Content of lecture 1 A. IFRS 15 B. Approach to advanced group - - PDF document

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FINANCIAL ACCOUNTING

Lecture 1 Exam technique in advanced group questions, ITC feedback

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Content of lecture 1

A. IFRS 15 B. Approach to advanced group statement issues

1. Goodwill calculations including foreign operations 2. Calculating re-measurement gains in a step acquisition (eg. associate to subsidiary) 3. Preparing the pro-forma journal entries for a step acquisition or a loss of control 4. Calculating the group profit/loss on loss of control 5. Journalising intercompany transactions 6. Preparing consolidated cash flow statements

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IFRS 15 Revenue

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 Step 1: Identify the contract

 Probability

 Step 2: Identify the performance obligations

 Distinct (2 requirements) – paragraph 27!

 Step 3: Determine the transaction price

 VAT  Variable consideration  Significant financing element  Non-cash consideration  Consideration payable to a customer

 Step 4: Allocating the transaction price to the performance

• bligations

 Stand alone selling prices  Discounts  Variable consideration

 Step 5: Recognise revenue

 Over time (input or output methods) – paragraph 35!  At a point in time (control)

Approach to a theory question

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Required: Critically review or Discuss the accounting treatment or accounting recognition and measurement

• All 5 steps

Required: Critically review of Discuss the recognition

• Steps 1, 2 and 5

Required: Critically review of Discuss the measurement

• Steps 3 and 4
• Be able to identify the items dealt with specifically in the

standard

• Include principles from the specifics in the standard
• Sale with a right of return
• Bill and hold sales
• Non-refundable upfront fees, customer loyalty programmes

Approach to a theory question

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Be able to identify the items dealt with specifically in the standard

• Include principles from the specifics in the standard in

your answer

• Sale with a right of return
• Warranties – two types: manufacturers warranty and

extended warranty

• Customer options for additional goods or services (customer

loyalty programmes)

• Non-refundable upfront fees
• Consignments
• Bill and hold arrangements

Detailed construction contracts excluded Licensing excluded

Approach to a theory question

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Example 1: On 16 September a customer books and pays (via EFT) for a return flight from Johannesburg to Cape Town on Kulula.com. The EFT payment has been transferred from the customer’s bank account to Kulula's bank account on 19 September. The flight to Cape Town is on 30 November and the return flight is

• n 7 December. The amount paid is non-refundable if the

customer cancels the booking. When will Kulula recognise revenue? (a) 16 September (b) 19 September (c) 30 November (d) 7 December

Revision of the core principle

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Core principle

The entity recognises revenue to depict the transfer

• f

promised goods

• r

services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Transfer = base on control

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Ability to direct the use Obtain substantially all of the remaining benefits from the asset

Control

Control also includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, the asset Great definition in paragraph 33 of IFRS 15!

WHAT IS CONTROL?

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INDICATORS OF CONTROL Indicators that control has passed include a customer having…

…a present

• bligation

to pay …physical possession …legal title …risks and rewards of

• wnership

…accepted the asset

IFRS 15 paragraph 38

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Revision of distinct

Not separately identifiable if (factor examples)

The entity bundles the goods or services that represents the combined output for which the customer has contracted The goods or services significantly modify or customise another good

• r service promised in the

contract The good or service is highly dependent or interrelated with

• ther goods or services in the

contract

Goods or services are distinct if BOTH the following criteria are met:

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract 27

Bundle test Customisation test Dependency test

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Example 2: Distinct

• Hifi corporation sells:
• 55 inch UHD TV
• 12 month manufacturers guarantee/warranty
• Extended warranty purchased

What are the performance obligations? See B28 – B33 specifically dealing with warranties

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Example 2: Solution

• 2 performance obligations
• 55 inch UHD TV
• Extended warranty
• Manufacturer warranty not a separate performance
• bligation. Will be accounted for as a provision in

terms of IAS 37

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Guidance on maintenance plans

• Maintenance plans on assets
• Will be distinct if:
• 27(a): The entity regularly sells maintenance plans

separately

• 27 (b): The maintenance plan is separately identifiable

from other promises in the contract

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Examples: Comprehensive example and ITC Questions

• 2019 January Paper 3 Question 1
• 2017 January Paper 1 Question 1

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Revision of groups issues

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BUSINESS COMBINATIONS– IFRS 3 – Calculating goodwill

• IFRS 3 – paragraph 32

Fair value of identifiable net asset value Consideration transferred + NCI + Fair value

• f previously

held interest

Goodwill

What happens if the goodwill arises in a foreign operation?

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Example 1: January 2018 ITC Feedback

• 2018 January Paper 1 Question 1 – Observations

(Cooba)

• Don’t miss the “Ignore taxation” at the beginning of the

scenario

• Part (a)
• Contingent liability disclosed in subsidiary books

– Present obligation but problem with recognition criteria (15%) OR – Possible obligation (15%)

• Liability recognised at acquisition date

– Exception to IAS 37: A contingent liability shall be recognised if it as present obligation that arises from past events and its fair value can be measured reliably (IFRS 3: 22-23)

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Example 1: January 2018 ITC Feedback

• 2018 January Paper 1 Question 1 –

Observations from the requirement (Cooba)

• Part (a)
• Discuss the appropriate accounting treatment of the client claim

in the financial statements of both Cars4Africa and the Valare Group for FY2017. Presentation and disclosure should not be addressed.

• Do you discuss?
• Definitions (Provision/Contingent/Liability)



• Classification (Provision or contingent

liability) 

• Recognition 
• Initial measurement 
• Subsequent measurement 

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Example 1: January 2018 ITC Feedback

• 2018 January Paper 1 Question 1 – Solution (Cooba)
• Part (a) - Separates
• Identify the past event
• Prove the obligation
• Prove the probability of outflow (more likely than not)
• Evaluate measurement
• Conclude !
• Part (a) – Group
• State exception
• Apply present obligation and FV measurement
• Conclude
• Measurement
• Spot rate the acquisition date
• Taking into account probability
• Subsequent measurement: monetary amount (re-translation),

IFRS 3 subsequent measurement principles IFRS 3:56

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Example 1: January 2018 ITC Feedback

• 2018 January Paper 1 Question 1 – Solution

(Cooba)

• Part (b) - Separates
• Use your standard
• 2 types of costs
• Relocation and retraining costs should be expensed (R500 000) IAS

37:81

• Retrenchment costs can be provided for (included in the provision)

(R125 000) – IAS 19 Termination Benefits

• Discounting is not necessary – short term

– Part (b) – Group

• IAS 19 Employee Benefits is an exception to fair value. IFRS

3:26 lists this as an exception. Therefore continues to measured at IAS 19 carrying amount

– Part (c)

• Do not miss the “Ignore taxation” at the beginning of the

question

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STEP ACQUISITION

Associate or simple investment Subsidiary Y0 Y1 Deemed disposal of PHI @ fair value, hence recognition of remeasurement gain + deferred tax on the remeasurement gain + [realisation of relevant reserves IAS 28:22(c)

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STEP ACQUISITION

Associate or simple investment Subsidiary Y0 Y1 Deemed disposal of PHI @ consideration = additional consideration + Fair value of PHI Acquisition of control over business Recognition of goodwill or GoBP

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IFRS 3

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STEP ACQUISITION

• Example 2:

– Let us look at January 2015 ITC Question – Paper 1 Question 2 – Draw a timeline for yourself – timeline is CRITICAL!

Joint venture (20%) Subsidiary consolidated (at 20%) NCI (at 80%)

1/7/2012

Acquisition of control over business through shareholder agreement (no purchase consideration)

1/11/2013 30/6/2014

Purchase of NCI (not an IFRS 3 issue) B96 Equity accounting Consolidation

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STEP ACQUISITION

• Example 2:

– Let us look at January 2015 ITC Question – Paper 1 Question 2

• Control obtained via a shareholders agreement (step

acquisition without a purchase consideration)  consolidate at 20%, NCI at 80%

• Calculating remeasurement gains in a step acquisition

(journal 1)

• IFRS 3 Fair value measurements at the acquisition

date (Journal 2)

• There is a transaction with NCI on the last day of the

financial year

• Additional advise on the question – do a total column
• f the analysis as part of your calculations, then do

the journal entries - especially given the transaction with NCI at year end (attached)

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LOSS OF CONTROL

Subsidiary Associate or simple investment Y0 Y1 Disposal of subsidiary IFRS 10.B98 Or Proceeds less carrying amount of what is sold + remeasurement gain (retained interest)

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Realisation of reserves

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LOSS OF CONTROL

Subsidiary Associate or simple investment Y0 Y1 Disposal of subsidiary @ Fair value Deemed acquisition

• f associate or

investment

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Change in control Losing or gaining control

Realise amounts recognised in OCI as if the underlying asset were sold Revaluation surplus Retained earnings Mark to market Retained earnings FCTR Profit and loss

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January 2018 ITC Feedback

• Example 3:

– Let us look at January 2018 ITC Question – Paper 2 –

• Loan from Zbank to finance R200 mil is irrelevant in IFRS

3 calculations. The R200 mil is the cash consideration.

• Learning approach could be sold or licenced (separable),

intentions do not matter. No tax allowances creates deferred tax liability as all benefits will be taxed in future!

• All temporary differences on the building x 22% as any

amount received above tax value is tax at 22%.

• Do a total column of the analysis as part of your

calculations, then do the journal entries – very difficult to do a foreign operation without an analysis

• Calculating the group loss on sale of shares

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January 2018 ITC Feedback

• Example 3:

– Let us look at January 2018 ITC Question – Paper 2

• Group profit/loss (disposal of interest) should be

calculated in Rands! But remove separate profit from parent company.

• Reclassification of FCTR from OCI to P/L – NB!!!
• The fair value reserve on the remaining shares is sneaky!
• Don’t forget to eliminate the intragroup dividend

received from the company profit!

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SUBSIDIARY TO SUBSIDIARY

Subsidiary Subsidiary Y0 Y1 In equity Transaction with

• wners

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Exam technique – INTERCOMPANY TRANSACTIONS

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Exam technique – INTERCOMPANY TRANSACTIONS

• Where are you?

(airport)

• Where should

you be? (program GPS)

• Route

calculated by GPS

• Done in

company accounts

• Should be done

at group level

• Pro-forma

journal entry

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Example 4 H purchased 80% shareholding in S on 1 January 2015. On this date the FV of stock was R2m (CA R1m). At 31 December 2015, 50% of the stock was sold to X (another sub in the group), whilst the other 50% still remains on hand in S. X then sold 40% of the purchase outside the group and the remaining is in stock. S and X uses CP + 25% markup on all sales. Provide the journal entries required to account for S in the consolidated group financial statements.

INTERCOMPANY TRANSACTIONS

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Example 4: Solution

• Step 1 – done in company accounts

Trial balance at 31 December 2015 H S X H + S + X Revenue

• 625 000

312 500 = 937 500 Cost of sales

• 500 000

250 000 = 750 000 Inventory

• 500 000

375 000 = 875 000

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Example 4: Solution

• Step 2 – should be done at group level

Trial balance at 31 December 2015 Group Comment Revenue 312 500 Only external sales Cost of sales 400 000 Group cost of external sales (2 000 000 x 50% x 40%) Inventory 1 600 000 Group cost of inventory (2 000 000 x 50%) + (2 000 000 x 50% x 60%)

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Example 4: Solution

• Step 3 – Journal

J1) Dr Inventory 1 000 000 Cr Retained earnings 1 000 000 IFRS 3 fair value adjustment at acquisition J2) Dr Revenue 625 000 Cr Cost of sales 625 000 Elimination of intercompany sales J3) Dr Cost of sales 275 000 Cr Inventory 275 000 Unrealised profit and realization of FV adjustment at acquisition Step 1 Step 3 Step 2 Revenue 937 500

• 625 000(J2)

312 500 Cost of sales 750 000

• 625 000(J2)

+ 275 000(J3) 400 000 Inventory 875 000 +1 000 000(J1)

• 275 000(J3)

1 600 000

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Example 5: January 2018 ITC Feedback

• 2018 January Paper 1 Question 1 – Observations

(Cooba)

• Two parts to the requirement: IFRS 2 (SBP) + IAS 19 Long-term

service awards

• Step 1: It is nothing in the parents separate books
• The parent does not receive goods or services and the parent has no
• bligation to provide shares/cash
• Step 1: Cash-settled in subsidiary’s separate books
• Subsidiary will receive services of employee and subsidiary will provide

the shares by purchasing in the open market (cash outflow)

• Step 2: Equity-settled in the group (group own shares)
• Cash-settled FV treated same as equity-settled FV
• Taking into account market condition (share price), but ignoring non-

market condition (EPS target)

• Step 3 Approach: Reverse cash-settled in subsidiary and post

equity-settled in group – with difference in profit/loss

• 1 communication skills mark
• For journal narrations

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Measurement period adjustments

 Measurement period adjustments

 About facts and circumstances that existed at the acquisition date  Changes to at acquisition assets/liabilities with corresponding entry to goodwill  Restatement of assets/liabilities affected since acquisition date  Fraud!  Similar to IAS 10

 Subsequent measurement of:

 Reacquired rights  Contingent liabilities  Indemnification assets  Contingent consideration

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Statement of cash flows

• The starting point in preparing a cash

flow statement

• Given:

– SoFP – Statement of P/L and other OCI – Statement of changes in equity

• The task to prepare the statement of

cash flows?

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Approach to a cash flow question: Identify what you are required to do:

Entire cash flow? Just section of cash flow that relate to 1 of the 3 areas?:

Operating activities Financing activities Investing activities

Just a note?:

Operating activities Change in control

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Example: Acquisition of a subsidiary

• Important reconciliation note (NB!!!) – for

gaining control (see IAS 7.40)

 Fair value AT (Must be given)  Reconciling to the cash purchase price  NB!

Essentially IFRS 3.32

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Example: Subsidiary to associate

• Example of the IAS 7.40 note disclosure – for

loss of control

 group CA on date of sale (Must be given)  Reconciling to the cash selling price  NB!

Essentially IFRS 10.B98 – PULL THE AMOUNTS FROM AN ANALYSIS

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Thank you Good luck 