Topic 3: Consolidation basic principles

Question 1

What is the acquisition method and its step, what rule is under the australian standards board for this?

Answer 1

Under AASB 3: Acquisition method
1.identify the acquirer
2. determine the acquisition date
3. recognise assets, liabilties and non controlling interests
4. recognise goodwill
The acquisition method is necessary to account for business combinations

Question 2

What are the steps within the consolidation process?

Answer 2

step 1:
-record parent and sub. line by line financials on con. worksheet
-line by line aggregation of the accounts
step 2:
- use acquisition analysis to determine goodwill/ GOB purchase
-eliminate parents investment in sub
- eliminate intragroup transaction
- identify and calc. of NCI
step 3:
transfer entries to the con. worksheet
- calc. balances
step 4:prepare group financials

Question 3

What are things that need to be considered for consolidation?

Answer 3

• same type of depreciation/ normal accounting methods must be used for parent and sub
• must have the same reporting period = change if not
  *FV must be used as a measurement of assets/ consideration etc

Question 4

how do we set out the consolidation worksheet template ?

Answer 4

financial items/ parent/ subsidiary/ dr/ reference/ cr/ group consolidation
*note: for the reference colums you note the no. for the consolidation journal entry

Question 5

what do we include in our consolidation adjustment journals?

Answer 5

• dividend recognition
  *goodwill recognition adjustments
  We post these as is directly to the consolidation worksheet debit and credit entries

Question 6

How do we recognise dividends for the subsidiary entity in journal entries?
- dividends declared
- dividends paid

Answer 6

dividends declared only:
Dr dividends declared
Cr dividends payable

dividends paid
Dr dividends payable
Cr Cash at band

Closing entry:
Retained profits
Dividend declared

Question 7

How do we recognise dividends for the parent entity in journal entries? (to account for the subsidiary dividends)
- dividends declared
- dividends paid

Answer 7

Dividends received (parent are shareholder of subsidiary):
Dr Cash
Cr Dividends receivable

Dividends declared (by subsidiary)
Dr dividends receivable
Cr dividends revenue

closing entry
dividend revenue
retained profits

Question 8

what costs/ items can form part of the consideration for the acquiring company acquiring the subsidiary?

Answer 8

• FV shares
  *FV of probable additional shares
  *Fv of unsecured notes

Question 9

what costs/items should not be included as part of consideration for the acquisition of the subsidiary?

Answer 9

• FV of debt obligations of the taget company if the debt obligations are not owed to teh former shareholders of the target company
• stamp duty payable
  *accounting fees for a due dilligence report on the target company
• costs incurred by a department in the parent entity formed to facilitate the acquisition of the target company
  *borrowing costs incurred on debt used to finance the acquisition of the target company
• allocation of directors fees for time spend on the acquisition of the target company
  *redundancy costs payable to employees of the target company as part of a planned restructuring of the target company