IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

produced for publ ic use; and the address whe re those con solidated fina ncial statements ar e

obtainable

(b) A list of significant investments in subs idiaries, j ointly co ntrolled entit ies, and associates ,

including the nam e, co un try of incorporation or residen ce, prop ortion of owne rship inter–

es t, and, if differ en t, proportion of voti ng power held

6.3 These discl osures are required whe re a parent, invest or in ajoint ly co ntrolled entity , or inves–

tor in an associate prep ared se parate fi na nc ia l sta teme nts:

(a) Th e fac t that the sta teme nts are separa te fin anc ial stateme nts and the reasons why those

statements are prep ared if not requ ired by law

(b) A list of sig nificant investments in subs idiaries, j ointly controlled entities, and associates,

incl uding the name, co untry of incorporation or re sidence, proporti on of ow ne rsh ip int erest

and, if differ ent, proportion of vo ting power held

Case Study 3

Facts

Entity X is preparing its group accounts for the year ended December 31, 20X4, and has acquired in–

vestments in three companies. The details are set out next.

(a) Entity Y

The whole of the share capital of Y was acquired on July I, 20X4, with a view to selling the

subsidiary within a year. At the date of acquisition, the estimated fair value less cost to sell of Y

is $27 million. (The fair value of the liabilities is $8 million.) At year-end, (December 31,

20X4), the estimated fair value less costs to sell is $26 million. (The fair value of the liabilities

is $7 million.)

(b) Entity Z

X has acquired, on August I, 20X4, 48% of Z, which is a major supplier of X. X has a written

agreement with another majo r shareholder, which owns 30% of the share capital of Z, whereby

X can receive as much of Z' s production as it wishes. X has also made a substantial loan to Z,

which is repayable on demand . If repaid currently, Z would be insolvent.

X has acquired 45% of the voting shares of W on September I, 20X4. The other shares are

owned by V (25%) and T (30%). V and T are both institutional investors and have representa–

tion on the board of directors. X can appoint four members of the board; V and T appoint three

each. The effective power to set W's operating policies lies with the four directors appointed by

X. However, if there is to be any change in the capital structure of the company, then the full

board (10 directors) must vote in favor of the proposal.

Required

Discuss how these three investments should be treated in the consolidated financial statements of X

group for year ended December 31, 20X4.

Solution

Entity Y, which was acquired on July I, 20X4, will have to be accounted for under IFRS 5. It will meet

the criteria as being held for sale and, therefore, must be accounted for in this way.

Initially, the fair value of the assets would be recorded at $27 million plus $8 million, which is $35 mil–

lion. The fair value of the liabilities would be recorded at $8 million. At the first balance sheet date, X

will have to remeasure the investment in entity Y at the lower of its cost and fair value less cost to sell,

which will be $26 million. The assets and liabilities will have to be presented separately in the consoli–

dated financial statements from any other assets and liabilities. The total assets at year-end December 31

will be shown separately as $33 million and the total liabilities will be shown separately as $7 million.

Obviously the subsidiary is not consolidated as such.

X owns 48% of the voting shares and has the power to control who has access to the operating capacity

of Z by virtue of a written agreement with another shareholder that owns 30% of the share capital. There

will be a presumption that X will have significant influence over Z through its ability to demand repay–

ment of a substantial loan. Therefore, X should consolidate Z. X has the power to govern the financial

and operating policies of the entity through agreement and through its relationship with Z.