Guidelines to Consolidation

1. General Awareness:
Tip 1: Care should be taken in respect of: o Share holding % acquired in subsidiary and/ or associate for sharing between parent and Non-controlling interest (NCI) o Unrealized profit: Whether % of profit applies on sales or cost of sales? (Margin or markup?) o Acquisition date and consolidation date for: Profit & Loss (P&L) consolidation Depreciation / amortization calculations Associate share of profit/ loss calculations Goodwill (Full goodwill method): Consideration paid by parent FV of NCI Less: Net assets of subsidiary at acquisition Share capital Share premium Fair value adjustment (FVA) Defer tax liability on FVA Full goodwill at acquisition xxx xxx xxx xxx xxx (xxx)

(xxx) xxx

Tip 2: Impairment in goodwill if any shall be charged to consolidated retained earnings (CRE) and NCI proportionately only in case of full goodwill method. Tip 3: Decrease in defer tax liability on FVA shall be proportionately credited to CRE and NCI at period end. Goodwill (Proportionate goodwill method): Consideration paid by parent Less: Net assets of subsidiary at acquisition (Computed as above x Parents share holding in subsidiary) Proportionate goodwill at acquisition xxx (xxx) xxx

Tip 4: Impairment in goodwill if any shall only be charged to CRE in proportionate goodwill method. Computing full goodwill If NCIs share of goodwill is already given in the question instead of its FV: Method 1: Compute proportionate goodwill and add to it NCIs goodwill to make it full goodwill. Method 2: Compute NCIs % of net assets of subsidiary at acquisition and add NCIs portion of goodwill to get FV of NCI. Now, compute full goodwill in normal manner.

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co.

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 Unrealized Profit (URP) Seller Parent Subsidiary Associate Indirect subsidiary Affectee of URP Parent Parent & NCI parent Parent & NCI Parents % of URP 100% % of share holding % of shareholding % of effective shareholding NCIs % of URP NA Remaining % NA Remaining %

TIP 5: In case of URPs, it does not matter who the buyer is. Focus should be on who the seller is. Tip 6: Intra-group sale involving associate: o If buyer is associate, reduce URP from investment because inventory lies with associate and we do not consolidate associate accounts. o If buyer is parent, reduce URP from inventory because now inventory lies with parent. Balance Sheet Approach Consolidation: Steps 1. Compute consideration paid 2. FV of NCI (if full goodwill method to be applied) 3. Goodwill 4. CRE & NCI 5. Consolidated balance sheet CRE and NCI in balance sheet approach Computing CRE and NCI involves line by line consolidation adjustments starting with closing balance of parents retained earnings in case of CRE and initial FV of NCI in case of NCI. Intra-group balances to be eliminated from consolidated balance sheet such as: o o Payables and receivables Loan notes directly issued by parent to subsidiary or by subsidiary to parent and interest receivable and payable therein. Entry by issuer in its separate accounts: Debit: Cash/ bank Credit: Loan notes payable. Entry by issuee in its separate accounts: Debit: Investment Credit: Cash/ bank

P&L Approach Consolidation: Steps 1. Step 1 to 3 same as balance sheet approach 2. Consolidated profit and loss 3. Profit attributable to parent and NCI 4. CRE and NCI 5. Consolidated balance sheet

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co.

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Intra-group balances to be eliminated from consolidated P&L such as: o Intra-group inventory sale and purchase to be eliminated from sales and cost of sales (C.O.S.) o URPs (relating to intra-group transfer of inventory or PPE that still exists at the consolidation date) to be added in C.O.S o Dividends received and paid between parent - subsidiary and parent associate to be eliminated Tip 7: When computing NCI in P&L approach, subtract from NCI the dividends paid to NCI. No such treatment in computing CRE Tip 8: Do not get confused regarding dividend in balance sheet approach. Assume there are no rules for dividend o Interest on loan notes issued between parent and subsidiary (not between parent and shareholders of subsidiary). Other matters to be considered in preparing consolidated P&L: Depreciation/ amortization on FVA Goodwill impairment Add/ less associate share of profit/ loss Impairment in Investment in associate Gain/ loss on disposal of investment

o o o o o

CRE in P&L approach CRE (Closing) CRE (opening) Profit attributable to parent Less: dividends paid by parent CRE (Closing) xxx xxx xxx xxx CRE (Opening) Parents opening retained earning Adjustments till last year regarding: -associate share of profit -subsidiarys post acquisition profit -Depreciation on FVAs -Goodwill impairments xxx xxx xxx xxx xxx xxx xxx

NCI in P&L approach NCI (Closing) NCI (opening) Profit attributable to parent Less: dividends paid by parent CRE (Closing)

xxx xxx xxx xxx

NCI (Opening) Initial FV of NCI Adjustments till last year regarding: -subsidiarys post acquisition profit -Depreciation on FVAs -Goodwill impairments NCI (Opening)

xxx xxx xxx xxx xxx xxx

Tip 9: If current year is the 1st year of consolidation then CRE opening and NCI opening as above shall be replaced by Parents RE and initial FV of NCI respectively. Column 2 above shall not be considered.

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co.

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2. Disposal of Subsidiary
Control Lost: FV of consideration received FV of remaining investment (if any) Less: Goodwill (net of impairment) Net assets at disposal (see below) Less: NCI at disposal Gain / (Loss) Net assets at disposal Share capital Share premium Retained earnings FVA Depreciation on FVA Net assets at disposal Tax on above gain Consideration received Cost of investment sold (do not include cost of remaining investment) Tax on above gain xxx xxx xxx xxx (xxx)

xxx xxx/ ( xxx)

xxx xxx xxx xxx (xxx) xxx

xxx (xxx) xxx

Tip 10: Tax on gain on re-measurement of remaining investment does not apply as it is not a realized gain. Tip 11: When control lost from subsidiary to associate, consider adding post disposal associate share of profit in P&L and showing remaining investment at FV in balance sheet. Control NOT Lost: TIP 12: Goodwill or gain/ loss shall not be treated as typical goodwill or gain/ loss. It shall be transferred directly to equity. Further Purchase of share holding Consideration paid Less: Decrease in NCI NCI at the time of transaction x xxx (xxx) xxx

Further % acquired . NCIs % before further acquisition Difference directly to equity (CRE debit if answer is positive & vice-versa)

Disposal of share holding to the extent that subsidiary remains subsidiary Consideration received Less: Increase in NCI Net assets + goodwill at the time of transaction x % disposed Difference directly to equity (CRE debit if answer is negative & vice-versa) xxx (xxx) xxx

TIP 13: Do not forget to subtract decrease in NCI and add increase in NCI while computing NCI for balance sheet.

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co.

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3. Peace-meal Acquisition
Tip 14: In peace-meal acquisition, % of share holding increases such that the acquisition changes investment relationship (e.g. from associate to subsidiary). Whereas in further purchase of share holding in case of control not lost (as above), status of investment relationship remains same, i.e. subsidiary remains subsidiary. Goodwill Consideration paid FV of existing investment Less: net assets at acquisition x parents % of share holding Proportionate goodwill

xxx xxx (xxx) xxx

Tip 15: Do not forget to add/ less gain/ loss on re-measurement of existing investment to FV in P&L.

4. Complex Group Structure

A ------- 80% holding in -----------> B ---------- 70% holding in ------------> C (Subsidiary of A) (Subsidiary of B) A ------ 80 % of 70 % i.e. 80% x 70% = 56% effective holding in --------> C (Indirect subsidiary of A) Tip 16: If effective share holding is 50% or below, relationship is that of indirect associate. Goodwill of Indirect Subsidiary: Goodwill Consideration paid (Consideration x % of shareholding in subsidiary) Less: net assets at acquisition x parents % of effective shareholding in indirect subsidiary Proportionate goodwill

xxx (xxx) xxx

Tip 17: All intra group trading concepts discussed above remain same in complex group structures.

5. Foreign Subsidiary
Valuation rates: Description Assets (including FVA), Liabilities and Goodwill Equity at Acquisition (Share capital, premium, Reserves, FVAs) Revenue and Expenses Post reserves include: Post profits and exchange gain/ loss Exchange rate for conversion of foreign financial statements at: Closing Date Acquisition date Transaction date (if available), else average rate

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co.

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 Step-wise Solving Procedure: 1. Compute goodwill in foreign currency in normal way 2. Translate goodwill as below: Goodwill at closing rate Goodwill at acquisition rate Exchange gain/ (loss) 3. Balance Sheet Approach: Translate subsidiarys balance sheet at rates specified above including retained earning as at the time of acquisition. Take post acquisition profit as balancing figure. Compute CRE and NCI. (Post acquisition profits are computed in above step) Consolidate parents balance sheet with subsidiarys translated balance sheet. 4. P&L Approach: Translate subsidiarys P&L at rates specified above and consolidate with parents P&L. Include exchange gains/ losses on goodwill and net assets (Format as below) in OCI. Other effect in CRE & NCI. Attribute P&L between parent and NCI Compute CRE and NCI in normal way Consolidate balance sheet Exchange gain/ loss on net assets: Net assets at acquisition ( at closing rate) Less: Net assets at acquisition ( at acquisition rate) Additional net assets (at closing rate) Additional net assets (at transaction or average rate) Exchange gain / (loss) Tip 18: Additional net assets are equal to subsidiarys profit amount. xxx (xxx) xxx (xxx) xxx (xxx) xxx/ (xxx)

xxx/ (xxx)

xxx/ (xxx) xxx/ (xxx)

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co.

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6. Consolidated Cash flow

Tip 19: Single entry approach should be used (making of T-accounts to get balancing figures) Tip 20: Increase/ decrease in debtors under working capital change in indirect method or under receipts from debtors in direct method shall be computed on gross debtor (i.e. net debtors + bad debts). However, bad debts are non-cash items and shall also be adjusted under adjustments for in indirect method and under payments to suppliers and employees in direct method as under. Tip 21: Short term borrowings/ bank overdraft are a part of cash and cash equivalent. Tip 22: Repayment by employees of interest free loan given to employees shall be included in cash-flow with finance cost and tax paid. Comparison of Direct Method with Indirect Method Direct Method Format Receipts from debtors Revenue Other income (not being interest or investment income) Add: Decrease in account receivables Decrease in other income receivable increase in unearned other income Payments to suppliers and employees C.O.S. Operating and admin expenses Less: Non-cash items included in COS and admin expenses Losses on disposals Retirement benefit expenses Less: Increase in trade payable Increase in accrued expenses Decrease in inventory Decrease in prepayments Cash generated from operations Finance cost paid Tax paid Retirement contributions paid Investing Activities Financing Activities Net Cash Inflow/ (Outflow) during the period Add: Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents Whether same as Indirect Method? xxx xxx xxx xxx xxx xxx xxx (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) Included in PBIT Included in Working capital change (WCC) Included in PBIT Included in adjustments Inverse treatment in WCC (xxx) xxx/ (xxx) (xxx) (xxx) (xxx) xxx/ (xxx) xxx/ (xxx) xxx/ (xxx) xxx xxx

xxx

Same result in both methods Exactly the same

Tip 23: In case where subsidiary is acquired during the year, current assets of subsidiary at acquisition shall be subtracted from consolidated ending balances while computing WCC. Tip 24: In case where subsidiary is disposed during the year, subsidiaries separate current assets at the time of disposal shall be added in parents balances for computing WCC. From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 7