Consolidations & Segment Reporting
Overview:
Business combination and acquisition method
o Developed in house or acquired externally (M&A).
o Vertical/ horizontal integration, diversification
Preparation of consolidated statements of financial position and consolidated statements of
comprehensive income
Investments in associates and joint arrangements
Segment reporting: purpose, reportable segments, segmental data
Consolidated statements to get the big picture, segment reporting for details and showing
disaggregated data. Split by geography, product groups, subsidiaries etc.
Segmented reporting included in notes
Business combination and acquisition method
Business combination
Definition of business combination (IFRS 3): transaction or other event in which an acquirer
obtains control of one or more businesses
Note difference between acquisition of a business (integrated set of assets and activities,
management team) vs. non-business (an asset)
Control
Definition of control (IFRS 10): a parent is exposed, or has rights, to variable returns through its
involvement with the subsidiary and has the ability to affect those returns through its power
over the subsidiary
Power arises from
o Voting rights (must be >50% voting rights regardless of financial interest) or
o One or more contractual arrangements (examples from IFRS 10):
Right to appoint majority of board members
Right to direct the investee to enter into, or veto, significant transactions for the
benefit of the investor
Where the investee's key personnel are related parties of the investor (eg. CEO
of investee is COO of investor)
De facto control
Acquisition method
The accounting method to be used for business combinations (IFRS 3)
Accounting Basics
Who is the acquirer and who is the acquiree?
When is the acquisition date? (Date of transfer of control)
Purchase price? (Fair value of the consideration without including acquisition costs. NOT book
value)
Recognition and measurement of identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree
o Fair value of assets, liabilities, contingent liabilities
, o Fair value less costs to sell for non-current assets held for sale
o Intangible assets (recognised post-acquisition)
Accounting for goodwill: difference between the purchase price and the fair value of the net
assets at acquisition date (non-identified intangible assets)
o Book value and fair value differ due to recognition of intangible assets post-acquisition,
PPE fair value appreciation etc.
Goodwill
Definition of goodwill (IFRS 3): Future economic benefits arising from other assets acquired in a
business combination that are not individually identified and separately recognized.
Why?
o Workforce, reputation, innovative capacity, market power, synergy possibilities, etc.
Example:
o P bought 100% of the shares of S at a purchase price of £100,000. The book value of the
net assets of S at the acquisition date according to the balance sheet of S was £70,000.
The fair value of the net assets of S was £80,000.
o Goodwill: £20,000
Treatment after recognition (IFRS 3)
o Measured at cost less any accumulated impairment losses (not amortized)
o Tested for impairment annually, or more frequently if events or changes in
circumstances indicate that it might be impaired (consistent with identifiable intangible
assets with indefinite lives)
o Rationale: difficult to predict patterns of use and useful life of intangible assets, so
amortization is hard to calculate
o Impairment (IAS 36): cash-generating unit (goodwill will be put under company’s cash-
generating unit where impairment loss is conducted. Goodwill is not impaired directly)
Non-controlling interests
When the acquirer buys <100% of the shares of the acquiree, there is a part of ‘non-controlling
interest’ in the acquiree
Measurement of non-controlling interest (NCI). 2 methods:
o NCI is proportionate share of the acquiree’s identifiable net assets at fair value (this
considers NCI does not affect goodwill, only recognises the parent’s share of the
goodwill)
o Fair value (consider the purchase price allocation will be based on the purchase price
that the acquirer would have paid when it acquired 100% of the shares)
Example (calculate goodwill when there is NCI + calculate NCI)
o P bought 70% of shares of S at a purchase price of £180,000. The fair value of the net
assets of S at the acquisition date was £200,000. If P had acquired 100% of shares of S,
the purchase price would have been £250,000. Calculate the goodwill on consolidation.
, o Methods 1 & 2 provide different results (since purchase price at 80% does not scale
proportionally to 100%)
*Personal thoughts: think M2 example above is wrong. FV should be 200,000. NCI should be 250,000 –
180,000 = 70,000.
Another example: Parent pays $100m for 80% of Subsidiary which has net assets with a fair
value of $75m. The directors of Parent have determined the fair value of the NCI at the date of
acquisition was $25m.
o Method 1 on left (NCI = 75m*0.2 = 15m), method 2 on right (NCI = 25m)
Consolidated Financial Statements
Rationale for consolidated financial statements: one economic entity
Consolidated accounts:
o Recognize and revalue the acquired net assets to fair value at acquisition date
o Calculate the goodwill, eliminate investment of the parent on the subsidiary and add in
the goodwill on consolidation
o Only include the parent share of the post-acquisition profits in the consolidation
o Eliminate unrealized intragroup profits and intragroup debts (since they are one
economic entity, intercompany trading is disregarded). This is done irrespective of the
proportion of holding in subsidiaries.
Remove intragroup receivables/ payables and add to cash (assumed received)
o Include non-controlling interest
