5 Consolidations and Segment Reporting

Question 1

What is the IFRS 3 definition of business combination?

Answer 1

Transaction or other event in which an acquirer obtains control of one or more business.

Question 2

What is the IFRS 10 definition for control?

Answer 2

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.

Question 3

How does power arise?

Answer 3

Power arises from rights (e.g., voting rights attaching to shares), or one or more contractual arrangements. De facto control.

Question 4

Define acquisition

Answer 4

The accounting method used for business combinations (IFRS 3).

Question 5

What are the 5 bases for acquisition accounting?

Answer 5

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.

Question 6

Define goodwill

Answer 6

Future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.

Question 7

What comes under goodwill?

(name 5)

Answer 7

Workforce, reputation, innovative capacity, market power, synergy possibilities, etc

Question 8

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.

Answer 8

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

Question 9

Goodwill equation

Answer 9

Goodwill = Purchase price - (fair value of assets - fair value of liabilities)

Question 10

How is goodwill measured after recognition?

(IFRS 3)

Answer 10

Measured at cost less any accumulated impairment losses (not amortised).

Question 11

How is impairment recognised for goodwill?

(IFRS 3)

Answer 11

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).

Question 12

What is non-controlling interest?

Answer 12

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.

Question 13

How is NCI measured?

(2)

Answer 13

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.

Question 14

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.

Answer 14

Purchase price: 180,000

Net assets @FV (200,000*0.7) = 140,000

Goodwill = 180,000 - 140,000 = 40,000

Question 15

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.

Answer 15

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

Question 16

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.

Answer 16

Purchase price (100%) = 250,000

Net assets @FV = 200,000

Goodwill = 250,000 - 200,000 = 50,000

Question 17

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.

Answer 17

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

Question 18

What is the rationale for consolidated financial statements?

Answer 18

They are one economic entity.

Question 19

Recognition and measurement for consolidated accounts.

(5)

Answer 19

• 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

Question 20

PPE row on the consolidated statement 31 Dec 20X9

Answer 20

25,000 + 6,000 = 31,000

Question 21

Goodwill row on the consolidated statement 31 Dec 20X9

Answer 21

9,000 - (80%*6000) = 4,200

Question 22

Current assets row on the consolidated statement 31 Dec 20X9

Answer 22

11,000 + 2,000 = 13,000

Question 23

Share capital row on the consolidated statement 31 Dec 20X9

Answer 23

30,000

Question 24

Retained earnings row on the consolidated statement 31 Dec 20X9

Answer 24

15,000 + [80%*(3000-1000)] = 16,600

Question 25

Non-controlling interest row on the consolidated statement 31 Dec 20X9

Answer 25

[20%\*6,000] + [20%\*(3,000-1,000)]

Question 26

Revenue row on the comprehensive income statement 31 Dec 20X8

Answer 26

20,000 + 10,000 - 2,000 \*eliminate intercompany trading = 28,000

Question 27

Cost of sales row on the comprehensive income statement 31 Dec 20X8

Answer 27

15,000 + 6,000 - [1,600 + (70%\*400)] \*eliminate intercompany trading = 19,120

Question 28

Distribution and administrative expenses on the comprehensive income statement 31 Dec 20X8

Answer 28

Dist: 300 + 300 = 500 Admin: 600 + 700 = 1,300

Question 29

Tax row on the comprehensive income statement 31 Dec 20X8

Answer 29

1640 + 1085 = 2,725

Question 30

Attributable to non-controlling interest row on the comprehensive income statement 31 Dec 20X8

Answer 30

From Net Income on S: 2015\*20% = 403

Question 31

What is the inter-company relationship, sharholdings, and IFRS accounting method if voting rights \> 50%?

Answer 31

Control. The company is a subsidiary. Acquisition method: full consolidation.

Question 32

What is the inter-company relationship, sharholdings, and IFRS accounting method if voting rights \>=20%?

Answer 32

Significant influence. Associated company. Equity method.

Question 33

What is the inter-company relationship, sharholdings, and IFRS accounting method if voting rights \<20%?

Answer 33

No real influence. Financial investment. Fair value method.

Question 34

What is an associate? | (IAS 28)

Answer 34

An associate is an entity over which the investor has _significant influence_.

Question 35

What does significant influnce mean?

Answer 35

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.

Question 36

What is the equity method?

Answer 36

- 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.

Question 37

What is the goodwill?

Answer 37

Cost of investment = 350 20% of A's net assets = (20%\*1000) = 200 350 - 200 = **150**

Question 38

What is P's share of the income of A?

Answer 38

Net income of A for the year: 1500 - 1000 = 500 20%\*500 = **100**

Question 39

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.

Answer 39

Question 40

# Define *joint arrangement* IFRS 11

Answer 40

An arrangement in which two or more parties have _joint control_

Question 41

Types of joint arrangements

Answer 41

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.

Question 42

How do we account for joint operations?

Answer 42

Joint operators account for their shares of assets, liabilities, revenues and expenses directly.

Question 43

How do we account for joint ventures?

Answer 43

Joint venturers recognise their interests in a joint venture as an investment and account for that investment using the equity method, same as associates.

Question 44

What is the purpose of segment reporting? (2)

Answer 44

Used for multi-business and multinational companies Disclosure of more disaggregated information

Question 45

What is the underlying principle for segement reporting?

Answer 45

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.

Question 46

What segment data must be reported?

Answer 46

Only segment data for **reportable segments** have to be disclosed

Question 47

How can segments be aggregated?

Answer 47

Two or more operating segments may be aggregated into a single operating segment, based on aggregation criteria.

Question 48

Elements of aggregation criteria | (5)

Answer 48

* 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).

Question 49

IFRS 8 quantitative thresholds | (3)

Answer 49

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.

Question 50

Which information needs to be disclosed about each reportable segment?

Answer 50

Only information disclosed to the CODM needs to be disclosed.