Part D: Financial Statements Of Groups Of Entities Flashcards
3 Elements of a business
1 Inputs - an economic resource that creates outputs when one or more processes are applied to it
2 Process - a system when applied to inputs, creates outputs
3 Output - the result of inputs and processes
There must be a genuine acquisition of a business for a business combination to have occurred
Business combinations- Acquisition method steps
1 - identify the acquirer
2 - determining the acquisition date
3 - recognising and measuring the identifiable assets acquired, the liabilities assumed and any NCI
4 - recognising goodwill
Identifying an acquirer
Usually transfers cash or shares
Must consider also:
- Relative voting rights in the combined entity
- Large minority interest when no other owner has a significant voting interest
- composition of the board and senior management of the combined entity
- terms on which the entity interests are exchanged
Acquirer usually has the largest relative size
For combinations involving multiple entities, look for who initiated the combination and the relative sizes
How may control be evidenced by power if less than 50%
Getting the 50%+ by an arrangement with other investors
Governing the financial and operating policies
Appointing the majority of the board of directors
Casting the majority of votes
On acquisition, how are contingent liabilities measured?
Until settled, at the higher of:
1) the amount that would be recognised under IAS 37 Provisions
2) the amount less accumulated amortisation under IFRS 15 Revenue
Where in the SFP does NCI go?
As a separate line in equity
2 ways NCI can be calculated
1: proportion of FV of S’s Net assets
2: FV of NCI itself
What makes up an equity table? And for what periods/dates?
- Share capital
- Share premium
- Retained earnings
- Revaluation reserve
- Any other reserve
For SFP date, at acquisition, and post acquisition
Group income statement - 6 rules
- Add across 100% from revenue to PAT (excluding dividends from subs and associates)
- NCI line added at the end of the statement as NCI’s% x S’s PAT
- Associate shown as one line called “Share in associates profit after tax”
- Depreciation from equity table working put to admin expenses or where told (only current year charge)
- Time apportion (although not for adjustments such as unrealised profits or depreciation)
- Adjust for Unrealised profit
Groups - adjusting for unrealised profit on SFP
Reduce profit of seller —> reduce seller RE
Reduce inventory —> reduce buyers inventory
Groups - adjusting for unrealised profit on SOCI
Reduce profit of seller —> increase sellers COS
Reduce inventory —> no adjustment
Unrealised profit- when does it become realised?
When the stock leaves the group.
So unrealised profit is profit made between group companies and remains in stock
If an item is in transit for group ico, which company would you alter? Sender or receiver?
Always alter the receiving company
Intra-group trading - stock in transit treatment
In receiving company,
Dr inventory
Cr payable
Intra-group trading - cash in transit treatment
In receiving company,
Dr cash
Cr receivable
Intra-group dividends treatment
Eliminate all dividends paid/received to/from other entities within the group
Impairment of Goodwill (proportionate NCI)
- Compare the recoverable amount of S (100%) to..
- NET ASSETS of S (100%) + Goodwill (100%)
- Goodwill in SFP is only for parent so needs grossing up first
- The difference in the impairment but only show the parent % of the impairment
Impairment of goodwill (fair value NCI)
- Compare the recoverable amount of S(100%) to…
- NET ASSETS of S (100%) + Goodwill (100%)
- Then find the difference to get the impairment which is then split between the parent and NCI share
Impairment of Goodwill adjustment on the income statement
- Proportionate NCI - add it to P’s expenses
2. Fair value NCI - add it to S’s expenses
Normal consideration- treatment
Dr investment in S
Cr cash
Future consideration- treatment
Dr investment in S
Cr liability
Amount needs discounting down to PV
Contingent consideration- treatment
Dr investment in S
Cr liability
All at fair value
Provisional Goodwill
When FV of NAs are not certain at acquisition date.
Have 12m to change the goodwill figure.
Any info after the 12m does not change goodwill and differences would be written off to I/S
Goodwill - Contingent liabilities
When a sub is acquired it is brought into accounts at FV.
Contingent liability does have a FV (even if normally just disclosure in the accounts). Therefore must be recognised in consolidated accounts until actually paid.
- Bring in at FV
- Measure at this amount unless it becomes probable at which point it’ll be measured at full liability
Step acquisitions - when does consolidation occur?
Consolidation only occurs when control is eventually achieved.
At which point,
- remeasure all previous holdings to FV
- any gain or loss to income statement
How to account for further acquisition after control is achieved?
Deemed to be a purchase from the NCI
FV consideration for extra % bought X
Decrease in NCI (X)
Difference goes to equity of the parent
Partial disposal- how to treat
Proceeds from disposal X
Increase in NCI (X)
Difference to equity of parents
Increase in NCI:
Goodwill + net assets from equity table
MULTIPLY by % disposed
What is a discontinued operation?
- a separate major line of business or geographical area
- is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area
- is a subsidiary acquired exclusively with a view to resale
How is a discontinued operation shown on the income statement?
The PAT and any gain/loss on disposal
A single line in I/S
How is a discontinued operation shown on the SFP?
If not already disposed of yet, as a held for sale disposal group
How is a discontinued operation shown on the cash flow statement?
Separately presented in all 3 areas - operating, investing and financing
How do you calculate the gain or loss on a full disposal?
Proceeds
MINUS net assets (100%)
MINUS goodwill
PLUS NCI
PLUS FV of the remaining % (if any)
What is the effect on income statement of Full disposal?
Consolidated until sale then treat as an associate (if we have significant influence)
Otherwise an FVTPL investment
Associate definition
An entity over which the group has significant influence but not control
Significant influence definition
When you own between 20-50% of the shares in a company but usually evidenced in one or more of the following:
- representation on the board of directors
- participation in the policy making process
- material transactions between the investor and investee
- interchange of managerial personnel
- provision of essential technical info
Exemptions for consolidated account preparation
- the parent is itself a wholly owned sub
- the parent is a partially owned sub (80%) and the other 20% owners allow it to not prepare consolidated accounts
- the parents shares are not publicly traded
- the parents own parent produces consolidated accounts
Operating Profit
Sales
MINUS COS
MINUS admin expenses
MINUS distribution costs
Cash flow statements - steps
1 - get profit from operating activities as starting point by going from PBT and reconciling to operating profit and place in “cashflow from operating activities”
2 - add back all non- cash items. But only those in operating profit (sales, Cos, admin and distribution costs) I.e. deprecation, impairments, profit on sale, payables, receivables and inventory)
3 - look at what’s left in income statement and find the cash
4 - look at SFP and find the cash (look at PPE and find the cash)
5 - find cash from share issues, bonus issues, loans
Where do finance costs go on the cash flow statement?
Operating activities
Where does taxation go in the cash flow statement ?
Operating activities
Where does investment property go in the cashflow statement ?
Investing activities
Cashflow statements - PPE
Work out the cash element of each PPE item and add to investing activities
Where in the cashflow statement do share proceeds go?
Financing activities
If there has been a bonus issue… treatment in cashflow statement
If debut went to…
Share premium - ignore the bonus issue and take balancing figure from SFP balances
Retained earnings - reduce the cash by the amount of the bonus issue
Where do loans go in cashflow statement?
Financing activities
Associates- accounting treatment
SFP
- one line only “investment in associate” goes in under the NCA section
- calculated as: cost + share of post acquisition reserves - impairment
Consolidated IS
- one line “share of associates PAT (-impairment)
- do not include any dividend from A
Unrealised profits for an associate
1 - only account for the parents share
2 - adjust earnings of the seller
Adjustments on IS:
- if A is seller - reduce “share of As PAT”
- if P is the seller - increase Ps COS
Adjustments on SFP:
- if A is seller - reduce As retained earnings and Ps inventory
- if P is seller - reduce Ps retained earnings and the “Investment in Associate” line
What is joint control?
The sharing of control where decisions about the relevant activities need unanimous consent
First see if the parties control the arrangement per IFRS 10
Types of joint arrangements
Joint operation
Joint venture
Joint operation definition
The parties have rights to the assets, and obligations for the liabilities, relating to the arrangement
Joint venture definition
The parties have rights to the net assets of the arrangement
Joint operations - on financial statements
A joint operator recognised:
- it’s assets incl share of any assets held jointly
- it’s liabilities incl share of jointly held
- revenue from the sale of its share of the output by the joint operation
- it’s expenses incl share of any jointly incurred
Joint ventures accounting treatment
Uses equity method (as associate)
JV unrealised profits
P to JV:
IS - increase Ps COS
SFP - decrease Ps RE and investment in JV
JV to P:
IS - decrease “share of JV PAT”
- decrease JVs RE
- decrease Ps stock
No elimination of payables and receivables
IAS 27
When a new parent is inserted above an existing parent, the cost of investment in the sub can. It be it’s carrying value rather than FV
IAS 27 relief limited to where…
- new parent obtains control by issuing shares
- assets and liabilities of the new group and original group are the same immediately before and after the reorganisation
- the owners of the original parent before the reorganisation have the same absolute and relative interests afterwards
A statutory demerger
Simpler of the two alternatives
Can only be used to split two or more trades
Either,
1) the shares in a sub are distributed out to the members
Or
2) the trade is transferred to a new company and shares in the new company are issued to the members of the old company
What exchange rates are to be used for subsidiaries
IS - average rate
SFP - closing rate
All exchange rate differences to reserves
Foreign exchange translation reserve
Opening NA @ closing rate
MINUS closing NA @ opening rate
MINUS profit @ average rate
Foreign goodwill
Goodwill must be retranslated every year end (closing rate) and any exchange gain/loss to equity
Functional currency
Results measured in this currency
- influences sales price
- used in the country where most competitors are and where regulations are made
- influences labour and material costs
Presentation currency
Foreign sub will usually present in the parents presentation currency
