Business Combinations

Question 2

How is Power defined in relation to Business Combiantions?

Answer 2

An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee AND has the ability to affect those returns through its power over the investee

Question 3

What are the reasons behind the need for consolidated accounts?

Answer 3

• It became relatively easy (and common) for reporting entities to set up other entities with little/ no legal ownership interest but which they effectively controlled
• Such entities were used to undertake borrowings
• These did not appear in the company’s financial statements (misleading)

Question 4

When is Consolidation typically required?

Answer 4

When a company has a majority of the voting shares, or the power to appoint or remove the majority of the board of the investee company, or has the ability to direct those activities which significantly affect investee’s returns

Question 5

How do we account for an investment of a Parent Company in the SOFP (balance sheet)?

Answer 5

• Investment is an asset
• Measured in accordance with IFRS 9

Question 6

How do we account for an investment of a Parent Company in separate financial statements?

Answer 6

• At cost
  OR
• At FV through profit or loss

Question 7

How do we account for a 100% Acquisition?

Answer 7

Step 1 - Financial statements of both are combined line-by-line adding together their assets and liabilities
Step 2 - Measurement of subsidiary’s assets and liabilities are at their FAIR VALUE at acquisition date
Step 3 - The carrying amount of the parent’s investment in subsidiary and equity of subsidiary are eliminated

Question 8

What is Goodwill on acquisition and how can it arise?

Answer 8

• Represents a payment made by acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised
• Happens when P pays S more than fair value as the economic benefit it expects cannot be individually identified (e.g. skill of the workforce)

Question 9

How do we measure Goodwill arising on acquisition?

Answer 9

• Measured initially as the difference between fair value and cost of acquisition
• Tested for impairment annually
• If a company pays less than the fair value, this is a “bargain purchase” and GW is recognised immediately in income statement (increases consolidated profit / retained earnings)

Question 10

How do we account for a Subsidiary’s Intangible Assets in an acquisition?

Answer 10

If they can be identified and “fair valued”:
- They will be recognised in the consolidated financial statements

Question 11

What is Non-Controlling Interest (NCI)?

Answer 11

When a subsidiary is not owned entirely by a parent company, the shareholders outside the group are known as the non-controlling interest

Question 12

How do we account for a less than 100% Acquisition (NCI)?

Answer 12

Step 1: The financial statements are combined line by line adding together assets and liabilities
Step 2: Measurement of the subsidiary’s assets and liabilities at their fair value at date of acquisition
Step 3: The carrying amount of the parent’s investment in subsidiary and equity of subsidiary are eliminated
Step 4: NCI in the subsidiary is separately reported

Question 12

How can NCI be measured WITH Goodwill?

Answer 12

Method 1:
- The NCI’s percentage share of the net assets of the subsidiary
Method 2:
- Fair value of NCI at the date of acquisition (only required if FV is included in the question)

Question 12

What are the implications of fair value adjustments to PPE post acquisition date - SOFP?

Answer 12

Revaluation of PPE to fair value affects depreciation (therefore must be adjusted), which in turn affects:
- Consolidated PPE values
- P’s Share of S’s consolidated retained earnings
- NCI

Question 13

How are Inter-company dealings treated on the SOFP?

Answer 13

• Only transactions outside the group are reflected on consolidated financial statements
• Unrealised intra-group profits (usually in inventories) must be eliminated on consolidation
• If these unrealised intra-group profits are in a subsidiary (upstream sales), the NCI and P’s share in S’s post acquisition reserves are reduced appropriately

Question 14

How do we deal with consolidated P/L with regards to Inter-company dealings?

Answer 14

• Inter-company sales/ purchases are wholly cancelled out on consolidation, irrespective of proportion of holding in the subsidiary
• Intra-group trading income/ expenses are wholly cancelled out on consolidation
• Unrealised intra-group profits (usually in inventories) must be eliminated on consolidation
• If intra-group profits are in a subsidiary, then P’s share of S’s post acquisition reserves and NCI are reduced appropriately