BUSINESS COMBINATION Flashcards
(18 cards)
Business combination
When an acquirer gains control over another business
Busines:
Assets/liabilities revalued to fair value, may generate goodwill or gain on bargain
Non business
No revaluation, no goodwill or gain recognition
Group structure
Parent and subsidiary treated as one economic entity, but remain separate legal entities
Control IFRS10
To gain control all 3 must be met:
Power over investee (voting rights, borad appointments
Exposure to variable returns (dividends, interest, residuals)
Ability to use power to affect returns
- direct control (parent directly owns majority interest)
- indirect control (control through another subsidiary (ownership claim))
The acquition method
- Identify the acquirer
- Determine the acquirision date
- Recognise assets and liablities at FV
- Recognise goodwill / gain on bargain
Goodwill =.
Consideration - FV of net assets
Gain on bargain
FV of net assets > consideration (recorded as income)
Goodwill
Asset: future economic benefits.
Cannot be separately sold or measured.
E.g. brand reputation, customer loyalty
Subject to impairment testin.
Consolidated financial statements
Combine all assets, liabilities, equity, income and expenses of parent and subsitiaries as one single entity.
To present group performance clearly, and provide relevant comparable information to users.
Consolidation process
Eliminate:
- parents investment in subsidariy
- intra group balances and transactions
Ensure uniform accounting policies across group.
Adjust entries to align subsidariys policies with parents .
Consolidation journals
Basic acquisition
Dr. Contributed equity
Dr. Retained earnings
Dr goodwill
Cr. Investment in subsidiary
Consolidation journals
Gain on bargain
Dr constibuted equity
Dr retained earnings
Cr investment in subsidiary
Cr gain on bargain purchase
Consolidation journals
Revaluation required
Dr contributed equity
Dr retained earnings
Dr revalyeaiton surplus
Dr goodwill
Cr investment in subsidiary
Intra group transactions
Dividends, inventory sales, PPE sales, services, loans.
Must be eliminated in full from consolidated financials.
Intra group journals dividends
Sibsidiary declares dividend
Dr dividend declared
Dr dividend payable
Intra group journals dividends
Parent records
Dr dividend receivable
Dr dividend income
Intra group journals dividends
Elimination
Dr dividend payable
Cr dividend declared
Dr dividend income
Cr dividend receivabel
