Consolidated Statements

Question 1

In the context of consolidated financial statements, explain the principle of how and why the following are accounted for:
(i) Goodwill arising on acquisition
(ii) Non-controlling interest

Answer 1

(i) Goodwill arising on acquisition:
- On acquisition of a subsidiary, parent usually pays more than just the value of the net assets (a premium) — this extra amount is called goodwill arising on acquisition
- Represents the anticipation of future economic benefits from assets that can’t be identified/separately recognised e.g brand loyalty, value
- Fulfills definition of an asset given by the Conceptual Framework and is recognised as a NCA in the CSoFP
- Not amortised but is tested for impairment each year – complex and subjective

(ii) Non-controlling interest:
- Shareholders who own equity shares in a subsidiary but don’t have control. Their shareholding is usually less than 50%
- CS show assets, liabilities, income and expenses that the group controls, but the NCI’s legal ownership of the subsidiary needs to be reflected
- Their share of the subsidiary’s profits is shown in the split of profits, and their ownership in the subsidiary is reflected in the equity section in the SoFP - Measured using FV method or proportion of net assets

Question 2

Explain how subsidiaries and associates are accounted for in consolidated financial statements, and discuss why they are treated differently

Answer 2

• Subsidiary is an entity that the investor controls
• Acquisition method of accounting:
  Consolidate 100% line by line and reflect NCI for the element not owned
  Intra group balances would be cancelled since it’s a single entity
  Goodwill also gets separately calculated (give calculation)
• An associate is an entity where the investor has significant influence (between 20-50% of equity shares)
• Use equity method of accounting:
  Investment in associate is represented by 1 line in CoSFP
  Calculated as cost of shares plus any post acquisition profits earnt since acquisition date
  CP&Lac 1 line showing the share of associates profit

Question 3

Discuss the two alternative methods for measuring non-controlling interest in the calculation of goodwill

Answer 3

• FV Method:
  Measures NCI, and therefore also goodwill, including the NCI’s share of the goodwill in the subsidiary
  Result in NCI and goodwill being higher
  Market value approach based on the market value of the shares
• Proportion of Net Assets:
  Includes only the fair value of subsidiary’s identifiable net assets on acquisition, and therefore excludes this inherent goodwill

Question 4

Explain the principle of ‘substance over form’ in respect of consolidation

Answer 4

• Company uses commercial substance over strict legal form
• Legally companies still exist as two separate companies but the substance is they have to prepare their consolidated accounts as if 1 single entity