Consolidated statement of Financial position Flashcards
What does IFRS 3 relate to?
IFRS 3 relates to Business combinations where a Parent is an entity which controls one or more other entities and a subsidiary is an entity that is controlled by another entity.
How is control of an entity determined?
Control =
- Power over an invested - holding > 50 % of ordinary shares.
- Exposure or rights to variable returns (dividends)
- The ability to use it’s power over the invest to affect the amount of the investors returns.
IFRS 10 prescribes a principles based approach:
- Contractual arrangements may determine control, where the activities of the entity are controlled by the contract and voting right to not determine control.
- Dispersed or unconnected shares - minority share holding but remaining shares are unconnected.
- Potential Voting rights - A company has potential voting rights despite being a minority shareholder. Share options or convertible loans.
What is the single entity concept?
The single entity concept - is that business combinations will be viewed as a single entity based on the economic substance of a relationship
When is a business combination exempt from preparing consolidated statements?
- The parent is wholly or partially owned and the subsidiary and owners are informed and do not object to not preparing consolidated statements.
- The parents debt or equity instruments are not traded.
- The parent does not file financial statements with the stock exchange for the purpose of trading financial instruments.
- Ultimate parent company produces consolidated statements under IFRS.
What are the 5 standard workings for the consolidated statement of financial position?
W1 - Group Structure
W2 - Net assets of the subsidiary
W3 - Goodwill
W4 - Non Controlling interest
W5 - Retained earnings.
What is included in W2 Net assets of the subsidiary?
W2 will look at the assets of the subsidiary at acquisition and the reporting date.
This includes:
- Share capital and Premium
- Retained earnings and other reserves
- Unrealised profit adjustments for Inventory and Fixed assets.
What is included in W3 for Goodwill?
Goodwill at acquisition is calculated as:
- Consideration - Cash and other
- Non controlling interest - Fair value of %age
- less the subsidiary net assets at acquisition
This may then be subject to impairment (full value given) to give Good will at reporting date, which will be shown as a non current asset.
What is included in W4 - Non controlling interest?
NCI is calculated as:
- NCI at acquisition
- Add NCI % of Subs post acquisition retained earnings
- Less NCI % of any impairment to Goodwill
What is included in W5 - retained earnings?
Retained earnings is calculated as:
- 100% of Parents reserves (retained earnings)
- Add Parents % of Subs post acquisition retained earnings
- Less Parents % of Goodwill impairment
- Add Gain on margin purchase
- Less Unrealised profit adjustment
- Less any interest on deferred consideration
What forms may consideration at acquisition take?
- Cash at acquisition - measured as cash paid. Dr Cost of investment, Cr Cash
- Deferred Cash - Measured at present value, Dr cost of investment, Cr Liability
- Shares issued - measured as fair value at acquisitor date, Dr cost of investment, Cr share capital/premium.
- Deferred shares -Fair value at acquisition date, Dr Cost of investment, Cr other components of equity.
- Contingent consideration - Fair value (Given), Dr cost of investment, Cr Liability/equity.
- Professional fee’s - expensed to P&L.
What about fair value adjustments?
A subsidiaries assets and Liabilities should be recorded at fair value for consolidation.
- PPE - Adjust to fair value at acquisition, the adj will continue while the asset is controlled by the sub. Dep’n will also need to be adjusted.
- Inventory - Must be adjusted to fair value at acquisition. The adjustment may still be required at the reporting date but inventory sold should be taken in to account.
- Intangible assets not recognised by the sub - will have been valued by the parent. Adjust for the asset and amortisation.
- Contingent liabilities - the subs Contingent liabilities will be included as provisions in the consolidated statements.
What about intra group/inter company balances?
Intra group balances must be removed:
- Debtor/creditor balances - net off (or adjust for cash in transit then net off)
- Cash in transit - Adjust the bank and receivable as if the cash had been received.
- Goods in transit - Adjust inventory/payables as if goods had been received. Note this will also likely require an unrealised profit adjustment.
What is unrealised profit?
Where transactions including a profit element have taken place within the group the profit is unrealised until the goods or asset have been sold outside of the group.
How is unrealised profit on goods adjusted for?
- Identify the profit element of the transaction - watch out for mark up vs margin on a sales figure.
- Where the sale is made by the parent to the sub Dr retained earnings and Cr inventory.
- Where the sale is made by the sub to the parent Dr closing retained earnings (Sub) Cr inventory (parent)
PUPs or PURPS will impact standard workings 2 (Net assets) and 5 (Retained earnings)
How is unrealised profit on Assets adjusted for?
- Identify the carrying amount and depreciation with the transfer.
- Identify the carrying amount and depreciation with out the transfer.
- Calculate difference in Carrying amount, Dep’n and the net.
The adjustments will then be
- Difference in carrying amount - reduces retained earnings of transferrer of the asset.
- Difference in Dep’n - increases retained earnings of transferee.
- Net difference - reduces value of consolidated PPE.
