the year
4 200
5 900
7 680
2 440
3 710
2 460
R6 640
R9 610
R10 140
P LTD GROUP
FOR THE YEAR ENDED 31 DECEMBER
Share
Retained
Total
capital
FCTR
earnings
Total NCI equity
Balance at
1 January 20.11
100 000
75 000
175 000
– 175 000
Acquisition
of subsidiary
––
––
20
000
20 000
Total comprehensive
Profit for the year

–
41 800
41 800
4 200
46 000
Other comprehensive
income –
9 760
9 760
2 440
12 200
Balance at
31 December 20.11
100 000
9 760 1116 800 226 560
26 640 253 200
Total comprehensive

Profit for the year
51 100
51 100
5 900
57 000
Other comprehensive
income
14 840
14 840
3 710
18 550
Balance at
31 December 20.12
100 000
24 600 2167 900
292 500
36 250
328 750
Dividends
(2 500)
(2 500)
Total comprehensive
Profit for the year
55 720
55 720
7 680
63 400
Other comprehensive
income
–9
840
9 840
2 460
12 300
Balance at
31 December 20.13
R100 000 R34 440 3R223 620 R358 060 R43 890 R401 950
FCTR = Foreign currency translation reserve
NCI = Non-controlling interests
(1) Test: 100 000 + 16 800 = 116 800
(2) Test: 127 500 + 40 400 = 167 900
(3) Test: 162 500 + 61 120 = 223 620
384
Foreign operations
Calculations
C1 Conversion trial balance of S Ltd at 31 December 20.11
FC Rate R
Trade receivables
120 000
R1,11
133 200
Share capital
(100 000)
R1,00
(100 000)
Profit for 20.11
(20 000)
R1,05
(21 000)
Exchange differences on translation:
31/12/20.11 (Balancing)
(12 200)
Comments
a All assets and liabilities as well as the total ownership interest of S Ltd are
converted at the closing rate (i.e. R1,11 = F1,00) on 31 December 20.11.
Always keep in mind
the accounting equation, i.e.:
Equity = Assets – Liabilities
b The exchange rate conversion difference, which is known as the foreign

currency translation reserve (FCTR), is brought about by the fact that
components of equity are not all converted at the closing rate, as assets and
liabilities.
l The acquisition date equity is converted at the historical exchange rate

applicable when the equity investment was made (e.g. R1,00 = F1,00). The
use of the historical exchange rate ensures that the goodwill or gain from a
bargain purchase on consolidation is determined once and for all, so that it
will not change in the future merely because the exchange rate has changed.
l Items of profit or loss for the current period are generally converted at the
average exchange rate for the period (e.g. R1,05 = F1,00).
c The net assets of the subsidiary increased during 20.11 by R33 200 (being
R133 200
less R100 000). R21 000 is attributable to the net profit for 20.11. The
balance of the increase, namely R12 200, arose because the Rand weakened
against the foreign monetary unit. The exchange differences on translation
are recognised in other comprehensive income. These movements in other
comprehensive income are then accumulated in equity under the heading of
foreign currency translation reserve. The foreign currency translation reserve
in essence represents a revaluation surplus originating from the revaluation
of P Ltd’s net investment in S Ltd. In this example, deferred tax has not been
provided for on the exchange differences accumulated in the foreign
currency translation reserve. Valid arguments also exist for the provision of
deferred tax on the translation gain or loss. Refer IAS 12 Income Taxes in
this regard.
385
Chapter 15
C2 Analysis of owners’ equity of S Ltd at 31 December 20.11

P Ltd 80%
Total
NCI
At
Since
i At acquisition date
Share capital
100 000
80 000
20 000
100 000
80 000
20 000
– Parent
100 000
80 000
20 000
• Current year:
Profit for the year
21 000
16 800
4 200
Exchange
differences
on translation
12 200
9 760
2 440
R133 200
R16 800 RE
R26 640
R9
760 FCTR
C3 Pro forma consolidation journal entries at 31 December 20.11
Dr
Cr
J1
Share capital (SCE)
100 000
80 000
20 000
Elimination of equity at acquisition date
J2
4 200
4 200
Recognition of non-controlling interests’ portion

in current year’s profit
J3
Non-controlling interests (OCI)
2 440
2 440
Recognition of non-controlling interests’ portion
in the exchange differences on translation
for current year
Comment
Note that the total exchange differences on translation of R12 200 do not get
journalised into the consolidated financial statements. It is included in the
converted Rand trial
balance which is combined with the parent’s trial balance on a line-by-line

basis. The only journal required in respect of the exchange differences on
translation is the allocation of the non-controlling interests’ portion (refer
journal 3).
386
Foreign operations
FC Rate R
Trade receivables
145 000
R1,25
181 250
Share capital
(100 000)
R1,00
(100 000)
Retained earnings 1/1/20.11 to 31/12/20.11
(20 000)
(21 000)
FCTR balance 31/12/20.11
(12 200)
Profit for 20.12
(25 000)
R1,18
(29 500)
Movement for 20.12 (Balancing)
–
(18 550)
A = Actual amount as per previous period’s consolidated statement of

financial position Comments
a All assets and liabilities (i.e. total ownership interest) are converted at the
closing rate (i.e. R1,25 = FC1,00) on 31 December 20.12.
b The exchange differences on translation for 20.12 occur because: l The

profit for 20.12 is translated at the average rate of exchange, while the
corresponding assets and liabilities are translated at the closing rate of
exchange on 31 December 20.12.
l The opening net assets for 20.12 are translated at the closing rate of
exchange on 31 December 20.12, which differs from the previous 20.11
closing rate of exchange.
c Note that the balance of the foreign currency translation reserve as at the
end of 20.11 (i.e. R12
200) is taken up in the conversion trial balance at
31 December 20.12.
P Ltd 80%
Total
NCI
At
Since
Share capital
100 000
80 000
20 000
100 000
80 000
20 000
– Parent
––
100 000
80 000
20 000
Retained earnings
21 000
16 800
4 200
Foreign currency translation reserve
12 200
9 760
2 440
• Current year:
Profit for the year
29 500
23 600
5 900
Exchange differences on translation
18 550
14 840
3 710
R181 250
R40 400 RE
R36 250
R24 600 FCTR
387
Chapter 15
Dr
Cr
J1
Share capital (SCE)
100 000
80 000
20 000
J2
4 200
FCTR (SCE)
2 440

6 640
Recognition of non-controlling interests’ portion in
retained earnings and FCTR to beginning of current
year
J3
5 900
5 900
current year’s profit
J4
3 710
3 710
current year’s FCTR movement
FC Rate R
Trade receivables
165 000
R1,33
219 450
Share capital
(100 000)
R1,00
(100 000)
Retained earnings: 1/1/20.11 to 31/12/20.12
(45 000)
(50 500)
(12 200 + 18 550) –
(30 750)
Profit for 20.13
(30 000)
R1,28
(38 400)
Dividend paid
10 000
12 500
Movement for 20.13 (Balancing)
(12 300)
388
Foreign operations
Comments
a All assets and liabilities (i.e. total ownership interest) are converted at the
closing rate (i.e. R1,33 = FC1,00) on 31 December 20.13.
b The exchange differences on translation for 20.13 occur because: l the

profit for 20.13 is translated at the average rate of exchange, while the
corresponding assets and liabilities are translated at the closing rate of
exchange on 31 December 20.13; and
l the opening net assets for 20.13 are translated at the closing rate of
exchange on 31 December 20.13, which differs from the previous 20.12
closing rate of exchange.
c Note that the balance of the foreign currency translation reserve at the end
of 20.12
(i.e. R30 750) has been directly taken up in the conversion trial balance at 31
December 20.13.
d The dividends paid by the subsidiary are converted to an appropriate

equivalent by scaling up the actual amount received by P Ltd to 100% (R10
000/0,8).
e The net assets of the subsidiary increased during 20.13 by R38 200 (R219
450 –
R181 250); R25 900 (R38 400 – R12 500) of which is attributable to
retained earnings for 20.13. The balance of the increase, namely R12 300,
occurred as a result of the weakening of the Rand against the foreign
currency unit.
Total
P Ltd 80%
NCI
At
Since
Share capital
100 000
80 000
20 000
100 000
80 000
20 000
– Parent
100 000
80 000
20 000
Retained
earnings
50 500
40 400
10 100
Foreign currency translation
reserve (12 200 + 18 550)
30 750
24 600
6 150
• Current year:
Profit for the year
38 400
30 720
7 680
Dividend
(12 500)
(10 000)
(2 500)
12 300
9 840
2 460
R219 450
R61 120 RE
R43 890
R34 440 FCTR
389
Chapter 15
Dr
Cr
J1
Share capital
100 000
Investment in S Ltd
80 000
20 000
J2
Retained earnings (SCE) (4 200 + 5 900) 10
100
FCTR
(SCE)
(3 710 + 2 440)
6 150
16 250
retained earnings and FCTR to beginning of current
year
J3
7 680
7 680
J4
2 460
2 460
current year’s FCTR movement

J5
Dividend received (P/L) (P’s portion)
10 000
2 500
Dividend paid (SCE)
12 500
Elimination of intragroup dividend in consolidated
390
Foreign operations
The impact of goodwill and IFRS 3 fair value
Example 15.2
remeasurements on foreign operations
2 P Ltd acquired 75% of S Ltd, a foreign entity with FC as its functional

currency, on 1 January 20.11 for FC3 000. At that date, S Ltd had share
capital of FC1 000 and retained earnings of FC2 000. From 1 January 20.11,
with IFRS 10 Consolidated Financial Statements. All of S Ltd’s assets
and liabilities were considered to be fairly valued on acquisition date, except
for land which was undervalued by FC500.
3 S Ltd’s retained earnings increased by FC300 in 20.11 and FC400 in
20.12.
4 During the 20.12 financial year, P Ltd sold inventory to S Ltd. On 31

December 20.12, inventory purchased from P Ltd amounting to FC20 was
still on hand. Total sales from P Ltd to S Ltd for the 20.12 financial year
amounted to FC30.
P Ltd sells inventory at a mark-up of 20% on cost.
5 P Ltd recognised the equity investment in S Ltd in its separate records

6 The P Ltd group elected to measure the non-controlling interest at its

proportionate share of the acquiree’s identifiable net assets at the acquisition
date. Ignore any effects of taxation.
7 It is the accounting policy of S Ltd to measure all items of property, plant

and equipment according to the cost model in terms of IAS 16 Property,
Plant and Equipment.
8 Ignore any effects of taxation.
9 The following exchange rates are applicable:
FC1,00 = ZAR
1/1/20.11 2,00
Average 20.11
2,10
31/12/20.11 2,20
Average 20.12
2,40
31/12/20.12 2,50
Comments
Remember goodwill and the fair value remeasurements are deemed to be

part of the foreign entity (IAS 21.47).
391
Chapter 15
Solution 15.2
(FC)
(R)
(R) 75% (R) 75% (R) 25%
Rate
100%
100%
At
Since
NCI
i At
acquisition
Share capital
1 000
R2,00
2 000
1 500
500
Retained earnings
2 000
R2,00
4 000
3 000
1 000
Fair
value
remeasure-
ment (land)
500
R2,00
1 000
750
250
3 500
R2,00
7 000
5 250
1 750
Equity represented
by goodwill – Parent
375
R2,00
750
750
3 875
7 750
6 000
1 750
• To beginning of current
year:
Retained earnings
300
R2,10
630
472
158
increase 20.11
(average)
FCTR
(excluding goodwill)
730
548 182
FCTR (goodwill only)
175
75
4 175
R2,20
9 185
1 095
2 090
• Current
year:
Retained earnings
400
R2,40
960
720
240
increase 20.12
(average)
Exchange differences
on translation
1 180
885
295
on translation
(goodwill only)
2113
113 –
4 575
R2,50 R11 438
R2 813
R2 625
392
Foreign operations
Comments
The following steps are followed in calculating the exchange differences on

translation of R730 for the 20.11 financial year:
Step 1: Translate the foreign currency at acquisition owners’ equity of FC3

500 to the presentation currency using the rate applicable at acquisition.
Step 2: Calculate the goodwill in the presentation currency and convert back
to the foreign currency as IAS 21 states goodwill is treated as an asset of the
foreign operation.
Step 3: Translate the profit for the 20.11 financial year to the presentation
currency.
Step 4: Remeasure goodwill to the closing rate at the end of the 20.11
financial year (see below).
Step 5: Translate the year end total foreign currency owners’ equity of FC4
175 to the presentation currency using the closing rate.
Step 6: The exchange differences on translation for the 20.11 financial year
will be the balancing amount in the presentation currency column (R9 185 –
R75 – R630 –
R7 750).
The same principle will apply when calculating the exchange differences on
translation of R1 180 for the 20.12 financial year.
Goodwill remeasurement calculation (method only used in respect of foreign

entities)
FC
Rate
At acquisition date
FC375
R2,00
750
FCTR 20.11
175
31/12/20.11
FC375
R2,20
825
Exchange differences on translation: 20.12
2113
31/12/20.12
FC375
R2,50
R938
Amount of non-controlling interest: IFRS 3.32(a)(ii)
1 750
7 750

date: IFRS 3.32(b)
(7 000)
R750
393
Chapter 15
C3 Proof of foreign currency translation reserve balance at 31

December 20.12
FC Rate R
Share capital
(1 000)
R2
(2 000)
Land remeasurement
(500)
R2
(1 000)
Retained earnings:
At acquisition
(2 000)
R2
(4 000)
Profit
for
20.11
(300)
R2,10
(630)
Profit
for
20.12
(400)
R2,40
(960)
Net assets
14 200
R2,50
10 500
1(1 910)
(1) Balancing
Comments
The foreign currency translation reserve of R1 910 agrees to the year end
balance of the reserve and includes the opening balance of R730 as well as
the current year
movement of R1 180.
Dr
Cr
R
R
J1
Land (SFP)
1 000
1 000
Fair value remeasurement on land
J2
Share capital (SCE)
2 000
4 000
1 000
Goodwill
(SFP)
750
1 750
Investment in S Ltd (SFP) (at cost price)

6 000
Elimination of acquisition date equity
J3
158
158
Recognition of non-controlling interests’ portion of
retained earnings since acquisition to beginning of
current year
J4 FCTR
(SCE)
182
182
FCTR since acquisition to beginning of current year
continued
394
Foreign operations
Dr
Cr
J5
240
240
J6
295
295
Allocate non-controlling interests’ portion of current
year’s FCTR
J7 Goodwill
(SFP)
(R938 – R750) 188
FCTR
(SCE)
75
Exchange differences on translation (OCI)
113
Remeasure goodwill to closing rate at reporting date –
the non-controlling interest does NOT share in this
portion of the FCTR (comment (b))
J8 Land
(SFP)
250
FCTR
(SCE)
(FC500 × (R2,20 – R2,00)) 100
(FC500 × (R2,50 – R2,20))
150
Recording effect of movement in exchange rate i.r.o.
fair value remeasurement on land (comment (a))

J9 Revenue
(P/L)
(FC30 × R2,40)
72
Cost of sales (P/L)
72
Elimination of intragroup sales
J10 Cost of sales (P/L) (FC20 × 2,50 × 20/120)
Inventory (SFP)
Elimination of unrealised profit on inventory
(comment (c))
395
Chapter 15
Comments
a Land is not presented on the subsidiary’s FC-denominated trial balance

(i.e. before conversion) at the remeasured amount. Therefore, the FCTR that
arose on the
subsidiary’s Rand-denominated trial balance (i.e. after conversion and before
consolidation) was not completely correct from a group perspective, because

the
pre-conversion trial balance does not take into account any pro forma
adjustments that are required at group level (e.g. fair value remeasurement
on land i.t.o. IFRS 3).
This principle is very similar to an asset that is remeasured on a pro forma

basis at group level, where the subsequent depreciation is then also corrected
at group level on a pro forma basis. The non-controlling interest does share
in this FCTR
movement of R250 and this is already taken into account in the non-
controlling
interest amounts of R182 (prior-period FCTR) and R295 (current-period

exchange
difference). This is so because the FCTR movements in the analysis above

are
calculated on a net equity value inclusive of the effect of the remeasurement

on land.
b In this example, the non-controlling interest is measured at the

proportionate share of the acquiree’s identifiable net assets at acquisition.
When this method is followed, the non-controlling interest does NOT share
in the FCTR on goodwill. However, where the non-controlling interest is
measured at fair value at acquisition, the non-controlling interest will have a
share in the FCTR on goodwill. This share is based on the profit-sharing
(ownership interest) ratio.
c Journal 10 is eliminating the unrealised profit included in the inventory

balance at
year end. As the unrealised profit is only eliminated at year end and not
throughout the year, the closing rate (R2,50) will be used to translate the
journal to the functional currency. There are, however, different schools of
thought on this principle. It can
also be argued that the elimination of any intragroup transactions will follow
the same translation principle, as discussed in chapter 15.8 above: l assets
and liabilities shall be translated at the closing rate at the date of the
statement of financial position;
l income and expenses shall be translated at the exchange rate applicable at

the date of the transaction or an average exchange rate for the period; and l
all resulting exchange differences shall be recognised in the foreign currency
translation reserve (FCTR)) in other comprehensive income.
396
Foreign operations
Assuming that P
Ltd measures the non-controlling interest at fair value at the
acquisition date and that the fair value of the non-controlling interest is R1
800 at that date, the analysis of owners’ equity of S Ltd and pro forma
consolidation journal entries would be as follows:
(FC)
(R)
(R) 75% (R) 75% (R) 25%
Rate
100%
100%
At
Since
NCI
I At acquisition
Share capital
1 000
R2,00
2 000
1 500
500
Retained earnings
2 000
R2,00
4 000
3 000
1 000
Fair value remeasurement
(land)
500
R2,00 1
000
750
250
3 500
R2,00
7 000
5 250
1 750
– Parent and NCI
400
R2,00
800
750
50
3 900
7 800
6 000
1 800
Retained
earnings
movement
R2,10
20.11 300 (average)
630
472
158
FCTR (excluding goodwill)
730
548
182
80
60
20
4 200
R2,20
9 240
1 080
2 160
• Current year:
Retained
earnings
movement
400
R2,40
960
720
240
20.12
(average)
Exchange
differences
on translation
1 180
885
295
Exchange
differences
on translation
(goodwill only)
120
90
30
FC4 600
R2,50 R11 500
R2 775
R2 725
Comment
Goodwill remeasurement calculation (method only used in respect of foreign

entities)
FC
Rate
At acquisition date
FC400
R2,00
800
FCTR 20.11
80
31/12/20.11
FC400
R2,20
880
120
31/12/20.12
FC400
R2,50
R1 000
397
Chapter 15
1 800
7 800

date: IFRS 3.32(b)
(7 000)

R800
Dr
Cr
J1 Land (SFP)
1 000
1 000
Fair value remeasurement on land
J2 Share capital (SCE)
2 000
4 000
1 000
Goodwill
(SFP)
800
1 800
Investment in S Ltd (SFP) (at cost price)
6 000
Elimination of acquisition date equity
J3 Retained earnings (SCE)
158
158
retained earnings since acquisition to beginning of
current year
J4 FCTR
(SCE)
202
Non-controlling interests (SFP/SCE) (182 + 20)
202
FCTR since acquisition to beginning of current year

240
240
J6 Non-controlling interests (OCI)
325
Non-controlling interests (SFP/SCE) (295 + 30)
325
current year’s FCTR
J7 Goodwill
(SFP)
(1 000 – 800) 200
FCTR
(SCE)
80
120
Remeasure goodwill to closing rate at reporting date –

the non-controlling interests does share in this portion of the FCTR
(comment (a))
continued
398
Foreign operations
Dr
Cr
J8
Land (SFP)
250
FCTR
(SCE)
(FC500 × (R2,20 – R2,00))
100
(FC500 × (R2,50 – R2,20))
150
Recording effect of movement in exchange rate i.r.o.
fair value remeasurement on land

J9
Revenue (P/L) (FC30 × R2,40)
72
Cost of sales (P/L)
72
Elimination of intragroup sales
J10 Cost of sales (P/L) (FC20 × 2,50 × 20/120)
Inventory (SFP)
Elimination of unrealised profit on inventory
Comment
The non-controlling interest does share in the FCTR on goodwill and this is
already taken into account in the non-controlling interest amounts of R202
(R182 + R20) and
R325 (R295 + R30).
15.10 Foreign operation and reporting entity have different reporting
dates
When the financial statements of a foreign operation are as of a date

different from that of the reporting entity, the foreign operation often
prepares additional statements as of the same date as the reporting entity’s
financial statements. When this is not done, IFRS 10 Consolidated
Financial Statements allows the use of a different reporting date, provided
that the difference is no greater than three months and adjustments are made
for the effects of any significant transactions or other events that occur
between the different dates. In such a case, the assets and liabilities of the
foreign operation are translated at the exchange rate on the statement of
financial position date of the foreign operation. Adjustments are made for
significant changes in exchange rates up to the statement of financial
position date of the reporting entity in accordance with IFRS 10.
The same approach is used in applying the equity method to associates and
joint
ventures in accordance with IAS 28 Investments in Associates and Joint

Ventures.
Exchange differences arising on a monetary item that forms part of a

reporting entity’s net investment in a foreign operation shall be recognised in
profit or loss in the separate financial statements of the reporting entity or
the individual financial statements of the foreign operation, as appropriate.
However, in the consolidated financial statements of the reporting entity that
include the foreign operation, such an exchange difference shall be
recognised in other comprehensive income (foreign currency translation
reserve).
Thus, the pro forma consolidation journals would normally include a

reclassification journal that reclassifies the exchange differences from profit
or loss to other comprehensive income.
399
Chapter 15
Loan to subsidiary as part of the net investment in a foreign
Example 15.3
operation
2 P Ltd obtained a controlling interest in S Ltd, a foreign subsidiary, with FC

as its functional currency, at the beginning of the financial year.
3 As part of the purchase agreement P Ltd granted a loan to S Ltd to the

value of FC1
000. The loan bears interest at a market-related interest rate of 10% per
annum, payable annually. The repayment of the loan is, however, not
expected in the foreseeable future. P Ltd regarded the loan as part of its net
investment in S Ltd.
4 According to P Ltd’s accounting policy, only the capital amount of the loan
amount is included as part of the net investment in a foreign operation.
FC1,00 = ZAR
At acquistion
2,00
Average for period
2,50
Year end
3,00
The journal entries in the separate accounting records of P Ltd would be as

follows: Dr
Cr
R
Initial recognition
J1 Loan to subsidiary (SFP) (1 000 × 2,00) 2
000
Bank (SFP)
2 000
Initial recognition of the loan at the spot exchange rate
Year end
J1 Bank
(SFP) (1 000 × 10% × 3,00) 300
Interest received (P/L) (100 × 2,50)
250
Foreign exchange differences (P/L)
50
Recognition of interest received on foreign loan
J2 Loan to subsidiary (SFP) ((1 000 × 3,00) – 2 000) 1
000
1 000
Restatement of foreign loan to the spot exchange rate
400
Foreign operations
The journal entries in the individual accounting records of S Ltd would be as

follows: Dr
Cr
FC
FC
Initial recognition
J1
Bank (SFP)
1 000
Loan from parent (SFP)
1 000
Initial recognition of the loan
Year end
J1
Interest paid (P/L) (1 000 × 10%) 100
Bank
(SFP)
100
Recognition of interest paid on loan from parent
The conversion trial balance of S Ltd at year end
FC Rate R
Interest paid
100
R2,50
250
Loan from parent
(1 000)
R3,00
(3 000)
Equity (Balancing)
900
R3,00
2 700
Year end (Balancing)
50
–
–
The following pro forma consolidation journal entries should be processed at

year end: Dr
Cr
J1 Foreign exchange differences (P/L)
1 000
1 000
Reclassification of the exchange differences that relate
the net investment in the foreign operation
J2 Interest received (P/L)
250
Interest
paid (P/L)
250
Elimination of intragroup interest received and paid
J3 Loan from parent (SFP)
3 000
Loan to subsidiary (SFP)

3 000
Elimination of intragroup loan
Assume the same information as stated above, except that the loan granted
was denominated in the functional currency of the parent. The loan to S
Ltd amounted to R2 000.
401
Chapter 15
The journal entries in the separate accounting records of P Ltd would be as

follows: Dr
Cr
Initial recognition
J1
2 000
Bank (SFP)
2 000
Initial recognition of the loan
Year end
J1 Bank
(SFP) (2 000 × 10%) 200

Interest received (P/L)
200
Recognition of interest received on foreign loan
The journal entries in the individual accounting records of S Ltd would be as

follows: Dr
Cr
FC
FC
Initial recognition
J1 Bank
(SFP)
(2 000/2,00) 1
000
1 000
Initial recognition of the loan at the spot exchange
rate
Year end
J1
Interest paid (P/L) ((2 000 × 10%)/2,50) 80
Bank
(SFP)
((2 000 × 10%)/3,00)
67
13
Recognition of interest paid on loan from parent
J2
Loan from parent (SFP) ((2 000/3,00) – 1 000)
333
333
Restatement of foreign loan to the spot exchange
rate
The conversion trial balance of S Ltd at year end:
FC Rate R
Interest expense
80
R2,50
200
Foreign exchange differences on interest

(13)
R2,50
(33)
Foreign exchange differences on loan
(333)
R2,50
(832)
Loan from parent (1 000 – 333) (667)
R3,00
(2
000)
Equity (Balancing)
933
R3,00
2 799
Year end (Balancing)
(134)
–
–
402
Foreign operations
The following pro forma consolidation journal entries should be processed at

year end: Dr
Cr
J1
832
832
Reclassification of the exchange differences that relate
the net investment in the foreign operation
J2
Interest received (P/L)
200
Interest paid (P/L)
200
Elimination of intragroup interest received and paid

J3
2 000
2 000
Elimination of intragroup loan
Comments
In the example above, P Ltd’s accounting policy is to include only the capital
amount of the loan (not the interest component) amount as part of the net
investment in a foreign operation. There are, however, different schools of
thought on this principle. It can also be argued that the interest is considered
part of the net investment in a foreign operation. If this is the case, the
exchange differences on translation of the interest to the presentation
currency will also be reclassified to other comprehensive income in
accordance with IAS 21.32 upon consolidation. It would be sensible to
disclose what is included (capital and/or interest) in the net investment in a
foreign operation in the accounting policy of the group.
15.12 Foreign operations – Associates and joint ventures
When a parent has an investment in a foreign operation in the form of an

associate or joint venture, the translation of the foreign operation follows the
same guidelines as discussed in chapter 15.8. Assets and liabilities shall be
translated at the closing rate and income and expenses shall be translated at
the exchange rate applicable at the date of the transaction or an average rate.
The resulting exchange differences shall be recognised as a separate
component of equity (commonly referred to as the foreign currency
translation reserve (FCTR)) in other comprehensive income until such time
as the associates or joint ventures are disposed of.
Example 15.4
Foreign operation – Associate
2 P Ltd obtained a 30% interest in A Ltd, a foreign entity with FC as its

functional currency, on 1 January 20.15 for FC3 000 and as a result obtained
significant influence over A Ltd from that date.
3 At acquisition date A Ltd’s net asset value amounted to FC8 000.
4 For the year ended 31 December 20.15, A Ltd made a net profit of FC1
500 and a dividend of FC800 was declared and paid on 30 November 20.15.
403
Chapter 15
5 P Ltd accounts for investments in associates at cost in terms of IAS

27.10(a).
FC1,00 = ZAR
1 January 20.15
2,00
30 November 20.15
2,80
Average for period
2,50
31 December 20.15
3,00
The journal entry in the separate accounting records of P Ltd would be as

follows: Dr
Cr
1 January 20.15
J1 Investment in associate (SFP) (3 000 × 2) 6
000
Bank (SFP)
6 000
Initial recognition of investment in associate at the
sport exchange rate
30 November 20.15
J2 Bank
(SFP)
(800 × 30% × 2,80) 672
672
Recognition of dividend received
Comments
The dividend received and paid will be translated at spot exchange rate on
the date of payment.
The pro forma consolidation journal entries would be as follows: Dr
Cr
31 December 20.15
J1 Investment in associate (SFP) (1 500 × 30% × 2,50) 1
125
1 125
Recognition of share of profit of foreign associate
J2 Dividend received (P/L)
672
672
Elimination of intragroup dividend received
J3 Investment in associate (SFP)
3 177
3 177
Remeasure the investment in associate to closing rate
404
Foreign operations
(FC)
(FC)
(R) 30% (R) 30%
Rate
100%
30%
At
Since
i At acquisition
Net asset value
8 000
2 400
R2,00
4 800
Investment in A Ltd
(3 000)
R2,00
(6 000)
Goodwill
(600) R2,00
(1
200)
Current
year:
Profit for the year
1 500
450
R2,50
125
(average)
Dividends
(800)
(240)
R2,80
(672)
700
210
453
(OCI)
23 177
1F3 210
R3,00
R9 630
(1) FC3 000 + FC210
(2) R9 630 – R453 – R6 000
Comments
The difference between translating a foreign subsidiary and a foreign

associate is that when the foreign operation is an associate, the net assets at
year end are not translated to the presentation currency but rather the initial
investment and since acquisition reserves of the associate. This is because
associates are accounted for using the equity method. The equity method is a
method of accounting whereby the investment is initially recognised at cost
and adjusted thereafter for the post-acquisition change in the investor’s share
of the investee’s net assets.
When equity accounting, the goodwill is not accounted for separately as it is

included in the initial investment in A Ltd. Therefore, no additional
exchange difference on translation adjustment is required for goodwill, as is
the case for subsidiaries.
15.13 Disposal of a foreign operation
On the disposal of a foreign operation, the cumulative amount of the

exchange differences relating to that foreign operation, recognised in other
comprehensive income and accumulated in the separate component of
equity, shall be reclassified from equity to profit or loss (as a reclassification
adjustment) when the consolidated gain or loss on disposal is recognised.
IAS 1 Presentation of Financial Statements addresses the issue of
reclassification adjustments.
The following are accounted for as a disposal of a foreign operation: l the

disposal of an entity’s entire interest in a foreign operation; l the partial
disposal of an entity’s interest in a foreign operation (an interest in the
former subsidiary, associate or jointly controlled entity is retained) and:
• the entity loses control of a subsidiary that includes a foreign operation;

405
Chapter 15
• the entity loses significant influence over an associate that includes a

foreign operation; and
• the entity loses joint control over a jointly controlled entity that includes a
foreign operation.
Therefore, on the disposal of a foreign operation, the cumulative amount of

the exchange differences relating to that foreign operation shall be
reclassified from equity to profit or loss as a reclassification adjustment.
When disposing of a foreign subsidiary, the cumulative amount of the
exchange differences relating to that foreign operation that have been
attributed to the non-controlling interests shall be derecognised, but
shall not be reclassified to profit or loss. This means that the cumulative
amount of exchange differences reclassified to profit or loss will be done on
a net basis, net of the non-controlling interests. Example 15.5 illustrates this
principle.
An entity can also partially dispose of its interest in a foreign operation
without losing control, significant influence or joint control. This would
be any reduction in an entity’s ownership in a foreign operation, except those
reductions referred to above as disposals. Partial disposals therefore include,
amongst others, changes in a parent’s ownership interest in a subsidiary that
do not result in a loss of control.
Upon the partial disposal of a subsidiary that includes a foreign operation,

the entity is required to re-attribute the proportionate share of the cumulative
amount of the exchange differences to the non-controlling interests in that
foreign operation.
Example15.6 below illustrates this principle. In any other partial disposal of

a foreign operation (e.g., a branch), the entity is required to reclassify to
profit or loss only the proportionate share of the cumulative amount of the
exchange differences.
An entity may dispose (or partially dispose) of its interest in a foreign

operation through sale, liquidation, repayment of share capital or
abandonment of all, or part of, that entity. A write-down of the carrying
amount of a foreign operation does not constitute a partial disposal.
Accordingly, no part of the foreign exchange gain or loss recognised in other
comprehensive income is reclassified to profit or loss at the time of a write-
down.
406
Foreign operations
Disposal of a foreign operation resulting in a loss of control
Example 15.5
(NCI is measured at fair value at the acquisition date)

20.17
P Ltd and
sub-
sidiaries
A Ltd
(consoli-
dated)
FC
ASSETS
500 000
7 000
Investment in A Ltd – 4 000 shares at cost price
50 000
Inventory
200 000
12 750
Total assets
R750 000
FC19 750
400 000
10 000
Retained earnings
250 000
9 750
100 000
R750 000
FC19 750

P Ltd and
subsidiaries
A Ltd
(consoli-
dated)
R FC
Revenue
500 000
30 000
Cost of sales
(210 000)
(20 000)
Gross profit
290 000
10 000
36 000
10 000
Profit before tax
336 000
10 000
Income tax expense

(146 000)
(5 250)
PROFIT FOR THE YEAR
190 000
4 750
R190 000
FC4 750
150 000
4 750
40 000
R190 000
FC4 750
407
Chapter 15
Retained
earnings
P Ltd and
sub-
sidiaries
A Ltd
(consoli-
dated)
FC
150 000
7 500
Profit for the year

150 000
4 750
(50 000)
(2 500)
R250 000
FC9 750
as its functional currency. P Ltd purchased 8 000 shares in A Ltd, a foreign
subsidiary with FC as its functional currency, on 1 January 20.13 for R100
000. The analysis of owners’ equity of A Ltd, calculated correctly up to 31
December 20.16, is as follows: Analysis of owners’ equity of A Ltd
(FC)
(R)
(R) 80% (R) 80% (R) 20%
Rate
100%
100%
At
Since
NCI
i At
acquisition
Share capital
10 000
R8,00 80 000
64 000
16 000
Retained earnings
2 500
R8,00 20 000
16 000
4 000
12 500
R8,00 100 000
80 000
20 000
Equity represented by good-
will – Parent and NCI
3 250
R8,00 26 000
20 000
6 000
15 750
126 000 100 000
26 000
• Current year:
Retained earnings
5 000 (average) 42 250
33 800
8 450
FCTR (excluding goodwill)
15 250
12 200
3 050
3 250
2 600
650
31 December 20.16
20 750
R9,00 186 750
48 600 38 150
2 On 31 March 20.17, P Ltd disposed of 4 000 shares in A Ltd for R86 000.
P Ltd exercised significant influence over the financial and operating policy
decisions of A Ltd from that date. The fair value of the remaining investment
by P Ltd in A Ltd was R80 000 at the date of disposal of the interest.
3 A Ltd’s profit and tax for 20.17 accrued evenly.
4P
Ltd accounted for the investment in A
Ltd at cost in its separate financial
statements.
408
Foreign operations
5 P Ltd elected to measure the non-controlling interest at fair value at the

date of acquisition.
Operations until the date of disposal thereof and A Ltd does not represent a
separate major line of business or geographical area of the group.
7 None of P Ltd’s subsidiaries declared or paid a dividend during the 20.17

financial year.
8 The company tax rate is 28%. Ignore capital gains tax consequences.
Assume there are no deferred tax consequences on the exchange differences
on translation of the foreign operation.
FC1,00 = ZAR
31/12/20.16
9,00
Average 1/1/20.17–31/3/20.17
9,20
31/3/20.17
9,50
Average 1/4/20.17–31/12/20.17
9,80
31/12/20.17 10,00
Solution 15.5
The consolidated financial statements, incorporating the results of A Ltd in

accordance with the equity method, for the year ended 31 December 20.17
are prepared as follows: P LTD GROUP
ASSETS
Non-current assets
500 000
Investment in associate (50 000(remaining cost) + 30 000(J1) + 8 460(J3))

or (80 000(fair value of retained investment after loss of control) + 8
460(since)) 88 460
588 460
Current assets
Inventory (P and other subsidiaries) 200
000
Total assets
R788 460
Share capital
400 000
965
4 495
688 460
Non-controlling interests (i.r.o. other subsidiaries)

100 000
Total equity
788 460
460
409
Chapter 15
P LTD GROUP

OTHER

DECEMBER 20.17
Revenue (500 000(P) + 69 000(A))
569 000
Cost of sales (210 000(P) + 46 000(A))
(256 000)
Gross profit (290 000(P) + 23 000(A))
313 000
Other income
(71(gain on disposal of interest) + 23 385(reclassification adjustment)) 23

456

13 965
Profit before tax
350 421
Income tax expense (146 000(P) + 12 070(A)) (158
070)
PROFIT FOR THE YEAR
192 351
Items that may be reclassified subsequently to profit or loss: Exchange

differences on translating foreign operations
10 731
Less: Reclassification adjustment
(23 385)
4 495
R184 192
150 165
Non-controlling interests (40 000(other) + 2 186(A))

42 186
R192 351
139 860
Non-controlling interests (42 186 + 1 821(A) + 325(A))
44 332
R184 192
410
Foreign operations
P LTD GROUP
Share
Retained
Total
FCTR Total NCI
capital
earnings
equity
Balance at
1 Jan 20.17
400 000 1183 800 214 800
598 600
398 150
696 750
Changes in equity
for 20.17
Dividends
(50 000)
– (50
000)
– (50
000)
Total comprehen-
sive income for
the year:
Profit for the year
–
150 165
150 165
42 186
192 351
Other comprehen-
sive income
– 4(10 305)
(10 305)
52 146
(8 159)
Derecognition of
non-controlling
interests
(42 482)
(42 482)
Balance at
31 Dec 20.17
R400 000 R283 965
R4 495 R688 460 R100 000
R788 460
(1) 150 000(P) + 33 800(A) = 183 800
(2) 12 200 + 2 600 = 14 800
(3) 100 000 + 42 482 – 2 146 – 42 186 = 98 150
(4) 139 860 – 150 165 = 10 305
(5) 44 332 – 42 186 = 2 146
(6) The cumulative amount of the exchange differences has been reclassified
from equity to profit or loss as a reclassification adjustment, on a net basis,
in terms of IAS 21.48 and IAS 21.48B. The balance of R4 495 remaining in
the FCTR arises subsequent to the loss of control in the period in which A
Ltd is an associate. The originating entry for this is the share of other
comprehensive income of the associate presented in the statement of profit
or loss and other comprehensive income.
411
Chapter 15
Calculations
C1 Analysis of owners’ equity of A Ltd – as subsidiary
(FC)
(R)
(R) 80% (R) 80% (R) 20%
Rate
100%
100%
At
Since
NCI
i At acquisition
Share capital
10 000
R8,00
80 000
64 000
16 000
Retained earnings
2 500
R8,00
20 000
16 000
4 000
12 500
R8,00
100 000
80 000
20 000
goodwill –Parent and
NCI 3
250
R8,00
26 000
20 000
6 000
15 750
126 000 100 000

26 000
year:
Retained earnings
5 000
42 250
33 800
8 450
FCTR
15 250
12 200
3 050
3 250
2 600
650
31 December 20.16
20 750
R9,00
186 750
48 600
38 150
• Current year:
Profit: first three months
11 188 R9,20
10 930
8 744
2 186
on translation
9 106
7 285
1 821
on translation
(goodwill only)
1 625
1 300
325
31 March 20.17
21 938
R9,50
208 411
65 929
42 482
iii Loss of control over
subsidiary
Derecognise assets and
liabilities (IFRS 10.B98) (21 938)
(208 411) (100 000) (65 929) (42 482)
(1) FC4 750/12 × 3 = FC1 188
412
Foreign operations
C2 Analysis of owners’ equity of A Ltd – as associate
(FC)
(FC)
(R) 40% (R) 40%
Rate
100%
40%
At
Since
i At
acquisition
value
8 421
R9,50
80 000
• Current year:
Profit: last nine months

13 562 1
425
R9,80
13
965
Dividend
(2 500) (1
000)
R10,00
(10
000)
965
24 495
31 December 20.17
FC8 846 R10,00
R88
460
(1) FC4 750 – FC1 188 = FC3 562

(2) R88 460 – R3 965 – R80 000 = R4 495 as balancing amount Comments
a If a parent loses control, as is the case with A Ltd here, the gain or loss on
disposal of interest would be calculated as follows using IFRS 10.B98:
Derecognise assets (incl. goodwill) and liabilities on date control is lost (208
411)
Derecognise non-controlling interest
42 482
86 000
Fair value of investment retained
80 000
R71
b By means of the relevant amounts (as contained in the analysis of the

ownership interest of A Ltd), the gain on disposal of shares in A Ltd can be
analysed as follows: Proceeds on disposal of interest
86 000
Attributable net assets disposed of [(208 411 – 26 000(GW)) × 40%]
(72 964)
13 036
Goodwill realised (only for the parent company) (20 000 × 40/80) (10 000)
3 036
Remeasurement gain (80 000 versus (72 965 + 10 000))
(2 965)
Capital (consolidated) gain on disposal of the interest
R71
c In this example, A Ltd had post-acquisition reserves comprising FCTR and

retained earnings. Any balance of the FCTR would, on the date of the
disposal, be reclassified through other comprehensive income to profit or
loss on a net basis. See journal entry 2. If A Ltd had other post-acquisition
reserves, any balance of these reserves would, on the date of the disposal, be
transferred to retained earnings (e.g.
revaluation surplus or mark-to-market reserve).
413
Chapter 15
26 000
126 000

date: IFRS 3.32(b)
(100 000)
R26 000
Dr
Cr
J1
30 000
Gain on disposal of interest (P/L) (per P) (comment (a)) 36
000
Cost of sales (P/L) (20 000 × 3/12 × R9,20) 46
000
Non-controlling interest (P/L) (first 3 months)
2 186
Income tax expense (P/L) (5 250 × 3/12 = 1 312 × R9,20) 12
070
Non-controlling interest (OCI) (1 821 + 325) 2
146
Revenue (P/L) (30 000 × 3/12 × R9,20)
69
000
Retained earnings (SCE) (opening balance)
33 800
FCTR (SCE) (opening balance)
14 800
Gain on disposal of interest (P/L) (group context)
71
Exchange differences on translation of foreign
operation (OCI) (9 106 + 1 625)
10 731
Consolidating the relevant amounts in respect of
period when A Ltd was a subsidiary
J2
Reclassification adjustment (OCI) (comment (b)) 23
385
Gain on disposal of interest (P/L)
23 385
Reclassification of realised exchange gains to P/L
J3

42 482
Non-controlling interests (SFP/SCE) (opening balance
in equity)
38 150
interest in profit)
2 186
Non-controlling interests (SFP/SCE) (1 821 + 325)
(current year’s exchange differences on translation)
2146
interests in equity for A Ltd (comment (c))
J4
8 460
Other income (dividend received) (P/L)
10 000
13 965
Share of other comprehensive income

of associate (OCI)
4 495
Equity accounting of associate for current year
414
Foreign operations
Comments
a The gain on disposal in the separate accounting records of P Ltd could also
be calculated as 86 000 – (100 000 × 4 000/8 000) = 36 000 profit.
b 12 200 + 2 600 + 7 285 + 1 300 = 23 385 Done on a net basis in terms of

IAS 21.48B. Hence, no NCI is recognised in this journal entry.
c All entries in J3 are made against the same ledger account with no net
effect. Thus, it may be argued that J3 is not needed. J3 only assists in
preparing the various line items for the non-controlling interests in the
consolidated statement of changes in equity.
Partial disposal of an interest in a foreign subsidiary with no
change in the status as the subsidiary remains a subsidiary
Example 15.6
(control is not lost) (NCI is measured at its proportionate
acquisition date)

20.17
P Ltd and
sub-
sidiaries
A Ltd
(consoli-
dated)
FC
ASSETS
500 000
7 000
Investment in A Ltd – 6 000 shares at cost price
60 000
Inventory
167 000
15 250
Total assets
R727 000
FC22 250
400 000
10 000
Retained earnings
227 000
12 250
100 000
R727 000
FC22 250
415
Chapter 15

P Ltd and
subsidiaries
A Ltd
(consoli-
dated)
FC
Revenue
500 000
30 000
Cost of sales
(210 000)
(20 000)
Gross profit
290 000
10 000
23 000
Profit before tax
313 000
10 000
Income tax expense

(146 000)
(5 250)
PROFIT FOR THE YEAR
167 000
4 750
R167 000
FC4 750
127 000
4 750
40 000
R167 000
FC4 750
Retained
earnings
P Ltd and
subsidiaries
A Ltd
(consoli-
dated)
FC
150 000
7 500
Profit for the year
127 000
4 750

(50 000)
R227 000
FC12 250
as its functional currency. P Ltd purchased 8 000 shares in A Ltd, a foreign
entity with FC
as its functional currency, for R80 000. From this date, P Ltd had control
over A Ltd in accordance with IFRS 10. The analysis of owners’ equity of A
Ltd, calculated correctly up to 31 December 20.16, is as follows:
416
Foreign operations
Analysis of owners’ equity of A Ltd
(FC)
Rate (R)
(R) 80% (R) 80% (R) 20%
100%
100%
At
Since
NCI
i At acquisition
Share capital
10 000
R8,00
80 000
64 000
16 000
Retained earnings
2 500
R8,00
20 000
16 000
4 000
12 500
R8,00
100 000
80 000
20 000
goodwill – Parent
–
Consideration
and NCI
12 500
100 000
80 000
20 000
i Since acquisition
• Current year:
Retained earnings
5 000 (average)
42 250
33 800
8 450
FCTR
15 250
12 200
3 050
31 December 20.16
FC17 500
R9,00 R157 500
1R46 000 R31 500
(1) 33 800(RE) + 12 200(FCTR) = 46 000
2 On 31 March 20.17, P Ltd disposed of 2 000 shares in A Ltd for R43 000.
3 A Ltd’s profit and taxation for 20.17 accrued evenly.
4 P Ltd accounted for the investment in A Ltd at cost in its separate financial
statements.
5 P Ltd elected to measure the non-controlling interest at its proportionate

Operations.
7 None of P Ltd’s subsidiaries declared or paid a dividend during the 20.17

financial year.
8 The non-controlling interest opening balance on 1 January 20.17 in the

statement of changes in equity for all other subsidiaries (excluding A Ltd)
was R60 000.
FC1,00 = ZAR
31/12/20.16 9,00
Average 1/1/20.17–31/3/20.17
9,20
31/3/20.17 9,50
Average 1/4/20.17–31/12/20.17
9,80
31/12/20.17 10,00
417
Chapter 15
Solution 15.6
The consolidated financial statements for the year ended 31 December 20.17
are prepared as follows:
P LTD GROUP
ASSETS
Non-current assets
Property, plant and equipment (500 000(P) + (7 000 × R10,00)(A)) 570
000
Current assets
Inventory (167 000(P) + (15 250 × R10,00)(A)) 319

500
Total assets
R889 500
Share capital
400 000
Retained earnings
267 489
Other components of equity (12 364 + 20 648) 33
012
700 501
188 999
Total equity
889 500
R889 500
418
Foreign operations
P LTD GROUP
Revenue (500 000(P) + 289 500(A))
789 500
Cost of sales (210 000(P) + 193 000(A))
(403 000)
Gross profit (290 000(P) + 96 500(A))
386 500
Other income (23 000(P) – 23 000(J5))
Profit before tax
386 500
Income tax expense (146 000 + 50 662) (196
662)
PROFIT FOR THE YEAR
R189 838
Items that may be reclassified subsequently to profit or loss: Exchange

differences on translating foreign operations
(9 106(analysis) + 10 056(analysis))
19 162
R209 000
133 689
Non-controlling interests (40 000(other) + 2 186(analysis) + 13

963(analysis)) 56 149
R189 838
147 008
Non-controlling interests (56 149 + 1 821(analysis) + 4 022(analysis)) 61

992
R209 000
419
Chapter 15
P LTD GROUP

Changes
Re-
Share
Total
in owner-
tained
FCTR Total NCI
capital
equity
ship
earnings
Balance at
1 Jan 20.17
400 000
1183 800 12 200
596 000
291 500 687 500
Changes in
equity for
20.17
Dividends
(50 000)
(50 000)
(50 000)
Total
compre-
hensive
income for
the year:
Profit for the
year –
133 689
133 689
56 149
189 838
Other
compre-
hensive
income –
– 413 319
13 319
35 843
19 162
Disposal of
interest (J5)
12 364
12 364
30 636
43 000
Transfer of
FCTR (J5)
(4 871)
(4 871)
4 871
Balance at
31 Dec
20.17
R400 000 R12 364 R267 489 R20 648 R700 501 R188 999 R889 500
(1) 150 000(P) + 33 800(A) = 183 800
(2) 31 500(A) + 60 000(other subsidiaries) = 91 500
(3) 61 992 – 56 149 = 5 843
(4) 19 162(OCI) – 5 843 = 13 319 or 19 162(OCI) – 1 821(NCI) – 4

022(NCI) = 13 319
420
Foreign operations
Calculations
(FC)
(R)
(R) 80% (R) 80% (R) 20%
Rate
100%
100%
At
Since
NCI
i At acquisition
Share capital
10 000
R8,00
80 000
64 000
16 000
Retained earnings
2 500
R8,00
20 000
16 000
4 000
12 500
R8,00
100 000
80 000
20 000
goodwill – Parent
12 500
100 000
80 000
20 000
year:
Retained earnings
5 000
42 250
33 800
8 450
FCTR
15 250
12 200
3 050
31 December 20.16
17 500
R9,00
157 500
46 000
31 500
• Current year:
Profit: first three months
11 188 R9,20
10 930
8 744
2 186
on translation
9 106
7 285
1 821
31 March 20.17
18 688
R9,50
177 536
62 029
35 507
Sale of 2 000 shares2
(20 000) (15 507)
35 507
46 522
71 014
Profit:
last nine months
33 562 R9,80
34 908
20 945
13 963
on translation
10 056
6 034
4 022
31 December 20.174
FC22 250 R10,00
R222 500
R73 501 R88 999
(1) FC4 750/12 × 3 = FC1 188
(2) 80 000 × 20/80 = 20 000At
(33 800 + 8 744) × 20/80 = 10 636 RE
(12 200 + 7 285) × 20/80 = 4 871 FCTR

10 636 + 4 871 = 15 507
Equity acquired from parent = 35 507
(3) FC4 750 – FC1 188 = FC3 562
(4) (33 800 + 8 744 – 10 636 + 20 945) = 52 853 RE
(12 200 + 7 285 – 4 871 + 6 034) = 20 648 FCTR
Total Since = 52 853 + 20 648 = 73 501
421
Chapter 15
Comments

calculated as
the consideration paid by NCI
43 000

acquired from parent – see below)
(35 507)
NCI after transaction (177 536 × 40%)
71 014
NCI before transaction (177 536 × 20%)
(35 507)
7 493
Add: FCTR already treated as equity
4 871
R12 364
b The amount for the change in ownership recognised in equity can also be
calculated
as follows (from the change in the parent’s interest): Fair value of the
consideration received by the parent
43 000
(35 507)
Historic fair value of shares disposed of
(20 000)
Retained earnings
(10 636)
FCTR
(4 871)
7 493
4 871
Amount to be recognised directly in equity/Capital gain on disposal of
interest (in group context)
R12 364
c Alternatively, the amount can also be calculated as follows: Proceeds on

43 000
Attributable net assets disposed
(35 507)
7 493
4 871
Amount to be recognised directly in equity/Capital gain on disposal of

interest (in group context)
R12 364
20 000
100 000

date: IFRS 3.32(b)
(100 000)
Goodwill (parent)
422
Foreign operations
C3 Pro forma consolidation journal entries for the consolidation Dr
Cr
J1
Share capital (SCE)
80 000
20 000
Goodwill
(SFP)
80 000
20 000
Main elimination journal entry at acquisition
J2
8 450
FCTR (SCE)
3 050
11 500
Recognition of of non-controlling interests’ portion
of retained earnings & FCTR
J3
2 186
2 186
of current year’s profit at 20%
J4
1 821
1 821
of exchange differences on translation at 20%
J5
20 000
Gain on disposal of interest (P/L) (per P)
23 000
FCTR (SCE)
4 871
12 364
(20 000(At) + 10 636(RE) + 4 871(FCTR))
35 507
Pro forma correction of group gain on disposal
J6
13 963
13 963
of current year’s profit at 40%
J7
4 022
4 022
of exchange differences on translation at 40%
423
Chapter 15
Comment
Conversion statement of profit or loss and other comprehensive income of A

Ltd for the year ended 31 December 20.1 7
First 3 months Last 9 months
TOTAL
FC
(R9,20)
(R9,80)
R
Revenue
30 000
69 000
220 500
289 500
Cost of sales
(20 000)
(46 000)
(147 000)
(193 000)
Gross profit
10 000
23 000
73 500
96 500
Income tax expense
(5 250)
(12 070)
(38 592)
(50 662)
FC4 750
R10 930
R34 908
R45 838
Question 15.1
Eastern Ltd is a South African company and has the South African Rand
(ZAR) as its functional currency. You have commenced with the final audit
of Eastern Ltd for the financial reporting period ended 30 June 20.18.
A few weeks into the engagement, a few unresolved accounting issues have
arisen.
These issues need to be dealt with by you and have been summarised below.
Separate/Individual financial statements of group companies are included in

the appendix.
Information relevant to the consolidation
Eastern Ltd acquired its 80% controlling interest in Travel Ltd, a foreign
entity, on 1 July 20.17 for LSL3 million when the equity of Travel Ltd
consisted of the following: LSL
100 000
Retained earnings
1 254 687
Revaluation surplus
1 228 125
Equity
2 582 812
The functional currency of Travel Ltd is the Lesotho Loti (LSL). The fair
value of Travel Ltd ordinary shares at the acquisition date amounted to
LSL36,00 per share.
All the assets and liabilities of Travel Ltd were deemed to be fairly valued at
the acquisition date, except for a factory building. No additional assets,
liabilities or contingent liabilities were identified at the acquisition date.
It was determined at the acquisition date that a factory building, owned by

Travel Ltd, appeared to be undervalued. Travel Ltd is entitled to a capital
allowance on the building, which is the same as the depreciation on the
building. The building is measured according to the revaluation model in the
individual financial statements of Travel Ltd.
424
Foreign operations
Details of the building are as follows:
LSL’000
Revalued carrying amount (1 July 20.17)
3 200
Fair value (1 July 20.17)

4 000
The directors of Travel Ltd have no intention of disposing of the building in

the near future. The building is depreciated on the straight-line basis over its
estimated remaining useful life of 10 years on 1 July 20.17. There is no
residual value for the purposes of depreciation. The factory building was
revalued at the reporting date 30 June 20.18 in the individual financial
statements of Travel Ltd.
Eastern Ltd disposed of a 20% interest in Travel Ltd on 30 June 20.18 for
R250 000
cash. Eastern Ltd therefore now holds a 60% interest in Travel Ltd after the
date of disposal and retains control over the board of directors of Travel Ltd.
The accountant was unsure how to account for the disposal in the separate
financial statements and therefore recorded the proceeds in a suspense
account.
l The South African tax rate of companies is 28% and the capital gains tax
inclusion rate is 80%.
l The applicable tax rate of companies is 25% in Lesotho.
l The following exchange rates are applicable:
LSL1,00
ZAR
1 July 20.17
0,50
30 June 20.18
0,70
Average for the 20.18 financial reporting period
0,60
Information about group accounting policies
l The Eastern Ltd Group elected to measure the non-controlling interests at

fair value at the acquisition date.
l The Eastern Ltd Group measures factory buildings according to the cost
model in terms of IAS 16 Property, Plant and Equipment.
l Eastern Ltd accounts for investments in subsidiaries at cost in accordance

with IAS 27.10(a) in its separate financial statements.
Required
Provide the pro forma journal entries that should be processed in respect of
Travel Ltd in the consolidated annual financial statements of Eastern Ltd for
the financial reporting period ended 30 June 20.18.
425
Chapter 15
APPENDIX
EXTRACTS FROM SEPARATE/INDIVIDUAL FINANCIAL

STATEMENTS
OF GROUP COMPANIES
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20.18
Eastern
Travel
Ltd
Ltd
R’000 LSL’000
ASSETS
Non-current assets
2 085
4 000
Equity investments at fair value (through other comprehensive income)
8 500
Investment in subsidiary: Travel Ltd
1 500
Current assets
Inventory
– 300
Trade receivables
5 800
280
Cash and cash equivalents
2 800
435
Total assets
20 685
5 015
Share capital (1 000 000/100 000 shares)
8 000
100
Revaluation surplus
– 445
2 000
Retained earnings
5 000
1 778
Total equity
15 000
2 323
Long-term borrowings
4 000
2 155
Deferred tax
350
120
Total non-current liabilities
4 350
2 275
Current liabilities
Trade and other payables
985
280
Suspense account: Proceeds on disposal
250
Current tax payable

100
137
Total current liabilities
1 335
417
Total liabilities
5 685
2 692
20 685
5 015
426
Foreign operations

Eastern
Travel
Ltd
Ltd
R’000 LSL’000
Revenue
100
2 000
Cost of sales
(20)
(500)
Gross profit
80
1 500
Other income
2 000
300
Other expenses
(500)
(500)
Finance costs (net)
(700)
(50)
Profit before tax
880
1 250
Income tax expense
(180)
(600)
PROFIT FOR THE YEAR
700
650
Items that will not be reclassified to profit or loss,
net of tax:
Gains on equity investments at fair value
300
Loss on property revaluation
(660)
1 000
(10)
STATEMENT OF CHANGES IN EQUITY THE YEAR ENDED 30

JUNE 20.18
Eastern
Travel
Ltd
Ltd
R’000 LSL’000
Retained earnings
Balance at 1 July 20.17
5 800
1 255
Total comprehensive income for the year
700
650
Transfer from revaluation surplus (on 30 June)
123
Dividend declared and paid (on 30 June)
(1 500)
(250)
Balance at 30 June 20.18

5 000
1 778
427
Chapter 15
Pro forma consolidation journal entries for Travel Ltd
Dr
Cr
J1
Factory building (SFP) (LSL800 000 × R0,50) 400
000
Deferred
tax
(SFP)
(LSL800 000 × 25% × R0,50)
100
000
Equity at acquisition (SCE) (balancing)

300 000
Pro forma IFRS 3 remeasurement of factory building at
acquisition including tax consequences
J2
Share capital (SCE) (LSL100 000 × R0,50) 50
000
Retained earnings (SCE) (LSL1 254 687 × R0,50) 627
344
Revaluation surplus (SCE) (LSL1 228 125 × R0,50)
614 063
Equity at acquisition (SCE) (J1 above)
300 000
Goodwill (SFP)
268 593
Investment in Travel Ltd (SFP)
1 500 000
Non-controlling interests (SFP/SCE) (at fair value)
(20 000 × LSL36 × R0,50)
360 000
Main elimination journal entry for Travel Ltd

at acquisition date
J3 Depreciation
(P/L)
((LSL800 000/10 years) × R0,70 (closing spot))
56 000
56 000
Pro forma adjustment of depreciation at group level
J4 Deferred
tax
(SFP)
(R56 000 × 25%)
14 000
14 000
Tax effect for depreciation adjustment
J5
Factory building (SFP)
(LSL660 000 × 1/0,75 × R0,70 (closing spot))
616 000
Loss on property revaluation (OCI)
616 000
Elimination of subsequent revaluation done by the
subsidiary due to group accounting policy of cost
J6
Tax on other comprehensive income (OCI)
(R616 000 (J6) × 25%)
154 000
Deferred
tax
(SFP)
154 000
Elimination of tax effect for building revaluation at year
end
J7
Retained earnings (SCE) (LSL123 000 × R0,70 (closing spot)) 86
100
86 100
Reversal of realisation of revaluation surplus to

retained earnings
continued
428
Foreign operations
Dr
Cr
J8 Goodwill
(SFP)
(LSL537 186 × (R0,70 – R0,50)) 107
437
Factory building (SFP) (LSL800 000 × (R0,70 – R0,50))
160 000
Deferred
tax
(SFP)
(LSL200 000 × (R0,70 – R0,50))
40 000
Exchange differences on translation (OCI) (balancing)

227 437
Exchange differences on translation due to non-
inclusion of pro forma IFRS 3 remeasurement of
building and goodwill on pre-consolidation
conversion trial balance
70 800
160 600
231 400
Recognition of NCI’s portion of profit and exchange
differences on translation for the current year
J10 Other income: Dividend received (P/L)
140 000
35 000
Dividend paid (SCE) (LSL250 000 × R0,70 (closing spot)) 175
000

J11 Suspense account: Proceeds on disposal (SFP)
250 000
Foreign currency translation reserve (SCE) (analysis)
160 600
Changes in ownership (SCE) (balancing)
160 800
Non-controlling interests (SFP/SCE) (analysis)
571 400
Change in ownership interest on disposal of 20% to
separate equity category
429
Chapter 15
Comments

Fair value of the consideration paid by NCI
250 000

acquired from parent)
(571 400)
NCI after transaction (analysis)

1 127 800
NCI before transaction (analysis)
(556 400)
(321 400)
160 600
(R160 800)
b Alternatively, the amount for the change in ownership recognised in equity

can also be calculated as follows (from the change in the parent’s
interest): Fair value of the consideration received by the parent
250 000
(571 400)
Historic fair value of shares disposed of
(375 000)
Retained earnings
(35 800)
FCTR
(160 600)
(321 400)
160 600
(R160 800)
430
Foreign operations
Calculations
C1 Analysis of owners’ equity of Travel Ltd
Total
ECT (80%–60%)
NCI
Total
LSL
Rate
ZAR
(20%–40%)
At
Since
i At acquisition
(1/7/20.17)
Share capital
100 000
0,50
50 000
40 000
10 000
Retained earnings
1 254 687
0,50
627 344
501 875
125 469
Revaluation surplus 1 228 125
0,50
614 063
491 250
122 813
Remeasurement
of
factory building
(4 million – 3,2 million)
800 000
0,50
400 000
320 000
80 000
Deferred
tax
(800 000 × 25%)
(200 000)
0,50
(100 000)
(80 000)
(20 000)
3 182 812
0,50 1 591 407 1 273 125
318 282
Equity
represented
by goodwill –
Parent and NCI
537 188
0,50
268 593
226 875
41 718
Consideration
(3 000 000 × 0,5)
and NCI (100 000 ×
20% × 36 × 0,5)
3 720 000
0,50 1 860 000 1 500 000
360 000
• Current year:
Profit
(650 000 –
180 000 + 220 000)
590 000
0,60
354 000
283 200
70 800
Dividend
paid
(30/06/20.18)
(250 000)
0,70
(175 000)
(140 000)
(35 000)
Exchange
differences on
translation
802 999
642 399
160 600
Equity/NAV
(30/06/20.18)
4 059 998
0,70 2 841 999
785 599
556 400
30/06/20.18
Disposal of interest
3(375 000) 4(196 400)
571 400
589 199 1 127 800
(1) 800 000 / 10 years remaining useful life = 80 000 depreciation (2) 200
000 / 10 years remaining useful life = 20 000 deferred tax (3) 1 500 000 ×
20/80 = 375 000
(4) (283 200 – 140 000) × 20/80
35 800 RE
642 399 × 20/80
160 600 FCTR
196 400
431
Chapter 15
C2 Goodwill remeasurement
LSL Rate
At acquisition date
537 186
R0,50
268 593
107 437
30/06/20.18
537 186
R0,70
376 030
C3 Factory building remeasurement
LSL Rate
At acquisition date
800 000
R0,50
400 0000
160 000
30/06/20.18
800 000
R0,70
560 0000
C4 Deferred tax remeasurement
LSL Rate
At acquisition date
(200 000)
R0,50
(100 000)
(40 000)
30/06/20.18
(200 000)
R0,70
(140 0000)
432
16
Consolidated statement of cash flows
Introduction
16.1 Background
..............................................................................................
436
Example
16.1:
Consolidated
statement
of cash flows ..............................
437
Associates and joint ventures
16.2
Investments in associates and joint ventures ..........................................
442
Example
16.2:
Investment in associate ....................................................
443
16.3
Acquisition and disposal of associates and joint ventures .......................
444
Example 16.3:
Acquisition and disposal of associate ...............................
444
Changes in ownership interests in subsidiaries
16.4
Acquisition and disposal of a subsidiary ..................................................
446
Example 16.4:
Acquisition and disposal of a subsidiary ...........................
449
16.5
Acquisition of a subsidiary in terms of a non-cash transaction ................
457
16.6
An associate becomes a subsidiary and a subsidiary

becomes an associate .............................................................................
457
Example 16.5:
Associate becomes a subsidiary and a subsidiary
becomes an associate ......................................................
459
16.7
Financing activities between non-controlling shareholders
and the group ...........................................................................................
469
16.8
Acquisition and disposal of an interest in an existing subsidiary
that does not result in a loss of control ....................................................
469
Sundry aspects
16.9 Foreign
operations
...................................................................................
469
16.10
Discontinued operations ..........................................................................
470
16.11 Intragroup
loans
.......................................................................................
470
Example 16.6:
Sundry aspects .................................................................
471
Question 16.1
........................................................................................................
479
433
STATEMENT OF CASH FLOWS – IAS 7
Definitions
Accounting
treatment
Cash
Operating
activities
Cash on hand and demand deposits.
+/- Investing activities
Cash equivalents
+/- Financing activities
Short-term, highly liquid investments that are
= Movement in cash and cash equivalents
readily convertible to known amounts of cash and
Use:
which are subject to an insignificant risk of
l Direct method
changes in value.
Receipts from customers less payments to
Operating activities
suppliers and employees.
Principal revenue-producing activities of the entity
l Indirect
method
and other activities that are not investing or
financing activities.
Profit or loss adjusted for non-cash items,
investment income, finance costs and
Investing activities
movements in debtors, creditors and inventory.
Acquisition and disposal of long-term assets and
other investments not included in cash
equivalents.
Financing activities
Activities that result in changes in the size and
composition of the contributed equity and
borrowings of the entity.
Operating activities
Financing activities
Principal revenue-producing activities; generally
Activities that result in changes in the size and
result from the transactions and other events that
composition of the contributed equity and
enter into the determination of profit or loss.
borrowings of the entity.
Examples:
Examples:
l Sale of goods and rendering of services;
l Issuing or redemption of shares or other equity
l Royalties, fees, commissions and other
instruments;
revenue;
l Proceeds from issuing debentures, loans,
l Payments to suppliers for goods and services;
notes, bonds, mortgages and other short- or
long-term borrowings;
Payments to and on behalf of employees;
l Repayments of amounts borrowed;
Receipts and payments of an insurance entity
for premiums and claims, annuities and other
l Payments by a lessee for the reduction of the
policy benefits;
outstanding liability relating to a finance lease.
l Income taxes;
l Receipts and payments from contracts held for
dealing or trading purposes;
l Interest received/paid and dividends
received/paid disclosed separately.
Investing activities
Acquisition and disposal of long-term assets and
other investments not included in cash
equivalents.
Examples:
l Acquisition or sale of property, plant and
equipment, intangibles and other long-term
assets;
l Acquisition or sale of financial assets that are not held for trading;
l Loans granted and repayment of loans.
435
Chapter 16
Introduction
16.1 Background
1 The
contents and format of the consolidated statement of cash flows are

essentially identical to those of the statement of cash flows of an individual
company and are prescribed by IAS 7.
2 The
consolidated statement of cash flows comprises four elements: l cash flows

from operatinng activities;
l cash flows from investinng activities;
l cash flows from financinng activities;
l net changes in cash and cash equivalents, representing the differences

between cash and cash equivalents at the beginning and end of the reporting
period.
Comment
The statement of cash flows of a company in effect represents a summary (in

a specific
format) of the company’s primary record of first entry, namely the cashbook.
436
Example 16.1
The following represents the abridged consolidated statements of the P Ltd

Group for the year ended 31 December 20.17:
P LTD GROUP

20.17
20.16
ASSETS
Non-current assets
Land and buildings at valuation
122 389
102 000
Plant and equipment
Cost price
196 684
157 824
Accumulated depreciation
(71 449)
(54 100)
Goodwill
3 200
3 200
12 973
7 505
Other financial assets
4 738
4 679
268 535
221 108
Current assets
Inventory
46 655
32 625
Receivables
68 387
60 345
Bank and money market assets
2 833
3 011
117 875
95 981
Total assets
R386 410
R317 089
Share capital
15 650
15 650
Retained earnings
86 971
76 708
99 149
78 760
201 770
171 118
8 008
7 082
Total equity
209 778
178 200
Deferred tax
40 351
34 639
Interest-bearing loans
49 308
34 423
89 659
69 062
Current liabilities
Payables
45 270
36 033
Tax due
2 388
2 712
Shareholders for dividends
6 291
6 291
Short-term loans
33 024
24 791
86 973
69 827
Total liabilities
176 632
138 889
R386 410
R317 089
437
Chapter 16
P LTD GROUP

OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue
140 421
Cost of sales
(62 502)
Gross profit
77 919
Other income (dividends received – R725; interest received – R2 264) 2
989
Other expenses
(39 023)
Finance costs
(9 920)
Share of profit of associate (including dividend received R2 615) 4 745
Profit before tax
36 710
Income tax expense
(13 616)
PROFIT FOR THE YEAR
23 094
Revaluation surplus
20 389
20 389
R43 483
21 946
1 148
R23 094
42 335
1 148
R43 483
P LTD GROUP
Non-
Revalua-
Share
Retained
control-
Total
tion
capital
earnings
Total
ling
equity
reserve
interests
Balance at
1 January 20.17
15 650
78 760
76 708
171 118
7 082
178 200
Changes in equity
for 20.17
Dividends declared
(11 683)
(11 683)
(222)
(11 905)
Total comprehensive
Profit for the year
21 946
21 946
1 148
23 094
Other comprehensive
income
– 20
389
– 20 389
20 389
Balance at
31 December 20.17
R15 650 R99 149 R86 971 R201 770
R8 008 R209 778
438
1 An analysis of the notes to the statement of profit or loss and other

comprehensive income indicates that the following items were included in
profit before tax: Depreciation on plant and equipment
R18 640
Profit on sale of plant and equipment
R280
2 The short-term portion of long-term loans included in short-term loans was

R7 704
(20.16: R14 701).

3 No land and buildings were purchased or sold during the current year.
Plant and equipment with a cost price of R2 000 and a carrying amount of
R709 was sold for R989 during the current year. It is estimated that R12 000
of the current year’s purchases of property, plant and equipment were
incurred to expand activities.
4 There were no changes in the shareholdings in subsidiaries during the year

under review.
5 Ignore the deferred tax implications of the revaluation of the land of the
parent.
Solution 16.1
P LTD GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities
Cash receipts from customers (C1)
132 379
Cash paid to suppliers and employees (C2)
(87 958)
Cash generated from operations
44 421
Investment income (2 264 + 725 + 2 615)
5 604
Interest paid
(9 920)
Tax paid (C7)
(8 228)
Dividend paid (C8)
(11 905)
Net cash from operating activities
R19 972
Cash flows from investing activities
Replacement of plant and equipment (C6)
(28 860)
Investment in other financial assets (4 738 – 4 679)
(59)
Additions to plant and equipment (C6)
(12 000)
Investment in associate (12 973 – 7 505 – (4 745 – 2 615)) (3
338)
Proceeds from sale of plant and equipment
989
Net cash used in investing activities
(R43
268)
Cash flows from financing activities
Long-term loans raised (C3)
7 888
Short-term loans raised (C4)
15 230
Net cash used in financing activities
R23 118
Net decrease in cash and cash equivalents
(178)
Cash and cash equivalents at beginning of period
3 011
Cash and cash equivalents at end of period
R2 833
439
Chapter 16
Calculations
C1 Cash received from customers
Receivables Dr
Cr
Balance at beginning of year 60
345
Revenue 140
421
Bank (balancing figure)
132
379
Balance at end of year
68 387
R200 766
R200 766
or
Revenue
140 421
Increase in receivables
(8 042)
R132 379
C2 Cash paid to suppliers and employees
Profit and loss account
Dr
Cr
Revenue
140
421
Depreciation 18
640
Interest paid
9 920
Interest received
2 264
Dividend received – other
725
Dividend received – associate
2 615
Equity accounted profit
2 130
280
Expenses (balancing figure) 83
165
Profit before tax
36 710
R148 435
R148 435
or
Cost of sales
62 502
Other expenses (statement of profit or loss and other comprehensive income)

39 023
Depreciation (18
640)
280
Expenses
R83 165
Expenses (83
165)
Increase in inventory
(14 030)
Increase in payables 9
237
(R87 958)
C3 Long-term loans raised
Long-term loans
Dr
Cr
Balance at beginning of year (34 423 + 14 701) 49
124
Raised (balancing figure)
7 888
Balance at end of year (49 308 + 7 704) 57
012
R57 012
R57 012
440
Comment
The reclassification of part of long-term loans as short-term loans does not

represent cash flow.
C4 Short-term loans raised
Short-term loans
Dr
Cr
Balance at beginning of year (24 791 – 14 701)
10 090
Raised (balancing figure)
15 230
Balance at end of year (33 024 – 7 704)
25 320
R25 320
R25 320
C5 Land and buildings
Land and buildings
Dr
Cr
Balance at beginning of year
102 000
Revaluation (99 149 – 78 760)
20 389
122 389
R122 389
R122 389
C6 Plant and equipment
Plant and equipment: Cost
Dr
Cr
157 824
Plant and equipment sold
2 000
Purchases – expansion
12 000
Purchases – replacement (balancing figure)
28 860
196 684
R198 684
R198 684
Plant and equipment: Accumulated depreciation
Dr
Cr
54 100
Sold
1 291
Depreciation
18 640
71 449
R72 740
R72 740
C7 Taxation
Taxation payable
Dr
Cr
2 712
Statement of profit or loss and other comprehensive income (13 616 – 5

712(deferred tax))
7 904
8 228
2 388
R10 616
R10 616
441
Chapter 16
Deferred tax
Dr
Cr
34 639
Statement of profit or loss and other comprehensive income (balancing

figure)
5 712

40 351
R40 351
R40 351
C8 Dividends paid
Dr
Cr
6 291
Dividends declared
11 905
11 905
6 291
R18 196
R18 196
Comment
Dividends paid by a subsidiary only have an influence on a group’s cash

flows insofar as the portion attributable to non-controlling shareholders is
concerned. The dividends
declared and paid by the parent, as well as the non-controlling shareholder’s
portion of the subsidiaries dividend, are shown in the consolidated statement
of changes in equity.
As far as dividends declared by subsidiaries are concerned, only the portion

due to the non-controlling shareholders is included in the consolidated
statement of financial position as part of current liabilities. The cash effect of
the dividend paid is disclosed in the statement of cash flows.
16.2 Investments in associates and joint ven
ntures
Where an associate is equity accounted in the consolidated financial

statements of the group, an
ny profits received in cash by the investor will be reflected as dividends

received in the statement of cash flows either as an investing or operatin ng
activity (as
other dividends received). Because the accumulated equity profits of the

associate in the consolidated statement of comprehensive income do not
represent a flow of cash, they are excluded from the consolidated statement
of cash flows. Advances made to or by the associate during the financial
year will be reflected in the statement of cash flows and classified as
investing activities.
442
Example 16.2
P Ltd acquired an investment in an associate, A Ltd, on 31 December 20.16.

P Ltd granted a loan to A Ltd on 1 July 20.17. A Ltd made repayments of
R17 000 on the loan. Extracts from the consolidated financial statements of
P Ltd reflect the following at 31 December 20.17:
STATEMENT OF FINANCIAL POSITION
20.17
20.16
Investment in associate – at carrying amount
38 850
18 000
Loan to associate
18 000

20.17
20.16
22 650
–
The only cash flows in respect of the investment in A Ltd will be the
dividends received.
RR
Opening balance
18 000 Dividend received (balancing)
1 800
22 650 Closing balance
38 850
40 650
40 650
Loan to associate
RR
Opening balance
– Repayments (given)
17 000
Loan advanced
18 000
35 000
35 000
The information will be presented as follows in the consolidated cash flow

statement: CONSOLIDATED STATEMENT OF CASH FLOWS FOR
THE YEAR ENDED
31 DECEMBER 20.17
Dividends received
1 800
Repayment of loan by associate
17 000
Advances to associate
(35 000)
443
Chapter 16
16.3 Acquisition and disposal of associates and joint ventures
Acquisitions
An investment made during the year in an associate or joint venture should

be disclosed as cash flow from an investing activity. An additional
investment in an existing associate or joint venture (provided that there is no
change in status, e.g. the associate does not become a subsidiary) will also be
disclosed as an investing activity.
Disposals
If the total investment in an associate of joint venture is disposed of, the

proceeds should be presented as an investing activity. Since the total
proceeds are reflected as an investing activity, the gain/loss on the disposal
recognised in profit or loss should be eliminated from operating activities for
cash flow purposes.
If a portion of the investment is sold and the retained investment remains an

associate or joint venture, the total proceeds are reflected as an investing
activity and the gain or loss should be eliminated from operating activities.
If a portion of the investment is sold and significant influence or joint

control is lost, the total proceeds are reflected as an investing activity. Both
the gain or loss on disposal and the fair value adjustment on the retained
investment should be eliminated from operating activities for cash flow
purposes.
Example 16.3
Acquisition and disposal of an associate
P Ltd acquired a 30% interest in A Ltd on 1 January 20.17 for R120 000. On
1 July 20.17 P Ltd acquired an additional 5% interest in A Ltd for R25 500,
when the net asset value of A Ltd was R570 000 (fairly valued). Extracts
from the consolidated financial statements of P Ltd reflect the following at
31 December 20.17: STATEMENT OF FINANCIAL POSITION
20.17
Investment in associate – at carrying amount
180 000
20.17
45 000
The cash flows in respect of the investment in A Ltd will be the dividends
received and amounts paid for the acquisition of the associate and additional
interest acquired.
444
RR
Acquisition of associate
120 000 Dividend received (balancing)
13 500
Acquisition of additional interest
180 000
Excess ((R570 000 × 5%) – R25 500)
3 000

45 000
193 500
193 500

statement: CONSOLIDATED STATEMENT OF CASH FLOWS
Cash paid to suppliers and employees (+R3 000 excess)
(XXX)
Dividends received
13 500
Investment in associate (120 000 + 25 500)
(145
500)
Assume that P Ltd sold the total investment on 31 December 20.17 for
R195 000.

R
Cash paid to suppliers and employees
(XXX)
(+R15 000(profit) (195 000 – 180 000)
Dividends received
13 500
Disposal of associate
195 000
Assume that P Ltd sold 50% of the investment on 31 December 20.17

for R85 000.
Significant influence was lost and the retained investment was classified as
at fair value through other comprehensive income. The fair value adjustment
(loss) on the retained investment amounted to R2 000.
445
Chapter 16


(XXX)
(–R5 000(loss) (180 000/2 – 85 000) – 2 000(fair value adjustment))

Dividends received
13 500
Disposal of part of associate
85 000
16.4 Acquisition and disposal of a subsidiary
1 Where control of a subsidiary is obtained or lost, the amount of cash paid

or received as a purchase or sales consideration is entered into the statement
of cash flows (under investing activities) net of cash and cash equivalents
acquired or sold. In both cases, it is incumbent upon a group to provide full
disclosure during a period of each of the following:
l the total consideration paid or received;
l the portion of the consideration consisting of cash and cash equivalents; l

the amount of cash or cash equivalents in the subsidiary over which control
is obtained or lost; and
l the amount of the other assets and liabilities in the subsidiary over which
control is obtained or lost, summarised by each major category (IAS 7.40).
2 Obtaining or losing control of a subsidiary is therefore accounted for in

terms of an
owner approach, rather than the entity approach, which forms the basis for
the preparation of the consolidated annual financial statements. The
inclusion of the net cash cost price of shares purchased/net cash proceeds
from shares sold in the statement of cash flows implies that the following
items were calculated at the date of the transaction (acquisition date/disposal
date), and that they are thus excluded from the consolidated statement of
cash flows:
l the underlying assets and liabilities of the subsidiary acquired/disposed of; l

financing provided/discontinued by the non-controlling shareholders; l
goodwill or excess on acquisition arising from the purchase of the shares; l
excess of fair value over the cost of the purchase of shares in a subsidiary; l
the profit arising from the sale of shares; and
l the carrying amount of the investment in the associate at the date of the
transaction (in the case where an associate becomes a subsidiary, or a
subsidiary becomes an associate).
446
3 The treatment of the cash consideration paid or received at the time of

obtaining or losing control of a subsidiary is in principle a simple procedure.
Consider the following summary, which expresses the purchasing by P Ltd
of an 80% equity share in the subsidiary S Ltd at date of acquisition.
Net assets acquired
Land and buildings
(1 200 000)
Plant and equipment:
Cost price
(800 000)
300 000
Mortgage bond
500 000
Inventory (350
000)
Receivables (550
000)
Payables 180
000
Bank (30
000)
(1 950 000)
390 000
Goodwill (40
000)
Cost price of shares
R1 600 000
In the consolidated statement of cash flows the following will be included as

part of
“investing activities”:
Net cash cost price of shares in subsidiary (1 600 000 – 30 000) R1 570 000
It should be borne in mind that the collection of R1 570 000 implies that a
portion of the movement which occurred in the relevant statement of
financial position items (between the two “statement of financial position”
dates) has been included in the statement of cash flows. The portions of the
movements that have been entered into the statement of cash flows (as a
result of the inclusion of the net cash cost price) are represented by the
amounts on the transaction date, as indicated in the above summary. In
addition, when analysing the movements that occurred in the statement of
financial position items, cognisance should be taken of assets and liabilities
(on the transaction date) purchased from and sold to subsidiaries. The outline
of the analysis of the movement in the statement of financial position items
under land and buildings would have to be expanded as follows: 447
Chapter 16
LAND AND BUILDINGS
Dr
Cr
XX
Non-cash portion of movement
Revaluation (the full revaluation movement for the current year, not only the
parent’s portion)
XX
Mortgage bond
XX
Portion of movement entered elsewhere in the statement
of cash flows
Interest charge (interest capitalised)
XX
Land and buildings owned by a newly purchased subsidiary
at date of acquisition (at fair value in terms of IFRS 3)
XX
Land and buildings owned by a subsidiary sold at the date
of sale of the subsidiary (at consolidated carrying amount) XX
Portion of movement arising from the relevant calculation to be

included in the statement of cash flows
Land and buildings sold
(sales by individual companies within the group)
XX
Land and buildings purchased
XX
XX
RXXX
RXXX
448
Example 16.4
Acquisition and disposal of a subsidiary
The following represents the abridged consolidated statements of the P Ltd

Group for the year ended 31 December 20.17.
P LTD GROUP
20.17
20.16
ASSETS
Non-current assets
Land and buildings at cost price
955 000
650 000
Plant and equipment
Cost price
2 610 000
1 850 000
(750 000)
(740 000)
Goodwill
75 000
50 000
1 835 000
910 000
4 725 000
2 720 000
Current assets
Inventory
675 000
405 000
Receivables
805 000
625 000
2 500
75 000
1 482 500
1 105 000
Total assets
R6 207 500 R3 825 000
Share capital
1 050 000
600 000
Retained earnings
1 687 500
965 000
2 737 500
1 565 000
495 000
400 000
Total equity
3 232 500
1 965 000
Deferred tax
205 000
125 000
2 030 000
1 200 000
2 235 000
1 325 000
Current liabilities
Payables
445 000
305 000
Tax due
45 000
30 000
250 000
200 000
740 000
535 000
Total liabilities
2 975 000
1 860 000
R6 207 500 R3 825 000
449
Chapter 16
P LTD GROUP
Revenue
3 250 000
Cost of sales
(1 250 000)
Gross profit
2 000 000
Other expenses
(767 500)
Finance costs
(135 000)
(dividend received – R125 000; equity-accounted profit – R375 000) 500

000
Profit before tax
1 597 500
Income tax expense
(400 000)
PROFIT FOR THE YEAR
1 197 500
R1 197 500
972 500
(225 000)
R1 197 500
P LTD GROUP

Non-
Share
Retained
Total
controlling
capital
earnings
Total
equity
interests
Balance at
1 January 20.17
600 000
965 000
1 565 000
400 000
1 965 000
Changes in
equity for 20.17
Issue of shares
450 000
– 450
000
450 000
Acquisition
of interest in
subsidiary –
160 000
160 000
Sale of interest
in subsidiary
(260 000)
(260 000)
Dividends
declared
(250 000)
(250 000)
(30 000)
(280 000)
Total comprehensive
Profit for the year
972 500
972 5000
225 000
1 197 500
Balance at
31 December 20.17
R1 050 000 R1 687 500 R2 737 500 R495 000 R3 232 500
450
1 The following items were included in the calculation of profit before tax:
Depreciation R370
000
Loss on sale of plant
R30 000
Exchange rate loss on foreign loan
R150 000
Profit on sale of land and buildings
R200 000
2 Companies in the group sold plant and equipment for R50 000. Details of
the plant at date of sale were as follows:
Cost R350
000
R270 000
The land and buildings of a subsidiary were expropriated by the local

authority for R450 000.
3 A portion of the plant and equipment purchased during the year under
review, to the value of R550 000, was used to replace the sold plant. In
addition, a portion of these purchases was financed through a finance lease
of R300 000. The balance of the property, plant and equipment purchased
was for the expansion of operations.
4 During the year under review, long-term loans amounting to R500 000
were redeemed.
5 P Ltd has several subsidiaries and associates. During the year under
review, the equity investment in associates was increased; a subsidiary (S
Ltd) was acquired, and the whole interest in subsidiary T Ltd was sold.
Acquisition of subsidiary S Ltd
On 30 June 20.17, P Ltd obtained 80% of the issued shares in S Ltd for R665
000.
On this date, the abridged statement of financial position of S Ltd was as

follows: Land and buildings
225 000
Plant and equipment (fair value)
240 000
465 000
Inventory 250
000
Receivables 495
000
Bank 15
000
R1 225 000
500 000

000
Loans 200
000
Deferred tax
50 000
Payables 175
000
R1 225 000
Disposal of subsidiary T Ltd
On 3 January 20.15, P Ltd obtained 75% of the issued shares in T Ltd for
R675 000.
On that date, the owners’ equity of T Ltd was as follows:
R600 000
Retained earnings R300
000
451
Chapter 16
On 30 September 20.17, P Ltd sold its entire interest in T Ltd for R850 000.
Particulars of the net assets of T Ltd on 30 September 20.17 were as follows:
Land and buildings
350 000
Cost
450 000
(210 000)
Inventory 180
000
Receivables 420
000
Bank overdraft
(30 000)
Payables (120
000)
R1 040 000
Solution 16.4
P LTD GROUP
Note

Cash receipts from customers
3 145 000
(1 852 500)
1 292 500
Investment income
125 000
Interest paid
(135 000)
Tax paid (30 000 + 370 000 – 45 000)
(355
000)
Dividend paid (200 000 + 280 000 – 250 000)
(230
000)
R697 500
Replacement of plant and equipment

(550 000)
Additions to land and buildings
(680 000)
Additions to plant and equipment
(350 000)
50 000
Proceeds on sale of land and buildings
450 000
Purchase of subsidiary (665 000 – 15 000)
1 (650
000)
(550 000)
Proceeds on sale of subsidiary (850 000 + 30 000)
880 000
(R1 400 000)

Long-term loans repaid
(500 000)
Long-term loans raised
680 000
Proceeds from issue of shares
450 000
Net cash from financing activities
R630 000
(72
500)
75 000
R2 500
452
Notes to the statement of cash flows

1 Purchase of subsidiary S Ltd
Fair
value of assets acquired:
Land
and buildings
(225 000)
Plant
(240 000)
Inventory
(250 000)
Receivables
(495 000)
Payables
175 000
Loan
200 000
Deferred tax
50 000
Bank
(15 000)
(800 000)
160 000
Goodwill
(25 000)
Purchase price
(665 000)
Cash
on acquisition
15 000
Net
cash purchase price
(R650 000)
2 Disposal of subsidiary T Ltd
Land
and buildings
350 000
Plant
and equipment
240 000
Inventory
180 000
Receivables
420 000
Payables
(120 000)
Bank
overdraft
(30 000)
1 040 000
(260 000)
Goodwill
Profit
on sale of shares
70 000
Proceeds from sale
850 000
Bank
overdraft of subsidiary sold
30 000
Net
cash proceeds
R880 000
Comment
Note that IAS 7 does not specifically require the disclosure of the non-
controlling interests and goodwill in the purchase or disposal of a subsidiary
note to the statement
of cash flows, but it is regarded as useful information and thus disclosed.
453
Chapter 16
Calculations
C1 Net changes in receivables, inventory and payables
Inventory
Dr
Cr
405 000
Subsidiary acquired
250 000
Subsidiary disposed of
180 000
Net increase (balancing figure)
200 000
675 000
R855 000
R855 000
Receivables
Dr
Cr
625 000
Subsidiary acquired
495 000
420 000

105 000
805 000
R1 225 000 R1 225 000
Payables
Dr
Cr
305 000
Subsidiary acquired
175 000
120 000
85 000
445 000
R565 000
R565 000

Sales
3 250 000
Net increase in receivables
(105 000)
R3 145 000
Comment
If sales are taken up directly in the “receivables” reconstruction, cash

received from
customers can be determined as the balancing figure.
454
Dr
Cr
Revenue
3 250 000
Depreciation 370
000
30 000
Exchange rate loss
150 000
Interest paid
135 000
Investment income
125 000
Equity income of associate
375 000
Profit on sale of land
200 000
Profit on sale of subsidiary
70 000
Expenses (balancing figure)
1 737 500
Profit before tax
1 597 500
R4 020 000
R4 020 000
or
Cost of sales (statement of profit or loss and other comprehensive income) 1

250 000
Other expenses (statement of profit or loss and other comprehensive income)
767 500
Depreciation
(370 000)
Exchange rate loss
(150 000)
Profit on sale of subsidiary (850 000 – (1 040 000 × 75%)) 70 000
Profit on sale of land
200 000
(30 000)
Expenses
R1 737 500
Expenses
(1 737 000)
Net increase in inventory
(200 000)
Net increase in payables
85 000
(R1 852 500)

C4 Taxation
Deferred tax
Dr
Cr
125 000
Subsidiary acquired
50 000
Tax expense (balancing figure)
30 000
205 000
R205 000
R205 000
Tax payable
Dr
Cr
30 000
Statement of profit or loss and other comprehensive income (400 000 – 30

000)
370 000
355 000
45 000
R400 000
R400 000
455
Chapter 16
C5 Plant and equipment purchased
Dr
Cr
1 850 000
Subsidiary acquired (fair value)
240 000
450 000
Plant sold by individual companies in the group

350 000
Finance lease
300 000
Cash purchases (balancing figure)
900 000
2 490 000
R3 290 000 R3 290 000
Dr
Cr
000
210 000
270 000
Depreciation expense
370 000

630 000
R1 110 000 R1 110 000
C6 Land and buildings purchased
Land and buildings
Dr
Cr
000
Subsidiary acquired
225 000
350 000
Land and buildings sold by individual companies
in the group (450 000 – 200 000)
250 000
680 000
955 000
R1 555 000 R1 555 000

Long-term loans
Dr
Cr
1 200 000
Subsidiary acquired
200 000
Loans repaid
500 000
Exchange rate loss
150 000
Plant (finance lease) 300
000
Loans raised (balancing figure) 680
000
2 030 000
R2 530 000 R2 530 000
456
C8 Dividends paid
Dr
Cr
000
Dividends declared
280 000
Bank (balancing figure) 230
000
250 000
R480 000
R480 000
C9 Investment in associate
Dr
Cr

000
375 000
Bank (balancing figure) 550
000
1 835 000
R1 835 000 R1 835 000
16.5 Acquisition of a subsidiary in terms of a non-cash transaction
1 No cash flow takes place when the purchase price of a subsidiary is fully
settled by the issue of shares in the parent. Consequently, the acquisition of
the subsidiary and the issue of the shares, respectively, are not reported as
part of investing activities or financing activities. However, should cash
and cash equivalents be held by a subsidiary at date of acquisition under the
particular circumstances, they would be reported as follows as an investing
activity:
Cash and cash equivalents held by a subsidiary at date of acquisition RXXX
2 In the event of a subsidiary being acquired in terms of a non-cash

transaction, details regarding the subsidiary’s assets, liabilities and other
relevant information should once again be provided by way of a note.
Should the subsidiary be acquired partly for cash and partly for the issue of
shares in the parent, only the net cash portion of the purchase price is entered
as an investing activity. The note on assets, liabilities and other relevant
information should, however, still be provided.
16.6 An associate becomes a subsidiary and a subsidiary becomes
an associate
1 The acquisition of an additional equity interest in an associate during the
current year that causes the associate to become a subsidiary will: l cause the
acquirer to remeasure its previously held equity interest in the associate at its
acquisition date fair value and recognise the difference in profit or loss
(IFRS 3.42);
l eliminate the carrying amount of the investment in the associate at the

acquisition date; and
l cause the net asset (assets and liabilities valued in terms of IFRS3) of the
subsidiary at date of acquisition, including any accruals since the date of
acquisition, to be entered in the consolidated statement of financial position.
457
Chapter 16
2 The fair value adjustment included in profit or loss does not represent cash
flow.
3 The net cash cost price of the additional equity interest in the subsidiary is
entered into the statement of cash flows as part of “investing activities”.
Details of the assets, liabilities, carrying amount of the investment in the
former associate, as well as other relevant information, are provided in a
note to the statement of cash flows.
4 In bringing into account the net cash cost price, part of the movements that
occurred in the individual statement of financial position items between the
two “statement of financial position” dates has been entered into the
statement of cash flows. The portion of the movements that has already been
entered represents the portion attributable to the individual assets, liabilities
and non-controlling owners’ equity of the subsidiary at date of acquisition.
5 The disposal of an equity interest in a subsidiary during the current year

that causes the subsidiary to become an associate will:
l at the date of the transaction, create an investment against the carrying

amount in an associate;
l cause the remeasurement of the carrying amount of the abovementioned
investment at the acquisition date fair value, and recognition of the
difference in profit or loss; and
l cause the net assets (assets and liabilities measured at the consolidated
carrying amount) of the subsidiary at date of the transaction to be excluded
from the consolidated statement of financial position.
6 The fair value adjustment included in profit or loss does not represent cash
flow.
7 The net cash proceeds from the equity interest disposed of are entered into
the statement of cash flows as part of “investing activities”. Details of the
assets, liabilities, non-controlling owners’ equity, profit/loss on the sale of an
interest and the carrying amount of the resulting investment in the associate
are provided in a note to the statement of cash flows.
8 A portion of the movements that occurred in the individual statement of

financial position items between the two “statement of financial position”
dates was entered into the statement of cash flows when the net cash
proceeds were accounted for.
The portion of the movements already entered represents the portion

attributable to the individual assets, liabilities and owners’ equity of the
subsidiary on the transaction date.
458
Associate becomes a subsidiary and a subsidiary becomes
Example 16.5
an associate
The following represent the abridged consolidated statements of the P Ltd

Group for the year ended 31 December 20.17.
P LTD GROUP
20.17
20.16
ASSETS
Non-current assets
Property at valuation
1 008 000
650 000
Plant and equipment
Cost price
2 610 000
1 850 000
(750 000)
(740 000)
Goodwill
97 500
55 000
400 000
275 000
Investment in unlisted shares
840 000
840 000
4 202 500
2 930 000
Current assets
Inventory
675 000
405 000
Receivables
805 000
625 000
15 000
75 000
1 495 000
1 105 000
Total assets
R5 700 500 R4 035 000
Share capital
1 050 000
600 000
Retained earnings
1 052 500
477 000
240 000
2 342 500
1 077 000
520 000
400 000
Total equity
2 862 500
1 477 000
Deferred tax
258 000
125 000
1 840 000
1 898 000
2 098 000
2 023 000
Current liabilities
Payables
445 000
305 000
Tax due
45 000
30 000
250 000
200 000
740 000
535 000
Total liabilities
2 838 000
2 558 000
R5 700 500 R4 035 000
459
Chapter 16
P LTD GROUP
Revenue
3 250 000
Cost of sales
(1 250 000)
Gross profit
2 000 000
Other income (dividend received on listed investments)
60 000
Other expenses
(719 500)
Interest paid
(135 000)
210 000
Profit before tax
1 415 500
Income tax expense
(400 000)
PROFIT FOR THE YEAR
1 015 500
Revaluation surplus
300 000
Other comprehensive income, net of tax

300 000
R1 315 500
825 500
190 000
R1 015 500
1 065 500
250 000
R1 315 500
460
P LTD GROUP

Re-
Non-
Share
Retained
Total
valuation
controlling
capital
earnings
Total
equity
reserve
interests
Balance at
1 January 20.17
600 000
477 000 1 077 000
400 000
1 477 000
Changes in equity
for 20.17
Issue of shares
450 000
450 000
450 000
Associate becomes
a subsidiary
––
160 000
160 000
Subsidiary becomes
an associate
––
–
– (260 000)
(260 000)
Dividends declared
(250 000)
(250 000)
(30 000)
(280 000)
Total comprehensive
Profit for the year
825 500
825 500
190 000
1 015 500
Other comprehensive
income
–
240 000
240 000
60 000
300 000
Balance at
31 December 20.17
R1 050 000 R240 000 R1 052 500 R2 342 500 R520 000 R2 862 500
1 The following items were, amongst others, included in other expenses:

Expenses
Depreciation R370
000
Impairment of goodwill
R12 500
Income
Profit on sale of plant
R30 000
Exchange rate loss on foreign loan
R50 000
Profit on sale of property R200
000
Profit on sale of shares in subsidiary
R67 000
Fair value adjustments on carrying amounts of investments in associates

after changes in shareholdings
R51 000
(R35 000 (S Ltd) + R16 000 (A Ltd))
2 Companies in the group sold plant and equipment for R110 000. Details of
the plant at date of sale were as follows:
Cost R350
000
R270 000
Certain land and buildings of a subsidiary were sold for an amount of R450
000, whilst another subsidiary, in which P Ltd has an 80% equity interest,
revalued its land and buildings at an amount of R353 000. Attributable
deferred tax is R53 000.
461
Chapter 16
3 A portion of the plant and equipment purchased during the year under
review, to the value of R580 000, was used to replace the sold plant. The
balance of the property, plant and equipment purchased was for the
expansion of operations. R20 000 is still due in respect of these purchases,
which amount has been included under payables.
4 During the year under review, long-term loans amounting to R500 000
were redeemed.
5 P Ltd has interests in several subsidiaries and an associate. During the year
under review, the following changes in interest took place:
l An associate (S Ltd) became a subsidiary due to the purchase of an

additional interest in equity for R345 000. The fair value of the 40% interest
previously held amounted to R355 000 at the date of the change in the
shareholding. Assume that all net assets values were equal to the IFRS 3
values.
l A subsidiary (A Ltd) became an associate due to the sale of an interest in

equity for R538 000. The fair value of the remaining 30% interest held
amounted to R330 000 at the date of the change in the shareholding.
l P Ltd elected to measure the non-controlling interests at their proportionate

6 The following equity analyses were applied inter alia in the preparation of
the given consolidated financial statements:
(a) Analysis of owners’ equity of S Ltd
P Ltd 40%–80%
Total
NCI
At
Since
Share capital
487 500
195 000
300 000
Retained earnings
80 000
32 000
48 000
567 500
227 000
348 000
Investment in S Ltd
R227 000
Retained earnings
120 000
48 000
72 000
• Current year:
Profit
1/1/20.17–30/6/20.17
100 000
40 000
60 000
800 000
88 000
480 000
Purchase 200 000 shares
320 000
(320 000)
160 000
Cost price of shares
(345 000)
Profit
1/7/20.17–31/12/20.17
150 000
120 000
30 000
R950 000
R208 000
R190 000
P Ltd received dividends amounting to R95 000 from S Ltd while S Ltd was
an associate.
462
(b) Analysis of owners’ equity of A Ltd
P Ltd 75%–30%
Total
NCI
At
Since
Share capital
200 000
150 000
50 000
Retained earnings
100 000
75 000
25 000
300 000
225 000
75 000
5 000
R230 000
Retained earnings
600 000
450 000
150 000
• Current year:
Profit
1/1/20.17–31/3/20.17
140 000
105 000
35 000
1 040 000
555 000
R260 000
Sold 90 000 shares
(135 000)
(333 000)
R468 000
Profit
1/4/20.17–31/12/20.17
250 000
75 000
R1 290 000
R297 000
8 Details of the net assets of S Ltd and A Ltd on the respective dates of the
changes in interest are as follows:
S Ltd
A Ltd
30/6/20.17
31/3/20.17
Land and buildings
225 000
350 000
Cost
360 000
450 000
(120 000)
(210 000)
Long-term loans
(200 000)
Deferred tax
(50 000)
Inventory
250 000
180 000
Receivables
495 000
420 000
Bank
15 000
(30 000)
Payables
(175 000)
(120 000)
R800 000 R1 040 000
463
Chapter 16
Solution 16.5
P LTD GROUP
Note
Cash receipts from customers
3 145 000
(2 020 000)
1 125 000
Dividends received (60 000 + 95 000)
155 000
Interest paid
(135 000)
Tax paid (30 000 + (400 000 – 30 000(C4)) – 45 000)
(355
000)
Dividend paid (200 000 + 280 000 – 250 000)
(230
000)
R560 000
Replacement of plant and equipment
(580 000)
Additions to land and buildings
(380 000)
Additions to plant and equipment
(600 000)
110 000
Proceeds on sale of land and buildings

450 000
Purchase of subsidiary
(330 000)
Proceeds on sale of subsidiary
568 000
(R762
000)
Long-term loans repaid
(500 000)
Long-term loans raised
192 000
Proceeds from issue of shares
450 000
Net cash from financing activities
R142 000

(60
000)
75 000
R15 000
464
Notes to the statement of cash flows
1 Purchase of subsidiary S Ltd
Fair value of assets acquired:
Land and buildings (225
000)
Plant (240
000)
Inventory (250
000)
Receivables (495
000)
Payables 175
000
Loan 200
000
Deferred tax
50 000
Bank (15
000)
(800 000)
160 000
Fair value of investment previously accounted for on the equity method 355
000
Goodwill (345 000 + 160 000 + 355 000 – 800 000) (60
000)
Purchase price
(345 000)
Cash on acquisition
15 000
Net cash purchase price
(R330 000)
2 Disposal of subsidiary A Ltd

Land and buildings
350 000
Plant and equipment
240 000
Inventory 180
000
Receivables 420
000
Payables (120
000)
Bank overdraft
(30 000)
1 040 000
(260 000)
Goodwill realised
5 000
Fair value of remaining investment
(330 000)
Fair value adjustment on carrying amount of investment in associate (330

000 – 30/75 (230 000 + 555 000)) 16
000
Profit on sale of shares
67 000
Proceeds from sale
538 000
Bank overdraft on sale
30 000
Net cash proceeds
R568 000
465
Chapter 16
Calculations
C1 Net changes in receivables, inventory and payables
Inventory
Dr
Cr
405 000
Subsidiary acquired
250 000
180 000
200 000
675 000
R855 000
R855 000
Receivables
Dr
Cr
625 000
Subsidiary acquired
495 000
420 000

105 000
805 000
R1 225 000 R1 225 000
Payables
Dr
Cr
305 000
Subsidiary acquired
175 000
120 000
Property, plant and equipment acquired
20 000
65 000
445 000
R565 000
R565 000
Revenue
3 250 000
Net increase in receivables
(105 000)
R3 145 000
Comment
If sales are taken up directly in the “receivables” reconstruction, cash

received from
customers can be determined as the balancing figure.
466
Dr
Cr
Revenue
3 250 000
Depreciation of assets and impairment of goodwill 382
500
Profit on sale of plant
30 000
Interest paid
135 000
Exchange rate loss
50 000
Dividend received – other
60 000
Dividend received – associate
95 000
115 000
Profit on sale of property
200 000
Profit on sale of subsidiary
67 000
Fair value adjustments on carrying amounts of investments
in associates
51 000
Expenses (balancing figure)

1 885 000
Profit before tax
1 415 500
R3 868 000 R3 868 000
Expenses
(1 885 000)
Net increase in inventory
(200 000)
Net increase in payables
65 000
(R2 020 000)
C4 Deferred tax expense
Deferred tax
Dr
Cr
125 000
Revaluation of land and buildings
53 000
Subsidiary acquired
50 000
Tax expense (balancing figure)
30 000
258 000
R258 000
R258 000
C5 Plant and equipment purchased
Dr
Cr
1 850 000
Subsidiary acquired
240 000
450 000
350 000
Payables 20
000
1 180 000
2 490 000
R3 290 000 R3 290 000
467
Chapter 16
Dr
Cr
740 000
210 000
270 000
Depreciation expense
370 000

630 000
R1 110 000 R1 110 000
C6 Land and buildings purchased
Land and buildings
Dr
Cr
650 000
Subsidiary acquired
225 000
350 000
Land and buildings sold by individual companies in the group 250 000
Revaluation 353
000
380 000
1 008 000
R1 608 000 R1 608 000

Dr
Cr
275 000
210 000
Dividend received
95 000
Fair value adjustment
35 000
Investment in S Ltd derecognised
355 000
Investment in A Ltd recognised
330 000
400 000
R850 000
R850 000
Long-term loans
Dr
Cr
1 898 000
Subsidiary acquired
200 000
Loans repaid
500 000
Exchange rate loss
50 000
Loans raised (balancing figure)
192 000
1 840 000
R2 340 000 R2 340 000
468
16.7 Financing activities between non-controlling shareholders

and the group
1 Loans from non-controlling shareholders and proceeds from shares

issued by a subsidiary to non-controlling shareholders are entered
separately in the consolidated statement of cash flows as part of financing
activities.
2 A share issue to non-controlling shareholders results in a reduction

(dilution) of the parent’s interest in the subsidiary. The inclusion in the
consolidated statement of cash flows of the proceeds from the shares issued
to non-controlling shareholders implies that the following items were
brought into account on the date of issue and should therefore be excluded
from the consolidated statement of cash flows: l the increase in the non-
controlling interests (comprising shares and the reserves transferred to non-
controlling shareholders); and
l the change in ownership accounted for as an equity transaction.
3 Notwithstanding the change in ownership accounted for as an equity

transaction, the issue of shares by a subsidiary to non-controlling
shareholders only affects the movements in one statement of financial
position item, namely “non-controlling interest”.
16.8 Acquisition and disposal of an interest in an existing subsidiary
that does not result in a loss of control
1 This paragraph deals with the following two cases in particular : l the
increase in an interest in an existing subsidiary arising from the acquisition
of an additional equity interest for cash; and
l the decrease in an interest in a subsidiary (the investee remains a

subsidiary) arising from the disposal of an equity interest for cash.
2 The expenditure relating to the investment or the proceeds from the sale of
the investment is shown separately as part of financing activities. The
inclusion of the cash cost price/proceeds in respect of the abovementioned
changes in interest implies that the following items were brought into
account at date of the transaction and that they should therefore be excluded
from the consolidated statement of cash flows:
l the change in the non-controlling interests; and
l the change in ownership accounted for as an equity transaction.
3 Notwithstanding the possible change in ownership accounted for as an

equity transaction, the acquisition of an interest in an existing subsidiary, as
well as the disposal of an interest in a subsidiary (to the extent that the
investee remains a subsidiary), only affects the movement in non-controlling
shareholders.
Sundry aspects
16.9 Foreign
operations
1 The translation of the financial statements of foreign operations gives rise

to exchange rate conversion differences. The question of whether the
exchange rate conversion differences and the changes which occur in the
amounts of the assets and liabilities represent cash flow solely because the
exchange rates have changed now arises.
469
Chapter 16
2 Exchange differences arising from these translations are recognised in

other comprehensive income. The parent’s attributable portion thereof is
included in a reserve known as the foreign currency translation reserve. The
portion attributable to non-controlling shareholders is included in equity as
part of the non-controlling interests.
3 In preparing the statement of cash flows, the exchange differences arising

from currency translations allocated to the foreign currency translation
reserve and non-controlling interests are reversed. A corresponding
adjustment is made to a non-current asset and/or current liability. In this
work, the full amount is taken into account (when analysing the changes that
occurred) in “land and buildings”.
16.10 Discontinued operations
1 IFRS 5.33 (c) requires that the net cash flows of discontinued operations
attributable to operating, investing and financing activities shall be
disclosed. These disclosures may be presented either in the notes or in the
financial statements. In example 16.6
in this work, the disclosure is presented in the notes.
16.11 Intragroup loans
1 Loans made by a parent to a subsidiary during the normal course of

business have no effect on the group’s cash and cash equivalents. Such
intragroup loans are, in any event, eliminated during the preparation of the
consolidated statement of financial position.
2 However, an existing shareholders’ loan is often taken over on the

acquisition of a subsidiary. In such a case, an outflow of cash takes place in
respect of both the shares and the loan purchased. The purchasing of the
shares and the loan are shown as part of “investing activities”. Details of the
loan assumed are also provided in the note to the statement of cash flows
that deals with the acquisition of the subsidiary. When a loan is sold upon
disposal of a subsidiary, the resulting cash inflow is shown as part of
“investing activities”.
470
Example 16.6
Sundry aspects
The following information relates to the Rain Ltd Group for the year ended
31 December 20.16:
RAIN LTD GROUP
20.16 20.15
ASSETS
Non-current assets
Land at valuation
1 941 413
1 632 300
Plant and equipment at cost less accumulated depreciation
2 667 100
2 143 500
345 000
335 000
Investment in Snow Ltd at fair value
190 000
Goodwill
52 000
52 000
5 005 513
4 352 800
Current assets
Inventory
960 800
957 200
Trade receivables
1 055 900
1 040 200
Cash and cash equivalents
64 700
66 510
Non-current assets held for sale
72 000
2 153 400
2 063 910
Total assets
R7 158 913
R6 416 710
Share capital (2 200 000 shares; 2 000 000 shares)
2 307 500
2 000 000
36 000
65 082
Revaluation surplus
115 000
50 000
Retained earnings
1 856 750
992 518
4 279 250
3 143 600
343 325
23 210
Total equity
4 622 575
3 166 810
Long-term loan
700 000
Deferred tax
59 538
44 200
59 538
744 200
Current liabilities
Trade payables
2 438 700
2 444 000
4 200
5 000
Tax payable
33 900
56 700
2 476 800
2 505 700
Total liabilities
2 536 338
3 249 900
R7 158 913
R6 416 710
471
Chapter 16
RAIN LTD GROUP
EXTRACT OF CONSOLIDATED STATEMENT OF PROFIT OR

LOSS

Revenue
4 500 200
Cost of sales
(1 925 000)
Gross profit
2 575 200
Other expenses
(874 400)
Finance costs
(250 600)
Share of profit of associates
14 000
Profit before tax
1 464 200
Income tax expense
(435 800)
PROFIT FOR THE YEAR
R1 028 400

840 400
188 000
R1 028 400
The following additional information has already been taken into

account in the financial statements above.
1 Included in other expenses in the consolidated profit before tax of the Rain
Ltd Group are the following:
Depreciation on plant and equipment
R480 000
Unrealised exchange gain on foreign debtors
R(127 000)
Realised exchange loss on long-term loan
R115 000
Other expenses are furthermore shown net of any other income,

reclassification adjustments and/or profit that may be forthcoming from the
additional information which follows.
2 Investment in Snow Ltd
Rain Ltd acquired 100 000 shares in Snow Ltd on 2 January 20.15 for a cash
amount of R110 000 when the equity of Snow Ltd was as follows: Share
capital (1 000 000 shares)
R1 000 000
Retained earnings R100
000
Rain Ltd purchased another 500 000 shares in Snow Ltd for a cash amount
of R1 225 000 on 1 January 20.16. On this date, Rain Ltd obtained control
over Snow Ltd. The fair value of the plant and equipment (the only
asset/liability of Snow Ltd) was R2 500 000 on that date.
3 Investment in Hail Ltd
Rain Ltd acquired a 60% interest in Hail Ltd on 1 January 20.15. On this
date, Rain Ltd obtained control over Hail Ltd. Hail Ltd is incorporated in
Go-Go land and has a functional currency of FC. No goodwill arose at
acquisition date.
Rain Ltd sold its entire interest in Hail Ltd on 1 October 20.16 for R1 366
920. On this date, Rain Ltd lost control over Hail Ltd. The exchange rate
was FC1 = R17,28
on 1 October 20.16.
472
Particulars of the net assets of Hail Ltd at 1 October 20.16 were as follows:
Plant and equipment
105 000
Trade receivables
52 500
Bank overdraft
(30 000)
FC127
500
An amount of R7 980 regarding the foreign exchange rate gain in the current
year on this investment has been allocated to the non-controlling interests. It
may be assumed that the movement in the foreign currency translation
reserve (FCTR) is attributable to plant and equipment only.
Hail Ltd was the only foreign operation of Rain Ltd.
4 The minutes of the directors’ meeting of Rain Ltd, held on 1 January

20.16, confirm that the management decision to discontinue the operations
of the packaging department of Rain Ltd was ratified with effect from 1
January 20.16. The decision was announced on this date. The packaging
department specialises in the distribution of packaging and has always been
a material division of Rain Ltd. The division was separately identifiable for
physical, operational and financial reporting purposes.
The operations of the packaging department were discontinued on 31 August

20.16.
The enforcement of the formal plan to end operations had a material

influence on the packaging department for the period 1 January 20.16 to 31
August 20.16. An extract of the financial statements, prepared by
management for the packaging department, for the eight months ending 31
August 20.16 was as follows: STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 AUGUST 20.16
Revenue
483 000
Cost of sales
(246 000)
Gross profit
237 000
Other expenses
(654 000)
Loss before tax
(417 000)
Taxation relief – current
166 500
LOSS AFTER TAX
(R250 500)
STATEMENT OF FINANCIAL POSITION ITEMS AS AT 31

AUGUST 20.16
31/8/20.16 31/12/20.15
Inventory
R370 500
Trade receivables
– R579
000
Trade payables
– (R393
000)
The above statement of profit or loss and other comprehensive income

figures of the packaging department are included in the applicable profit or
loss categories in the statement of profit or loss and other comprehensive
income of Rain Ltd. All losses incurred by the packaging department are
deductible for tax purposes.
473
Chapter 16
5 Finance costs incurred on qualifying equipment amounted to R286 000

during the 20.16 financial year. This interest was incurred on a loan that was
acquired specifically for the acquisition and installation of the equipment,
which took a substantial time to complete. Half of the finance costs incurred
is still outstanding and is included in trade payables at 31 December 20.16.
The equipment was installed and ready for use as intended by management
on 31 December 20.16. Interest earned on the temporary investment of
borrowed funds amounted to R146 900 for the year and is included in other
expenses.
6 Rain Ltd classified plant, with a carrying amount of R78 000, as held for
sale on 31 December 20.16. This was the only asset classified as such by the
group. No plant or equipment was disposed of during the year.
7 The only companies in the group that own land are Rain Ltd and Ice Ltd, a
subsidiary in which Rain Ltd has an 80% interest and control over. Both
these companies revalued their land during the 20.16 financial year. The land
of Ice Ltd increased in value with R90 000 during 20.16. Neither party
disposed of any land during the year.
8 Rain Ltd declared a dividend of R41 250 for the year ended 31 December
20.16.
9 It may be assumed that no impairment relating to goodwill has taken place.
10 Apart from movements that are clearly evident from the information
above, no disposals or acquisitions of investments took place during the
year.
11 Rain Ltd elected to measure non-controlling interests for all acquisitions

at the proportionate share of the net asset value.
12 Cash flows from dividends and interest paid and received are classified as
operating activities.
13 Rain Ltd irrevocably elected to present any subsequent changes in the fair
value of their equity instruments in other comprehensive income in terms of
IFRS 9 Financial Instruments.
14 Assume a tax rate of 28% and a capital gains tax inclusion rate of 80%.
Ignore the effects of value-added tax (VAT) and dividends tax.
474
Solution 16.6
RAIN LTD GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR

ENDED
31 DECEMBER 20.16
Con-
Discon-
Total
tinuing
tinued

2 642 300
1 062 000
3 704 300
Cash payments to suppliers
and employees (C2)
(1 879 670)
(922 500)
(2 802 170)
Cash generated by operations
762 630
139 500
902 130
Interest paid (C3)
(246 700)
(246 700)
Dividends paid (C9)
(50 603)
(50 603)
Income taxes paid (C5)

(632 557)
166 500
(466 057)
Dividends received (C10)
4 000
4 000
Interest received (given)
146 900
146 900
(R16 330)
R306 000
R289 670
Acquisition of property, plant
and equipment
(207 350 [C6] + 236 950 [C7])
(444 300)
Acquisition of subsidiary (given)
(1 225 000)
Proceeds on disposal of subsidiary *
(1 366 920 + (30 000 x R17,28))
1 885 320
Net cash from investing activities
R216 020
Proceeds from issue of share capital
(2 307 500 – 2 000 000)
307 500
Loan repaid (700 000 + 115 000) (815
000)
Net cash used in financing activities
(R507
500)
Net decrease in cash and cash
equivalents
(1 810)
Cash and cash equivalents at
beginning of period
66 510
Cash and cash equivalents at end
of period
R64 700
475
Chapter 16
Calculations
C1 Cash receipts from customers
Continuing
Trade receivables – opening balance (1 040 200 – 579 000)
461 200
– closing balance (given)
(1 055 900)
Foreign exchange gain (given)
127 000
Revenue (4 500 200 – 483 000)
4 017 200
Disposal of subsidiary (52 500 × R17,28) (907
200)
2 642 300
Discontinued
Trade receivables – opening balance (given)
579 000
Revenue (given)
483 000
R1 062 000
Continuing
Cost of sales (1 925 000 – 246 000)
(1 679 000)
Other expenses (874 400 + 146 900 – 654 000) (367
300)
Non-cash items:
Depreciation (non-cash) (given)
480 000
Exchange gain on debtors (non-cash) (given)
(127 000)
Exchange loss on long-term loan (financing activity) (given) 115 000
Gain on bargain purchase [1 225 000 + 190 000 – (60% × 2 500 000)]
(85 000)
Impairment loss on held for sale asset (non-cash) (78 000 – 72 000) 6 000
Profit on disposal of subsidiary [1 366 920 – (60% × 127 500 × 17,28)]
(45 000)
Reclassification adjustment of FCTR [36 000 + (7 980 / 40% × 60%)] (47
970)
Movements in working capital:
Inventory [960 800 – (957 200 – 370 500)]
(374 100)
Trade payables – opening balance (2 444 000 – 393 000)
(2 051 000)
– closing balance (2 438 700 – 143 000)
(50% of outstanding finance cost)
2 295 700
(R1 879 670)
Discontinued
Cost of sales (given)
(246 000)
Other expenses (given)
(654 000)
Movements in working capital:
Inventory – opening balance (given)

370 500
Trade payables – opening balance (given)
(393 000)
(R922 500)
476
C3 Interest paid
Finance costs (given)
(250 600)
Borrowing costs capitalised to plant and equipment
(286 000 – 146 900) (139
100)
Finance costs unpaid at year end (286 000 × 50%) (given)
143 000
(R246 700)
C4 Revaluation surplus of Rain Ltd
Revaluation surplus
– opening balance (given)
50 000

(115 000)
Revaluation by Ice Ltd
[(90 000 × 80%) – (90 000 × 80% × 80% (CGT rate) × 28%)]
55 872
Post-tax revaluation of Rain Ltd
(R9 128)
C5 Income taxes paid
Deferred tax – opening balance (given)
(44 200)
59 538
Revaluation by Ice Ltd (90 000 × 80% × 28%) (20
160)
Revaluation by Rain Ltd [9 128 [C4] / (1 – (80% × 28%)) × 80% × 28%] (2
635)
Deferred tax movement included in income tax expense in P/L
(7 457)
Continued operations tax expense (435 800 + 166 500)
(602 300)
Current tax for the year

(609 757)
Tax payable – opening balance (given)
(56 700)
33 900
(R632 557)
C6 Land – additions
Land – opening balance (given)
1 632 300
(1 941 413)
Revaluation by Ice Ltd (given)
90 000
Revaluation by Rain Ltd [9 128 [C4]/(1 – (80% × 28%))]
11 763
(R207 350)
C7 Plant and equipment – additions
Plant and equipment – opening balance (given)
2 143 500

(2 667 100)
Increase in FCTR (7 980 / 0,4)
19 950
Subsidiary acquired (given)
2 500 000
Subsidiary sold (105 000 × R17,28)
(1 814 400)
Depreciation (given)
(480 000)
Borrowing costs capitalised (C3)
139 100
Plant classified as held for sale (given)
(78 000)
(R236 950)
477
Chapter 16
C8 Dividends declared by subsidiaries to NCI
NCI – opening balance (given)
(23 210)

343 325
Profit for the year (given)
(188 000)
FCTR attributable to NCI (given)
(7 980)
Revaluation [(90 000 × 20%) – (90 000 × 20% × 80% × 28%)]
(13 968)
Subsidiary acquired (2 500 000 × 40%)
(1 000 000)
Subsidiary sold (127 500 × R17,28 × 40%)
881 280
(R8 553)
C9 Dividends paid
Shareholders for dividends – opening balance (given)
(5 000)
4 200
Rain Ltd (given)
(41 250)
NCI (C8)
(8 553)
(R50 603)
C10 Dividends received
Investments in associates – opening balance (given)
335 000
(345 000)
Share of profit of associates (given)
14 000
R4 000
478
Question 16.1
The following information relates to Ronda Ltd, a company with several

subsidiaries and associates:
AS AT 30 JUNE 20.18
20.18 20.17
ASSETS
Non-current assets
4 440 500
5 750 000
Goodwill
103 000
137 000
600 000
210 000
5 143 500
6 097 000
Current assets
Receivables
483 000
465 000
Inventories
520 000
680 000
Bank
1 886 000
183 500
2 889 000
1 328 500
Total assets
R8 032 500
R7 425 500
Share capital
3 600 000
2 550 000
Retained earnings
2 127 500
1 476 000
5 727 500
4 026 000
1 135 500
2 521 000
Total equity
6 863 000
6 547 000
Interest bearing borrowings
400 500
150 000
Deferred tax
391 000
463 000
791 500
613 000
Current liabilities
Trade payables and accumulated interest
275 000
150 000
Short-term portion of interest bearing borrowings
60 000
50 500
South African Revenue Service

43 000
65 000
378 000
265 500
Total liabilities
1 169 500
878 500
R8 032 500
R7 425 500
479
Chapter 16
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS
Revenue
3 120 000
Cost of sales
(1 184 000)
Gross profit
1 936 000
Net operating costs
(732 000)
Finance costs paid
(24 000)
Income from associates
Share of profit
27 000
Dividends received
12 000
Profit before tax
1 219 000
Income tax expense
(348 000)
PROFIT FOR THE YEAR
R871 000
771 500
99 500
R871 000
1 On 1 March 20.18, Ronda Ltd increased its 70% interest in Matador Ltd to
90%, at a total cost of R1 000 000. The purchase price was settled partly by
issuing 100 000
R1 shares for R700 000. The remainder was paid in cash. At the date of
acquisition of the interest, the net assets of Matador Ltd were as follows:
5 250 000
Receivables 380
000
Interest-bearing borrowings (430
000)
(180 000)
Bank overdraft
(20 000)
R5 000 000
2 Ronda Ltd purchased a 60% interest in Ring Ltd on 1 July 20.16 for R300
000. On that date, the carrying values of the net identifiable assets
approximated their fair values and the balance sheet of Ring Ltd indicated
the following equity: Share capital (250 000 shares)
250 000
000
R450
000
480
On 1 January 20.18, a third of this interest was sold for R160 000. On 1
January 20.18, the fair value of the remaining investment in Ring Ltd was
R320 000 and the carrying amounts of the assets of Ring Ltd were as
follows: Property, plant and equipment
1 300 000
Receivables 300
000
Inventories 150
000
Bank 40
000
Interest bearing borrowings
(685 000)
Deferred tax
(260 000)
(170 000)
R675
000
The recoverable amount of goodwill was R27 000 on 30 June 20.17 and R25
500
on 1 January 20.18.
3 On 1 July 20.17, Ronda Ltd entered into a lease agreement. Ronda Ltd did
not elect the simplified accounting treatment for the equipment. In terms of
the agreement, equipment with a cost of R55 000 was leased for a period of
five years. The interest rate is 10% per annum and instalments are payable
annually in arrears on 1 July.
4 The following are, inter alia, included in profit before taxation:

Depreciation R355
000
Realised exchange loss on interest bearing foreign loan
80 000
Unrealised exchange loss on interest bearing foreign loan
70 000
Bad debts written off
22 000
Impairment of goodwill
8 500
5 Ronda Ltd invested $10 000 in a fixed deposit in the USA on 30 June
20.17. At that date, the exchange rate was $1 = R6,90. On 30 June 20.18, the
exchange rate was $1 = R9,30.
6 Accept a tax rate of 30%. Ignore capital gains tax and VAT.
Required
Prepare the statement of cash flows of the Ronda Ltd Group for the year
ended 30 June 20.18 according to the direct method. No notes are required.
481
Chapter 16
RONDA LTD GROUP
STATEMENT OF CASH FLOWS
2 780 000
Cash paid to suppliers and employees (C3)
(1 154 500)
1 625 500
Financing cost paid (24 000 – 5 500) (18
500)
Dividends received
12 000
Dividends paid (C5)
(335 000)
Tax paid (C6)
(182 000)
R1 102 000
Cash flows from investment activities
Additions of property, plant and equipment (C7)
(290 500)
Purchase of interest in associate (C4)
(43 000)
Proceeds from disposal of interest in subsidiary (160 000 – 40 000) 120
000
(R213 500)
Proceeds from long-term borrowings (C8)
740 000
Proceeds from issue of share capital by parent (C9)
350 000
Acquire additional interest in subsidiary [1 000 000 – (100 000 × 7)] (300
000)
R790 000
Net increase in cash and cash equivalents
1 726 500
Exchange rate profit on cash and cash equivalents (C3)
24 000
Cash and cash equivalents beginning of year
183 500
Cash and cash equivalents end of year
R1 886 000
Calculations
C1 Cash receipts from clients
Sales
3 120 000
Movement on receivables
(34 000)
Opening balance
465 000
Ring Ltd
(300 000)
Bad debt
(22 000)
Closing balance
(483 000)
R2 780 000
482
C2 Owners’ equity of Ring Ltd
(60%–40%)
Total
NCI
At
Since
At acquisition
450 000 270 000
180 000
Investment
300 000
Goodwill
30 000
Since
225 000
135 000
90 000
Interest disposed of (1/3)
(90 000) (45 000)
135 000
Goodwill
30
000
Impairment 20.17
(3 000)
Impairment until 1 January 20.18
(1 500)
25
500
Realised (25 500 × 1/3)
(8
500)
R17
000
Profit on disposal of interest
Proceeds
160
000
Equity sold
(135 000)
Goodwill realised
(8 500)
R16
500
Profit on remeasurement
Fair value (given)
320 000
Carrying amounts (300 000 – (3 000 + 1 500) + 135 000 × 2/3) (287 000)
R33
000
483
Chapter 16
Cost of sales
(1 184 000)
Operating cost
(732 000)
Movement on inventories
10 000
Opening balance
680 000
Ring Ltd
(150 000)
Closing balance
(520 000)
Movement on payables
289 500
Opening balance
(150 000)
Ring Ltd
170 000
Accumulated interest (55 000 × 10%)

(5
500)
Closing balance
275 000
Non-cash items
406 000
Depreciation
355 000
Goodwill
8 500
Bad debts
22 000
Unrealised exchange rate losses
70 000
Remeasurement profit (C2)
(33 000)
Profit on disposal of interest (C2)
(16 500)
Reclassification
Realised exchange rate loss

80 000
Exchange rate profit [(6,9 – 9,3) × 10 000]
(24
000)
(R1 154 500)
Investment in associate opening balance
210 000
27 000
Ring Ltd
320 000
Closing balance
(600 000)
R43
000
C5 Dividends paid
Non-controlling interests opening balance
2 521 000
Interest in profit for year

99 500
Matador Ltd (20% × 5 000 000)
(1 000 000)
Ring Ltd (180 000 + 90 000) (C2)
(270 000)
Closing balance
(1 135 500)
Dividend to non-controlling shareholders
215 000
Dividend paid by Ronda Ltd (2 127 500 – (1 476 000 + 771 500)) 120
000
R335
000
484
C6 Tax paid
Deferred tax opening balance
463 000
Ring Ltd
(260 000)
Deferred tax closing balance
(391 000)
Deferred tax
(188 000)
Total tax expenses
348 000
Current tax
160 000
SARS opening balance
65 000
SARS closing balance
(43 000)
R182
000
C7 Additions to property, plant and equipment
Opening balance
5 750 000
Ring Ltd
(1 300 000)
Right-of-use asset
55 000
Depreciation
(355
000)
Closing balance
(4 440 500)
R290
500
C8 Loan incurred
Opening balance (150 000 + 50 500)
200
500
Lease liability
55 000
Unrealised exchange rate loss
70 000
Realised exchange rate loss
80 000
Ring Ltd
(685 000)
Closing balance (400 500 + 60 000)
(460
500)
R740
000
C9 Proceeds on share issues
Opening balance (450 000 + 2 100 000)
2 550 000
Issue in exchange for subsidiary
700 000
Closing balance (600 000 + 3 000 000)
(3 600 000)
R350
000
C10 Goodwill
Opening balance
137 000
Impairment (given)
(8 500)
Sell subsidiary Ring Ltd (C2)

(25 500)
R103
000
485
Document Outline
Cover
Half Title
Title Page
Copyright Page
Preface
Contents
9 IFRS 3 Business combinations – Advanced aspects
Introduction
The acquisition method
Recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interests in the
acquiree
9.2 Recognition principle
Example 9.1: Recognition of identifiable liabilities
Example 9.2: Classification of identifiable assets
acquired
Example 9.3: Recognition of intangible assets
9.3 Measurement principle
Example 9.4: Remeasurement of liability to fair value
Example 9.5: Fair value of operating lease – Lessor
Example 9.6: Fair value of items used differently
Example 9.7: Measurement of non-controlling interests
9.4 Exceptions to the recognition and measurement principles
Example 9.8: Contingent liabilities
Example 9.9: Deferred tax
Example 9.10: Indemnification asset
Example 9.11: Recognition and measurement of a
favourable operating lease
Example 9.12: Non-current assets held for sale
9.5 Measurement of consideration transferred
Example 9.13: Measurement of consideration transferred
Example 9.14: Measurement of consideration transferred
– Asset
9.6 Measurement of contingent consideration transferred
Example 9.15: Contingent consideration – Financial
liability
Example 9.16: Contingent consideration – Asset
Example 9.17: Compensation for reduction in equity
instruments
Measurement period
9.7 Measurement period adjustments
Example 9.18: Measurement period and adjustment to
goodwill
Example 9.19: Measurement period adjustment – Non-
controlling interest measured at proportionate share
Example 9.20: Measurement-period adjustment – Non-
controlling interest measured at fair value
Question 9.1
10 IFRS 10 Consolidated financial statements – Control
Introduction
10.2 Investment entities
Example 10.1: Investment entities
Control
10.3 Purpose and design of the investee
Example 10.2: Purpose and design of the investee
10.4 Power of an investee
Example 10.3: Substantive rights
Example 10.4: Protective rights
Example 10.5: Majority of voting rights without power
Example 10.6: Power without a majority of voting rights
Example 10.7: Potential voting rights
10.5 Exposure to variable returns from an investee
10.6 Link between power and variable returns
Example 10.8: Investor acting as agent or principal
10.7 Unconsolidated structured entities
10.8 Summary of control assessment
Question 10.1
11 Investments in associates and joint ventures
Introduction
11.1 Background
11.2 Significant influence
Accounting for investments in associates in the separate financial
statements of the investor
Accounting for investments in associates in the consolidated
financial statements of the investor
11.3 Equity method
11.4 Equity method procedures
Example 11.1a: Application of the equity method
Example 11.1b: Fair value adjustment at acquisition date
Example 11.2: Revaluation surplus of an associate
Example 11.3: Attributable loss of an associate
Example 11.4: Elimination of unrealised profit in
inventories (investor company sells to associate)
inventories (associate sold to investor company)
equipment (investor sells to associate)
equipment (associate sells to investor company)
Example 11.8: Associates in a horizontal group
Example 11.9: Investment in an associate which itself is
a parent
Example 11.10: Investment in associate by a partially-
owned subsidiary
11.5 Classification as held for sale
11.6 Impairment losses
11.7 Discontinuing the use of the equity method
11.8 Disclosure
Piecemeal acquisition of interests in investees
11.9 Changes in ownership interest
Example 11.11: Piecemeal acquisition whereby the
status of an investment changes to that of an associate
(significant influence is obtained)
Example 11.12: Acquisition of additional interest
Example 11.13: Disposal of the entire interest in an associate
(significant influence is lost)
Example 11.14: Partial disposal of an interest in an associate
– Loss of significant influence (associate becomes IFRS 9
investment
Question 11.1 Basic equity accounting/interest received
Question 11.2 Basic equity accounting/reporting dates differ
12 Interests in joint arrangements
Basic concepts
12.1 Description of basic concepts
12.2 Types of joint arrangements
Classification of joint arrangements
12.3 Structure of the joint arrangement
12.4 Legal form of the separate vehicle
12.5 Terms of the contractual arrangement
12.6 Other facts and circumstances
12.7 Joint operations
12.8 Joint ventures
Disclosure
Examples
Example 12.1: Basic approach – Joint arrangement in a
separate entity
Example 12.2: Joint operation not structured in a separate
entity
13 Changes in ownership of subsidiaries through buying or selling
shares
Introduction
13.1 Methods of change in ownership
13.2 Methods of step-acquisition
13.3 Acquisition of an additional interest in an existing
subsidiary
Example 13.1a: Acquisition of a further interest in an
existing subsidiary where the subsidiary remains a
subsidiary (there is no change in status) (NCI is
Example 13.1b: Acquisition of a further interest in an
existing subsidiary where the subsidiary remains a
subsidiary (there is no change in status) (NCI is
measured at fair value at the date of acquisition)
13.4 Acquisition of an additional interest whereby the
investee (investment) becomes a subsidiary
Example 13.2: Acquisition of a further interest where the
investment becomes a subsidiary (NCI is measured at
fair value at the date of acquisition)
13.5 Acquisition of an additional interest whereby an
associate becomes a subsidiary
Example 13.3: Acquisition of a further interest where an
associate becomes a subsidiary (control is obtained)
(NCI is measured at its proportionate share of the
13.6 Basic approach on disposal of an interest
13.7 Partial disposal of an interest in a subsidiary where
control is not lost
Example 13.4a: Partial disposal of an interest in a
subsidiary with no change in the status as the subsidiary
remains a subsidiary (control is not lost) (NCI is
Example 13.4b: Partial disposal of an interest in a
measured at fair value at the date of acquisition)
13.8 Loss of control with partial disposal of a subsidiary, with
a simple investment retained
Example 13.5: Partial disposal of a subsidiary (loss of
control) and an investment retained (NCI is measured at
their proportionate share of the acquiree’s identifiable
net assets at the acquisition date)
13.9 Partial disposal of an interest in a subsidiary, whereby it
becomes an associate
Example 13.6: Partial disposal of an interest in a
subsidiary resulting in a change in status as the
subsidiary becomes an associate (a loss of control by the
parent occurs) (NCI is measured at its proportionate
acquisition date)
13.10 Loss of control and intragroup sale of assets
Example 13.7: Loss of control over a subsidiary with
previous intragroup profits on the sale of depreciable
assets
13.11 Changes of interest in complex groups
Question 13.1
Question 13.2
Question 13.3
14 Changes resulting from the issue of additional shares by investees
and other changes in ownership
Introduction
Changes in subsidiaries
Issue of shares
14.1 Issue of capitalisation shares
Example 14.1: Capitalisation issue giving rise to
fractional dealings
14.2 Rights issue by a subsidiary
Example 14.2: Illustrative example of the entries by
the subsidiary and the parent with a rights issue
Example 14.3: Rights issue by subsidiary with no
change in relative interests (there is no loss of
control with the rights issue) and no change in
status as the subsidiary remains a subsidiary (NCI is
Example 14.4: Illustrative example of a parent’s
owners’ equity increasing after a rights issue (i.e.
the parent takes up more than its proportionate
share of the new shares on offer in the rights issue)
Example 14.5: Rights issue by a subsidiary
resulting in an increase of the interest of the parent
(control is not lost in the rights issue) and the status
does not change as the subsidiary remains a
subsidiary (NCI is measured at its proportionate
acquisition date)
Example 14.6: Rights issue by a subsidiary
resulting in a decrease of the interest of the parent
(control is not lost in the rights issue) and the status
does not change as the subsidiary remains a
subsidiary (NCI is measured at fair value at the
acquisition date)
Buy-back of shares
14.3 Buy-back of shares by a subsidiary
Example 14.7: Simple illustration of a share buy-back
Example 14.8: Buy-back of shares by a subsidiary with
no change in relative interests (there is no loss of
control) (NCI is measured at its proportionate share of
the acquiree’s identifiable net assets at the acquisition
date)
Example 14.9: Buy-back of shares by a subsidiary with
no change in status as an increase in the parent’s interest
occurs (there is no loss of control) and the subsidiary
remains a subsidiary (NCI is measured at its
assets at the acquisition date)
Example 14.10: Buy-back of shares by a subsidiary
where there is no change in the status as the subsidiary
remains a subsidiary (there is no loss of control) and a
decrease in the parent’s interest occurs due to the share
buy-back (NCI is measured at fair value at the
acquisition date)
14.4 Share-based payments of a subsidiary
Example 14.11: Issue of new shares by a subsidiary in
terms of a share-based payment transaction resulting in a
decrease of the interest of the parent (control is not lost)
and the status does not change as the subsidiary remains
a subsidiary (NCI is measured at its proportionate share
of the acquiree’s identifiable net assets at the acquisition
date)
14.5 Loss of control through expiry of an agreement and
obtaining control through an agreement
Example 14.12: Loss of control over a subsidiary on
expiry of agreement (NCI is measured at fair value at the
acquisition date)
Example 14.13: Obtaining control through an agreement
where an associate becomes a subsidiary (NCI is
14.6 Accounting for a change in investment entity status
Changes in associates and joint ventures
14.7 Accounting for other changes in the net assets of an
associate
IFRS 5 and investments held for sale
14.8 Important definitions
14.9 Applying IFRS 5 in the consolidated financial
statements
14.10 Associates classified as held for sale
Question 14.1
15 Foreign operations
Introduction
15.1 Foreign operation
15.2 Functional currency
15.3 Presentation currency
15.4 Spot exchange rate
15.5 Closing rate
15.6 Monetary item
currency
15.8 Translation of financial statements to the presentation
currency
15.9 Translation of a foreign operation
Example 15.1 Basic conversion of the financial
statements of a foreign subsidiary
Example 15.2 The impact of goodwill and IFRS 3 fair
value remeasurements on foreign operations
15.10 Foreign operation and reporting entity have different
reporting dates
Example 15.3 Loan to subsidiary as part of the net
investment in a foreign operation
15.12 Foreign operations – Associates and joint ventures
Example 15.4 Foreign operation – Associate
15.13 Disposal of a foreign operation
Example 15.5 Disposal of a foreign operation resulting
in a loss of control (NCI is measured at fair value at the
acquisition date)
Example 15.6 Partial disposal of an interest in a foreign
Question 15.1
16 Consolidated statement of cash flows
Introduction
16.1 Background
Example 16.1: Consolidated statement of cash flows
16.2 Investments in associates and joint ventures
Example 16.2: Investment in associate
16.3 Acquisition and disposal of associates and joint ventures
Example 16.3: Acquisition and disposal of associate
16.4 Acquisition and disposal of a subsidiary
Example 16.4: Acquisition and disposal of a subsidiary
16.5 Acquisition of a subsidiary in terms of a non-cash
transaction
16.6 An associate becomes a subsidiary and a subsidiary
becomes an associate
Example 16.5: Associate becomes a subsidiary and a
subsidiary becomes an associate
16.7 Financing activities between non-controlling
shareholders and the group
16.8 Acquisition and disposal of an interest in an existing
subsidiary that does not result in a loss of control
Sundry aspects
16.9 Foreign operations
16.10 Discontinued operations
16.11 Intragroup loans
Example 16.6: Sundry aspects
Question 16.1

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Group Statements – Volume 2

Group Statements – Volume 2

Associate Professor of Accounting

University of South Africa

Associate Professor of Accounting

University of South Africa

Associate Professor of Accounting

Associate Professor of Accounting

MCom(Forensic Acc) (Potchefstroom) CA(SA)

Senior Lecturer of Accounting

University of South Africa

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First edition 1975, Reprinted 1976

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ISBN 978 0 409 12849 9

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Copyright subsists in this work. No part of this work may be reproduced in

Editor: Mandy Jonck

Technical Editor: Liz Bisschoff

Group Statements focuses on providing detailed explanatory application

Separate Financial Statements;

Consolidated Financial Statements;

Investments in Associates and Joint Ventures; and

• IFRS 12 Disclosure of Interests in Other Entities (by providing limited

equity in table format, but extensive use is also made of consolidation

The book is aimed at:

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• members and students of professional bodies such as the South African

• practicing accountants and preparers of consolidated financial statements.

LexisNexis Passplus is still included for Volume 1 of this work. PassPlus is

• some aspects relating to the identification of a business combination and

• pre-existing relationships and reacquired rights in a business combination;

• some aspects relating to determining control (such as delegated power,