Consolidated shizz and rules Flashcards
What is IFRS 10
Control
- Power over investee
- Exposure to variable returns
- Ability to use power to affect returns
ie parent subsidiary
what are the aims of consolidated accounting
- to treat the group as a single economic entity
- to present all the assets and liabilities of the group companies consolidated BS
- even if the subsidiaries are only partly owned by the parent company
- to cancel out inter company trades
- to disclose the NCI minority shares of subsidiaries capital and reserves
- to include only the parent companys share of post acq share of the subsidiaries profits
- to show goodwill on acq
What is goodwill on acquisition
the difference b/w how much the parent buys the shares of the subsidiary and the fair value of its underlying assets and liabilities
a) to reflect company value a a whole compared to value of individual assets/liabilities
b) to induce shareholders to sell shares
What are some problems in preparing BS
- apportioning subsidiary’s capital and reserves
- what to do with the parent companys investment in the subsidiary
- how to calculate goodwill on acq
- How to calculate NCI
Under what rule and what are the two permissable approaches of calculating NCI
IFRS 3
- to assume that the NCI share of the subsidiary net assets at the date of acq is equal to value of the shares in the company
- To base the calculation on the fair value of the NCI shares n the subsidiary following takeover
What happens to group IS with subsidiaries acquired during the year
- Group IS will only include profits of the subsidiary since acq
- necessary to time apportion subsidiary IS during year of acq
What are 2 ways of calculating ROCE
ROCE =Operating Profit/Equity(includingNCI)+NCL
ROCE = Operating profits/TA-CL
What is the currency translation of foreign subsidiaries for the BS
usually the closing rate
what is the currency translation of foreign subsidiaries for the IS
usually the average rate
proxy for the date that transactions in IS occurred
What is an accounting aim for a parent company for a foreign subsidiary
to recognise that the parent company is investing in the net worth of the foreign subsidiary rather than its individual assets
What is an associated company
- owns 20-50% of ordinary share capt
- holding company exercises a significant influence
- not controlled by the holding company
- equity method of accounting
what is the equity method of accounting
associate is accounted for as an investment in the NCA section of the BS
How do you treat the associate in consolidated income statement
- one line entry of group shares of associates PAT
- no line by line consolidation of the associates income and expenses
- no minority/ NCI
What is IAS 36
Impairment of assets
what is IAS 38
Intangible assets
What is IFRS 3
Business combinations
What is goodwill
- An intangible NCA
- Held on an ongoing basis and lacking physical substance
- representing the value of the business as a whole compared to the value of the individual assets and liabilities
ie future earnings capacity of the business - Therefore goodwill is different to other intangible assets, which also lack physical substance because it cannot be sold w/o disposing of the whole business
What is the residual amount
- Purchased goodwill on acquisition of a subsidiary
- difference between the purchase price and the fair value of the separately identifiable assets and liabilities
What does goodwill do for shareholders
the premium paid to shareholders induces them to sell their shares
Whats the difference between purchased and home grown goodwill in the FS
Purchased GW is recognised in the consolidated balance sheet
Home-grown GW is not recognised on BS
Whats the difference between purchased and home grown goodwill with transactions
Purchased GW a transaction exists to measure against it
Home-grown GW cannot be measure reliably
Whats the difference between purchased and home grown goodwill as an asset
Purchased GW recognised as an asset whereas home-grown GW
What are the implications of the complicated valuation of GW
- BS are incomplete
- Similar companies may display different results because of their acquisition strategy
- Acquisitive companies recognising GW and intangibles whereas non-acquisitive companies are unable to do so
Comment. Acquisitions cause the value of goodwill to crystallise in company accounts
the main point of difference will occur when comparing the results of acquisitive companies to those of companies relying primarily on organic growth
Why is goodwill a problem asset
- Difficulty measuring it
- Difficult separating it from other intangibles
- Difficulty in being certain GW on acquisition is an asset at all
Classification of intangibles
Marketing - brands, trademarks Tech - Research patents Artisitic - copyright Data-processing - software Manufacturing - industrial design Quoatas - Agricultural Customer - order book Human capital - training
What is the IFRS treatment of goodwill
- Goodwill capitalised and annually reviewed for impairment
- No amortisation
Whats the difference between amortisation and impairment
- IAS 38 allows intangible assets acquired in a business combination to be amortised providing they are deemed to have a limited useful life. Unlike the treatment of goodwill, the annual charge to the IS each year, similar to depreciation
This means there is more scope for variation in company accounting practice
Are annual impairment reviews of goodwill subjective or objective and what would they be dependent on
- Assessment of which “cash generating unit” CGU the GW belongs to
- Fair value less costs to sell off the CGU
- PV of the CGU Future CF
Discuss
Assessment of which “cash generating unit” CGU the GW belongs to
This is due to the scope for variation
Discuss
Fair value less costs to sell off the CGU
- How can you say what this is in the absence of an active market
- Often arrived at simply as a multiple of historical earnings
- A rough and ready proxy
Discuss
PV of the CGU Future CF
Future - Unreliable estimates inevitable
Discount rate - depends on assessment of risk
- From an audit perspective there is an inherent lack of evidence to support the accounting treatment of GQ and intangibles prescribed by accounting standards
