Chapter 8 - Consolidated Financial Statements

Question 1

• Definition

An Acquiree

Answer 1

The business or businesses that the acquirer obtains control of in a business combination

Question 2

• Definition

An Acquirer

Answer 2

The entity that obtains control of the acquiree

Question 3

• Definition

A Business Combination

Answer 3

A transaction or other event in which an acquirer obtains control of one or more businesses

Question 4

• Definition

Goodwill

Answer 4

An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised

Question 5

• Definition

Parent / Group

Answer 5

PARENT = An entity that controls one or more entities

A GROUP = A Parent and its subsidiaries

Question 6

• Definition

A Subsidiary

Answer 6

An entity controlled by another entity

Question 7

• Definition

Non-Controlling Interest

Answer 7

The equity in a subsidiary not attributable, directly or indirectly to a parent

Question 8

• Definition

Fair Value

Answer 8

The price that would be received to sell and asset or paid to transfer a liability in an orderly transactions between market participants at the measurement date

Question 9

• The Five Circumstances where Control is deemed to exist

Answer 9

• Voting Rights - e.g > 50% of Shares
• Rights to appoint, reassign or remove management personnel
• Rights to appoint or remove another entity that directs the relevant activities
• Rights to direct the investee to enter into, or veto changes, to the benefit of the investor
• Other rights. e.g - Decision making rights that give the investor to direct the relevant activities
• The key is the power to direct or effect the decision making of the investee’s business activities*

Question 10

GOODWILL CALCULATION:

Answer 10

Consideration Paid = X
                                    Plus
NCI at Acquisition   = X
                                    Less
Net Assets               = (X)
                                    Less
Impairment of GW   = (X)

            = GOODWILL

Question 11

NON-CONTROLLING INTEREST CALCULATION:

Answer 11

Share Capital attributable to NCI = SC x %
Plus
Share Premium attributable to NCI = SP x %
Plus
Revaluation attributable to NCI = REV x %
Plus
Retained Earnings to NCI = Total RE x %

             = NON-CONTROLLING INTEREST

Question 12

RETAINED EARNINGS CALCULATION:

Answer 12

Parent Retained Earnings = X
Plus
Subsidiary attributable to Parent = X
Less
Impairment of Goodwill = (X)

                 = RETAINED EARNINGS

Question 13

Adjustments - Profit/Loss

Answer 13

Eliminate Sales between companies where all goods have been sold:

DR Sales - Full Sales amount
CR COS - Full Sales amount

Eliminate Sales where unrealised profit remains:

DR Sales - Full Sales amount
CR COS - Full Sale amount - Unrealised Profit

E.g - £100,000 = Sale Amount
£20,000 = Unrealised Profit

DR Sales - 100,000
CR COS - 80,000

If the profit is made by the subsidiary, their profit for the year must be deducted by £20,000 before calculating their share of profit

Question 14

Adjustments - Statement of Financial Position

Answer 14

Only unrealised profit should be adjusted on the SFP and should balance

Unrealised Profit Adjustment:

DR - Retained Earnings
CR - Inventory

If unrealised profit is in the subsidiary company, the subsidiaries post acquisition’s retained earnings must be reduced before NCI calculations are made

Eliminate Inter-Company Balances:

DR - Trade Payables
CR - Trade Receivables

Revaluation of Assets:

DR - Non Current Assets
CR - NCI Equity

Question 15

Method to be used in Acquisitions:

Answer 15

THE ACQUISITION METHOD

Measures the cost of the Identifiable assets and liabilities acquired, and usually results in the recognition of Goodwill.

ASSETS AND LIABILITIES ACQUIRED: The identifiable assets and liabilities are measured at their fair value on the date of acquisition.

GOODWILL: Is an asset representing the future economic benefits from other assets acquired in a business combination that are not individually identified and separately recognised.

• Goodwill is tested for impairment annually.

NEGATIVE GOODWILL: When the acquisition is less than the fair value of the assets acquired.

• First step is to check the values to ensure they are correct.
• Negative goodwill is to be immediately recognised in the SPL immediately.

Question 16

How Fair Values are to be treated on Acquisition:

Answer 16

IFRS 3 Business Combinations states that the cost of the business acquired is to be measured at the fair values of all identifiable assets and liabilities that existed at the date of acquisition.

The Procedure:

• Re-state the subsidiaries SFP using fair values
• Increases are credited to the revaluation reserve
• Decreases are debited to the revaluation reserve
• The fair value of A&L must be capable of being measured reliably

Question 17

The effect of Fair Value calculations for:

• Goodwill
• Non-Controlling Interest
• Post-acquisition Profits

Answer 17

GOODWILL:- The cost of the investment in the subsidiary, less the fair value of the subsidiary’s identifiable assets and liabilities

NON-CONTROLLING INTEREST:- The proportion of the subsidiary, based on the fair value of the subsidiary’s identifiable assets and liabilities

POST-ACQUISITION PROFITS:- Will be affected where the use of the fair value of NCA leads to a different depreciation charge