Lec 8

Question 1

Expanding businesses require:

Answer 1

Buying a company
Build up an entire new business
Start joint ventures with third parties

Question 2

6 standards dealing with investments

Answer 2

IAS27 seperate financial statements
Ifrs10 consolidated financial statements
Ias28 investments in associates and joint ventures
IFRS 11 joint arrangements
IFRS 12 disclosure of interest in other entries
IFRS 3 business combinations

Question 3

IAS27 seperate financial statements

Answer 3

How investor presents investments when an entity elects (or is required by local regulations) to present seperate fs

Investments are accounted either at cost or in accordance with IFRS 9(equity FI)

IAS27 does not mandate who and when to produce seperate financial statements > IFRS 10 does by exempting consolidation for some entries

Question 4

Ifrs10 consolidated financial statements

Answer 4

Accounting and disclosure requirements when an entity controls another one:
Power over investeee
Exposed or has right to investees returns
Ability to affect investees returns

Fs are presented as a group of entities (single entity). The following exceptions allow firms to present seperate fs:
Parent is 100% sub of another parent that accepts not to present consolidated fs.
Equity debt of the parent not pub traded
Parent not about to issue financing instrument in public markets
Ultimate parent produces consolidated fs under ifrs

Question 5

What entities don’t need to consolidate

Answer 5

No firm in trading or is about to trade instruments publicly
Ultimate parent is issuing consolidated fs under IFRS standards
Ultimate Parent accepts other parents not to present consolidated fs

Question 6

Ias28 investments in associated and joint ventures

Answer 6

When investor has significance influence (but not control or joint control)
Sig influence > holding 20-50% + not control

Investments are accounted at equity method:
Recognition: at cost
Sub measurement: increase/decrease a carrying amount with investees ni
Dividends = reduce ultimate parent carrying amount

Question 7

Ifrs 11 joint arrangements

Answer 7

When investor has contractually agreed joint control over investee
Joint operations: rights to the asset and liabilities
Joint venture: rights to the net assets

How to distinguish between joint operations/venture? Legal form or contract between parties should say but generally:
Not sep entrust:joint operations
Seperate “vehicles entity: joint venture

Joint venture: equity method as in ias28
Joint operations: ias16 share of assets, liabilities….

Question 8

Ifrs 3 business combinations objectives

Answer 8

Objective is to provide relevant info on any combination of businesses where an acquirer obtains control of another business

Question 9

Ifrs 3 business combinations establish:

Answer 9

Ifrs 3 establishes requirements to investor / acquirer in how to:

Recognise and measure acquired A/L and any nci
Recognise and measure goodwill
Info to disclos about the operation in acquirers fs

Question 10

Business combinations: concepts

Economic entity v legal entity

Answer 10

Economic entity prepares consolidated fs and reports goodwill
Economic entity or group of combinations included a parent company and at least one fully controlled subsidiary.

Control exists: when a parent has
Power over investees
exposed or has right to knvetesses returns
Ability or affect investees returns

Question 11

Consolidation

Answer 11

Consolidated is th aggregation of the financial statements of a parent and a subsidiary
Ifrs is mandatory for consolidated fs

Eliminate intra group transaction > the purpose is to show the results and financial position of a group of companies as a single economic entity

Question 12

The actuations method

Answer 12

Ifrs 3 requires investors to apply the acquisition method when acquiring a subsidiary

Acquisition method:
Identify acquirer
Determine the acq date
Recognise and measure the identifiable asset, liabilities assumed and nci
Recognise and measure goodwill or bargain purchase

Question 13

Ifrs3 acquisition method step 1

Answer 13

Identify the acquirer:
Straightforward: the investor THat is making the purchase
Mergers: two companies merge: who is the acquirer?
One with the biggest fair value

Question 14

Ifrs3 acquisition method step 2

Answer 14

2. Determine the acq date

The date on which the acquirer obtains control Over the Target > when assets and liabilities are legally transferred

Question 15

Step 3: ifrs 3 acq method

Answer 15

3. Recognise and measure identifiable assetS, assumes liabilities, and nci if existent;

At acq date: net assets (a-l) values at fv
Remember to recognise targets internally generated intangibles (eg Porsche brand in verband acquisition)

Question 16

Step 4: acquisition method

Answer 16

Identify goodwill (or bargain purchase) 
Difference between consideration paid and fv (net assets)

Question 17

Ifrs 3 and consolidation IFRS 10

Answer 17

Consolidation after acquisition (reg in ifrs10)

1. Eliminate investment (carrying amount) in consolidated bs
2. Elimate intra Group transactions (relations of the consolidated economic entity with 3rd parties not itself )
3. Add recognised a&Zlatan from sub + parent
   Take into account potential goodwill/ bargain purchase
4. Test goodwill for impairment in future periods

Question 18

Consolidation after acquisition

Answer 18

1. Eliminate investment
2. Remove intra group transactions
3. Add recognised a&Zlatans and goodwill/bargain purchase
4. Test for goodwill

Question 19

Disclosure for business combinations, users should be able to understand:

Answer 19

Groups composition
Nci of groups activities and cash flow

Users should be able to evaluate:
If there are any restrictions on groups ability to use assets and settle liabilities

And changes and risks of groups interests in consolidated structures
Consequence of any changes in ownership of subsidiaries
Consequence of losing control over subs