2 Consolidated Statement of Financial Position

Question 1

What is working 1

Answer 1

Working 1 – Group Structure
* Outline group structure
* % of ownership
* Nature of relationship
* Dates of occurrence

Question 2

What is working 2

Answer 2

Working 2 – Net Assets of Subsidiary

Share capital
Share premium
Retained earnings
FV adjustment
FV deprecation
PURP (S is seller)

Question 3

What is working 3

Answer 3

Working 3 – Goodwill
Consideration paid by P
NCI value @ acquisition:
(1) Proportion of NA Method = NCI’s % of FV of NA @ acquisition (W2), or
(2) FV Method = No. of shares held by NCI x Sub’s share price
Less: FV of NA @ acquisition (W2)
Goodwill @ date of acquisition
Less: impairment (if any)
Carrying value of goodwill (CSFP)

Question 4

What is working 4

Answer 4

Working 4 – NCI
NCI value @ acquisition (as in W3)
NCI % of post-acquisition reserves (W2)
Less: NCI % of impaired goodwill
(FV method only)

Question 5

What is working 5

Answer 5

Working 5 – Group Retained Earnings
100% of P’s RE
P’s % of impaired goodwill
Proportionate Method = 100%, or
FV Method = Split between P and NCI (W4)
PURP (when P is seller)
P’s % of S’s post-acquisition profit (W2)

Question 6

Goodwill - IFRS3

Answer 6

‘An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised’.

Question 7

Types of goodwill

Answer 7

1. Positive goodwill is when you pay more than the target companies net assets
2. Bargain purchase is when you pay less than the target companies net assets

Question 8

Treating positive goodwill

Answer 8

Recognise in group’s statement of financial position, i.e. capitalise and annually test for impairment (IAS 36).

Question 9

Treating negative goodwill

Answer 9

• Negative goodwill - recognise in the group’s statement of P/L, i.e. it will increase the group’s profit for the year.
• None of the negative goodwill is attributed to the NCI as it is considered to have arisen from the good negotiating skills of the acquirer (parent).
• This needs to be written off in working 5

Question 10

Bargain purchase – How & Why?

Answer 10

• The shareholders are highly motivated to sell:
  o To raise money quickly
  o The shareholder(s) want to retire, etc.
• It can be difficult to break-up assets and sell them individually – it can be quicker to sell shares.
• The directors of the selling company may not realise the true/fair value of the net assets, i.e. the book values on the SFP are undervalued, e.g. undervalued land values.
• The buyer may have insider knowledge, e.g. the land value is higher than NBV as a new airport is about to be built.

Question 11

Symbiosis

Answer 11

Symbiosis – there is a good commercial fit between the parent and subsidiary
o E.g. motor manufacturer and car parts manufacturer.

Question 12

Fair value adjustment

Answer 12

• Individual assets might not have the same value as their book value
• IFRS 3 gives details about how to calculate fair value

Question 13

What is fair value

Answer 13

It is the amount for which an asset could be exchanged, or liability settled, between willing and knowledgeable parties in an arm’s length transaction
* This means out in the open market what is it worth

Question 14

Non-controlling interests (NCI)

Answer 14

• If a subsidiary is not wholly (100%) owned by a parent, IFRS10 requires that the group SFP should be presented as if the subsidiary is wholly owned, but the net assets attributable to the NCI should be shown separately.
• NCI is that part of the subsidiary which is not owned by the parent.
• IFRS 3 permits 2 methods for calculating the NCI:
  o Method 1 – Partial (proportionate share)
  o Method 2 – Full (at fair value)
   If there is not the information just use proportional
• The reason all the assets are consolidated with the parent is that they are the ones having the control not the NCI so goes on their books

Question 15

Method 1 (partial) - NCI

Answer 15

At the proportionate share of the fair value of the subsidiary’s identifiable net assets (goodwill belonging to NCI is not included in NCI).
* NCI’s % of FV of NA @ acquisition (from W2)

Question 16

Method 2 (full) - NCI

Answer 16

At Fair value (full value), usually based on the market value of the shares held by the NCI, (goodwill belonging to NCI is included in NCI).
* NCI ‘s shares x share price

Question 17

Cost of investment

Answer 17

Ways of paying for a subsidiary
* Cash
* Deferred consideration
* Contingent consideration
* Share exchange

Question 18

Deferred consideration

Answer 18

• Not all the consideration is paid at the date of acquisition, part of the payment is deferred to a late date
• This should be measured at fair value at date of acquisition
  o This is found by discounting it to the present value

Question 19

Accounting for discounting (differed consideration)

Answer 19

• Each year the discount is unwound by charging interest on the outstanding liability
• This increases the deferred liability each year
• The discount is treated as a finance cost (CSPL)
  o Depending on time period will dictate if it is current or non current

Question 20

Contingent consideration

Answer 20

• This is the same as deferred but the payment is depending on if certain criteria are met
• It is assumed that the criteria will be met so is accounted for

Question 21

Share exchange

Answer 21

• The parent issues shares in itself, in return for shares acquired in the subsidiary
• The share price at acquisition is used to record the FV of the shares
• Remember if they buy 60% only work it out for 60% of the share capital

Question 22

Intra group transactions

Answer 22

• Groups are very likely to trade with each other and is probably the main reason they brought the subsidiary
  o Might be to limit supply to a competitor or guarantee a discounted supply of their own
  o However, it could just be a good fit for diversification
• Often they will have a mutual current account where intra group trading and loans go to which is balanced with a single transaction periodically

Question 23

Cash in transit

Answer 23

1. Deal with cash in transit first
   a. Assume that the cash has been delivered
2. Then remove the intragroup trading
   a. If this is done first the accounts will not be coherent as one will think they have paid, reducing the liability but the other has not been paid so the receivable will be greater

Question 24

Parent sells to subsidiary

Answer 24

Revenue - Deduct sale
COGS - Deduct purchase
COGS - Add un realised profit
Closing stock - Deduct un realised profit
Group RE - Deduct un realised profit

Question 25

Subsidiary sells to parent

Answer 25

Revenue - Deduct sale
COGS - Deduct purchase
COGS - Deduct un realised profit
Closing stock - Deduct un realised profit
Net assets - Deduct NCI’s % of un realised profits
Group RE - Deduct groups % of un realised profits