Consolidation: other adjustments/complications

Question 1

consideration-share exchange

Answer 1

e.g. aquiring 80% of the 210,000 issued shares. in an exchange where they issued 2 new shares for every 3 aquired
fair value = £4.10
consideration= 210,000 x 80% x 2/3 x£4.10

Question 2

Deffered Consideration

Answer 2

future payments must be recorded at the present value of the future amount payable
Example: Pierce acquired 60% of the 300,000 issued shares of Strange on 1 August 2018 paying£400,000 in cash. In addition, Pierce will pay the shareholders of Strange £2.86 per share on 31 July 2019. Pierce’s cost of capital was 10%.
Consideration = £400,000 + (300,000 x 60% x£2.86 /1.10 = 468,000)= £868,000. Finance cost to 31. 7.19 = 468,000 x 10% = £46,800

Question 3

Contingent Consideration

Answer 3

• usually payable to former owners and is dependent on some future event
• if the estimate is later revised, the movement should be put through profit or loss as parent company adjustment
• the figure for contingent constideration will be given in questions.

Question 4

additional depreciation arising from fair value adjustment

Answer 4

• depriciation on non current assests should be based on the revalued figure
• there will be an adjustment for higher/lower depriciation charge if it is a depriciating asset
  it is charged against the post aquisition profit of the subsidary (step 3)

Question 5

Provision for Unrealised Profit

Answer 5

• if inventory transferred at a profit from one company to another remains unsold, then the unrealised profit in that inventory should be emilinated on consolidation
  (step 7) if the parent company is the seller
  (step 3) if the subsidary company is the seller

Question 6

Calculating Unrealised Profit (compare selling price with the given cost)

Answer 6

Provision of Unrealised Profit= selling Price - cost x unsold %

Question 7

Calculating Unrealised Profit (Profit Margin Calculation)

Answer 7

PUP= Selling Price x Profit x Unsold %

Question 8

Calculate Unrealised Profit (Mark Up Cost Calculation)

Answer 8

PUP= Selling Price x Mark Up %/100 + Mark Up % x Unsold %

Question 9

Fair Value - Assets and Contingent Liabilities

Answer 9

Certain assets and liabilities are not included in the subsidaries own individual financial statements e.e intangible assets and contingent liabilities

Question 10

Gain on Bargain Purchase

Answer 10

sometimes it is possible on aquisition of the subsidary to pay less for the company than the net assets are worth.

Question 11

Preference Shares

Answer 11

The holding of preference shares do not have any impact on the control scenario.
If they are aquired by a parent as part of a consideration, they will need to be included as a part of a goodwill calculation