Week 9 Everything

Question 1

Group

Answer 1

A group consists of a parent entity and all the subsidiaries
controlled by the parent. Virtually all large and medium sized business are
structured as groups. Listed Companies typically have numerous subsidiaries,
sometimes more than 100 subsidiaries.

Question 2

There are several reasons for organising a business as a

group:

Answer 2

Business operations in different countries and/or different industries are established or purchased as separate subsidiaries

A previously separate entity may be acquired, (i.e. a take – over), therefore becoming a subsidiary.

A new risky business venture may be established as a new
subsidiary company, to gain the advantage of limited liability

Question 3

Business operations in different countries and/or different industries are established or purchased as separate subsidiaries

Answer 3

Adopting such a business structure, facilitates the separate management, monitoring and evaluation of each business activity
the group is engaged in, and making decisions relating to each business activity. Furthermore, business operations in different countries and different industries are subject to different laws and regulations

Question 4

A previously separate entity may be acquired, (i.e. a take – over), therefore becoming a subsidiary.

E.g.

Answer 4

E.g. a competitor may be acquired to increase market share, to obtain benefits of economies of scale, including cost reductions and synergies.

Question 5

A parent entity may obtain subsidiaries by:

Answer 5

Establishing a new entity, e.g. registering a new company with ASIC, and purchasing 100% of the initial share capital

Acquiring an existing entity, e.g. purchasing a majority of the shares of another company

Question 6

Acquiring an existing entity, e.g. purchasing a majority of the shares of another company

Answer 6

The acquirer is called the parent entity, the purchased entity is called the subsidiary. The parent entity is required to produce consolidated financial statements which include the parent and all of its subsidiaries

Question 7

Group structure

Answer 7

Zanzibar Ltd is a travel agent and aims to expand its business internationally. To do so it decides to acquire the 80% of shares of Madagascar Ltd for $3 million and 100% of shares of Cape Horn Ltd for $2.4 million.

After the acquisition, Zanzibar Group structure can
be presented as follows:

Question 8

Need for information about the Group

Answer 8

Parent entities use a large part of their assets to invest in subsidiaries, (and lend to subsidiaries). Therefore the parent derives a large part of its profit from dividend revenues from subsidiaries (and interest revenue from subsidiaries). An investor in the parent entity has effectively invested in the group, and derive their returns on investment, (e.g. dividends) from the group. Therefore investors in the parent entity require information about the financial performance and
financial position of the group

Question 9

Information about the financial performance and financial position of the group is provided by portraying

Answer 9

the group as a single economic entity in the consolidated financial statements

Question 10

Consolidated Financial Statements

Answer 10

Consolidated financial statement for the group add together the financial statements of the parent and all its subsidiaries, after making various consolidation adjustments.

Question 11

The Consolidated Statement of Financial Position

Answer 11

The Consolidated Statement of Financial Position shows all the assets under the control of the parent entity, the liabilities of the group to external parties outside the group, and the equity of the group

Question 12

➢ The Consolidated Statement of Profit or Loss

Answer 12

The Consolidated Statement of Profit or Loss shows the profit earned by the group, resulting from transactions with external parties outside the group

Question 13

AASB10

Answer 13

Consolidated financial statements requires a parent entity
to include in its consolidated financial statements all of its
subsidiaries

Question 14

subsidiary

Answer 14

an entity controlled by the parent

Question 15

Control is defined as:

Answer 15

A Parent controls a when the parent is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.

Question 16

Therefore a Parent controls a Subsidiary if and only if:

Answer 16

a) The Parent has power over the Subsidiary;
b) The Parent has exposure to variable returns from its investment in the Subsidiary
c) The Parent has the ability to use its power over the Subsidiary to affect the amount of the Parent’s returns.

Question 17

The Parent has power over the Subsidiary where:

Answer 17

➢ The parent has existing rights that give it the current ability to direct the relevant activities of the subsidiary

➢ The relevant activities of the subsidiary are the activities that significantly affect the subsidiary’s profitability

➢ Essentially the parent has the power to make the major decisions relating to subsidiary’s operations and finances, and impose those decisions upon the subsidiary

Question 18

The Parent has the ability to use its power over the Subsidiary to affect the amount of the Parent’s returns.

Answer 18

If the parent uses its power over the subsidiary to make good decisions relating to the subsidiary, the parent benefits by obtaining higher returns (profits) from the subsidiary. Conversely, if the parent uses its power over the subsidiary to make bad decisions relating to the subsidiary, the parent suffers by obtaining lower returns (lower profits rent uses its of losses) from the subsidiary

Question 19

Examples of control

Answer 19

9/5/19

Question 20

Non-controlling interests

Answer 20

If a parent entity controls the subsidiary by owning less than 100% of its share capital, the remaining part of shares that are not owned by the parent entity represents the non-controlling interests. Both the parent entity and the noncontrolling interests have an ownership interest in the subsidiary’s equity, and are entitled to share of the subsidiary’s profits, and
dividends.

9/5/19

Question 21

Direct and indirect control

Answer 21

We need to remember that the
‘economic entity’ comprises the parent entity and all of its
subsidiaries, regardless of whether the subsidiary is directly controlled by the parent entity, or indirectly controlled by virtue of an indirect equity interest

Question 22

Business Combination

Answer 22

When a parent acquires a new subsidiary by obtaining control of an existing entity, e.g. purchasing shares in that entity, the acquisition of the entity is a Business Combination

Question 23

AASB3: Business Combinations defines a Business Combination as:

Answer 23

A transaction or other event in which an acquirer (the parent) obtains control of one or more businesses (subsidiaries)

Question 24

If an investor entity purchases shares in a company, but does
not obtain control of that company, that investment is not a
subsidiary. The investment in the company might be:

Answer 24

❖ A Joint Venture (where the investor has joint control over the company);

❖ An Associate (where the investor has significant influence over the company)

❖ A Financial Asset.