Chapter 8 - Consolidated Financial Statements Flashcards
- Definition
An Acquiree
The business or businesses that the acquirer obtains control of in a business combination
- Definition
An Acquirer
The entity that obtains control of the acquiree
- Definition
A Business Combination
A transaction or other event in which an acquirer obtains control of one or more businesses
- Definition
Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised
- Definition
Parent / Group
PARENT = An entity that controls one or more entities
A GROUP = A Parent and its subsidiaries
- Definition
A Subsidiary
An entity controlled by another entity
- Definition
Non-Controlling Interest
The equity in a subsidiary not attributable, directly or indirectly to a parent
- Definition
Fair Value
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
- The Five Circumstances where Control is deemed to exist
- 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*
GOODWILL CALCULATION:
Consideration Paid = X
Plus
NCI at Acquisition = X
Less
Net Assets = (X)
Less
Impairment of GW = (X)
= GOODWILL
NON-CONTROLLING INTEREST CALCULATION:
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
RETAINED EARNINGS CALCULATION:
Parent Retained Earnings = X
Plus
Subsidiary attributable to Parent = X
Less
Impairment of Goodwill = (X)
= RETAINED EARNINGS
Adjustments - Profit/Loss
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
Adjustments - Statement of Financial Position
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
Method to be used in Acquisitions:
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.
How Fair Values are to be treated on Acquisition:
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
The effect of Fair Value calculations for:
- Goodwill
- Non-Controlling Interest
- Post-acquisition Profits
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
