FAC2602

Open Rubric
 LEARNING OUTCOME
You should be able to consolidate the financial statements of a group of companies
where the interest in a subsidiary was acquired on a date other than at the end of the
financial year in accordance with International Financial Reporting Standards.

OVERVIEW

6.1 INTRODUCTION .................................................................................................. 2

6.2 APPORTIONMENT OF ITEMS IN THE STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME.................................................................. 2
6.3 APPORTIONMENT OF ITEMS IN THE STATEMENT OF CHANGES IN EQUITY
.............................................................................................................................. 3
6.4 PRESENTATION OF THE CONSOLIDATED STATEMENT OF PROFIT OR
LOSS AND OTHER COMPREHENSIVE INCOME AND THE CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY ............................................................ 3
6.5 EFFECTIVE DATE OF ACQUISITION ................................................................. 9
6.6 EXERCISE ........................................................................................................... 9
SELF-ASSESSMENT.................................................................................................... 16

KEY CONCEPTS
• Current-year profit apportionment
• Allocate profits pre-acquisition
• Allocate profits post-acquisition
• Pro forma consolidation entries

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 ASSESSMENT CRITERIA
After studying this learning unit, you should be able to:

• allocate the profit of the subsidiary in the year of acquisition

between the pre- and post-acquisition periods
• draft the consolidated annual financial statements where the
interest in a subsidiary was acquired on a date other than at the
end of the financial year in accordance with IFRS
• do the pro forma consolidation journal entries

6.1 INTRODUCTION
In the preceding learning units, the date of acquisition of an interest in a subsidiary has
always been the first day of the subsidiary's accounting period. In practice, the effective
date on which the delivery of shares takes place very rarely coincides with the end of a
financial year. The purchase of an interest in a subsidiary at a date other than the
accounting date is known as the interim acquisition of a subsidiary. We therefore need to
allocate items in the statement of profit or loss and other comprehensive income (to pre-
and post-acquisition date periods) to determine the amount of retained earnings at the
effective date of acquisition, which is a prerequisite for determining the goodwill at the
date of acquisition.

6.2 APPORTIONMENT OF ITEMS IN THE STATEMENT OF PROFIT OR

LOSS AND OTHER COMPREHENSIVE INCOME

If it is not practicable to apportion the profit or loss of the subsidiary for any financial year
with reference to the facts, we may treat it as if it accrued evenly from day to day during
the year and apportion it accordingly.

We must examine income and expenditure items individually to determine the basis on
which we should apportion each item between the period before acquisition and the
period since acquisition.

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6.3 APPORTIONMENT OF ITEMS IN THE STATEMENT OF CHANGES
IN EQUITY

We must account for preference dividends in respect of issued preference shares of the
subsidiary on a time basis, even if they have not been declared.

Declared ordinary dividends are year-end items by nature and fall in the post-acquisition
period.

6.4 PRESENTATION OF THE CONSOLIDATED STATEMENT OF

PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME AND
THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The first step in preparing the consolidated statement of profit or loss and other
comprehensive income during the current financial year is to apportion the income and
expenditure of the current year between pre- and post-acquisition periods. Once we have
done this, we can draw up the consolidated statement of profit or loss and other
comprehensive income and the consolidated statement of changes in equity using one
of two methods.

In this module, we will only deal with one method, i.e. where only the post-acquisition
profits are included in the operating profit.

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 EXAMPLE 1

The following are the trial balances of Sandy Ltd and South Ltd for the year ended
31 December 20.2:
Sandy South
Ltd Ltd
R R
Share capital - ordinary shares (800 000/355 000 shares) (800 000) (355 000)
Retained earnings - 1 January 20.2 (480 000) (120 000)
Gross profit (422 700) (166 200)
Dividends received - 31 December 20.2 (23 800) -
Auditors' remuneration 8 500 5 000
Depreciation 102 000 42 000
Staff costs 95 000 35 000
Interest paid on bank overdraft 3 800 -
Income tax expense 12 000 4 200
Dividends declared and paid - 31 December 20.2 80 000 34 000
Property, plant and equipment at carrying amount 861 600 426 200
Investment in South Ltd at fair value
- 248 500 shares purchased on 1 July 20.2 364 700 -
(cost price: R364 700)
Cash at bank 126 700 51 800
Inventory 72 200 43 000

Additional information
South Ltd became a subsidiary of Sandy Ltd on 1 July 20.2. The profit of South Ltd was
earned evenly throughout the year. Consider the carrying amount of the assets and
liabilities of South Ltd to be equal to the fair value thereof at the date of acquisition, with
the exception of land. The excess of the purchase price over the net carrying amount of
the assets at the date of acquisition was due to the difference between the carrying
amount and the fair value of the land.

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 REQUIRED
Draft the consolidated statement of profit or loss and other
comprehensive income and the consolidated statement of changes in
equity of the Sandy Ltd Group for the year ended 31 December 20.2
in compliance with the requirements of IFRS. Do all calculations to the
nearest rand.

SOLUTION 1

SANDY LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.2

Notes R
Gross profit 505 800
[422 700 + (166 200/12 x 6)]
Administrative expenses (246 500)
[102 000 + (42 000/12 x 6)] + [95 000 +
(35 000/12 x 6)] + [8 500 + (5 000/12 x 6)]
Finance costs (3 800)
Profit before tax 1 255 500
Income tax expense [12 000 + (4 200/12 x 6)] (14 100)
PROFIT FOR THE YEAR 241 400
Other comprehensive income for the year -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 241 400

Total comprehensive income attributable to:

Owners of the parent (241 400 − 12 000) 229 400
(b)
Non-controlling interests 12 000
241 400

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SANDY LTD GROUP
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.2

• Profit before tax

Profit before tax is arrived at after taking into account the following: R
Expenses
Auditors' remuneration (8 500 + 2 500) 11 000
Depreciation (102 000 + 21 000) 123 000
Staff costs (95 000 + 17 500) 112 500

SANDY LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.2
Non-
Share Retained Total
Total controlling
capital earnings equity
interests
R R R R R
Balance at 1 January 20.2 800 000 480 000 1 280 000 – 1 280 000
Changes in equity for 20.2
Equity on date of acquisition 156 300(a) 156 300
Total comprehensive income
for the year
Profit for the year 229 400 229 400 12 000(b) 241 400
Dividend paid: ordinary (80 000) (80 000) (10 200)(c) (90 200)
Balance at 31 December
800 000 629 400 1 429 400 158 100(d) 1 587 500
20.2

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Calculations
1. Analysis of owner's equity of South Ltd
(1)
Sandy Ltd 70 % NCI

Total At Since
30%
R R R R
At acquisition
Share capital 355 000 248 500 106 500
Retained earnings 120 000 84 000 36 000
(1/1/20.2)
(2)
Retained earnings (1/1/20.2 40 000 28 000 12 000
– 1/7/20.2)
(4) (3)
Revaluation of land 6 000 4 200 1 800
(a)
521 000 364 700 156 300
Purchase difference -
- -
Consideration and NCI
521 000 364 700 156 300
Since acquisition
Current year
Profit for the year (b)
(5)
Dividends 40 000 28 000 12 000
(c)
(34 000) (23 800) (10 200)

527 000 4 200 (d)

158 100

(1)
248 500/355 000 x 100 = 70%
(2)
Refer to calculation 2.
(3)
364 700 - 248 500 - 84 000 - 28 000 = 4 200 (balancing figure)
(4)
4 200/70% = 6 000
(2)
Refer to calculation 3.

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2. Allocation of items in the statement of profit or loss and other comprehensive
income

1/1/20.2 1/7/20.2
Total
to to
30/6/20.2 31/12/20.2
R R R
Gross profit 166 200 83 100 83 100
Auditors' remuneration (5 000) (2 500) (2 500)
Depreciation (42 000) (21 000) (21 000)
Staff costs (35 000) (17 500) (17 500)
Income tax (4 200) (2 100) (2 100)
Profit earned throughout the year 80 000 40 000(2) 40 000(5)

3. Pro forma consolidated journal entries

Dr Cr NCI
R R R
Share capital 355 000
Revaluation surplus 6 000
Retained earnings (120 000 + 40
160 000
000(2))
Investment in South Ltd 364 700
(a)
Non-controlling interests 156 300 156 300
Elimination of owner's equity of South
Ltd at acquisition

Non-controlling interests (SCI) 12 000

(b)
Non-controlling interests (SFP) 12 000 12 000
Recording of non-controlling interests
in
profit after tax
Dividends received – Sandy Ltd 23 800
(c)
Non-controlling interests (SFP) 10 200 (10 200)
Dividends paid – South Ltd 34 000
Elimination of intragroup dividend
and recording of non-controlling
interests in dividend
(d)
158 100

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According to the alternative method, we include both the pre- and post-acquisition profits
after tax of the subsidiary in the profit after tax for the year. Thereafter, we deduct the
profit earned by the subsidiary before acquisition of the controlling interest in order to
determine the profit of the group for the year. You will not be tested on this method in
FAC2602.

6.5 EFFECTIVE DATE OF ACQUISITION

The date of acquisition is the date on which control over the net assets and operations
of the subsidiary is effectively transferred to the parent. In practice, there must be certainty
as to the date of acquisition as this is the date from which the results of the subsidiary must
be included in the group annual financial statements. The following are possible dates to
consider for the date of acquisition:

• the date on which substantial agreement is reached

• the date on which control over the net assets and activities of the subsidiary is
transferred to the parent
• the date of signing of the agreement
• the date specified in the agreement
• the date of payment of the purchase consideration

6.6 EXERCISE
Your e-tutor can guide you in answering this question.

West Ltd became a subsidiary of East Ltd on 1 January 20.2. Consider the carrying
amount of the assets and liabilities of West Ltd to be equal to the fair value thereof at the
date of acquisition.

The following are the trial balances of East Ltd and West Ltd for the year ended 30
September 20.2:

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 East West
Ltd Ltd
R R
Credits
Share capital – ordinary shares (75 000/125 000 shares) 75 000 125 000
–12% preference shares (20 000 shares) 20 000 –
6% debentures 100 000 45 000
Retained earnings – 1 October 20.1 800 000 305 000
Sales 607 000 428 250
Interest received – 2 400
Dividends received 3 750 –
Trade and other payables 8 300 47 840
Dividends payable 10 000 –
Bank 4 000 –
Accumulated depreciation 53 500 22 950
Long-term borrowing – Bank Ltd – 105 000
1 681 550 1 081 440
Debits
Property, plant and equipment 481 100 452 000
Cost of sales 390 000 285 500
Administrative expenses 65 000 47 000
Depreciation 15 500 2 300
Interest paid – debentures 4 500 2 700
Income tax at 28% 36 960 20 202
Trade and other receivables 314 037 208 738
Bank – 18 000
Dividends paid 15 000 5 000
Dividends declared – 30 September 20.2 10 000 –
Investment in West Ltd (75% equity) at fair value 349 453 –
(cost price: R349 453)
Investment in South Ltd – 6% debentures at fair value – 40 000
(cost price: R40 000)
1 681 550 1 081 440

Additional information
1. West Ltd applied for a loan at Bank Ltd on 1 July 20.1. Bank Ltd granted the loan at
an interest rate of 20% per annum for a period of five years. The interest for the year
ended 30 September 20.2 has not been recorded yet and is payable on 1 October
20.2. Capital repayment will only start in 20.4.

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2. The sales of West Ltd are seasonal. 60% of the sales occurred during the first six
months of the financial year. The remaining amount of the sales figure was earned
evenly spread over the rest of the financial year. West Ltd maintains a gross profit
percentage of 50% on the cost price. All other income and expenditure were received
and spent evenly throughout the year. Income tax must be apportioned according to
the profit before tax for that period.

REQUIRED
Draft the consolidated annual financial statements of the East Ltd
Group for the year ended 30 September 20.2 in compliance with the
requirements of IFRS. Do all calculations to the nearest rand.

SOLUTION

EAST LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER
20.2

R
ASSETS
Non-current assets
Property, plant and equipment 856 650
(481 100 + 452 000 – 53 500 – 22 950)
Goodwill 13 358
Investment in South Ltd – 6% debentures at fair value 40 000
910 008
Current assets
Trade and other receivables (314 037 + 208 738) 522 775
Cash and cash equivalents 18 000
540 775
Total assets 1 450 783

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 EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (75 000 + 20 000) 95 000
Retained earnings(e) 893 907
988 907
Non-controlling interests(d) 119 236
Total equity 1 108 143
Non-current liabilities
6% debentures (100 000 + 45 000) 145 000
Long-term borrowing 105 000
250 000
Current liabilities
Trade and other payables (8 300 + 47 840 + 21 000(f) + 1
78 640
500(g))
Dividends payable 10 000
Bank overdraft 4 000
92 640
Total liabilities 342 640
Total equity and liabilities 1 450 783

(f) R105 000 loan x 20% = R21 000

(g) R100 000 debentures x 6% = R6 000

In trial balance = R4 500

Additional provision = R6 000 - R4 500 = R1 500

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EAST LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20.2

Notes R
Revenue (607 000 + 299 775(2)) 906 775
Cost of sales (390 000 + 199 850) (589 850)
Gross profit 316 925
Other income(7) 1 800
Administrative expenses (15 500 + 1 725(5) + 65 000 + 35 250(4)) (117 475)
Finance cost (4 500(g) + 1 500(g) + 17 775(6)) (23 775)
Profit before tax 1 177 475
Income tax expense (36 960 + 13 153(8)) (50 113)
PROFIT FOR THE YEAR 127 362
Other comprehensive income for the year -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 127 362
Total comprehensive income attributable to:
– Owners of the parent (127 362 - 8 455) 118 907
– Non-controlling interests b)
8 455
127 362

EAST LTD GROUP

NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.2

1. Profit before tax

R
Profit before tax is arrived at after taking into account the following:
Income
Income from investment(7) 1 800
Expenses
Depreciation (15 500 + 1 725(5)) 17 225

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 EAST LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

30 SEPTEMBER 20.2
12%
Ordi- Non-
prefe-
nary Retained control- Total
rence Total
share earnings ling equity
share
capital interests
capital
R R R R R R
Balance at
75 000 20 000 800 000 895 000 – 895 000
1 October 20.1
Changes in equity for 20.2
Equity on date of acquisition 112 031(a) 112 031
Total comprehensive income
for the year
Profit for the year 118 907 118 907 8 455(b) 127 362
Dividend declared: ordinary (10 000) (10 000) – (10 000)
Dividend paid: ordinary (15 000) (15 000) (1 250)(c) (16 250)
Balance at
75 000 20 000 893 907(e) 988 907 119 236(d) 1 108 143
30 September 20.2

Calculations
1. Analysis of owner's equity of West Ltd
East Ltd 75%(1)
NCI
Total At Since 25%
R R R R
At acquisition
Share capital 125 000 93 750 31 250
305 000 228 750 76 250
Retained earnings 1/10/20.1
(9) 4 531
Retained earnings 18 126 13 595
(a)
Equity represented by goodwill 448 126 336 095 112 031
- parent
-
Consideration and NCI 13 358 13 358
Since acquisition to end of 461 484 349 453 112 031
the current year
Profit for the year
(10) (b)
Dividends 33 822 8 455
25 367 (c)
(5 000) (3 750) (1 250)
(d)
490 306 21 617 119 236

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2. Allocation of items in the statement of profit or loss and other comprehensive
income
Total 1/10/20.1 1/1/20.2
to to
31/12/20.1 30/9/20.2
R R R
(2) (2)
Sales 428 250 128 475 299 775
Cost of sales (285 500) (85 650) (199 850)
(3) (3)
Gross profit 33.3% (50/150) 142 750 42 825 99 925
(4) (4)
Administrative expenses (47 000) (11 750) (35 250)
(5) (5)
Depreciation (2 300) (575) (1 725)
Profit from operations 93 450 30 500 62 950
(f) (6) (6)
Finance costs (2 700 + 21 000 ) (23 700) (5 925) (17 775)
(7) (7)
Income from investments 2 400 600 1 800
Profit before tax 72 150 25 175 46 975
(8) (8)
Income tax expense (20 202) (7 049) (13 153)
(9) (10)
PROFIT FOR THE YEAR 51 948 18 126 33 822

(1)
75% equity (given)
(2)
Sales: R428 250 x 60% = R256 950 for the first six months
 For the first three months = R256 950/2 = R128 475
 For the remaining nine months = R428 250 - R128 475 = R299 775
(3)
Gross profit
R128 475 x 50/150 = R42 825
R299 775 x 50/150 = R99 925
(4)
Administrative expenses
R47 000 x 3/12 = R11 750
R47 000 x 9/12 = R35 250
(5)
Depreciation
R2 300 x 3/12 = R575
R2 300 x 9/12 = R1 725
(6)
Finance costs
(R21 000 + R2 700) x 3/12 = R5 925 (R21
000 + R2 700) x 9/12 = R17 775
(7)
Income from investments
R2 400 x 3/12 = R600
R2 400 x 9/12 = R1 800

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(8)
Income tax expense
R25 175 x 28% = R7 049
R46 975 x 28% = R13 153

3. Entry in the financial records of West Ltd

Dr Cr NCI
R R R
Interest paid on long-term borrowings 21 000
Trade and other payables 21 000

4. Pro forma consolidated journal entries

Share capital 125 000
Retained earnings (305 000 + 18 126 (a)) 323 126
Goodwill 13 358
Investment in West Ltd 349 453
Non-controlling interests 112 031 (a) 112 031
Elimination of owner's equity of West Ltd at
acquisition
Non-controlling interests (SCI) 8 455
Non-controlling interests (SFP) 8 455 (b) 8 455
Recording of non-controlling interests in profit
after tax
Dividends received – East Ltd 3 750
(c)
Non-controlling interests (SFP) 1 250 (1 250)
Dividends paid – West Ltd 5 000
Elimination of intragroup dividend and recording
of non-controlling interests in dividends
(d)
119 236

SELF-ASSESSMENT
After studying this learning unit, are you able to:
• allocate the profit of the subsidiary in the year of acquisition
between the pre- and post-acquisition periods?
• draft the consolidated annual financial statements where the
interest in a subsidiary was acquired on a date other than at the
end of the financial year in accordance with IFRS?
• do the pro forma consolidation journal entries?

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