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ACCA P2 (INT) Notes

[Corporate Reporting]

ACCA
Corporate Reporting (P2)
(International)

Comprehensive Notes
By: Arif Javed (FCCA)

1

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Table of contents
Contents
IAS-2
IAS-7
IAS-8
IAS-10
IAS-12
IAS-16
IAS-17
IAS-19
IAS-20
IAS-21
IAS-23
IAS-24
IAS-33
IAS-36
IAS-37
IAS-38
IAS-40
IAS-41
IFRS-2
IFRS-3
IFRS-5
IFRS-8
IFRS-15
Financial instruments
Consolidation

2

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

Page number
03
06
11
13
15
17
22
28
33
36
38
40
43
50
53
55
58
59
61
66
67
69
71
74
80

ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-2: Inventories
Objective of IAS-2
Objective of IAS-2 is to prescribe the accounting treatment for inventories
...

Scope of IAS-2
Inventories include materials for use in production (raw materials), materials in process
of production in ordinary course of the business (work in progress) and assets held for
sale in ordinary course of the business (finished goods)
...
Work in progress arising from construction contracts (IAS-11)
2
...
Biological assets (IAS-41)
Recognition criteria
Inventory should be recognized in SFP is it meets following criteria
1
...
Future economic benefits are probable from use or sale of the inventory
Measurement
Initial measurement (at the time of first time recognition)
At the time of initial recognition inventory is measured at historical cost (cost for which
inventory was bought or manufactured)
Subsequent measurement (at reporting date)
At each reporting date inventory is measured at lower of cost and net releasable value
(NRV)
Cost of inventory
Purchase cost
Incidental cost of purchase
Trade discount
Non refundable taxes
Conversion cost (labour and overheard)
Procurement cost
Total cost

3

$
x
x
(x)
x
x
x
X

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Cost of inventories should not include
 Abnormal wastage
 Holding cost
 Admin overheads
 Selling cost
 Foreign exchange differences arising from import of the inventory
 Interest cost on deferred payments on inventory
Incidental cost of purchase
Cost incurred to complete the purchase transaction like
1
...
Valuation fee
3
...
Agency commission
5
...
It
includes carriage inward cost
...

Writing down of inventory
Inventory is written down to NRV if its NRV has fallen below its cost
...

De-recognition

Damaged/destroyed
Dr
Cr

x
x

Sold at profit
Dr
Cash/receivables
Cr
Inventory
Cr
SPL

x
x
x

Sold at loss
Dr
Cash/receivables
Dr
SPL
Cr
Inventory

5

SPL
Inventory

Sold

x
x
x

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-7: Statement of cash flows
Objective of IAS-7
The objective of IAS-7 is the presentation of information about changes in cash and
cash equivalents of an entity in the form of statement of cash flows
...

Cash equivalents
These are highly liquid investments which can be converted into known amount of cash
within short period of time (3 months according to IAS-7)
...

Presentation of statement of cash flows
Cash flows from operating
activities
Operating activities are
main revenue generating
activities of the business
like sales, purchases and
payroll etc
...


Cash flows from financing
activities
Financing activities are
those which affect the
capital structure of the
business by means of
changes in equity capital
and debt capital
...

Direct method is used when cash inflows and outflows related to different items of
incomes and expenses are given
...
In this
case we will start form operating profit given in SPL and convert it into operating cash
flows
...
Accounting
errors require retrospective adjustment in accounts
...

 If it is not practicable/possible to adjust the error up to the year in which it
occurred then it should be adjusted up to the year backward which is possible
...

Accounting policy
Broad basic principles, rules, procedures and assumptions used by an entity to present
its financial statement
...

However IAS-8 allows changes in accounting policies in following circumstances:
1
...
If it is required by an accounting standard (new standard or change in existing
standard)
...
If it results in improved presentation of financial statement
...

Accounting policy requires retrospective adjustment in financial accounts of the entity
...
For example estimate about useful life of non-current assets, estimate about
residual value of non-current assets and estimate about doubtful debts
...


11

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Notes
 Change in accounting estimates requires prospective adjustment in financial
statements of the entity
...

 Some accounting estimate changes affect current and future years like change in
estimated useful life of the assets or change in estimated residual value of the
assets
...

Reporting period
Reporting date

Authorization date

Issue date

Period covered by IAS-10
Events after reporting period

Adjusting events

Non-adjusting events

Events which provide further evidence of
condition existed at
The conditions existed at reporting date
Required adjustment in Financial
Financial
Statements at reporting date

Events for which no
reporting date
Require no adjustments in
statements at reporting
date (Only disclosed in notes to
accounts)

Examples of adjusting events
 Sale of inventory for less than cost which was measured at cost at reporting date
 Bankruptcy of a customer after reporting period
 Identification of a prior period error after reporting period
 Change of accounting policy after reporting period
 Determination of sale price of an asset after reporting period which was sold
before reporting date
 Determination of purchase price of an asset after reporting date which was
bought before reporting date
 An indication after reporting period that entity is not going concern
 Sale of an investment property at less than its fair value after reporting period
 Payments of dividends proposed before reporting date

13

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Examples of non adjusting events
 Change of accounting estimates after reporting period
 Fall in fair value of an assets after reporting period
 Destruction or damage of an asset after reporting period
 Revaluation of an asset after reporting period
 Sale or purchase of subsidiary after reporting period
 Major business reorganization after reporting period
 Payment of dividends proposed after reporting period
 Increase or decrease in value of an asset after reporting period

14

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-12: Taxation
Taxation
Current tax

Defer tax

Tax on current year profits

Tax on c/y profits which has not been
accounted for in current years
Or
Tax has been charged in excess of
actual amount of tax on c/y profits

= c/y profits x tax rate
When accounted for
Dr
Tax expense
Cr
Tax payable
When paid
Dr
Tax payable
Cr
Cash/bank

x
x

It arises due to differences in
accounting and tax profits

x
x

If revaluation of NCA increases the
accounting base and defer tax liability,
this increase should be debited in
revaluation reserves instead of SPL (in
tax expense)
Dr
Revaluation reserves
x
Cr
DTL
x
Excessive increase should be debited
SPL
...

Increase in DTL
Decrease in DTL
Dr
Tax expense
x
Dr
DTL
x
Cr
DTL
x
Cr
Tax expense
x
Increase in DTA
Decrease in DTA
Dr
DTA
x
Dr
Tax expense
x
Cr
Tax expense
x
Cr
DTA
x
How to determine temporary differences
For assets Tax base
x
Accounting base
(x)
Deductible/(taxable) TD
x/(x)
 Tax base is the value of asset deductible from tax profits in future (in the form of
depreciation)
...

 Accounting base is the value of asset deductible from accounting profits in future
(in the form of depreciation)
...

For liabilities Tax base
x
Accounting base
(x)
Taxable/(deductible) TD
x/(x)
 Tax base is the value of liability which will be added in tax profits in future (in the
form of amortization)
...


16

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-16: Property, plant and equipment
Objective of IAS-16
Objective of IAS-16 is to prescribe the accounting treatment for property plant and
equipment in financial statements
...

It excludes
4
...
Exploration and evaluation assets (IFRS-6)
6
...
Mineral rights and mineral reserves such as oil, natural gas and similar nonregenerative resources
...
Cost can be measured reliably and
4
...

Subsequent measurement (at reporting date)
At each reporting date property plant and equipment can be measured using cost model
or revaluation model
...
Legal fee
7
...
Professional fee
9
...
Advertisement
Procurement cost
It is the cost incurred in bringing the PPE in present condition and location
...

Depreciation
Depreciation is the systematic allocation of depreciable amount of a NCA to SPL over
its useful life
...
It is the allocation
of its depreciable amount to SPL over the life of the asset so that it can be
matched against revenue generated by that asset
...


18

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Accumulated deprecation
It is the total depreciation from date of purchase of asset to measurement date
...

Increase in valuation (Revalued amount > NBV)
Dr
PPE
x
Cr
Revaluation reserves
x
Decrease in valuation (Revalued amount < NBV)
Dr
SPL
x
Cr
PPE
x
Depreciating the PPE after revaluation
Revalued amount of PPE is depreciated over remaining useful life at the time
revaluation
...

Amount equal to excess depreciation caused by revaluation is transferred from
revaluation reserves to retained earnings every year
...

Subsequent revaluation of PPE
If an item of PPE which was revalued previously has been revalued again and its value
has moved in opposite direction to the previous revaluation, first of all previous
revaluation effect should be reversed and then new effect recorded
...

De-recognition

Damaged/destroyed
Dr
Cr

SPL
PPE

Sold

x
x

Sold at profit
Dr
Cash/receivables
Cr
PPE
Cr
SPL

x
x
x

Sold at loss
Dr
Cash/receivables
Dr
SPL
Cr
PPE

x
x
x

Any balance in revaluation reserves account at the time of disposal is transferred to
retained earnings
...

Types of lease
1
...
Finance lease
Operating lease
A lease contract where lessor transfers the rights of economic benefits from an asset to
the lessee while retaining the risks and rewards related to ownership of the asset
...

 Lease term is not more than 90% of useful life of the asset
...

 Risks and rewards related to ownership of the asset are not transferred to the
lessee
...

 Asset can be leased out for multiple times during its useful life
...

Dr
Cr

Lease rent receivable
Lease rent income

When received
Dr
Cash
Cr
Lease rent receivable

22

Rent payable is treated as an
expense on accrual basis
...

Its characteristics are
 It is a long term lease
...

 PV of minimum lease payments is more than 90% of FV of the asset
...

 Ownership of the asset may pass to the lessee at the end of lease term
...

Accounting treatments for finance lease
Ownership risks and rewards
Lessor

Lease payment (Principal + Interest)

Transfer of asset title to lessee
Dr
Lease receivables x
Cr
NCA
x
With FV of the asset

Receipt of lease installment
Dr
Cash
x
Cr
Lease receivables x
Cr
Interest income
x

Lessee

Transfer of asset title from
lessor
Dr
NCA
x
Cr
Lease liability
x
With lower of:
1
...
PV of minimum lease
payments
Payment of lease installment
Dr
Lease liability
Dr
Interest expense
Cr
Cash
x

x
x

Separation of principal and interest part from total lease payment
Actuarial method is used for separating the interest part and principal part in a total
lease installment
...
1)-5
=
-----------=
-------------R
0
...
791

Annual cash flows (annual installment) = 400,000/3
...
31 2016
Balance
Interest @10%
Payment on Dec
...
31 2018
Balance
Interest @10%
Payment on Dec
...
31 2020
Balance

24

FV
400,000

Interest

= 105,518
Total

40,000
65,518
334,481

105,518
33,448

72,070
262,411

105,518
26,241

79,277
183,134

105,518
18,313

87,205
95,929

105, 518
9,589

95,929
Nil

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

105,518

ACCA P2 (INT) Notes

[Corporate Reporting]

SPL extracts
Depreciation
Interest expense
Total expense

2016
80,000
40,000
--------120,000

2017
80,000
33,448
---------113,448

2018
80,000
26,241
---------106,241

2019
80,000
18,313
---------98,313

2020
80,000
9,589
--------89,589

2016
400,000
80,000
320,000

2017
400,000
160,000
240,000

2018
400,000
240,000
160,000

2019
400,000
320,000
80,000

2020
400,000
400,000
0

SFP extracts
NCA cost
Acc
...

Sale and finance lease back
Asset title

Owner
=
Lessee








Asset title

Buyer
=
Lessor

Asset title will not pass to the buyer/lessor
...

Legal ownership of the asset will pass to the buyer/lessor
...

Finance lease asset will be depreciated over lease term
...

Lease payments will reduce the lease liability as explained previously
...


Sale and operating lease back
Owner
=
Lessee






Asset title
Right to economic benefits from the asset

Buyer
=
Lessor

Asset title will pass to the buyer/lessor
...

Legal ownership of the asset will pass to the buyer/lessor
...

Actual gain or loss arising on sale of the asset will be recognized in SPL in year
of sale
...


26

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Guidelines for recognizing gain or loss on disposal

Sale
proceeds

> FV

= FV

< FV

Recognize it
immediately

Future lease
peyments

Future lease
payments

Future lease
peyments

Future lease
payments

= MV

> MV

= MV

< MV

All
gain/(loss) is
actual
...

= Any deferred gain/(loss) is amortized over lease term
= It is the loss which can be avoided by selling asset at FV
...

Deferred loss is treated as an asset and deferred gain is treated as a liability in SFP
...


Short term
employee
benefits

These include
wages, salaries,
bonuses and other
such benefits
...


Other long term
employee
benefits
These include in
service long term
benefits like medical
benefits, company
car and living
accomodation etc
...

These are of two types:
1
...
Defined benefit pension plans
Defined contribution pension plans
In this plan, employee’s contribution is defined (say 5% of gross salary) but benefit to be
received is not defined
...

Benefits to be received in this scheme will depend upon
 Contributions paid
 Length of employment
 Return earned on plan assets
Accounting treatment of defined contribution pension plan
Accounting treatment of this type of pension plan is very simple
...
If there is some under or over payment,
it is treated as accrual or prepaid in SFP
...

This pension scheme is also called final salary scheme because benefit payable to
employee depends upon the final year salary
...

Contributions to be paid in this scheme will depend upon
 Life expectancy
 Investment returns
 Wage inflation
Accounting treatment of defined benefit pension plans
Accounting treatment of this type of pension scheme is complicated
...

How it works? (This is called project unit credit method)
For example an employee who had started working with the employer 5 years ago, will retire after 15
years (total 20 years of service) and will be paid a pension of 20% (defined pension: final year
salary*20%*20)
...
Cost of capital is 10%
...
0814
=
$36,715
Amount needed today
=
$36,715*1
...
Assume that current liability is $9,500 in
books
...










At any time there will be plan assets (measured at FV) and plan liabilities
(measured at PV of future obligation)
...

Interest receivable on plan assets will be treated as an income and interest
payable on plan obligations will be treated as an expense
...

Employer will pay some benefits each year which will be deducted from plan
assets and also from plan liabilities (because it will reduce both pension assets
and liabilities)
...


29

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Financial statement extracts (final outcome)
Statement of financial position (SFP)
PV of plan obligations (c/d)
FV of plan assets (c/d)
Net obligations/(assets)

$
x
(x)
x/(x)

Statement of profit or loss (SPL)
Net interest component
Service cost component
Total charge to SPL

$
x
x
X

Statement of other comprehensive income (SOCI)
$
Net actuarial gain/(loss)
x/(x)
Notes:
1
...

2
...

3
...

4
...

5
...
Past service cost is fully charged as an expense in the year in
which it arises provided that it was not accounted for in actuarial assumptions
...
Actuarial gain or loss is calculated as follows:

30

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

FV of net assets
Opening assets
Interest income (opening assets*discount rate)
Contributions paid
Benefits paid
Closing assets should be
Closing assets are
Actuarial gain/(loss) B-A

$
x
x
x
(x)
A
B
x/(x) (1)

PV of obligations
Opening obligations
Interest expense (op obligations*discount rate)
Service cost (current +past)
Benefits paid
Closing obligations should be
Closing obligations are
Actuarial gain/(loss) A-B

$
x
x
x
(x)
A
B
x/(x) (2)

Total actuarial gain/(loss)

x/(x)

(1+2)

Asset ceiling
If FV of plans assets is more than PV of plan obligations at reporting date, it will
result in net assets which are subject to upper limit/ceiling
...
If plan assets are more
than asset ceiling, assets up to asset ceiling are recognized only
...
This may occur in case of a plant closure or discontinued operation
which results employees being made redundant
...

This may occur when an employee leaves the entity for new job elsewhere
...


31

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Accounting treatment of curtailment and settlement
As a result of curtailment, reduction in PV of obligations is treated as an income and
reduction in FV of assets is treated as an expense
...

Short term employee benefits
1
...

2
...
Such benefits may be cumulative or non cumulative
...
Such unutilized benefits are
recognized over the period services are provided by the employee
...

Non cumulative means that expense should only be recognized when absence
occurs
...

3
...

Termination benefits
Terminations benefits payable as result of the termination of employment wither by
employer or by employee by accepting voluntary redundancy
...
Payments which
are to be made more than 12 months after reporting date should be discounted to
present value
...

These are accounted for in the same manner as posy employment benefits, typically
projected unit credit method
...

Government grant is recognized in financial statements
...

Recognition of government
It is recognized in financial statements when it becomes receivable
...
Asset related government grant (provided to acquire or develop a qualifying
asset)
2
...

Receipt
Dr
cash
x
Cr
deferred income
x (NCL)
Amortization
Dr
deferred income
x
Cr
SPL
x
Repayment
Dr
deferred income
x
Dr
SPL
x
Cr
cash
x

33

Grant received is deducted from cost
of the asset
...

Receipt
Dr
cash
x
Cr
NCA
x
Repayment
Dr
NCA
Dr
depreciation
Cr
cash

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

x
x
x

ACCA P2 (INT) Notes

[Corporate Reporting]

Amount of deferred income which is to
be amortized in one year time is
treated as current liability
...
Asset has useful life of 5 years
after which it will have nil residual
value
...
Total cost of the asset
is $100,000
...

Receipt
Dr
cash
40,000
Cr
NCA
40,000
With grant
Cost
60,000

acc dep (3y) NBV
36,000
24,000

Repayment after three years
Cost
acc dep (3y) NBV
60,000
36,000
24,000
24,000
16,000
60,000
40,000

Y-1
CLs
Deferred income
NCLs
Deferred income

8,000
24,000

Y-2
CLs
Deferred income
NCLs
Deferred income

Dr
Dr
Cr

8,000

Without grant
Cost
acc dep (3y) NBV
100,000
60,000
40,000

16,000

NCA
depreciation
cash

Grant is to be repaid after three years
due to deviation from government
conditions
...

Receipt
Dr
cash
Cr
deferred income
Amortization
Dr
deferred income
Cr
SPL
Repayment
Dr
deferred income
Dr
SPL
Cr
cash

35

x
x (NCL)
x
x
x
x
x

Grant received is treated as an
income immediately if:
1
...
Related conditions have been
already met
3
...
For immediate financial
support
Receipt
Dr
cash
Cr
SPL

x
x

Repayment
Dr
SPL
Cr
cash

x
x

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-21: The effects of changes in foreign exchange rates
Objective of IAS-21
The objective of IAS-21 is to prescribe how to include foreign currency transactions and
foreign operations in financial statements of an entity and how to translate the financial
statements of foreign operation
...

Presentation currency
Presentation currency is the currency in which an entity presents its financial
statements
...

Subsequent measurement
 Monetary items are translated using closing rate
...

Note: Monetary items are those which meet definition of a financial asset or liability
under IFRS-9
...


36

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Foreign currency transactions in consolidated financial statements
Foreign subsidiary presents its accounts in its own functional currency which is different
from parent’s currency
...

Translating subsidiary’s financial statements
Statement of financial position
All the assets (including goodwill) and liabilities are translated at closing rate (exchange
rate at reporting date)
...

Statement of profit or loss
All the incomes and expenses are translated at average rate
...

Calculation of borrowing cost
Interest
Incidental cost
Discount on issue
Premium of redemption
Total borrowing cost

$
x
x
x
x
X

Accounting treatment of borrowing cost
Borrowing

Qualifying borrowing

General borrowing

To finance a qualifying asset

Other than qualifying borrowing

Capitalized in SFP and added
in cost of the asset

Expensed out in SPL

Qualifying asset
An asset under development which requires substantial period of time to get ready for
intended use or sale
...
Borrowing cost has started to incur
2
...


38

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ACCA P2 (INT) Notes

[Corporate Reporting]

When to cease the capitalization of borrowing cost
Capitalization of borrowing cost is ceased on earlier of:
1
...
When borrowing cost had ceased to incur
Note: Borrowing cost related to the period when there is no development activity on
qualifying asset is expensed out in SPL
...
Period when borrowing cost has started to incur but development activities on
qualifying asset have not yet started
...
Period when development of qualifying asset has suspended
...
Period when development of qualifying asset had stopped (asset has become
available for use) and borrowing cost is still incurring
...
Borrowing cost will be:
$
Amount payable on original borrowing
x
Amount receivable from temporary re-investment
(x)
Borrowing cost
X
Financing options for a qualifying asset
Qualifying asset can be financed through

Qualifying borrowing
Whole borrowing cost is capitalized

Qualifying borrowings are not used
in calculation of capitalization rate

General borrowing
Borrowing cost is capitalized
using capitalization rate
Weighted average rate for all the
general borrowings
If amount of a borrowing changes
during the year, average amount
outstanding during the year is
used

39

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-24: Related party disclosures
All the transactions between related parties are disclosed regardless of whether a price
is charged
...

d) An entity and reporting entity both are joint venture of a third party
...

f) An entity controlled by or jointly controlled by the person mentioned in (a) above
...

h) An entity or any member of its group which provide key management personnel
services to the reporting entity or its parent
...

b) Key management personnel of one entity have significant influence over the
other entity
...

d) A customer or supplier having significant volume of transactions with the entity
...

Disclosures
 Relationship between parents and subsidiaries should always be disclosed
whether or not any transactions have taken place between them
...

Weighted average number of shares
If there is no change in number of shares during the year then weighted average
number of shares are equal to actual number of shares outstanding during the year
...
Number of shares can change in following circumstances during the year:
1
...
Issue of bonus shares during the year
3
...
Issue of new shares during the year
Example # 1
No
...
5 = 50c

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

120,000
40,000
160,000
$65,000

ACCA P2 (INT) Notes

[Corporate Reporting]

Comparative EPS
Comparative EPS will not be affected by issue of new shares during the year
2
...

Example # 2
Number of shares on 1st January 2016
Bonus issue on 1st July 2016
Profit after tax for the year ending 31 December 2016

120,000
1 for 4
$52,500

Weighted average number of shares can be calculated as:
= (130,000 + 30,000) * 12/12
= 150,000
EPS

= 52,500/150,000

= $0
...
40

= 40c

Comparative EPS (previous year EPS)
Comparative EPS will be re-calculated by adjusting number of shares by bonus shares

44

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ACCA P2 (INT) Notes

[Corporate Reporting]

Example # 4
Number of shares on 1st January 2015
Number of shares on 1st January 2016
Issue of new shares on 1st may 2016
Bonus issue on 1st august 2016
Profit after tax for the year ending 31 December 2015
Profit after tax for the year ending 31 December 2016
EPS for the year ending 31 December 2015

120,000
120,000
30,000
1 for 5
$45,600
$67,200

= 45,600/120,000

= $0
...
3167
= 31
...
Rights issue during the year
When rights are issued during the year, number of shares before rights issue are
adjusted by bonus element on rights shares
...
It is done by multiplying number of shares before rights issue by cum-right
price/ex-right price
Cum right price
Share price just before the right issue (share + right)
Ex right price
Share price just after the rights issue (share only)
Example # 5
Number of shares on 1st January 2016
Rights issue on 1st September 2016 @ $3
...
2)) / (100,000 + 25,000) = $3
...
2
= 3
...
2
Ex right price = 19
...
84 per share
Weighted average number of shares can be calculated as
1st January 2016 to 31st August 2016
= 100,000 * 8/12 * 4/3
...
3690

= 36
...
2 per share
Share price on 1st September 2016 before right issue
Profit after tax for the year ending 31 December 2015
Profit after tax for the year ending 31 December 2016
EPS for year ending 31st December 2015
Restated EPS
= 25 * 3
...
25 = 25c

Diluted EPS
It is calculated as
Distributable profits + potential saving
=
------------------------------------------------------------Weighted av
...
of shares + potential shares



Potential saving means after tax interest saved on conversion of loan notes into
ordinary shares
...

It can arise from
1
...
Exercise of share options

46

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ACCA P2 (INT) Notes

[Corporate Reporting]

Dilutive event
An event which causes the dilution in EPS is called dilutive event
...

Non dilutive event
An event which causes no dilution in EPS is called non dilutive event
...

Convertible bonds or loan notes
When convertible bonds are converted, they affect both earnings and shares
...
Convertible bonds may or may not cause dilution in
EPS
...
Current
weighted number of shares of the entity are 500,000 and current year earnings are
$150,000
...

Calculate basic and diluted EPS for the entity for current year
...
3 = 30c

Current earnings
Potential interest saving (100,000 * 10% *70%)
Total earnings

$150,000
$7,000
$157,000

Current weighted average shares
Potential shares (100,000 * 30/100)
Total shares

500,000
30,000
530,000

Diluted EPS =

157,000
-----------530,000

Dilution in EPS

=

47

= $0
...
6

= 29
...
4c

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ACCA P2 (INT) Notes

[Corporate Reporting]

Example # 8 (non dilutive event)
An entity has $100,000 convertible loan notes having 10% coupon rate which can be
converted in 20 ordinary shares for each $100 of loan note after five years time
...
Rate of tax is 30% for the entity
...


Current EPS =

150,000
-----------500,000

= $0
...
302

= 30
...
Options only increase number of shares and do not affect earnings
...

Number of shares are adjusted as follows:
Current number of shares
Free shares resulting from exercise of options
Total number of shares

48

x
x
X

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Example # 9 (share options)
An entity has issued 50,000 options under which option holder can buy company’s
ordinary shares at $4 per share after three years
...
2 per share
which is expected to be $4
...
Current year earnings are
$40,000 and current number of shares are 100,000
...
4 = 40c

Current number of shares
Free shares resulting from options
50,000 * $4
= $200,000
$200,000/$4
...
379

100,000

5,556
105,556

= 37
...
9 = 2
...

Unsystematic decline means, decline in value which is not related to use of the asset
(economic benefits)
...
If recoverable amount is less than carrying amount it indicates
impairment
...

If it is not possible to test an asset for impairment separately, it should be tested
as part of a cash generating unit
...


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ACCA P2 (INT) Notes

[Corporate Reporting]

Cash generating unit
CGU is the smallest group of assets which generate independent cash flows
...
First of all charge to the assets to which it can be directly related
2
...
Then charge to all other non-current assets on pro rata basis
...
Reversal of impairment loss of goodwill is not allowed
...
Impairment of intangible NCAs can only be reversed if the event causing
impairment has reversed
...
Impairment of tangible NCAs can be reversed to the value that should have been
if there was no impairment
...
If it does
not meet recognition criteria, it is only disclosed in notes to accounts
...
For example an entity is facing legal action from a customer
who has claimed some damages
...
If entity looses the case, a liability will arise otherwise contingent liability
will finish
...
For example an entity has claimed the damages caused to
its asset from insurance company
...
If insurance company accepts the claim, an asset
will arise and if insurance company rejects the claim, contingent asset will finish
...


54

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ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-38: Intangible non-current assets
Objective of IAS-38
Objective of IAS-38 is to prescribe the accounting treatment for intangible non-current
assets in financial statements which are not specifically dealt with in another ISA/IFRS
...
Financial assets (IAS-32)
2
...
Expenditure on development and extraction of minerals, natural gas and similar
resources
...
Intangible assets arising from insurance contracts
5
...
Defer tax assets (IAS-12)
7
...
Assets arising from employee benefits (IAS-19)
9
...
Cost can be measured reliably and
6
...
Assets is separately identifiable and in control of the entity (by virtue of legal
rights)
Measurement
Initial measurement (at the time of first time recognition)
At the time of initial recognition all intangible non-current assets are measured at
historical cost
...

Note: Amortization is always calculated using straight line method
...

Accumulated amortization
It is the total amortization from date of purchase of asset to measurement date
...

Development expenditure

Does not meet capitalization criteria

Meets capitalization criteria

Expensed out in SPL
NCA

Capitalized in SFP as intangible

1
...
Management has sufficient
financial and technical
resources to complete the
asset
3
...
Cost to develop the asset is
reliably measurable

56

Not amortized until development is
complete
After development has completed, it is
amortized over its useful life

Amortization starts once asset becomes
available for use

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ACCA P2 (INT) Notes

[Corporate Reporting]

De-recognition
Intangible NCA is de-recognized from SFP when it ceases to meet recognition criteria
...

Recognition criteria
Investment property is recognized when
1
...
Future economic benefits associated with the property are probable
Measurement
Initial measurement (at the time of recognition)
Initially investment property is measured at cost
...
Any changes
in FV over the year are charged to SPL
...

Changing the measurement model
IAS-40 allows the change in measurement model if it results in more appropriate
presentation
...
Investment property is measured at cost model until its FV cannot be
measured
...

Transfer between IAS-40, IAS-16 and IAS-2
Cost/NRV is treated as FV

IAS-2

FV is treated as cost

FV is treated as cost

IAS40

RA is treated s FV

RA = Revalued amount (Asset is revalued and treated under IAS-16)

58

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IAS16

ACCA P2 (INT) Notes

[Corporate Reporting]

IAS-41: Agriculture
IAS- 41 applies to biological assets and agricultural produce at the time of harvest
...

Agricultural produce
Agricultural produce is the harvested product of the entity’s biological assets
...

Biological transformation
It comprises process of
 Growth
 Degeneration
 Production
 Procreation
That causes qualitative or quantitative changes in biological assets
...

For example
A farmer buys a diary calf
►
The calf grows into a mature cow ►
The farmer milks the cow
►
harvested)

the calf is a biological asset
this growth is biological transformation
milk is agricultural produce (which is

Recognition criteria
A biological asset should be recognized if
 Cost or fair value can be measured reliably &
 Future economic benefits are probable from the asset &
 Entity has control over the asset

59

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ACCA P2 (INT) Notes

[Corporate Reporting]

Measurement
Initial measurement (at the time of recognition)
Biological asset is initially measured at fair value less cost to sell (equivalent to NRV)
Gain or loss may arise when biological asset is initially measured
...

 A gain may arise when a new biological asset is born (such as lamb or calf)
...

Any change in fair value over the year is recognized in SPL as gain or loss
...
Both types of changes should be disclosed separately (not
necessarily) for better understanding of the users
...

Vesting date
The date on which the counterparty (employee) becomes entitled to receive cash or
equity instruments under the arrangement OR
The date on which share options or share appreciation rights are exercised by
employees
...

 At each reporting date calculate amount of expense & equity reserves to be
recognized to date on the basis of estimated number of options to be vest and
FV of options at grant date
...
Increase in equity reserves
during the year is recognized as an expense in SPL
...

On 1 January 2014 it grants 100 share options to each of its 500 employees
...
At grant
date FV of each share option is $15
...
31 December 2016 is the vesting date
...

During year ending 31 December 2014, 20 employees left and further 40 employees are
expected to leave in future years
...

During year ending 31 December 2015, further 15 employees left and further 15 are
expected to leave in future years
...

During year ending 31 December 2016, further 10 employees left
...

Related equity reserves and expense will be recognized as follows:
Equity reserves
31 December 2014 (500-20-40)*100*15*1/3 =
220,000
31 December 2015 (500-35-15)*100*15*2/3 =
450,000
31 December 2016 (500-45)*100*15*3/3
=
682,500

62

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Expense
220,000
230,000
232,500

ACCA P2 (INT) Notes

[Corporate Reporting]

Accounting treatment after vesting date
If employees exercise the share options (exercise price < market price)
Dr
Equity reserves
x
(as recognized above)
Dr
Cash
x
(proceeds from share issue under options)
Cr
Share capital
x
(par value of shares issued)
Cr
Share premium
x
(balancing figure)
If employees do not exercise the options (exercise price > market price)
Entity may retain the equity reserves as such or transfer it to retained earnings
...

Cancellation or settlement
An entity can cancel or settle the share option scheme before vesting date
...

 Any amount paid to employees up to FV of the equity instrument at that date is
deducted from the equity
...


63

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ACCA P2 (INT) Notes

[Corporate Reporting]

Accounting treatment for equity settled transactions
Dr
Cr

Expense
Liability

x
x

Calculation of liability and expense resulting from the transaction
 At each reporting date entity will estimate the number of employees who will
meet related conditions (employment and performance conditions only, market
conditions are ignored)
...

 Total c/d amount is recognized as a liability
...


Let explain with an example
An entity has 31 December year end
...
Each grant is conditional upon the employee working for the entity till 31
December 2016
...

Here 1 January 2014 is the grant date
...
Vesting
period is three years from 1 January 2014 to 31 December 2016
...
FV of SAR was $18 on 31 December 2014
...
FV of SAR was $20 on 31 December 2015
...
FV of SAR was $21
on 31 December 2016
...

 Decrease in liability (due to reduced number of employees who will exercise in
future) is treated as an income
...

 At the end of exercise period FV and intrinsic value of SAR will be the same
...

Hybrid transactions
If a share based transaction gives the entity choice over its treatment as equity settled
or cash settled transaction then
 If entity has an obligation to settle it in cash, it should be treated as cash settled
share based transaction and
 If entity has no obligation to settle it in cash, it should be treated as equity settled
share based transaction
...

The entity which receives goods or services in a share based arrangement must
account for those goods or services irrespective of which entity in the group settles the
transaction either in equity or cash
...

Conditions for held for sale classification
An asset or disposal group can be classified as held for sale if following conditions are
met:
 Asset is available for immediate sale
 Management has a committed plan to sell the asset
 Sale is highly probable
o An active program to locate a buyer has started
o The asset is being marketed at reasonable price for sale
o Sale is expected within 12 months from its classification
Measurement of NCA held for sale
NCA held for sale is measured at lower of
1
...
FV less cost to sell
 If FV less cost to sell of a NCA held for sale falls below its cost, it is treated like
impairment loss and is charged to SPL
...

 When as asset is classified as held for sale which was previously used in the
business (treated under IAS-16), it should be revalued to FV (this revaluation is
treated under IAS-16) and then measure at FV less cost to sell (under IFRS-5)
...

 If after writing down, subsequently FV less cost to sell increases, a gain is
recognized but not in excess of impairment loss previously recognized (under
IFRS-5 and IAS-36)
...

 Assets and liabilities held for sale are not offset
...


67

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ACCA P2 (INT) Notes

[Corporate Reporting]

NCA held for sale is not sold in one year

Due to controllable factors

Due to uncontrollable factors
Conditions for held for sale are still met

It should be transferred to IAS-16

No

Yes

Assets is depreciated for current year Keep it classified as NCA held for sale
And measured at lower of
1
...
And recoverable amount

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ACCA P2 (INT) Notes

[Corporate Reporting]

IFRS-8: Operating segments
Objective of IFRS-8
Objective of IFRS-8 is to provide information about operating segments of certain
entities that will enable users of financial statements to evaluate the nature and
financial impact of business activities and its economic environment
...

Operating segment
A component of an entity
 That engages in business activities which generate revenues and incur expenses
 Whose results are regularly reviewed by chief operating decision maker to make
decisions about allocation of resources and assessing performance
 For which discrete financial information is available
It means that it is the management who decides which part of the entity should be
treated as a separate segment
...

o Reported profit is more than or equal to 10% of total profit of all the segments
...

o Reported assets are more than or equal to 10% of total assets of all the
segments
...


69

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ACCA P2 (INT) Notes

[Corporate Reporting]

Disclosure requirements
Following disclosures are required by IFRS-8
 Factors used to identify reportable segments (for example products or services,
geographical areas or combination of these)
...

 For each segment entity should report
o A measure of profit or loss
o A measure of total assets
o A measure of total liabilities

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ACCA P2 (INT) Notes

[Corporate Reporting]

IFRS-15: Revenue from contracts with customers
Revenue
Revenue is the income arising in course of ordinary activities of the business
...
Contract may be in written or verbal form or established through
customary business practices
...

 Contract has commercial substance
...

 Payments terms can be identified
...

Step-2
Performance obligations are promises to transfer distinct goods or services to a
customer
...
Amount collected on behalf of
third parties are excluded
...

 The existence of a significant financing component in the contract
Financing component exists if there is significant difference between timing of
considerations received and delivery of goods or services to the customer
...

 Non cash considerations
Any non cash considerations are measured at fair value
...

 Consideration payable to a customer
Considerations paid to a customer in exchange for distinct good or services are
treated in the same way as good or services purchased from suppliers
...

Step-4
Total transaction price of the contract should be allocated to each performance
obligation in the ratio of its stand alone selling prices
...
If stand alone price is not
available, it should be estimated
...

Step-5
Revenue is recognized when entity satisfies a performance obligation by transferring
promised goods or services
...
Over the time or
2
...


72

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ACCA P2 (INT) Notes

[Corporate Reporting]

If performance obligation is satisfied over the time, its revenue is also recognized over
the time along with progress of that performance obligation
...

If performance obligation is satisfied at a point in time, the revenue is recognized at that
time
...
Control means ability to get benefits from the asset and preventing others from
obtaining benefits from that asset
...

 Cost of fulfilling the contract if they do not fall under scope of any other
standard and entity expects t recover them
...

Presentation on statement of financial position
If entity has recognized the revenue before considerations are received, it should be
recognized
 Either as receivables (if right to receive considerations is unconditional)
 Or as a contract asset
If entity has received considerations before recognition of the revenue, it should be
recognized as a contract liability
...

Financial assets
Any assets which is
a) Cash
b) Right to receive cash or other financial instrument
c) An equity instrument of another entity
d) Right to exchange financial assets or liabilities with another entity under
conditions which are potentially favorable for the entity
e) A contract that will or may be settled in entity’s own equity instruments and is a
non derivative for which entity is or may be obliged to receive a variable number
of entity’s own equity instruments
Examples of financial assets are
 Trade receivables
 Shares of other entities held as investment
 Options
Following assets are not financial assets
 Physical assets like property plan and machinery, inventories and leased assets
...

 Prepaid expenses and deferred revenues
...

Financial liability
Financial liability is
a) a contractual obligation to deliver cash or other financial asset to another entity
b) a contractual obligation to exchange financial assets or liabilities with another
entity under conditions which are potentially unfavorable for the entity
c) A contract that will or may be settled in entity’s own equity instruments and is a
non derivative for which entity is or may be obliged to deliver a variable number
of entity’s own equity instruments
Examples of financial liabilities are
 Trade payables
 Loan stocks or debentures
 Redeemable preference shares

74

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ACCA P2 (INT) Notes

[Corporate Reporting]

Equity instrument
Any contract that evidences a residual interest in the assets of an entity after deducting
all of its financial liabilities
Classification and measurement of financial assets (IFRS-9)
Financial assets may a
1
...
Equity instrument
...

Financial assets (debt instruments) measured at amortized cost
Financial asset (debt instrument) can be (not necessarily) measured at amortized cost if
it meets following two tests:
1
...

This means that entity does not plan to sell the assets prior to its maturity and
retain it till redemption and collect cash flows generated from it
...
Contractual cash flow characteristics test
Contractual cash flows generated from the asset must comprise principle and
interest elements only
...

Calculation of amortized cost
Opening asset
Finance income
(Opening
asset*effective %)
X
X

75

Cash received
(Par value*Coupon
rate)
(X)

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

Amortized cost
(Closing asset)
X

ACCA P2 (INT) Notes

[Corporate Reporting]

Let explain with example
An entity bought a bond for
Redemption period
Coupon rate of interest
Effective rate of interest
Redemption value
Year b/f value
100,000
102,000
104,240

effective int
...
received =

12,000
12,240
12,509

10,000
10,000
10,000

SPL

Y-1
Y-2
Y-3

+

$100,000
3 years
10% (interest actually paid on this bond)
12% (rate after taking into account redemption premium)
$106,749

SCF

c/d value
(amortized cost)
102,000
104,240
106,749
SFP

Notes
1
...

2
...

3
...


Financial assets (debt instruments) measured at FVTOCI
Financial asset (debt instrument) can be (not necessarily) measured at FVTOCI if it
meets following two tests:
1
...

This means that entity has held the asset to collect contractual cash flows,
however if entity finds an opportunity to buy another asset with higher returns, it
may also sell it
...
Contractual cash flow characteristics test
Contractual cash flows generated from the asset must comprise principle and
interest elements only
...
- int
...
Cost + FV adj =
102,000
800
104,240
(340)
106,749
351

FV (c/d)
102,800
103,900
107,100

At end of Y-1, FV exceeds amortized cost by (102,800 – 102,000) $800 which will be
accounted for as
Dr
Financial assets
800
Cr
SOCI
800
At end of Y-2, FV is less than amortized cost by (103,900 – 104,240) $340 which will be
accounted for as
Dr
SOCI
340
Cr
Financial asset
340
At end of Y-1 FV exceeds amortized cost by (107,100 – 106,749) $351 which will be
accounted for as
Dr
Financial assets
351
Cr
SOCI
351
Notes
 Amount recognized in SPL will be same as for assets measured at amortized
cost
...

 Asset will be revalued to FV at reporting date
...
This will be reclassified
to profit or loss when asset is disposed
...
Any change in fair value over the year is charged
to profit or loss
...

Financial assets (Equity instruments) measured at FVTOCI
A financial asst can be (not necessarily) measured at fair value through other
comprehensive income (FVTOCI) if it meets the following conditions:
1
...
There is an irrevocable choice to measure the asset at FVTOCI at initial
measurement
At each reporting date asset is revalued to FV and any changes in FV over the year are
recognized in statement of other comprehensive income
...

Financial assets (Equity instruments) measured at FVTPL
At each reporting date asst is measured at FV and any changes in FV over the year are
recognized in profit or loss
...


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ACCA P2 (INT) Notes

[Corporate Reporting]

Classification and measurement of financial liabilities (IFRS-9)
Financial liability can be measured as follows:
Initial measurement
At fair value less transaction cost
At fair value

Subsequent measurement
At amortized cost
At FV through profit or loss (FVTPL)

Financial liabilities measured at amortized cost
Financial liabilities can be (not necessarily) measured at amortized cost if it is not
measured at FVTPL
...
Amortized cost
is calculated in the same manner as for financial assets
...

It is also possible to measure a liability at FVTPL which would otherwise be measured
at amortized cost, if it eliminates or reduces the accounting mismatch
...
For example convertible bonds are compound financial instruments
...

Equity component is recognized as other components of equity in equity capital
...
For this investment whatever the parent will get is the fair value of subsidiary’s
net assets
...

We will take investment in subsidiary from parent’s statement of financial position and equity
capital (which is equal to book value of net assets) from subsidiary’s statements of financial
position for workings
...

Pre acquisition
Anything which a subsidiary has at the date of acquisition
...
It will be adjusted as
CI
►
Consolidated reserves account
NCI
►
NCI account

Calculation of goodwill

Proportionate method

Fair Value/full goodwill method

Goodwill is calculated for CI only

Goodwill is calculated for CI & NCI

One working for goodwill only
(COI a/c)

Two workings for goodwill
(COI a/c & COI (NCI) a/c)

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ACCA P2 (INT) Notes

[Corporate Reporting]

Workings
Cost of investment (COI) account
Investment in subsidiary
Share capital
Share premium
Pre acquisition reserves
Pre acquisition adjustments
Goodwill

$
x
---x
--X

(CI %age)
$
-x
x
x
x
x (balance)
-X

Goodwill is calculated at the time of acquisition, therefore all the pre-acquisition adjustments
(CI %age) are made in this account
...


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ACCA P2 (INT) Notes

[Corporate Reporting]

Consolidated reserves (retained earnings) account

Parent reserves (100%)
Subsidiary post acquisition reserves (CI %age)
Post acquisition adjustments (CI %age)
Impairment of GW (CI %age)
Decrease/increase in investment in A
Balance c/d

$
--x
x
x
x
--X

$
x
x
x
-x
---X

It contains only post-acquisition elements therefore only post acquisition adjustments (CI %age)
are made in this account
...
COI (NCI) account is a sub
working
...

If it shows positive goodwill
Dr
Goodwill
Cr
NCI
If it shows negative goodwill
Dr
NCI
Cr
Goodwill

82

x
x
x
x

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ACCA P2 (INT) Notes

[Corporate Reporting]

Fair value adjustments
If fair value of net assets of subsidiary is different from its book value at the time of acquisition,
then it is adjusted at the time of acquisition
...

Increase in FV
Dr
Asset
x
total
Cr
COI
x
controlling interest
Cr
NCI
x
non controlling interest
Decrease in FV
Dr
COI
x
controlling interest
Dr
NCI
x
non controlling interest
Cr
Asset
x
total
Depreciation on FV adjustments
If FV of a depreciating asset increases at the time acquisition it will result in additional
depreciation in post acquisition period and vice versa
...
It is post
acquisition adjustment and will be adjusted as
Increase in valuation
Dr
NCA
x
Total
Cr
Revaluation reserves
x
CI
Cr
NCI
x
NCI
Decrease in valuation
Dr
Revaluation reserves
x
CI
Dr
NCI
x
NCI
Cr
NCA
x
Total

83

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Recording an asset at acquisition date which is not recognized by subsidiary
Dr
Asset
x
Cr
COI
x (CI %age)
Cr
NCI
x (NCI %age)
Derecognizing an asset at acquisition date which is wrongly recognized by subsidiary
Dr
COI
x (CI %age)
Dr
NCI
x (NCI %age)
Cr
Asset
x
Recording a liability at acquisition date which is not recognized by subsidiary
Dr
COI
x (CI %age)
Dr
NCI
x (NCI %age)
Cr
Liability
x
Derecognizing a liability at acquisition date which is wrongly recognized by subsidiary
Dr
Liability
x
Cr
COI
x (CI %age)
Cr
NCI
x (NCI %age)
Intra group sales
When there are intra group sales, selling entity recognizes profit or loss on the transaction
...

Parent sold good to subsidiary
Dr
Consolidated reserves
Cr
Inventory

x (total URP)
x

Subsidiary sold goods to parent
Dr
Consolidated reserves
Dr
NCI
Cr
Inventory

x (CI %age)
x (NCI %age)
x (Total URP)

84

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Intra group sale of NCA
When non-current asset is sold within a group, selling entity recognizes gain or loss on disposal
and buying entity charges depreciation
...

Parent sold asset to subsidiary
Dr
Consolidated reserves
Cr
NCA

x
x

URP

Dr
Cr
Cr

x
x
x

Depreciation on URP

NCA
Consolidated reserves
NCI

Subsidiary sold asset to parent
Dr
Consolidated reserves
Dr
NCI
Cr
NCA

x
x
x

Dr
Cr

x
x

NCA
Consolidated reserves

Dividend proposed by the subsidiary
Dr
Dividend proposed
Cr
Consolidated reserves
Cr
Dividend payable to NCI

URP
Depreciation on URP

x (In SFP)
x
c (In current liabilities in consolidated SFP)

Mid-year acquisition
If a subsidiary is acquired during the current year, current year profit of subsidiary should be
divided into pre-acquisition and post-acquisition
...

Step acquisition
If a subsidiary is acquired in steps, acquisition date is that when control is acquired
...


85

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

For example
31 December 2012

1 January 2016
1 January 2016
Cost of acquisition is

Acquisition
40%

---20%

Inv/FV
$32,000

Increase in FV
Dr
COI
Cr
SPL

4,000
4,000

$36,000
$20,000
$56,000

Complex group
Complex group forms when there are more than one subsidiaries in a group
...

 Parent controls a subsidiary which controls another subsidiary (vertical group)
 Parent controls a subsidiary through direct investment and other subsidiary through
partially direct and partially indirect acquisition (D shaped group)
When parent acquires direct control over two subsidiaries, there is no problem; both
subsidiaries are consolidated in the same way as one subsidiary is consolidated
...
Date
31/12/2016
31/12/2016

70%
S2

86

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

CI
80%
56%

NCI
20%
44%

ACCA P2 (INT) Notes

[Corporate Reporting]
H

31/12/2015

80%
S1
S2

31/12/2016

CI
80%
56%

NCI
20%
44%

S1
S2

S1

Aq
...
Date
31/12/2015
31/12/2016

CI
60%
36%

NCI
40%
64%

70%
S2

H
31/12/2015

60%
S1

31/12/2016

60%
S2

Notes
 Acquisition date is when control subsidiary’s control passes to the parent
 Controlling interest can be less than 50%

87

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

D shaped group
H
31/12/2015

30%
60%
31/12/2015
40%
S1

S1
S2

Aq
...
Date
31/12/2016
31/12/2016

CI
60%
48%

NCI
40%
52%

S1
S2

Aq
...
60% of this will be shown in COI
account and 40% in NCI account
...


88

Prepared by: Arif Javed (FCCA), 0321- 66 96 281

ACCA P2 (INT) Notes

[Corporate Reporting]

Disposal of a subsidiary
a)
b)
c)
d)

Full disposal (control lost)
Subsidiary to financial investment (control lost)
Subsidiary to associate (control lost)
Subsidiary to subsidiary (control not lost)

80% - 80% = Nil
80% - 60% = 20%
80% - 50% = 30%
80% - 20% = 60%

Gain/(loss) on disposal is only calculated when control is lost
...

Calculation of gain or loss
In parent individual accounts
Sale proceeds
COI sold
Gain/(loss)
Taxation
Gain after tax

$
x
(x)
x/(x)
(x)
x

In consolidated accounts
Sale proceeds
FV of retained interest
BV of NCI
Total
FV of NCA sold
Unimpaired GW
Gain/(loss)

$
x
x
x
x
(x)
(x)
x

50%
30%
20%
100%
(x)
(x)
x

In C above
Transaction between controlling interest and non controlling interest
Acquisition
Dr
NCI
x (reduction in NCI)
Cr
Cash
x (cash paid to acquire further share)
Dr/Cr other component of equity x (balancing figure)
Disposal
Dr
Cash
x (cash received from sale of shares)
Cr
NCI
x (increase in NCI)
Dr/Cr Other component of equity x (balancing figure)
In this case gain/(loss) is not calculated on disposal as control is not lost

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