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Financial Reporting > Group Financial Statements > Flashcards

Group Financial Statements Flashcards

0
Q

How many shares of a subsidiary does a parent need to own for the parent to have control?

A

over 50%

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1
Q

What is the definition of a business combination?

A

A business combination is a transaction in which an acquirer obtains control of one or more business

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2
Q

What is the purpose of consolidated financial statements?

A

The purpose of consolidated financial statements is to show the group as a single economic entity.

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3
Q

How should assets & liabilities be treated in the consolidated statement of financial position?

A

Include all of the parent and subsidiary. Exclude any intra group balances such as receivables and payables

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4
Q

How should goodwill acquired in a business combination be treated?

A

Treated as an intangible asset in the consolidated statement of financial position, with no annual amortisation charges but with an annual review of impairment.

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5
Q

What is a bargain purchase in a business combination and how should it be treated?

A

Where the fair value of consideration is less than the fair value of the net assets acquired.
> Reassess the identification and measurement of the new assets acquired and the measurement of the consideration transferred.
> Recognise any remaining balance as a gain in the consolidated income statement in the period of acqusition.

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6
Q

How should unrealised intra-group profit on inventory be treated?

A

Reduce the consolidated inventory by the amount of the unrealised profit.
> If P sells to S, reduce the group retained earnings by the entire PURP
> If S sells to P, reduce the S retained earnings by the PURP amount within working 2 of the Net Assets of the Subsidiary calc.

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7
Q

How should the equity in a consolidated statement of financial position be calculated?

A

All of P’s share capital and reserves and P’s share of S’s post acquisition reserves.
Adjust retained earnings for any accumulated impairments of goodwill, PURP etc.

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8
Q

How should the non-controlling interest be presented within equity of a consolidated statement of financial position?

A

IN RETAINED EARNINGS = Take the amount of net assets post acquisition and multiply by the % owned.

IN NCI = Take the amount of net assets (working 2) at the year end and multiply by the % not owned.

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9
Q

Where there is a mid year acquisition of subsidiary what are the reserves of the subsidiary?

A

Reserves at acquisition are opening reserves plus profit earned up to the date of acquisition .
It is assumed that a subsidiary’s profits accrue evenly over time.

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10
Q

What is step 1 of the standard workings for a consolidated statement of financial position?

A

Establish a group structure : -

P ——————-> S
80%

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11
Q

What is step 2 of the standard workings for a consolidated statement of financial position?

A

Net assets of the subsidiary (one calc for each subsidiary)

                                           @Y/E         @Acq          @Post Acq  Share Capital                            x                 x Retained Earnings                    x                 x                        PURP where S sold                (x)
                                \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
                                            1x                2x                    3x
1x = NCI working (4) 
2x = Goodwill working (3)
3x = Retained Earnings working (6)
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12
Q

What is step 3 of the standard workings for a consolidated statement of financial position?

A

Goodwill (Intangible asset in SOFP)
£
Consideration transferred x
Less Net Assets @ Acquisition (W2) (x)
Add NCI @ Acquisition x
____
x
Less impairment (x)
____
Goodwill of Subsidiary x

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13
Q

What is step 4 of the standard workings for a consolidated statement of financial position?

A

Non Controlling Interest

Share of net assets at Y/E (re W2) x % not owned

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14
Q

What is step 5 of the standard workings for a consolidated statement of financial position?

A

Investments in Associates (Investments)

                                                                                           £ Original Cost                                                                          x Add Share of post acquisition retained earnings (W6)         x Less impairment                                                                   (x) Less PURP                                                                           (x) Less FV depreciation                                                            (x)
                                                                                        \_\_\_\_ Investment                                                                             x
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15
Q

What is step 6 of the standard workings for a consolidated statement of financial position?

A

Retained Earnings

                                                                                £ Parent Retained Earnings                                           x Less PURP (where the parent sells)                          (x) Sub % retained earnings (re step 2)                          x Less impairment                                                        (x) Ass % retained earnings (re step 5)                           x Less impairment                                                        (x)
                                                                              \_\_\_ Retained Earnings                                                      x
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16
Q

How should income and expenses be treated in the consolidated income statement?

A

Include all P and all of S. Exclude any dividend income from S

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17
Q

How should intra group sales be treated in the consolidated income statement?

A

Deduct the amount of intra group SALES from both revenue and cost of sales. Add amount of unrealised PROFIT to sellers cost of sales.

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18
Q

How should the mid year acquisition of a subsidiary be treated in the consolidated income statement?

A

Time apportion S’s profit and deduct any intra group items

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19
Q

What is step 1 of the standard workings for a consolidated income statement?

A

Establish a group structure

P ———————-> S
80%

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20
Q

What is step 2 of the standard workings for a consolidated income statement?

A

Prepare consolidation schedule
Parent Subs Adj Consolidated
Revenue per Q x x x

Cost of Sales per Q (x) (x)
Inventory NRV adj (x)
PURP (x)
FV adj (x) (x)

Expenses per Q           (x)                 (x)
Goodwill impairment   (x)                                                        (x)

Tax per Q (x) (x)
_________________________________________
PROFIT x x1 x

X1 =Sub prof figure used in step 3 NCI profit %

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21
Q

What is step 3 of the standard workings for a consolidated income statement?

A

Non Controlling Interest
£
Sub Profit x% x

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22
Q

How is the share capital calculated in the statement of changes in equity?

A

The share capital should be the P only, including new shares issued in the period

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23
Q

What is an associate?

A

An associate is an entity over which the group has significant influence, but not control. A holding of 20%> is presumed to give significant influence.
The associate is not part of the group because the group comprises only the P & S

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24
Q

How should the associate be accounted for?

A

Associates should be accounted for by the equity method of accounting

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25
Q

What is the equity method?

A

The equity method is a method of accounting whereby the associate is initially recognised at cost and adjusted thereafter for the post acquisition change in the parents share of the associate.
The profit and loss of the parent includes the parents share of the profit or loss of the associate.

26
Q

When a group disposes of all of a subsidiary where should this be recognised?

A

> The parents separate financial statements

> The consolidated financial statements

27
Q

How should the profit or loss on the disposal of a subsidiary be calculated in the parents financial statements?

A

£
Sales Proceeds x
Less : carrying amount (cost in p’s own SOFP) (x)
—
Profit or loss on disposal x

28
Q

How should the profit or loss on the disposal of a subsidiary be calculated in the consolidated financial statements?

A

£ £
Sales Proceeds x
Less:
Carrying amount of goodwill @ date of disposal:-
Consideration transferred @ acquisition date x
NCI at acquisition date x
—-
x

Net assets @ acquisition date (x)
—-
Goodwill @ acquisition date x
Impairment to date (x)
—-
Goodwill at disposal (x)
Carrying amount of net assets at date of disposal w1 (x)
Add back:
Non controlling interest in net assets at date of disposal x
—–
Profit/loss on disposal x

(W1) Carrying Amount of Net Assets
Net Assets brought forward x
Profit/loss for current period to date of disposal x
Dividends paid in current period prior to date of disposal (x)
—-
Net assets at date of disposal x

29
Q

What is the definition of control?

A

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities

30
Q

What are the four circumstances where control exists even though P has less than 50% of the voting rights of S?

A

1) P has the power over more than 50% of the voting rights through the existence of an agreement with other investors.
For example P may own 40% of the voting rights but shareholders owning a total of 21% between them agree not to vote on resolutions. P owns 40% of the 79% of voting.
2) P has the power to govern the financial and operating policies of S either by agreement or through statute.
3) P has the power to appoint or remove the majority of the board of directors of S and that body controls S
4) P has the power to cast the majority of votes at a meeting of the board of directors of S and that body controls S

31
Q

What are potential voting rights and why should they be taken into account when determining whether controls exists?

A

In determining whether controls exists potential voting rights stemming from financial instruments such as a convertible debt, warrants and options should be taken into account, but only when the instruments giving rise to them are CURRENTLY EXERCISABLE or CONVERTIBLE, that is:
> During the conversion period from convertible debt
> During the exercise period for warrants and options
In such cases the entitlement to these extra voting rights provides the POWER to govern the policies of another entity

32
Q

What is the definition of a special purpose entity?

A

A special purpose entity is another entity which has been created to ‘accomplish a narrow and well defined objective’

33
Q

What happens if an entity has control over a special purpose entity?

A

If an entity has control over a special purpose entity, then the special purpose entity should be consolidated as part of the consolidated financial statements

34
Q

Under what circumstances is the special purpose entity under the control of the entity?

A

Control is determined where: -
> The activities of the SPE are conducted on behalf of the entity, with the entity obtaining benefits from the SPE’s operations
OR
> The entity has the decision making powers which lead to obtaining the majority of the benefits of SPE’s operations
OR
>The entity has the right to the majority of the benefits of the SPE and as result may also be exposed to the majority of the risks associated with the SPE’s activities
OR
>The entity retains the majority of the residual ownership risks related to the SPE or its assets

35
Q

What happens where an entity gains control after purchasing shares on different dates?

A

On the acquisition date the acquirer should recognise the acquirees identifiable net assets and any goodwill acquired in the business combination.
An acquirer which gained control after purchasing shares on different dates should :
> Remeasure entity held immediately before control gained at its fair value at the acquisition date
> Recognise the gain or loss on remeasurement in profit or loss

36
Q

What are the two ways that NCI can be measured at the acquisition date?

A

1) As the NCI’s share of the acquirees net assets

2) At the NCI share of fair value

37
Q

How is goodwill measured where NCI is measured at FV and at share of net assets

A

FAIR VALUE =

Consideration transferred
Less Fair Value @ acqusition
Add NCI Fair Value @ acqusition
GOODWILL

SHARE OF NET ASSETS =

Consideration transferred
Less net assets @ acqusition
Add NCI % @ acqusition
GOODWILL

38
Q

If on acquisition of NCI it is valued at fair value how should it be measured subsequently?

A

Fair Value of NCI @ acquisition date
NCI x % post acquisition
= NCI

39
Q

How is impairment of goodwill for a subsidiary calculated where the NCI is measured as a share of net assets?

A

£
NCI of net assets (working 4 on group workings) x
Gross up the goodwill to 100% (GWx100/%) x
——-
x
Recoverable amount (x)
——-
Impairment Loss x

Only the parents share of the impairment loss is charged to the p&l (deducted from parents retained earnings)

40
Q

How is impairment of goodwill for a subsidiary calculated where the NCI is measured at fair value?

A

£

NCI of net assets (working 4 on group workings) x
Fair value of goodwill x
——-
x
Recoverable amount (x)
——-
Impairment Loss x

The impairment loss is split between the parent and the NCI

41
Q

What happens if there are losses in the subsidiary?

A

The losses should be split between the parent and NCI. If the NCI makes continuous losses it is possible for the NIC balance to be negative i.e a debit.

42
Q

What is deferred consideration in respect of buying a subsidiary and how should it be treated?

A

Deferred consideration is where some of the consideration towards the purchase of a subsidiary is not paid until a later date. Deferred consideration should be measured at its fair value at the acquisition date.

IF THE CONSIDERATION IS EQUITY SHARE =
> Its fair value should be measured at the acquisition date.
> The deferred amount should be recognised as part of equity, under a separate heading ‘shares to be issued’

IF THE CONSIDERATION IS CASH =
> A liability should be recognised at the present value of the amount payable.

43
Q

What is the definition of contingent consideration?

A

Contingent consideration is an obligation of the acquirer to transfer additional consideration to the former owner of the acquiree if specified future events occur or conditions are met

44
Q

Assuming provisional figures are used for fair values in respect of net assets on the acquisition of a subsidiary what is the time frame to make adjustments?

A

> Within 12 months of the date acquisition = permitted to make FV adjustments to net assets
After 12 months of the date of acquisition = No adjustments to FV permitted.

45
Q

What is the definition of a joint venture?

A

A joint venture is a contractual arrangement whereby two or more parties (venturers) undertake an economic activity that is subject to joint control

46
Q

What are the key characteristics of a joint venture?

A

> The venturers have a contractual agreement between themselves
The agreement results in them having joint control over the shared activities

47
Q

What is the definition of a venturer?

A

A venturer is a party to a joint venture and has joint control over the joint venture

48
Q

What is the definition of joint control?

A

Joint control is a contractually agreed sharing of control over an economic activity and exists only when the strategic, financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control

49
Q

What is the definition of an investor?

A

An investor in a joint venture is a party to a joint venture and does not have joint control over the joint venture.
An investor will hold between 0 - 20% of the shares

50
Q

What is a contractual agreement?

A

A contractual arrangement will usually be in writing either as a formal document or in the form of minutes from a meeting.
It will cover the purpose of the joint venture, the duration and how income and expenses are to be shared.
In addition, the process for resolving disputes should be agreed together with an exit strategy.

51
Q

What are the 3 broad types of joint venture?

A

1) Jointly controlled operations
2) Jointly controlled assets
3) Jointly controlled entities

52
Q

What is a jointly controlled operation?

A

A jointly controlled operation is where : -

1) No separate entity is set up
2) The parties to the transaction share the activities that are to be carried out
3) The contractual arrangement will normally set out how revenue and expenses are to be shared.

53
Q

Under a jointly controlled operation what will the ventures do?

A

1) Pool their resources
2) Provide their expertise
3) Use their own property, plant and equipment
4) Incur their own expenses
5) Be responsible for raising their own finance

54
Q

How should each venturer account for a jointly controlled operation?

A

Each venturer should recognise the following amounts in its own individual entity financial statements :

1) Its share of income from the operations
2) The expenses that it incurs relating to the operation
3) Its property, plant and equipment that it uses to carry out the activities of the operation
4) Any other of its assets involved in the operation
5) Any liabilities that the venturer has an obligation to meet

At the end of each accounting period it will be necessary to produce a memorandum income statement for the joint venture combining all the income and expenses of ALL the venturers so that a calculation can be made on the profit entitlements of each venturer.
Each venturer should then recognise a receivable and or a payable

55
Q

What are jointly controlled assets?

A

A joint venture uses jointly controlled assets when : -
> No separate entity is set up
> The assets may be jointly owned
> The venturers use the assets as an extension of their own activities
> The assets are used to generate benefits to be shared by each of the venturers
> Each venturer will normally bear an agreed share of the expenses incurred.

THE MOST IMPORTANT POINT IS THAT THE ASSETS ARE JOINTLY CONTROLLED.

A common example is an oil pipeline. Whereby each venturer uses the pipeline to transport its own supply of oil and pays a proportion of the running costs.

56
Q

How is a jointly controlled asset accounted for?

A

A venturer should recognise the following in its own financial statements :

1) Its share of the jointly controlled assets
2) Any liabilities that the venturer has an obligation to meet
3) Its share of any liabilities that are jointly incurred
4) Expenses incurred by the venturer
5) Its share of expenses incurred jointly
6) Its share of any revenue.

57
Q

What is a jointly controlled entity?

A

The key identifying factor for a jointly controlled entity is that in this type of joint venture arrangement separate legal entity is set up, with the ownership of that entity being shared by the venturers.

As a separate legal entity it will maintain its own accounting records and prepare its own financial statements.

58
Q

How is a jointly controlled entity accounted for?

A

Each venturer in a jointly controlled entity is required to recognise in its consolidated financial statements its share of the entity by either :

1) Proportionate consolidation
2) The equity method of accounting

59
Q

What is proportionate consolidation?

A

There are two methods for presenting proportionate consolidation :

1) LINE BY LINE = By adding the relevant proportion of the jointly controlled entity’s assets, liabilities, income and expenses on a line by line basis to those of the venturer - this results in a single line for each figure.
2) SHARE SHOWN SEPARATELY = By splitting each line of the financial statements between the amount which relates to the venturer and that which represents the proportion of the jointly controlled entity.

60
Q

What is the equity method of accounting?

A

Under the equity method of accounting the investment in the jointly controlled entity is initially recorded at cost. There are then adjustments each period for the venturers share of the retained profits or losses of the jointly controlled entity for the current period.

In the venturers consolidated statement of financial position the investment in the jointly controlled entity is shown as a single line figure as part of non-current assets.

In the venturers consolidated income statement there is a single line for the share of the jointly controlled entity’s results.

61
Q

What are the comparisons of IFRS and UK GAAP for consolidated financial statements?

A 
UNDER UK GAAP : - 
Merger accounting (a method of consolidating a subsidiary) is required where certain criteria are met

UNDER IFRS : -
Merger accounting is not allowed. All business combinations are to be accounted for using the acquisition method.

UNDER UK GAAP : -
Minority interest is always measured at its share of net assets

UNDER IFRS : -
IFRS 3 allows non-controlling interest to be measured at fair value or its share of net assets

UNDER UK GAAP : -
Acquisition-related costs are added to the cost of the investment in the subsidiary and affect goodwill.

UNDER IFRS : -
Acquisition-related costs are recognised as an expense in profit and loss as incurred.

UNDER UK GAAP : -
Goodwill is usually amortised over its estimated useful economic life.

UNDER IFRS : -
Prohibits amortisation and requires annual impairment reviews

62
Q

What are the comparisons of IFRS and UK GAAP for associates?

A

UNDER UK GAAP : -
The investors share of the associates operating results, exceptional items, interest, profit before tax should be separately disclosed.

UNDER IFRS : -
The investors share of the profit or loss of an associate is to be disclosed.

Financial Reporting (25 decks)

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