Lecture 9 - Consolidation

Question 1

what is classed as a controlling interest in a company?

Answer 1

over 50% equity

Question 2

how many times does business combination occur?

Answer 2

once

any additional subsidiary stock is ‘additional investment’

Question 3

what is a subsidiary?

Answer 3

when another corporation acquires controlling interest in its stock

Question 4

does an entity continue as a separate legal entity when 100% acquired?

Answer 4

yes

subsidiaries / affiliates continue as separate legal entities and prepare their own financial reports

Question 5

when may an entity be excluded from consolidation?

Answer 5

• 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

Question 6

how does a joint venture differ from a merger?

Answer 6

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

Question 7

who prepares consolidated FS?

Answer 7

the parent company

Question 8

when cost > book value…

Answer 8

excess is goodwill

Question 9

when cost < book value…

Answer 9

excess is a gain on the bargain purchase

Question 10

non-controlling interest represents..

Answer 10

represents the minority shareholders

Question 11

parent pays 40,000 for 85% interest…

Answer 11

implies full value = 40,000/85% = 47,059

minority share = 15% = 47,059*0.15 = 7,059

Question 12

steps after acquisition for the balance sheet?

Answer 12

• 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

Question 13

excess assigned to assets and liabilities after acquisitions are…

Answer 13

amortised according to the account

Question 14

amortisation of inventory / other current assets?

Answer 14

• amortises in first year
• amortised to cost of sales

Question 15

amortisation of buildings / equipment?

Answer 15

• amortises across the remaining useful life at combination date
• charged as a depreciation / amortisation exepense

Question 16

amortisation of land / copyright?

Answer 16

not amortised

Question 17

amortisation of long term debt?

Answer 17

• from time to maturity
• charged as an interest expense

Question 18

goodwill arises from…

Answer 18

factors such as good reputation and strong customer relationships

Question 19

can internally generated goodwill be recognised as an IA?

Answer 19

no

IAS38 forbids internally generated goodwill to be recognised as an asset

Question 20

goodwill purchased in a business combination is dealt with by…

Answer 20

IFRS3 business combinations

Question 21

what does IFRS3 business combinations say?

Answer 21

• 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

Question 22

negative goodwill?

Answer 22

if the cost of a business combination is less than the net fair value of the identifiable liabilities and assets

Question 23

when would negative goodwill arise?

Answer 23

• errors in determining the cost of the business combo / FV of assets & liabilities
• a ‘bargain purchase’ has occurred

Question 24

negative goodwill remaining after reassessment of fair values is recognised as…

Answer 24

income in the acquirer’s P&L

Question 25

subsequent measurement of goodwill?

Answer 25

• 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

Question 26

disclosure requirements for IFRS3 (business combos)?

Answer 26

• 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

Question 27

group = ?

Answer 27

parent + all its subsidiaries

Question 28

associate?

Answer 28

when a parent has significant influence, but not control over an entity

20-50% ownership

Question 29

joint arrangement?

Answer 29

when two or more parties have joint control

Question 30

criteria for subsidiary, associate and joint arrangement?

Answer 30

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

Question 31

objective of IFRS3?

Answer 31

improve relevance, reliability and comparability of information about business combination

Question 32

3 elements that make up a business?

Answer 32

inputs (e.g., PPE, inventories)

processes (e.g., production, workforce)

outputs (e.g., dividends, cost savings)

Question 33

acquisition method?

Answer 33

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

Question 34

how are assets and liabilities recognised upon business combo?

Answer 34

fair value at acquisition date

Question 35

non controlling interest?

Answer 35

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

Question 36

goodwill = ?

Answer 36

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

Question 37

goodwill / negative goodwill calculation?

Answer 37

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