1

Enquiries: www.aspireexecutiveinstitute.com 0555213559

QUESTION 1

IFRS 10: Consolidated Financial Statements outlines the requirements for the preparation and presentation of
consolidated financial statements, requiring entities to consolidate other entities it controls. The control principle in
IFRS 10 sets out the following three elements of control: power over the investee; exposure, or rights, to variable
returns from involvement with the investee; and. the ability to use power over the investee to affect the amount of
those returns.

Required:

a) What are Consolidated Financial Statements?

b) Identify FOUR (4) circumstances under which a company may gain control over another company but will not be
allowed to prepare consolidated financial statements?

SOLUTION

(a)According to IFRS 10: Consolidated Financial Statements are the financial statements of a parent and its subsidiaries
presented as if they are the financial statements of a single economic entity.

b) Exemption from preparing consolidated financial statements

A parent need not prepare consolidated financial statements providing:

•It is itself a wholly-owned subsidiary, or is partially-owned with the consent of the non-controlling interest (Non -
Controlling interest); and

•It debt or equity instruments are not publicly traded; and

•It did not or is not in the process of filing its financial statements with a regulatory organization for the purpose of
publicly issuing financial instruments; and

•The ultimate or any intermediate parent produces consolidated finical statements available for public use that comply
with IFRS

QUESTION 2

IFRS10: Consolidated Financial Statements outlines the requirements for the preparation and presentation of
consolidated financial statements, requiring entities to consolidate other entities it controls.

Required:

a) Define control

b) Indicate FOUR (4) circumstances that an entity may not have gained control in another entity but may be allowed
to prepare consolidated financial statements.

Solution
2
Enquiries: www.aspireexecutiveinstitute.com 0555213559
a) Control is identified by IFRS10 Consolidated Financial Statements as the sole basis for consolidation and comprises
the following three elements:

SOLUTION

a. Power over the investee, where the investor has current ability to direct activities that significantly affect the
investee’s returns;

b. Exposure, or right to, variable returns from involvement in the investee; and

c. The ability to use the power over the investee to affect the amount of the investor’s returns.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Control is presumed where the acquirer acquires more than one-half of that other entity’s voting rights (unless it can be
demonstrated that such ownership does not constitute control).

b) Control may also have been obtained, even when one of the combining entities does not acquire more than one-
half of the voting rights of another, if, as a result of the business combination, it obtains:

•Power over more than one-half of the voting rights of the other entity by virtue of an agreement with other investors;
or

•Power to govern the financial and operating policies of the other entity under a statue or an agreement; or

•Power to appoint or remove the majority of the members of the board of directors or equivalent governing body of the
other entity; or

•Power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the other
entity

QUESTION 3

IFRS 3 Business combinations permits a non-controlling interest at the date of acquisition to be valued by one of two
methods:
(a) At its proportionate share of the subsidiary's identifiable net assets; or
(b) At its fair value (usually determined by the directors of the parent).

Required:

Explain the difference that the accounting treatment of these alternative methods could have on the consolidated
financial statements, including where consolidated goodwill may be impaired.

SOLUTION

IFRS 3 Business Combinations allows as an option a non-controlling interest to be valued at its proportionate share of the
acquired subsidiary's identifiable net assets. This carries forward the only allowed method in the previous version of this
Standard. Its effect on the statement of financial position is that the resulting carrying amount of purchased goodwill only
relates to the parent's element of such goodwill and as a consequence the non-controlling interest does not reflect its
share of the subsidiary's goodwill. Some commentators feel this is an anomaly as the principle of a consolidated statement
3
Enquiries: www.aspireexecutiveinstitute.com 0555213559
of financial position is that it should disclose the whole of the subsidiary's assets that are under the control of the parent
rather than just the parent's share.

This principle is applied to all of a subsidiary's other identifiable assets, so it seems logical to extend that treatment to
goodwill.

Any impairment of goodwill under this method would only be charged against the parent's interest, as the non- controlling
interest's share of goodwill is not included in the consolidated financial statements.

The second, more recent, method of valuing the non-controlling interest at its fair value would normally increase the value
of the goodwill calculated on acquisition. This increase reflects the non-controlling interest's ownership of the subsidiary's
goodwill and has the effect of 'grossing up' the goodwill and the non-controlling interests in the statement of financial
position by the same amount. It is argued that this method reflects the whole of the subsidiary's goodwill/premium on
acquisition and is thus consistent with the principles of consolidation.

Under this method any impairment of the subsidiary's goodwill is charged against both the parent and non- controlling
interest in proportion to their shareholding in the subsidiary.

QUESTION 4

Aspire has been approached by a potential new customer, Sigmund, to supply it with a substantial quantity of goods
on three months credit terms. Aspire is concerned at the risk that such a large order represents in the current difficult
economic climate, especially as Aspire's normal credit terms are only one month's credit. To support its application for
credit, Sigmund has sent Aspire a copy of Derrick's most recent audited consolidated financial statements. Sigmund is
a wholly owned subsidiary within the Derrick group. Derrick's consolidated financial statements show a strong
statement of financial position including healthy liquidity ratios.

Comment on the importance that Aspire should attach to Derrick's consolidated financial statements when deciding on
whether to grant credit terms to Sigmund.

Solution

Aspire cannot take assurance from the Derrick group financial statements that Sigmund would be able to meet its liability
in respect of the goods. The group financial statements will have aggregated the assets and liabilities of all the group
companies and it will not be possible to use them to calculate liquidity ratios for any one company This is important,
because Aspire's contract would not be with the Derrick group, it would be with Sigmund.

If Sigmund defaulted on its obligations, the Derrick group would be under no legal obligation to step in, so that the fact
that the group has a strong financial position is not really relevant. It would only become relevant if Derrick were willing
to offer a parent company guarantee.

In the absence of a parent company guarantee, Aspire must base its decision on the financial position of Sigmund as shown
in its individual company financial statements. It should also obtain references from other suppliers of Sigmund,
specifically those who supply it with large orders on 90-day credit terms.
4
Enquiries: www.aspireexecutiveinstitute.com 0555213559
QUESTION 5

In line with IFRS 3: Business Combinations, explain how the following items of an acquiree should be dealt with at the
date of acquisition

(a) Intangible assets

(b) Cost of a business combination

Intangible assets
The acquiree may have intangible assets, such as development expenditure. These can be recognised separately from
goodwill only if they are identifiable. An intangible asset is identifiable only if it:

(a) Is separable, ie capable of being separated or divided from the entity and sold, transferred, or exchanged, either
individually or together with a related contract, asset or liability, or

(b) Arises from contractual or other legal rights.

The acquiree may also have internally-generated assets such as brand names which have not been recognised as
intangible assets. As the acquiring company is giving valuable consideration for these assets, they are now recognised as
assets in the consolidated financial statements.

Cost of a business combination

The general principle is that the acquirer should measure the cost of a business combination as the total of the fair values,
at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in
exchange for control of the acquiree. Sometimes all or part of the cost of an acquisition is deferred (ie does not become
payable immediately). The fair value of any deferred consideration is determined by discounting the amounts payable to
their present value at the date of exchange.

Where equity instruments (eg ordinary shares) of a quoted entity form part of the cost of a combination, the published
price at the date of exchange normally provides the best evidence of the instrument's fair value and except in rare
circumstances this should be used. Future losses or other costs expected to be incurred as a result of a combination should
not be included in the cost of the combination. Costs attributable to the combination, for example professional fees and
administrative costs, should not be included: they are recognised as an expense when incurred. Costs of issuing debt
instruments and equity shares are covered by

IAS 32 Financial instruments: presentation, which states that such costs should reduce the proceeds from the debt issue
or the equity issue.

QUESTION 6

A financial assistant has observed that the fair value exercise means that a subsidiary's net assets are included at
acquisition at their fair (current) values in the consolidated statement of financial position.

The assistant believes that it is inconsistent to aggregate the subsidiary's net assets with those of the parent because
most of the parent's assets are carried at historical cost.

Required:

Comment on the assistant's observation and explain why the net assets of acquired subsidiaries are consolidated at
acquisition at their fair values.
5
Enquiries: www.aspireexecutiveinstitute.com 0555213559
SOLUTION

IFRS 3 Business Combinations requires the purchase consideration for an acquired entity to be allocated to the fair value
of the assets, liabilities and contingent liabilities acquired (henceforth referred to as net assets) with any residue being
allocated to goodwill. This also means that those net assets will be recorded at fair value in the consolidated statement of
financial position. This is entirely consistent with the way other net assets are recorded when first transacted (i.e. the
initial cost of an asset is normally its fair value). This ensures that individual assets and liabilities are correctly valued in
the consolidated statement of financial position. Whilst this may sound obvious, consider what would happen if say a
property had a carrying amount of GHc5 million, but a fair value of GHc7 million at the date it was acquired. If the carrying
amount rather than the fair value was used in the consolidation it would mean that tangible assets (property, plant and
equipment) would be understated by GHc2 million and intangible assets (goodwill) would be overstated by the same
amount.
There could also be a 'knock-on' effect with incorrect depreciation charges in the years following an acquisition and
incorrect calculation of any goodwill impairment. Thus the use of carrying amounts rather than fair values would not give
a 'faithful representation' as required by the Framework. The assistant's comment regarding the inconsistency of value
models in the consolidated statement of financial position is a fair point, but it is really a deficiency of the historical cost
concept rather than a flawed consolidation technique. Indeed, the fair value of the subsidiary's net assets represent the
historical cost to the parent. To overcome much of the inconsistency, there would be nothing to prevent the parent from
applying the revaluation model to its property, plant and equipment.

QUESTION 7

What does IFRS 10 Consolidated Financial statement say about the consolidation of a subsidiary with different
reporting date to that of the parent ?

Different reporting dates

In most cases, all group companies will prepare accounts to the same reporting date. One or more subsidiaries may,
however, prepare accounts to a different reporting date from the parent and the bulk of other subsidiaries in the group.

In such cases the subsidiary may prepare additional statements to the reporting date of the rest of the group, for
consolidation purposes.

If this is not possible, the subsidiary's accounts may still be used for the consolidation, provided that the gap between
the reporting dates is three months or less.

Where a subsidiary's accounts are drawn up to a different accounting date, adjustments should be made for the effects
of significant transactions or other events that occur between that date and the parent's reporting date.

QUESTION 8

The carrying amount of a subsidiary’s leased property will be subject to review as part of the fair value exercise on
acquisition and may be subject to review in subsequent periods.

Required:
Explain how a fair value increase of a subsidiary’s leased property on acquisition should be treated in the consolidated
financial statements; and how any subsequent increase in the carrying amount of the leased property might be treated
in the consolidated financial statements.
6
Enquiries: www.aspireexecutiveinstitute.com 0555213559
SOLUTION

A fair value adjustment to the carrying amount of a subsidiary’s leased property is usually required where the property
has been carried at depreciated historical cost. If it is already carried at a revalued amount, this should be broadly equal
to its fair value and no adjustment would normally be required. The pre-acquisition increase should be reflected in the
consolidated statement of financial position by including the subsidiary’s leased property at its fair value, with the
corresponding effect being a fair value adjustment in the calculation of consolidated goodwill. The adjustment has the
effect of reducing the amount of the purchase consideration that is allocated to goodwill. The fair value of the leased
property need not be reflected in the subsidiary’s own entity financial statements, although sometimes this is done to
make future consolidation simpler.

Where there is a post-acquisition increase in the value of a subsidiary’s leased property, this may or may not be reflected
in the consolidated financial statements, depending upon whether the group has a policy of carrying such properties at
revalued amounts (current values). If it does, then the increase would be included in ‘other comprehensive income’ and
the non-controlling interest would be shown to have a share of this. The other effect would be that there is likely to be an
adjustment in the income statement for additional amortisation based on the increase in value. In the statement of
financial position, the group’s share of the post-acquisition increase would be added to the group’s property revaluation
reserve and the non-controlling interest’s share of it would be added to the non-controlling interest’s part of equity

QUESTION 9

An acquirer may obtain control of an acquiree without transferring consideration. In such cases, IFRS 3 requires an
acquirer to be identified, and the acquisition method to be applied.

Required:

Briefly explain how this situation may come about, and highlight on the appropriate consolidation treatment required.

SOLUTION

An entity may gain control without transferring consideration through any of the following ways:

• the acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control;

• minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the
majority voting rights; and

• a combination by contract alone.

Consolidation implication

In a business combination achieved without the transfer of consideration, goodwill is determined by using the acquisition-
date fair value of the acquirer’s interest in the acquiree (measured using a valuation technique) rather than the acquisition-
date fair value of the consideration transferred. The acquirer measures the fair value of its interest in the acquiree using
one or more valuation techniques that are appropriate in the circumstances and for which sufficient data is available. If
more than one valuation technique is used, the acquirer should evaluate the results of the techniques, considering the
relevance and reliability of the inputs used and the extent of the available data.
7
Enquiries: www.aspireexecutiveinstitute.com 0555213559
QUESTION 10

Whether an investor’s rights in an entity are voting or contractual under IFRS 10: Consolidated financial statements,
these rights should be carefully evaluated to find out whether they are mere protective or actually confer power over
investee.

Required:

Explain protective rights, providing FOUR (4) instances where voting or contractual rights could be regarded as
protective.

SOLUTION

Protective rights are 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. Protective rights relate to fundamental changes to the activities of an
investee or apply in exceptional circumstances. However, not all rights that apply in exceptional circumstances or are
contingent on events are protective. Because protective rights are designed to protect the interests of their holder without
giving that party power over the investee to which those rights relate, an investor that holds only protective rights cannot
have power or prevent another party from having power over an investee.

Some examples of the types of rights that might be protective include:

•Rights held by a lender that can be used to prevent borrower from undertaking activities that could significantly change
the credit risk of the borrower.

•Rights held by a lender to seize assets in the event of default.

•The right of a party holding a non-controlling interest in an investee to approve capital expenditure above set limits or
to approve the issue of equity or debt instruments.

•Blocking rights over matters such as foreign takeovers or changes to an investee’s founding charter held by a
governments or founding party via a ‘golden share’.

• Rights held by a franchisor to protect the franchise brand against adverse actions by a franchisee.

QUESTION 11

The loss of control of a subsidiary that is a business, other than in a nonreciprocal transfer to owners, results in the
recognition of a gain or loss on the sale of the interest sold and on the revaluation of any retained non-controlling
investment. A loss of control is an economic event, similar to that of gaining control, and therefore is a re-measurement
event.

Required:

Explain in what ways an investor may lose control over an investee, indicating how such accounting event should be
dealt in the consolidated financial statements.
8
Enquiries: www.aspireexecutiveinstitute.com 0555213559
SOLUTION

Events that may result in deconsolidation of a subsidiary that is a business include the following:

•A parent sells all or part of its ownership interest in its subsidiary, thereby losing its controlling financial interest in its
subsidiary.

•Expiration of a contractual agreement that gave control of the subsidiary to the parent expires.

•The subsidiary issues shares, thereby reducing the parent’s ownership interest in the subsidiary so that the parent no
longer has a controlling financial interest in the subsidiary.

•The subsidiary becomes subject to the control of a government, court, administrator, or regulator.

If a parent loses control of a subsidiary that is a business through means other than a nonreciprocal transfer to owners, it
must:

•Derecognize the assets (including an appropriate allocation of goodwill) and liabilities of the subsidiary at their carrying
amounts at the date control is lost.

•Derecognize the carrying amount of any NCI at the date control is lost (including any components of accumulated other
comprehensive income attributable to it).

•Recognize the fair value of the proceeds from the transaction, event, or circumstances that resulted in the loss of control.

•Recognize any non-controlling investment retained in the former subsidiary at its fair value at the date control is lost.

•Reclassify to income [profit or loss], or transfers directly to retained earnings if required, in accordance with other US
GAAP [IFRS], the amounts recognized in other comprehensive income in relation to that subsidiary.

•Recognize any resulting difference as a gain or loss in income [profit or loss] attributable to the parent The gain or loss is
calculated as the difference between:

•The aggregate of:

o The fair value of the consideration transferred.

o The fair value of any retained noncontrolling investment in the former subsidiary on the date the subsidiary is
deconsolidated.

o The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other
comprehensive income or loss attributable to the NCI) on the date the subsidiary is deconsolidated.

•The carrying amount of the former subsidiary’s net assets.

9
Enquiries: www.aspireexecutiveinstitute.com 0555213559
QUESTION 12

Explain the consolidation implication of a change in group structure that does not result in loss of control

SOLUTION

The following accounting implications should be noted when an NCI in a subsidiary changes but the same parent retains
control:

•no gain or loss is recognised when the parent sells shares (so increasing NCI)

•a parent’s purchase of additional shares in the subsidiary (so reducing NCI) does not result in additional goodwill or other
adjustments to the initial accounting for the business combination

•in both situations, the carrying amount of the parent’s equity and NCI’s share of equity is adjusted to reflect changes in
their relative ownership interest in the subsidiary. Any difference between the amount of NCI adjustment and the fair
value of the consideration received or paid is recognised in equity, attributed to the parent.

QUESTION 13

All business combinations are accounted for by the acquisition method which involves identifying the acquirer.
However, it might not be easy identifying the acquirer.

Required:

Explain TWO (2) reasons why it might be difficult to identify the acquirer.

SOLUTION

IFRS 3 initially directs an entity to IFRS 10 ‘Consolidated Financial Statements’ to identify the acquirer, and to consider
which entity controls the other (ie the acquiree). In most business combinations identifying the acquirer is straightforward
and is consistent with the transfer of legal ownership. However, the identification can be more complex for business
combinations when:

•businesses are brought together by contract alone such that neither entity has legal ownership of the other

•a combination is affected by legal merger of two or more entities or through acquisition by a newly created parent entity

•there is no consideration transferred (combination by contract), or

•a smaller entity arranges to be acquired by a larger one.

QUESTION 14

What are the disclosure requirements of a parent company that is exempt from preparing consolidated financial
statements and elects not to do so and instead prepares separate financial statements?

SOLUTION
10
Enquiries: www.aspireexecutiveinstitute.com 0555213559
When a parent, in accordance with paragraph 4(a) of IFRS 10, elects not to prepare consolidated financial statements
and instead prepares separate financial statements, it shall disclose in those separate financial statements:

1. The fact that the financial statements are separate financial statements; that the exemption from consolidation has
been used; the name and principal place of business (and country of incorporation, if different) of the entity whose
consolidated financial statements that comply with International Financial Reporting Standards have been produced for
public use; and the address where those consolidated financial statements are obtainable.

2. A list of significant investments in subsidiaries, joint ventures and associates, including:

•the name of those investees.

•The principal place of business (and country of incorporation, if different) of those investees.

•its proportion of the ownership interest (and its proportion of the voting rights, if different) held in those investees.

3. A description of the method used to account for the investments listed under (2).

QUESTION 15

Accra Ltd, a government business entity, acquires 40% of the voting rights of Tema Ltd. The remaining investors each
hold 5% of the voting rights of Tema Ltd. A shareholder agreement grants Accra Ltd the right to appoint, remove and
set the remuneration of management responsible for key business decisions of Tema Ltd. To change this agreement, a
two-thirds majority vote of the shareholders is required.

Required:

In accordance with IFRS 10: Consolidated Financial Statements, discuss whether Accra Ltd controls Tema Ltd.

SOLUTION

Composition of control according to IFRS 10

•Power over the investee to direct relevant activities

The absolute size of Accra Ltd' shareholding in Tema Ltd (40%) and the relative size of the other shareholdings alone are
not conclusive in determining whether Accra Ltd has rights sufficient to give it power. However, the shareholder
agreement which grants Accra Ltd the right to appoint, remove and set the remuneration of management responsible
for the key business decisions of Tema Ltd gives Accra Ltd power to direct the relevant activities of Tema Ltd. This is
supported by the fact that a two-thirds majority is required to change the shareholder agreement and, as Accra Ltd
owns more than one-third of the voting rights, the other shareholders will be unable to change the agreement whilst
Accra Ltd owns 40%.

•Exposure or rights to variable returns of the investee

As Accra Ltd owns a 40% shareholding in Tema Ltd, it will be entitled to receive a dividend. The amount of this dividend
will vary according to Tema Ltd's performance and Tema Ltd's dividend policy. Therefore, Accra Ltd has exposure to the
variable returns of Tema Ltd.

•Ability to use power over the investee

11
Enquiries: www.aspireexecutiveinstitute.com 0555213559
The fact that Accra Ltd might not exercise the right to appoint, remove and set the remuneration of Tema Ltd's
management should not be considered when determining whether Accra Ltd has power over Tema Ltd. It is just the
ability to use the power which is required and this ability comes from the shareholder agreement.

• Conclusion

The IFRS 10 definition of control has been met. Accra Ltd controls Tema Ltd and therefore Accra Ltd should consolidate
Tema Ltd as a subsidiary in its group financial statements.

QUESTION 16

Under IFRS 3: Business Combinations, the identifiable assets, liabilities and contingent liabilities of subsidiaries are
therefore required to be brought into the consolidated financial statements at their fair value rather than their book
value. The difference between fair values and book values is a consolidation adjustment made only for the purposes of
the consolidated financial statements.

Required:

Explain the justification for undertaking fair value exercise when a parent acquires a controlling stake in a subsidiary
company.

SOLUTION

Fair value of assets and liabilities acquired

Assets and liabilities in an entity’s own financial statements are often not stated at their fair value, for example, where
the entity’s accounting policy is to use the cost model for assets. If the subsidiary’s financial statements are not adjusted
to their fair values, where, for example, an asset’s value has risen since purchase, goodwill would be overstated (as it
would include the increase in value of the asset).

Consolidated accounts are prepared from the perspective of the group, rather than from the perspectives of the individual
companies. The book values of the subsidiary's assets and liabilities are largely irrelevant, because the consolidated
accounts must reflect their cost to the group (i.e. to the parent), not their original cost to the subsidiary. The cost to the
group is their fair value at the date of acquisition.

Purchased goodwill is the difference between the value of an acquired entity and the aggregate of the fair values of that
entity's identifiable assets and liabilities. If fair values are not used, the value of goodwill will be meaningless.

QUESTION 17

IAS 28: Investment in Associates and Joint Ventures defines an associate as an entity over which an investor has
significant influence. Significant influence is the power to participate in the financial and operating policy decisions of
the investee but not in control or joint control of those policies. Significant influence is presumed to exist where the
investor entity holds more than 20% (but not more than 50%) of the voting power of the investee entity. In assessing
significant influence, all facts and circumstances are assessed, including the term of exercise of potential voting rights
and any other contractual arrangements.

Required:

Identify FIVE (5) factors that are indicative of significant influence.

12
Enquiries: www.aspireexecutiveinstitute.com 0555213559
SOLUTION

The following factors are indicative of significant influence:

•Representation on the board of directors or equivalent governing body;

•Participation in the policy-making process, including decisions about dividends and other distributions;

•Material transactions between parties;

•Interchange of managerial personnel; and

• Provision of essential technical information

QUESTION 18

Discuss the matters to consider in determining whether an investment in another company constitutes an associate
status.

SOLUTION

IAS 28 Investments in Associates and Joint Ventures defines associates. For an investment to be classified as an investment
in an associate, the investor must have 'significant influence' over the investee. Significant influence is presumed to exist
with a holding of 20% or more of the voting power unless the investor can clearly demonstrate that this is not the case.
Conversely, a holding of less than 20% is presumed not to be an associate unless it can be clearly demonstrated that the
investor can exercise significant influence. The voting rights can be held directly or through subsidiaries.

IAS 28 says that a majority holding by one investor does not preclude another investor from having significant influence.
An investing company owning a majority holding in another company normally has control over the investee and would
thus class it as a subsidiary. In normal circumstances, it is difficult to see how a company could be controlled by one entity
and be significantly influenced by a different entity unless 'control' was passive. The 20% test is not definitive and the
following other evidence should be considered.

Does the investing company:

•Have representation on the Board of the investee?

•Participate in the policy-making processes (operational and financial); have material transactions with the investee?

•Interchange managerial personnel with the investee; or provide technical expertise to the investee?

QUESTION 19

An investor entity can enter into a contractual arrangement with another entity in which unanimous consent of both
parties is required in order to take decisions relating to operating and financial policies of the investee. Such an
arrangement could either be a joint venture or a joint operation.

Required:

Explain the distinction between joint venture and joint operation under IFRS 11: Joint arrangements.

SOLUTION
13
Enquiries: www.aspireexecutiveinstitute.com 0555213559
Joint venture: In a joint venture, the parties having joint control have rights to the net assets of the arrangement. These
parties are called “joint venturers”.

Joint operation: In a joint operation, the parties having joint control have rights to the assets and obligations for the
liabilities relating to the arrangement. These parties are called “joint operators”.

When assessing the rights and obligations from the joint arrangements, it’s very important to look at how the joint
arrangement is structured, mainly whether the arrangement is structured through separate vehicle or not.

Separate vehicle is a separately identifiable financial structure, including separate legal entities (e.g. company) or some
entities recognized by a statute (not necessarily having legal personality).

When a joint arrangement is NOT structured through a separate vehicle, then the classification is easy: it is a clear joint
operation.

When the joint arrangement is structured through separate vehicle, then it can be either joint venture or joint operation.

IFRS 11 requires accounting for the investment in a joint venture using the equity method according to IAS 28 Investments
in Associates and Joint Ventures.

When an investor classifies its investment as a joint operation, then you should recognize in the financial statements:

•Its assets, including its share of any assets held jointly;

•Its liabilities, including its share of any liabilities incurred jointly;

•Its revenue from the sale of its share of the output arising from the joint operation;

•Its share of the revenue from the sale of the output by the joint operation; and

•Its expenses, including its share of any expenses incurred jointly

QUESTION 20

IFRS 3: Business Combinations defines fair value consistently with IFRS 13: Fair Value Measurement. IFRS 3 requires the
acquiree’s assets and liabilities to be incorporated into the consolidated financial statements at their fair values rather
than at their carrying amounts.

Required:

a) Explain the meaning of fair value in accordance with IFRS 13.

b) Explain the reasons why acquiree’s assets and liabilities are measured and recognised at their fair value within the
consolidated financial statements.

SOLUTION

IFRS 13 Fair Value Measurement defines fair value as 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.

In order to account for an acquisition, the acquiring company must measure the cost of what it is accounting for, which
will normally represent:
14
Enquiries: www.aspireexecutiveinstitute.com 0555213559
•The cost of the investment in its own statement of financial position

•The amount to be allocated between the identifiable net assets of the subsidiary, the non-controlling interest and
goodwill in the consolidated financial statements.

ii) The subsidiary’s identifiable assets and liabilities are included in the consolidated accounts at their fair values for the
following reasons:

•Identifiable assets and liabilities recognised in the accounts are those of the acquired entity that existed at the date of
acquisition. Assets and liabilities are measured at fair values reflecting conditions at the date of acquisition. The following
do not affect fair values at the date of acquisition and are therefore dealt with as post-acquisition items.

•Consolidated accounts are prepared from the perspective of the group, rather than from the perspectives of the
individual companies. The book values of the subsidiary’s assets and liabilities are largely irrelevant, because the
consolidated accounts must reflect their cost to the group (i.e. to the parent), not their original cost to the subsidiary. The
cost to the group is their fair value at the date of acquisition.

•Purchased goodwill is the difference between the value of an acquired entity and the aggregate of the fair values of that
entity’s identifiable assets and liabilities. If fair values are not used, the value of goodwill will be meaningless.

QUESTION 21

The consideration given by an investor to acquire an interest in an investee may be settled in different forms such as
cash, deferred, share exchange or contingent consideration. The contingent consideration may be in the form equity
or asset/liability.

Required:

Explain the distinction between the treatment of contingent consideration classified as equity and contingent
consideration classified as either asset or liability.

SOLUTION

Contingent consideration classified as a liability or an asset:

Contingent consideration classified as either an asset or a liability (financial or nonfinancial) should be remeasured to fair
value at each reporting date and changes in fair value should be included in profit or loss in accordance with IAS 39 or IFRS
9.

Contingent consideration classified as equity: Equity-classified contingent consideration is measured initially at fair value
on the acquisition date and is not remeasured subsequent to initial recognition. Settlement of the equity-classified
contingent consideration is accounted for within equity. In other words, the initial value recognized for an equity
contingent consideration arrangement on the acquisition date is not adjusted, even if the fair value of the arrangement
on the settlement date is different.