Accounting for groups Flashcards
Last year when doing consolidated group accounts we looked at book value to consolidate, but what do we do this year?
We use fair value to consolidate.
What is the difference between a merger and acquisition?
a merger is the combining of two organizations into an entirely new entity,( a + b = c, so there is no separate a and b) while an acquisition is when a company absorbs another, but no new organization is created ( still a and b ).
When one company acquires/controls one entity, then…?
a group account needs to be prepared
What does this show
When Company A acquires 100% of company B, they have to prepare separate individual statements, but then they need to publish group account.
What are the 4 types of investment of parent in other entities?
1) Subsidiary ( acquiring another entity 100% control )
2) Financial asset ( invest very little < 20%)
3) Joint arrangements (investing with other parties Joint venture)
4) Associates ( a company owns around 20-50% of voting rights within another company. )
Can control exist even with less than 50% of shares of another company?
Yes through agreement, thus can have power to remove majority board owners, new policies etc.
What are the steps of thinking when looking at a company acquiring another?
When creating a consolidated SOCI and SOFP what is the main things that are eliminated?
Intragroup transactions are eliminated( some numbers may inflate results) , you prepare the statements as if they were a single entity. investors want to see performance of group.
As book value is not the same as fair value, what is the requirement of the parent company to the subsidiary at ?
fair value at the point of acquisition, this is important for calculating good will.
According to IFRS 3 Business combinations
What is the fair value of tangible assets?
If at point of acquisition there isn’t a market value, then what do we use?
FV of tangible assets = market value.
If at point of acquisition there isn’t a market value we use deprecated replacement cost. ( cost of replacing the existing asset)
According to IFRS 3 Business combinations
What is the fair value of intangible assets( patents etc) ?
If at point of acquisition there isn’t a market value, then what do we use?
FV is based on market value.
If at point of acquisition there isn’t a market value we would use the best arms length estimate ( price that will be determined by 2 independent parties, one potential buyer and one potential seller, the price determined is the best estimate)
According to IFRS 3 Business combinations
What is the fair value of monetary assets and liabilities ?
Amount to be received or disbursed, if very long term then it needs to be discounted to find pv because there might be inflation.
According to IFRS 3 Business combinations
What is the fair value of Marketable securities and Non-marketable securities ?
Marketable securities ( e.g. stocks bonds) - current market values Non-marketable securities e.g. saving bonds - estimated value based on performance as its hard to find FV.
What is goodwill and what are the relevant accounting standards ?
Goodwill is an intangible asset, the relevant accounting standards are IFRS 3 business combinations and IAS 36 impairment of Assets.
What is the formula of working out goodwill? ( e.g. where we are finding total goodwill)
There are 2 methods to work out the amount of NCI
As Yin plc acquires all the issued share capital it means there is no NCI and there is no fv of any previously held equity, so goodwill calculation is simply FV of consideration transferred - fair value of identifiable assets accured and liabitilies assumed
Calculate goodwill at acquisition ( HINT: only price changes) and what are the adjustments that need to happen
IASB not an accounting regulator
The choice of two options within the IASB
standard was the outcome of a political exercise
to make sure the standard was approved, rather
than on the basis that the approach was
conceptually sound.
We really have to ponder the impacts of such
decisions on the ultimate quality of financial
information being generated in compliance with
accounting standards.
Firstly before we start we do we notice and what do we have to do ( HINT READ THE INFO.
DOES GROUP PAY TAXES?
What does this question assume what method to use?
ONE of the assets have not been recorded at FV, the cost reported in the net assets was £250,000
So the tax base or NBV of the plant is £250000-£180000 = £70000.
So there is a fair value adjustment that needs to be made in the net assets section, so we need to increase 1mil by 40000( net of tax)
The 50000 needs to be net of tax using 20% tax rate ( subsidiary owns plant, if owned by parent we would use parent tax rate, so basically 50000 is gross we need to find the net of tax )
We assume we use Partial goodwill method.
Now workout the goodwill using Partial goodwill?
Goodwill = Acquisition price - ( Acquisition percentage x Fair value of subsidiary identifiable net assets)
= £800000 - ( 70% x £1040000)
NCI = NCI percentage x Fair value of subsidiary iidentitifable net assets
NCI
= 30% x £1,040,000*
= £312,000
With all this in mind using the same information as when calculating partial goodwill what is Assume the same information as in Pa plc and Sub plc, except
this time, value the non-controlling interests in the acquiree at
fair value. The fair value of the NCIs (the remaining 30%
holding of ordinary shares) is £340,000. What is the goodwill of NCI and the total goodwill. Full goof will method.
- NCI
= £340,000 (given as additional information) - Goodwill = Pa plc’s goodwill + NCI’s goodwill
= £72,000 + (£340,000 – £312,000)
= £100,000 ( PARENT + SUBISDIARY GOOD WILL )
OR its Goodwill = Fair value of subsidiary - ( Fair value of subsidiary identifiable net asset_s = (800000+ 340000) - £1040000 = £100000
NCI = NCI percentage x fair value of subsidiary = 30% x £1140000 = 3420000
