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AAFR > Consolidation > Flashcards

Consolidation Flashcards

1
Q

At Acquisition date, how to calculate the fair value of net assets?

A
  • Subsidiary’s

Share Capital + Retained Earning + - Fair Value Adjustments = FV of Net Assets

  • Proceeds paid for subsidiary (Investment) - FV of Net Assets = Goodwill
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2
Q

What to do at acquisition date, when there is a contingent liability disclosed in the books of the subsidiary? [2]

A
  • In Net Assets FV working, we are going to put it > Less: Contingent Liability XXX
  • This would not be expensed out as it is technically decreasing the net assets and increasing the Goodwill

Goodwill dr Liability cr

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3
Q

What to do at reporting date, when the contingent liability is unchanged on the books of subsidiary as a disclosure since acquisition date?

A
  • In Net Assets FV working, we are going to put it again> Less: Contingent Liability XXX
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4
Q

What to do at reporting date, when the contingent liability is settled by the same amount on the books of subsidiary? [2+2]

A
  • In Net Assets FV working, we would not put anything regarding this Contingent Liability. This would result in increase in Post-acquisition profit.
  • In Consolidated PNL, we would book a gain equal to the amount of contingent liability booked at acquisition date to set off expense booked by subsidiary and incorporate this as part of Goodwill.
  • Entry in subsidiary books:
    Expense dr Cash cr
  • Entry in consolidated books:
  • Liability dr Gain cr
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5
Q

What to do at reporting date, when the contingent liability is settled by higher amount on the books of subsidiary? [2+2]

A
  • In Net Assets FV working, we would not put anything regarding this Contingent Liability. This would result in increase in Post-acquisition profit.
  • In Consolidated PNL, we would book a gain equal to the amount of contingent liability booked at acquisition date to set off expense booked by subsidiary and incorporate this as part of Goodwill.
  • Entry in subsidiary books:
    Expense dr Cash cr
  • Entry in consolidated books:
  • Liability dr Expense dr Cash cr

Amount over contingent liability would be expensed out by both Grp+Subs

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6
Q

How to calculate Goodwill if only consideration of acquisition is given and there is no FV of NCI? [2]

Partial Goodwill

A
  • Goodwill = Consideration - Share of FV of Net Assets of Parent
  • NCI = FV of Net Assets * % of holding by NCI

Partial Goodwill

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7
Q

How to calculate Goodwill if consideration of acquisition is given and there is also FV of NCI? [2]

Full Goodwill

A
  • Goodwill = Consideration + FV of NCI - Total FV of Net Assets
  • NCI = FV of NCI (Generally FV/share * no. of shares held by NCI)

Full Goodwill

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8
Q

How would a group account for Intangibles on the books of subsidiary having fair value?

A
  1. Compare with carrying amount
  2. Record Excess (FV-CA) and amortize over the period

Like PPE

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9
Q

How would a group account for Intangibles on the books of subsidiary not having fair value? [2]

A
  • Derecognize it at acquisition
  • Keep derecognizing on reporting dates if its still in the books of subsidiary.
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10
Q

How would a group account for Intangibles NOT on the books of subsidiary having fair value + Definite life? [2]

A
  1. Record in the books of subsidiary (Add in NCA, and in Net Asset working)
  2. Amortize over the period
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11
Q

How would a group account for Intangibles NOT on the books of subsidiary having fair value + indefinite life? [2]

A
  • Recognize only
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12
Q

B/S: Intra-group sales/purchases and their impact on profit if 100% inventory is sold out of the group?

Parent to Subsidiary

A

No adjustment in profit, only receivable and payable is eliminated

because the intra-group inventory is completely out of the group

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13
Q

B/S: Intra-group sales/purchases and their impact on profit if 40% inventory is sold out of the group?

Parent to Subsidiary

A
  • Unrealised Profit = Gross Profit of Parent * % of unsold stock
  • Reduce Gross Profit of Group by the amount of Unrealised Profit.
  • For that, reduce inventory by URP (closing stock of subsidiary) to increase cost of sales.
  • Group Reserves dr, Inventory cr

If S>P, Net Assets dr, Inventory cr

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14
Q

In Balance sheet working, how to adjust for dividend declared by subsidiary for its shareholders? [4]

A
  1. Parent would have booked: Dividend Receivable (own share) dr, Dividend Income cr
  2. Subsidiary would have booked: Retained Earnings dr, Dividend Payable (100%) cr
  3. Adjusting entry for group would be: Dividend Payable (Parent share) dr, Dividend Receivable cr
  4. No adjustment of Dividend Income by Parent as it would be set off due to its deduction from RE of subsidiary. (Post acquisition would be decreased while Parent RE would be increased leading to NIL efect)
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15
Q

Disposal of PPE at Gain, by Parent to Subsidiary. What would be the adjusting entries?

A
  • Entry by Parent: Cash dr, PPE cr, Gain (P/L>RE) cr
  • Entry by Subsidiary: PPE dr, Cash cr (this ppe is overstated by the amount of gain)

Adjusting entry
- Group Reserves dr, PPE cr
(Gain on disposal * remaining life/total life at time of disposal)

Logic: Gain would overstate group profits, incremental depreciation would understate the profit and set off a proportion of such gain. The net amount would need to be reversed.

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16
Q

Disposal of PPE at Gain, by Subsidiary to Parent. What would be the adjusting entries?

A
  • Entry by Subsidiary: Cash dr, PPE cr, Gain (P/L>RE) cr
  • Entry by Parent: PPE dr, Cash cr (this ppe is overstated by the amount of gain)

Adjusting entry
- Net Asset of Subsidiary dr, PPE cr
(Gain on disposal * remaining life/total life at time of disposal)

The net asset includes Retained earning of subsidiary which includes this overstatement due to gain.

Logic: Gain would overstate group profits, incremental depreciation would understate the profit and set off a proportion of such gain. The net amount would need to be reversed.

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17
Q

Components of Consideration paid to acquire subsidiary [5]

A
  1. Cash
  2. Share capital (Rs 10 * no. of shares issued)
  3. Share premium (FV-10 * no. of shares issued)
  4. Deferred consideration (PV at incremental borrowing rate)
  5. Contingent consideration (at FV by actuary)
  6. PPE (FV of PPE amount = Investment)
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18
Q

How to account for deferred consideration for acquisition of a subsidiary? [3]

A
  1. At acq: Investment dr, Deferred consideration cr
  2. At reporting date: Interest Expense (Group reserve) dr, Deferred consideration cr
  3. At payment: Deferred consideration dr, Cash cr
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19
Q

How to account for PPE paid as consideration for investment in subsidiary?

A

Investment (at FV of PPE) dr, PPE (at CA) cr, Gain on disposal cr

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20
Q

Steps for preparing consolidated P&L. [5]

A
  1. Identify date of acquisition (to check post-acq months)
  2. Prepare unadjusted consolidated P&L (Parent PNL items + time proportion x Subsisdiary PNL items)
  3. Park Intragroup adjustments
  4. Prepare adjusted consolidated P&L
  5. Distribute profit among NCI and Parent (NCI share = Subsidiary Seperate books profit * time proportion * share of NCI)
20
Q

Adjustments for loan given by parent to subsidiary [3]

A

Entries
- Parent:
Loan receivable dr, Cash cr

Interest receivable dr, Interest Income cr

  • Subsidiary:
    Cash dr, Loan payable cr

Interest Expense dr, Interest Payable cr

  • Eliminate Loan receivable and payable, and Interest receivable and payable from Balance Sheet
  • No need to mess with interest expense and income as both will set off each other in Net Asset/GR working.
  • BUT IN CONSOLIDATED PNL, to resolve presentation issues, the interest expense and income will be adjusted by being eliminated completely.
20
Q

FV adjustment at acquisition of PPE/Intangibles. How to adjust for it in Consolidated PNL? [2]

A
  1. If FV of PPE>CA, the depreciation expense would be understated.
  2. Intragroup adjustment would be needed where Depreciation Expense would be increased by (Additional FV/Remaining useful life)
21
Q

How to deal with impairment of Goodwill B/S and Consolidated PNL? [3]

A
  1. Increase expense by the amount of impairment of goodwill in Consolidated PNL
  2. In B/S working, reduce Goodwill and Group Reserves
  3. Reduce NCI too by its % of impairment if its full goodwill
22
Q

How to deal with intra-group Dividends in Consolidated PNL?

A
  1. Dividend Income of parent would be showing in PNL only as Dividend Paid is appropriation of profit and comes in SOCIE.
  2. We would eliminate dividend income from PNL only.
23
Q

Consolidated PNL: Intragroup Sales from Parent to subsidiary, 100% sold at end. [2]

Subsidiary to Parent

A

Intragroup adjustment in CPNL:
1. Eliminate the sales Parent to Subsidiary (by amount of sales of parent)
2. Eliminate COGS of Subsidiary as it is not the original cost at which the group bought it for. (by amount of COGS of subsidiary or Sales of Parent)

(S>P): Eliminate sale of subsidiary and cogs of parent

24
Q

Consolidated PNL: Intragroup Sales from Parent to subsidiary, 40% sold at end. [2]

Subsidiary to Parent

A

Intragroup adjustments in CPNL:
1. Eliminate the sales Parent to Subsidiary (by amount of sales of parent)
2. Eliminate COGS of Subsidiary as it is not the original cost at which the group bought it for. (by amount of COGS of subsidiary x % sold) or (by COGS of subsidiary - URP on inventory)

(S>P): Eliminate sale of subsidiary and cogs of parent by proportion

25
Q

Associate

Equity Accounting: Initial Recognition

A
  1. Higher of Cost or FV (Share of Net Assets): Investment dr, Cash cr
  2. Goodwill is not booked separately, Investment dr, Cash cr, BPO/Gain (Group Reserve) cr
26
Q

Equity Accounting: How to deal with dividend from Associate?

A
  1. Profit in books of associate: Investment dr, Share of Profit cr
  2. Dividend payment from associate: Cash dr, Invetment cr
27
Q

Equity Accounting format for Associate [4]

A
  1. Higher of Cost or Share of net assets
  2. Add: Share of Profit
  3. Less: Dividends (receipt basis)
  4. Less: Other adjustments (N-1)
28
Q

How to account for inventory sold to associate by parent?

A
  1. Find unrealised profit: (Inventory sold $ * profit margin * share of holding)
  2. Group Reserve dr, Investment in associate (N-1) cr
29
Q

How to account for inventory sold to parent by associate?

A
  1. Find unrealised profit: (Inventory sold $ * profit margin * share of holding)
  2. Share of Profit dr, Inventory cr
30
Q

Consolidated PNL with Associate: Share of Profit from Associate working.

A
  1. Profit in books of associate x holding %
  2. Bargain Purchase Gain
  3. Less: Impairment of associate
  4. Less: URP - Unsold inventory (A > P)
  5. Less: Incremental depreciation by holding %
31
Q

Consolidated PNL with Associate: How to deal with dividend and profit from Associate

A
  1. Deduct Dividend income from associate in intra-group adjustments
  2. Include full share of profit in working of Profit from associate (without deduction of dividend)
32
Q

Consolidated PNL with Associate: How to deal with unsold inventory from Parent to associate?

A
  1. Eliminate (URG * % holding) by increasing Cost of Sales in intragroup adjustments.
33
Q

What to do when a normal investment or associate becomes subsidiary due to increased holding?

A
  1. Revalue the old holding to current market value and park gain in Group Reserves
  2. Consideration for Subsidiary will be equal to current market value of shares * no. of shares held
34
Q

How to deal with further acquisition of a subsidiary where holding is over 50% but more shares are acquired?

A
  1. Calculate Goodwill based on original consideration at the time of acquiring control
  2. Prepare net assets till the date of furhter acquisition
  3. Calculate CA of NCI at date of further acquisition
  4. Reduce NCI proportionately and compare with further investment amount
  5. Park gain or loss in ‘Other Component of Equity”
  6. Subsequent profits will be distributed as per new holding%
35
Q

How to recognize/account for disposal of a subsidiary in group accounting when the group has 2 subsidiaries: 100 Disposal. [5]

A
  1. Calculate Net Assets of subsidiary at the date of disposal.
  2. Calculate Goodwill at the date of disposal (original investment and impairments)
  3. Calculate NCI till the date of disposal
  4. Calculate gain/loss on disposal of subsidiary [Consideration - Net Assets - Goodwill + NCI]
  5. Derecognize separate books gain and recognize consolidated books gain
36
Q

How to recognize/account for disposal of a subsidiary in group accounting when the group has 2 subsidiaries: Disposal that makes the holding from subsidiary to Associate. [6]

A
  1. Calculate Net Assets of subsidiary at the date of disposal.
  2. Calculate Goodwill at the date of disposal (original investment and impairments)
  3. Calculate NCI till the date of disposal
  4. Calculate gain/loss on disposal of subsidiary [Consideration - (Net Assets+NCI-Goodwill)]
  5. Derecognize separate books gain and recognize consolidated books gain
  6. Recognize remaining investment in consolidated books at “Fair Value”
    * Investment in Associate dr, Group Reserve cr (FV Gain)
    * Investment in Associate dr, Group Reserve cr (Bargain Purchase gain)
    * Share of undistributed profit dr, Group Resrve cr
37
Q

How to recognize/account for disposal of a subsidiary in group accounting: Disposal results in less holding but it is still a subsidiary 80% > 60% holding. [Partial Goodwill] [6]

A
  1. Calculate Net Assets at acquisition
  2. Calculate Goodwill partial (at acq)
  3. Calculate Net Assets at disposal date
  4. Calculate Post-acquisition profit and transfer it to NCI and GR.
  5. Transfer share disposed to NCI by:
    * Net Assets at disposal date * % holding disposed (NCI increase)
    * Entry would be: Cash dr, NCI cr, Gain cr
  6. In group reserves, reverse gain recognied in separate books and recognize gain in consolidated books (found above).
38
Q

How to recognize/account for disposal of a subsidiary in group accounting: Disposal results in less holding but it is still a subsidiary 80% > 60% holding. [Full Goodwill] [6]

A
  1. Calculate Net Assets at acquisition
  2. Calculate Goodwill full (at acq)
  3. Calculate Net Assets at disposal date
  4. Calculate Post-acquisition profit and transfer it to NCI and GR.
  5. Transfer share disposed to NCI by:
    * (Net Assets at disposal date + Goodwill recognized) * % holding disposed (NCI increase)
    * Entry would be: Cash dr, NCI cr, Gain cr
  6. In group reserves, reverse gain recognied in separate books and recognize gain in consolidated books (found above).
39
Q

What to do when our subsidiary (1) has control i.e. over 50% holding in another company subsidiary (2)?

A
  1. Calculate effective holding in subsidiary 1 and 2. (Parent’s share in 2 would be = its % holding in 1 * control of subsidiary 1 in 2)
  2. Calculate net assets of each subsidiary normally (at acq and reporting date)
  3. In Goodwill calculation of subsidiary 2:
    * Consideration = Parent’s holding in subsidiary 1 * consideration paid by subsidiary 1
    * Less: FV of Net Assets = Net assets at acq of 2 * effective holding by parent in 2
  4. In NCI calculation of subsidiary 1, there is going to be an indirect holding adjustment of:
    * NCI’s holding in subsidiary 1 * Consideration paid by subsidiary 1 for 2.
40
Q

What to do when our subsidiary (1) has 20% shareholding in another company subsidiary (2) and the parent also buys 40% of share in subsidiary (2)?

A
  1. Find whether the group has control over subsidiary (2) = Holding by parent (40) + holding by subsidiary 1 (20) = 60 which is over 50, so yes there would be control.
  2. Calculate effective holding in subsidiary 1 and 2. (Parent’s share in 2 would be = (its % holding in 1 * control of subsidiary 1 in 2) + its own direct holding in subsidiary (2)
  3. In Goodwill calculation of subsidiary 2:
    * Consideration = (Parent’s holding in subsidiary 1 * consideration paid by subsidiary 1) + Consideration paid by parent for direct holding in subsidiary (2)
    * Less: FV of Net Assets = Net assets at acq of 2 * effective holding by parent in 2
  4. In NCI calculation of subsidiary 1, there is going to be an indirect holding adjustment of:
    * NCI’s holding in subsidiary 1 * Consideration paid by subsidiary 1 for 2.
41
Q

BASIC GUIDE FOR FOREIGN SUBSIDIARY BALANCE SHEET AND ITS WORKINGS [7]

A
  1. Calculate Net Assets workings in USD
  2. In Goodwill calculation, find goodwill in USD and multiply it with spot rate at acquisition to find Goodwill in PKR
  3. Find NCI’s Net Asset at acq share in USD and multiply it with spot rate to find it in PKR
  4. Find Post acquisition in USD (NA RD - NA ACQ) and multiply it with AVG RATE and transfer that PKR amount to GR and NCI.
  5. Goodwill will be revalued for fx gain/loss at each reporting dae as it’s fair value is in USD.
  6. Find exchange gains/losses in net assets by: * Opening NA in USD + Post Acq in USD = Closing NA in USD.
    * Now find the same in PKR i.e. Opening NA PKR (at spot) + Post Acq in PKR (at AVG) = Closing NA in PKR (1)
    * (Spot rate at RD x Closing NA in USD0 - Closing NA in PKR (1) = Exchange gain/(loss): bal fig
    * This exchange gain/loss will be shared amongst parent and NCI and will go their own OCIs.
  7. Exchange Reserves would need to be made for parent that would include:
    - Exchange gain (OCI) of parent on Net Assets
    - Exchange gain on Goodwill
42
Q

BASIC GUIDE FOR CONSOLIDATED PNL WITH FOREIGN SUBSIDIARY

A

to be written

43
Q

Steps with consolidated socie

A
  1. Find opening balances of equity:
    - Net Asset at acquisition, net asset at opening reporting date (find post acq till opening date)
    - Find NCI and GR by adding that opening post acq
    - If Goodwill was impaired before CY, put that in GR too
  2. Make consolidated PNL for the year (just as you do)
  3. Make SOCIE using the format
44
Q

Consolidated SOCIE format

A
  1. Columns: SC (parent), SP (parent), Group Reserves, NCI, Total
  2. Balance as at opening date
  3. Add: Acquisition of Subsidiary (to NCI column)
  4. Add: Consolidated Profit (respective shares from PNL to GR and NCI)
  5. Less: Dividend by subsidiary (only from NCI)
  6. Less: Dividend from Parent (only from GR)
  7. Less: Subsidiary Disposal (from NCI)
45
Q

Steps for Consolidated SOCIE if there is a disposal of subsidiary during the year. [3+3]

A
  1. Find opening balances of GR, NCI
  2. Consolidated PNL
    - Only consolidate those subsidiaries that are not disposed during the year
    - Add: Profit from discontinued operations
    - Profit from DC operatings: Gain on disposal of subsidiary + Profit % till disposal
  3. Eliminate NCI of disposed off subsidiary
46
Q

Consolidated Cashflows with acquisition of subsidiary [3]

A
  1. Calculate Goodwill of subsidiary
  2. Prepare the acquisition entry:
    Assets dr XX
    Goodwill dr XX
    Cash dr XX,
    Accounts payable XX
    NCI XX
    Cash (consideration paid) XX
  3. Put all these items above into relevant accounts
47
Q

Consolidated Cashflows with disposal of subsidiary [2]

A
  1. Prepare entry:
    NCI XX dr
    Creditor XX dr
    Cash XX dr (consideration received),
    Assets XX cr
    Receivables cr
    Stock cr
    Cash cr
    Gain: bal fig cr (non-cash adjustment)
  2. Put all these in relevant accounts

AAFR (6 decks)

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