1. Introduction to Group Accounts

Question 1

What is a subsidiary?

Answer 1

An entity that is controlled by another entity

Question 2

What is the typical ownership threshold for one company to have control of another?

Answer 2

50%

Question 3

Why do we create group accounts?

Answer 3

To present the group to the parent’s shareholders as a single economic entity

Question 4

How does the investment in the subsidiary appear in the consolidated accounts?

Answer 4

It does not - it is replaced by the net assets of the subsidiary and goodwill

Question 5

Which companies share capital appears in the consolidated accounts?

Answer 5

Only the parent company

Question 6

How are assets and liabilities consolidated in the group accounts?

Answer 6

Added across

Question 7

Why do we add across the assets and liabilities of the parent and subsidiaries in the consolidated accounts?

Answer 7

To reflect the economic substance of the relationship - the parent controls the subsidiaries assets and liabilities

Question 8

What is the official definition of goodwill?

Answer 8

The asset representing the future economic benefits arising from other assets acquired in a business combination, that are not individually identified

Question 9

In simple terms, what is goodwill?

Answer 9

The difference between the price paid to acquire a business and the fair value of the net assets of that business

Question 10

Where does goodwill appear in the financial statements?

Answer 10

Under intangible non current assets in the group statement of financial position

Question 11

Is goodwill amortised?

Answer 11

No, it is reviewed annually for impairment

Question 12

What is the double entry for impairment to goodwill?

Answer 12

Dr Expense in P&L

Cr Goodwill asset

Question 13

What is the calculation for goodwill?

Answer 13

• Cost of investment (+ NCI)

- Minus net assets at acqn date

Question 14

What makes up retained earnings in the group accounts?

Answer 14

Parent company’s retained earnings + group share of subsidiaries post acqn reserves

Question 15

Why are retained earnings not directly added across in the group SFP?

Answer 15

To reflect the legal/ownership position

Question 16

What is the calculation for group retained earnings?

Answer 16

1. Subsidiary retained earnings at SFP date minus subsidiary retained earnings acqn date
2. Add group share to total parent retained earnings
3. Minus group % of any goodwill on impairment

Question 17

When the parent does not own 100%, what is the name of the shareholding of the remaining proportion?

Answer 17

The Non Controlling Interest

Question 18

Where does NCI sit in the consolidated accounts?

Answer 18

Equity

Question 19

What is the calculation for NCI?

Answer 19

1. NCI at acquisition (proportional or fair value)
2. Plus NCI % of subsidiaries post acqn retained earnings
3. Minus NCI % of impairment on goodwill

Question 20

How do we calculate NCI at acquisition using the proportional share method?

Answer 20

NCI % of subsidiary net assets at acquisition

Question 21

According to IFRS 10, what are the 3 conditions for an investor to have control over an entity?

Answer 21

1. Power over investee - ability to direct relevant activities
2. Exposure/right to variable returns from involvement
3. Ability to use its power to affect returns

Question 22

What 4 scenarios might result in control arising without 50% of shares being owned?

Answer 22

1. Remaining shares owned by a large number of non controlling shareholders
2. A contractual arrangement
3. Investee is economically depending on the investor (e.g. most sales go to the investor)
4. The investor has potential voting rights (e.g. convertible bonds)

Question 23

What 4 conditions required for a parent not to prepare group accounts?

Answer 23

1. It is itself a wholly owned subsidiary (or part owned with the permission of the NCI), AND
2. It is not publically traded, AND
3. It is not in the process of filing for the public market, AND
4. The ultimate or intermediary parent produces group accounts

Question 24

What are the 3 options for valuing investment in the subsidiary in the parent company’s accounts?

Answer 24

1. Cost
2. Cost, revalued to fair value each year end
3. Using the equity method

Question 25

What is the name for ‘negative’ goodwill?

Answer 25

Gain on bargain purchase

Question 26

How is negative goodwill shown in the financial statements?

Answer 26

Dr Goodwill (Negative under equity)
Cr Income in the P&L