Consolidation Step Acquisition

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abonanno
Posts: 7
Joined: 02 Sep 2020, 15:55

Consolidation Step Acquisition

Post by abonanno »

I am currently performing an IFRS consolidation and am having an issue with reconciling the closing Group Retained Earnings - I would appreciate if anyone may help out. The following is the scenario:

P acquired a 50% investment in S in 2016 for €283,322. This investment is accounted for at equity method and up to 31 December 2019, P recognised share of profits on the investment of €206,800, therefore the carrying amount as at 31 December 2019 was €490,122.

On 22 September 2020, P acquired a further 25% investment in S at a purchase price of €245,061. Therefore P no longer has influence but now has 75% control over P and is required to consolidate the investment.

Further info
- the Net Assets Value of S as at 22 September 2020 amounts to €962,992
As at 22/09/2020 As at 31/12/2020
Share Capital €100,000 €100,000
Retained Earnings €340,515 €339,267
Other Legal Reserves €522,477 €524,066
€962,992 €963,333
- Parent's retained earnings as at 31/12/2020 (before consolidation) amount to €8,653,445

Workings:

1. Calculation of gain / loss on disposal
Carrying amount of formerly held investment - 50% €490,122
Fair value of formerly held - (50% * €962,992) €481,496
Thus, Loss to be recognised in profit or loss €8,626

2. Calculation of goodwill
25% - Purchase Consideration at crossing date €245,061
25% NCI at crossing date (25% * €962,992) €240,748
50% FV previous held interest (245,061 *50/25) €490,122
Less: FV identifiable assets (€962,992)
Goodwill €12,939

Thus Entry eliminating the investment upon consolidation

Investment in Parents books (735,184)
Share capital in subsidiary 100,000
Share capital - NCIs portion (25,000)
Goodwill (as per above) 12,939
Loss on disposal (as per above) 8,626
NCI share of other Reserves - pre acquisition (130,619)
NCI share of Retained Earnings - pre acquisition (85,129)
NCI share of other Reserves - post acquisition (397)
NCI share of Retained Earnings - post acquisition 312
Retained Earnings - NCI's share of pre+post Retained Earning 84,817
Other Reserves- NCI's share pre+post 131,017
Retained Earnings (entry balancing figure) 638,620

The issue I have is that as per my understanding the Group Consolidated Retained Earnings should be equal to the Parent's Retained Earnings + the subsidiary's post acquisition profits as follows...

Parent's Retained Earnings as at 31/12/2020 €8,653,445
Subsidiary's post acquisition profits €312
Total consolidated retained earnings €8,653,757

Actual consolidated retained earnings after posting above entries amounts €8,260,650.... thus I have an unreconciled difference of €393,107.... :? I would really appreciate is anyone notices what am I doing incorrectly... there should be a mistake somewhere....
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Marek Muc
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Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Consolidation Step Acquisition

Post by Marek Muc »

it's much too loooong I'm afraid, try phrasing it as a short and succint question
abonanno
Posts: 7
Joined: 02 Sep 2020, 15:55

Re: Consolidation Step Acquisition

Post by abonanno »

Yes I know... I tried to give as much details as possible...

In a nutshell I am consolidating a subsidiary of which the Parent obtained control through the purchase of 25% of the share capital part way through the year and in the previous year this was an associate wherein the parent held 50%. Now therefore the Parent holds 75%. So this is a step up acquisition.

I calculated the loss on disposal (of the associate investment) and goodwill for a step up acquisition as we have learnt, however in the end when I reconcile the Group Retained Earnings I am ending up with a difference since the Retained Earnings should be equal to the Parent's Retained Earnings + the subsidiary's post acquisition profits...

I know it's a bit complicated and one has to look into the details to be able to help... but I have thought to post it here just in case someone is an expert in the area...

Many thanks for this interesting forum!
abonanno
Posts: 7
Joined: 02 Sep 2020, 15:55

Re: Consolidation Step Acquisition

Post by abonanno »

To clarify something I note that the difference in the Group Retained earnings (after posting the consolidation adjustments) when compared to the Parent's retained earnings + subsidiary post acquisition profits is equal to:
- the difference between the carrying amount of the investment in the PArent's book and the share capital in the subsidiary's books (the investment was not acquired at nominal value but at Net Asset Value) and
- goodwill
Leo
Posts: 211
Joined: 05 Apr 2020, 22:31

Re: Consolidation Step Acquisition

Post by Leo »

In the statement of changes in equity, normally, you should only observe in the year when the operation of increase in shares was realized the following movements :

1. A profit in the P&L related to the gain on "disposal" of the sub as an associate. (Equity attributable to owners of parent)
2. The NCI % measured at fair value which is an increase (NCI).

That's all you should have.
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Marek Muc
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Location: Warsaw, Poland

Re: Consolidation Step Acquisition

Post by Marek Muc »

it seems to me that you're now talking about the mechanics of your consolidation software and how it attributes equity items to consolidated entities
Leo
Posts: 211
Joined: 05 Apr 2020, 22:31

Re: Consolidation Step Acquisition

Post by Leo »

Can you drill down the movements of retained earnings and send the details?
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Marek Muc
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Posts: 1703
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Consolidation Step Acquisition

Post by Marek Muc »

I guess that's in the first post in this topic :)
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