FR - Investment in Subsidiaries (Business Combination) Flashcards
What is a business combination defined as
Under IFRS 3
- Refers to any event where one entity obtain control over another entity. “controls”
What are two types of how a business can acquire another
- Purchase of shares of another company
- Purchase of net asset of another entity
- Arises from contractual arrangement, one entity signs an agreement with another
IFRS 3 - Business as: “an integrated set of activities and asset capable of being conducted and managed for the purpose of providing goods or services to customer, generating investment income”
How does a company asses control
- IFRS 10 - Consolidated F/S - investors ability of investee through the power to govern policies of the investee
-Establish hold or right to hold greater than 50% voting shares
IFRS 3 - additional factor to consider
- Relative voting rights of combined entity control more than 50%
- Composition of the governing body
-composition of senior management
- Entity is larger, acquirer usually relative larger entity of asset, revenue, and profit
What is the acquirer, parent, acquiree, and subsidiary of the business combination
Acquirer - Entity that obtains control over the other entity (acquire)
Parent - Entity that controls the net asset of another entity through voting control of its shares
Acquiree - Entity that has been purchased/ controlled
Subsidiary - A separate legal entity controlled by another entity
Explain how the purchase of net assets is made
- The company determines the identifiable net assets (asset & liabilities) are recorded at FV on the books of the parent
- Form of consideration, including other asset such as property and option to purchase common shares in the parent
Acquisition date - date parent company obtain control
Acquisition-related costs - legal, advertising, and accounting fees, are expenses for cost incurred
Explain how the purchase of shares is made
- Obtain control through the purchase of majority shares of the company
Parent: Entity that controls one or more entities
Subsidiary: An entity that is controlled by another entity
Consolidated F/S - not carried forward from one period to the next of working paper
Have parent stand-alone F/S and subsidiary stand-alone F/S and recorded
What method is used for the recording of the investment
Investment is made using the cost method - recording the investment at cost
- Parent may use either the cost or the equity method, record its investment in the subsidiary in stand-alone F/S
Dr. Investment in subsidiary xx
Cr. Consideration given up (Cash, common share, debt) xx
Dr. Acquisition cost xx
Cr. Cash xx
Dr. Shares capital or related liability xx
Cr. Cash xx
What method is used for the consolidated statement on the date of acquisition
Acquisition method is used - FMV of the acquired company is allocated between net tangible and intangible asset portion of the SFP of the buyer. Difference is regarded as goodwill
What are the first steps to prepare the consolidated statement on date of acquisition
Step 1. Set up the investment in the parent SFP, if not already done so
- Consolidation problem - case facts will indicate whether the SFP information provided is prior to acquisition or after acquisition
What are the second steps to prepare the consolidated statement on date of acquisition
Step 2: Prepare the acquisition differential schedule
- Parent will have paid an amount higher than the proportionate of BV of subsidiary net asset
Two reason: FV differential - FV of assets and liabilities of the subsidiary at the time of acquisition may be different from the BV of those assets and liabilities
Goodwill - Represent the expected value for future financial performance.
Calculation:
Purchase price
+ Non Controlling interest
= BV of subsidiary net asset
= Acquisition differential (or purchase premium/ discount)
+/- FV differential
= Goodwill
What are the two methods to measure the non-controlling interest (NCI) for IFRS 3
- Identifiable new asset approach (INA) - Measures as NCI shareholder ownership % of the FV of the INA of the subsidiary (FV of subsidiary IA - FV subsidiary identifiable liabilities) * NCI percentage ownership
- Fair value enterprise method (FVE) - Measured as FV of NCI shareholder ownership interest
FVE method
1, Value the NCI using the trading price of the subsidiary share after the acquisition
NCI = (# of common shares of subsidiary owned by NCI) * Market price per share
2. If subsidiary shares do not trade in an active market, shares may be used other valuation techniques
Explain what fair value differential is and negative goodwill
Fair value differential - If the FV of an asset is greater than the BV of the asset, it makes sense that the parent would be willing to pay more for the shares of the subsidiary
FV differential is: BV (or carrying value) - FV
- Goodwill the subsidiary has on SFP at the acquisition date is not carried forward to the consolidated SFP.
Deferred income taxes - on FV differential will also arise. Temporary difference in how entry is recorded
Negative goodwill (bargain purchase)
- Parent pays less for subsidiary than FV of net asset at date of acquisition and negative goodwill
- No goodwill is recorded, any difference between the purchase price and FV of net asset acquired is recognized as a gain in F/S
Explain how Step 3 of the consolidated method is used for the date of acquisition
- Are like journal entries in that the debit must equal the credit. Differential in that they are only used to prepare the consolidation, never posted to GL
Elimination entry
1. Record a debit to goodwill to set up the goodwill calculated in the acquisition differential schedule
2. Set up, NCI if any,
Record a credit in equity for any value of the consolidated entity attributed to the minority shareholder
3. Record FV differential
- Parent based its purchases price on the FV of the asset/ liabilities, the parent wants the consolidated SFP to reflect the FV
4. Elimination the subsidiary common shares
- Since the parent is already recording all subsidiary net asset, it would be double counting to also record
5. Eliminate the subsidiary R/E
- Subsidiary R/E are really earning of previous owner. Parent cannot record these accumulated earning in its own consolidated F/S
6. Eliminate parent investment
- Parent would have recorded an investment in its SFP for the subsidiary
Intercompany balance
- Parent may also own portion of subsidiary preferred share
- Ownership in preferred shares should be eliminated upon consolidation
- Any dividend payable/ receivable should be eliminated upon consolidation
What is the last step of the consolidated method
- It is to prepare the consolidated SFP
- Consolidated statement of change in equity, or consolidated statement of cash flow at the acquisition date does not provide useful information
What is the difference between IFRS and ASPE
ASPE 1591 - subsidiaries, parent has a choice of method to use for reporting its subsidiary
1. Acquisition method (consolidation)
2. Equity method
3. Cost method - If quoted in an active market, FV through profit or loss (FVPL)
