Module 5: Business Combinations (Part 1) Flashcards by Oliver Casey

A g____ of companies consists of a ______ company and one or more ________ companies that are controlled by the ______ entity.

group; parent; subsidiary; parent;

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Parent individual accounts and their group accounts are presented in a single package. This comprises:
- The p_____ c_______ financial statements
- C________ s________ of f_______ p________
- C________ s________ of profit or loss and other comprehensive income
- C________ s________ of c______ in e______
- C________ s________ of c___ f____

parent company;
Consolidated statement; financial position;
Consolidated statement;
Consolidated statement; changes; equity;
Consolidated statement; cash flows;

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What is the name of:
- IAS 27
- IFRS 3

IAS 27: Separate Financial Statements
IFRS 3: Business Combinations

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What is the name of:
- IFRS 10
- IAS 28

IFRS 10: Consolidated Financial Statements
IAS 28: Investments in Associates and Joint Ventures

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A subsidiary is an e____ controlled by another e_____ (its p_____)
IFRS _ _ provides a definition of control

entity; entity; parent; 10;

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Control

An investor controls an i______ when the i_____ is e______, or has r_____, to v______ returns from its involvement with the i______ and has the ability to a_____ those r_____ through p_____ over the investee.

investee; investor; exposed; rights; variable; investee; affect; returns; power;

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Power

Existing rights that give the c______ a______ to direct the relevant activities that significantly affect the i______’s r______

current ability; investee; returns;

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Returns

The investor’s returns can be only _____, only ______, or both ______ and _______

positive; negative; positive; negative;

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Parent

An _____ that controls one or more ________

entity; subsidiaries;

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Associate

An _____ over which the i_____ has s________ i________

entity; investor; significant influence;

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Significant influence

The power to participate in the f_________ and o________ p_____ d_______ of an i______ but is not c_____ or j______ c______ of those policies

financial; operating; policy; decisions; investee; control; joint control;

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Groups may include p_________ or other non-corporate e______

partnerships; entities;

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IFRS 10 - Control

An investor controls an investee if it has all of the following:
- P_____ over the i______
- E_______ to, or v______ r______ from its involvement with the i_______; and
- The ability to use its p_____ over the i______ to affect the amount of the investor’s r_____

Power; investee;
Exposure; variable rights; investee;
power; investee; returns;

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There are circumstances where the parent owns only a minority of the v_____ p_____ of the s_______, but still has control because it has:
- Rights to a_____, r______ or r______ key management personnel who can d_____ the relevant activities.
- Rights to a______ or r______ another entity that directs the relevant activities.
- Rights to d_____ the i______ to enter into, or v___ changes to, t_________ for the benefit of the i______; and
- O_____ r______, such as those specified in a m________ c______

voting power; subsidiary;
appoint; reassign; remove; direct;
appoint; remove;
direct; investee; veto; transactions; investor;
Other rights; management contract;

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An entity’s relevant activities are those which significantly affect its p_____ or l_____ - normally its t_____, o______ and f________ activities

profits; losses; trading; operating; financial;

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If a parent has invested in a subsidiary it normally expects to obtain some kind of r_____ on its investment.
The r______ must have the potential to v___ as a result of the i______’s performance.

return;
return; vary; investee;

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IAS 28 states that if an investor holds _ _ % or more of the v____ p____ of the i______, it is presumed that the investor has s_________ i_______ over the investee, unless it can be clearly shown that this is not the case.

20; voting power; investee;
significant influence;

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The existence of significant influence is evidenced in one or more of the following ways:
- Representation on the b_____ of d_______ of the investee
- Participation in the p_____ m______ process
- M______ t_________ between i_____ and i_______
- Interchange of m________ p________; and/or
- Provision of essential t______ i__________

board; directors;
policy making;
Material transactions; investor; investee;
management personnel;
technical information;

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S_______ = C______ ( > _ _ %) = Full consolidation (IFRS _ _ )
A_______ = S________ i_________ ( _ _ % + rule) = E_____ accounting (IAS _ _ )
I_______ which is neither of the above = No s________ i_________ ( < _ _ % rule) = As for single company accounts

Subsidiary; Control; 50; 10;
Associate; Significant influence; 20; Equity; 28;
Investment; significant influence; 20;

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When a parent issues consolidated financial statements, it consolidates a__ s________, both f______ and d______

all subsidiaries; foreign; domestic;

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A parent need not present consolidated financial statements if and only if all of the following hold:
- The parent is a w_____-o_____ s_______ or it is a p_______ o______ s_______ of another entity and its other owners have been i______ about, and do not o______ to, the parent not presenting consolidated financial statements.
- Its securities are not p_____ t_____
- It is not in the process of i______ s________ in p_____ s_______ markets; and
- The u______ or i________ p_____ publishes consolidated financial statements that comply with _ _ _ _

wholly-owned subsidiary; partially owned subsidiary; informed; object; publicly traded; issuing securities; public securities; ultimate; intermediate parent;

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A parent that does not present consolidated financial statements must comply with IAS _ _ rules on s______ f_______ s__________

27; separate financial statements;

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Consolidated financial statements are prepared using the same a________ p_____ for like transactions and other events in similar circumstances
A_______ must be made where members of a group use different a_________ p_______, so that their financial statements are suitable for consolidation

accounting policies; Adjustments; accounting policies;

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A subsidiary may prepare accounts to a different reporting date from the parent if:
- Provided the gap between reporting dates is _ months or ____.
- A_______ should be made for the effects of s________ t_________ or other events that occur between that ____ and the p_____’s r_______ _____

3; less;
Adjustments; significant transactions; date; parent’s reporting date;

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The results of subsidiaries are included in consolidated financial statements from: - The d___ the p_____ obtains c______, to - The d___ the i_______ loses c_______

date; parent; control; date; investor; control;

Once an investment is no longer a subsidiary, it should be treated as: - An a________ under IAS _ _; or - As an i________ under IFRS _

associate; 28; investment; 9;

P______ c________ financial statements are no longer required in A________

Parent company; Australia;

In a parent's separate financial statements, investments in s_______ and a________ included in the consolidated financial statements are either: - A________ for at c___; or - In accordance with _ _ _ _ 9

subsidiaries; associates; Accounted; cost; IFRS;

The parent recognises d_______ from a s______ or an a______ in profit or loss when its r_____ to r_______ the d________ is established.

dividends; subsidiary; associate; right; received; dividend;

- If Harold holds a 40% shareholding in James; and - The finance director of Harold sits on James' Board of Directors; How should the investment in James be treated in the consolidated financial statements?

As an associate, using the equity method

Evidence of a parent-subsidiary relationship: - The parent has power to d____ the o______ a_______ of the entity by statute. - The parent has power to r_____ a m_______ of members of the b_____ of d_______. - The parent has power over more than _ _ % of the v_______ r_____ through agreement with other investors

direct; operating activities; remove; majority; board; directors; 50; voting rights;

IFRS 3 allows two ways of measuring the non-controlling interest at acquisition: 1) P____ g______ method 2) F___ g______ method

Partial goodwill; Full goodwill;

Partial goodwill method: - The non-controlling interest is measured as a p_______ s_____ of the f____ v_____ of the subsidiary's n__ a______

proportionate share; fair value; net assets;

Full goodwill method: - The non-controlling interest is measured at f___ v_____ (based on the m_____ v_____ of shares held by the non-controlling interest)

fair value; market value;

WEx: Non-controlling interests, P308 Study Guide

see textbook;

Q2 Eliminations P310 Study Guide

see textbook;

Q3 Non-controlling interest, P311 Study Guide

See textbook;

Goodwill arises where the c_________ t________ by the parent company is not equal to the g____ s_____ of the n__ a______ of the subsidiary at acquisition.

consideration transferred; group share; net assets;

Suppose P Co. purchases all 40,000 shares in S Co. and pays $60,000 cash to previous shareholders. The entries in P Co.'s books would be: Dr. I________ in _ Co. at c___ = $60k Cr. B___ = $60k

Investment; S; cost; Bank;

Suppose that instead of $60,000 cash for all 40,000 shares, the shareholders of S Co. agreed to accept one ordinary share in P Co for every two ordinary shares in S Co, because the market value of P Co's shares is $3 per share. P Co. issues 20,000 new shares. How would this transaction be recorded in the books of P Co? Dr. I_______ in _ Co. = 20k * $3 = $60k Cr. S_____ c______ = 20k*$3 = $60k

Investment; S; Share capital;

Goodwill arising on consolidation is sometimes called p_______ on a__________

premium; acquisition;

Any earnings retained by the s_______ prior to a_________ by the p_____ c_______ are incorporated into the e_________ process to arrive at a figure for g_______. In other words, not only S Co.'s s_____ c_______, but also its p__-a________ retained earnings, are e_________ against the asset 'i_________ in _ Co.' in the accounts of the p_____ company. The remaining balance of $12k is g______ in the consolidated statement of financial position.

subsidiary; acquisition; parent company; elimination; goodwill; share capital; pre-acquisition; eliminated; investment; S; parent; goodwill;

Any p__-a________ retained earnings of a s_______ are not aggregated with the parent's r________ e_______ in the consolidated statement of financial position. The figure of consolidated retained earnings comprises the r_______ e_______ of the p_____ plus the p___-a________ retained earnings only of s_________.

pre-acquisition; subsidiary; retained earnings; retained earnings; parent; post-acquisition; subsidiaries;

WEx: Goodwill and pre-acquisition profits, P313 Study Guide

See textbook;

WEx: Goodwill and pre-acquisition losses, P314 Study Guide

see textbook;

6.3 Goodwill and non-controlling interest at a proportion of fair value of net assets, P315 Study Guide

See textbook;

6.4 Goodwill and non-controlling interest at fair value, P315 Study Guide

See textbook;

WEx: Consolidated statement of financial position, P315 Study Guide

see textbook;

6.6 Effect of non-controlling interest at fair value P317 Study Guide

See textbook;

Goodwill arising on consolidation is subject to an a______ i___________ review

annual impairment;

Double entry to write off impairment: Dr. G_____ r_________ e________ Cr. G_______

Group retained earnings; Goodwill;

When non-controlling interest is measured at f___ v____, the goodwill in the statement of financial position includes goodwill attributable to the non-controlling interest. Dr. G____ r________ e_______ Dr. N__ - c________ i_______ Cr. G_______

fair value; Group retained earnings; Non-controlling interest; Goodwill;

If goodwill of $23,000 was impaired by 20% ($4,600) the double entry would be: (Group owns 75% of subsid.) Dr. G____ r________ e_______ ($_ _ _ _ ) Dr. N__ - c__________ i______ ($_ _ _ _ ) Cr. G_______ ($ _ _ _ _ )

Group retained earnings ($3,450) Non-controlling interest ($1,150) Goodwill ($4,600)

6.7 Impairment of goodwill (all) P317 Study Guide

See textbook;

Goodwill arising on consolidation is the difference between: - The cost of an a_________, plus - The n__ - c_________ i______ and the value of the s________ n__ a_____. - The difference can be n_______ - IFRS 3 refers to this as a b_____ p________

acquisition; non-controlling interest; subsidiary's net assets; negative; bargain purchase;

In a 'bargain purchase' situation: 1) The a______ should first re-assess the amounts at which it has measured both the c___ of the c__________ and the acquiree's i__________ n__ a_____. This exercise should identify any e______. 2) Any e_____ remaining is recognised i___________ in p____ or l____.

acquirer; cost; combination; identifiable net assets; errors; excess; immediately; profit; loss;

Deferred or contingent consideration - An acquirer measures the cost of an i_________ in a s______ as the total of the f____ v_____, at the date of a__________, of: - A_____ transferred by the a______, - L________ incurred or assumed, and - E_____ instruments issued by the a______, in exchange for control of the acquiree.

investment; subsidiary; fair values; acquisition; Assets; acquirer; Liabilities; Equity; acquirer;

Where equity instruments (eg. ordinary shares) of a quoted company form part of the c__________, the p______ p_____ at the date of exchange provides the best evidence of the instrument's f___ v_____.

consideration; published price; fair value;

6.9.2 Deferred consideration P318 Study Guide;

See textbook;

Expenses of an acquisition, such as l______ and a__________ fees, are written off to p_____ or l___ as incurred. However, IFRS 3 requires that the c____ of i_______ e_____ are d______ to the s_____ c______ account.

lawyers'; accountants'; profit; loss; costs; issuing equity; debited; share capital;

WEx: Cost of a business combination, P319 Study Guide

See textbook;

IFRS 3 requires that the following are disclosed in respect of acquired goodwill arising in a period: - A q_______ d_________ of the factors that make up the goodwill r_______; - The a_______ - d___ f___ v____ of the total c_________ transferred, split into each major class of c__________; - The amounts recognised at the acquisition date for each major class of a_____ acquired and l________ assumed; - The amount of any gain recognised on a b_____ p_______; and - The amount of the n__ - c________ i______ and the m________ b_____ used.

qualitative description; recognised; acquisition-date; fair value; consideration; consideration; assets; liabilities; bargain purchase; non-controlling interest; measurement basis;

In subsequent years, a reconciliation of the c_______ a_____ of goodwill at the beginning and end of the reporting period is required showing separately: - I________ l_____ brought forward - Additional g_____ r_________ in the period - I_________ l______ recognised in the period; - I_________ l______ carried forward; and - Any other changes in the c_______ a______ during the reporting period;

carrying amount; Impairment losses; goodwill recognised; Impairment losses; Impairment losses; carrying amount;

The preparation of a consolidated statement of financial position consists of two procedures: - Take the individual accounts of the p_____ c_______ and each s_______ and e_______ items that appear as an a_____ in one company and a l_______ or e_____ in another. - Add together all the remaining a_____ and l_______ throughout the group.

parent company; subsidiary; eliminate; asset; liability; equity; assets; liabilities;

Items requiring elimination include: - The asset 'i________ in s_______ c________' which appears in the parent company's accounts is matched with the liability (or equity) 's_____ c______ and r______' in the subsidiaries' accounts; - There may be i____ - g____ t______ within the group. For example, S may sell goods on credit to P. P would then be a r________ in the accounts of S Co, while S Co would be a p______ in the accounts of P Co.

investment; subsidiary companies; share capital; reserves; intra-group trading; receivable; payable;

WEx: Elimination, P320 Study Guide;

See textbook;

The share capital of s______ companies must always be e_________ on c_________

subsidiary; eliminated; consolidation;

The procedure for unequal company trading is to eliminate as f__ as p______. - U___________ l____ s____ will appear as a l______ of the group. - U___________ balances on i____ - g_____ accounts represent g_____ or c____ in t_____, which will appear in the consolidated statement of financial position

far; possible; Uneliminated loan stock; liability; Uneliminated; intra-group; goods; cash; transit;

Q4: Elimination, P322 Study Guide

See textbook;

Where one company in a group engages in trading with another group company, any _____ made is e_________ on c__________.

profit; eliminated; consolidation;

- In a c_________ s________ of ______ or ____, the only profits r________ should be those earned by the group in providing g_____ or s______ to o_________. - These are referred to as r________ profits

consolidated statement; profit; loss; recognised; goods; services; outsiders; realised;

Accounting treatment for eliminating profit on consolidation. Dr. G____ r________ e______ Cr. G_____ i________ (statement of financial position) with the amount of p_____ u________ by the group.

Group retained earnings; Group inventory; profit unrealised;

Non-controlling interests in unrealised intra-group profits: accounting treatment Dr. G____ r________ e________ (with P's share of unrealised profit) Dr. N__ - c__________ i_______ (with NCI share of unrealised profit) Cr. I________ (statement of financial position) (with the unrealised profit)

Group retained earnings; Non-controlling interest; Inventory;

Q6 Unrealised profits, P325 Study Guide;

see textbook;

WEx: Non-controlling interests and intra-group profits, P326 Study Guide

See textbook;

Accounting treatment: Intra-group sales of non-current assets a) Sale by parent: Dr. G____ r_______ e_______ Cr. N__ - c_______ a______ b) Sale by subsidiary: Dr. G_____ r_______ e_______ (P's share) Dr. N__ - c________ i_______ (NCI's share) Cr. N__ - c_______ a______ with the profit on disposal, less additional depreciation

Group retained earnings; Non-current assets; Group retained earnings; Non-controlling interest; Non-current assets;

WEx: Intra-group sale of non-current assets, P328 Study Guide

See textbook;

The reason for the non-controlling interest is to: - Show the e_____ in a s_______ not attributable to the p_____

equity; subsidiary; parent;

When a parent company acquires a subsidiary during its a________ p_____, the only accounting entries made at the time will be those recording the c___ of a_______ in the p______ company's books.

accounting period; cost; acquisition; parent;

12.1 example P329 Study Guide

See textbook;

Q7: Acquisition during the accounting period, P329 Study Guide

see textbook;

The statement of financial position of a s_______ at the date it is a________ may not be a guide to the f___ v____ of its n__ a_____.

subsidiary; acquired; fair value; net assets;

Two ways to adjust the book value of the subsidiary's net assets to their fair value: 1) The subsidiary incorporates n_______ r_________ in its own financial records. 2) The r________ are not i_________ in the s________'s books

necessary revaluations; revaluations; incorporated; subsidary;

Remember: - When depreciable assets are r______, there will be a corresponding alteration in the amount of depreciation c_____ and a_________

revalued; charged; accumulated;

WEx: Fair value adjustments, P331 Study Guide

see textbook;

Q8 Fair Value P333 Study Guide

see textbook;

The acquiree's identifiable assets and liabilities might include assets and liabilities n__ p_______ r________ in the a_______'s financial statements.

not previously recognised; acquiree;

An acquirer should not recognise l________ for f______ l______ or other costs expected to be incurred as a result of the b_______ c__________

liabilities; future losses; business combination;

Q9: Goodwill on consolidation with fair value adjustments, P334 Study Guide

see textbook;

Q1 P336

$600 debit

Q2-4 P336

see textbook;

Q5 p337

See textbook;

Q6 p337

see textbook

Q7 p337

see textbook;

Q8 p338

see textbook;

Q9 P338

see textbook;

Q10 p338

see textbook;

Module 5: Business Combinations (Part 1) Flashcards

(97 cards)