KCB Notes - Group Accounts Flashcards
What is the definition of a parent company? What is the definition of a subsidiary?
What defines if it is a parent company or not?
A parent company is an entity that controls one or more entities.
A subsidiary company is an entity controlled by another entity (parent company)
A company is a parent company of another company (known as its subsidiary) if:
a) it controls it through owning a majority of the voting shares.
b) through having the power to appoint the board, through a control contract.
c) by a power in the subsidiary’s governing document or
d) through other mechanisms specified in the Companies Act 2006 or accounting standards.
What standards / legislation provides information in relation to the need to prepare group accounts?
IFRS 10: If one company controls another, a single set of consolidated financial statements need to be prepared to reflect
the financial performance and position of the group as one combined entity.
CA 2006 : If a business operates through more than one company, group accounts have to be prepared that give a clear picture of the total activities that the company controls.
In the parent company definition, what should be considered under the elements of control?
Power over the investee is typically existing rights, normally exercised through most of voting rights (owning more than 50% of the equity shares).
Exposure or rights to variable returns (a dividend) stems from the investor’s involvement with the investee.
A crucial determinant of the control is the ability to use power over the investee to affect the amount of investor returns.
Define goodwill.
Goodwill is:
The price paid for a company at acquisition (to gain control) will normally exceed the fair market value of its net assets or equity. The difference is PURCHASED GOODWILL.
This represents the additional amount paid for factors such as the reputation of the business, the experience of employees, the customer base and the brand of the business.
Purchased goodwill is the difference between the VALUE of an acquired entity (including any NCI) and the NET ASSETS of that entity’s identifiable assets and liabilities.
What is non - controlling interest?
Non-controlling interest is where the parent owns less than 100% of the ordinary share capital of a subsidiary, the interest not controlled
by the parent is called the NCI.
What happens to the share of the parent companies pre-acquisition and post-acquisition profits in Group accounts?
PRE- ACQUISITION
The share of the parent co of Pre acquisition profit is taken into the calculation of goodwill. Goodwill is an intangible asset and will be displayed on the Statement of Financial Position as a non-current asset.
POST ACQUISITION
The share of the parent co of post acquisition profit is included in the Consolidated Retained Earnings.
What is a joint venture?
Businesses often go into partnership with other businesses on profit - raising ventures under joint ventures, which are dealt with in IFRS 11 (Joint Arrangements).
- A joint venture is a business arrangement whereby the parties that have joint control of the arrangement agree to pool their resources and expertise to achieve a particular goal.
- They have joint rights to the assets and obligations for the liabilities relating to the arrangement. The risks and rewards of the enterprise are also shared.
What may be some of the reasons behind a joint venture?
Reasons behind the formation of a joint venture often include:
- business expansion
- development of new products
- moving into new markets, such as those overseas
How are joint ventures recognised in accounting?
The parties to a joint venture must recognise their interest in a joint venture as an investment and account for it using the equity method in accordance with IAS 28.
What information does IAS 28 equity method provide for joint ventures?
International Accounting Standard 28 sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.
The equity method initially recognises the investment in an associate or a joint venture in the investor’s statement of financial position at cost. It adjusts the carrying amount thereafter with the change in the investor’s share of the post-acquisition profit (or loss) of the investee.
The equity method is sometimes called a ‘one-line consolidation’.
International Accounting Standard 28 requires the use of the equity
method of accounting for investments in associates and joint
ventures (the investee), whereby the investment is initially recorded
at cost and adjusted thereafter for the post-acquisition change in the
investor’s share of the profit (or loss) of the investee.
The value of the investment is cost plus the group’s share of the
investee’s post-acquisition profits or losses
How is the carrying amount of an investment calculated under IAS 28?
The carrying amount of the investment in an associate or joint venture is calculated as follows:
- Cost of investment X
PLUS - Group percentage share of post-acquisition profits or losses
and other comprehensive income (since acquisition) X
LESS - Impairment losses (X)
LESS - Group percentage share of unrealised profits (when the investor is the seller) (X)
List key factors under IAS 28 - Equity Method
- As associates and joint ventures are not controlled, their financial statements
may be prepared to a different date to that of the investor. - IAS 28 allows some latitude for differences in year ends, but only up to a three month difference.
- If the year-end dates are further apart than three months, special accounts would be required from the associate or joint venture.
- Any transactions such as sales or purchases between group companies and the associate or joint ventures are not normally eliminated: they will remain part of the consolidated figures in the consolidated statement of profit or loss and OCI.
- It is normal practice to adjust for the group share of any unrealised profit in inventory.
- As per IAS 28, the equity method is discontinued when significant influence or joint control is lost or if the investor’s interest changes to achieve control. At this point, the associate or joint venture will become a subsidiary
