Short Questions in Consolidated Flashcards
Set out the journal entries that will be required on consolidation to recognise the goodwill arising on the acquisition of Arlott Ltd in the consolidated statement of financial position of Tongwell plc.
DR Intangible assets – goodwill 39,160
DR Net assets (320,000 + 112,300) 432,300
CR Investments 385,000
CR Non-controlling interests (320,000 + 112,300) × 20% = 86,460
IFRS 11, Joint Arrangements requires each venturer in a joint venture to recognise its share of that entity in its consolidated financial statements using the equity method of accounting.
Identify and explain the principles behind the use of the equity method of accounting for joint ventures in consolidated financial statements
- Requires the equity method to recognise ‘significant influence’ but not control, over the joint venture. Complete consolidation would be misleading.
- Equity method accounts for an entity’s interest in the net assets of an investee by:
- Recording the investment initially at cost
- Adjusting cost each period for the venturer’s share of the retained profits or losses of the joint venture for the current period;
- In the COSFP the investment in the joint venture is shown as a single line figure as part of NCA
- In the CSPL there is a single line for the venturer’s share of the joint venture’s results for that period
Goodwill is subsumed within the carrying amount of the joint venture in the consolidated statement of financial position, and the total investment tested for impairment annually. No amortisation is permitted.
Explain the single entity concept and the distinction between control and ownership by reference to the consolidated statement of financial position prepared in part 1 of this question.
- The assets and liabilities are added together as if the group were a single entity (eg., trade receivables are added)
- This does not apply to joint ventures
- The single entity concept also means that any intra-group transactions and balances need to be eliminated, as otherwise items would be double counted in the context of the group as a single entity. Hence the intra-group balances between Tongwell plc and Watling Ltd are adjusted to agree and then cancelled out.
- Any unrealised profit made between parent and subsidiary companies also needs to be eliminated where that profit has not yet been realised outside the group. E.g Removal of profit over the remaining UL of asset
- It is important to distinguish between control and ownership. Control is reflected by including
all of the subsidiary’s assets, liabilities, income and expenses in the consolidated financial statements, even where the parent does not own 100% of that subsidiary. So, for example, for Tongwell plc, 100% of Watling Ltd’s inventories of £195,900 are added in even though, in effect, Tongwell plc only owns 75% of those inventories. - Ownership is then reflected by showing that part of the subsidiary’s net assets and results included in the consolidation, which is not owned by the parent, as non-controlling interests.
Tongwell plc’s consolidated statement of financial position shows non-controlling interests of £190,025, representing that part of Watling Ltd not owned by Tongwell plc.
Explain the concepts underlying the preparation of consolidated financial statements, illustrating these concepts with reference to the consolidated statement of financial position of Tazel plc.
- Group accounts reflect the results and net assets of group members to present the group to the parent’s shareholders as a single economic entity (single entity concept). This reflects the substance of the group arrangement as opposed to its legal form, where each group member is a separate legal person.
- In the consolidated statement of financial position of Tazel plc all of the assets and liabilities of the group companies are added together and shown as one.
However, the single entity concept also means that any intra-group transactions need to be eliminated, as otherwise items would be double counted in the context of the group as a single entity.
For example, when Tazel plc sold the machine to Saldan Ltd an unrealised profit was made in the group and this was eliminated in the consolidated financial statements. An additional adjustment also needs to be made each year as otherwise inflated depreciation would be charged within the group financial statements.
The other principle underlying the preparation of consolidated financial statements is the distinction between control and ownership.
Control is reflected by including all of the subsidiary’s assets and liabilities in the consolidated statement of financial position, even where the parent does not own 100% of that subsidiary.
So, for Tazel plc, 100% of Saldan Ltd’s net assets are added in even though, in effect, Tazel plc only ‘owns’ 80% of them.
Ownership is then reflected by showing that part of the subsidiary’s net assets, which is not ‘owned’ by the parent, as non-controlling interests. Tazel plc’s consolidated statement of financial position shows non-controlling interests of £291,310 representing that part of Saldan Ltd not owned by Tazel plc.
Where an investor (Tazel plc) does not have control but does have significant influence over an investee (Umtata Ltd), line-by-line consolidation is not appropriate.
But because Tazel plc has this influence, it is reflected in the consolidated statement of financial position as a single line item – being cost plus the group’s share of Umtata Ltd’s post-acquisition increase in net assets less any impairments in the value of the investment.
Describe any differences between IFRS Standards and UK GAAP in respect of the preparation of consolidated financial statements. Answers may be presented in a bullet point format.
UK GAAP Requires goodwill to be amortised over its useful life, with rebuttable presumption that
this should not exceed 10 years
IFRS: Goodwill is not amortised and is instead
subject to annual impairment review
UK GAAP: Impairment losses re goodwill may be
reversed (in limited circumstances)
IFRS: Impairment losses cannot be reversed
UK GAAP: Acquisition related costs added to cost of acquisition
IFRS: Acquisition related costs are expensed
UK GAAP: Negative goodwill presented on the
statement of financial position directly under
positive goodwill, as a negative asset
IFRS: Negative goodwill (gain on a bargain
purchase) recognised in profit or
loss/retained earnings
UK GAAP: Non-controlling interests must be measured using the proportionate method
IFRS: May use the proportionate method or the
fair value method
UK GAAP:A subsidiary should be excluded from
consolidation where severe long-term
restrictions apply or where the interest is
held exclusively for resale
IFRS: No allowed exclusions from consolidation
UK GAAP: Where a subsidiary is disposed of and meets the definition of a discontinued operation its
results are shown in a separate column in the
consolidated profit and loss account
IFRS: The results of the subsidiary are shown as a
single amount on the face of the consolidated statement of profit or loss
You have been asked by the finance director to prepare a document explaining what the fundamental principles of the ICAEW’s Code of Ethics are. The document is to be given to a new trainee accountant coming into the department.
1) Integrity
A professional accountant should be straightforward and honest in all professional and business relationships. Integrity also means that members must not knowingly be associated with misleading information.
Objectivity (2)
A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgements.
Professional competence and due care (3)
A professional accountant is required to attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service, based on current technical and professional standards and relevant legislation; and act diligently and in accordance with applicable technical and professional standards.
Confidentiality (4)
A professional accountant should respect the confidentiality of information acquired as result of professional or business relationships. Confidential information must not be disclosed outside the organisation without authority, unless there is a duty or right to disclose, or disclosure is in the public interest and permitted by law.
Professional behaviour (5) A professional accountant should comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession
With reference to the acquisition of Carlow Ltd, and using calculations where appropriate, explain the two methods of calculating goodwill and non-controlling interests allowed by IFRS 3, Business Combinations.
IFRS allows two methods of measuring the NCI at acquisition date:
1) at its fair value (the fair value method)
2) at the NCI’s share of the fair value of the identifiable assets acquired and liabilities assumed (the ‘proportionate method’)
The proportionate method results:
- in goodwill being the difference between the cost of the parent’s investment and its share of the fair value of the identifiable assets and liabilities of the acquiree.
The market transaction only provides evidence of the amount of the parent entity’s goodwill
- no evidence of the amount of goodwill attributable to the NCI
- only the parent’s share of the goodwill of the subsidiary will be recognised
Fair value method:
- Consistent with IFRS 3 as IFRS 3 requires both the consideration transferred and the identifiable assets acquired and liabilities assumed to be measured at fair value
- Works on the basis that the goodwill attributable to the NCI can be calculated on the estimate of the FV of the NCI itself
The fair value method usually results in a higher amount for the NCI/goodwill – the difference between this amount and the amount as measured using the proportionate method is effectively added to the goodwill acquired in the business combination and is the goodwill attributable to the NCI at the acquisition date.
Ciera Durango, the financial controller, who is an ICAEW Chartered Accountant, is concerned that impairments in relation to all three investments have been identified. Ciera was involved in the investment decisions and is worried about the impact that showing these impairments might have on her current position at Altima plc
Identify and explain any ethical issues arising for Ciera and explain any action Ciera should take.
Chartered accountants must always abide by the spirit of the five fundamental ethical principles. Assuming that there is doubt over the carrying amounts of the three investments, Ciera should carry out her own impairment review to confirm or otherwise the valuations.
As an ICAEW Chartered Accountant Ciera needs to ensure that she acts with integrity, demonstrating
high standards of both professional behaviour and conduct. There is a self-interest threat here as Ciera’s position in Altima plc may be under threat because impairments appear to have arisen on acquisitions in which she was involved.
However, her judgement should not be influenced by the fact that her competence may be questioned if large impairments arise from investment decisions she was involved in, remembering that another of the five fundamental principles is professional behaviour.
Describe the UK GAAP financial reporting treatment of the goodwill recognised on the acquisition of Tacoma Ltd and calculate the impact of applying this UK GAAP treatment on the consolidated financial statements of Altima plc for the year ended 31 March 2014
UK GAAP (FRS 102) is more restrictive than IFRS Standards in respect of the calculation of goodwill and does not permit a choice to be made. Under UK GAAP, non-controlling interests are always calculated using the proportionate basis.
Goodwill calculated using the proportionate basis is usually lower than that under the fair value method.
Goodwill should be amortised over its estimated useful life under UK GAAP and there is a rebuttable presumption that this is not more than 10 years.
Although annual impairment reviews are not required under UK GAAP, if an impairment was identified this would be recognised in the goodwill calculation.
As the proportionate method is applied under UK GAAP none of the impairment is allocated to non-controlling interests.
Hence, reporting under UK GAAP will also affect non-controlling interests and the retained earnings as reported in the consolidated financial statements of Altima plc.
Describe the differences between IFRS Standards and UK GAAP in relation to the acquisition and disposal of Starkey Ltd
Acquisition of Starkey Ltd
The calculation for goodwill is the same under UK GAAP as per IFRS Standards, however under IFRS Standards the parent entity has a choice whether to measure the non-controlling interests at fair value or at the proportion of net assets.
Under UK GAAP only the proportion of net assets method is permitted.
UK GAAP requires goodwill to be amortised over its useful life and there is a rebuttable presumption that this should not exceed 10 years.
Under IFRS Standards, amortisation is not permitted and instead annual impairment reviews take place.
Disposal of Starkey Ltd
UK GAAP requires that a detailed analysis of discontinued operations should be shown on the
face of the profit and loss account.
However, IFRS Standards only require a single line to be shown on the face of the statement of profit or loss.
Explain how the equity section of the consolidated statement of financial position reflects ownership
Under the single entity concept group financial statements are prepared based on the economic substance that as the parent entity has control, the parent and subsidiaries should be prepared as a single entity.
Ownership however is also shown in the consolidated financial statements, this is shown in equity which is also described as the ownership interest.
The share capital in the consolidated statement of financial position is that of the parent company only and non-controlling interests are shown as part of equity, which represents that part of the subsidiary not owned by the parent.
However, other reserves, such as retained earnings show both the parent and subsidiaries earnings since they were controlled by the parent (post-acquisition reserves).
Explain, with reference to the single entity concept, how trading between a parent entity and an associated company is treated in the preparation of consolidated financial statements.
An associated company is not part of a group, therefore the single entity concept that applies between a parent and its subsidiaries does not extend to associated companies.
This is because the parent entity only has significant influence over an associated company rather than control.
Transactions between group companies and associates are not cancelled on consolidation as an associate is not part of the group. However, any unrealised profit should be eliminated.
Calculate Huygens plc’s distributable profits at 31 March 2015, explaining your calculation
For entities within a group, distributable profits must be made for each individual entity, rather than the consolidated group.
Therefore, Huygens plc’s distributable profits are those profits distributable by the parent company only.
The basic rule is that distributable profits are measured as accumulated realised profits less accumulated realised losses, this is usually retained earnings of the individual company.
In the case of public companies, the amount of distributable profits is further reduced by any
excess of unrealised losses over unrealised profits.
No information is available in this question to determine this.
Huygens plc’s distributable profits are therefore calculated as follows:
The share of profits in the joint venture only affects the consolidated retained earnings, but Huygens plc’s own financial statements would include the dividend from Quimby Ltd of £3,750.
This should have been recognised in the Huygens plc’s own statement of profit or loss, thereby increasing retained earnings by £3,750, but was instead incorrectly deducted from investments.
The finance cost arising on the deferred consideration will be recognised by Huygens plc and therefore reduces retained earnings by £1,000.
Huygens plc’s distributable reserves are therefore £579,650 + 3,750 – 1,000 = £582,400.
Explain the single entity concept and the distinction between control and ownership by reference to the consolidated statement of financial position prepared in part 1 above
Group accounts are prepared on the basis that the parent and the subsidiaries are a single entity.
The single entity concept reflects the economic substance of the group relationship contrasting with its legal form (of legal and separate entities).
This reflects the economic nature of the relationship, whereby Huygens plc has control over Planck Ltd and can decide on how Planck Ltd’s assets and liabilities are used and can dictate its business and operating strategies.
In order to provide useful information to the users of the accounts, consolidated financial statements are prepared rather than just demonstrating the legal relationship of Huygens plc owning shares in Planck Ltd in the single entity financial statements of Huygens plc.
In accordance with the single entity concept the assets and liabilities of the parent and subsidiaries are added together, as if the group were a single entity.
So, for example, the trade receivables of Planck Ltd are added to those of Huygens plc to present a single balance in the consolidated financial statements.
The single entity concept also means that any intra-group balances need to be eliminated, as otherwise items would be double counted – for example, the group as a single entity cannot trade with itself, it cannot owe money to itself etc.
So, for example, the intra-group balances
between Huygens plc and Planck Ltd are removed from trade receivables and from trade payables.
Any profit made within the group also needs to be eliminated, where that profit has not yet been realised outside the group. For example, Planck Ltd sold goods worth £12,800 to Huygens plc, making a profit of £1,920.
Because £9,600 of those goods remain in Huygens plc’s inventories at the year end, profit of £1,440 has not yet been realised outside the group; it is therefore removed from both the seller’s inventories and retained earnings.
The distinction between control and ownership is reflected by including all/100% of the subsidiaries’ assets and liabilities in the consolidated statement of financial position even where the parent does not own 100% of that subsidiary.
So, for Huygens plc’s consolidated statement of financial position, 100% of Planck Ltd’s inventories are added in, even though, in effect, Huygens plc only owns 80% of those inventories. This is because Huygens plc controls those inventories by virtue of its control of Planck Ltd.
Ownership is then reflected by showing that part of each subsidiary’s net assets included in the consolidated financial statements which are not owned by the parent, as non-controlling interests.
Huygens plc’s consolidated statement of financial position therefore includes total non-controlling interests of £29,202, representing that part of the subsidiary not owned by Huygens plc
Describe the differences between IFRS Standards and UK GAAP in respect of the financial reporting treatment and disclosures of joint ventures.
FRS 102 recognises implicit goodwill on acquisition of a joint venture and requires it to be amortised.
Under IAS 28, goodwill is subsumed within the investment in joint venture figure.
FRS 102 does not require such detailed information about the investee or about risks associated with the investment.
IFRS 12 specifies disclosure requirements for interests in joint ventures
