Topic list Syllabus reference

Exam focus point
Group aspects

The Financial Reporting syllabus now explicitly includes the interpretation of financial statements of groups, as well as single entities. The June 2018 exam had an analysis question on groups. Consider any group issues, such as new capital raised to acquire a subsidiary, intragroup trading, acquisitions or disposals, or reliance on a group company for financial support.
When analysing financial performance it is important to consider the effect of parent/subsidiary relationships. Ratios based on consolidated financial statements can obscure the performance of the parent or the subsidiary. It is particularly important to be able to isolate the effects of acquisitions or disposals of subsidiaries on the financial statements and on the ratios.

1. 
   Acquisitions
   

Ratio analysis is particularly relevant when a company is considering an acquisition. In reviewing the financial statements of the acquiree, the acquirer needs to be alert to any evidence of window dressing. Have transactions been undertaken to boost the results of the acquiree prior to the sale? And are there favourable business relationships or supply chains that will no longer apply post-acquisition?
It will also be important to review the effect of the acquisition on the group financial statements. This will require calculating underlying ratios, to see what results would have looked like if the acquisition had not taken place.

2. 
   Disposals
   

When a disposal takes place, IFRS 5 requires the results of the discontinued operation to be separately presented (IFRS 5: para. 33), so that users can assess properly the performance of the continuing operations. In carrying out ratio analysis it is also necessary to eliminate the effects of group companies or trading operations that have been disposed of.
This means removing the results of the disposal from profit or loss (including any profit or loss on disposal, which is a one-off item) and removing the net assets of the operation disposed of from capital employed. Then important ratios such as gross profit %, operating profit % and ROCE can be calculated for the remaining business.
In this way it will be possible to judge whether the disposal had a favourable result - it may even turn out that the operation disposed of was the most profitable part of the business! It may also be possible to judge whether the sale was correctly priced - perhaps that profitable subsidiary or division should have been priced a bit higher.

3. 
   Example
   

This is a question from the June 2015 exam.
Yogi Co is a public company and extracts from its most recent financial statements are provided below:
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH

	20X5	20X4
	$000	$'000
Revenue	36,000	50,000
Cost of sales	(24,000)	(30,000)
Gross profit	12,000	20,000
Profit from sale of division (note (i))	1,000	nil
Distribution costs	(3,500)	(5,300)
Administrative expenses	(4,800)	(2,900)
Finance costs	(400)	(800)
Profit before tax	4,300	11,000
Income tax expense	(1,300)	(3,300)
Profit for the year	3,000	7,700

STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH

ASSETS