CH. 11 Basic Groups - Consolidation of SFP & SPLOCI Flashcards
From the shareholders perspective, why is it important to consolidate accounts?
It is important for a group to consolidate all of the entities that a parent controls so that current and potential investors can make informed decisions about providing resources to the entity.
It is impractical for investors to assess all F/S of each sub in the group.
e.g Royal Duch has 100’s of subs and associates, it is not practical for all investors to assess each and every company, to make an informed decision.
How do investment entities treat consolidated accounts?
Investment companies are mainly involved in buying and selling shares, ultimately not interested in running the organisations.
- Subs are not consolidated and treated at F.V through profit and loss
This is because it creates more relevant information.
This treatment is mandatory for this sort of company:
1) obtain funds from one or more for the purpose of investment management services
2) invest funds solely for returns of capital appreciation or investment income
3) Measures and evaluates performance on a fair value basis
Typical characteristics: -
- more than one investment
- more than one investor
- investors are not related parties
- ownership interests in the form of equity or similar interests
Why can it be difficult to identify the difference between Busines Combination or acquisition of an asset?
3 IFRS 3 Business combinations
Business Combination – A transaction or event In which an acquirer obtains control of a business.
Business – Integrated set of activities and assets capable of being managed to generate a return for the principle.
Note – that definitions does not say it has to be operating.
It can be difficult at times to distinguish the difference in acquiring an asset or a business combination. So a screening test has been proposed.
Test
Is substantially all of the fair value of the assets acquired concentrated in a single identifiable asset?
- Yes – Then it is not a business combination
- No – The business process contains a substantive process that has the ability to convert inputs to outputs.
Explain in words how are all Business Combinations (Subsidiaries) accounted for?
VIA the Acquisition Method.
It Requires:
- A- Identifying the Acquirer
- B- Consideration paid on the Acquisition Date
- C- Identifiable assets acquired and liabilities assume and any NCI
- D- Recognising Goodwill or Gain on a bargain purchase
IFRS 3: Name the 2 methods on how Non-Controlling Interests measured at acquisition?
- - “Full Goodwill” Method (Fair Value)
or
- - Partial Goodwill Method (Proportionate share of Net Assets)
Provide an overview of the consolidation rules of the SOFP?
All the steps of Consolidating SOFP
Step 1 - Read Question and draw up w1 Group Structure
Step 2- Draw up Statement and workings proforma’s and transfer numbers across working down the list methodically
Step 3 - Read notes and attempt Workings for Adjustments (e.g Net assets, PURP calculation)
Step 4 - Calculate Goodwill
Step 5 - Calculate Share of Retained Earnings
Step 6 - Calculate Investments in associates/joint venture
Step 7 - Calculate Non-Controlling Interests
Consolidation of SFP.
STEP - 1
Step - 1 Read Question and Draw the Group Structure while noting down key figures given.
- *- Percentage of Ownership
- Acquisition Date**
- **Reserves Pre-Acquisition
- Consideration Transferred (Possible workings if the consideration has contingent Liabilties)**
- *- NCI F.V if given or is the policy proportionate.**
What are the steps to consolidating SOFP?
Step 2 - Proforma
Once the group structure has been determined, set up a proforma statement of financial position.
- – Eliminate the carrying amount of the parent’s investments in its subsidiaries
(these will be replaced by goodwill) -
– Add together the assets and liabilities of the parent and its subsidiaries in full
(But don’t add up the final totals until all workings and adjustments have been carried out) - – Include only the parent’s balances for share capital and share premium
Consolidation of SFP
Step 3 - Right down adjustments and attempt the workings of the net asset.
Step 3 - Adjustments
What are the Types of Adjustments For Intragroup Transactions?
- All intragroup assets, liabilities, equity, income and expenditure and cash flows are eliminated in full.
Cancellation of group balances
- Dr – Payables (Creditors)
- Cr - Receivables (Debtors)
Goods or cash in transit - Just Complete the transaction
- Dr - Inventories/cash
- Cr – Payables/receivables
- Elimination of UNREALISED PROFITS on intragroup transactions. PURPS
Parent Sales to Sub
- Dr – RE of Parent in the SFP / Cost of sales (If you’re doing P/L)
- Cr – GROUP inventories
Sub Sales to Parent
- Dr – R.E of Sub in the SFP/ Cost of sales (If you’re doing P/L)
- Cr – GROUP inventories
>>>The rule is always to reduce the profits of the selling company.
Cancellation of intragroup sales/purchases - P/L ADJUSTMENT
- Dr – Group Revenue
- Cr – Group COS
Step 4 - Goodwill Calculation BPP Method
Full Goodwill Method - Nci at F.V
And
Partial Goodwill Method - Nci at the proportionate share
Step 5 - Groups Retained Earnings and Other Reserves - Kaplan Method
Step 5 - Groups Retained Earnings and Other Reserves - BPP Method
STEP 6 NCI Calculation
NCI @ Acquisition
+ Share of Movement in R.E
= C/B of NCI
- IF THE FULL GOODWILL METHOD was used, make sure to remove the impairment of any goodwill to date.
Step 7 Investment in Associate calculation