6. Consolidated financial statements Pt 1

Question 1

What is the definition of Consolidated Financial Statements?

Answer 1

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

Question 2

What are some reasons for consolidation?

Answer 2

Supply of relevant information
Comparable information
Accountability
Reporting of risks and benefits

Question 3

Does the process of consolidation requires the aggregation of the financial statements of a number of entities?

Answer 3

Yes

Question 4

Does the aggregation process affect the financial statements or accounts of entities within the group?

Answer 4

No

Question 5

What does the parent have to prepare for the financial statements?

Answer 5

A parent will prepare a set of consolidated financial statements showing the financial position,
financial performance and cash flows of a group of entities as if they were a single economic entity.

Question 6

What is the definition of power?

Answer 6

It is defined in Appendix A of AASB 10 as follows: Existing rights that give the current ability to direct the relevant activities.

Question 7

What is non-controlling interest?

Answer 7

Check…

Question 8

True or False?

The criterion for consolidation is that of control.

Answer 8

True

Question 9

What are the three characteristics of control?

Answer 9

(1) power over an investee,
(2) exposure or rights to variable returns from the investee, and (3) the ability to use power over the investee to affect the amount of the investor’s returns.

Question 10

What is power?

Answer 10

Power is the current ability to direct the relevant activities of an investee and arises from rights.

Question 11

What kind of returns must the parent have?

Answer 11

The returns to a parent must be variable and have the potential to vary as a result of the performance of the investee.

Question 12

Is there a link between power and returns?

Answer 12

Yes, in that a parent must have the ability to use its

power to affect its returns from its investment

Question 13

Are parent entities required to prepare consolidated financial statements?

Answer 13

Yes, by combining the financial statements of the members of the group.

Question 14

What happens when Australian subsidiaries have a foreign parent?

Answer 14

The ultimate Australian parent may have to prepare consolidated financial statements.

Question 15

Does the AASB provide anything for the preparation of consolidated financial statement?

Answer 15

Yes, where a higher parent does not meet AASB requirements.

Question 16

True or False?
Parent entities that meet all the conditions in paragraph 4(a) of AASB 10 are exempted from preparing consolidated financial statements.

Answer 16

True

Question 17

What is an acquirer?

Answer 17

An entity that obtains control of other combining entities or businesses.

Question 18

Is determining which entity is the acquirer important?

Answer 18

Yes, because it is the assets and liabilities of the acquiree that are adjusted to fair value in accordance with AASB 3. Also requires the consideration of many factors, not just which
entity owns a majority of the shares of another.

Question 19

True of false

AASB 10 does contain disclosure requirements for consolidated financial statements.

Answer 19

False

Question 20

Where a parent prepares separate financial statements, does the AASB 127 contains requirements relating to the information to be disclosed in those statements.

Answer 20

Yes

Question 21

What does AASB emphasis?

Answer 21

Disclosures for consolidated financial statements are contained in AASB 12 which emphasises the ability of users of financial statements to be able to evaluate risks.

Question 22

True or False?

AASB 12 requires specific disclosures by structured entities.

Answer 22

True

Question 23

what happens when the parent entity and the subsidiary’s have different reporting periods?

Answer 23

Adjustments must be made to the subsidiary’s statements before the preparation of the consolidated financial statements

Question 24

Is it required under the acquisition method the identifiable assets and liabilities of the acquiree are to be reported at fair value, business combination valuation reserve entries are prepared as part of the consolidation process?

Answer 24

Yes

Question 25

True or false?
Where the parent entity holds shares in the subsidiary, pre-acquisition entries are a part of the consolidation worksheet entries in order to ensure no double-counting of group assets and equity.

Answer 25

True

Question 26

Can a consolidation worksheet be used in the process of making consolidated financial statements?

Answer 26

Yes

Question 27

Why are consolidated worksheet entries prepared?

Answer 27

To make adjustments to convert the added-together financial statements of the parent and subsidiary to the financial statements of the group.

Question 28

When is an acquisition analysis prepared?

Answer 28

An acquisition analysis is prepared at acquisition date to identify the identifiable assets and liabilities of the subsidiary at fair value.

Question 29

Does an acquisition have to be revalued?

Answer 29

Where at acquisition date the parent holds shares in the subsidiary that it has previously acquired, this investment must be revalued to fair value at acquisition date and recognise the resulting gain or loss, if any, in profit of loss or other comprehensive income, as appropriate.

Question 30

What does the acquisition analysis determine?

Answer 30

Whether any goodwill or gain on bargain purchase has arisen as a part of the business combination.

Question 31

Are differences between carrying amounts and fair values recognised?

Answer 31

Differences between carrying amounts and fair values of the identifiable assets and liabilities of the subsidiary at acquisition date are recognised using business combination valuation reserves.

Question 32

What may the acquisition analysis include?

Answer 32

The recognition of assets and liabilities not recognised in the records of the subsidiary.

Question 33

What do business combination valuation entries recognise?

Answer 33

They are used to recognise the identifiable assets and liabilities of the subsidiary at fair values and goodwill measured as a residual amount.

Question 34

When the subsidiary has recorded a divided payable at acquisition date does it have to be taken into consideration?

Answer 34

Yes, when calculating the consideration transferred.

Question 35

When the subsidiary has recorded goodwill at acquisition date, do adjustments have to be made?

Answer 35

Yes, in the acquisition analysis to determine the amount of goodwill to be recognised in the consolidation worksheet.

Question 36

Do the pre-acquisition entries eliminate the reacquisition equity?

Answer 36

Yes, of the subsidiary and the investment account recorded by the parent.

Question 37

True or false?
The business combination valuation entries change in periods after the acquisition date as the assets held by the subsidiary at that date are either consumed or sold, and liabilities are settled.

Answer 37

True

Question 38

Do transfers to and from pre-acquisition reserves affect the pre-acquistion entries?

Answer 38

Yes, in periods after the acquisition date.

Question 39

Do bonus dividends, dividends paid or payable from pre-acquisition equity after the acquisition date affect the pre-acquisition entries?

Answer 39

No

Question 40

Are pre-acquisition entries prepared after acquisition date affected by changes in the business combination valuation entries?

Answer 40

Yes

Question 41

The adjustments to change the carrying amounts of the identifiable assets and liabilities of the subsidiary to fair value at acquisition date may be made via what?

Answer 41

The consolidation worksheet or in the actual records of the subsidiary.

Question 42

There are costs associated with applying the revaluation model in the subsidiary’s accounts, which may result in?

Answer 42

An entity preferring to make value adjustments in the consolidation worksheet.

Question 43

Can assets be measured using the the revaluation

Answer 43

Only some assets can be measured using the revaluation model in the subsidiary’s accounts.

Question 44

Is an acquirer required by AASB 3 to disclose information in its financial statements?

Answer 44

Yes, to enable users to evaluate the nature and financial effect of each business combination during the reporting period.

Question 45

What does AASB 12 contain?

Answer 45

It establishes the disclosures relating to a parent’s interests in subsidiaries.

Question 46

When does a reverse acquisition occur?

Answer 46

When the legal subsidiary in a business combination has the power to govern the financial and operating policies of the legal parent.

Question 47

What happens to the subsidiary in a reverse acquisition?

Answer 47

In the case of a reverse acquisition, the subsidiary effectively becomes the acquirer and its assets and liabilities are measured at fair value.

Question 48

What is an example of a reverse acquisition circumstance?

Answer 48

One circumstance that creates a reverse acquisition is where a legal parent issues enough voting equity as consideration in an exchange transaction so that control of the combined entity passes to the owners of the legal subsidiary.