Hello and welcome to SEMA F2 financial management. Chapter one is about group accounting. I hope all of you downloaded the express notes from our website from nearby the videos you're listening and this chapter is just to warm you up and in fact help you to build on what you've learned in SEMA F1 consolidation. Now some of the things you heard already in F1 and it is there where you decided the purpose of preparing consolidated financial statements. It is all about providing relevant information to stakeholders and by having a group of companies. Uh you could argue that individual information is important for local jurisdictions for instance of the subsidiaries and local stakeholders. But from the initial investor's point of view because these investments are connected and will decide about the connection between such investments you need to have an overview of your uh investments as a whole. So um in terms of necessity um it is only when the standards on consolidation appeared that the information became more relevant to investors um whose investments were growing and you know you're investing in one company and that company was investing in other companies. So they were um becoming a bigger and bigger pool of entities to control and understand. Now if you look at terminology, it's very important to remember all the words we're going to use. So subsidiary, what is a subsidiary? A subsidiary is an entity in which the parent company will have more than 50% of the voting com uh power. In other words, and I will pick and choose the key words here. In other words, the parent company will have control in the subsidiary. So what is control? is the power to control financial and operating policies of this other entity. And how do you measure control? Well, in effect, for the purpose of your paper, it will be um mentioned to you the voting p power in most cases. And they will say that you have more than 50%, therefore you will control. However, you have to be careful because it's not always this particular percentage that expresses whether you really control or not an entity. You could have let's say 30 35% just under 50% ownership or voting power. However, you may have some form of indirect control into that business. For instance, you can have um certain members in the board of directors. You may have certain percentages of profit based on various management or royalty agreements and so on. So sometimes control is not purely measured by the voting power. In fact, in reality, these are things to look at and investigate to be sure. However, for exam, take as a benchmark unless otherwise told the 50% voting power. Now, the parent company of course is the top of the group structure that controls subsidiaries and has significant interest in associates, which just takes me to the word associate. Who are the associates? And then you could see it was linked in with significant influence. Well, associate is a company in which the parent has significant influence but not control. So no control nor joint control. What does it mean significant influence? Well, if we look at in in terms of uh percentages of ownership um of ownership of shares or of voting power, it would be anywhere between 20 and 50%. So that can be an indication you have significant influence and that particular company is an associate company to you. So let's say if you buy 25% of British Airways you suddenly become very very important then you must be rich in the first place and then that be a if you're a company will be an associate company. Somewhere in this interval if you take the word significant influence as we said is not control but you can influence the operating policies and decisions of another entity. So what you have to look at have a look at these percentages is it higher than 50% maybe you talk about the subsidiary in control. If it's less than 50% voting power most likely you will talk about an associate and significant influence in that company. Now you will hear a lot of the equity or in fact you'll hear what we call net assets for consolidation purposes. So everybody should be familiar with the fact that these net assets are capital plus reserves or can you remember from the frame frame framework document assets less liabilities. Many times you will hear net esses particularly when you say that you acquired the company and you want to calculate goodwill and that will be the difference between what you pay in simple terms. We'll get we'll become more technical in a minute and the net fair value of net assets of the company acquired because that's what you acquire the net assets of that company at fair value. Okay. What are group reserves? Again, you will hear about group reserves and imagine there are the consolidated reserves of your of the of the investor and of course it's 100% of the parent company but also you add to that all the what we call postacquisition retain gains of all subsidiaries joint ventures and associates. So the no matter how complex the group is let's say made up of subsidiaries and associates you do consolidate all their reserves. You take the parent and all the postacquisition portions of each of the entities that you have control of or significant influence. If you go to non-controlling interest, it used to be called minority interest. I don't know if it was in your times or not. Um but I think minority interest expresses um as easy as non-controlling interest that these shareholders that do not have control or significant influence um sorry don't have control rather and if uh if you think you bought 80% uh in a company and I have 20% I would be the non-controlling interest the share of net assets and gains of a subsidiary that is not owned by the parent that would be the definition and I thing goodwill you heard already and hopefully you remember from F1 um we touched upon there uh is the premium you pay in excess of the net assets of the subsidiary or associate acquired. I think terminology is essential. I would just mention here one very important thing before I remind you about the workings um of specific to consolidation uh that consolidation represents 35% of the syllabus. So it's good to know your consolidations well. Make sure you do practice questions but don't fall in love with consolidations and aim to get 100% for them because remember there is 65% of your syllabus made up of various other standards. So please please please keep the right balance and do remember is 35% of your syllabus. I'm not saying it's negligible but I'm saying don't aim to get it perfect. Get the key principles. So what are the key workings that you need for consolidation? Well, one of them is group retained earnings and one of them is goodwill calculation. One of them is non-controlling interest and one is consolidated reserves. May I briefly mention about consolidated retained earnings. So have a look here and what do we have? We have the parent company, we have a subsidiary, a second subsidiary and an associate company. So you can guess the voting power behind um your relationship with the subsidiaries. Subsidiary one, two and respectively associate. Now what we have to do please do use some workings and we do recommend this particular workings to get you um into the motion to make sure you don't omit elements and to make sure you guys have speed in the exam because the timing is so important in your exams as well. So what you're going to take you're going to take what I put here today means you're going to take the brown figure on your reserves on parent subsidiary each subsidiary and associate. Where do you take these figures from? You're going to take them from statement of financial position a date of consolidation. So very easy pick them up there and what you have to start doing is various bits and pieces of adjustments. So, do you have any omissions or errors to correct in the individual financial statements? If you do, make sure you put them through. Also, do you remember your PUP POP provision for unrealized profit? When you are selling inventory between two parts, two entities of the same group and you're selling it at the profit. However, you haven't sold this inventory outside the group. we are saying you have not realized that profit yet from a group perspective. So what you're doing you're adjusting that you're getting rid you're reversing that artificial pro uh profit you're making when you sell from an entity to another and that you do it via the provision for unrealized profit. So make sure you get rid of that profit which is not yet realized. Then you have various things like write offs of fair value adjustments. So if you have fair value that you you adjusted for um obviously information would be provided in the notes you would have to as you could see here let's say you have um uh depreciation of a non-current asset and you have not included that individual in the individual financial statements but you needed the fair value of net assets to calculate goodwill because this fair value was used just on consolidation. As you depreciate the excessive value of your non-current assets, that excess depreciation has to be rec recycled through the consolidated um profit and loss. And that's why you see it just here. It's not captured from adding line by line the figures here. So here is for instance my example with a write offs. You can have different reversals and so on. That was the example is uh right of fair value. What about impairment of goodwill? The same story. Goodwill arises only a consolidation and any uh well any impairment related to goodwill would have to be recycled through uh the profit and loss consolidated. You cannot find it to say I'm capturing it from adding it up one by one column by column parent subsidiary subsidiary and associate. Okay. If you do all these adjustments, you are getting to say, okay, these are my subtotals of my retained earnings to date of consolidation with adjustments and then make sure you take out all preacquisition reserves from sub one, sub 2 and associate because they have never been yours and you remain with a postacquisition profit. Of course, you take 100% of the parent company and you take the relevant given percentages from the case of your controlled entities or the ones you have significant influence like the associate. And this is how you get to a total consolidated retained earnings. Well, I hope it's useful and I would love to see you again to see you uh virtually um to the next video which will be a continuation of this chapter and we'll go through goodwill and non-controlling interest workings. Thanks very much for listening and speak to you soon. Best of luck with prep.