Lecture 9 - Consolidation Flashcards
what is classed as a controlling interest in a company?
over 50% equity
how many times does business combination occur?
once
any additional subsidiary stock is ‘additional investment’
what is a subsidiary?
when another corporation acquires controlling interest in its stock
does an entity continue as a separate legal entity when 100% acquired?
yes
subsidiaries / affiliates continue as separate legal entities and prepare their own financial reports
when may an entity be excluded from consolidation?
- control doesn’t rest with majority owner
- joint ventures
- acquisitions of groups of asses that don’t constitute a business
- combination between entities under common control
how does a joint venture differ from a merger?
joint venture = strategic alliance where two or more parties for a partnership to share assets, knowledge etc
there’s no transfer of ownership in the deal
in a merger, there’s transfer of ownership
who prepares consolidated FS?
the parent company
when cost > book value…
excess is goodwill
when cost < book value…
excess is a gain on the bargain purchase
non-controlling interest represents..
represents the minority shareholders
parent pays 40,000 for 85% interest…
implies full value = 40,000/85% = 47,059
minority share = 15% = 47,059*0.15 = 7,059
steps after acquisition for the balance sheet?
- eliminate the parent’s investment in subsidiary
- eliminate the subsidiary’s equity accounts (stock, retained earnings etc)
- adjust asset & liability accounts for unamortised excess balance
- record goodwill, if any
- record non-controlling interest
excess assigned to assets and liabilities after acquisitions are…
amortised according to the account
amortisation of inventory / other current assets?
- amortises in first year
- amortised to cost of sales
amortisation of buildings / equipment?
- amortises across the remaining useful life at combination date
- charged as a depreciation / amortisation exepense
amortisation of land / copyright?
not amortised
amortisation of long term debt?
- from time to maturity
- charged as an interest expense
goodwill arises from…
factors such as good reputation and strong customer relationships
can internally generated goodwill be recognised as an IA?
no
IAS38 forbids internally generated goodwill to be recognised as an asset
goodwill purchased in a business combination is dealt with by…
IFRS3 business combinations
what does IFRS3 business combinations say?
- goodwill is defined as ‘an asset representing the future benefits arising from assets acquired in business combination that aren’t individually identified/recognised’
- business combination occurs when an entity acquires control of a business
- goodwill acquired in business combination is recognised as an asset initially at cost
- cost of goodwill = cost of business combination - net fair value of identifiable assets & liabilities
negative goodwill?
if the cost of a business combination is less than the net fair value of the identifiable liabilities and assets
when would negative goodwill arise?
- errors in determining the cost of the business combo / FV of assets & liabilities
- a ‘bargain purchase’ has occurred
negative goodwill remaining after reassessment of fair values is recognised as…
income in the acquirer’s P&L
subsequent measurement of goodwill?
- goodwill in a business combo is NOT amortised
- instead, goodwill is measured at cost - impairment losses
- impairment losses occur when an asset’s value falls below its carrying amount
- goodwill is tested for impairment annually
disclosure requirements for IFRS3 (business combos)?
- reconciliation of CA of goodwill at the beginning & end of the period (showing disposals, additions, impairment losses etc)
- the amount of negative goodwill which has been included in the P&L
group = ?
parent + all its subsidiaries
associate?
when a parent has significant influence, but not control over an entity
20-50% ownership
joint arrangement?
when two or more parties have joint control
criteria for subsidiary, associate and joint arrangement?
subsidiary = parent has control, share is >50%, acquisition method
associate = significant influence, share is 20-50%, equity method
joint arrangement = joint control, ownership shared equally
objective of IFRS3?
improve relevance, reliability and comparability of information about business combination
3 elements that make up a business?
inputs (e.g., PPE, inventories)
processes (e.g., production, workforce)
outputs (e.g., dividends, cost savings)
acquisition method?
1 - identify the acquirer
2- determine the acquisition date
3 - recognise assets, liabilities and non-controlling assets
4 - recognise goodwill or gain from bargain purchase
how are assets and liabilities recognised upon business combo?
fair value at acquisition date
non controlling interest?
equity in subsidiary not attributable to a parent
if parent owns less than 100% of the entity, the non-controlling interest is the residual amount that they don’t own
goodwill = ?
asset representing future economic benefits arising from other assets acquired in a business combo
these assets aren’t individually identified/recognised
cost less net assets
goodwill / negative goodwill calculation?
FV of consideration + non controlling interest + FV of previous equity interests - FV of net assets
if >0, goodwill
if <0, gain on a bargain purchase
