Lecture 17 - Accouniting For Groups Of Companies (1)

Question 1

What are ‘consolidated financial statements’?

Answer 1

Consolidated financial statements are ‘the financial statements of a group of companies in which the assets, liabilities, equity and cash flows of the parent and its subsidiaries are presented as those of a single economic entity’

Question 2

What is meant by the terms ‘a group’, ‘a parent’ and ‘a subsidiary’?

Answer 2

Group = a parent and its subsidiaries
Parent = an entity that controls one or more entities
Subsidiary = an entity that is controlled by another entity

Question 3

Under which set of circumstances are firms exempt from producing consolidated accounts?

Answer 3

1. A wholly owned subsidiary or
2. A partially owned subsidiary of another company and all of its owners do not object to it presenting consolidated accounts
3. The parents shares or securities aren’t publicly traded
4. The subsidiaries parent company presents consolidated financial statements that are available for public use and comply with IFRS

Question 4

What must not be done when consolidating balance sheets for a group of companies? What should be done instead?

Answer 4

Simply add up the totals without making adjustments.

Instead, crossovers should be cancelled out so they don’t appear on both sets of financial statements.

Question 5

What 2 main things should be cancelled out when consolidating group accounts?

Answer 5

1. If the company owns 100% of the share capital of a subsidiary, the investment (by the parent) should be cancelled against the share capital (of the subsidiary).
2. If one of the group companies owes money to another within the group, the liability in the books of one should be cancelled against the recoverable of the other.

Question 6

When cancelations take place, these should be done in the…

Answer 6

The consolidated workings, not in the individual company accounts

Question 7

If a company purchases shares in a subsidiary for more than the book value of the equity, why would this be done?

Answer 7

1. The fair value of the net assets of the subsidiary may be higher than their book value.
2. The company may be also purchasing the goodwill of the subsidiary.

Question 8

If goodwill is involved in the sale from one company to a subsidiary, the excess is to be shown as what in the consolidated balance sheet?

Answer 8

An asset