FRS 102: Consolidated financial statements

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FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with the issue of consolidated financial statements (group accounts) in Section 9 Consolidated and Separate Financial Statements and Section 19 Business Combinations and Goodwill.

This article will not go into the detail of preparing consolidated financial statements because the principles involved are largely the same as under previous UK GAAP. For example, the requirement to eliminate intra-group trading is still the same and the consolidation of a subsidiary is required when the parent company controls the operating and financial policies of the entity (which is often achieved with an ownership interest of more than 50% of the net assets).

Other issues relating to group accounts which remain the same under FRS 102 are as follows:

  • Uniform accounting policies should be used across the group. If this is not possible, consolidation adjustments will be necessary.
  • Accounting year-ends should be the same, where practicable. If a different accounting reference date is used, interim financial statements should be prepared to the parent’s accounting reference date for use in the consolidation. If this is not practicable, the subsidiary’s financial statements for the previous financial year should be used provided the year-end did not end more than three months’ prior to the parent’s year-end. Where this is the case, any changes in the intervening period which materially affect the view given in the group accounts should be reflected by way of a consolidation adjustment.
  • Goodwill is the difference between the consideration paid and the net assets acquired.

Areas that have been subject to significant change relate to when a parent acquires further shares in a subsidiary and, conversely, when a parent disposes of some of its ownership interest in a subsidiary, but still retains control following the disposal.

Further investment in a subsidiary

It is a common scenario in a group context where a parent company has previously acquired a controlling stake in a subsidiary (for example the parent may already own, say, 70% of the subsidiary), but then acquires further ownership interest in the subsidiary.

This increases the parent’s ownership interest and dilutes the non-controlling interest (previously referred to as ‘minority interest’). It is this situation which has been subject to significant change under FRS 102 when compared to previous FRS 2 Accounting for subsidiary undertakings.

Under previous FRS 2, when a parent already had control over a subsidiary and then subsequently acquired more of the subsidiary’s net assets, resulting in a dilution in minority interests, the net assets of the subsidiary would be revalued to fair value at the date control was increased and additional goodwill would also be recognised in the consolidated financial statements.

Under FRS 102, the net assets of the subsidiary would not be revalued to fair value and no additional goodwill is recognised. This is because paragraph 9.19D of FRS 102 (September 2015) regards such transactions as one among equity holders in their capacity as equity holders, as can be seen in the following example:

Example – Parent acquires further ownership interest

On 1 January 2016, Holdco Ltd acquired 80% of the net assets of Subco Ltd for a consideration of £125,000. At the date of acquisition, the fair value exercise revealed the net assets of Subco to be £70,000 and this was also equivalent to their book value. On 1 January 2017, Holdco acquired a further 10% interest for £40,000 when the book value of the net assets of Subco were £95,000 and the fair value of those net assets was £110,000. The group has an accounting reference date of 31 December.

Acquisition of the 80% ownership interest (1 January 2016)

When Holdco acquired the first 80% share of Subco, it obtained control and hence a parent-subsidiary relationship was created. Therefore, the identifiable assets and liabilities of Subco are consolidated at their fair value of £70,000. Positive goodwill is recognised in the group accounts of £69,000, calculated as follows:

       

£

Cost of investment

   

125,000

Net assets acquired (£70,000 x 80%)

(56,000)

Goodwill

     

69,000

On 1 January 2016, the value of the non-controlling interest (NCI) is £14,000, (or £70,000 x 20%).

Year-end 31 December 2016

The increase in Subco’s net assets amounts to £25,000 (£95,000 less £70,000) and this has arisen due to the profit in the year. This profit is split £20,000 to Holdco (£25,000 x 80%) and £5,000 to the NCI (£25,000 x 20%). The NCI share in Subco is now £19,000 (£14,000 + £5,000).

Further acquisition 1 January 2017

On 1 January 2017, Holdco acquired a further 10% of Subco for £40,000 resulting in NCI reducing from 20% to 10%. Therefore, the NCI’s share in Subco decreases by £9,500 (£95,000 x 10%) and their share in Subco will now equal £9,500 (£19,000 less £9,500) or 10% x £95,000. The fact that the fair value of Subco’s net assets is higher than book values is irrelevant under FRS 102 because Holdco does not increase goodwill following the additional investment.

This further acquisition by Holdco on 1 January 2017 is accounted for as a transaction among equity holders. Paragraph 22.19 of FRS 102 says that the NCI must be adjusted to reflect the parent’s additional ownership interest and any difference between the value of the NCI adjustment and the consideration paid to acquire the additional 10% share is recognised in equity and attributed to the equity holders of the parent. The journals to effect this transaction are as follows:

     

£

Dr NCI

   

9,500

Dr Equity attributable to Holdco

30,500

Cr Cash at bank

 

(40,000)

Keep in mind that under FRS 102, the additional ownership interest acquired during the year does not trigger the subsidiary’s net assets to be revalued to fair value, and no additional goodwill will be recognised because Subco was already a subsidiary of Holdco prior to the additional investment. FRS 102 requires this sort of transaction to be accounted for as one among equity holders.

Disposals of ownership interest

When a parent company disposes of ownership interest in a subsidiary, there will be one of two outcomes following the disposal:

  • The parent loses control over the subsidiary; or
  • The parent continues to retain control over the subsidiary.

Control is lost

If control is lost, there are no changes to the accounting treatment under FRS 102. The results of the subsidiary are included in the group accounts up to the date on which control is lost and a gain or loss is recognised.

Control is retained

If the parent disposes some of its ownership interest, but still retains control (i.e. the parent still owns more than 50% of the subsidiary’s net assets following the disposal), there are differences in accounting treatment. Under previous FRS 2, a gain or loss would be recognised on the disposal and a proportion of the goodwill would have been written off. Under FRS 102, the transaction is accounted for as one among equity holders.

Example – Disposal of ownership interest where control is retained

On 30 June 2017, Holdco Ltd disposed of a 25% ownership interest in Subco Ltd for £200,000, which reduced Holdco’s ownership interest from 90% to 65%. On 30 June 2017, the carrying amount of the identifiable net assets in Subco was £600,000.

Under FRS 102, no gain or loss is recognised as the disposal is treated as one among equity holders because the parent still retains control over the subsidiary.

The NCI will increase from 10% to 35% and hence the NCI’s share of Subco’s net assets will increase from £60,000 (£600,000 x 10%) to £210,000 (£600,000 x 35%), i.e. NCI will increase by £150,000.

Holdco still retains control over Subco as it still owns 65% following the disposal, hence paragraph 22.19 of FRS 102 will apply and Holdco will account for the disposal as follows:

     

£

Dr Cash at bank

 

200,000

Cr NCI

   

(150,000)

Cr Equity attributable to Holdco

(50,000)

Conclusion

Additional investments and disposals of ownership interest are not uncommon among group members, and FRS 102 does introduce some significant changes in accounting treatment where acquisitions and disposals of ownership interest are concerned where control is retained.

Effectively the new accounting treatments are less arduous than in previous UK GAAP as there is no requirement to revalue a subsidiary’s net assets to fair value at the date control is increased, nor is there a requirement to recognise a gain or loss and write-off a proportion of goodwill where disposals that result in the parent still retaining control are concerned.

About Steven Collings

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Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.

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