KCB WEEK 5 (SUN) - GROUP ACCOUNTS

Question 1

When will a company be considered a parent? (4 conditions)

Answer 1

• Controls majority of voting
• Through power to appoint board through control contract
• By a power in the subsidiary’s governing document
• Other mechanism as specified in the Act or accounting standards

Question 2

Requirement for group / consolidated accounts re IFRS 10 and CA2006

Answer 2

IFRS 10 – if one controls another, single set of consolidated financial statements prepped to reflect financial position and performance of the group as one combined entity

CA2006 – if business operates through >1 company, group accounts have to be prepared that give a clear picture of the total activities that the company controls

Question 3

What are the 3 main elements defining ‘control’ (re parent/subsidiary)

Answer 3

• Typical rights- ex. exercise voting rights (>50% equity shares)
• Exposure/rights to variable returns (dividends) from investor involvement with investee
• Crucial determinate of control is ability to use power over investee to affect amount of investor returns (ex. parent could tell sub not to declare a dividend if parent already holds plenty of cash)

Question 4

What is goodwill?

Answer 4

• Price paid for company at acquisition (to gain control) will normally exceed market value of its net assets/equity. The difference = purchased goodwill.
• Represents additional amount paid for factors such as rep/experience of employees/customer base and brand of business
• It is the difference between value of an acquired entity (any non-controlling interest included) and the net assets of that entity’s identifiable assets and liabilities.
• Only shown in the consolidated statement of financial position as goodwill value
  o Will not be shown if parent on own- would be shown in assets as ‘investment in XYZ Limited’ at cost – total (goodwill total NOT fair value of the subsidiary)

Question 5

What is an NCI

Answer 5

• Where parent owns less than 100% of ordinary share capital, interest that is not controlled by the parent is called the NCI

Question 6

Parent companies reporting of pre and post acquisition profits

Answer 6

Pre-acquisition profit: profit there at the date of acquisition
Share of parent co of pre-acq profit is taken into the calculation of good will
If parent company looks at investment it has already paid higher due to pre-acquisition profit of RE for the subsidiary (already in the goodwill calculation and away from parents shareholders)
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Post-acquisition profit: profit earned by subsidiary after its acquisition
Investment income earned by parent company
Share of parent co of post-acq profit is include in consolidated retained earnings

Shareholders of parent will profit / gain returns from the post-acquisition profits (in % proportion owned) of the subsidiary – to be included in consolidated RE

Question 7

PREPARATION OF CONSOLIDATED SOFP

Answer 7

Parent SOFP / Consolidated SOFP
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ASSETS & LIABILITIES
* Combine line by line (ex. property)
* Eliminate investment in subsidiaries (goodwill figure replaces investment in figure)
* Eliminate intra-group items (ex. unrealised profits and balances)

EQUITY
* Eliminate share capital and share premium balances of subsidiaries
Sub share = already part of goodwill value / pre-acquisition profit
So only parent company share capital is included
* Eliminate pre-acq profit of sub
Group RE = parent’s RE (100%) + Parent’s % share of sub’s post-acq earnings/reserves
* Disclose NCI at the foot of the SOFP
NCI = FV of NCI at acquisition + NCI share of post-acq earnings/reserves
 

Question 8

UNREALISED PROFITS

Answer 8

ex. sold goods to parent at sales value of £100m – cost sub £80m then parent sells at £100m value to its own customer- £50m sold with £50m value kept as closing inventory. Cost value is 80% - true cost to subsidiary is £40m (1/2). Difference = £10m, UNREALISED PROFITS, not sold to anyone else – reduce sub profit & inventory by £10m)
- Balances:

Question 9

PREPARATION OF CONSOLIDATED SPLOCI

Answer 9

• Eliminate intra-group sales / purchases
  (figures should represent sales to and purchases from those outside of the group)
• Exclude any unrealised profits on intra-group trading (any inventory kept by parent/subsidiary from intra-group purchase, any profit in closing inventory – at reporting date)

Unrealised profit is calculated to reduce consolidated gross profit

Unrealised prof from intra-group sales will be eliminated against inventory figure in consolidated SOPLOCI

• NCIs
  Calculated and split between amounts attributable to equity holders in group and the NCIs
  NCI % x subsidiary profit for period = £XX
  Less
  NCI % share x PURP (prov for unreal profit) when sub is seller (£XX)
  (no need to do this if parent is the seller)

Profit attributable to NCI £XX

Similar split where there is OCI (if any OCI for the subsidiary)