INTRODUCTION

Most parent companies present their own individual accounts and their group accounts in a single 

package. The package typically comprises the following;

1. Parent company financial statements, which will include investments in subsidiary undertakings 

as an asset in the statement of financial position and income from subsidiaries (dividends) in the 

income statement.

2. Consolidated statement of financial position

3. Consolidated statement of profit or loss and other comprehensive income

4. Consolidated statement of cash flows.

Key definitions

Group accounting

Group accounting is bringing together separate entities into one reporting entity.

The main objective of preparing group accounts is to present the financial statement of the parent 

company and its subsidiary companies as if they existed as a single economic entity.

Parent company/holding

A holding company refers to the company that controls one or more other entities. 

Subsidiary

A subsidiary refers to an entity that is controlled by the parent company i.e. where the parent controls 

more than 50% of the shareholdings.

IFRS 10 defines a subsidiary as “An entity that is controlled by another entity. The control means that 

the parent company can govern the financial and operating policies of its subsidiaries to gain benefits 

from the operations of subsidiary. Control can be gained if more than 50% of the voting rights are 

acquired by the parent. This is usually done by purchasing more than 50% of the shares of subsidiary. 

An investor controls an investee if and only if the investor has all the following:

(a) Power over the investee;

(b) Exposure, or rights, to variable returns from its involvement with the investee; and

(c) The ability to use its power over the investee to affect the amount of the investor’s returns.

Group

It refers to the parent and all its subsidiary companies 

Control

This refers to the power to govern financial and operating policies of an entity so as to obtain benefits 

from its activities.

As per IAS27 control is presumed to exist when the investor controls more than 50% of the voting 

power of the investee company

-There are circumstances when control exists, when the investor controls more than 50% or less they 

include:

- If the investor has power to participate in the operating policies/financial policies in the investee 

company.

- If the investor has power to appoint or remove a majority of the members of BOD in the investee 

company.

Non-controlling interest (NCI)

Non-controlling interest represents the portion which remains not acquired by the parent in a 

subsidiary company i.e. it’s the portion attributable to the minority shareholders.

For the parent to consolidate for the operations of a subsidiary the share of the NCI must be taken into 

consideration in the consolidated financial statement (with their percentage).

Associates

It is an investee company where the parent controls 20% but not exceeding 49% of the shareholdings.

Joint venture

A joint venture is an entity in which the parent company controls 50% of the shareholding.

A joint arrangement

A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is 

the contractually agreed sharing of control of an arrangement, which exists only when decisions about 

the relevant activities require the unanimous consent of the parties sharing control.

Joint arrangement can exist in two different forms as set out by IFRS 11:

- joint operation

- joint venture

Simple investment 

A simple investment is an investee company in which the parent controls less than 20% of the 

shareholding.

GROUP STRUCTURES

For the parent company to consolidate for the operations of the investee companies it should first 

determine the group structure and shareholding.

There are three types of group structures. Namely;-

1. Horizontal group structure

2. Vertical group structure

3. Mixed group structure

Horizontal group structure

It exists where the parent company has a direct control in one or more investee companies.

Example

H Ltd acquires 80%, 50% and 40% of A Ltd, B Ltd and C Ltd respectively.

Required:

Show the group structure and shareholding for consolidation purposes.

NOTE

A is a subsidiary B is a joint venture C is an associate

Vertical group structure

A vertical group structure exists where subsidiary company has a direct control in another subsidiary 

company (sub-subsidiary)

Example 

H Ltd acquired 80% of S Ltd and S Ltd acquired 70% of B Ltd.

Required:

Show the group structure and shareholding for consolidation purposes

CONSOLIDATION

Consolidation is the process of adjusting and combining financial information from the individual 

financial statements of a parent undertaking and its subsidiary undertakings to prepare consolidated 

financial statements that present financial information for the group as a single economic entity. 

Consolidation process

The financial statements of a parent and its subsidiaries are combined on a line-by-line basis by 

adding together like items of assets, liabilities, equity, income and expenses.

The following steps are then taken, in order that the consolidated financial statements should show 

financial information about the group as if it was a single entity.

1. The carrying amount of the parent's investment in each subsidiary and the parent's portion of 

equity of each subsidiary are eliminated or cancelled

2. Non-controlling interests in the net income of consolidated subsidiaries are adjusted against group 

income, to arrive at the net income attributable to the owners of the parent

3. Non-controlling interests in the net assets of consolidated subsidiaries should be presented 

separately in the consolidated statement of financial position

Other matters to be dealt with include:

- Goodwill on consolidation should be dealt with according to IFRS 3

- Dividends paid by a subsidiary must be accounted for.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The statement of financial position is another term for the balance sheet. The statement lists 

the assets, liabilities, and equity of an organization as of the report date.

The preparation of a consolidated statement of financial position, in a very simple form, consists of 

two procedures:

1. Take the individual accounts of the parent company and each subsidiary and cancel out items 

which appear as an asset in one company and a liability in another.

2. Add together all the uncancelled assets and liabilities throughout the group

Items requiring cancellation may include:

- The asset 'shares in subsidiary companies' which appears in the parent company's accounts will 

be matched with the liability 'share capital' in the subsidiaries' accounts.

- There may be intra-group trading within the group. For example, H Co may sell goods on credit 

to S Co. S Co would then be a receivable in the accounts of H Co, while H Co would be a payable 

in the accounts of S Co.

Illustration 

Ongayo Ltd. regularly sells goods to its one subsidiary company, S Ltd., which it has owned since S 

Ltd's incorporation. The statement of financial position of the two companies on 31 December 2016 is 

as given below

Required;-

Prepare the consolidated statement of financial position of Ongayo Co at 31 December 2016.

Ongayo’s Ltd's bank balance is not netted off with S Ltd's bank overdraft. To offset one against the 

other would be less informative and would conflict with the principle that assets and liabilities should 

not be netted off.

The share capital in the consolidated statement of financial position is the share capital of the 

parent company alone. This must always be the case, no matter how complex the consolidation, 

because the share capital of subsidiary companies must always be a wholly cancelling item.

Part cancellation

An item may appear in the statements of financial position of a parent company and its subsidiary, but 

not at the same amounts.

The parent company may have acquired shares in the subsidiary at a price greater or less than their par 

value. The asset will appear in the parent company's accounts at cost, while the liability will appear in 

the subsidiary's accounts at par value. This raises the issue of goodwill, which is dealt with later in 

this chapter.

Even if the parent company acquired shares at par value, it may not have acquired all the shares of the 

subsidiary (so the subsidiary may be only partly owned). This raises the issue of non-controlling 

interests, which is also dealt with later in this chapter.

The inter-company trading balances may be out of step because of goods or cash in transit.

One company may have issued loan stock of which a proportion only is taken up by the other 

company. 

Illustration

The following question illustrates the techniques needed to deal with items mentioned above. The 

procedure is to cancel as far as possible. The remaining uncancelled amounts will appear in the 

consolidated statement of financial position.

Uncancelled loan stock will appear as a liability of the group.

Uncancelled balances on intra-group accounts represent goods or cash in transit, which will appear in 

the consolidated statement of financial position.

The statements of financial position of P Ltd. and of its subsidiary S Ltd. have been made up to 30 

June. P Ltd. has owned all the ordinary shares and 40% of the loan stock of S Ltd. since its 

incorporation.

Accounting for Non-controlling interest (NCI) in the books of the parent company

The total assets and liabilities of subsidiary companies are included in the consolidated statement of 

financial position, even in the case of subsidiaries which are only partly owned. A proportion of the 

net assets of such subsidiaries in fact belong to investors from outside the group (non-controlling 

interests).

NCI is accounted for in the consolidated financial statement using either of the following methods.

1. Fair value method (full method)

2. Partial method

Fair value method

Under this approach the NCI is to be recognized in the consolidated financial statement after taking 

into consideration the goodwill attributable to both the parent and the minority shareholders.

The share of NCI will be as follows;-

C Ltd acquired 90% of the ordinary shares of D Ltd on 1st January 2017 for sh.1400 million when the 

net assets of D Ltd were sh.1, 500 million. On 1st January 2017 the fair value of the NCI was Sh.155 

million.

Required: 

Calculate goodwill on acquisition of D Ltd using both the partial method and full method.

NOTE:

To calculate the goodwill using full method either of the following must be provided:

- NCI must be stated at the fair value on the date of acquisition.

- There must be goodwill attributable to the NCI that had been recognized in the previous 

consolidated financial statement.

- Market prices of the ordinary shares of the subsidiary are stated to be attributable to the NCI.

Illustration 

A Ltd acquired 80% of ordinary shares of B Ltd on 1/1/2017 for Sh.1750 million when the total net 

assets of B Ltd were 2000 million. On 1/1/2017 the market price of ordinary shares of A Ltd and B 

Ltd were sh.200 and sh.112.5 each respectively. B Ltd has issued 20 million ordinary shares of sh. 10 

each.

Required:

Calculate the value of goodwill on acquisition of B using full method.

Answer

Goodwill = cost of investment -share of net Assets acquired

Accounting treatments of goodwill

IFRS 3 states that purchased positive goodwill should be capitalized and subjected to an annual

impairment review.

The net goodwill (after impairment) should be treated as a non-current asset in consolidated statement 

of financial position (COSFP).

Deferred consideration

Sometimes the purchase consideration may include some deferred consideration which does not 

become payable until later date.

When computing the cost of investment the amount of deferred consideration should be discounted to 

its present value at the date of acquisition.

The difference between the deferred consideration at the acquisition date and the date when its 

payable should be treated as an interest expense.

This interest should be charged against the profit of the parent company.

Illustration 

P Ltd acquired 80% of ordinary shares of S Ltd on 1/1/2015 when the fair value of net assets of S was 

Sh.90 million. P Ltd paid Sh.30 million in cash immediately and issued 1 million new ordinary shares 

to the purchase consideration. The market value of P Ltd.’s and S Ltd.’s ordinary shares on 1/1/2015 

was sh.40 and sh25 respectively.

Additionally P Ltd agreed to pay sh.14, 641,000 on 31/12/2018 provided that the earnings of S Ltd 

increased at annual rate of 15% per annum in each of 4 years under consideration. P Ltd cost of 

capital is 10% per annum and the fair of NCI at acquisition date was sh.20m.

Required:

Calculate the value of goodwill on date of acquisition

Goodwill and Pre-acquisition profits

Any Pre-acquisition retained earnings of a subsidiary company are not aggregated with the parent 

company's retained earnings in the consolidated statement of financial position. The figure of 

consolidated retained earnings comprises the retained earnings of the parent company plus the post-acquisition retained earnings only of subsidiary companies. The post-acquisition retained earnings are 

simply retained earnings now less retained earnings at acquisition.

The subsidiary may also have share premium or revaluation surplus balances at the acquisition 

date. These will be brought into the goodwill calculation along with other Pre-acquisition reserves. 

Any post-acquisition movement on these balances will be split between group and NCI.

Illustration 

Goodwill and Pre-acquisition profits

Sing Ltd. acquired the ordinary shares of Wing Ltd. on 31 March when the draft statements of 

financial position of each company were as follows.

Required;-

Prepare the consolidated statement of financial position as at 31 March.

Answer

The technique to adopt here is to produce a new working: 'Goodwill'. A proforma working is set out 

below

Impairment of goodwill

Goodwill arising on consolidation is subjected to an annual impairment review and impairment may 

be expressed as an amount or as a percentage. The double entry to write off the impairment is:

DEBIT Group retained earnings

CREDIT Goodwill

However, when NCI is valued at fair value the goodwill in the statement of financial position 

includes goodwill attributable to the NCI. In this case the double entry will reflect the NCI proportion 

based on their shareholding as follows.

DEBIT Group retained earnings

DEBIT Non-controlling interest

CREDIT Goodwill

OTHER IMPORTANT ADJUSTMENTS

Adjustments made when preparing consolidated statement of financial position are;-

Goods in transit

One entity may have sold goods to the other entity but at the end of financial period the other entity 

may not have received the goods.

Goods in transit should be adjusted in the books of the entity that is supposed to receive them.

The receiving entity should record the goods in transit as per the provisions of IAS2 i.e. at the lower 

of cost and Net realizable value.

Entries in the books for the goods in transit,

Debit: Group inventory

Credit: Group creditors

Cash in transit 

Arises when one entity has remitted some money to another entity but had not been received at the 

end of the year.

Cash in transit is adjusted by adding it to the cash/bank balance in the books of the entity that is 

supposed to receive it.

Entries in the books for cash in transit,

Debit: Group cash and cash equivalents

Credit: Group debtors.

Intercompany balances

Intercompany balances arise when group members owe each other at the end of financial period.

For consolidation purposes inter-company balances should be eliminated in full by;

Debit;-Group payables account

Credit;-Group receivable account

Errors in the books of Account

Errors in the books of accounts are adjusted in the books of the entity that made the errors.

Unrealized profits

Unrealized profit arises when goods sold to a group member remained unsold at the end of the 

financial period.

To avoid profit overstatement, unrealized profits should be eliminated during/on consolidation.

However the elimination of unrealized profit depends on the sales stream.

Upward sales stream

This arises when the subsidiary is the one selling to the parent company. In this case the UPCI 

(increased profit on closing inventory) will be eliminated by:

DR: Retained earnings (% HCO)

DR: Non-controlling interest (% NCI)

CR: Group inventory A/C

Downstream transactions

Downstream transactions arise when the parent company in the one selling to the subsidiary.

Unrealised profit on closing inventory will be eliminated by:

Notes

1. The NCI in the retained earnings of S Co is 40% × Sh.15, 750 = Sh.6, 300.

2. The profit on the transfer less related depreciation of Sh.2, 250 (2,500 – 250) will be deducted from 

the carrying amount of the plant to write it down to cost to the group.

3. Depreciation overcharge = depreciation amount × depreciation rate.

Revaluation gain in the books of the subsidiary on acquisition

Revaluation arises whenever there is a difference between the fair value and the net book value 

(NBV) of an asset:

With revaluation gain;

DR: Group property plant and equipment account

CR: Revaluation reserve account

Revaluation gain leads to depreciation undercharge which should be adjusted for by:

DR: retained earning account

CR: Group PPE

Depreciation undercharge = Revaluation gain × Depreciation rat

Retained earnings account

It is prepared in order to determine the aggregate profit for the parent company and all its investee 

companies.

Retained earnings is prepared as follows (same as profit A/C)

The phrase ‘Pre-acquisition’ is used to refer to the profit on the date of acquisition.

Cost of control Account (COC)

This account is prepared in order to determine the value of goodwill arising on acquisition the 

subsidiary; however it is only applicable when the parent is using the partial method. The cost of 

control account is prepared as follows;-

Cost of control account

NCI’s share = Adjusted profit×% NCI

Acquisition of a subsidiary during its accounting period

The subsidiary company's accounts to be consolidated will show the subsidiary's profit or loss for the 

whole year. For consolidation purposes, however, it will be necessary to distinguish between:

- Profits earned before acquisition

- Profits earned after acquisition

Practically, a subsidiary company's profit may not accrue evenly over the year; for example, the 

subsidiary might be engaged in a trade, such as toy sales, with marked seasonal fluctuations. 

Nevertheless, the assumption can be made that profits accrue evenly whenever it is impracticable to 

arrive at an accurate split of pre- and post-acquisition profits.

Once the amount of Pre-acquisition profit has been established the appropriate consolidation workings 

(goodwill, retained earnings) can be produced.

It is worthwhile to summarize what happens on consolidation to the retained earnings figures 

extracted from a subsidiary's statement of financial position. 

Illustration 

The accounts of S Co, a 60% subsidiary of P Co, show retained earnings of Sh.20, 000 at the end of 

the reporting period, of which Sh.14, 000 were earned prior to acquisition. The figure of Sh.20, 000 

will be distributed as follows in the consolidation process;

Note;

All pre acquisition earnings are taken to the goodwill calculation.

Illustration 

Hinge Ltd. acquired 80% of the ordinary shares of Singe Ltd. on 1 April 2015. On 31 December 2014 

Singe Ltd's accounts showed a share premium account of Sh.4, 000 and retained earnings of Sh.15, 

000. The statements of financial position of the two companies at 31 December 2015 are set out 

below as below. Neither company has paid any dividends during the year. NCI should be valued at 

full fair value. The market price of the subsidiary's shares was Sh.2.50 prior to acquisition by the 

parent.

There has been no impairment of goodwill

Pre-acquisition losses of a subsidiary

Illustration of the entries arising when a subsidiary has Pre-acquisition losses

Suppose P Ltd. acquired all 50,000 Sh.1 ordinary shares in S Co for Sh.20, 000 on 1 January 2011 

when there was a debit balance of Sh.35, 000 on S Ltd's retained earnings. In the years 2011 to 2014 S 

Co makes profits of Sh.40, 000 in total, leaving a credit balance of Sh.5, 000 on retained earnings at 

31 December 2014. P Ltd's retained earnings at the same date are Sh.70, 000

PREPARATION OF CONSOLIDATED INCOME STATEMENT

When preparing a consolidated income statement the parent company should combine its operations 

with those of subsidiary company on line by line basis as if they belong under one economic entity.

However all intercompany transaction between the parent and subsidiary should be eliminated.

Intra-group trading

The consolidated figures for sales revenue and cost of sales should represent sales to and purchases 

from, outsiders. An adjustment is therefore necessary to reduce the sales revenue and cost of sales

figures by the value of intra-group sales during the year.

Unrealised profits on intra-group trading should be excluded from the figure for group profits. This 

will occur whenever goods sold at a profit within the group remain in the inventory of the purchasing 

company at the year end. The best way to deal with this is to calculate the unrealised profit on unsold 

inventories at the year end and reduce consolidated gross profit by this amount. Cost of sales will be 

the balancing figure.

Pre-acquisition profits

When considering examples which include Pre-acquisition profits in a subsidiary, the figure for 

profits brought forward should include only the group share of the post-acquisition retained profits. If 

the subsidiary is acquired during the accounting year, it is therefore necessary to apportion its 

profit for the year between Pre-acquisition and post-acquisition elements. This can be done by simple 

time apportionment (i.e. assuming that profits arose evenly throughout the year) but there may be 

seasonal trading or other effects which imply a different split than by time apportionment.

With a mid-year acquisition, the entire statement of profit or loss of the subsidiary is split between 

Pre-acquisition and post-acquisition amounts. Only the post-acquisition figures are included in the 

consolidated statement of profit or loss.

Additional information;-

1. The issued share capital of the group was as follows;

Kikomi Ltd.: 5,000,000 ordinary shares of Sh.1 each.

Sarova Ltd.:1,000,000 ordinary shares of Sh.1 each.

2. Kikomi Ltd. purchased 80% of the issued share capital of Sarova Ltd. on November 2016. At that 

time, the retained earnings of Lamlash stood at Sh.52, 000.

Required:

Prepare the Kikomi group consolidated statement of profit or loss for the year to 30 April 2017, and 

extracts from the statement of changes in equity showing group retained earnings and the non-controlling interest.

Illustration 

Mantas acquired 80% of the issued share capital of Rochas on 1 January, 2017.

Their respective Statements of Comprehensive Income for the year ended 31 December, 2017 are as 

follows:

Dividends of sh.5, 000 and sh.2, 500 respectively have been proposed.

Required;-

Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income of Mantas 

Group for the year ended 31 December, 2017.

Additional information:

1. At the date of acquisition the fair values of Pembe’s assets were equal to their carrying amounts 

with the exception of a building which had a fair Sh.1 million in excess of its carrying amount. At 

the date of acquisition the building had a remaining useful life of 20 years. Buildings depreciation 

is charged to administrative expenses. The building was revalued again at 31 December 2018 and 

its fair value had increased by an additional Sh.1 million.

2. Sales from Serebwa to Pembe were Sh.6 million during the post-acquisition period. All of these 

goods are still held in inventory by Pembe. Serebwa Ltd. marks up all sales by 20%.

3. Despite the property revaluation, Serebwa Ltd. has concluded that goodwill in Pembe Ltd, has 

been impaired by sh.500,000.

4. It is Serebwa Ltd’s policy to value the non-controlling interest at full (fair) value.

5. Income and expenses can be assumed to have arisen evenly throughout the year

Required;-

Prepare the consolidated statement of profit or loss and other comprehensive income for the year 

ended 31 December 2018

ACCOUNTING FOR ASSOCIATES

IAS 28 requires all investments in associates to be accounted for in the consolidated accounts using 

the equity method, unless the investment is classified as 'held for sale' in accordance with IFRS 5 in 

which case it should be accounted for under IFRS 5.

An investor is exempt from applying the equity method if:

It is a parent exempt from preparing consolidated financial statements under IFRS 10, or

All of the following apply:

The investor is a wholly-owned subsidiary or it is a partially owned subsidiary of another entity 

and its other owners, including those not otherwise entitled to vote, have been informed about, and do 

not object to, the investor not applying the equity method.

The investor's securities are not publicly traded.

It is not in the process of issuing securities in public securities markets.

The ultimate or intermediate parent publishes consolidated financial statements that comply with 

International Financial Reporting Standards.

Under IAS 28 an investment in an associate should not be excluded from equity accounting when an 

investee operates under severe long-term restrictions that significantly impair its ability to transfer 

funds to the investor. Significant influence must be lost before the equity method ceases to be 

applicable.

The use of the equity method should be discontinued from the date that the investor ceases to have

significant influence.

From that date, the investor shall account for the investment in accordance with IFRS 9 Financial

instruments. The carrying amount of the investment at the date that it ceases to be an associate shall 

be regarded as its cost on initial measurement as a financial asset under IFRS 9

If an investor issues consolidated financial statements (because it has subsidiaries), an investment in 

an associate should be either:

- Accounted for at cost, or

- In accordance with IFRS 9 (at fair value) in its separate financial statements.

If an investor that does NOT issue consolidated financial statements (i.e. it has no subsidiaries) but 

has an investment in an associate this should similarly be included in the financial statements of the 

investor either at cost, or in accordance with IFRS 9.

The equity method

Many of the procedures required to apply the equity method are the same as are required for full 

consolidation. In particular, intra-group unrealised profits must be excluded.

Consolidated Statement of Profit or Loss

The basic principle is that the investing company (X Co) should take account of its share of the 

earnings of the associate, Y Co, whether or not Y Co distributes the earnings as dividends. X Co 

achieves this by adding to consolidated profit the group's share of Y Co's profit after tax.

Under equity accounting, the associate's sales revenue, cost of sales and so on is NOT amalgamated 

with those of the group. Instead the group share only of the associate's profit after tax for the year is 

added to the group profit.

Consolidated Statement of Financial Position

A figure for investment in associates is shown which at the time of the acquisition must be stated at 

cost. At the end of each accounting period the group share of the retained reserves of the associate is 

added to the original cost to get the total investment to be shown in the consolidated statement of 

financial position.

Illustration 

P Ltd, a company with subsidiaries, acquires 25,000 of the 100,000 Sh.1 ordinary shares in A Ltd. for 

Sh.60, 000 on 1 January 2018. In the year to 31 December 2018, A Ltd. earns profits after tax of 

Sh.24, 000, from which it pays a dividend of Sh.6, 000.

How will A Ltd's results be accounted for in the individual and consolidated accounts of P Ltd. for the 

year ended 31 December 2018?

In the individual accounts of P Ltd, the investment will be recorded on 1 January 2018 at cost. Unless 

there is an impairment in the value of the investment (see below), this amount will remain in the 

individual statement of financial position of P Ltd permanently. The only entry in P Ltd's individual 

statement of profit or loss will be to record dividends received. For the year ended 31 December 2018, 

P Ltd will:

Debit cash (25%×6,000) Sh.1, 500

Credit income from shares Sh.1, 500

In the consolidated financial statements of P Ltd equity accounting principles will be used to account 

for the investment in A Co. Consolidated profit after tax will include the group's share of A Ltd's 

profit after tax (25%×Sh.24,000 = Sh.6,000). To the extent that this has been distributed as dividend,

it is already included in P Ltd's individual accounts and will automatically be brought into the 

consolidated results. That part of the group's share of profit in the associate which has not been 

distributed as dividend (Sh.4, 500) will be brought into consolidation by the following adjustment.

DEBIT Investment in associates Sh.4, 500

CREDIT Share of profit of associates Sh.4, 500

The asset 'Investment in associates' is then stated at Sh.64,500, being cost plus the group share of 

post-acquisition retained profits.

Illustration

The following consolidation schedule relates to the P Ltd. Group, consisting of the parent company, 

an 80% owned subsidiary (S Ltd) and an associate (A Ltd) in which the group has a 30% interest

NOTE

In the consolidated statement of financial position the investment in associates should be shown as:

- Cost of the investment in the associate; plus

- Group share of post-acquisition profits; less

- Any amounts paid out as dividends; less

- Any amount written off the investment

The consolidated statement of financial position will contain an asset 'Investment in associates'. The 

amount at which this asset is stated will be its original cost plus the group's share of any post-acquisition profits which have not been distributed as dividends.

Illustration

On 1 January 2016 the net tangible assets of A Ltd amount to Sh.220, 000, financed by 100,000 Sh.1 

ordinary shares and revenue reserves of Sh.120, 000. P Ltd, a company with subsidiaries, acquires 

30,000 of the shares in A Co for Sh.75, 000. During the year ended 31 December 2016 A Ltd's profit 

after tax is Sh.30, 000, from which dividends of Sh.12, 000 are paid.

Show how P Ltd's investment in A Ltd would appear in the consolidated statement of financial 

position at 31 December 2016

Illustration

Below are the draft accounts of Parent Co and its subsidiaries and of Associate Co. Parent Co 

acquired 40% of the equity capital of Associate Co three years ago when the latter's reserves 

stood at Sh.40, 000.

Summarized statements of financial position

Required;-

Prepare the summarized consolidated accounts of Parent Co.

Notes

1. Assume that the associate's assets/liabilities are stated at fair value.

2. Assume that there are no non-controlling interests in the subsidiary companies.

Upstream and downstream transactions

Upstream' transactions are, for example, sales of assets from an associate to the investor. 

Downstream transactions are, for example, sales of assets from the investor (parent) to an associate.

Profits and losses resulting from 'upstream' and 'downstream' transactions between an investor 

(including its consolidated subsidiaries) and an associate are eliminated to the extent of the investor's 

interest in the associate. This is very similar to the procedure for eliminating intra-group transactions 

between a parent and a subsidiary. The important thing to remember is that only the group's share is 

eliminated.

Illustration 

Downstream transaction

A Co, a parent with subsidiaries, holds 25% of the equity shares in B Co. During the year, A Co 

makes sales of Sh.1, 000,000 to B Co at cost plus a 25% mark-up. At the year end, B Co has all these 

goods still in inventories.

Answer 

A Co has made an unrealised profit of Sh.200, 000 (1,000,000×

25/125) on its sales 

to the associate. The group's share (25%) of this must be eliminated:

25% × 200,000=50,000

DEBIT Cost of sales (consolidated profit or loss) Sh.50, 000

CREDIT Investment in associate (consolidated statement of financial position) Sh.50, 000.

Because the sale was made to the associate, the group's share of the unsold inventory forms part of the 

investment in the associate at the year end. If the associate had made the sale to the parent, the 

adjustment would have been:

DEBIT Cost of sales (consolidated profit or loss) Sh.50,000

CREDIT Inventories (consolidated statement of financial position) Sh.50,000

Associate's losses

When the equity method is being used and the investor's share of losses of the associate equals or 

exceeds its interest in the associate, the investor should discontinue including its share of further 

losses. The investment is reported at nil value. After the investor's interest is reduced to nil, additional 

losses should only be recognised where the investor has incurred obligations or made payments on 

behalf of the associate (for example, if it has guaranteed amounts owed to third parties by the 

associate).

DETAILED ILLUSTRATION (SUBSIDIARY AND ASSOCIATE)

The statements of financial position of Nthingu Ltd. and its investee companies, Ochoi Ltd. and 

Maina Ltd., at 31 December 2015 are shown below

Additional information

1. Nthingu Ltd., acquired 600,000 ordinary shares in Ochoi Ltd. on 1 January 2010 for sh.1, 000,000 

when the retained earnings of Ochoi Ltd. were Sh.200, 000.

2. At the date of acquisition of Ochoi Ltd., the fair value of its freehold property was considered to 

be Sh.400, 000 greater than its value in Ochoi Ltd’s statement of financial position. Ochoi Ltd., 

had acquired the property in January 2010 and the buildings element (comprising 50% of the total 

value) is depreciated on cost over 50 years.

3. Nthingu Ltd. acquired 225,000 ordinary shares in Maina Ltd. on 1 January 2014 for sh.500,000 

when the retained earnings of Maina Ltd. were sh.150,000.

4. Ochoi Ltd., manufactures a component used by both Nthingu Ltd. and Maina Ltd. Transfers are 

made by Ochoi Ltd., at cost plus 25%, Nthingu Ltd held sh.100,000 inventory of these 

components at 31 December 2015. In the same period Nthingu Ltd., sold goods to Maina Ltd. of 

which Maina Ltd. had Sh.80, 000 in inventory at 31 December 2015. Nthingu Ltd., had marked 

these goods up by 25%.

5. The goodwill in Ochoi Ltd., is impaired and should be fully written off. An impairment loss of 

Sh.92, 000 is to be recognized on the investment in Maina Ltd.

6. Non-controlling interest is valued at full fair value. Ochoi Ltd., shares were trading at sh.1.60 just 

prior to the acquisition by Nthingu Ltd.

Required;-

Prepare the consolidated statement of financial position at 31 December 2015

JOINTLY CONTROLLED ENTITIES

A joint arrangement is an arrangement of which two or more parties have joint control. 

A joint arrangement has the following characteristics: 

- the parties are bound by a contractual arrangement, and

- the contractual arrangement gives two or more of those parties joint control of the arrangement.

A joint arrangement is either a joint operation or a joint venture. 

Key definitions

Joint arrangement is an arrangement of which two or more parties have joint control

Joint control is the contractually agreed sharing of control of an arrangement, which exists only 

when decisions about the relevant activities require the unanimous consent of the parties sharing 

control

Joint operation is a joint arrangement whereby the parties that have joint control of the arrangement 

have rights to the assets, and obligations for the liabilities, relating to the arrangement

Joint venture is a joint arrangement whereby the parties that have joint control of the arrangement 

have rights to the net assets of the arrangement

Joint venturer is a party to a joint venture that has joint control of that joint venture

Party to a joint arrangement is an entity that participates in a joint arrangement, regardless of 

whether that entity has joint control of the arrangement

Separate vehicle is a separately identifiable financial structure, including separate legal entities or 

entities recognised by statute, regardless of whether those entities have a legal personality

IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. 

Joint control involves the contractually agreed sharing of control and arrangements subject to joint 

control are classified as either a joint venture (representing a share of net assets and equity accounted) 

or a joint operation (representing rights to assets and obligations for liabilities, accounted for 

accordingly).

Types of joint arrangements

Joint arrangements are either joint operations or joint ventures:

- A joint operation is a joint arrangement whereby the parties that have joint control of the 

arrangement have rights to the assets, and obligations for the liabilities, relating to the 

arrangement. Those parties are called joint operators. 

- A joint venture is a joint arrangement whereby the parties that have joint control of the 

arrangement have rights to the net assets of the arrangement. Those parties are called joint 

venturers. 

Classifying joint arrangements

The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights 

and obligations of the parties to the arrangement. An entity determines the type of joint arrangement 

in which it is involved by considering the structure and form of the arrangement, the terms agreed by 

the parties in the contractual arrangement and other facts and circumstances. 

Regardless of the purpose, structure or form of the arrangement, the classification of joint 

arrangements depends upon the parties' rights and obligations arising from the arrangement. 

A joint arrangement in which the assets and liabilities relating to the arrangement are held in a 

separate vehicle can be either a joint venture or a joint operation. 

A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases, 

the contractual arrangement establishes the parties' rights to the assets, and obligations for the 

liabilities, relating to the arrangement, and the parties' rights to the corresponding revenues and 

obligations for the corresponding expenses. 

Financial statements of parties to a joint arrangement

1. Joint operations

A joint operator recognizes in relation to its interest in a joint operation: 

- its assets, including its share of any assets held jointly;

- its liabilities, including its share of any liabilities incurred jointly; 

- its revenue from the sale of its share of the output of the joint operation;

- its share of the revenue from the sale of the output by the joint operation; 

- and its expenses, including its share of any expenses incurred jointly.

A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement 

in a joint operation in accordance with the relevant IFRSs. 

The acquirer of an interest in a joint operation in which the activity constitutes a business, as defined 

in IFRS 3 Business Combinations, is required to apply all of the principles on business combinations 

accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the 

guidance in IFRS 11. 

These requirements apply both to the initial acquisition of an interest in a joint operation, and the 

acquisition of an additional interest in a joint operation (in the latter case, previously held interests are 

not re-measured). 

A party that participates in, but does not have joint control of, a joint operation shall also account for 

its interest in the arrangement in accordance with the above if that party has rights to the assets, and 

obligations for the liabilities, relating to the joint operation.

2. Joint ventures

A joint venturer recognizes its interest in a joint venture as an investment and shall account for that 

investment using the equity method in accordance with IAS 28 Investments in Associates and Joint 

Ventures unless the entity is exempted from applying the equity method as specified in that standard. 

A party that participates in, but does not have joint control of, a joint venture accounts for its interest 

in the arrangement in accordance with IFRS 9 Financial Instruments unless it has significant influence 

over the joint venture, in which case it accounts for it in accordance with IAS 28

DISPOSAL OF INVESTMENT IN A SUBSIDIARY (PARTIAL AND FULL 

DISPOSAL)

Treatment for disposals of subsidiary varies on account of whether control or significant influence is 

retained or lost. Following treatments are applicable depending on type of disposal;

1. Full sale of shares in associate or subsidiary (full disposal)

2. Sale of shares in subsidiary such that control retained/remains subsidiary (Partial disposal)

3. Sale of shares in a subsidiary leaving investment as an associate (Partial disposal) 

4. Disposal of shares in a subsidiary leaving it a simple or ordinary investment.

1. Full sale of shares in associate or subsidiary (full disposal)

Rules for consolidation

If the disposal is mid of the year then NCI and Net Assets need to be calculated till the date of 

disposal.

Dividends paid must be deducted in calculating Net Assets.

Goodwill recognized prior disposal is original goodwill less any impairment to date

Sam Ltd had acquired 75% shareholding in Shem Ltd on 1st January 2003 when retained earnings in 

Shem Ltd were Sh. 10m. The whole investment was disposed off on 31st December 2011 for sh.115 

m. A Ltd has not accounted for the sale of investment in its books.

Required;

Prepare statement of financial position as at 31st December 2011

Answer

Step 1

Compute gain or loss on disposal (in the books of Sam Ltd)

Gain/loss on disposal = sale proceeds – cost of investment

2. Sale of shares in subsidiary such that control is still retained/remains subsidiary (Partial 

disposal)

Treatment in the holding Company’s books 

The gain or Loss on disposal to be reported in the holding company’s own account is determined as 

follows:

In a case where a subsidiary is sold in between the year and still remaining as a subsidiary at the end 

of the year, the only change is ordinary shareholding on Non-controlling interest.

In the Consolidated statement of income, the Non-controlling interest will be calculated as follows 

a) Non-controlling interest in the profit of the subsidiary from the beginning of the year to the date 

of disposal of the shares plus

b) Non-controlling interest in the profits of the subsidiary from the date of disposal up to the end of 

the year.

In the Consolidated Statement of Financial Position, the Non-controlling interest will be based on the 

percentage as at date the statement of financial position.

3. Sale of shares in a subsidiary leaving investment as an associate (Partial disposal) 

In this case, the subsidiary should be consolidated as a subsidiary from the beginning of the year to 

the date of disposal and thereafter to be allocated for an associate.

The trading reserves of the subsidiary should be split into two parts and dealt with as follows;

(a) The part covering the period from the beginning of the year to the date of disposal should be 

consolidated normally in the income statement as a subsidiary with the trading reserves of the 

holding company.

(b) The part covering the period from the date of disposal to the end of the year should be 

incorporated in the income statement as an associate.

In the Consolidated Statement of Financial Position, the company should be allocated for as an 

associate i.e. it is only the net investment in the associate that will appear as a Non-Current Asset 

using the equity.

Illustration

The following are the financial statements Agano Ltd and Bomba Ltd as at 31st December 2011

A Ltd acquired 75% shareholding in B Ltd on 1st January 2013 when the retained profit was sh. 20m

A Ltd has not accounted for the disposal in its books.

Required:

Prepare consolidated statement of income and the statement of financial position if;-

(i)Agano Ltd sold 20% of its shareholding in Bomba Ltd for Sh. 54,000 on 30th September 2017. 

(Scenario 1)

(ii) Agano Ltd disposed 2

/3 of its shares in Bomba Ltd on 30th September 2017 for sh. 135,000. 

(Scenario 2)

Answer 

SCENARIO 1

Sale of shares in subsidiary such that control retained/remains subsidiary

(i)A. Ltd sold 20% of its shareholding in B.Ltd for Sh. 54,000 on 30th September 2011.

4. Disposal of shares in a subsidiary leaving it a simple or ordinary investment.

Treat the company as a subsidiary up to the date of disposal thereafter show income dividends 

receivable or received in the income statement and reflect the dividends receivable as a current asset.

In the consolidated balance sheet the remaining investment is valued at fair value 

Profit or loss on disposal is calculated as;

FOREIGN SUBSIDI

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