Learning Area 8Chapter 11: Group accounts and insurance company accounts

What should you know?

•Knowledge of holding companies, subsidiaries and associates etc. •Be able to calculate goodwill•Understand group AFS

Example: Group

Sanlam Limited

100%

Sanlam Life Insurance Company Limited

http://www.sanlam.co.za/wps/wcm/connect/sanlam_en/Sanlam/For+Individuals/Sanlam+Sky+Solutions/About+Us/Structure

/

Subsidiary companies p2• Holding company holds a controlling interest in subsidiary

company.• Controlling interest if:• >50% shares/voting rights• Right to appoint/remove the board

• Holding company owns 100% of subsidiary’s shares: Wholly owned subsidiary

• Holding company owns less than 100%: Partially owned subsidiary

Subsidiary companies p3• Subsidiary company: own AFS• Holding company: own AFS and consolidated AFS• Purpose: to present group as single economic unit• What is consolidated AFS?• Adding across statements • Eliminating Intra-group transactions (i.e. eliminating double

counting problems) • Why consolidated AFS?• Control• Investors’ interest

Subsidiary companies p3 & p4H BS S BS Group BS

R’000 R’000 R’000Non-current assets 8 6Investment in S Ltd 10 -Current assets 12 10Total assets 30 16

Share capital (R1 shares) 20 10Current liabilities 10 6Total equity and liabilities 30 16

Subsidiary companies p3, 4 & 5H BS S BS Group BS

R’000 R’000 R’000Non-current assets 8 6 14Investment in S Ltd 10 - -Current assets 12 10 22Total assets 30 16 36

Share capital (R1 shares) 20 10 20Current liabilities 10 6 16Total equity and liabilities 30 16 36

Goodwill p5• Goodwill = Cost of acquisition – book value of shares acquired• Cost of acquisition = Cash paid + market value of shares / debt

paid to subsidiary’s shareholders• Why pay more than book value?- Holding company is paying for intangibles such as : Reputation of subsidiary Customer base Loyal workforce • All separate identifiable assets should be recognised before

goodwill is calculated e.g. trademarks etc.• Test annually for impairment

Accounting for goodwill p7H BS S BS Group BS

R’000 R’000 R’000Non-current assets- Other 8 6 14-GoodwillInvestment in S Ltd 11 -Current assets 11 10 21Total assets 30 16 36

Share capital (R1 shares) 20 10Current liabilities 10 6 16Total equity and liabilities 30 16 36

Accounting for goodwill p7H BS S BS Group BS

R’000 R’000 R’000Non-current assets- Other 8 6 14-Goodwill 1Investment in S Ltd 11 - -Current assets 11 10 21Total assets 30 16 36

Share capital (R1 shares) 20 10 20Current liabilities 10 6 16Total equity and liabilities 30 16 36

Goodwill p8• What happens if Company H bought Company S for an

amount lower than book value? - Therefore goodwill will be a negative amount- Negative amount added to the “other reserves” item (so that

“other reserves” increase)

• Question 11.1• Solution 11.1.docx

Non-controlling interests p9• If holding company owns <100%...still consolidated AFS (add

100% of Subsidiaries’ assets, liabilities, income, expenses), but:

• Non-controlling interest to account for ‘minority Shareholder’s share in net assets of Subsidiary’

• Example p9 LA8 Non-controlling interest example.docx

Associated companies p12Is a company over which the holding company has significant

influence, but no control!• Usually between 20% and 50% shareholding• Do not include 100% income, expenses, assets, liabilities (as

no control)• Include:• I/S: % of profit as a single line: income from associate• BS: Investment…increases by % income per income statement

and decreases by dividends paid.

Interpretation of consolidated AFS p12

• Group has no legal entityBUT - controlled by same shareholders, therefore an accounting entity for which group AFS is compiled

• In theory – it is possible for subsidiary to fail without receiving support from group members.

• In practice – almost impossible since one of group members will bail out struggling company.

• Why?..... It poses a reputational risk!!

SummarySubsidiary Associate Investment

Controlling interest:->50%- appoint board of directors

Significant influence- 20 – 50%

<20%, if not S or A

Consolidate 100% of A, L, I, ENon-controlling interest

One line in I/S (income from associate) and BS (investment in associate)

BS: Investment @ cost/market valueI/S: Dividend income

Insurance company accounts p14 - 19

• Uncertainties• When claims are to be paid and how much?• How many future premiums to be received• Profits: how much and when to recognise

• Additional liabilities: future claims – calculated by actuaries• AFS differ from normal companies’ AFS• Only short theory questions p14 – 19 in test and exam (Tested

later in studies in the relevant specialist subjects General and Life)

HOMEWORK

• Question 11.2 (p12 Subsidiaries and associates)• Question 11.3 (p13 Definitions)