Topic 5 - Consolidation of Wholly Owned Subsidiaries Flashcards
What are the four steps involve with the Consolidation Process?
- Acquisition analysis
- Business Combination Valuation Adjustments
- Elimination of pre-acquisition equity / ‘Investment in subsidiary’ account
- Intra-Group Transactions
What do we do in an Acquisition analysis?
compare FVINA minus any continent liabilities as at acquisition date with the consideration transferred.
Do we use book or fair value to calculate the FVINA?
ALWAYS fair value
When is there goodwill and when is there a gain on bargain purchase?
Goodwill = FVINA Consideration transferred
how is FVINA often determined using equity? rather than using the individual asset and liability balances.
determine the FVINA with reference to the equity balances = Equity of the subsidiary +/- Fair Value adjustments to A/L
Where do the fair value adjustments go?
Business Combination Valuation Reserve BCVR
Where control is achieved in stages, i.e. step by step acquisition, what must first be done before the acquisition analysis can be carried out? does this affect the consolidation worksheet?
previously Held Equity Interest be revalued to fair value prior to performing the acquisition analysis.
These entries are made in the parents books, therefore the consolidation entries remain unchanged.
BCVR: When are Fair Value Adjustments required?
- If the book value of the subsidiary’s A/L ≠ fair value, or
* An unrecognized contingent liability exists
Where are Fair value adjustments are made to?
Business Combination Valuation Reserve’ (BCVR) (similar to Asset Revaluation Reserve):
• Increases/decreases in FV (net of tax)
• Goodwill on Consolidation
What entries are made to revalue an assets to fair value (assuming FV > BV)
DR Asset
CR Deferred Tax Liability (DTL)
CR Business Combination Valuation Reserve (BCVR)
What entries are made to revalue a liability (assuming FV > BV) or recognise an unrecorded contingent liability
DR Business Combination Valuation Reserve
DR Deferred Tax Asset (DTA)
CR Liability
What is the purpose of Pre-Acquisition Elimination Entries?
- Eliminate the problem of ‘triple-counting’ of the subsidiary’s net assets
- Offset Parent’s ‘Investment in Subsidiary’ account against Subsidiary’s Equity Account (as at acquisition date) ‘Pre-Acquisition Equity’
Why are Pre-acquisition equity i.e. equity balances that existed in the subsidiary prior to acquisition date, eliminated and investment in subsidiary eliminated?
From a Group’s perspective, you cannot have an investment in yourself, nor can you have equity in yourself.
IMPORTANT ONLY pre-acquisition equity is eliminated, not post- acquisition equity
How does the BCVR amount change when you have a gain on bargain purchase instead of goodwill?
you credit gain on bargain purchase separately.
whereas with goodwill the amount would have been included in the BCVR amount.
Which three steps must be completed for consolidation in subsequent years?
- BCVR enteries
- Pre acquisition elimination enteries
- intra group transactions
