Consolidated Financial Statements Flashcards
(10 cards)
Accounting for partially owned subsidiaries
Even if the parent owns <100%, we still apply…?
Why is the non-controlling interest calculated?
Sometimes you may need to work out…?
- Even if the parent owns <100%, we still apply line-by-line consolidation in full to reflect control vs. ownership
- The non-controlling interest is calculated to show this distinction between resources controlled and owned
- Sometimes you may need to work out the parent’s % holding in a subsidiary yourself
Example of group structure working
- P’s SOFP shows: Investment in S, at cost (14 million shares) is £21m
- S’s SOFP shows: Ordinary shares (50p per share) total £10m
What % of the ordinary shares of S does P hold?
S’s share capital: £10m/0.50 = 20m shares
P owns 14m/20m shares = 70%
Consolidated Statement of Financial Position Question Technique (6 steps)
- Establish group structure
- Set out net assets of the subsidiary (/ies)
- Calculate goodwill (if any)
- Calculate any accounting policy adjustments
- Calculate non-controlling interest at year-end (if any)
- Calculate retained earnings
The Mitchell Group example
Goodwill impairment
What happens to the reserves on the date of acquisition, according to the goodwill computation?
How is an impairment loss related to goodwill accounted for?
What happens to the reserves on the date of acquisition, according to the goodwill computation?
- The goodwill computation ‘freezes’ the reserves on the date of acquisition. Reserves made after that date will lead to an increase (or decrease) in the group’s reserves.
How is an impairment loss related to goodwill accounted for?
- An impairment loss related to goodwill is accounted for by reducing the goodwill figure and the group reserves by the amount of the loss.
Trading within the group
Intra-group balances may arise in groups of companies as follows: (3)
What does this mean for the single entity concept? (2)
Intra-group balances may arise in groups of companies as follows:
- One group company may lend money to another group company. The loan will be an asset for the lending company and a liability for the borrowing company
- One group company may buy goods or services on credit from another group company. The supplier company will have a trade receivable and the customer company will have a trade payable
- One group company may have a current credit account with another group company. The balance on this account is an asset for one company and a liability for the otherWhat does this mean for the single entity concept?
Elimination of Intra-group Balances
- On consolidation, we need to remove any intercompany transactions
- This is required to reflect the group as a ‘single entity’
Unrealised Profits
What is it?
What does IFRS 10 require?
2 scenarios and their treatment?
The assets shown in the financial statements of a group company may include items acquired from another group company at a price in excess of original cost. The unrealised profit must be eliminated in the group accounts.
IFRS 10 requires that profits or losses on intra-group transactions must be eliminated in full on consolidation, irrespective of whether the subsidiary companies involved are wholly-owned or partly-owned.
- If an asset is sold from parent to subsidiary, any unrealised profit on the transaction is subtracted from group retained earnings.
- It is ‘unrealised’ as this profit has not yet been earned/ realised from an external customer.
- If an asset is sold from subsidiary to parent, any unrealised profit on the transaction is allocated proportionately between group retained earnings and the non-controlling interest.
Different year end dates
What should happen in a scenario where a parent and subsidiary have differing period end dates?
What should happen if this is not possible?
Note?
- In a scenario where a parent and subsidiary have differing period end dates, the subsidiary should produce statements which align with the parent’s accounting period end date
- If this is not possible, the most recent subsidiary statements can be used as long as any significant transactions are adjusted for
- The maximum difference in period end dates is three months
Aim ltd example
Points discussed can include: (4)
Points discussed can include:
- Consolidated financial statements are required when one company has control over another to comply with regulation, i.e. IFRS 3 Business combinations and IFRS Goodwill. This gives investors and other stakeholders confidence in the financial statements.
- Consolidated financial statements present a group of companies as if it is a single entity. This shows the resources that are under control of the management and how they are performing.
- Consolidated financial statements show the economic substance of the group rather than the legal form, i.e. the assets and liabilities that are under the control of the management rather than the fact that each company is a legal entity.
- This enables stakeholders to make better decisions about the company, e.g. to invest or not or to lend money.
Intra company transactions are removed from the accounts on consolidation so it prevents manipulation of profits.
SoFP
