Financial Reporting for Business Groups

0 · How to Use Thisread first

The final exam is 55%, CLOSED BOOK, and a hurdle — score ≥45% in the exam itself or you fail the unit, whatever your other marks. Rest: tutorial participation 15% (9% group presentation + 6% weekly), group case study 20% (≈Wk 11), four in-lecture quizzes 10% (Wks 5, 7, 9, 11).

Permitted in the exam: an unannotated CAANZ Financial Reporting Handbook + ONE double-sided HAND-WRITTEN A4. Printed standards are banned; no Excel templates — you draft every worksheet journal by hand.

So treat this as the master you distil onto your own handwritten A4: it is the formula + journal bank for the whole unit. Side 1 = build the consolidation; side 2 = eliminate & the breadth topics. Tutorial/quiz questions are "adapted from past exams" — your best exam proxy.

1 · Control · Consolidate?C1 · AASB 10

Control [AASB 10.6–7] = all THREE: (a) power over the investee (current ability to direct the relevant activities), (b) exposure to variable returns (+/−, not just dividends), (c) the link — ability to use power to affect returns.

No % in the definition. Control is substance over form: de facto control can exist below 50%; a majority can fail if rights are non-substantive.

• Substantive rights — holder has the practical ability to exercise (no barriers) ⇒ count
• Protective rights — apply only on default/fundamental change ⇒ never confer power
• Potential voting rights (options/convertibles) count only if substantive — currently exercisable & not deeply out-of-the-money
• Agent vs principal — a trustee acting for others does not control

Who consolidates: a parent prepares consolidated financial statements (CFS). Exemption [10.4]: a wholly/partly-owned sub whose debt isn't publicly traded & whose ultimate parent files IFRS CFS.

Disclosure

AASB 12 — significant judgements in determining control [.7], info on subs & NCI [.10], unconsolidated structured entities [.24]. AASB 124 — parent & sub are related parties [.9]: disclose the relationship, ultimate parent, & related-party transactions.

1b · Investment-Type Mapwhich method?

Method is driven by decision-making rights, not the % alone (% is only an indicator).

Threshold is substance: 19% may be significant influence; 45% may be de facto control; 60% need not be control if rights aren't substantive.

2 · Acquisition MethodC2 · AASB 3

Apply the acquisition method [AASB 3.4] — the 5-part acquisition analysis:

1. Identify the acquirer — who obtains control [3.6–7]
2. Identify the acquisition date — date control passes; fixes FVs & freezes pre-acq equity
3. Measure FVINA — identifiable A & L at acquisition-date fair value [3.18] (may include items the sub can't book — internally generated intangibles, contingent liabilities)
4. Measure consideration transferred at FV [3.37] = cash + FV of assets given + FV of shares issued + FV of liabilities to former owners
5. Recognise goodwill OR gain on bargain purchase

In the parent's own books the acquisition is recorded at cost:

Parent's books (cost)Dr Investment in Subsidiary  (cost)
  Cr Cash / Share capital / Liability

Goodwill formula [3.32]

Goodwill =Consideration transferred (parent)
 + Amount of any NCI
 + FV of previously held interest (step acq)
 − FVINA (fair value of identifiable net assets)

Goodwill (positive) ⇒ asset, not amortised, impairment-only [AASB 136] & irreversible. GOBP (negative) ⇒ rare: first reassess that all A, L & the consideration are correctly identified & measured, then recognise the residual excess as income (gain) in P&L in the acquisition period [3.34–36].

Trap: FVINA is measured net of the 30% deferred tax on the FVAs — forgetting it overstates FVINA & understates goodwill. 100% acq ⇒ NCI = 0, so goodwill = consideration − FVINA. In a step acquisition the previously held interest is re-measured to FV at the date control is obtained, with the gain/loss to P&L.

2b · Acquisition Analysisworked · 100%

Bowen Ltd buys 100% of Larsen Ltd on 1 Jul 20X4 for $900 cash. Larsen's equity at acquisition: Share capital $400, Retained earnings $250, General reserve $50. One asset off FV: land carried at $200, FV $300 (+$100).

FVA on land (net of tax)Uplift $100 → BCVR $70 + DTL $30 (100×30%)

FVINA at acquisition= 400 + 250 + 50 + 70 (after-tax FVA)
= 770

Goodwill= Consideration 900 − FVINA 770
= 130

Check direction: if Bowen had paid only $700, residual = 700 − 770 = −70 ⇒ reassess, then a $70 gain on bargain purchase to P&L (not "negative goodwill").

#1 mistake: computing FVINA from book equity (omit the after-tax FVA), or using the FVA gross ($100) instead of ×(1−t) ($70); also forgetting to add NCI in the formula when the sub is partly owned.

3 · The WorksheetC3 · AASB 10.B86

Two core tasks: (1) aggregate line-by-line A, L, equity, income, expenses & cash flows of parent + subs; (2) adjust — offset investment vs pre-acq equity (book goodwill) & eliminate intra-group items in full.

Two governing principles

• #1 — consolidation entries live only in the worksheet; they never touch the parent's or sub's general ledger.
• #2 — the worksheet is a temporary record; entries are not carried forward — re-process every period until disposal. Any entry that hit a prior period's profit is redirected to Opening Retained Earnings (ORE).

Order of adjustments

Step 1  Acquisition analysis
Step 2a FVA (BCVR) + tax effect
Step 2b Pre-acquisition elimination (+ goodwill)
Step 2c Intra-group eliminations (+ tax)
Step 3  NCI memorandum

FVAs (2a) go BEFORE pre-acq (2b) — they form part of pre-acq equity & affect goodwill, so the BCVR must exist before it's eliminated.

Layout: Account | Parent | Subsidiary | Adj Dr | Adj Cr | Group. Group = Parent + Sub + Dr − Cr. Process every P&L line first, then every SoFP line; cross-reference each adjustment.

Goodwill — subsequent measurement debate: AASB once amortised goodwill (≤20 yrs); now impairment-only [136]. Impairment gives better matching but is judgemental/manipulable; amortisation is simple but arbitrary — an examinable critical-evaluation point.

3b · Pre-Acq Eliminationbooks goodwill

Eliminates the sub's acquisition-date equity against the investment & recognises goodwill.

100% owned, with goodwillDr Share capital     (@ DOA)
Dr Retained earnings  (@ DOA)
Dr General reserve   (@ DOA)
Dr BCVR         (FVA reserve)
Dr Goodwill
  Cr Investment in Subsidiary (@ cost)

Bowen/Larsen: Dr Cap 400 / RE 250 / Gen res 50 / BCVR 70 / Goodwill 130 → Cr Investment 900. (Debits 400+250+50+70+130 = 900 = credit.✓)

If GOBP insteadDr Cap / RE / Reserves (@ DOA)
  Cr Gain on bargain purchase (yr 1)
     OR Cr Opening RE (later years)
  Cr Investment in Subsidiary

Traps: uses equity frozen at DOA, not current; debit-balance equity (accumulated losses) is credited; the goodwill entry is repeated unchanged every year while the sub is held. Only GOBP shifts its credit from "Gain" (yr 1) to "Opening RE" (later), because the gain hit a prior period's profit.

Goodwill impairment

Yr of impairment:
Dr Impairment loss  Cr Accum impairment–GW
Later years (cumulative):
Dr Opening RE (prior) + Dr Impairment (current)
  Cr Accum impairment–GW (cumulative)

Impairment is not reversible — reinstate prior impairment via ORE each period.

Partly-owned sub

If the sub is only partly owned, the pre-acq elimination removes only the parent's % share of pre-acq equity (the parent's interest); the rest stays as NCI (side 2). Goodwill recognised here is the parent's goodwill (partial method) or parent + NCI goodwill (full method). The BCVR is still posted at 100% — NCI takes its share of it in the memorandum.

Read the worksheet: after posting BCVR + pre-acq, the Investment account nets to zero in the Group column & goodwill appears as a consolidated asset. If Investment ≠ 0, the credit was the wrong amount or you eliminated current (not DOA) equity. The pre-acq entry's debits (equity + goodwill) must equal the investment credit — a built-in check.

4 · FVA / BCVR + TaxC4 · AASB 3/112

At DOA the sub's books may not show FV (cost model; NRV rule; can't book internal intangibles [138.63]; contingent liabilities). FVAs capture pre-acq FV changes, go to the BCVR (equity reserve), & reduce goodwill $-for-$, net of tax.

Tax effect [AASB 112.19]

FVA changes the carrying amount but not the tax base ⇒ temporary difference ⇒ deferred tax @ 30%.

Three sources of FVAs the group books that the sub couldn't: cost-model assets below FV; internally generated intangibles [138.63] identifiable by the group [3.B31]; contingent liabilities failing the sub's recognition test [3.23].

Land (non-depreciable)

DOA & every year heldDr Land          100
  Cr BCVR       70
  Cr Deferred Tax Liability 30

If the land is later sold externally, replace the FVA with adjustments to the on-sale gain (the group's gain is lower than the sub recorded):

Dr Gain on disposal 100
  Cr BCVR 70   Cr Income tax expense 30
Years after sale: Dr Opening RE 70 / Cr BCVR 70

Trap: AASB 3 keeps recognising the FVA even after sale — it just shifts to ORE; the pre-acq elimination is unaffected.

Inventory FVA

If the FVA asset is inventory (FV > cost at DOA) and it is sold during the year, the uplift is realised through cost of sales rather than held as a reserve:

Dr BCVR  Cr COGS (uplift on inventory sold)
Dr Income tax exp  Cr BCVR (tax reverses to ITE, not DTL)

Once fully sold, later years carry only an ORE/BCVR clean-up. Realisation route differs by asset: land = on external sale; inventory = when sold; plant = via depreciation; intangible = via amortisation.

Intangibles: the group recognises one only if identifiable [138.12] (separable OR contractual/legal). Brands & customer relationships are contentious — opportunistic allocation to goodwill (which isn't amortised) vs depreciable FVINA is an examinable critique.

4b · Depreciable Assetplant · FVA dep'n

Marlowe Ltd sub: plant cost $500, accum dep $200 (CA $300), FV $400 at DOA, 5 yrs left.

DOA — restate then upliftDr Accum dep 200  Cr Plant 200 (to gross)
Dr Plant 100 (FV increment 400−300)
  Cr BCVR 70   Cr DTL 30

Each year — realise via dep'nDr Depreciation exp 20 (100÷5)
  Cr Accum depreciation 20
Dr DTL 6 (20×30%)  Cr Income tax exp 6

Year 3 (2 prior yrs in ORE)Dr Depreciation exp 20 (current)
Dr Opening RE 40 (prior 2 yrs)
  Cr Accum depreciation 60
Dr DTL 18  Cr Income tax exp 6  Cr Opening RE 12

The FVA + DTL recognition entry stays the SAME every year; the depreciation realisation grows cumulatively & splits current(P&L)/prior(ORE). The DTL unwinds as the asset depreciates.

4c · Contingent LiabilityAASB 3.23

Group recognises a contingent liability that is a present obligation with reliably measurable FV — even if outflow is not probable (narrower than AASB 137). Liability ⇒ DTA.

Dr BCVR 1,000  Cr Provision for damages 1,000
Dr Deferred Tax Asset 300  Cr BCVR 300

Measurement period [3.45–50]: within 12 months of DOA, new info about facts existing at DOA is applied retrospectively (adjusts FVA & goodwill). After 12 months ⇒ goodwill & pre-acq entry unchanged; the difference is a current-period gain/loss.

Worked: the $1,000 provision settles for $1,150. If within 12 months & the facts existed at DOA ⇒ restate FVA & goodwill by $150. If after 12 months ⇒ goodwill unchanged; the extra $150 is a current-period loss.

Side-1 Beltmemorise

Control = power + variable returns + link
Goodwill = Consid + NCI + prior int − FVINA
FVINA = equity@DOA ± FVA×(1−0.30)
BCVR = FVA×(1−t) · DTL/DTA = FVA×t
Pre-acq: Dr equity@DOA + Goodwill / Cr Invt
FVA dep'n = increment ÷ remaining life
FVA dep'n tax reversal = dep'n × 0.30
GOBP = FVINA − Consideration (if positive)
Order: AA → BCVR+tax → pre-acq → intra → NCI
Prior-period effect → Opening RE

5 · Intra-GroupC5 · AASB 10.B86(c)

CFS show only external transactions. Eliminate intra-group items in full, regardless of % (full amount even for partly-owned subs; only the unrealised-profit portion later affects NCI). Downstream = parent→sub; upstream = sub→parent.

3 Golden Rules

1. Eliminate the transaction (its revenue & expense / the balance)
2. Eliminate unrealised profit held inside an asset's carrying amount
3. Recognise the tax timing difference on (2) @ 30%

Profit is unrealised until the asset is sold externally (inventory/land) or consumed via depreciation (PPE). The unrealised-profit elimination creates a temporary difference ⇒ a DTA (group asset carrying amount < its tax base).

The 5 types: (1) inventory, (2) NCA — land & PPE, (3) dividends, (4) loans & interest, (5) fees. Only (1)&(2) carry unrealised profit; (3)–(5) have no profit, tax or NCI effect.

No-profit transactions

Dividends (paid in year)Dr Dividend revenue  Cr Dividend paid
Declared, unpaid — also:
Dr Dividend payable  Cr Dividend receivable

Service / management feeDr Fee revenue  Cr Fee expense

Loan & interestDr Loan payable  Cr Loan receivable
Dr Interest revenue  Cr Interest expense
Also eliminate any accrued interest payable/receivable

Trap: these have no profit effect ⇒ no tax & no NCI effect. A dividend fully settled in a later year ⇒ no entry (it re-nets to zero).

Worked · dividend

Larsen declares $80 dividend, still payable at year-end; Bowen owns 75%. Eliminate the full intra-group portion: Dr Dividend revenue 60 / Cr Dividend declared 60; Dr Dividend payable 60 / Cr Dividend receivable 60. The other $20 is NCI's share — it reduces the NCI balance, not eliminated.

Periodic vs perpetual

For inventory, under perpetual the unrealised-profit credit is to Inventory, debit COGS; under periodic it runs through the Closing inventory (P&L) line. The profit eliminated is identical — only the account names change.

5b · Inventory & NCAunrealised profit

Inventory (closing) + tax

Dr Sales revenue  Cr COGS (full intra-group sales)
Dr COGS  Cr Inventory (unrealised profit on hand)
Dr Deferred Tax Asset  Cr Income tax exp (UPP×30%)

Opening inventory (next yr — realised)Dr Opening RE (prior profit, after tax)
Dr Income tax exp (tax portion)
  Cr COGS (realised this period)

Worked: Larsen sells inventory to Bowen for $200 (cost $150 ⇒ $50 profit); ¼ still on hand at year-end. UPP = 50×¼ = $12.5. Eliminate sales $200/COGS; then Dr COGS 12.5 / Cr Inventory 12.5; Dr DTA 3.75 / Cr ITE 3.75.

Trap: only the unrealised profit (markup × units still on hand) hits the asset; the full sales/COGS elimination has no profit effect. UPP in inventory ⇒ DTA (group inventory carrying amount < tax base). Opening-inventory profit is realised this year ⇒ redirect to ORE.

Land (non-depreciable)

Year of sale:
Dr Gain on sale 300  Cr Land 300
Dr DTA 90  Cr Income tax exp 90
Held later: Dr Opening RE 300 / Cr Land 300; Dr DTA 90 / Cr Opening RE 90

Depreciable PPE

Gain elimination + tax, plus a depreciation correction — the buyer over-depreciates the inflated transfer price, so reverse the excess each year:

Dr Gain on sale  Cr Asset (to original CA)  + Dr DTA/Cr ITE
Dr Accum dep  Cr Depreciation exp (excess each yr)
Dr Income tax exp  Cr DTA (unwind as gain realises)

Worked · depreciable PPE

Bowen sells machinery to Larsen for $260 (CA to group $200 ⇒ gain $60); 4 yrs left. Year 1: Dr Gain 60 / Cr Machinery 60; Dr DTA 18 / Cr ITE 18. Excess dep'n = 60÷4 = $15/yr ⇒ Dr Accum dep 15 / Cr Depreciation exp 15; Dr ITE 4.5 / Cr DTA 4.5. By year 4 the deferred gain is fully realised through use.

Trap: for PPE the gain realises by use — adjust both accum dep & dep expense each year; prior years go to ORE. If sold externally before fully depreciated, recognise any remaining unrealised gain then.

6 · NCIC6 · AASB 10/3

Entity concept [AASB 10 App A]: NCI = equity of the group not attributable, directly or indirectly, to the parent ⇒ part of group equity (not a liability, not excluded). Group still reports 100% of net assets; equity splits into Parent Interest + NCI. P&L shows profit attributable to NCI [101.81B]; SoFP shows NCI in equity [101.54(q)]; PI = consolidated total − NCI.

Full vs partial goodwill [3.19]

Choice per business combination:

Goodwill = Consid + NCI − FVINAPartial: NCI = NCI% × FVINA
Full: NCI = FV of the NCI shares

Full method ⇒ NCI carries its goodwill ⇒ total goodwill higher; impairment then hits NCI differently. The full-method NCI fair value may embed a control premium, so it is not simply NCI% × the parent's price per share.

The 3-step NCI memorandum

An allocation (not separate journals), by equity component, on the sub's equity adjusted for after-tax FVAs & after removing unrealised profits:

1. At DOA = NCI% × (capital + reserves + RE + BCVR), all @ DOA
2. DOA → start of current year = NCI% × change in sub equity to the beginning of the year
3. Current year = NCI% × current profit (& OCI), adjusted for current UPP & FVA dep'n

NCI in SoFP = Step1 + Step2 + Step3 − NCI share of sub dividends. NCI share of profit (income statement) = the Step-3 profit piece.

Worked · Larsen 25% NCIEquity@DOA 700 + BCVR 70 = 770
Step1 = 25% × 770 = 192.5
Step2 = 25% × ΔRE (DOA→start yr) say 120 = 30
Step3 = 25% × current profit 160 (post-adjust) = 40
Less NCI div = 25% × 80 = (20)
NCI in SoFP = 192.5 + 30 + 40 − 20 = 242.5

Full vs partial here: under the full method add NCI's share of goodwill into Step 1; goodwill impairment is then split between PI & NCI (AASB 136 IE 7B). Under partial, impairment of the parent's goodwill hits PI only — a key reason the two methods give different NCI & group profit.

Preference shares held outside the group & classified as equity form part of NCI; the parent's profit share is adjusted for cumulative preference dividends [10.B95]. AASB 12 requires per-subsidiary NCI disclosures where the NCI is material.

6b · NCI & Intra-Groupupstream only

• NCI is adjusted only for the unrealised-profit elimination, never the gross transaction
• Allocate UPP to NCI only on UPSTREAM sales (sub is seller) — the sub's own profit. Downstream (parent seller) reduces parent profit only ⇒ no NCI adjustment
• No NCI adjustment for fees / interest / rent (consumed within the group)
• Sub dividends: parent's share eliminated intra-group; NCI's share reduces the NCI balance
• Negative NCI — losses allocated proportionately even if NCI goes negative [10.B94]

Trap (very common): students adjust NCI for the full intra-group sale, or for downstream UPP. Rule: NCI shares UPP only on upstream (and the sub's own) transactions.

7 · Consolidated Cash FlowC7 · AASB 107

Cash = on hand + demand deposits; equivalents = short-term (≤3 mo), liquid, insignificant risk. Three classes [107.10]: Operating, Investing, Financing. Direct or indirect [.18]; if direct, AU still needs a profit→CFO reconciliation [1054.16].

Group issue: acquiring a sub mid-year

Cash to acquire a sub (investing)= Cash consideration − cash & equivalents acquired WITH the sub
(net outflow if cash paid > cash acquired)

When reconstructing notional consolidated ledgers (AR, inventory, payables, PPE, tax), add the sub's opening balances as an "acquisition effect" so they aren't mistaken for operating flows.

Receipts (e.g. AR)= Opening AR + Acquisition effect − Closing AR + Sales (− bad debts)

Trap: failing to strip the acquired sub's opening working capital distorts CFO. The "cash used to acquire subsidiary" line is identical under direct & indirect methods.

Indirect: profit → CFO

1. Add back non-cash expenses (depreciation, impairment, bad debts); deduct non-cash income
2. Remove investing/financing items (e.g. gain on sale of PPE)
3. Accruals: ↑ non-cash current asset ⇒ deduct; ↑ current liability ⇒ add (and vice versa)

Disclose: components of cash [.45]; material non-cash financing/investing [.43]; and aggregate details of subs acquired — purchase price, cash portion, cash acquired, other A&L by class [.39–40].

8 · SegmentsC8 · AASB 8

Core principle [8.1]: disclose info enabling users to evaluate the nature & financial effects of the business activities & the economic environments. Management approach: report as seen by the CODM — may differ from consolidated GAAP. An operating segment [8.5]: (i) business activities, (ii) results regularly reviewed by the CODM, (iii) discrete financial info (corporate overhead is not a segment). May aggregate [8.12] if similar economics AND similar in all five (products, process, customer, distribution, regulation).

Reportable — the 10% tests [8.13]

Reportable if it meets any one:

• Revenue ≥ 10% of combined revenue (external + intersegment)
• Result ≥ 10% of the greater (absolute) of combined profits or combined losses
• Assets ≥ 10% of combined segment assets

75% coverage [8.15]Reportable segments together ≥ 75% of entity EXTERNAL revenue — add more if short; rest = "all other".

Reconcile [8.28] total reportable revenue, result, assets & liabilities to group totals — segments ≠ group because not all are reportable, corporate is excluded, intersegment items are eliminated, and measurement bases may differ on the management basis.

Trap: the result-test denominator is the higher absolute of total profits OR total losses (not the net); segment numbers are on the management basis ⇒ reconcile.

Worked · result test

Profit-makers total +500; loss-makers total −180. Denominator = greater absolute = 500 ⇒ threshold = 50. A segment with a −60 result is reportable (|60| ≥ 50), even though its loss is small relative to the net group profit of 320.

Disclose [8.23–24]

• Segment profit/loss; assets & liabilities (if reported to CODM)
• Revenue split: external vs intersegment
• Depreciation/amortisation; material non-cash items
• Interest revenue/expense; tax; additions to non-current assets
• Equity-accounted share of profit & investment carrying amount

Entity-wide [.32–34]: revenue by product/service; geographic revenue & non-current assets by country (excluding financial instruments, DTAs, post-employment & insurance assets); & reliance on major customers (any single customer ≥10% of revenue), disclosed even by a single-segment entity.

9 · Equity MethodC9 · AASB 128

Significant influence = participate in policy, not control; presumed ≥20%. "One-line consolidation": initial at cost (FVA & goodwill subsumed in cost).

CA = Cost + OI%×post-acq Δ − OI%×divShare profit: Dr Invt Cr Share of profit
Dividend: Dr Dividend rev Cr Invt
FVA dep'n / UPP: Dr Share of profit Cr Invt (×OI%×(1−t))
OCI: Dr Invt Cr Revaluation surplus
Tax: Dr Tax exp Cr DTL (CA>TB)

Losses only to a zero CA [128.39]. UPP: eliminate OI% on BOTH directions [128.28]; on consolidation re-record prior movements via ORE. Goodwill not separately impaired — test the whole investment [128.42].

10 · JO vs JVC10 · AASB 11

Joint control = relevant-activity decisions need unanimous consent of the parties sharing control.

Classification = rights/structure, not the %: a 50% interest can be either, yielding very different leverage & EPS.

11 · Foreign CurrencyC11–12 · AASB 121

Three currencies: functional, foreign, presentation. Functional = currency driving sales price & costs [.9]; prioritise para 9 when indicators conflict.

FX transaction — 3 stepsTxn date: spot rate (Dr Receivable/Cr Sales)
Bal date: monetary @ closing → FX gain/loss to P&L
Settlement: final FX diff to P&L; Dr Cash/Cr Recv

Only MONETARY items re-translate at closing rate (cash, receivables, payables, loans); non-monetary (PPE, inventory, prepayments) stay at historic.

FCTR: current-rate method — A&L @ closing, I&E @ average, equity @ historic; differences → OCI, accumulate in FCTR (recycled on disposal). Temporal ⇒ differences to P&L.

12 · Exam Daydon't drop marks

• Order: AA → BCVR+tax → pre-acq → intra → NCI; prior effects → Opening RE
• NCI: upstream UPP only; never the gross transaction
• Segments: result denominator = higher absolute of profits/losses
• FX: only monetary items re-translate; FCTR→OCI, temporal→P&L
• By hand: label the journals first, then plug