5 Consolidations and Segment Reporting Flashcards
What is the IFRS 3 definition of business combination?
Transaction or other event in which an acquirer obtains control of one or more business.
What is the IFRS 10 definition for control?
A parent is exposed, or has rights, to variable returns through its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.
How does power arise?
Power arises from rights (e.g., voting rights attaching to shares), or one or more contractual arrangements. De facto control.
Define acquisition
The accounting method used for business combinations (IFRS 3).
What are the 5 bases for acquisition accounting?
Who is the acquirer and who is the acquiree?
When is the acquisistion date?
Purchase price.
Recognition and measurement of assets, liabilities and non-controlling interest.
Accounting for goodwill.
Define goodwill
Future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.
What comes under goodwill?
(name 5)
Workforce, reputation, innovative capacity, market power, synergy possibilities, etc
Example: P bought 100% of the shares of S at a purchase price of £100,000. The book value of the net assets of S at the acquisition date according to the balance sheet of S was £70,000. The fair value of the net assets of S at the acquisition date was £80,000.
Explain how to calculate the goodwill on consolidation in accordance with IFRS 3.
100% of the shares for £100,000.
As we are dealing with transactions, we are concerned with fair value not book value.
Goodwill = £100,000 - £80,000 = £20,000
Goodwill equation
Goodwill = Purchase price - (fair value of assets - fair value of liabilities)
How is goodwill measured after recognition?
(IFRS 3)
Measured at cost less any accumulated impairment losses (not amortised).
How is impairment recognised for goodwill?
(IFRS 3)
Treated for impairement annually, or more frequently if events or changes indicate that it might be impaired (consitent with identifiable intangible assets with indefinitite lives).
What is non-controlling interest?
When the acquirer buys less than 100 percent of the shares of the acquiree, there is a part of ‘non-controlling interest’ in the acquiree.
How is NCI measured?
(2)
The non-controlling interest’s proportionate share of the acquiree’s identifiable net assets at fair value (consider NCI does not get affected by goodwill).
Fair value: consider the purchase price allocation will be based on the purchase price that the acquirer would have paid if it acquired 100 percent of the shares.
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the goodwill using proportionate net assets.
Purchase price: 180,000
Net assets @FV (200,000*0.7) = 140,000
Goodwill = 180,000 - 140,000 = 40,000
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the goodwill using proportionate NCI.
Purchase price = 180,000
NCI (200,000*0.3) = 60,000
180,000 + 60,000 = 240,000
Net assets @FV = 200,000
Goodwill = 240,000 - 200,000 = 40,000
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the 100% value and net assets.
Purchase price (100%) = 250,000
Net assets @FV = 200,000
Goodwill = 250,000 - 200,000 = 50,000
Example: P bought 70% of shares of S at purchase price of £180,000. The fair value of the net assets of S at the acquisition date was £200,000. If P had acquired 100% it would have been £250,000.
Calculate the 100% NCI and net assets.
Purchase price = £180,000
NCI (250,000-200,000) = £50,000
£180,000 + £50,000 = £230,000
Net assets @FV = £180,000
Goodwill = £230,000 - £180,000 = £50,000
What is the rationale for consolidated financial statements?
They are one economic entity.
Recognition and measurement for consolidated accounts.
(5)
- recognise and revalue the acquired net assets to fair value at acquisition date
- calculate the goodwill, eliminate investment of the parent on the subsidiary and add in the goodwill on consolidation
- only include the parent share of the post-acquisition profits in the consolidation
- recognise inter-company trading and eliminate unrealised profits
- include non-controlling interest
PPE row on the consolidated statement 31 Dec 20X9
25,000 + 6,000 = 31,000
Goodwill row on the consolidated statement 31 Dec 20X9
9,000 - (80%*6000) = 4,200
Current assets row on the consolidated statement 31 Dec 20X9
11,000 + 2,000 = 13,000
Share capital row on the consolidated statement 31 Dec 20X9
30,000
Retained earnings row on the consolidated statement 31 Dec 20X9
15,000 + [80%*(3000-1000)] = 16,600
Non-controlling interest row on the consolidated statement 31 Dec 20X9
[20%*6,000] + [20%*(3,000-1,000)]
Revenue row on the comprehensive income statement 31 Dec 20X8
20,000 + 10,000 - 2,000 *eliminate intercompany trading
= 28,000
Cost of sales row on the comprehensive income statement 31 Dec 20X8
15,000 + 6,000 - [1,600 + (70%*400)] *eliminate intercompany trading
= 19,120
Distribution and administrative expenses on the comprehensive income statement 31 Dec 20X8
Dist: 300 + 300 = 500
Admin: 600 + 700 = 1,300
Tax row on the comprehensive income statement 31 Dec 20X8
1640 + 1085 = 2,725
Attributable to non-controlling interest row on the comprehensive income statement 31 Dec 20X8
From Net Income on S:
2015*20% = 403
What is the goodwill?
Cost of investment = 350
20% of A’s net assets = (20%*1000) = 200
350 - 200 = 150
What is P’s share of the income of A?
Net income of A for the year: 1500 - 1000 = 500
20%*500 = 100
What is the consolidated statment of financial position of P (end of 20X9)?
Given goodwill is 150 and P’s share of A’s income is 100.
