Topic 1- Consolidated Flashcards
When is a group account required?
When an investment in shares is enough to give INFLUENCE over the investee company.
Having influence/control is being able to direct it’s activities and use that power to affect the amount of returns
what are the motives to acquire influence in another company? 4 reason
- To reduce competition in the market
- diversify into new markets- i.e. industry markets or geographical
- bring expertise in house e.g. retailer being manufacturing in house
- To benefit from synergies arising from the accquision?
What are the list of group accounting standards? there are 5
▪ IFRS 10 ‘Consolidated financial statements’
▪ IFRS 3 ‘Business Combinations’
▪ IAS 27 ‘Separate Financial Statements’
▪ IAS 28 ’Investment in Associates and Joint Ventures
▪ IFRS 11 ‘Joint Arrangements’
What is defined as control by IFRS 10 ‘Consolidated financial statements’?
3things
very important
- Power over the investee, where the investor has existing rights that gives it the current ability to DIRECT ACTIVITIES that significantly affect the investee’s returns
- Exposure, or RIGHTS TO, variable returns from involvement in the investee; and (i.e. right to dividends)
- The ability to use power over the investee to AFFECT the amount of the INVESTOR’S Returns.
When is the following applicable?
‘majority of the voting rights but = NO power’?
When another entity has the right to direct the relevant activities, this could be due to the companies actions being subject to direction by government, court administrator, receiver, liquidator or regulator.
When is the following applicable?
‘minority of the voting rights but = YES power’?
E.g. you own 30% and the 70% are owned by 70 individual people who cannot make decisions together so they give you the power.
An investor can have power with less than a majority of the voting rights of an investee, for example, through:
A. A contractual arrangement between the investor and other vote holders.
B. Rights arising from other contractual arrangements.
C. The investor’s voting rights.
D. Potential voting rights; or
E. A combination of (a)–(d).
Which activities can affect a company’s return? Give 5 examples
A. Selling and purchasing of goods or services.
B. Managing financial assets during their life (including upon default).
C. Selecting, acquiring or disposing of assets.
D. Researching and developing new products or processes; and
E. Determining a funding structure or obtaining funding
what is an example of a decision being made regarding relevant activities?
give 2
A. Establishing operating and capital decisions of the investee, including budgets; and
B. Appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment.
From the Consolidated statement of financial position,
which things are added for Parent and Subsidary?
Intangible Assets
PPE
Inventories
Trade and other receivables
Cash and cash equivalents
Long term borrowings
Long term provisions
Trade and other payables
Short term borrowings
From the Consolidated statement of financial position,
which things are included from the Parent only?
Equity Share Capital
Other components of equity e.g. –Share Premium
What is ‘Purchased good will’?
The figure on the CSOFP is known as ‘purchased goodwill’ and is the difference between;
the cost of the parent Co investment at fair value
and
the fair value of the identifiable assets,liabilities,contingent liabilities
how often is good will reviewed for impairment?
It is reviewed annually for impairment
What is negative good will
Negative goodwill arises when the purchase consideration is less than the fair value of the net assets acquired.
how do you deal with negative good will?
When goodwill calculates as negative, an investor/ parent company must check the accuracy of the calculation. If it proved accurate it should be credited directly to the statement of profit or loss.
What are the 5 workings?
w1- Group Structure w2- Net Assets of Subsidary w3- Good Will w4- Non controlling Interest w5- Group retained earnings
What is Working 1?
Group structure:
- Percentage
- Date acquired
What is working 2
Net assets of subsidary i.e. (Assets-Liability= Equity/NA)
@date of Acq @reporting date
Equity share capital (+prem) Other components of equity Retained earnings FV Adjustments FV Depreciation PURP adjustment (S ->P)
*Difference between @ Acq and Reporting date is the post acquisition profit and that is split between Parent and NCI
What is working 3?
Good Will
Cost of Consideration
NCI interest at acquisition
Less: FV of net assets at acquisition
=Goodwill on acquisition
Less: Impairment to date
= Carrying value of goodwill in CSOFP
What are the methods used to measure GoodWill and Non controlling interest
Fair value method
Proportion of Net Assets method
What is FV method used to measure GW and NIC
Share price on the market X the number of shares NCI has
What is Proportion of Net Assets method used to measure GW and NIC
NCI % owned x FV of net assets at acquisition (W2)
If using the FV method what must you remember?
the impairment is shared between parent and NCI according to parent ownership
i.e. if using proportionate then only the parent incurs this and 100% of this is deducted form parent’s RE
What is working 4?
Non controlling interest
NCI interest at acquisition
NCI % of subsidiary’s post acquisition Retained Earning
=NCI
Less: Impairment (If using FV method)
What is working 5?
Group retained earnings
100% Parent retained earnings
Less: 100% PURP (if P->S)
= Parent’s % of subsidiary’s post acq RE
Less: Impairment to date
= Carrying value of group reserves in CSOFP
What is the PURP adjustment and what is it made to?
Profit for un-realized profit
- Inventory
- Retained earnings
what are the two adjustments that must be made for PURP
we pretend the transaction never happened so we put the asset back to the group value and remove the unrealised profit element between original profit adjusted in the sellers
1) Cancel intrra company balances (Receivables & Payables)
2) Remove the PURP ‘‘Made up’’ Profit
- > Return inventory to the true cost to the group
- > Retained earnings
i.e. Cancel any profit relating to goods NOT sold outside out group yet AKA goods still in stock
If parent sells to subsidiary and the asset is held at year end in subsidiary accounts
what is the adjustments required and identify the DR CR
1) Calculate the PURP
2) Return/reduce the inventory for the group
3) Increase the cost of sales for the group (to lower the profit)
Dr Group retained earnings W5
Cr Inventory in CSFP
Cr Net assets (W2) at reporting da
If subsidiary sells to parent and the asset is held at year end in parent’s accounts
what is the adjustment?
Dr Net assets (W2) at reporting date
Cr Inventory in CSFP
Regarding cash and goods in transit, how do you deal with this
pretend it has been completed
In the separate financial statements of a parent company a subsidiary, associate or jointly controlled entity may be accounted for either:
▪ At cost; or
▪ In accordance with IFRS9 – Financial instruments (Measured at fair value with gains or losses taken to
‘other comprehensive income (FVTOCI’).
under which circumstances is there an exemption from creating consolidated financial statements
▪ The parent itself is a wholly owned subsidiary or a partially owned subsidiary
▪ The parents debt or equity instruments are not traded in public market
▪ the parent did not file it’s financial statements with a securities commission or other regulatory organisation
▪ The ultimate parent company produces consolidated financial statements that comply with IFRS standards and are available for public use
identifiable assets and liabilities acquired of sub must be accounted at their what
fair value
when assessing the fair value of subsidiaries’ identifiable assets and liabilities- which workings must be updated
Working 2- net assets of sub
Update the assets and liabilities in the consolidated statement of financial position
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s intangible assets measured
Fair value = IAS 38 Carrying value
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s PPE measured
Fair value = Market value
if there is no evidence of market value depreciated replacement cost should be
used
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s Marketable securities (trade on active market) measured
Fair value = quoted price
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s non- Marketable securities (trade on active market) measured
Fair value= estimated value
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s Finished goods measured
FV= Selling price - disposal costs and reasonable profit allowance
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s WIP goods measured
FV= Ultimate selling price less completion costs, disposal cost and reasonable profit allowance
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s Raw materials measured
FV= Current replacement costs
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s receivables measured
FV= Present value of amounts expected to be received - allowance for bad debts and collection costs
regarding measuring the identifiable assets and liabilities of the subsidiary at fair value,
how is the fair value of the subsidiary’s payables measured
FV- Present value of amounts expected to be paid
The consideration paid for the subsidiary must be measured at what
Fair value
The consideration paid for the subsidiary must be measured at fair value
If the consideration was an immediate transfer of shares
what is it measured at and the double entry
Current market value at the acquisition date
Dr Investment at X /GW
CR Share capital
Cr share premium
The consideration paid for the subsidiary must be measured at fair value
If the consideration was an deferred cash
what is it measured at and the double entry
Cash Discount to present value and unwind the discount
Dr Investment at X /GW
Cr liability
The consideration paid for the subsidiary must be measured at fair value
If the consideration was an deferred shares
what is it measured at and the double entry
At current market value- valued at Market price of parents shares at the acquisition date
Dr Investment at X /GW
Cr Other components of equity (shares to be issued in the future reserve)
The consideration paid for the subsidiary must be measured at fair value
If the consideration was an contingent deferred shares or cash
what is the fair value
regardless of the likelihood of the contingent event to occur, consideration is to be measured at it’s fair value at the acquisition date
The consideration paid for the subsidiary must be measured at fair value
If the consideration was an contingent deferred cash
what is it measured at and the double entry
Fair value at acquisition date
Dr Investment at X /GW
Cr liability
The consideration paid for the subsidiary must be measured at fair value
If the consideration was an contingent deferred shares
what is it measured at and the double entry
Fair value at acquisition date
Dr Investment at X /GW
Cr Other components of equity (shares to be issued in the future reserve)
Regarding disposals, how is this accounted for in the parents FS
Proceeds
Less: Carrying amount of Investment
= Gain/Loss on disposal
Regarding disposals, how is this accounted for in the consolidated FS
Proceeds
Less: Net assets at date of disposal
Less: Net Good Will at date of disposal
Add: NCI at date of disposal
= Gain/Loss on disposal
on consolidation, what items that are normally not included in CSFP included and under what conditions
Internally generated assets (such as brand names) and research projects can be recognised within consolidated financial statements if a fair value can be attached to them.
Nothing illegal can be included
how do you calculate the PUP on an asset transfer between parents and subsidiaries
1) calculate the carrying value to the buyer using the $Bought at price - Dep (over UEL)
2) calcuate what the Carrying value would’ve been if it wasn’t transferred
The differnece between these two is the pup
which one doesn’t hold voting rights- pref or non pref
Preference shares carry no-voting rights and therefore are excluded when considering the control held over an investee.
