Week 1 - Complex entities and the consolidated statements of financial position Flashcards
Why does one business acquire another? (5)
Synergies allow for cost saving Allows business to be more efficient Increases the speed to access markets Access to technology/skills Control over quality
How could an investor show power over an investee?
By having existing rights to direct the relevant activities of the entity.
What are the relevant activities of an entity? (4)
Selling/purchases decisions
R&D activities
Non-current assets
Investing or financing
What is the issue with determining the power over an investee by looking at relevant activities?
Different activities could be directed by different investors which means that we need to identify key activities - What is the purpose of the entity?
Why do we need group accounts? (6)
- Reflects the economic substance of transactions
- Eliminates off balance sheet financing - gives better information for the stakeholders
- If we control activities of other entities, we should be responsible for the results
- Ensures comparability
- Helps understandability
- Not useful to lenders if not consolidated; misses a lot of information
Factors required for there to be control? (3)
Power over the investee
Exposure to variable returns
Ability to affect returns
What it means by ability to affect returns?
The agent can guide you to make a decision but its ultimately up to you to affect the returns
Other factors indicating control? (3)
Contractual agreements e.g. being able to appoint members to the board
Potential voting rights - Convertibles
Minority voting rights small and dispersed - a lot of shareholders own a small portion of large voting rights.
What is goodwill?
The premium over the book value of a company that you’re willing to pay
Is goodwill Amortised?
No because the standards say that the value of the brand does not fall. However, there is a regular impairment review
What are pre and post acquisition reserves?
Retained earnings & equity items
Pre acquisition are reserves that existed before acquisition
Post acquisition are reserves that the acquirer can access
What is non controlling interest?
A minority interest that occurs when you don’t acquire 100% of the shares.
They feature in the equity section because they don’t meet the definition of assets or liability.
What is the acquisition method stated in IFRS3? (5)
Identify the acquirer Determine acquisition date Measure the consideration transferred Recognise the assets, liabilities and NCI in the acquire Recognise and measure goodwill
What are the workings for consideration?
W1 - Group structure W2 - Net assets of the subsidiary W3 - Goodwill W4 - Non controlling interest W5 - Group retained earnings
What is the structure of W2?
@ acq @reporting post acq
SC
SP
RE
