Page 34 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

Group accounting issues
IFRS 10 Consolidated financial statements specifies three criteria to determine whether one
entity has control of another as follows:
 Power over the investee – normally by owning a majority of the equity shares
 Exposure or rights to variable returns
 The ability to use power to affect the variable returns
If the three criteria have been met, the, one entity has control over another and the acquirer
must then prepare consolidated financial statements. The fair value of consideration paid may
include cash paid, contingent and/or deferred consideration, together with a share exchange. If
there was a non‐controlling interest (less than 100% interest acquired) this would need to be
valued as at the date of acquisition. The fair value of net assets acquired would also need to be
determined, with possible fair value adjustments (usually relating to PPE and possible recognition
of intangible assets no currently recognised on the subsidiary’s SOFP. Goodwill would then be
accounted fr as a non‐current intangible asset, subject to an annual impairment review.

IFRS 11 Joint arrangements deals with joint arrangements, either in the form of a joint operation
(JO) or a joint venture (JV). Joint arrangements arise when an entity is subject to joint control by
two or more joint arrangement parties. In a JO, there is no separate entity established, and each
JO party with record their transactions on behalf of the JO activity, with periodic settlement of
amounts due to/from the JO parties.

In a JV, there is a separate entity which is subject to joint control, with each JV party having a
shareholding in the JV entity. An interest in a JV is equity accounted (in the same way as an
interest in an associate).

IAS 28 Investments in associates and joint ventures will apply when a shareholding of between
20%‐50% is obtained in another entity over which they exercise significant influence. This is
normally regarded as having the ability to participate in the financial and operating policy
decisions of the investee, but without having control.
Application to Jord
Currently, there is no indication that Jord has an interest in any other business. If Jord did set up
or acquire either a domestic or foreign subsidiary (perhaps to lower production costs, or to move
into a new market abroad), it would need to comply with the requirements of IFRS 10 ‐12.

Consideration may need to be given regarding how this may be financed. For example, will any of
the consideration paid consist of deferred or contingent consideration or a share exchange?
Contingent consideration may be a useful element if wishing to retain the motivation and
commitment of any owner/shareholders bought out as a result of an acquisition. A share
exchange would reduce the amount of cash that otherwise would be payable to reduce any cash
payment as a result of making the acquisition.

84 KAPLAN PUBLISHING