5 Consolidations and Segment Reporting Flashcards
What is the IFRS 3 definition of business combination?
Transaction or other event in which an acquirer obtains control of one or more business.
What is the IFRS 10 definition for control?
A parent is exposed, or has rights, to variable returns through its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.
How does power arise?
Power arises from rights (e.g., voting rights attaching to shares), or one or more contractual arrangements. De facto control.
Define acquisition
The accounting method used for business combinations (IFRS 3).
What are the 5 bases for acquisition accounting?
Who is the acquirer and who is the acquiree?
When is the acquisistion date?
Purchase price.
Recognition and measurement of assets, liabilities and non-controlling interest.
Accounting for goodwill.
Define goodwill
Future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.
What comes under goodwill?
(name 5)
Workforce, reputation, innovative capacity, market power, synergy possibilities, etc
Example: P bought 100% of the shares of S at a purchase price of £100,000. The book value of the net assets of S at the acquisition date according to the balance sheet of S was £70,000. The fair value of the net assets of S at the acquisition date was £80,000.
Explain how to calculate the goodwill on consolidation in accordance with IFRS 3.
100% of the shares for £100,000.
As we are dealing with transactions, we are concerned with fair value not book value.
Goodwill = £100,000 - £80,000 = £20,000
Goodwill equation
Goodwill = Purchase price - (fair value of assets - fair value of liabilities)
How is goodwill measured after recognition?
(IFRS 3)
Measured at cost less any accumulated impairment losses (not amortised).
How is impairment recognised for goodwill?
(IFRS 3)
Treated for impairement annually, or more frequently if events or changes indicate that it might be impaired (consitent with identifiable intangible assets with indefinitite lives).
What is non-controlling interest?
When the acquirer buys less than 100 percent of the shares of the acquiree, there is a part of ‘non-controlling interest’ in the acquiree.
How is NCI measured?
(2)
The non-controlling interest’s proportionate share of the acquiree’s identifiable net assets at fair value (consider NCI does not get affected by goodwill).
Fair value: consider the purchase price allocation will be based on the purchase price that the acquirer would have paid if it acquired 100 percent of the shares.
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the goodwill using proportionate net assets.
Purchase price: 180,000
Net assets @FV (200,000*0.7) = 140,000
Goodwill = 180,000 - 140,000 = 40,000
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the goodwill using proportionate NCI.
Purchase price = 180,000
NCI (200,000*0.3) = 60,000
180,000 + 60,000 = 240,000
Net assets @FV = 200,000
Goodwill = 240,000 - 200,000 = 40,000
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the 100% value and net assets.
Purchase price (100%) = 250,000
Net assets @FV = 200,000
Goodwill = 250,000 - 200,000 = 50,000
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the 100% NCI and net assets.
Purchase price = £180,000
NCI (250,000-200,000) = £50,000
£180,000 + £50,000 = £230,000
Net assets @FV = £180,000
Goodwill = £230,000 - £180,000 = £50,000
What is the rationale for consolidated financial statements?
They are one economic entity.
Recognition and measurement for consolidated accounts.
(5)
- recognise and revalue the acquired net assets to fair value at acquisition date
- calculate the goodwill, eliminate investment of the parent on the subsidiary and add in the goodwill on consolidation
- only include the parent share of the post-acquisition profits in the consolidation
- recognise inter-company trading and eliminate unrealised profits
- include non-controlling interest
PPE row on the consolidated statement 31 Dec 20X9
25,000 + 6,000 = 31,000
Goodwill row on the consolidated statement 31 Dec 20X9
9,000 - (80%*6000) = 4,200
Current assets row on the consolidated statement 31 Dec 20X9
11,000 + 2,000 = 13,000
Share capital row on the consolidated statement 31 Dec 20X9
30,000
Retained earnings row on the consolidated statement 31 Dec 20X9
15,000 + [80%*(3000-1000)] = 16,600
Non-controlling interest row on the consolidated statement 31 Dec 20X9
[20%*6,000] + [20%*(3,000-1,000)]
Revenue row on the comprehensive income statement 31 Dec 20X8
20,000 + 10,000 - 2,000 *eliminate intercompany trading
= 28,000
Cost of sales row on the comprehensive income statement 31 Dec 20X8
15,000 + 6,000 - [1,600 + (70%*400)] *eliminate intercompany trading
= 19,120
Distribution and administrative expenses on the comprehensive income statement 31 Dec 20X8
Dist: 300 + 300 = 500
Admin: 600 + 700 = 1,300
Tax row on the comprehensive income statement 31 Dec 20X8
1640 + 1085 = 2,725
Attributable to non-controlling interest row on the comprehensive income statement 31 Dec 20X8
From Net Income on S:
2015*20% = 403
What is the inter-company relationship, sharholdings, and IFRS accounting method if voting rights > 50%?
Control. The company is a subsidiary. Acquisition method: full consolidation.
What is the inter-company relationship, sharholdings, and IFRS accounting method if voting rights >=20%?
Significant influence. Associated company. Equity method.
What is the inter-company relationship, sharholdings, and IFRS accounting method if voting rights <20%?
No real influence. Financial investment. Fair value method.
What is an associate?
(IAS 28)
An associate is an entity over which the investor has significant influence.
What does significant influnce mean?
The power to participate in the financial and operating policy decisions of the investee, but is not in control (or joint control) of these policies.
What is the equity method?
- Investment initially recognised at cost, then adjusted for the post-acquisition change in the investor’s share of the net assets of the investee.
- One-line consolidation, not inclusing the fair value of the net assets of the investee at each individual lines.
What is the goodwill?
Cost of investment = 350
20% of A’s net assets = (20%*1000) = 200
350 - 200 = 150
What is P’s share of the income of A?
Net income of A for the year: 1500 - 1000 = 500
20%*500 = 100
What is the consolidated statment of financial position of P (end of 20X9)?
Given goodwill is 150 and P’s share of A’s income is 100.
Define joint arrangement
IFRS 11
An arrangement in which two or more parties have joint control
Types of joint arrangements
Depending on rights and obligation of the parites involved:
Joint operations: operators, have rights to the assets, and obligations for the liabilities.
Joint ventures: venturers, have rights to the net assets, and obligations for the liabilities.
How do we account for joint operations?
Joint operators account for their shares of assets, liabilities, revenues and expenses directly.
How do we account for joint ventures?
Joint venturers recognise their interests in a joint venture as an investment and account for that investment using the equity method, same as associates.
What is the purpose of segment reporting?
(2)
Used for multi-business and multinational companies
Disclosure of more disaggregated information
What is the underlying principle for segement reporting?
The process of identifying segments for external reporting purposes begins with the information used by the chief operating decision maker (CODM) to evaluate past performance and make decisions about future allocations of resources.
What segment data must be reported?
Only segment data for reportable segments have to be disclosed
How can segments be aggregated?
Two or more operating segments may be aggregated into a single operating segment, based on aggregation criteria.
Elements of aggregation criteria
(5)
- the nature of the products and services
- the nature of the production processes
- the type or class of customer for their product or service
- the methods used to distribute their products or procide their services
- if applicable, the nature of the regulatory environment (e.g. banking, insurance, or public utilities).
IFRS 8 quantitative thresholds
(3)
Reported revenue (external and intersegmental sales) is >=10% of combined revenue of all operating segments.
Assets are >=10% of combined assets of all operating segments.
At least 75% of the entity’s revenue is included in reportable segments.
Which information needs to be disclosed about each reportable segment?
Only information disclosed to the CODM needs to be disclosed.
