Ch 13 - Group Accounts: Basic Principles Flashcards
What is the journal when one company buys another?
DR Investment X
CR Cash in Parent
How does the purchase os a sub affect the FS of the sub?
S Ltd’s books aren’t impacted, as the transaction is between P Ltd and S Ltd’s owner (rather than S Ltd itself)
What situation does it create is P owns more than 50% of the ordinary shares in S Ltd?
This will usually give P Ltd control of S Ltd
P Ltd (the parent company, P) has enough voting power to appoint the majority of S Ltd’s shareholders ( the subsidiary company, S)
P in effect, is able to manage S as if it were merely a department of P, rather than a separate entity
What is the legal vs economic substance when P buys S?
In strict legal terms, P and S remain distinct, but in economic substance they can be regarded as a single unit (a ‘group’
What are consolidated accounts made up of?
A consolidated balance sheet
A consolidated statement of comprehensive income
A consolidated statement of changes in equity
A consolidated statement of cash flows
Notes to the consolidated accounts
What is the purpose of consolidated accounts?
Present financial info about a parent undertaking and its subsidiary undertakings as a single economic unit
To show the economic resources controlled by the group
To show the obligations of the group
To show the results the group achieves with its resources
What sections are relevant to the preparation of consolidated access?
Section 9 Consolidated and Separate Financial Statements
Section 14 Investments in associates
Section 15 Investments in Joint Ventures
Section 19 Business Combinations and Goodwill
What is the objective of the consolidated FS?
What is the consequence of this?
to show the position of the group as if it were a single economic entity
Therefore
100% of the A&L of P and S are included in CBS
100% of the income and expenses of P and S are included in CP&L
What are the basic steps to a consolidated BS?
Consolidate 100% of A&L of P and S with the exception of the investment in S within P’s bal sheet
Include P’s share capital and share premium only in equity
Consolidate all of P’s p&L acc but only consolidate P’s share of S’s P&L account since acquisition
If P doesn’t own 100% of S Ltd, then we need to reflect in equity that the non-controlling interest (NCI) owns a share of the net assets being consolidated
What is the layout of a consolidated BS?
Goodwill
Assets (100% of S & P )
Liabilities (100% of P&S)
Net assets
Equity
Share capital (P only)
P&L reserve (100% of P & 100% of S post-acquisition)
NCI amount
Equity
What does the consolidated P&L show?
The consolidated P&L account shows the profit generated by the group resources shown in the related consolidated balance sheet
Describe the form of the CP&L
100 % of turnover and expenses of P Ltd and S Ltd are included in profit after tax
After profit after tax, show the ownership of that profit attributable to SH of the group and to the NCI
Show the basic layout of C P&L
Turnover (100% of P & S)
CoS (100% of P&S)
Operating expenses (100% P&S)
Operating profit
Tax (100% of P & S )
Profit after tax Y
Attributable to ordinary SH (B)
Attributable to NCI X
Total Y
What is control?
The power to govern the financial and operating policies of an entity, so as to obtain benefits from its activities
How can power arise over a sub?
ownership of the majority of voting rights, power can also arise through Rights to appoint, reassign or remove KMPs who can direct relevant activities Rights to appoint or remove another entity that directs relevant activities Rights to direct the invested to enter into, or veto changes tom transactions for the benefit of the investor Other rights (e.g. those specified in management contracts)
What is a coterminous year end?
differing accounting dates of group mebers
What must be done if companies in a group have diff acc dates?
FRS Section 9 allows FS made up to a date not more than 3 months different to the parent with due adjustment for signif transactions or other events between dates
How must acc policies be treated for group companies?
All group companies should apply the same acc policies on consolidation
If a group member uses different acc policies in its indiv FS, adjustments must be made as part of the consolidation
