F2C - Chapter 11: Group accounts - Subsidiaries (CSOFP)

Question 1

What are the motives of acquiring another company?

Answer 1

Reduce competition in the market place
Diversify into new markets, such as entering new industries or sectors or new geographical markets
Bring expertise in-house
Benefit from synergies arising from the acquisition

Question 2

When does a group exist?

Answer 2

Where one company controls another company

Question 3

According to IFRS 10 when does an investor control an investee?

Answer 3

If, and only if, the investor has all of the following elements:
Power over the investee
Exposure, or rights, to variable returns from its involvement with the investee
The ability to use its power over the investee to affect the amount of the investor’s returns

Question 4

What is power defined as?

Answer 4

Existing rights that give the current ability to direct the relevant activities

Question 5

Acquisition Accounting:
In accordance with IFRS 10 consolidated financial statements what rules are applied.

Answer 5

Parent and subsidiary’s assets, liabilties, income and expenses are combined in full
Share capital is the share capital of the parent only
Intra-group balances and transactions are eliminated
Uniform accounting policies must be used
Non-controlling interests are presented with equity, separately from the equity of the owners of the parent.
Profit and total comprehensive income are attributed to the owners of the parent and to the non-controlling interests

Question 6

What is a subsidiary?

Answer 6

Entity that is controlled by another entity - the parent.

Question 7

When is control normally achieved by the parent?

Answer 7

When they own a majority of the company i.e. more than 50% of the equity shares of the subsidiary

Question 8

What does NCI shareholders own?

Answer 8

The shares in the subsidiary that are not owned by the parent entity

Question 9

When calculating goodwill at acquisition the value of the NCI is added to what?

Answer 9

Value of the parent’s investment in the subsidiary

Question 10

What are the two methods to value the NCI at the date of acquisition according to IFRS 3 Business Combinations?

Answer 10

Fair value
Proportionate share of net assets method

Question 11

How do we record the impairment loss of goodwill?

Answer 11

Reduce goodwill by the full amount of the impairment loss
Reduce NCI balance held in equity by the NCI% of the impairment loss
Reduce consolidated retained earnings by the P% of the impairment loss

Question 12

A residual amount may exist as a result of the subsidiary’s what?

Answer 12

Positive reputation
Loyal customer base
Staff expertise

Question 13

What is goodwill capitalised as?

Answer 13

An intangible asset on the consolidated SFP

Question 14

What is fair value?

Answer 14

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 15

What are the types of consideration that may be included in the SFP?

Answer 15

Cash (FV = amount paid)
Shares issued by the parent - immediately or deferred (FV = market price of the shares as at the acquisition date)
Deferred cash consideration (FV = Present value of amounts paid)
Contingent consideration (FV = probability weighted present value)

Question 16

What should be excluded as part of consideration paid?

Answer 16

Directly attributable costs of acquisition
Provisions for future losses relating to the acquired subsidiary

Question 17

What are directly attributable costs of acquisition expensed to?

Answer 17

Parent’s SPL

Question 18

What is contingent consideration?

Answer 18

Consideration that may be paid in the future if certain future events occur or conditions are met

Question 19

How do we record FV adjustments in the CSFP?

Answer 19

Adjust the net assets working at acquisition and the reporting date as appropriate based on the details below.
Reflect the reporting date adjustment on the face of the CSFP.

Question 20

How do we record depreciation arising from a fair value adjustment in the CSFP?

Answer 20

Adjust the net assets working in the reporting date column to reflect the cumulative impact upon depreciation caused by the FV adjustment.
Reflect the adjustment on the face of CSFP by reducing the carrying amount of the fair valued asset
Extra depreciation will reduce the post-acquisition profits of the subsidiary included in consolidated reserves and NCI calculations