Group accounting, including statements of cash flows

Group accounting is the backbone of SBR. ACCA's study guide says the first question in Section A examines group accounting: you discuss group issues and use a spreadsheet to adjust a consolidated financial statement. Notice the verb, adjust. At this level you are rarely asked to consolidate from a blank page. You are handed a draft prepared by someone who got a principle wrong, and the marks go to the student who explains the correct treatment and corrects the figures. This lesson assumes the FR workings (net assets, goodwill, NCI, group retained earnings) and adds what SBR examines on top: the acquisition method in depth, step acquisitions, changes in ownership with and without loss of control, and the consolidated statement of cash flows.

Control and the acquisition method

IFRS 10 Consolidated Financial Statements makes control the only basis for consolidation. An investor controls an investee when it has all three of: power over it (existing rights to direct the activities that most affect its returns); exposure, or rights, to variable returns from it; and the ability to use that power to affect those returns. Voting rights are the usual source of power, but contracts, potential voting rights that are currently exercisable, and a large holding among many small, scattered ones can all give control below 50%.

IFRS 3 Business Combinations applies only when what is bought is a business: inputs and processes that together contribute significantly to the ability to create outputs. If substantially all the fair value of the gross assets bought sits in one asset or a group of similar assets (the optional concentration test), it is an asset purchase, with no goodwill.

The acquisition method has four steps: identify the acquirer (the entity that obtains control, judged on voting rights, the board, senior management and relative size, not simply on which company issued shares); fix the acquisition date (when control passes); recognise and measure the identifiable assets, liabilities and NCI; and measure goodwill.

Four other D1 points recur in Section B. A parent need not prepare consolidated statements if it is itself a subsidiary whose other owners do not object, its debt and equity are not publicly traded or being registered for trading, and a parent above it publishes IFRS consolidated statements. A subsidiary bought exclusively for resale that meets IFRS 5's criteria at acquisition is consolidated as a disposal group held for sale, at fair value less costs to sell, and shown as a discontinued operation. In the parent's separate statements, IAS 27 allows investments in subsidiaries at cost, under IFRS 9 or by the equity method. And IFRS 19 Subsidiaries without Public Accountability: Disclosures (effective 1 January 2027) lets an eligible subsidiary, one without public accountability whose parent publishes IFRS consolidated statements, apply IFRS recognition and measurement with reduced disclosures.

Goodwill and the two NCI measures

Goodwill is the residual: consideration, plus NCI, plus the fair value of any interest held before control, less the fair value of the identifiable net assets. NCI is measured, acquisition by acquisition, at fair value (full goodwill) or at its proportionate share of net assets (the parent's goodwill only). SBR tests what the choice does later, at impairment.

A parent buys 80% for $100m when net assets are $90m and the NCI's fair value is $24m. A year later the subsidiary, a cash-generating unit, has net assets of $92m and a recoverable amount of $110m.

IAS 36 requires the gross-up because the recoverable amount reflects 100% of the unit's cash flows, while proportionate goodwill covers only the parent's share.

Step acquisitions

When an investor reaches control in stages, IFRS 3 treats crossing the control threshold as a significant economic event: in effect the investor sells its old holding and buys a subsidiary. So, at the date control passes:

1. Remeasure the previously held interest to fair value, with the gain or loss in profit or loss. (For an equity investment designated at fair value through OCI under IFRS 9, the change stays in OCI and is never recycled.)
2. Reclassify any OCI recognised on the old holding as if it had been sold, for example an associate's translation reserve.
3. Calculate goodwill once, at that date, with the fair value of the old holding as part of the cost.

Kuje plc, a fictional company, has held 30% of Bwari Co since 20X3, equity accounted at $19m. On 1 July 20X7 it buys a further 50% for $45m cash. At that date the original 30% is worth $24m, the 20% NCI is worth $18m and Bwari's net identifiable assets have a fair value of $70m.

The remeasurement journal is: debit investment in associate $5m, credit gain $5m ($24m − $19m). The gain arises on an equity-accounted investment, so under IFRS 18 it is classified in the investing category. Bwari is equity accounted to 30 June and consolidated from 1 July. A later purchase of more Bwari shares is not a step acquisition: control already exists, so it is an equity transaction.

Changes in ownership

IFRS 10 treats NCI as owners of the group, so a deal between the parent and the NCI is a transaction between owners, recorded in equity. Only crossing the control boundary produces a gain or loss.

These examples use $m with NCI at fair value.

An increase. Kuje owns 70% of Gurara Co, and the NCI's carrying amount is $36m. Kuje buys another 10%, a third of the NCI's shares, for $15m. NCI falls by 10/30 × $36m = $12m, and the $3m paid above that is charged to the parent's equity: debit NCI $12m, debit equity $3m, credit cash $15m.

A decrease, control kept. Kuje owns 90% of Jabi Co, whose net assets are $100m with goodwill of $20m. It sells 15% for $20m, keeping 75%. NCI rises by 15% × ($100m + $20m) = $18m, and the $2m excess is credited to the parent's equity: debit cash $20m, credit NCI $18m, credit equity $2m.

A decrease, control lost. Kuje owns 80% of Karshi Co and sells 60% for $90m, keeping 20% (now an associate) worth $28m. At the disposal date Karshi's net assets are $110m, goodwill $15m and NCI $25m; there is no OCI reserve.

The $28m becomes the cost of the associate. The parent's own statements show a different gain (proceeds less the carrying amount of the shares sold), and if Karshi is a discontinued operation under IFRS 5, its results and the gain appear in the discontinued operations category.

Consolidated statements of cash flows

A consolidated statement of cash flows is prepared from the consolidated statements, so intragroup cash flows have already gone. Under IAS 7 as amended by IFRS 18 (mandatory from 1 January 2027 and examinable now), the indirect method starts from operating profit. The share of profit of associates, investment income and finance costs sit below operating profit, so you no longer adjust for them: you simply pick up their cash flows in investing and financing.

Worked example

Usuma plc, a fictional company, has prepared the consolidated statements below. Prepare its consolidated statement of cash flows for 20X7 and explain the fall in cash to a director.

Notes:

1. On 1 July 20X7 Usuma bought 80% of Gwagwa Co for $45m in cash plus 6m Usuma shares worth $2.50 each. NCI was measured at its fair value of $16m. Gwagwa's identifiable net assets at fair value were property, plant and equipment $50m, inventory $12m, trade receivables $10m, cash $4m and trade payables $6m.
2. Operating expenses include depreciation of $35m, a goodwill impairment of $2m and a $2m gain on plant sold for $10m.
3. Finance costs were paid in full. There was no other comprehensive income.
4. Usuma issued shares for cash during the year and paid an equity dividend.

W1: goodwill. Gwagwa's net assets are $50m + $12m + $10m + $4m − $6m = $70m. Goodwill = $45m + $15m (6m × $2.50) + $16m − $70m = $6m. Check: $20m + $6m − $2m impairment = $24m, the closing figure.

W2: property, plant and equipment.

W3: working capital, excluding Gwagwa's balances at acquisition.

W4: the other balances. Each cash flow is the figure that makes the account move from opening to closing.

The statement reconciles: $98m − $81m − $35m = −$18m, and $40m − $18m = $22m, the closing cash in the statement of financial position. A note discloses the acquisition: consideration of $60m ($45m cash and $15m shares), the $4m of cash acquired, and Gwagwa's assets and liabilities by class.

Explaining it to a director. Profit was $61m but cash fell by $18m, and that is not a warning sign in itself. Operations generated $98m after tax from an operating profit of $90m. The group then spent $94m on growth, $53m on plant and $41m on Gwagwa net of Gwagwa's own cash, partly offset by $13m from the plant sale and the associate's dividend. A net $35m went to providers of finance, including $6m to outside shareholders in subsidiaries. The $15m of shares issued to Gwagwa's former owners cost no cash, which is why it does not appear. The board's question is whether the new investment will earn its return.

The ethical angle. Suppose the chief executive asks the finance team to hold back $15m of supplier payments due in late December, so that operating cash flow clears a figure promised to the bank. Each entry would be accurate, but the purpose is to give lenders a misleading picture of normal cash generation. ACCA's Code requires integrity and objectivity: explain the effect to the chief executive, decline to time payments to mislead, and take the matter to the audit committee if the pressure continues. Where a group stretches payments through supplier finance arrangements, IAS 7 and IFRS 7 require disclosure of their terms and effects.

Common mistakes

• Recognising a gain or loss in profit or loss when a holding changes but control does not.
• Calculating step-acquisition goodwill at the date of the first purchase, or using the old holding's carrying amount instead of its fair value.
• Leaving a new subsidiary's assets and liabilities in the working capital and PPE movements, so the acquisition is counted twice.
• Showing shares issued as consideration as cash from a share issue, or showing the whole consideration instead of cash paid less cash acquired.
• Starting the indirect method from profit before income taxes and then adjusting for associates and finance costs: an IAS 1 habit.
• Forgetting the dividend paid to the NCI, or leaving out the NCI brought in by an acquisition when finding it.

Exam technique

Expect a draft consolidated statement and a list of issues. For each issue, state the principle, apply it to the facts and give the adjustment; then post it in the spreadsheet with columns for the draft, the adjustment and the revised figure, so the marker can follow every number. For a cash flow requirement, set up the format first, then one working per balance (opening, non-cash movements, closing, with cash as the balancing figure). Strip out an acquired or sold subsidiary's balances before you touch any other working. Keep to your time: a complete answer with one wrong working scores better than a perfect half answer.

Study with AI

I am studying ACCA Strategic Business Reporting (SBR), group accounting (D1). Give me
one question at a time: a step acquisition, a purchase of shares from the NCI, a
disposal with loss of control, and a group statement of cash flows under IAS 7 as
amended by IFRS 18 (starting from operating profit) with a subsidiary bought in the
year. Use $m. Wait for my answer, then mark it and show the correct workings.

AI assistants often start cash flows from profit before tax and put gains on changes in ownership through profit or loss: check every answer against these notes.

Lecturer's note: Every ownership question in SBR turns on one line: the control boundary. Crossing it, in either direction, is a big economic event: something is sold and something else is bought, so everything is measured at fair value and a gain or loss goes to profit or loss. Moving about inside it, from 70% to 80% or from 90% to 75%, is only owners trading with each other, so it goes to equity and goodwill does not move. The cash flow rules follow the same line: crossing it is investing, and trading with the NCI inside it is financing. Ask "did control change?" before you write anything.

Key points

• Control under IFRS 10 needs power, exposure to variable returns and the link between them; IFRS 3 applies only to the acquisition of a business.
• Goodwill is consideration plus NCI plus the fair value of any previous holding, less net identifiable assets; proportionate goodwill is grossed up for impairment testing.
• In a step acquisition, remeasure the old holding to fair value through profit or loss and calculate goodwill once, when control passes.
• A change in a holding without loss of control is an equity transaction; loss of control gives a gain or loss that includes the retained interest at fair value and recycled OCI.
• The consolidated statement of cash flows starts from operating profit; acquisitions appear in investing net of cash acquired, and NCI dividends and trades with the NCI in financing.

Quick check

1. P owns 60% of S, and the NCI's carrying amount is $40m. P buys a further 20% for $25m. What are the entries?
2. P holds 25% of A, an associate carried at $30m and now worth $34m. It buys a further 35% for $50m. The NCI's fair value is $55m and A's net identifiable assets are $120m. Calculate goodwill and the gain on the old holding.
3. NCI was $20m at the start of the year and $26m at the end. A subsidiary bought in the year brought NCI of $4m, and the NCI's share of profit was $5m. What dividend was paid to the NCI, and where does it appear?

Answers

1. NCI falls by 20/40 × $40m = $20m, and the extra $5m paid is charged to the parent's equity: debit NCI $20m, debit equity $5m, credit cash $25m. Nothing goes to profit or loss.
2. Goodwill = $50m + $34m + $55m − $120m = $19m. The gain on remeasuring the 25% is $34m − $30m = $4m, in profit or loss.
3. $20m + $4m + $5m − $26m = $3m, a financing outflow.