Week 5 - Accounting for groups Flashcards
4 types of investments/controls
- Total control, >= 50: parent-subsidiary relationship
- Joint control: joint arrangement/relationship (can be more than 2 parties)
*not partnership (for individuals) - Significant influence, 25-50%: parent and associate relationship
- using equity method, not acquisition method - Lesser/no influence, <20%: simple investment regarded as non-current asset
IFRS 10 Consolidated Financial Statements:
3 criteria that mean group accounts must be prepared
(ie. a parent entity/investor controls an entity/investee)
- Investor is EXPOSED to VARIABLE RETURNS, ie. exposed to risk
- Investor can INFLUENCE investee’s activities that significantly affect investee’s returns
- Investor can exert POWER to affect the amount of investor’s variable returns
In other situations where the parent may be still be able to exert control even with <50% voting rights, the board of directors will exercise discretion on whether accounts are consolidated or not.
4 cases where CONTROL may exist with <50% voting rights
- Agreement w/ other investors gives power over 50%
- Power over financial and operating policies by an agreement
- Power to appoint or remove majority of board members
- Power to cast the majority of VOTES at a board meeting
On what basis are the consolidated fin. stt.s prepared at the effective date of control?
FAIR VALUE
Why are inter-company transactions, balances and unrealised gains on transactions between Group companies eliminated?
Intra-group sales INFLATE SALES of the group. If not eliminated, it doesn’t show the performance of the group b/c the sale is not to external economic entities - not truthful representation.
5 reasons for consolidating the fin. stt.s of DIFFERENT LEGAL ENTITIES
- To show the results and financial position of a GROUP as a SINGLE ECONOMIC ENTITY
- A consolidated SoCI shows the external sales/transactions; the effects of all intra-group transactions are ELIMINATED. Consolidated SOFP shows the total assets controlled & total liabilities owed by the group.
- prevents manipulation & misleading accounts, esp. inflating sales by selling within the group -> investor protection - For disclosure of info b/c the accounts of the parent co. contain little information about the financial performance, potential, resources & obligations of the group -> better ACCOUNTABILITY
^usually parent is just a holding co. and thus have little info - More meaningful group EPS figure
- consolidated accounts show full earnings on parent co.’s investment, while parent’s individual accounts only show dividend received from subsidiaries -> prediction - Better measurement of parent co. directors’ performance when group ROCE is used, as total earnings of group can be compared with its total assets
Which standard does Goodwill follow?
How do we treat positive goodwill and negative goodwill (a gain from a bargain purchase)?
Any tax implications for goodwill?
Goodwill is an intangible asset but allows IFRS 3 Business Combinations (for tangible assets) rather than IAS 38 Intangible Assets
From W6 slides, goodwill is an asset and can arguably generate future economic benefits, and arguably should be liable for tax but IAS12 states no tax implications for goodwill.
- Positive goodwill is capitalised (recognised as an asset) w/o amortisation but MUST be subject to annual impairment tests
» impairment = reduced ability to generate future economic benefits - Negative goodwill must be treated as an immediate INCOME in group income statement. Must be thoroughly reviewed first that the net book value of acquisition is not understated
*potentially can happen but not very often
Formula for calculating goodwill
FAIR VALUE of CONSIDERATION TRANSFERRED
+ Amount of non-controlling interests
+ Fair value of any previously held equity interest in the acquiree
- Fair value of identifiable NET ASSETS
= Goodwill on acquisition date
*Contingent liabilities must be recognised in calculating goodwill
Contingent liabilities
Potential future liabilities -> PRESENT OBLIGATION from group’s perspective
Non-controlling interests + IFRS 10 definition
ie. parent & partly-owned subsidiary, vs wholly-owned subsidiary
When parent co. doesn’t acquire 100% shares but still >= 50% enough and can obtain control
IFRS 10 definition: the equity in a subsidiary not attributable, directly or indirectly, to a parent
- NCI is included as part of the group’s equity, consistent w/ the SINGLE ENTITY CONCEPT
- viewed as an OWNER within the group
IFRS 3 provides a choice in the measurement of NCIs. What are the 2 types of measurement?
- Full goodwill accounting, at fair value - INCLUDES NCI’s goodwill
- so there’ll be parent’s goodwill + NCI goodwill
- in basic accordance w/ the entity concept of consolidation - Partial goodwill accounting, at the NCI’s proportionate share of the acquiree’s identifiable net assets
- EXCLUDES NCI’s goodwill
- inconsistent with a ‘pure’ application of the entity concept of consolidation
IASB’s justification of allowing the ‘choice of method’ in measuring NCIs (IFRS 3) + what we make of IASB’s decision?
- introducing a choice was NOT the IASB’s 1st preference
- IASB believes that it reduces COMPARABILITY of the fin. stt.s
- however, IASB was unable to agree on a single measurement basis b/c neither alternative was supported by enough board members
- decided to permit choice b/c IASB concluded that the benefits of the other improvements to the acct. for biz combinations, outweigh the disadvantages of allowing an option
- The choice of 2 options within the IASB standard was the outcome of a POLITICAL EXERCISE to make sure the standard was approved, rather than on the basis that the approach was conceptually sound.
- subject to political pressures from diff. parties. Maybe there should be an independent body to issue the standard? - IASB know that they’re compromising/affecting the QUALITY of info & reducing comparability (and transparency) for users to MAKE DECISIONS
- we have to PONDER the impacts of such decisions on the quality of financial info being generated in compliance w/ acct. standards
Where is Goodwill impairment recorded in the financial statements?
Under Operating expenses in the SoCI + deduct from Goodwill in SOFP
