Introduction to Consolidation Flashcards
Consolidated Financial Statements
What is a group (when does it exist, what does it consist of)?
How is control defined?
- A group exists where one enterprise (the parent) controls, either directly or indirectly, another enterprise (the subsidiary).
- A group consists of a parent and its subsidiaries.
Subsidiary = an entity that is controlled by another entity. - Control as defined per IFRS 3 Business Combinations is
- the power to govern the financial and operating policies of another entity so as to obtain benefit from its activities.
The single entity concept
The part of the subsidiary’s net assets not owned by the parent is known as the non-controlling interest (NCI).
IFRS 10 Definition of control
IFRS 10 Consolidated Financial Statements states that an investor controls an investee if, and only if, it has all three of the following:
extra note
- Power over the investee
- Exposure, or rights, to variable returns from its involvement with the investee; and
- The ability to use power over the investee to affect the amount of the investors variable return
Control is assumed if the parent has more > 50% of the voting rights. This is usually assumed if they own more than 50% of the shares.
Other indicators of control
What powers (4)
If less than 50% of shares are owned may still have control:
- Agreement with other investors gives power.
- Power over financial and operating policies by an agreement.
- Power to appoint or remove majority of board members.
- Power to cast the majority of votes at a board meeting.
Usefulness of group financial statements to stakeholders
Why do we prepare group statements?
What happens if the company gains control?
Why do we need to prepare one set of financial statements for all companies?
Why do we prepare group statements?
- When a company buys shares in another company, it records the cost as an investment.
What happens if the company gains control?
- The company becomes the parent, and the acquired company becomes a subsidiary.
- The financial statements must reflect the economic substance of their relationship.
Why do we need to prepare one set of financial statements for all companies?
- Group financial statements are prepared based on the idea that the parent and subsidiaries function as a single entity.
The single entity concept
Economic substance?
Legal form?
Economic substance - Results and net assets consolidated to present group as a single entity
Legal form - Each company is separate legal entity
What comprises group financial statements?
Goodwill per IFRS 3
Definition?
Examples (3)
What is it calculated as?
What is negative goodwill?
“An asset representing the future economic benefit arising from other assets acquired in a business combination that are not individually identified or separately recognised.”
Examples of these other ‘assets’:
- customer lists,
- internal branding,
- reputation
Goodwill is calculated as the amount by which the consideration paid exceeds the fair value of the share of net assets purchased
Negative goodwill – INCOME in the Statement of Profit or Loss [“Gain on bargain purchase”] credit
What do we mean by ‘fair values’? (3/0,3,1)
Fair values
- The fair value of the consideration transferred is set against the fair value of the net assets at the date of acquisition
- Fair value of consideration:
- Cash
- Shares
- A combination
- Fair value of net assets:
- The subsidiary’s assets less liabilities
Acquisition costs
They must be? Because they are not part of?
What happens to different types of acquisition costs?
- Acquisition costs must be expensed
- Not part of the consideration paid and not included in goodwill working
- External costs e.g. professional and legal fees are expensed to proft or loss
- Share issue costs/costs of arranging financial liabilities are deducted from equity/financial liability
IFRS 3 Business Combinations
How are positive and negative goodwill recognised?
What has to be done for both and why?
- Goodwill is usually positive but can be negative
- Positive goodwill
- Recognised as an intangible asset with no amortisation
- Annual impairment review in accordance with IAS 36 impairment of assets
- Negative goodwill
- Review of fair value of net assets to ensure no over or understatement of assets or liabilities.
- Recognise immediately in Statement of Profit or Loss under IFRS 3
Example
Goodwill – accounting treatment
Where is it recognised?
What happens?
- Recognised in CSoFP as intangible non-current asset
- Not amortised in CSoPL but annual impairment review carried out
impairment loss will be recognised in CSoPL
The effect of consolidation – Purchase of a company
Companies have?
What does the investing company not acquire and who does this stay with?
- Companies have their own legal identity
- Investing company does not acquire legal title to target company’s net assets
- Legal title remains with target company
Example – purchase of a wholly owned subsidiary
- Investment in shares of Shilling Ltd in Pound Ltd book’s has been replaced by underlying net assets of Shilling Ltd
- Parent only
- Profits of Shilling Ltd are combined with Pound Ltd in consol a/cs from date of acquisition. Post-acquisition profits are earned under parent’s control
Example – purchase of a wholly owned subsidiary (picture)
What are the mechanics of consolidation in financial accounting?
How are profits combined in consolidation?
What happens to post-acquisition profits and retained earnings? (2)
What are the mechanics of consolidation in financial accounting?
- Investment in the subsidiary (S) shown in the parent company’s (P) statement of financial position (SoFP) is replaced in the consolidated statement of financial position (CSFP) by the line-by-line addition of S’s net assets to P’s to reflect group resources.
How are profits combined in consolidation?
- Profits of S are combined with those of P from the date of acquisition.
What happens to post-acquisition profits and retained earnings?
- Post-acquisition profits are earned under P’s control.
- Retained earnings include S’s post-acquisition retained earnings.
What are the adjustments needed and the consolidated TB
IFRS 3 Business Combinations
What is Non-Controlling Interest?
How are assets and liabilities treated in consolidated accounts?
Who is accountable for the use of assets and liabilities?
What are the key responsibilities of the parent company’s directors? (2)
What is Non-Controlling Interest?
- Share of subsidiary not owned by parent
How are assets and liabilities treated in consolidated accounts?
- All assets and liabilities controlled are included in the consolidated accounts
Who is accountable for the use of assets and liabilities?
- The directors of the parent company
What are the key responsibilities of the parent company’s directors?
- Ensuring a true and fair view
- Evaluating management performance
Non-controlling interest in consolidated statement of financial position
What are the 2 methods
Method 1 - Proportionate share - ACC2005
Share of net assets of subsidiary at reporting date.
Method 2 – Fair value
Share of net assets of subsidiary PLUS goodwill apportioned to the non-controlling interest.
Control and ownership - example
Prepare the consolidated statement of financial position of Armstrong Ltd as at 31 January 2023.
Control and ownership – example #2
In the year ended 31 January 2024 the two
companies continued to trade. Their financial statements were as follows:
Control and ownership – example #3
What are other reserves in a subsidiary? (3)
What does IFRS 10 require for accounting policies in a group? (3)
What are other reserves in a subsidiary?
- Other reserves include more than just retained earnings.
- Each reserve should be treated separately.
- The group’s share of any post-acquisition movement in all reserves must be recognized in the consolidated statement of financial position (CSOFP).
What does IFRS 10 require for accounting policies in a group?
- Uniform accounting policies must be applied across the group.
- The group is treated as a single entity.
- The parent company’s accounting policies take precedence.
