Consolidated statement of financial position

Question 1

Basic principle of the consolidated statement of financial position

Answer 1

• is that it shows all assets and liabilities of the parent and subsidiaries

Question 2

Method of preparing a consolidated statement of financial position of single subsidiary

Answer 2

1. The investment in the subsidiary shown in parent’s statement of financial position is replaced by net assets of S.
2. The cost of the investment in S is effectively cancelled against the ordinary share capital and reserves of the subsidiary, leaving goodwill as a balance

Question 3

What it will show the consolidated statement of financial position ?

Answer 3

• net assets of the whole group P + S
• the share capital of the group (which always equals the share capital of P only)
• the retained earnings, comprising profits earned by the group ( i.e. all of P’s historical profits plus P’s share of S’s post-acquisition profits)

Question 4

The mechanics of consolidation
W1: Establish the group structure

Answer 4

Will need to show:
- how much of the subsidiary is owned by P
- how long P has had control over S

Question 5

The mechanics of consolidation
W2: Net assets of subsidiary

Answer 5

• first column shows the fair value of S at acquisition, which can be used to calculate goodwill
• the second columns shows the fair value of S’s net assets at the year-end
• the final column shows the post-acquisition movement in S’s net assts. This increase or decrease will be split between the 2 parties that own S, according to their % ownreship

Question 6

The mechanics of consolidation
W3: Goodwill

Answer 6

If fair value method adopted:
NCI value = fair value of NCI’s holding at acquisition (number of shares NCI own x subsidiary share price)
If proportion of net assets method adopted:
NCI value = NCI% X fair value of net assets at acquisition
- if goodwill is positive - treat as non-current asset
- if goodwill is negative - treat a a bargain purchase and a gain is included within retained earnings

Question 7

Goodwill calculation

Answer 7

Parent holding (investment) at fair value
Non-controlling interest at acquisition
Less: fair value of net asset at acquisition W2
= Goodwill on acquisition
Less impairment
= Goodwill

Question 8

The mechanics of consolidation
W4: Non-controlling interest calculation

Answer 8

NCI value at acquisition
NCI share of post-acquisition reserves
Less NCI share of impairment (fair value method only)

Question 9

The mechanics of consolidation
W5: Group retained earnings

Answer 9

P’s retained earnings (100%)
P’s % of S’s post-acquisition retained earnings
Less: P’s share of impairment

Question 10

Definition of the goodwill

Answer 10

• is an asset representing the future economic benefits arising form other assets acquired in a business combination that are not individually identified and separately recognised

Question 11

Positive goodwill - treatment

Answer 11

• capitalised as an intangible non-current asset
• tested annually for possible impairments
• amortisation of goodwill is not permitted by the IFRS Standard

Question 12

Impairment of the positive goodwill

Answer 12

Proportion of net asset method:
DR Group reserves
CR Goodwill
Fair value method:
DR Group reserves (% of impairment attributable to the parent
DR NCI (% of impairment attributable to NCI
CR Goodwill

Question 13

When negative goodwill arise?

Answer 13

• where the cost of the investment is less than the value of net assets purchased
• most likely the reason is a misstatement of the fair values of assets and liabilities, required goodwill review of calculation

Question 14

What are pre-acquisition reserves?

Answer 14

• are the reserves which exist in a subsidiary at the date when that subsidiary is acquired.
• capitalised at the date of acquisition by including them in the goodwill calculation

Question 15

What are post-acquisition reserves?

Answer 15

• are reserves recognised by the subsidiary in the period following acquisition
• profits in retained earnings
• revaluation gains in revaluation surplus

Question 16

What is a non-controlling interest?

Answer 16

• if parent may not won all of the shares in the subsidiary, e.g. if P owns a controlling 80% interest in the ordinary shares of S, there is a non-controlling interest of 20%

Question 17

Accounting treatment of a non-controlling interest

Answer 17

• in the consolidated statement of financial position, include all of the net assets of S
• show the net assets of S which belong to the non-controlling interest within the equity section of the consolidated statement of financial position

Question 18

What is the fair value definition?

Answer 18

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

Question 19

What is the purchased goodwill?

Answer 19

• is the difference between the value of an acquired entity and the aggregate of the fair values of that entity’s identifiable assets and liabilities.
• if the fair values are not used, the value of goodwill will be meaningless

Question 20

What elements of the cost of acquisitions includes?

Answer 20

• cash paid at the date of acquisition
• fair value of any other consideration i.e. deferred/contingent considerations and share exchanges

Question 21

What are the incidental costs of acquisition which should be written off?

Answer 21

• legal, accounting, valuation and other professional fees

Question 22

What is deferred consideration?

Answer 22

• promise to pay an agreed sum on a predetermined date in the future
• should be measured at fair value at date of the acquisition, taking into account the time value of money
• calculated by discounting the amounts payable to present value at acquisition

Question 23

What is the contingent consideration?

Answer 23

• is an agreement to settle in the future provided certain conditions attached to the agreement are met
• included at fair value

Question 24

What are the two ways to discount the deferred amount to fair value at the acquisition date?

Answer 24

• apply discount fraction to the deferred amount, where r is the interest rate and n the number of years to settlement 1/(1+r) n little n
• discount factor of the payment based on a given cost of capital ( 1$receivable in three years time based on a cost of capital of 10% = $0.75)
• each year the discount is then unwound by ‘charging interest on the outstanding liability, what will increase the deferred liability each year

Question 25

Contingent share exchange

Answer 25

• where contingent consideration involves the issue of shares, there is no liability.
• this potential share issue should be recognised as part of equity under a separate caption representing shares to be issued

Question 26

Post-acquisiton revaluations

Answer 26

• in subsidiary’s non-current assets, the full amount of the gain should be added to non-current assets

Question 27

What could be potential problem areas for intra-group trading?

Answer 27

• current accounts between P and S
• loans held by one company in the other
• dividends and loan interest
• unrealised profits on sales of inventory
• unrealised profits on sales of non-current assets

Question 28

If there are goods or cash in transit what adjustment needs to be done to statement of financial position?

Answer 28

• cash in transit adjusting entry:
  DR Cash
  CR Receivables
• goods in transit adjusting entry:
  DR Inventory
  CR Payables
  -adjustment is just for purpose of consolidation only

Question 29

What adjustments are needed when one group entity sells goods to another?

Answer 29

• current accounts must be cancelled
• where goods are still held by a group entity, any unrealised profit must be cancelled
• inventory must be included at cost to the group

Question 30

Provision for Unrealised Profit

Answer 30

• where goods have been sold by one group entity to another at a profit, and some of these goods are still in the purchaser’s inventory at the year-end, then the profit on these goods is unrealised from the viewpoint of the group as a whole

Question 31

What is the process to adjust for unrealised profit?

Answer 31

1. Determine the value of closing inventory held by an individual entity which has been purchased from another entity in the group
2. Using mark-up or margin, calculate the value of profit included within closing inventory
3. Make the adjustments/depends on seller

Question 32

What are the adjustments if the seller is the parent?

Answer 32

• the profit element is included in the parent’s retained earnings and belongs to the group
  DR Group retained earnings (W5- deduct profits)
  CR Group inventory (deduct inventory on face of SFP)

Question 33

What are the adjustments if the seller is subsidiary?

Answer 33

• the profit element is included in the subsidiary’s retained earnings and relates partly to the group, partly to any non-controlling interest
  DR Subsidiary retained earnings (deduct the profit in W2 - in reporting column)
  CR Group inventory (deduct inventory on face of SFP)

Question 34

What if one group entity sells non-current assets to another?

Answer 34

• there would have been no profit on the sale
• depreciation would have been based on the original cost of the asset to the group

Question 35

Adjustment for unrealised profit in non-current assets

Answer 35

The net PUP amount should be deducted when adding across the parent and subsidiary’s non-current assets. The profit on transfer should be deducted from the reserves of the selling company. The difference in depreciation, i.e. the excess depreciation charged against the buying entity’s profit, should be added to the reserves of the buying company

Question 36

What if a parent acquires a subsidiary mid-year?

Answer 36

• the net assets at the date of acquisition must be calculated based on the net assets at the start of the subsidiary’s financial year plus the profits of up to the date of acquisition.

Question 37

What transactions are included which may not be at market value, or may be lost if the company is removed from the group?

Answer 37

*Intra-group loans
- these may be at low interest, which may change if the company is removed from the group
*Intra-group receivables/payables
- these can be done to manipulate an entity’s cash position prior to a sale
*Inventory/Non-current assets
- assets could have been sold at inflated prices between the group. The unrealised profits will be removed from the consolidated financial statements, but the item will remain at the inflated cost in the individual statements of financial position
*Shared costs/assets
-the company may share assets with others in the group, which would be lost if the company were removed from the group