C. Group Accounting Flashcards
If a subsidiary is acquired mid-year, how are the results consolidated on the CSPLOCI?
only post-acquisition results consolidated
-time appropriated
how are intra-group dividends dealt with int the CSPLOCI?
dividends should be eliminated from investment income
how is goodwill impaired on the CSPLOCI?
FV method: NCI share of profit adjusted to reflect their share of loss
Prop method:all the goodwill impairment is allocated to the parents so no NCI adjustment
how are intra-group balances eliminated form the CSPLOCI?
balance deducted from revenue and cost of sales
PUP(unrealised profit) added to COS
-if S is seller, adjust NCI to reflect their share of PUP
how are depreciation adjustments made to CSPLOCI?
adjustment made to reflect FV adjustment(deduct from COS)
if depreciation charge related to sub assets, adjustment should be reflected in the calculation of profit attributable to the NCI
what additions are made to the CSFP and CPLOCI for an associate?
CSFP: investment in associate
CPLOCI: share of profit of associate (time app.)
why are intergroup transactions between P and A not eliminated from consol accounts?
because the A is outside the group
-not 100% consolidated
what adjustments are eliminated from group accounts from the A?
PUP: unrealised profits
dividends
what is the CSFP and CSPLOCI PUP adjustment if a parent sells to associate?
CSFP:
Dr RE
Cr investment in associate (cant reduce A inventory so reduce inv)
CPLOCI:
increase cost of sales
what is the CSFP and CSPLOCI PUP adjustment if an associate sells to a parent?
CSFP:
Dr RE
Cr inventory
CPLOCI:
reduce share of profit of associate
What does the statement of changes in equity show?
the movement in the equity section of the statement of financial position from the previous reporting date to the current reporting date
who is equity split between on the CSOCE?
parent and NCI shareholders
what are the 2 columns of the CSOCE?
- changes in equity attributable to parent shareholders
- changes in equity attributable to NCI shareholders
what is the parent shareholders column in the CSOCE made up of?
share capital
share premium
retained earning and other reserves
where does the parents shareholders equity b/f in the CSOCE come from?
group reserves calculation but equity instead of reserves and post acqn is up until b/f date
where does the NCI shareholder equity b/f figure in the CSOCE come from?
usual NCI working
where do the comprehensive income figures come from for CSOCE?
foot of CSPLOCI where it is split between parent and NCI shareholder
what does the closing balance in the NCI column in the CSOCE agree to?
NCI equity balance in the consolidated statement of financial position
why do the SFP and SPLOCI not show how the business has generated and used cash in the accounting period?
they are prepared on an accruals basis
what do SCF enable users to assess?
the liquidity, solvency and financial adaptability of a business
what does ‘cash’ consist of?
cash in hand and deposits repayable upon demand, less overdrafts
-includes cash held in a foreign currency
what are ‘cash equivalents’?
short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value
what are ‘cash flows’?
inflows and outflows of cash and cash equivalents
what are the 3 classifications of cash flows in CSF?
cash flows from operating activities
cash flows from investing activities
cash flows from financing activities
what are cash flows from operating activities?
entity’s principal REVENUE EARNING activities and other activities that don’t fall under other headings
what are cash flows from investing activities?
acquisition and disposal of long-term ASSETS and other investments (excluding cash equivalents)
what are cash flows from financing activities?
activities that change the size and composition of the entity’s EQUITY and borrowings
what are the two methods of calculating the cash from operations that are permitted by the IAS 7?
direct or indirect method
what is the indirect method of calculating cash flows from operating activities?
reconciles profits to cash flows from operating activities
-starts with PBT and adjusts for non-cash charges and credits to reconcile to net cash flow
what adjustments are made to PBT using the indirect method?
- depreciation, amortisation and impairment
- P/L on disposal of non-current assets
- change in inventory
- change in receivables
- change in payables
what cash flows appear under investing activities?
- cash paid for PPE and NCAs
- cash received on sale if PPE and other NCAs
- cash paid for investments in or loans to other entities
- cash received for the sale of investments or repayment of loans to other entities
what are some of the cash flows that appear under financing acitivites?
mainly to and from external providers of finance
inflows: receipts from share issues, debentures, loan notes
outflows: repayments other than overdrafts, leases, redeeming shares
why is there a debate about how interest and dividends are classified on a cash flow?
some see them as operating activities (day to day)
others seen them as financing activities
some see them as investing as this is what LT finance raise is used for
how does IAS 7 allow interest and dividend to be classified?
under any heading as long as it is consistent period to period
how do we class interest and dividends?
interest received:investing activities
interest paid:operating activities
dividends received: investing activities
dividends paid:financing activities
when calculating parent’s dividend in a CSCF, why do we take the profit not comprehensive income?
as P’s share of profit impacts RE and comprehensive income doesn’t
why is the share of P/L of the associate adjusted in the operating activities section of the SCF?
it is a cash item included in the profit
where should the associate’s share of OCI be adjusted?
if other comprehensive income includes it then it should be taken into account but should not be adjusted for within operating activities as it is not a part of profit
what is standard accounting practice for acquisition of subsidiaries in the CSCF?
- subsidiary’s cash flows arising from the date of control should be included
- cash payments for acquisition are investing activities
what are cash paid on acquisitions of a subsidiary, investment income received and dividends received from associate classified as on the CSCF?
investing activities
what are the two main complications that arise from a parent and subsidiary using different currencies?
- the translation of the foreign currency subsidiary into the parent’s functional currency
- the resulting calculation and recognition of foreign currency exchange gains or losses
what rate is used for income and expenses(P&L)?
the average rate
what rate is used for asset, liabilities and goodwill?
assets and liabilities: closing rate at YE
goodwill:closing rate
what are the exchange differences upon translation separated into?
exchange difference on net assets
exchange differences on goodwill
what are the exchange differences on net assets?
closing NA @ CR
- opening NA @ OR
- comprehensive income @ AR
what are the exchange differences on goodwill?
closing GW @ CR
less opening GW @ OR
impairment @ AR
where is the annual exchange difference recognised?
within other comprehensive income on the CSPLOCI
how is the exchange difference on net assets split?
between parent and NCI
how is the exchange difference on goodwill split up?
if FV method:split between P and NCI
if proportionate method:only allocated to parent
how is the FV difference treated in the CSFP?
group share of difference is held in a separate reserve within equity
what is a related party?
a person or entity that is related to the entity that is preparing its financial statements (the reporting entity)
when does a relationship exist in related parties?
if control, joint control, common control or significant influence exists between the party and the reporting entity
what are some typical related parties?
key management personnel
close family members of key management personnel
entities that are members of the same group (including parent subsidiaries, associates and joint ventures)
what parties are not normally considered related?
- two entities simply because they have key management personnel in common
- two joint ventures as they share joint control of a joint venture
- providers of finance
- key customers and suppliers
- trade unions and public utilities
- govt departments
- stakeholders with a significant volume of business, merely by virtue of the resulting economic dependence
what are key management personnel?
persons having authority and responsibility for planning, directing and controlling the activities of the entity directly, including any director (whether executive or otherwise) of that entity
who qualifies as a close family member?
those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity
e.g children, spouse, partner, other dependents
a person or close member of that person’s family is related to a reporting entity if that person:
- has control or joint control over the reporting entity
- has significant influence over the reporting entity
- is a member of the key management personnel of the reporting entity or of a parent of the reporting entity
an entity is related to a reporting entity if any of the following conditions applies:
- the entity and the reporting entity are members of the SAME GROUP
- one entity is an ASSOCIATE or JOINT venture of the other entity
- both are JOINT VENTURES of the same third party
- one entity is a JOINT VENTURE of a third entity and the other entity is an associate of the third entity
- the entity is part of a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity
- the entity is controlled or jointly controlled by a person identified as a related party to the reporting entity
- a person identified as a related party of the reporting entity has significant influence over the entity or is a member of the key management personnel of the entity
what is a related party transaction
a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged
where there have been transactions between the entity and a related party, the entity is required to disclose:
- the nature of the related party and relationship
- the nature of the transaction
- the amount of the transaction
- any outstanding balance relating to the transaction
- any provisions for doubtful debts remaining to the amount of any outstanding balance
IAS 24 requires an entity to disclose ‘key management personnel compensation in total and for each of the following categories’:
- short-term employee benefits
- post-employment benefits
- other long-term benefits
- termination benefits
- equity compensation benefits
what are some examples of related party transactions?
- purchases/sales of goods
- purchases/sales of property or other assets
- rendering/receipt of services
- leasing arrangements
- management contracts
- finance arrangements
what is the need for related party transaction disclosures?
board sells at discounted price, related party will benefit from relationship, shareholders will be unaware of these deals within business if they are not disclosed
what does EPS show?
confidence in the company by the market
what is the basic EPS equation?
earnings divided by number of shares
how are earnings calculated in basic EPS?
PAT-NCI-irredeemable preference share dividends
what is the number of shares in the basic EPS calculation?
weighted average number of ordinary shares on a time weighted basis
-time appropriated
what is another name for bonus issues?
scrip issues
what are bonus issues?
issues to current shareholders based on current shareholding and for free
-no cash raised
what are the characteristics of a bonus issue to the issuer and the shareholder?
issuer: no additional resources provided
shareholder: owns same proportion of business as before issue
what are the effects of a bonus issue on the EPS calucations?
- bonus shares are deemed to have always been in issue and therefore are reflected for the full period
- the comparative figures are also restated to include bonus shares
what is the EPS calculation for bonus shares?
EPS=earnings /(no/shares before bonus x BF)
How is the bonus fraction calculated?
no/shares after bonus issue/no/ shares before bonus issue
e.g 4/3 if 1:3 issue
how can you calculate comparative figures?
multiply previous basic EPS by inverse of BF
what are the characteristics of a rights issue?
- contribute to additional resources
- normally prices below full market price
How is the bonus element calculated for rights issue?
multiply capital in use by CRP/TERP
what does the DEPS tell shareholders?
the potential impact of changes in share capital e.g convertible bonds or share options
-dilution
how are basic earnings and number of shares adjusted to deal with potential ordinary shares?
converted to equity shares on the first day of issue
what is the DEPS calculation for convertible options?
(earnings + notional extra earnings)/(number of shares + notional extra shares)
why does dilution take place during convertible transactions?
earnings increase less than proportionally to increase in shares
what are dilutive potential ordinary shares?
they shares issued during conversion
- no. shares rise
- no fresh capital is received
why does IAS 33 require an entity to disclose DEPS?
- indicate to current shareholders the effect on current profitability of commitments
- more informed decision making
- DEPS assumes the worst possible future dilution that has already happened
what are the effects of converted convertible bonds/preference shares on earnings and number of shares?
- interest/dividend would be saved therefore earnings would be higher
- number of shares would increase
Between interest on bonds and preference dividends, which ones are tax deductible?
interest:tax deductible so consider tax implications on DEPS
how do we decide how many shares to convert option into?
choose maximum amount of additional shares
Why does and option have a dilutive effect on EPS?
cash received when option is exercised will be less than the MV of the share, so option will only be exercised if the exercise price is lower that the market price
-increase in resources does not match the increase there would have been if the issue of shares were at market value
how are the total number of shares issues on the exercise of an option split into two?
- fair value shares:number of shares issued if the cash received had been used to buy shares at fair value
- bonus(free) issue:the remainder, treated like a bonus issue
how are ‘free’ shares calculated?
no/ options x (FV-EP)/FV
or: no options-no purchased at MV= free element
what is the impact of convertibles on DEPS earnings and WAV?
earnings:save interest, pay more tax due to interest saved
no/shares: increase, convert at maximum possible conversion
impact of options on DEPS earnings and WAV?
earnings: no impact as non tax deductible
shares: increase by bonus element
