DipIFR Syllabus D. Preparation of external financial reports - Reserves Calculation - Notes ^{8 / 14}

So far we have looked at how to calculate goodwill and then NCI for the SFP, now we are looking at how to calculate any group reserves on the SFP

There could be many reserves (eg Retained Earnings, Revaluation Reserve etc), however they are all calculated the same way

Basic Idea

The basic idea is that group accounts are written from the Parent companies point of view.

Therefore we include all of Parent (P’s) reserves plus parent share of Subs post acquisition gains or losses in that reserve.

Let’s look at an example of this using Retained Earnings.

Illustration 1

P acquired 80% S when P’s Retained earnings were 1,000 and S’s were 600

Now, P’s RE are 1,400 and S’s RE are 700.

What is the RE on the SFP now?

It is worth pointing out here that all these workings only really to start to make sense once you start to do lots of examples - see my videos for this.

Impairment

If Goodwill has been impaired then goodwill will reduce and retained earnings will reduce too.

However, the amount of the impairment depends on the NCI method chosen:

1. Proportionate NCI method 

   This means that NCI has zero goodwill, so any goodwill impaired all belongs to the parent and so 100% is taken to RE

2. FV method 

   Here NCI is given a share of NCI, so also takes a share of the impairment. 

   Therefore the group only gets its share of the impairment in RE (eg 80%)

Illustration 2

P acquired 80% S when P’s Retained earnings were 1,000 and S’s were 600.

Now, P’s RE are 1,400 and S’s RE are 700. 

P uses the FV method of accounting for NCI and impairment of 40 has occurred since.

What is the RE on the SFP now?