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 positive purchased and negative purchased goodwill?
Positive purchase goodwill ( if goodwill >0) it is recognised as asset( capitalised) with no amortisation, it has to be subject to annual impairment tests. ( e.g. total assets of Sub ltd is 4.5m and Pa plc has brought sub ltd for 6m. ( this is positive goodwill of 1.5m)
Negative goodwill ( when you buy subsidiary for less than the FV of assets ( gain from a bargain purchase), this is recognised on SOCI and also in RE and because its rare it needs to be reviewed to ensure NBV of acquisition is not understated.
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
We are going to delve deep into the fair value of consideration transferred, what does this actually consist of?
Buying price + fair value of anything that has not been factored into the buying price.
What does contingent liabilities mean?
a liability that may occur depending on the outcome of an uncertain future event.
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
When a parent doesn’t buy all the shares in the subsidiary but buys enough to allow it to obtain control ( e..g A Ltd (parent) owned 70% of B Ltd), and the remaining 30% owned by unrelated entities, from the perspective of A ltd, what is the 30%
The 30% is NCI
Are NCI entitled to the subsidiary’s profit and RE every year?
Yes
When working out CBS what are the 3 key elements for NCI?
1) We need to know NCI’s proportion of net assets of subsidiary at pre acquisition. ( goodwill at acquistion date)
2) NCI share of changes in equity since acquisition date ( calculating NCI share is post acquisition movements in RE and reserves
3) NCI shares in profit or loss of the susbisdaires in the current period.
