SAI

CHAPTER 14

CONSOLIDATIONS, JOINT ARRANGEMENTS, ASSOCIATES, AND SEPARATE FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

Scope

IFRS 10, Consolidated Financial Statements, requires that an entity that is a parent must present consolidated financial statements that include all subsidiaries of the parent.  Only two exceptions to this rule are presently available. Firstly, a parent need not present consolidated financial statement if all the following criteria are met:

·         The parent itself is a wholly-owned subsidiary or it’s a partialy-owned subsidiary of another entity and all of its owner, including those not normally entitled to vote, have been informed about, and don’t object to, the parent not presenting consolidated financial statements;

·         Its debt and equity  instruments are not traded in a public market,

·         It didn’t file, nor is it in the process of filling, its financial statements with a securities  exchange commissions or other regulatory organization for the purpose of issuing any class of its instruments in a public market,

·         Its ultimate or intermediate parent produces consolidated financial statements that are available for public use and comply with IFRS.

Secondly, postemployment benefit plans or other long-term employee benefits plans to which IAS 19, Employee Benefits, aplly are also excluded from the scope of IFRS 10.

Power. Power arises from rights, and could arise in any of the following circumstances: (1) and investor may have the majority of voting rights: (2) an investor may have less than 50% of the voting rights, and (3) other arrangements. The lower on moves down this hierarchy, the more complex the assessment becomes.

Exposure, or rights, to variable returns from an investee. An investor is exposed, or has right to, variable returns when the investor’s returns from the involvement have the potential to vary as a result of the investor’s performance, wheter negative or positive.

Link between power and returns. The test or link of control is when the investor has the ability to use the power to affect the investor’s returns through its involvement, Therefore it is important to determine whether the investor is actin as an agent or the principal.

Majority of voting rights. Control is presumed if the majority of voting rights is held, unless other factors indicates that the majority of voting rights normally result in control.

Less than a majority of voting rights. Control could exist when a party has less than a majority of voting rights. The following are examples of instances where control could exist even though less than a majority of voting rights is held:

·         A contractual arrangement between the investor and other parties that provide the investor with a right to direct the relevant activities.

·         Right arising from the other contractual arrangements.

·         The extent of the investor’s voting rights.

·         The investor may hold potential voting rights that are substantive.

Other arrangements. Control can also exist through other contractual arrangements. This would usually be the case  with structured entities. A structured entities is an entity that has been designed so that voting or similar rights aren’t the dominant factor in deciding who controls the entity.

Consolidation Procedures

Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.

In preparing consolidated financial statements an entity combines the item presented in the financial statements line by line, adding together like items of assets, liabilities, equity, income, and expenses. In order to present financial information about the group as that of a single economic entity, the following procedures are followed:

·         Like items of assets, liabilities, equity, income, expenses and cash flows of the parent are combine with those of the subsidiary.

·         The carrying amount of the parent’s investment in each subsidiary is eliminated against the parent’s portion of equity of each subsidiary.

·         Intragroup assets, and liabilities, equity, income, expenses and cash flows relating to transaction of the entities in the group are eliminated.

Intercompany transactions and balances. In preparing consolidated financial statements, any transactions among member of the group must be eliminated. The reason for this requirement is to avoid grossing up the financial statements for transactions or balances that don’t represent economic events with outside parties.

Income and expenses. Income and expenses of the subsidiary are included in the consolidated financial statements from the date control is obtained until the date when control is lost. The income and expenses are based on amounts of assets and liabilities recognized at the acquisition date.

Potential voting rights. When voting rights exist, the portion of profit and loss and changes in equity allocated to the parent and noncontrolling interest in the consolidated financial statements are based solely on the existing ownership interest and don’t reflect the potential changes in ownership.

Noncontrolling interest. In the consolidated statement of financial position noncontrolling interest is presented within equity, separately from the equity of the owners of the parents.

Changes in ownership interest resulting in loss of control. Control of a subsidiary can be lost as a result of a parent’s decision to sell its shares in the subsidiary to a third party or as a result of a subsidiary selling its shares in the marketplace.

JOINT ARRANGEMENTS

A joint arrangements is defined as an arrangement of which two or more parties have joint control. Spesifically, a joint arrangement has two or more parties have joint control. Specifically, a joint arrangement has two characteristics: (1) the parties must be bound by contractual arrangement, and (2) the contractual arrangement must give two or more of the parties joint control over the arrangement. Therefore not all parties need to have joint control.

Joint control is defined as the contractually agreed sharing of control of an arrangement, which exist only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Types of Joint Arrangements

Type	Right Obligations
Joint Operation	Rights to the assets, and obligations for the liabilities, relating to the arrangement.
Joint Venture	Rights to the net assets of the arrangements.

Accounting for Joint Operations

A joint operation will account for the following:

·         Its assets, including its share of any assets held jointly

·         Its liabilities, including it share of any liabilities incurred jointly

·         Its revenue from the sale of its share of the output arising from the joint operation

·         Its share of the revenue from the sale of the output by the joint operation

·         Its expenses, including its share of any expense incurred jointly.

Accounting for Joint Ventures

A joint venture recognize its interest In a joint venture as an investment by applying the equity method of the accounting as describe in IAS 28.

Separate Financial Statements

The accounting for a joint operation in the consolidated and separate financial statements is the same. A party that participates in a joint operation that does not have joint control must also apply the same principles as discussed above to account for its interest. Equity accounting is only applied in the consolidated financial statements of the joint venture. In the separate financial statements IAS 27, is applied.

ASSOCIATES

Identification of an Associate

An associate is an entity over which an investor has significant influence. Significant influence is the power to participate in the financial and operating policy decision of the investee but is not control or joint control of those policies.

Accounting for an Associate

An entity recognize its interest in a associate by applying the equity method of IAS 28, Investment in Associates and Joint Ventures, except if an axception is applicable.

EQUITY METHOD OF ACCOUNTING

Scope and Application

      The equity method of accounting is applied to investments in associates and joint ventures. The cost method for accounting for associates would simply not reflect the economic reality of the investor’s interest in an entity whose operations were indicative, in part at least, of the reporting entity’s management decision and operational skills.

The Equity Method

Basic principles. The equity method permits an entity controlling a certain share of the voting interest in another entity to incorporate its pro rata share of the investee’s operating result into its profit or loss.

Intercompany transaction between investor and investee. Transaction between the investor and investee may require that the investor make certain adjustments when it records its share of the investee earnings. In preparing consolidated financial statements, all intercompany transaction are eliminated. However, when the equity method is used to account for investment, only the profit component of intercompany transactions is eliminated.

Contribution of nonmonetary asets. If an investee makes a contribution of a nonmonetary asset to an associate or joint venture in exchange for an equity interest, the fair value of the asset is in principle capitalized as part of the investment.However, fair value gains or losses are only recognize by the investor to the extent of the unrelated investor’s interest in the associate or joint venture.

Accounting for changes in Ownership Interest

Loss of significant influence. Significant influence is lost when an investee losses the power to participate in the financial and operating policy decisions of the investee.

Discontinuing the equity method. The equity method is discontinued from the date when the investment ceases to be an associate or joint venture. When the equity method is discontinued, any equity share of the associate or joint venture recognized in other comprehensive income must be removed by regarding this as a part of the sale of the transaction, the effect is that the gain and loss previously recognized in other comprehensive income is reclassified to profit or loss.

CHAPTER 15

BUSINESS COMBINATIOS

BUSINESS COMBINATIONS AND CONSOLIDATIONS

IFRS 3(R) and IAS 27(R) and International Accounting Convergence

      In January 2008, the IASB issued a revised version of IFRS 3, Business Combinations, which in this publication is being referred to as IFRS 3(R), as well as an amended version of IAS 27, Consolidated an Separate Financial Statements, which is being referred to as IAS 27(R).

Effective Date and Transition Provisions

      IFRS 3(R) and IAS 27(R) came into effect for the first annual reporting period beginning on after July 1, 2009. Early application was permitted, although the new pronouncements couldn’t be applied to periods beginning prior to June 30, 2007.

Objectives

      The overriding objective of the new standards is to improve the relevance, representational faithfulness, transparency, and comparability of information provided in financial statements about business combinationsand their effect on the reporting entity by establishing principles and requirements with respect to how an acquirer, in its consolidated financial statements.

BUSINESS COMBINATIONS

      The revised standards IFRS 3(R ) replaces the cost principle of accounting for the business combinations with the fair value principle. Under the cost principle, which was apllied under IFRS 3, the exchange transaction was tobe recorded as cost. That cost was tobe allocated to the assets acquiredand liabilities assumed, and goodwill was to be recognized for the difference between the cost and the fair value of the identifiable net assets acquired.

Determining Fair Values

      Accounting for acquisitions requires a determinationof the fair value for each of the acquired entity’s identifiable tangible and intangible asets and for each of its liabilities at the date of combination.

Transactions and Events Accounted for as Business Combinations

      A business combination result from the occurrence of a transaction or other event that results in an acquirer obtaining control of one or more business. This can occur in many different ways that include the following examples individually or in some cases, in combinations:

·         Transfer of cash, cash equivalents, or other assets, including the transfer of assets of another business of the acquirer

·         Incurring liabilities

·         Issuance of the equity instruments

·         Providing more than one type of consideration, or

·         By contract alone without the transfer of consideration.

Techniques for Structuring Business Combintions

      A business combination can be structured in a number of different ways that satisfy the acquirer’s strategic, operational, legal, tax, and risk management objectives.

Accounting for Business Combination Under theAacquisition Method

      The acquirer is to account for a business combination using the acquisition method. This term repreents an expansion of the now-outdate term, “purchase method”. The following steps are required to apply the acquisition method:

1.      Identify the acquirer

2.      Determine the acquisition date

3.      Identify the assets and liabilities, if any, requiring separate accounting because they result from transactions that aren’t part of the business combination, and account for them in accordance with their nature and the applicable IFRS.

4.      Identify assets and liabilities that require acquisition date classification or designation decisions to facilitate application of IFRS in postcombination financial statements and make those classification or designations based on

a.      Contractual terms;

b.      Economic conditions

c.       Acquirer operating or accounting policies;

d.      Other pertinent conditions existing at the acquisition date.

5.      Recognize and measure the identifiable tangible and intangible assets acquired and liabilities assumed.

6.      Recognize and measure any noncontrolling interest in the acquire.

7.      Measure the consideration transferred

8.      Recognize and measure goodwill or, if the business combination result in bargain purchase, recognize a gain from the bargain purchase.

      Step 1- Identify the acquirer. The provisions of IAS 27(R ), Consolidated and Separate Financial Statements, should be used to identify the acquirer-the entity that obtains control of the acquiree. If applying the guidance in IAS 27(R ) doesn’t clearly indicate the party that is the acquirer, IFRS (3) provides factors to consider in making that determination under different fact and circumstances.

      Step 2- Determine the acquisition date. The general rulenis that the acquisition date is the date on which the acquirer legally transfers consideration, acquires the assets, and assume the liabilities of the acquire. This date, in a relatively straightforward transaction is referred to as the closing date. Not all transactions are that straightforward, however.

      Step 3- Recognize and measure the identifiable tangible and intangible assets acquired and liabilities assumed. IFRS 3 (R) provides the acquirer with choice of two methods to measure noncontrolling interest arising in a business combination:

1.      To measure the noncontrolling interest at a fair value, or

2.      To measure the noncontrolling interest at the noncontrolling interest’s share of the acquire;s net assets.

      Step 4- Identify assets and liabilities requiring separate accounting. IFRS 3(R ) provides a basic recognition principle that, as of the acquirer is to recognize, separately from goodwill, the fair values of all identifiable assets acquired, the liabilities assumed, and if applicable, any noncontrolling interest in the acquire.

      Step 5- Classify or designate identifiable assets acquired and liabilities assumed. In order to facilitate the combine entity’s future application of IFRS in its postcombination financial statements, management is required to make decisions on the acquisition date relative to the classification or designation of certain items.

      Step 6- Recognize and measure any noncontrolling interest in the acquire. IFRS 3 (R ) provides the acquirer with a choice of two method to measure noncontrolling interest at the acquisition daate arising in a business combination:

1.      To measure the noncontrolling interest at fair value or

2.      To measure the noncontrolling interest at the present ownership instruments share the recognize amounts of the acquiree’s identifiable net assets.

      Step 7- Measure the consideration transferred. In general, consideration transferred by the acquire is measured at its acquisition-date fair value. Examples of consideration that could be transferred include cash, other assets, a business, a subsidiary of the acquirer, contingent consideration, ordinary or preference equityninstruments, options, warrants, and member interest of mutual entities.

      Step 8- Recognize and measure goodwill or gain from a bargain purchase. Goodwil represent an intangible that isn’t spesifically identifiable. It result from situation when the amount the acquirer is willing to pay to obtain its controlling interest exceeds the aggregate recognize values of the net asset acquired measured following the pronciples of IFRS3(R ).

GW (or GBP)   = (CT+NI+PE)-NA

GW                              = Goodwill

GBP                 = Gain from a bargain purchase

NI                     = Noncontrolling interest in the acquire

CT                    = Consideration transferred, generally measured at acquisition-date fair value

PE                    = Fair value of the acquirer’s previously held interest in the acquire if the acquisition was

                           achieved in stages

NA                   = Net Assets acquired.

      Bargain purchase. A bargain purchase occurs when the value of net assets acquire is in excess of the acquisition date fair value of the consideration transferred plus the amount of any noncontrolling interest and plus fair value of the acquirer’s previously held equity interest.

      Acquisition-related cost. Cost incurred by an acquirer to enter into a business combination.

Goodwill and Gain from Bargain Purchase.

      Goodwill. Goodwill represents the difference between the acquisition date fair value of the consideration transferred plus the amount of any noncontrolling interest in the acquire plus the acquisition date fair value of the acquiree’s previously held equity interest in the acquire.

      Gain from a bargain purchase. In certain business combination, the consideration transferred is less than the fair valueof net assets required.

CHAPTER 29

RELATED-PARTY DISCLOSURES

INTRODUCTION

      Transactions between entities that are considered related parties, as defined by IAS 24, Related-Party Disclosures, must be adequately disclosed in financial statements of the reporting entity. Such disclosures have long been a common feature of financial reporting, and most national accounting standard-setting bodies have imposed similar mandates.

A related party is a person or entity that is related to the entity that is preparing its financial statements (in this Standard referred to as the ‘reporting entity’).

A person or a close member of that person’s family is related to a reporting entity if that person:

1.      has control or joint control over the reporting entity;

2.      has significant influence over the reporting entity; or

3.      is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

An entity is related to a reporting entity if any of the following conditions applies:

1.      The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

2.      One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

3.      Both entities are joint ventures of the same third party.

4.      One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

5.      The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

6.      The entity is controlled or jointly controlled by a person identified above

7.      A person identified in 1. Above has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity)

Scope of the Standard

        IAS 24 is to be applied applied in dealing with related parties and transactions between a reporting entity and its related partie. The requirements of this standard apply to the financial statements of each reporting entity.

Applicability

        The requirements of the standard should be applied to related parties as identified in the definition of a related party.