CH18-19 Group accounts

Question 1

How is “control” over a subsidiary usually achieved?

Answer 1

By acquiring over 50% of the common hares.

Question 2

Which conditions must be met for a parent not needing to prepare consolidated financial statements?

Answer 2

The parent itself is a wholly owned subsidiary
The parent’s shares or securities are not publicly traded
The parents ultimate parent company presents consolidated financial statements which are publicly available for use and comply with international standards.

Question 3

An investor controls an investee when the investor…

Answer 3

Has existing rights that enable it to direct the “relevant activities” of the investee.

Question 4

Relevant activities=

Answer 4

Those activities that significantly affect returns.

Question 5

Which way of measuring NCI is most commonly used in practice?

Answer 5

By calculating the NCI shareholders’ proportion of the subsidiary’s identifiable net assets. Identifiable assets do not include goodwill.

Question 6

What is the alternative way of measuring NCI? This is less frequently used and will not be tested in the exam as a calculation.

Answer 6

The alternative way also accounts for goodwill attributable to NCI. This is done by measuring NCI at fair value on the date of acquisition.

Question 7

If a company liquidates, what are the preference shareholders entitled to?

Answer 7

Only to receive assets equal to the nominal value of their preference shares.

Question 8

WHat is the maximum amount of time difference between reporting periods of a subsidiary and its parent?

Answer 8

Max 3 months.

Question 9

Explain the acquisition method

Answer 9

It is used when consolidating. Add line-by-line and the subtract portion attributable to NCI.

Question 10

When is the equity method used?

Answer 10

When accounting for an associate and not a subsidiary. It is done by first recognising the investment in associate at cost and then updating that figure every year to account for the investor’s share of the associates profit.

Question 11

Name the 6 steps when consolidating

Answer 11

1. Fair-value adjustment (RR). 2. Elimination of investment in subsidiary/GW calculation. 3. Goodwill impairment. 4. Calculation of NCI. 5. Elimination of intra-group balances and unrealised profit. 6. Calculate group reserves.

All steps won’t always be needed, it depends on the task.

Question 12

Downstream transaction=?

Answer 12

A transaction sold from parent to subsidiary at a mark-up.

Question 13

Upstream transaction=?

Answer 13

A transaction from subsidiary to the parent at a mark-up. The elimination of this becomes trickier since the excessive profit is “in the sub” and therefore part of it belongs to the NCI and part of it ot the parent.

Question 14

How is an upstream transaction eliminated?

Answer 14

By reducing the consolidated inventory by the full amount. And then eliminating the reserves attributable to the group and the other part attributable to NCI.

Question 15

1

Answer 15

1

Question 16

When does an investor not have control over an investee?

Answer 16

When the investor has no power or rights to direct the investee’s relevant activities.

Question 17

lower closing inventory means?

Answer 17

Higher CoS and therefore lower profits. –> Lower retained earnings.

Question 18

Where is dividend paid by subsidiary to a parent eliminated?

Answer 18

It is eliminated on the SCE and the dividend income on the parent’s SCI is eliminated when consolidating.