Principles of Group Accounting under IFRS
Wiley Regulatory Reporting Series

The new International Financial Reporting Standards (IFRS) 10, 11, and 12 are changing group accounting for many businesses. As business becomes increasingly global, more and more firms will need to transition using the codes and techniques described in Principles of Group Accounting under IFRS. This book is a practical guide and reference to the standards related to consolidated financial statements, joint arrangements, and disclosure of interests. Fully illustrated with a step-by-step case study, Principles of Group Accounting under IFRS is equally valuable as an introductory text and as a reference for addressing specific issues that may arise in the process of consolidating group accounts.

The new international standards will bring about significant changes in group reporting, and it is essential for accountants, auditors, and business leaders to understand their implications. Author Andreas Krimpmann is an internationally recognized authority on the transition from GAAP to IFRS, and this new text comes packaged with GAAP/IFRS comparison resources that will help make the changes clear. Other bonus resources include an Excel-based consolidation tool, checklists, and a companion website with the latest information. Learn about:

• Definitions, requirements, processes, and transition techniques for IFRS 10, 11, and 12 covering group level accounting
• Practical implementation strategies demonstrated through a clear case study of a midsize group
• Key concepts related to consolidated financial statements, joint ventures, management consolidation, and disclosure of interests
• Comparisons between GAAP and IFRS to clarify the required changes for international firms

Whatever stage of the consolidation process you are in, you will appreciate the professional perspective in Principles of Group Accounting under IFRS.

List of figures xvii

List of tables xxiii

Preface xxvii

Introduction to the book xxix

A The case study 1

1. About the group 2

2. Allocation of examples 4

B Legal requirements for consolidated financial statements 9

1. IFRS standards 10

1.1. Transition to the new consolidation suite (IFRS 10 to IFRS 12, IAS 27 and IAS 28) from IAS 27 rev. 2008 13

1.2. Dependencies between IFRS 3 and IFRS 10 22

1.3. Accounting transition of joint ventures 23

2. Exemptions 35

3. Local accounting standards 38

4. Taxation 39

5. Definitions 41

C Definition of Groups 43

1. The control concept 44

2. Joint control 55

3. Loss of control 61

4. Group compositions 65

5. Special cases 68

5.1. Structured entities 68

5.2. Limited partnerships 70

5.3. Deemed separate entities 71

D Preparation of Consolidated Financial Statements and Annual Reports 73

1. Lifecycle of subsidiaries 74

2. Structures 78

2.1. Accounting in group structures 78

2.2. Shared services 80

2.3. Accounting structures 83

2.4. Reporting structures 92

3. The preparation process 98

3.1. Communication 102

3.2. Subsidiaries 103

3.3. Reporting 106

3.4. The parent 107

3.5. The group 107

4. Organization 110

E Initial consolidation 113

1. Basics 114

1.1. Valuation levels 116

1.2. The opening balance sheet 119

2. Mergers and acquisitions 128

2.1. The acquirer’s view 130

2.2. The group’s view 132

3. Purchase price allocation 136

3.1. The acquirer 138

3.2. The acquisition date 140

3.3. Consideration transferred (purchase price) 143

3.4. Acquired assets – recognition and measurement 152

3.4.1. General requirements on recognition and measurement 152

3.4.2 Existing assets and liabilities 158

3.4.3. Non-accounted assets and liabilities 161

3.5. Goodwill and non-controlling interests 182

3.6. Business vs. assets and liabilities 190

4 Other aspects of purchase price allocations 193

4.1 Cash flow statements 193

4.2 Disclosures 194

5. Consolidation techniques 197

5.1. The parent’s view 198

5.2. The group’s view 202

5.2.1. Step one – preparation for consolidation 203

5.2.2 Step two – consolidation 210

5.2.3. Bargain purchases 216

6 Special cases 217

6.1 Reverse acquisitions 217

6.2 Acquisitions achieved in stages 220

6.3 Obtaining control in special situations 222

6.3.1 Obtaining control without an acquisition or consideration 222

6.3.2 Exchange of equity interests 223

6.3.3 Mutual entities 223

6.4. Multi-component contracts 225

6.4.1. Regular employment contracts 227

6.4.2. Share-based payments as non-controlling interests 229

6.4.3 Share-based payment exchanges 230

6.5 Pre-existing relationships 231

6.5.1 Reacquired rights 239

6.6. Shares of the parent company 240

6.7. Non-material subsidiaries 241

F Subsequent consolidation 245

1. Basics 246

1.1. Preparation mechanics 248

1.2. Tasks & timing 249

2. Subsidiary preparation 253

3. Equity consolidation 263

3.1. Consolidation requirements 263

3.2. Consolidation techniques 266

3.3. Special cases 269

4. Debt consolidation 270

4.1. Intercompany relationships 271

4.2. Consolidation techniques 273

4.3. Differences 278

4.4. Preventative activities 282

4.4.1. Organizational aspects 282

4.4.2. Simple settlement 283

4.4.3. Netting 284

5. Consolidation of income and expenses 286

5.1. Intercompany relationships 287

5.2. Consolidation techniques 291

5.2.1. Profit & loss statement by function 292

5.2.2. Profit & loss statement by nature 299

5.2.3. Consolidation differences 308

6. Unrealized profits 310

6.1. Profit calculation 312

6.1.1. Purchased assets 313

6.1.2. Self-constructed assets 313

6.2. Transfer pricing 316

6.2.1. Basics 316

6.2.2. Profit and cost determination 329

6.2.3. Documentation and compliance 332

6.2.4. Application in group accounting 336

6.3. Consolidation techniques 337

7. Non-controlling interests 341

7.1. Allocation of profit and loss 341

7.2. Consolidation techniques 343

7.3. Special cases 345

8. Group-level transactions 345

8.1. Valuation adjustments and remeasurements 346

8.2. Impairments 348

8.2.1. Basics 348

8.2.2. Impairment steps 350

8.2.3. Cash-generating units 362

8.2.4. Other issues 371

8.3. Netting 373

8.4. Reclassifications 374

9. Special cases 375

9.1. Intercompany dividends 375

9.1.1. Basics 375

9.1.2. Ordinary profit distributions 378

9.1.3. Profit transfer agreements 379

9.2. Intercompany sale of non-current assets 380

9.3. Consolidation of multi-level groups 389

9.3.1. Characteristics of multi-level groups 389

9.3.2. Consolidation techniques 391

9.3.3. Special cases 415

G Associated companies 425

1. Basics 426

1.1. The equity method 427

1.2. Preparation of and presentation in financial statements 427

2. Consolidation techniques 430

2.1. Initial consolidation 430

2.1.1. Purchase price allocation 432

2.1.2. Consolidations 440

2.1.3. Issues around the initial consolidation 443

2.2. Subsequent consolidation 443

2.2.1 Adjustments 443

2.2.2. Equity accounting 448

2.2.3 Debt consolidation 450

2.2.4. Unrealized profits and income & expense consolidations 451

2.3. Disposals / Deconsolidation 456

2.3.1. The parent’s view 457

2.3.2. The group’s view 458

2.3.3. IFRS 5 and disposals of associated companies 466

3. Treatment of losses 469

4. Impairments 470

5. Special cases 471

5.1. Associates and cash-generating units 472

5.2. Partnership as associate 473

5.3. Non-material associate becomes material 476

H Joint arrangements 479

1. Basics 480

2. Accounting and consolidation 489

2.1 Joint operations 489

2.2 Joint ventures 494

2.3 Interests in joint arrangements without joint control 495

3. Disposals / Deconsolidation 495

3.1 Joint operations 496

3.1.1 The parent’s view 496

3.1.2 The group’s view 499

3.2 Joint ventures 499

3.2.1 The parent’s view 499

3.2.2 The group’s view 500

3.3 IFRS 5 and disposals of joint arrangements 500

I Changes in control 501

1. Basics 502

2. The parent’s view 504

3. Increase in investments 505

3.1. Financial investment to associate 506

3.2. Financial investment to joint venture 510

3.3. Financial investment to subsidiary 511

3.4. Associate to joint venture 515

3.5. Associate to subsidiary 515

3.6. Joint venture to subsidiary 525

4. Decrease in investments 527

4.1. Associate to financial investment 527

4.2. Joint venture to financial investment 533

4.3. Joint venture to associate 534

4.4. Subsidiary to financial investment 534

4.5. Subsidiary to associate 537

4.6. Subsidiary to joint venture 541

5. Acquisitions and disposals without changes in control 544

5.1. Financial investment 545

5.1.1. Step acquisitions 546

5.1.2. Partial disposals 547

5.2. Associate 548

5.2.1. Acquisitions and increases in capital 549

5.2.2. Partial disposals and decreases in capital 552

5.3. Joint venture 556

5.3.1. Retirement of parties 557

5.3.2. Acceptance of new parties 558

5.4. Subsidiary 559

5.4.1. Step acquisition 562

5.4.2. Partial disposals 564

6. Special cases 565

6.1. Discontinued operations 565

6.2. Deemed disposals 567

6.3. Other constitutions of control 567

J Disposals and deconsolidation 569

1. Basics 570

1.1 Transitional consolidation without external involvement 572

2. Control 573

3. Deconsolidation techniques 575

3.1 The parent’s view 576

3.2 The group’s view 578

3.2.1 Calculation of gains and losses 579

3.2.2 Asset and liability elimination 584

3.2.3 Goodwill 585

3.2.4 Other comprehensive income 588

3.2.5 Consolidation tasks 588

3.2.6 Journal entries 590

3.3. Special cases 598

3.3.1. Statement of cash-flow 598

3.3.2 Fixed asset schedule 599

3.3.3 Group-internal transactions 600

3.3.4 Multiple arrangements and misuse 600

4. Discontinued operations 601

4.1 Step 1 – IFRS 5 Check 603

4.2. Step 2 – The decision date 609

4.3. Step 3 – Measurement 610

4.3.1. Measurement scheme and timing 610

4.3.2. Individual assets 612

4.3.3. Disposal groups 616

4.3.4. Impairment losses 617

4.4. Step 4 – Life as a discontinued operation 619

4.4.1. Presentations 619

4.4.2. Subsequent measurement 623

4.5. Step 5 – Sale of discontinued operations 624

4.6. Step 6 – Deconsolidation 625

4.7. Special cases 627

4.7.1. Distributions to owners 627

4.7.2. Changes to sales plan, criteria not any longer met 627

4.7.3. Purchase of subsidiary for immediate sale 628

4.7.4. Disposal groups without any non-current assets 629

K Special areas 631

1. Currency translation of foreign operations 632

1.1. Basics 632

1.2. Translation to the functional currency 635

1.2.1. Monetary items 636

1.2.2. Non-monetary items 637

1.2.3. Translation tasks and techniques 637

1.2.4. Changes in the functional currency 640

1.2.5. Special cases 640

1.3. Translation to the presentation currency 641

1.4. The exchange rate 646

1.5. Currency translations in practice 648

1.6. Taxation 650

1.7. Special cases 650

1.7.1. Goodwill and non-controlling interests 650

1.7.2. Currency effects of intercompany relationships 651

1.7.3. Disposal of foreign operations 653

1.7.4. Currency translation in multi-level groups 654

1.8. Classifications of balance sheet items for translations 655

2. Deferred taxes in groups 656

2.1. Basics 656

2.1.1. The temporary concept 656

2.1.2. Accounting for deferred taxes – Recognition 658

2.1.3. Accounting for deferred taxes – Measurement 660

2.2. Differences 661

2.2.1. Inside basis differences I 661

2.2.2 Inside Basis Differences II 663

2.2.3. Outside basis differences 665

2.3. Special cases 667

2.3.1. Intangible assets and goodwill 667

2.3.2. Unused tax credits and tax losses 668

2.3.3. Foreign currency translation 669

2.3.4. Tax groups 670

2.3.5. Partnerships 673

2.3.6. Associates 674

2.3.7. Restructuring 676

2.4. Tax reconciliation 676

2.5. Classification of deferred tax elements 677

3. Cash flow statements 679

3.1. Basics 679

3.2. Group effects 681

3.2.1. Changes in the group composition 682

3.2.2. Consolidation 683

3.2.3. Foreign currency translations 683

3.2.4. Associates companies and joint ventures 685

3.3. Other effects 685

3.4. Preparation techniques 686

3.5. Classification of cash flow elements 689

4. Partnerships 691

5. Restructuring of groups 693

5.1. Basics 693

5.2. Types of restructuring 695

5.3. Restructuring methods 699

5.3.1. Sales 700

5.3.2. Mergers 701

5.3.3. Splits 704

5.4. Special case: Shareholder initiated restructurings 707

l Management consolidation 711

1. Basics 712

2. Business units 714

3. Projects and cost units 726

3.1 Projects 727

3.2 Cost units 728

3.3 Consolidation tasks and techniques 729

4. Dependency between management consolidations and consolidated financial statements 730

M Consolidated financial statements 733

1. The basics 734

2. Statements 735

3. Notes & group disclosures 738

3.1. Structure of notes 738

3.2. Accounting policies and group disclosures 739

3.3. Disclosures 741

3.4. Other disclosures 743

3.5. Preparation process 744

4. Management report 746

N Appendix I: Fair value measurement 751

1. History 751

2. Definition 752

3. Measurement 753

3.1 Market approach 755

3.2. Cost approach 756

3.3. Income approach 756

4. Measurement techniques for selected assets and liabilities 758

Appendix II: IFRS – US-GAAP comparison 760

Appendix III: IFRS 766

1. List of IFRS 766

2. IFRIC and SIC interpretations 768

Reference list 771

Glossary 773

Index 779

Andreas Krimpmann, Berlin, Germany, is a Certified Public Accountant and owner of Krimpmann MBA ▪ CPA, providing consulting and services in financial and management accounting. He is Head of the IFRS and Controlling working group of the Internationaler Controllerverein and Head of the IFRS-Practice Committee of the German CPA Society. Andreas is also an Associate Professor at Berlin universities (Beuth University of Applied Sciences and HTW University of Applied Sciences) for accounting, management accounting and taxes and teaches IFRS and group accounting at various training academies and educational institutions (e.g. Haufe Academy).