Ch 14 - Consolidated Bal Sheet Flashcards
What are the issues may have to deal with in consolidated BS?
Consolidated balance sheet workings Mid year acquisitions Intra-group items Unrealised profits FRS
What will a standard question ask you to do?
question will present you with accounts of the parent company and accounts of one or more subsidiaries and will require you to prepare consolidated accounts
What are the workings?
W1 Establish group structure W2 Net assets of subsidiary W3 Goodwill on acquisition W4 NCI W5 Group P&L figure W6 Other group reserves (e.g. group revaluation surplus)
Describe W1
W1 Establish group structure
Draw diagram to show % ownership, include a date
Describe W2
W2 Net assets of the subsidiary Along the top At the report date (result to W4) At the date of acquisition (result to W3) Movement
Along the side Share capital Share premium Reserves: P&L acc (mvmt goes to W5) Revaluation reserve (mvmt goes to W6)
Share cap & prem will never move
Should do each subsidiary separately
Describe W3
Consideration paid x
Add NC% x net assets at acquisition (W2) X
Less 100% x net assets at acquisition (W2) (X)
= Goodwill at acquisition Y
Less amortisation/imapirment to date (X) (W5)
= Goodwill c/f on CBS
Goodwill = intangible on CBS
Amortised over useful life
Where is Goodwill found in CBS?
As an intangible asset
What must be done to goodwill over time?
Amortised
How long should the useful life of goodwill be?
Rebuttable presumption that it shouldn’t exceed 10 years
How is -ve goodwill treated?
treated as a -ve asset on the balance sheet and amortised over the useful life
Shown separately to +ve GW
What is -ve goodwill known as?
Gain on bargain purchase
Gets CR to consolidated P&L in year of acquisition and to RE
Where can you find ‘Consideration paid’ for W3?
Either given in Q or under Investments in Bal Sheet
What is amortisation/impairment to date?
Cumulative
Describe W4
W4 NCI
NCI % x S’s net assets at REPORTING DATE (from W2)
This will sit in equity in CBS
Describe W5
W5 Group P&L (RE)
100% of Ps P&L acc X
P% of S’s post acquisition P&L acc (W2) X
Less: Goodwill amortisation/impairment to sate (W3) (X)
= Group P&L
Describe W6
W6 Other Group Reserves e.g. group revaluation surplus
What must you calc when there is a midyear acquisition
S’s RE at the midpoint year
Either apportion from start of year or end
What are the 2 forms of intra-group transactions?
Intra-group loans
Intra-group trading
What must you do with an intra-group loan?
Cancel the debtor in one company and the creditor in the other
What does intra-group trading lead to?
If P and S trade with each other, then this will probably be done on credit
This leads to
A debtors account in one company’s balance sheet
A creditors account in the other company’s balance sheet
But
What are the 2 problems with intra-group trading for consolidation purposes?
These are amounts owing within the group rather than outside the group
Therefore must not appear on the consolidated balance sheet (as per intra-group loan)
The 2 balance (debtor and creditor) may not agree due to
Cash in transit
Goods in transit
What is the result of cash in transit/goods in transit?
The 2 balance (debtor and creditor) may not agree due to it
What are the usual rules for dealing with cash in transit?
Make a consolidation adjustment to the balance sheet of the recipient
Cash in transit adjustment entry
DR Cash in transit
CR Debtors current account
Goods in transit adjusting entry
DR Stock
CR Creditors current account
These adjustments are only for the purposes of consolidation
Once in agreement, the debtor and creditor should be cancelled as for intra-group loans
What must be done once Dr and CR agree relating to cash in transit?
Once in agreement, the debtor and creditor should be cancelled as for intra-group loans
What do you refer to the account for intra-group trading?
when companies within a group trade the intra-group debtor and intra-group trade creditor are referred to as the ‘current account’
Why may unrealised profits arise in group accounts?
Profits made by members of a group on transactions with other group members are
Recognised in the accounts of the indiv companies
But in terms of the group as a whole, such profits are unrealised
So must be eliminated from consolidated accounts as a consolidation adjustment
What adjustments are required when one group company sells to another?
Cancel current accounts
Deal with any unrealised profits if goods are still held by a group company at the year end
Write down stock value to cost rather than the amount at which it was sold between P and S
What are the steps for adjusting for intra-group trading when P is selling to S??
Step 1: Calc how much profit is included in closing stock
Determine the value of closing stock included in an indiv company’s accounts which has been purchased from another company in the group
Use mark-up or gross profit percentage (gross margin) to calc how much of that value represents profit earned by the selling company
Step 2:
If P is selling to S
Remove the profit element
This is included in the parent company’s accounts and relates entirely to the group
DR Group P&L account reserve (W5)
CR Group Stock (on CBS)
What are the steps for adjusting for intra-group trading when S is selling to P??
Step 1: Calc how much profit is included in closing stock
Determine the value of closing stock included in an indiv company’s accounts which has been purchased from another company in the group
Use mark-up or gross profit percentage (gross margin) to calc how much of that value represents profit earned by the selling company
Step 2: If S selling to P Remove the profit element This is included in the subsidiary company’s accounts and relates partly to the group, partly to NCI’s (if there are any) DR Subsidiary P&L acc reserve (W2) CR Group stock (on CBS)
What is the FV of an asset?
The FV of an asset and a liability is defined in FRS 102 to be the amount for which an asset could be exchanged or a liability settled between knowledgable, willing parties in an arms length transaction
What are the different ‘considerations’ that could be used to buy an asset/
Cash consideration Deferred cash consideration (include at PV so discounting of liability is unwound each year) Share consideration Contingent consideration
What is the double entry for a cash consideration?
DR Cost of investment (amount included in ‘consideration calc of goodwill)
CR Cash
How are deferred cash considerations dealt with?
If not all the purchase consideration is paid at the date of the acquisition, some may be deferred until a later date (deferred consideration)
DR Cost of investment
CR Liabilities
Deferred consideration should be included at its Present Value (PV)
Subsequently, the discounting of the liability will be unwound each year
DR Finance Costs
CR Liabilities
Won’t impact goodwill
Does the timing of the consideration affect goodwill?
This won’t impact the consideration in the goodwill calc, which will remain unchanged
What is a share consideration?
Instead of paying cash, the parent may issue its own shares in exchange for the shares of the subsidiary
DR Cost of investment (market value at acquisitions ate)
CR Share capital
CR Share premium
What is a deferred share consideration?
Deferred share consideration
If not all the shares are issued at the acquisition date, some may be issued at a later date
Known as deferred shares
Always take the market value at the date of acquisition to measure the amount of consideration for deferred shares
DR Cost of Investment
CR Shares to be issued
What is a contingent consideration?
Contingent consideration is an amount which may be payable at a future date in respect of the purchase of an investment, dependent upon certain future events
E.g. An extra amount may be paid for an investment in a subsidiary if it achieves a certain level of sales growth over 5 years
When should contingent considerations be included in past of cost of investment?
included as part of the cost of investment assuming
Payment is probable
It ca be reliably measured
Measured at FV at the date of acquisition
What is the acc treatment for contingent cash?
DR Cost of investment
CR Provision
What is the acc treatment for contingent shares?
DR Cost of investment
CR Shares to be issued
How would you calc the contingent consideration?
It would be given in the exam
What is the treatment per FRS 102 Section 19 for if the potential adjustment isn’t recognised at the acquisition date but subsequently becomes probable and can be measured reliably
the additional consideration should be treated as an adj to the cost of the business combination
What acquisition costs can be included in the cost of the combination?
Prof fees and similar incremental costs incurred directly in making the acquisition
With the exception of arranging finance, where costs are deducted from the liability/share premium account
E.g. loans or share issues
Why could changes occur to the FV of contingent considerations?
The FV of the contingent consideration at acquisition could be diff to the actual consideration paid
How are diffs to FV of contingent considerations treated?
Any diffs are normally treated as a change in acc estimate and adjusted prospectively acc with FRS 102 Section 10
The only time a change would be treated retrospectively with a corresponding adj to goodwill would be if the change related to conditions that existed in acquisition date and occurred within 1 year of the date of acquisition
When is the only time a change in contingent consideration would be treated retrospectively?
The only time a change would be treated retrospectively with a corresponding adj to goodwill would be if the change related to conditions that existed in acquisition date and occurred within 1 year of the date of acquisition
How do you recognise the acquisition of liabilitie and assets in an acqusition
To process FV adjustment in consolidation question, you must consider the impact both at the acquisition and reporting date in W2
At acquisition put an adjustment into the net asset working (W2) to bring the net assets to FB
This will then affect W3
At the reporting date account for the adjustment on the face of the CBS and in the net assets working (w2)
This will affect the NCI working (W4)
How is a difference between NBV in Ss books and FV treated in an acquisition?
Any difference between NBV in S’s books and FV is treated as a FV uplift which is shown on the face of the balance sheet and in W2
When is depreciation charged in an acquisition?
Depr should be charged on all FV adjustments from the point of acquisition
With a fair value adjustment, show the W2 calc
Calc of subs NA
Along the top
Reporting date
Date at acquisition
Down the side Ordinary share capital P&L acc reserve FB adjustments on fixed assets FV fixed assets depr (cumulative since acquisition) Total
note: total post acquisition mvmt of P&L reserve, FV adj on fixed assets and FV fixed assets depr go to W5
How should Goodwill in S’s books be treated in consolidated BS?
Any goodwill in S’s books (e.g. from the purchase of a sole trader) shouldn’t appear on the consolidated BS as it isn’t identifiable
So must be removed from net assets in (W2)
Must not appear on face of CBS
How are intangibles in S dealt with in consolidation?
There may be intangibles in S which aren’t recognised on S’s BS as they don’t meet criteria of FRS 102 Section 18
Upon consolidation, the FV of all identifiable assets should be recognised on the CBS and in W2
How are contingent liabilities disclosed in S;s books dealt with?
In S’s indiv accounts, S may disclose contingent liabilities
Contingent liabilities existing at acquisition of S should be included on the face of the CBS and in (W2) at FV
This will be given in the exam
Why might an adjustment to provision of fair values of the subsidiaries net assets be required?
Ideally the FV of net assets will be ascertained by the first year end after the acquisition
In practice, this might not be possible
E.g. if the acquisition is in the last month of the year
Why does FRS 102 allow the use of provisional FRS?
Ideally the FV of net assets will be ascertained by the first year end after the acquisition
In practice, this might not be possible
E.g. if the acquisition is in the last month of the year
How are adjustments made to provisional fair values?
Depends on whether they are made in the measurement period or not
How are adjustments made to provisional fair values if they are made in the measurement period?
i.e. less than 12 months from acquisition date
An adjustment is made retrospectively and goodwill is recalculated
How are adjustments made to provisional fair values if they are made outside the measurement period?
i.e. more than 12 months from the acquisition date
They are treated as a change in acc estimate and adjusted for prospectively
An impairment review is performed
What is the differences between IFRS and UK GAAP re measurement of NCI?
IFRS 3 Business Combinations allow a choice of how to measure NCI
The proportionate (share of NA) method
Fair Value (full goodwill) method
The choice is made on an acquisition by acquisition basis
The choice will affect the goodwill and NCI calc
What is the differences between IFRS and UK GAAP re NC in the goodwill calc?
UK GAAP calcs NCI at proportionate method = acquisition as NCI% x Was at acc
IFRS allows a choice between proportionate or FV
In an exam, how would you calc the FV of the NCI for the FV method of calculating NCI?
you will be told the FV of NCI in the exam
Simply insert this number into the NCI line of the goodwill working
