GROUP ACCOUNTS Flashcards Preview

Financial Accounting 2 > GROUP ACCOUNTS > Flashcards

Flashcards in GROUP ACCOUNTS Deck (46):
1

Basic Structure of business combinations:
Case 1 - Direct:
-Company A acquires the assets and liabilities of company B

Case 2 - Indirect:
-Company A acquires shares in (and control of) company B

Case 1: Presents no special accounting difficulty; there is no "group".
The assets and liabilities acquired by Company A will be accounted for at their fair value (purchase price)
Only profits generated using the acquired assets post-acquisition will be recorded in Company A's accounts.

Case 2:
Company A has an investment (in company B) that would appear in its SoFP.
There is a group; A is the parent or holding company and B is the subsidiary.

2

Why prepare group accounts?

To provide useful information to shareholders and other users of the holding enterprise's financial statements about the group as a whole.

Prevent manipulation:
-Inflating sales by selling within the group (the effect of all intra-group transactions are eliminated from group accounts)
-Better measurement of management performance.

3

When do we have a group?

CONTROL:
If one entity controls another then a group exists and consolidated accounts must be prepared. Per IRS 10:
-An investor, regardless of the nature of its involvement with an entity, shall determine whether it is the parent by assessing whether it controls the investee.
- An investor controls an investee when it 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.
-Thus, an investor control an investee if and only if the investor has all the following:
a) power over the investee
b) exposure, or rights, to variable returns from its involvement with the investee
c) the ability ot use its power over the investee to affect the amount of the investor's returns.

4

What situations might control exist?

-where a majority of voting rights are held by the investor.
-where les than a majority of the voting rights are held by the investor (but perhaps where the balance of the voting rights are widely dispersed among many different owners.
- where the investor holds some potential voting rights in the investee.

5

POTENTIAL VOTING RIGHTS

These are instruments which have the potential, if exercised or converted, to give the entity voting power.
-includes share option, convertible notes.

6

VARIABLE RETURNS

A necessary attribute of control is an expectation that the investor will be exposed to variable returns from its involvement with the investee.
(e.g. dividends)
Per IFRS 10:
Variable returns are returns that are not fixed and have the potential to vary as a result of the performance of an investee. An investor assesses whether returns from an investee are variable and how variable those returns are on the basis of the substance of the arrangement and regardless of the legal form of the returns.

7

JOINT CONTROL

Only one party can be in control of an entity before that controlling entity can be considered to be the parent entity.
If an entity "jointly controls" another entity then that entity cannot be considered to be a subsidiary, and rather than applying IFRS 10, another standard IFRS 11 Joint Arrangements - needs to be applied

8

H has 100% ownership of S and 75% ownership of S2.
S1 has 30% ownership of S1
S has 25% ownership of S1.
Describe ownership structure.

S and S2 are subsidiaries of H.
Ownership of S1:
(100% * 30%) + (75%*25%) = 48.75%
Control of S1:
30% + 25% = 55%
Hence, S1 is also a subsidiary of H

9

ACQUISITION METHOD

Per IFRS 3 (2008):
4 An entity shall account for each business combination by applying the acquisition method.

5. Applying the acquisition method requires:
a) identifying the acquirer
b) determining the acquisition date
c) recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree
d) recognising and measuring goodwill or gain from a bargain purchase.

10

IDENTIFY THE ACQUIRER

IFRS 3 para 6:
For each business combination, one of the combining entities shall be identified as the acquirer .
Per appendix A the acquirer is: the entity that obtains control of the acquiree.

11

IDENTIFYING THE ACQUISITION DATE

IFRS 3 PARA 8:
The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree

12

MEASURING COST

The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition date fair values.

13

FAIR VALUE

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

14

GOODWILL

Consideration pad by parent (price paid for investment)
+
Non-Controlling Interest
-
Fair value of subsidiaries net assets
Share Capital
Retained Earnings
=
Consolidated goodwill at acquisition date.

15

What if we don't pay cash for the subsidiary?

The company may issue new share capital to finance the purchase of the subsidiary.
When cash paid purchase would be recorded :
Dr Investment in subsidiary
Cr Bank
When shares issued:
Dr Investment in subsidiary
Cr Share Capital
Cr Share Premium

16

NEGATIVE GOODWILL

If the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with para 36 exceeds the cost of the business combination, the acquirer shall:
a) reassess the identification and measurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination
b) recognise immediately in profit or loss any excess remaining after that reassessment.

17

NON CONTROLLING INTEREST

Any shares of the subsidiary not held by the parent.

18

Two methods of measuring non controlling interest.

-At the on controlling interest's proportionate share of the acquiree's identifiable net assets (method per old standard)
-at fair value

Choice is available for each business on a case by case basis.

19

RATIONALE OF "NEW METHOD" OF CALCULATING GOODWILL

The traditional method of calculating goodwill only recognises the goodwill acquired by the parent, and is based on the parent's ownership interest rather than the goodwill controlled by the parent.

20

RATIONALE OF THE "OLD" METHOD OF CALCULATING GOODWILL

What is goodwill? Normally considered to include such items as:
-Product reputation
-Skilled workforce
-Market share
These are valid but in acquisition the may also contsin:
-Premium to acquire control
-Value of synergy within the group.

21

PROBLEMS WITH NON CONTROLLING INTEREST

Different people have different opinions:
Fair value method should be used with exception only allowed if costs outweigh benefits.
Permitting a choice impairs comparability
Fair value is consistent with the IASB's measurement principle
Diminishes the importance of convergence with FASB and sets dangerous precedent of exceptions to convergence.

ANOTHER OPINION:
-Fair value method should not be permitted
Choices reduce comparability
Goodwill is not like other assets as it cannot be separately identified and measured directly.
Parent only goodwill can be reliably measured (using actual price paid). It faithfully represents the acquisition transaction - NCI is not a part of this transaction.

22

DIFFERENCES BETWEEN FAIR VALUE AND BOOK VALUE

After combining the financial statements we need to adjust the values of the subsidiary to reflect fair value
Dr Non current assets
Cr Revaluation Reserve

23

Are group accounts prepared on the basis of ownership or control?

OWNERSHIP

24

PRE-ACQUISITION PROFITS

Made before date parent acquired control.
Represent net assets at acquisition date
Dealt with through goodwill calculation.

25

POST-ACQUISITION PROFITS

Made after date of acquisition
Include in consolidated income statement
Therefore consolidated retained earnings will include the retained earnings of the parent together with the accumulated earnings of the subsidiaries since they were acquired.

26

On what date are goodwill and NCI calculated at?

GOODWILL: Date of acquisition
NCI: DATE OF ACCOUNTS

27

IFRS 10 ON INTRA GROUP TRANSACTIONS

para B86
c) eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group

28

When is profit realised in a group?

In order for a group to realise profit, the sale must be made to a customer outside the group.

29

How to make adjustment for intra company sales of inventory?

Adjust for sale and purchases for purchase of items between group companies- income statement items.
Reduce sales and reduce purchases
Journal 1:
Dr Sales Selling price to subsidiary
Cr Cost of Sales

Journal 2:
Dr Cost of Sales (Cl. Inventory)
Cr Inventory
Profit element * % of goods remaining in stock

30

How to make adjustments for intra company dividends?

% share of subsidiary * dividends paid by subsidiary

Dr Dividends received
Cr Dividends paid (retained earnings)

31

Impairment of goodwill adjustment

% of goodwill
Dr Impairment of goodwill (IS expense)
Cr Goodwill (SoFP)

32

AN ASSOCIATE

An entity over which the investor has significant influence

33

JOINT VENTURE

a joint venture arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

34

SIGNIFICANT INFLUENCE

Is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Evidence of significant influence:
If holding is >20% of voting power assume significant influence, unless it can be shown otherwise.

35

The EQUITY METHOD

A method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post acquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's profit or loss and the investor's other comprehensive income includes its share of the investee's other comprehensive income,

36

Calculation method for associate

Cost of initial investment:
Group share of post acquisition reserves in associate:
Current general reserve - general reserve at acquision
Group share of general reserve
Current retained earnings - retained earnings at acquisition
Group share of retained earnings
Group share of reserves since acquisition (TOTAL)
Current value of associate

THEN
Only include group share of associates post tax profits
Enter into income statement

Also remove dividend recieved from associate

37

Journal entry for associate

Dr Investment in associate
Cr Group Retained earnings
Cr Group General reserve

38

GROUP ACCOUNTS STEP 1

Add the SoFP and IS of the parent and the subsidiary.NOT THE ASSOCIATE

39

GROUP ACCOUNTS STEP 2

Fair value adjustment:
Increase in value of subsidiaries non current assets:
Fair Value - Book value

1. Dr Non current assets
CR Revaluation Reserve

40

GROUP ACCOUNTS STEP 3

GOODWILL
Price paid for investment

ADD NCI (at acquisition):
Ordinary shares (% * OS)
Retained Earnings (% * RE)
Revaluation reserve (% * RR)

LESS FV of subsidiaries net assets at acquisition:
Ordinary shares
Retained Earnings
Revaluation reserve

=GOODWILL

JOURNAL 2
Dr Ordinary share capital
Dr Retained Earnings
Dr Revaluation Reserve
Dr Goodwill
Cr Investment in subsidiary
Cr NCI

41

GROUP ACCOUNTS STEP 4

NCI

Movement in non controlling interest share of subsidiary
Ordinary shares (% * (x1 -x2)
Retained Earnings (% * x1 - x2)
Revaluation Reserve (% * x1 - x2)
Movement in NCI
Journal 3:
Dr Retained Earnings
Cr NCI

42

GROUP ACCOUNTS STEP 5

INTRA COMPANY TRANSACTIONS:

inventory sold for
Mark up %
Profit element (selling price * (mark up %/ 100 + mark up %)
Remaining in accounts (%)

JOURNAL 4:
Elimination of profit on inventory
Dr Costs (amount remaining in accounts)
Cr Inventory

JOURNAL 5:
Remove sale and purchase between group companies:

Dr Sales (selling price)
Cr Cost of Sales

INTRA COMPANY DIVIDENDS:

Only need to remove group part of dividends:
Subsidiary paid x dividends
Group share of dividend = % = x * %

JOURNAL 6
Dr Dividends received
Cr Dividends paid (Retained Earnings)

43

GROUP ACCOUNTS STEP 6

NCI Share of profit

NCI is % that parent doesnt own,
Profit after tax of subsidiary = x
NCI share = x * %

44

GROUP ACCOUNTS STEP 7

Adjust retained earnings.
After making all adjustments to the IS, you MUST calculate the corresponding adjustment to profits.
ADJUSTMENTS TO IS to be reflected in RETAINED EARNINGS:
Reduce sales for inter company transaction Dr
Removal of profit on inter company trading Dr
Reduce purchases for intercompany trading Cr
Reduce dividend income 24
Reduction in profits (RE)

45

GROUP ACCOUNTS STEP 8 (associate)

Update value of investment
Cost of initial investment
Group share of retained earnings since acquisition
Investment current value

JOURNAL 7
Dr Investment in subsidiary
Cr Retained Earning

Include group share of post tax profits:

Subsidiary post tax profits
Group share (to IS)

46

When adding/subtracting debits and credits what do you have to remember/

ASSET = DEBIT
LIABILITY/EQUITY = CREDIT
REVENUE = CREDIT
EXPENSE = DEBIT