M6: Consolidated Flashcards
(45 cards)
What is a group for financial reporting purposes?
A group includes the parent company and all subsidiaries
How does a company recognise shareholdings in other companies in its separate financial
statements?
Recognise as one of the three below;
- Joint control (>50% OF ORDINARY SHARES)
- Significant influence (20 -50% of ORDINARY shares)
- Neither control nor significant influence (<20% ORD)
How are companies in a group structure classified into three types?
Subsidiary (>50% ORDINARY SHARES)
Associate (20 - 50% ORDINARY SHARES)
Financial asset (<20% ORDINARY SHARES)
What are consolidated financial statements and why are they prepared?
Consolidated financial statements are prepared to include the parent and its subsidiaries, represented
as a single entity.
They are prepared to exclude intercompany transactions and only transactions with third party entities.
What is the process for consolidation financial statements?
Step 1) Aggregate the parent’s and subsidiary’s financial statements on a line-by-line basis
Step 2) Prepare and post the journal entry to record the acquisition of the subsidiary
Step 3) Account for impairment of goodwill
Step 4) Allocate share of subsidiary’s historical profit/loss and other gains/losses to NCI
Step 5) Allocate share of subsidiary’s current year profit/loss and other gains/losses to NCI
Step 6) Intercompany and other adjustments
FINAL STEP) Transfer of adjustments to profit or loss to retained earnings
What is a non-controlling interest (NCI)?
Shows how much of the equity and P&L belongs to a NCI (Where the parent doesn’t own 100%)
We need to show how much of the equity belongs to NCI and how much of the P&L belongs to NCI.
Does the consolidated FS include assets and liabilities of subsidiaries?
YES. HOWEVER NOT THE SPL TRANSACTIONS.
What is goodwill and when is it recognised in the financial statements?
Goodwill is an intangible asset equal to the premium paid for a controlling shareholding in another
company.
It’s recognised in the consolidated financial statements when the parent acquires control of the subsidiary. However, it is not separately recognised in the separate financial statements of the parent.
When is goodwill calculated from and how is it calculated?
Goodwill is calculated at the acquisition date, the date at which control is obtained.
Calculation:
Fair value of consideration transferred by Parent = XX
Fair value of net assets of Subsidiary:
Share capital = XXX
Retained earnings = XXX
Revaluation surplus = XX
Goodwill = TOTAL OF ABOVE
How is a consolidated statement of financial position prepared at the date of acquisition of
a subsidiary, including the recognition of goodwill?
Dr Goodwill
Dr Share Capital
Dr Retained Earnings
Cr Investment in Subsidiary
Cr Non Controlling Interest (SOFP)
We need to recognise Goodwill and remove the SC, RE and Investment. This gives us a consol. that has just the goodwill and the NCI.
How is a non-controlling interest measured and recognised at the acquisition date
NCI is measured during the goodwill calculation to bring our fair value % + NCI to bring it to 100%
We do this because we take 100% control of the net assets (share capital and RE) so need to recognise 100% at the top to calculate goodwill correctly.
What are the different forms of consideration in a business combination?
- Deferred cash payment
- Shares issued by the acquirer (Acquirer issues shares to previous shares of the acquired company in a share for share exchange)
- Debt instrument issued by the acquirer
- Non-monetary assets transferred by the acquirer (transfer an asset to the previous shareholders)
How are share consideration and deferred and contingent consideration measured and recognised?
Share consideration - put the MV x shares into the cost of investment in a singular line.
Deferred and Contingent consideration - We add this PV amount to the cost of investment. We recognise as a liability as we need to pay this cash in >12months time.
What are the journal entries for share consideration and Deferred/contingent consideration when acquiring a company?
Share -
Dr Cost of Investment X
Cr Contingent shares to be issued X
Being contingent share consideration
Deferred/Contingent -
Dr Cost of Investment X
Cr Liability X
Being Contingent cash consideration
What are FV adjustments and how are they recognised in the calculation of goodwill and acquisition journal?
When we bring the historic cost assets from subsidiary into the Consol. We uplift these to the FV and include this into the goodwill calculation.
E.g. 100k Historic cost. 150k FV. = 50k uplift in goodwill calculation to make sure its at fair value.
What effect on the Consol statements happen in the following situations:
- Contingent liabilities in the Subsidiary (These are normally on disclosed)
- Intangible assets (Brand that cannot be recognised within Sub’s own FS)
-
We take into account Contingent liabilities and intangible assets for the value we are going to pay for the subsidiary.
How is ‘negative goodwill’ recognised?
Recognised as a BARGAIN PURCHASE when:
the consideration transferred plus the NCI is less than the FV of net assets acquired, then this results in “negative goodwill”,
Journal entry:
Dr Share Capital
Dr Retained Earnings
Cr Investment in Subsidiary
Cr Non Controlling Interest (SOFP)
Cr Bargain Purchase (SPL)
How is a goodwill impairment recognised in the consolidated SOFP?
What is journal to recognise this impairment in reporting period and before the start of the reporting period?
An additional consolidation journal entry must be posted when consolidation is performed
In the reporting period:
Dr SPL Impairment loss
Cr Goodwill
Before the start of the reporting period:
Dr Retained Earnings
Cr Goodwill
What is the difference between Goodwill being impaired IN THE REPORTING PERIOD vs BEFORE THE START OF THE REPORTING PERIOD?
We Dr SPL Impairment loss in the reporting period
We Dr Retained earnings before the start of the reporting period.
How is the NCI allocated its share of post-acquisition profits when preparing the consolidated SOFP for both:
- From Acqusition date to Start of current period
- From start of current period to Year-end date
From Acq. date to Start =
Profit:
Dr Retained earnings
Cr SOFP - NCI
Losses:
Dr SOFP NCI
Cr Retained Earnings
From start of current period to Year-end:
Profit:
Dr SPL - NCI
Cr SOFP - NCI
Losses:
Dr SOFP - NCI
Cr SPL - NCI
What are intercompany trading transactions?
Transactions between parent company and subsidiary companies
How are intercompany balances eliminated?
We Dr Trade Payables and Cr Trade Receivables
Being the cancellation of intracompany balances
This takes away the payable from one of the company and then takes away the receivable in the other = 0
Where does NCI sit within the SoFP?
Within the equity section underneath RE.
Share cap + RE + NCI = What is owed to parents shareholders/Subsidiary NCI co.
When we do a calculation for goodwill, do we include profit for the whole year when we bought the company mid-year?
NO. ONLY PROFIT PRIOR TO ACQ’N IS INCLUDED WITHIN THE GOODWILL CALCULATION IN THE NET ASSETS SECTION.
