Topic 2 Group Accounting - Basic Groups(2).ppt

1、School of Accounting Dr Ling Mei Cong,Corporate Reporting 545,Topic 2 Group Accounting- Basic Groups Pre-reading Kaplan Ch1,CORPORATE REPORTING 545,2,Do not remove this noticeCOMMONWEALTH OF AUSTRALIACOPYRIGHT REGULATIONS 1969WARNING,This material has been copied and communicated to you by or on beh

2、alf of Curtin University pursuant to Part VA of the Copyright Act 1968 (the Act) The material in this communication may be subject to copyright under the Act. Any further copying or communication of this material by you may be the subject of copyright protection under the Act.,CORPORATE REPORTING 54

3、5,3,Learning Objectives,Apply the method of accounting for business combinations (IFRS 10; IFRS 3) Apply and discuss the criteria used to identify a subsidiary Apply the principles relating to the cost of a business combination Apply the recognition and measurement criteria for identifiable acquired

4、 assets and liabilities and goodwill Determine appropriate procedures to be used in preparing group financial statements (IFRS 10),CORPORATE REPORTING 545,4,ACCA Exam Focus,There will always be a group accounting question as Q1 on this paper Basic principles will enable you to get easy marks in the

5、question before attempting any of the tricker parts,CORPORATE REPORTING 545,5,Consolidated Financial Statements,Consolidated financial statements are the financial statements of a group presented as those of a single economic entity (IFRS 10) Parent: an entity that has one or more subsidiaries. Subs

6、idiary: an entity which is controlled by another entity. Control: existing rights that give the current ability to direct the relevant activities. An investor controls an investee if and only if the investor has all the following (IFRS 10, Para 6): Power over the investee Exposure, or rights to, var

7、iable returns The ability to use power Control is often presumed to exist when the parent owns more than 50% of voting power of an entity,CORPORATE REPORTING 545,6,Who must prepare CFS?,A parent shall present consolidated financial statements in which it consolidates its investments in subsidiaries

8、(IFRS 10, Para 4). A parent need not present consolidated financial statements if and only if: The parent is itself a wholly owned subsidiary. Parents debt or equity instruments are not traded in a public market. The parent does not file its financial reports with a securities commission. The ultima

9、te or intermediate parent of the parent produces publicly available CFSs.,CORPORATE REPORTING 545,7,Particular situations,CORPORATE REPORTING 545,8,Invalid reasons!: Subsidiary undertakes different activities Subsidiary has made losses or has significant liabilities Director seeks to disguise the tr

10、ue ownership of the subsidiary Director seeks to disguise the true size and extent of the subsidiary,While IFRS 10 is not explicit, it adopts entity concept implicitly. Under entity concept Group consists of the assets and liabilities of parent and all the assets and liabilities of the subsidiary (i

11、es) Non-controlling Interest is classified as an equity holder Transactions between group entities are adjusted in full. They are not affected by the % ownership interest,CORPORATE REPORTING 545,9,Concepts of Consolidation Entity Concept,Goodwill and fair value adjustments IFRS 3,IFRS 3 Business Com

12、binations requires that on acquisition both the cost of investment and the net assets acquired are recorded at their fair value. Goodwill is measured as the difference between: the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any NCI; and the

13、net fair value of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3) at acquisition date.,CORPORATE REPORTING 545,10,Fair value adjustments IFRS 3 cond,The purchase consideration is: The amount of cash paid; plus The fair value of other purchase conside

14、ration given by the acquirer; plus Include contingent consideration even if is not deemed to be probable of payment at the date of acquisition. Note: Exclude directly related acquisition cost such as professional fees (legal, accounting, valuation etc.), which now must be expensed If payment of cash

15、 is deferred, it should be discounted to present value using a rate which the acquirer could obtain similar borrowing If the acquirer issues shares, fair value is normally the market price at the date of acquisition.,CORPORATE REPORTING 545,11,Fair value adjustments IFRS 3 cond,Fair value of net ass

16、ets of acquiree Contingent liabilities that are present obligations arising from past events and can be measured reliably are recognised at fair value at acquisition date A provision for future operating losses cannot be created as this is a post-acquisition item. Similarly, restructuring costs are

17、only recognised to the extent that a liability actually exists at the date of acquisition Acquired intangible assets must always be recognised and measured,CORPORATE REPORTING 545,12,IFRS 10 defines non-controlling interest (NCI) as “equity in a subsidiary not attributable, directly or indirectly, t

18、o a parent”. NCI is presented and identified within equity separately from the parents equity The NCI is entitled to a share of the consolidated equity.,Nature and calculation of NCI,CORPORATE REPORTING 545,13,Impact depends on the treatment of goodwill. Two options: Full (fair value) basis Proporti

19、onate (net) basis,Effects of NCI on the consolidation process,CORPORATE REPORTING 545,14,Example,Brussels acquired 82% of Madrid on 31 December 2011. At acquisition, the statement of financial position of Madrid showed issued equity capital of $3,000,0000 and retained earnings of $3,255,000. Include

20、d in this total is freehold land with a book value of $400,000 (market value of $958,000), a brand with a nil book value (market value $500,000), plant and machinery with a book value of $1,120,000 and a market value of $890,000. The fair value of all other assets and liabilities is approximately eq

21、ual to book value. The directors of Brussels intend to close down one of the divisions of Madrid and wish to provide for operating losses up to the date of closure, which are forecast as $729,000. An investment in plant and machinery will be required to bring the remaining production line of Madrid

22、to date. This will amount to $405,000 in the next 12 months. The consideration comprised $4,000,000 cash, $1,500,000 shares with a nominal value of $1.00 and fair value of $1.50 each as well as further cash consideration of $400,000 to be paid one year after acquisition. The discount rate is 10%. Fa

23、ir value of NCI of Madrid at acquisition is $1,300,000.,CORPORATE REPORTING 545,15,Example- cond,Requirement: calculate the goodwill arising using both the proportionate and full basis.,CORPORATE REPORTING 545,16,Proportionate basis,CORPORATE REPORTING 545,17,W1 Net assets at acquisition,CORPORATE R

24、EPORTING 545,18,Full (fair value) basis,CORPORATE REPORTING 545,19,Consolidation methods,Methods of preparing consolidated financial statements: Worksheet approach (easiest for learning purposes) Direct method (most efficient),CORPORATE REPORTING 545,20,Consolidation techniques,To produce consolidat

25、ed statements of financial position and comprehensive income, you should follow the standard workings step by step Intragroup transactions The full effect of intragroup transactions are adjusted on consolidation regardless of the ownership interest held by the parent Dividends are an exception,CORPO

26、RATE REPORTING 545,21,Statement of financial position standard workings,CORPORATE REPORTING 545,22,W1 Group structure,To sort out the structure of the group You may also want to include the date of acquisition for each subsidiary or associate,CORPORATE REPORTING 545,23,W2 Net assets of each subsidia

27、ry and associate,At acquisition At reporting date $000 $000 Equity capital x x Share premium x x Retained earnings x x Other components of equity x x Fair value adjustments x x x (to W3) x (to W4),CORPORATE REPORTING 545,24,W3 Goodwill,$000 Purchase consideration (i.e. fair value paid by parent) X N

28、CI value at acquisition* X X Less: fair value of all identifiable net assets at acquisition (per net assets working) (X) Goodwill at acquisition X Less: impairment to date* (X) Goodwill to consolidated statement of financial position X * if full (fair value) basis adopted, NCI value = FV of NCI at d

29、ate of acquisition this will normally be given in a question. *if proportionate basis adopted, NCI value = NCI% of net assets at acquisition (per net assets working). * Goodwill is subject to annual impairment review. The impairment is allocated between the Group and NCI.,CORPORATE REPORTING 545,25,

30、W4 Non-controlling interest,NCI value at acquisition* (per W3) x NCI % of post-acquisition retained earnings x Less: NCI% of unrealised profit in inventory/NCA (x) Less: NCI% of goodwill impairment (full basis* only) (x) NCI to consolidated statement of financial position x * The choice of accountin

31、g for NCI should be consistent with the goodwill.,CORPORATE REPORTING 545,26,W5 Group retained earnings,$000 Parent entity (100%) X For each subsidiary: group share of post acquisition retained earnings (W2) X Less goodwill impairment (W3) (X) Less group share of unrealised profits (if any) (X) Total group retained earnings X,CORPORATE REPORTING 545,27,Example,Petras and Signe,CORPORATE REPORTING 545,28,Statement of comprehensive income standard workings,CORPORATE REPORTING 545,29,W4 Consolidation schedule,If the subsidiary has been ac