1. Introduction to Group Accounts Flashcards
What is a subsidiary?
An entity that is controlled by another entity
What is the typical ownership threshold for one company to have control of another?
50%
Why do we create group accounts?
To present the group to the parent’s shareholders as a single economic entity
How does the investment in the subsidiary appear in the consolidated accounts?
It does not - it is replaced by the net assets of the subsidiary and goodwill
Which companies share capital appears in the consolidated accounts?
Only the parent company
How are assets and liabilities consolidated in the group accounts?
Added across
Why do we add across the assets and liabilities of the parent and subsidiaries in the consolidated accounts?
To reflect the economic substance of the relationship - the parent controls the subsidiaries assets and liabilities
What is the official definition of goodwill?
The asset representing the future economic benefits arising from other assets acquired in a business combination, that are not individually identified
In simple terms, what is goodwill?
The difference between the price paid to acquire a business and the fair value of the net assets of that business
Where does goodwill appear in the financial statements?
Under intangible non current assets in the group statement of financial position
Is goodwill amortised?
No, it is reviewed annually for impairment
What is the double entry for impairment to goodwill?
Dr Expense in P&L
Cr Goodwill asset
What is the calculation for goodwill?
- Cost of investment (+ NCI)
- Minus net assets at acqn date
What makes up retained earnings in the group accounts?
Parent company’s retained earnings + group share of subsidiaries post acqn reserves
Why are retained earnings not directly added across in the group SFP?
To reflect the legal/ownership position
What is the calculation for group retained earnings?
- Subsidiary retained earnings at SFP date minus subsidiary retained earnings acqn date
- Add group share to total parent retained earnings
- Minus group % of any goodwill on impairment
When the parent does not own 100%, what is the name of the shareholding of the remaining proportion?
The Non Controlling Interest
Where does NCI sit in the consolidated accounts?
Equity
What is the calculation for NCI?
- NCI at acquisition (proportional or fair value)
- Plus NCI % of subsidiaries post acqn retained earnings
- Minus NCI % of impairment on goodwill
How do we calculate NCI at acquisition using the proportional share method?
NCI % of subsidiary net assets at acquisition
According to IFRS 10, what are the 3 conditions for an investor to have control over an entity?
- Power over investee - ability to direct relevant activities
- Exposure/right to variable returns from involvement
- Ability to use its power to affect returns
What 4 scenarios might result in control arising without 50% of shares being owned?
- Remaining shares owned by a large number of non controlling shareholders
- A contractual arrangement
- Investee is economically depending on the investor (e.g. most sales go to the investor)
- The investor has potential voting rights (e.g. convertible bonds)
What 4 conditions required for a parent not to prepare group accounts?
- It is itself a wholly owned subsidiary (or part owned with the permission of the NCI), AND
- It is not publically traded, AND
- It is not in the process of filing for the public market, AND
- The ultimate or intermediary parent produces group accounts
What are the 3 options for valuing investment in the subsidiary in the parent company’s accounts?
- Cost
- Cost, revalued to fair value each year end
- Using the equity method
What is the name for ‘negative’ goodwill?
Gain on bargain purchase
How is negative goodwill shown in the financial statements?
Dr Goodwill (Negative under equity) Cr Income in the P&L
