Introduction to Consolidated financial stmts Flashcards
What two ways could companies grow?
expand organically- building up business for own trading
acquisitive growth- acquiring shares in other entities
Parent Company
aka Holding Company
entity that controls one or more entities
What 3 things must an investor have to be said to control an investee?
- power to direct relevant activities
- exposure or rights to variable returns from involvement
- ability to use power to affect amount of investors return (only ability needed, doesn’t have to be actively using)
Subsidiary
entity controlled by another entity
- often more than 50% ownership
- accounting treatment- consolidate
What are examples of how a company can have power to direct relevant activities in another?
- voting rights
- right to appoint/remove key management or another entity that directs
- management contract
- acquiring/ disposal of assets
What are examples of how a company can have exposure or rights to variable returns?
- dividends
- interest from debt
- investment value changes
- exposure to loss from providing credit
- residual interest on liquidation
- tax benefits
Associate
An entity over which investor has significant influence
- often between 20%- 50% ownership
- accounting treatment- equity account
What is significant influence defined as?
- power to participate in financial/operating policy decisions
- not control or joint control over policies
How could significant influence be shown?
- represented on board of directors
- participate in policy making process
- material transactions between entity and investee
- interchange of management
- share of essential technical info
Trade Investment
- often less than 20% ownership
- simple investment in shares of another entity that is not associate or subsidiary
How are trade investments shown in stmts?
- investments under NCA IN SFP
- Dividends received are investment income in SPLOCI
How are shares in subsidiary, associate or trade investments shown in parent company’s stmts?
- when acquired investment recorded at cost within NCA
- dividends received are investment income
Why is there a need for group financial smts?
Parent company shareholders only have access to their stmts showing investment at cost and dividends received
- can’t see impact of parents control
over net assets/profit of subsidiary
- group accounts bridge information gap
- aim to record substance of relationship as single economic unit rather than legal form (separate entities)
How are Assets and Liabilities dealt with when consolidating?
Add parent and subsidiary’s assets and liabilities line by line in FP
- shows control
- not including investment in sub
- no matter ownership %, 100% of subs assets/liabilities added on as have control over
How is investment in subsidiary dealt with when consolidating?
- cancelled out with share capital and pre-acquisition of subsidiary
- as the shares are held internally within group need to be eliminated
- pre-acq reserves not generated under control of parent so eliminated
What happens to share capital and share premium when consolidating?
only parents shown
- show ownership
- group accounts prepared for parents shareholders and subs SC eliminated against investment
What happens to reserves when consolidating?
Show parents reserves
Plus group share (ownership % of) of post-acquisition reserves of subs
- to only include reserves generated under parents control
What are the steps to consolidating to make group accounts for FP?
- draw group structure (ownership % and date acquired)
- note pre- acquisition reserves
- add assets and liabilities lines together
- share capital of Parent only
- cancel investment with sub Share Cap and Retained Earnings
What is the format for cancelling the investment of a parent company in a subsidiary?
Consideration/Investment
(Subs Share Capital)
(Subs Pre Acq Retained Earnings)
What is the format to work out group retained earnings?
Retained earnings of subsidiary
(Pre-Acq RE)
———————-
Post Acq RE
Parents RE
+ ownership share % of post Acq RE
—————————
Consolidated RE
How are associates shown as NCA in consolidated financial position stmt?
With Equity Method
Cost of Associate
+ Share of post- acquisition RE
(Parents Impairment losses on associate)
———————————
Investment in Associates (NCA)
- assets all about control
How are associates shown in Retained Earnings in consolidated financial position stmt?
- RE all about ownership
Associates RE
(Pre-acq RE)
———————-
Post acq RE
Parents RE
+ ownership share % of post acq RE
(impairment losses on associate)
Group RE
How is an associate shown in consolidated SPLOCI?
Two separate lines
Before group profit before tax
- associates profit for year x group ownership %
(impairment losses)
Associates other comp income for yr x group ownership %
