Week 7 Flashcards
Reasons regulators require parents to prepare consolidated statements
- To supply relevant info to investors in the parent entity
- Allow comparison of group to other entities
- Assist discharge of accountability by management of the group
- Report risks and benefits of group as single economic entity
Reasons regulators require parents to prepare consolidated statements
- Allow comparison of group to other entities
- Some entities are organised into a group structure such that different activities are undertaken by separate entities within the group.
- Other entities are organised differently, with some having all activities conducted within the one entity.
- Access to consolidated financial statements makes comparisons across the group an easier task for the users of financial statements.
Reasons regulators require parents to prepare consolidated statements
To supply relevant information to investors in the parent entity.
- A shareholder’s wealth in the parent is dependent not only on how that entity performs, but also on the performance of the other entities controlled by the parent.
three elements that must be held by an investor in order for it to have control:
- power over the investee
- exposure, or rights, to variable returns from its involvement with the investee
- the ability to use its power over the investee to affect the amount of the investor’s returns.
Power over the investee
four characteristics of power
- power is related to relevant activities
- power arises from existing rights
3, power is the ability to direct
- the ability to direct must be current to have power.
Power over the investee
four characteristics of power
power related to relevant activities
activities of the investee that significantly affect the investee’s returns
Power over the investee
four characteristics of power
power arising from existing rights - voting rights
when investor has more htan 50% of voting shares?
where an investor holds more than half of the voting rights of the investee
Power over the investee
four characteristics of power
power arising from existing rights - voting rights
when investor has less than 50% of voting shares?
examine the potential actions of other shareholders in the investee.
business combination occurs when
acquirer obtains control of another business or businesses
Direct acquisition
acquirer purchases assets of the acquiree and possibly assumes liabilities then recognising these assets and liabilities in its own accounts.
Direct acquisition
what does acquiree do?
acquiree will will then either continue to operate with a reduced level of assets and liabilities (if partial net assets are acquired) or may liquidate (if all its net assets are acquired).
Direct acquisition
How to identify the acquiree
net assets acquired, not the entity from whom the net assets were acquired.
Indirect acquisition
acquirer purchases sufficient shares in another entity to obtain control of that entity and hence control that entity’s net assets
Indirect acquisition
what does the acquiree do
acquiree and does not liquidate, but continues its operations with no change in its assets and liabilities.
indirect acquistion
how is acquiree identified
the transaction is between the acquirer and the shareholders of the other entity and the acquiree is identified as the entity (represented by net assets) over whom control is obtained.