Checkpoint 1 Flashcards
(26 cards)
When does an investor control the investee?
An investor controls an investee if and only if the investor has all of the following:
- Power over the investee, i.e. the investor has the ability to direct the relevant activities
- Exposure, or rights, to variable returns from its involvement with the investee
- Ability to use its power over the investee to affect the amount of the investor’s returns
Standard Goodwill Proforma
Cost of combination (consideration)
NCI [NCI% x S’s share capital x market value]
Less: B’s net assets at acq’n date:
Share capital
Retained earnings
[Any FV adjustment]
Less: Goodwill Impairment
Standard Retained Earnings Proforma
Retained earnings at SFP date: A & B
Less: B’s Retained earnings at acquisition
Therefore, B’s post-acq’n retained earnings
Group share of B’s post-acq’n retained earnings
(100% × x)
Less: goodwill impairment losses to date [OUR share if it’s at fair value which is more likely]
How do you calculate Goodwil with the proportionate or partial method?
We add to the cost of combination a NCI based on the net assets of the subsidiary, e.g. if we only own 75% and the net assets of the subsidiary are 65,000, then the NCI is 25% x 65,000 = 16,250 which we add it back to the cost of combination
Not that examined in the exam
Standard NCI Proforma
- NCI at acquisition
+ Plus: NCI% × B’s Retained earnings post acquisition - Less: NCI share of goodwill impairment
How can a parent record its investment in a subsidiary?
A parent can record its investment in a subsidiary in its own individual company accounts at either:
1. Cost or
2. At cost initially and then “revalued” each year end to fair value or
3. Using the equity method
work on the assumption that the P records its investment at initial cost
How do we calculate a Fair Value Adjustment?
We calculate the fair value at acquisition [This goes to Goodwill calculation] and we compare it with the value at SFP date. The movement between the two will go to Retained Earnings [P&L Account]. Remeber! There is a calculation with 3 columns for this!
Intra group balances. Why these won’t reconcile as of year end? Given the fact that we need to remove the intercompany balances from consolidation.
These won’t balance because there would be in transit items.
Cash in transit
Dr Cash (Add to cash)
Cr Receivables (Deduct from receivables)
Goods in transit
Dr Inventories (Add to inventories)
Cr Payables (Add to payables)
Eliminate intra group receivables and payables
Dr Intra group payable (Deduct from payables)
Cr Intra group receivable (Deduct from receivables
Inventories sold at a profit to other group companies. How do we account for that? In both situations, when the parent sells to the subsidiary and when the subsidiary sells to be parent. As you cannot sell to yourself.
When inventories are sold at a profit by one group member to another then, on consolidation, the buying company’s inventories will be overstated to the extent of the profit still included in its year end statement of financialposition. To eliminate this “unrealised profit” from the value of inventories, we post an adjustment to the consolidated inventory figure. We call this the “provision for unrealised profit”, or “PUP” adjustment:
Sale by Parent (P) to Subsidiary (S)
Adjust in P’s books
Dr Retained earnings of P (i.e. the seller)
Cr Consolidated inventories
Sale by Subsidiary to Parent
Adjust in S’s books
Dr Retained earnings of S (i.e. the seller)
Cr Consolidated inventories
How do you calculate the PUP adjustment needed on inventories still left as of year end? [Proforma]
PUP = profit on intercompany sale × % of goods still in inventories at the year end.
What adjustment is necessary when a group depreciates PPE based on an increased carrying amount due to intra-group transactions? I.e. the subsidiary bought that asset for $150, when its carrying amount was $100 in the parent’s books.
Effectively, the group is “over-depreciating” the asset and so an adjustment is
needed to inflate the value of the asset.
These adjustments are netted off into a single journal:
Dr Expense/Retained earnings (of the selling company) X
Cr Property, plant and equipment X
Where X is the net unrealised profit, calculated as:
Original PUP on transfer Z
Less: depreciated by the year end (Y)
An alternative way of calculating X is:
Original PUP on transfer × Remaining life left at y/e / Remaining life left at date of transfer
What is a deferred consideration and how do we calculate it?
Deferred consideration – refers to any amounts payable in the future. The fair value used in the goodwill calculation is the present value of the future amount payable, using the purchaser’s cost of capital to discount.
Formula: Future payment value x 1/(1+r) at the power of n, where r is the discount rate and n is the number of years in the future.
How do you calculate the profit when you know the sales amount and the markup on cost?
Markup on cost means:
Sales = Cost + Profit = Cost x (1+Markup)
How do you record negative goodwill? [Gain on bargain]
Credit profit or loss account with the amount of the negative goodwill
How do we account for impairment in goodwill?
In goodwill, we take the total amount of the impairment and we make sure that we multiply it by the group share (i.e. 75%)
SPorL: How do you consolidate the dividends amount? [Receivable from other entity from the group]
This is a tricky question. You just remove them - so they will appear as nil in the consolidation.
SPorL: There is an additional section that splits the attributed consolidated profit. How does it look like and how do you split it?
Attributable to:
Parent
Non-controlling interest (20% × 10)
Total
First, we calculate the total NCI [in the above example is 20%] - we multiply the percentage of the NCI by the SUBSIDIARY’s profit. We know the consolidated total so we just subtract the NCI to find the profit attributed to the parent.
!!! Please remember there might be some adjustments to the profit of subsidiary, i.e. the company that makes the sale that we would need to remove from the profit [e.g. depreciation, impairment]
In the SPorL, when a parent company sells goods to a subsidiary within the same group, what accounting adjustments must be considered for the group’s financial statements, especially concerning the sales transactions and inventory holdings at year-end?
- For any sale between parent and subsidiary, regardless of who sells to whom:
Dr Group Revenue
Cr Group Cost of Sales - Dr Cost of Sales [PUP]
Cr Inventories (SFP) [PUP - only if inventories are still in stock at YE]
Disposal of a subsidiary. How do you consolidate?
The results of the subsidiary and the profit attributable to non-controlling interest must be time apportioned in the group statement of profit or loss up to the date of disposal
Profit or loss on disposal in the parent company accounts [Proforma]
Sale proceeds X
[OG Cost] Carrying amount of investment (held at cost or fair value) (X)
Total: Profit or loss on disposal
Profit or loss on disposal in the group accounts [Proforma]
Sale proceeds X
Net assets at disposal X
Goodwill at disposal X
Less: NCI at disposal (X)
Total: Profit or loss on disposal
If you know the sale price and the margin percentage, how do you calculate the cost?
cost = sale price x (1 - margin)
How do we account for an associate in the investor’s separate financial statements?
We treat the investment in the associate in the parent company’s accounts in exactly the same way as we treated the investment in the subsidiary. In this exam, the investment in associate is almost always recorded at cost. So we will just show the figure of the investment at cost.
How do we account for an associate in the consolidated financial statements?
An investment in an associate should be accounted for in the consolidated financial statements using the equity method i.e. the cost of the associate plus or minus any post-acquisition profits or losses less any impairment.
Cost of associate X
Share of post-acquisition profit X/(X)
Less: impairment losses on associate to date (X)
Less: share of dividend received (X)
“Investment in Associate”
In the P&L, we will show Group % of Associate’s Profit After Tax for the year
