1.+FRA - Study+Guide - v2.0 5

FINANCIAL REPORTING ANALYSIS
Relevant activities may include (but not limited to) the following:
• Selling and purchasing goods or services
• Managing financial assets
• Selecting, acquiring and disposing of assets
• Researching and developing new products and processes
• Determining a funding structure or obtaining funding (SFRS(I) 10 para B11)
In some cases, assessing power is straightforward, for example, where power is

obtained directly and solely from having the majority of voting rights or potential voting
rights, and as a result of the ability to direct relevant activities.
(SFRS(I) 10 para 11)
In other cases, assessment is more complex and more than one factor must be
considered. SFRS(I) 10 gives the following examples of substantive rights, other than
voting or potential voting rights, which individually, or in combination, can give an
investor de facto power.
• Rights to appoint, reassign or remove key management personnel who can direct
the relevant activities
• Rights to appoint or remove another entity that directs the relevant activities
• Rights to direct the investee to enter into, or veto changes to transactions for the
benefit of the investor
• Other rights, such as decision-making rights specified in a management contract that
give the holder the ability to direct the relevant activities
SFRS(I) 10 suggests that the ability rather than contractual right to achieve the above
may also indicate that an investor has power over an investee.
Returns
An investor must have exposure, or rights, to variable returns from its involvement with
the investee in order to establish control.
This is the case where the investor’s returns from its involvement are not fixed and have
the potential to vary as a result of the investee’s performance.
(SFRS(I) 10 para 15)
Returns may include:

(a) Dividends, other distributions of economic benefits from an investee (eg interest from
debt securities issued by the investee) and change in the value of the investor’s
investment in that investee
KHE-LCD-SGD-00446 50
(b) Remuneration for servicing an investee’s assets or liabilities

(c) Fees an exposure to loss from providing credit support
(d) Returns as a result of achieving synergies or economies of scale through an investor
combining use of their assets with use of the investee’s assets
(SFRS(I) 10 para B 57)
Link between power and returns
In order to establish control, an investor must be able to use its power to affect its
returns from its involvement with the investee. This is the case even where the investor
delegates its decision-making powers to an agent.
(SFRS(I) 10 para B58-B72)
Business Combinations
A business combination is the bringing together of separate entities or businesses into

one reporting entity in Consolidated Financial Statements.
The result of nearly all business combinations is that one entity, the acquirer / holding /
parent, obtains control of one or more other businesses, the acquiree / subsidiary.
Consolidation procedures
Consolidated financial statements:
(a) Combine like items of assets, liabilities, equity, income, expenses and cash flows of
the parent with those of its subsidiaries.
(b) Offset (eliminate) the carrying amount of the parent’s investment in each subsidiary
and the parent’s portion of equity of each subsidiary.
(c) Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entities of the group (profits or losses resulting
from intragroup transactions that are recognised in assets, such as inventory are
eliminated in full). Intragroup losses may indicate an impairment that requires
recognition in the consolidated financial statements.
Principle of cancellation
Like things in different final accounts within the group should be cancelled out from each
other to arrive at the group’s final accounts.
Note: The group or consolidated financial statements are supposed to show how the group
as a whole has dealt with the world outside.
Eliminate cost of investment
It is necessary to eliminate the cost of investment in the Parent’s books against the
shareholders’ equity in the Subsidiary’s books. The elimination will avoid double counting
when all the assets and liabilities of Parent and Subsidiary are added together.
Pre-acquisition and post-acquisition reserves
Pre-acquisition reserves represent the net assets of the subsidiary at the date of
acquisition and therefore have to be eliminated against the cost of investment in
the consolidation process. Also, pre-acquisition reserves are not earned under
common control and therefore should not be shown in the consolidated accounts.
Post-acquisition reserves represents reserves earned by the subsidiary after it

became a member of the group and therefore form part of the reserves of the group
and consequently have to be included in the consolidated accounts.
Goodwill
Goodwill should be recognised on a business combination. This is calculated as the

difference between:
1. Cost of investment (The fair value of the consideration transferred) and the
non-controlling interest in the acquiree at the acquisition date, and
2. The fair value of the acquiree’s identifiable net assets and liabilities.
Goodwill and the non-controlling interest
The calculation of goodwill will depend on the method chosen to value the non-controlling
interest at the acquisition date.
SFRS(I) 3 provides a choice in valuing the non-controlling interest (NCI) at acquisition
EITHER:
Method 1: The proportionate share of net assets method

NCI% X fair value of the net assets of the subsidiary at the acquisition date
Proportionate goodwill Method $

Cost of investment / Fair value of consideration paid 8,000,000
Non-controlling interest (30% x 8750,000) 2,625,000
Less: Fair value of net assets of S at acquisition (8,750,000)
Goodwill at acquisition 1,875,000
Proportionate goodwill Method $

Less: P’s share of fair value of net assets of S
at acquisition [70% x 8,750,000] (6,125,000)
Parent’s Goodwill 1,875,000
OR
Method 2: The fair value method

Fair value of NCI at date of acquisition.
Full goodwill Method - NCI

$
Fair value of non-controlling interest (3 million x $1·20) 3,600,000
11,600,000
Less: Fair value of net assets of S at acquisition (8,750,000)
Full Goodwill at acquisition 2,850,000
Full goodwill Method – NCI’s goodwill $

Less: P’s share of fair value of net assets at acquisition (6,125,000)
[70% x 8,750,000]
Parent’s Goodwill 1,875,000
Goodwill attributable to NCI 975,000
[3,600,000 – (30% x 8,750,000)]
Full goodwill 2,850,000
Impairment of Goodwill
Goodwill is recognised as an asset and tested for impairment annually.
The amount impaired will be charged to the statement of profit or loss and in the
statement of financial position, goodwill will be carried at purchased goodwill less
accumulated impairment.
Intra-Group Transactions

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FINANCIAL REPORTING ANALYSIS

In some cases, assessing power is straightforward, for example, where power is

Returns may include:

(b) Remuneration for servicing an investee’s assets or liabilities

Link between power and returns

A business combination is the bringing together of separate entities or businesses into

Consolidated financial statements:

Pre-acquisition and post-acquisition reserves

Post-acquisition reserves represents reserves earned by the subsidiary after it

Goodwill should be recognised on a business combination. This is calculated as the

Goodwill and the non-controlling interest

SFRS(I) 3 provides a choice in valuing the non-controlling interest (NCI) at acquisition

Method 1: The proportionate share of net assets method

Proportionate goodwill Method $

Goodwill at acquisition 1,875,000

Proportionate goodwill Method $

Method 2: The fair value method

Full goodwill Method - NCI

Full goodwill Method – NCI’s goodwill $

Goodwill is recognised as an asset and tested for impairment annually.

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