F2 - 1. Introduction to Group Accounts

Question 1

What is a group?

Answer 1

Where one company parent buys shares in a subsidiary such that the parent controls the subsidiary (>50%)

Question 2

What are the 2 reasons for creating group accounts?

Answer 2

1. Parent’s shareholders cannot see performance of sub if investment held at cost
2. Operate as single economic entity, so reflects the economic substance of the relationship

Question 3

What is the basic principle of consolidation of the group statement of financial position?

Answer 3

Add together the individual SoFPs

Question 4

How is the investment in the sub shown in the consolidated statement of financial position?

Answer 4

IT IS NOT (replaced by net assets and goodwill)

Question 5

What share capital is shown in the consolidated statement of financial position?

Answer 5

Only that of the parent

Question 6

Why do we add together the assets and liabilities of the parent and sub to form the consolidated statement of financial position?

Answer 6

To reflect that the parent controls all assets and liabilities

Question 7

What 2 additional categories are added to the the consolidated statement of financial position?

Answer 7

1. Goodwill (intangible asset)

2. Non Controlling Interest (under equity)

Question 8

What is included in the retained earnings of the consolidated statement of financial position?

Answer 8

The entire parent retained earnings, and the share of the subsidiaries retained earnings since purchase

Question 9

What is goodwill?

Answer 9

The difference between the price paid to acquire a business and the fair value of its net assets - representing the future economic benefit arising from other assets acquired in the business combination

Question 10

Under what category of the consolidated statement of financial position is goodwill recorded?

Answer 10

Intangible non current assets

Question 11

Is goodwill amortised?

Answer 11

No - it is reviewed annually for impairments

Question 12

What is Non Controlling Interest?

Answer 12

The shareholding that is not owned by the controlling party, with the figure recorded being what the NCI is owed at the year end date

Question 13

What is the calculation for NCI?

Answer 13

% of Net Assets/Fair Value @ Aqn
+ % of post acqn retained earnings
- % of goodwill impairment (IF USING FULL/FAIR VALUE METHOD)

Question 14

What is the proportionate method of goodwill calculation?

Answer 14

Cost of Combination
+ NCI% of Net Assets
- Net Assets
= Goodwill

Question 15

What is the full/fair method of goodwill calculation?

Answer 15

Cost of Combination
+ Fair value of NCI
- Net Assets
= Goodwill

Question 16

What is different about how goodwill impairment is treated between the proportionate/fair value methods?

Answer 16

100% impairment goes to the parent / impairment split between parent and NCI

Question 17

What are the 3 IF AND ONLY IF conditions for an investor to control another entity?

Answer 17

1. Power to direct normal operating activities
2. Exposure to variable returns
3. Ability to use power to affect returns

Question 18

What are the 4 main sources of power over another entity?

Answer 18

1. Owning >50% of shares
2. <50%, but other shares are held by lots of minor NCIs
3. Contractual arrangement
4. Potential voting rights (e.g. holds convertible bonds)

Question 19

What are the 3 main reasons that a parent might be exempt from preparing group accounts?

Answer 19

1. It is in itself a wholly owned sub
2. Debt and equity instruments are not publicly traded
3. The ultimate or intermediate parent produces group accounts that comply with IFRS

Question 20

What are the 3 methods that can be used by a parent to record investment in a subsidiary in their own individual accounts? (And which is most common)

Answer 20

1. At cost
2. At cost, then revalued
3. Using the equity method
   » COST

Question 21

What is a gain on bargain purchase?

Answer 21

The gain when an organisation pays less for a company than the net assets value (i.e. negative goodwill)

Question 22

What are the 2 checks you must make before recording a gain on bargain purchase?

Answer 22

1. Have all the subs assets and liabilities been recognised?

2. Are all the elements of the calculation correct?

Question 23

How is a gain on bargain purchase recorded?

Answer 23

Immediately credit statement of profit or loss with income