ACCY231 WK10 L19-20 Business Combinations Flashcards
What are group financial statements?
The aggreagated financial reports of a parent company and its subsidiaries.
What is a parent company?
A parent company is a company that has controlling interest in another company, giving it control of its operations.
What is a subsidiary?
A subsidiary is a company that belongs to another company, which is usually referred to as the parent company.
The parent holds a controlling interest in the subsidiary company, meaning it has or controls more than half of its stock.
In cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly-owned subsidiary.
What is controlling interest?
A controlling interest is when a shareholder holds a majority of a company’s voting stock.
A shareholder does not have to have majority ownership in a company to have controlling interest as long as they own a significant portion of voting shares.
What is a business combination?
A transaction or other event in which an acquirer obtains control of one or more businesses.
What are the three elements of a business?
Input
An economic resource that can create outputs when a process is applied to it.
Process
Turns inputs into outputs.
Outputs.
The result of inputs and processes that provide goods and services to customers, or investment income, or generate income from ordinary activities.
What is the acquirer called after it gains control of the acquiree (the business getting aquired)?
The parent company
What is the acquiree (the business getting acquired) called after the acquirer gains control?
The subsidiary company
What is the four step acquisition method?
- Identify the acquirer
- Determine the acquisition date
- Recognise and measure the identifiable assets and liabilities and non-controlling interest
- Recognise and measure goodwill or gain from bargain purchase
What does step 1 of the four step acquisition involve?
Identify the acquirer.
The acquirer is the entity that obtains control.
What does step 2 of the four step acquisiton method involve?
Determine the acquisition date
The acquisition date is the date at which the acquirer gains control.
From the acquisition date, the assets and liabilities of the acquiree must be included in the consolidated financial accounts and statements of the group.
What does step 3 of the four step acquistion method involve?
Recognise and measure identifiable assets and liabilities and non-controling interests.
As of the acquisition date, the acquirer shall recognised, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in the acquiree.
The acquirer shall measure the identifiable assets and the liabilities assumed at the acquisition fair values.
Additionally, contingent liabilities must be recognised by the acquiree upon consoldiation.
Upon acquisition, some assets internally generated by the acquiree may become recognisable by the acquirer.
What is non-controlling interest?
Non-controlling interests are equity interests owned by shareholders other than the parent company.
What does step 4 of the four step acquisition method involve?
Recognise an measure goodwill or gain on bargain purchase.
Goodwill is calculated using the following formula:
Amount of consideration transferred for acquisition + Non-controlling interest - Fair value of assets acquired and liabiilities assumed (net assets or equity)
The difference is goodwill when it is positive. Goodwill recognised as an asset in the statement of financial position.
The difference is a gain on bargain purchase when the difference is negative. Gain on bargain purchase is recognised as ioncome in the profit or loss statement.
