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Exams:
Date:
o Week 7- Mid-Term Test
Content:
o Weeks 1-4.
o A
Assessment Type:
o Closed Book.
Duration:
o 1 Hour.
Weighting:
o 30%
Location:
o In Person (Location TBC).
Requirements:
o Prepare a consolidated statement of financial position (20 Marks).
o Written Question (10 Marks).
Week 13-15 Final Exam
Weighting:
o 70%.
Duration:
o 2 Hours.
Date:
o TBC.
Assessment Type:
o Closed Book.
Consists of:
, o Section A (30 Marks):
Prepare a consolidated statement of financial position and a
consolidated income statement.
o Section B (40 Marks):
Consists of three 20-mark questions, mainly written questions on
IFRS’s regulatory framework.
Required to do two of them.
Week 1
Introduction to Consolidated Accounts
Self-Study Chapter 20 (Elliot and Elliot):
Accounting for Groups at the Date of Acquisition
Preparing Consolidated Accounts for a Wholly Owned Subsidiary
When a company acquires the shares of another company it records the cost as an
investment. If the shares acquired give it control over the acquired company, then
the acquirer is referred to as a parent or holding company and the acquired
company as a subsidiary.
The shareholders of the parent company want to know how well the directors of
their company have managed all of the net assets which they control. This
information is provided by the preparation of consolidated accounts, which
aggregates the assets and liabilities of both companies. In doing this it replaces the
Investment in subsidiary in the parent’s accounts with the fair value of the assets
and liabilities of the subsidiary.
The parent may well have to pay a premium over and above the fair value of the net
assets in order to obtain control- this is referred to as goodwill.
IFRS 10 Consolidated Financial Statements
IFRS Consolidated Financial Statements defines a group and how to determine control and
also requires the use of fair values for a subsidiary.
IFRS 10 Definition of a Group:
o One of the IASB’s main objectives has been to develop a consistent basis for
determining when a company consolidates the financial statements of
another company to prepare group accounts. For this, it has stated that
control should be the determining factor.
o Under IFRS Consolidated Financial Statements, 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.
IFRS 10 Definition of Control:
o Under IFRS 10 an investor is a parent when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee.
o An investor controls and investee if and only if the investor satisfies all of the
following requirements:
, Exposure, or rights, to variable returns whether positive or negative
from its involvement with the investee;
Power over the investee whereby the investor has existing rights that
give it the ability to direct those activities that significantly affect the
investee’s returns.
The ability to use its power over the investee to affect the amount of
the investor’s returns.
Scope of Consolidation:
o The Group financial statements comprise x and all the companies over which
x is able to exercise control as defined by IFRS 10.
What if the shares acquired are less than 50%?
o Even in this situation, it may still be possible to identify an acquirer when one
of the combining enterprises, as a result of the business combination,
acquires:
(A) power over more than one-half of the voting rights of the other
enterprise by virtue of an agreement with other investors;
(B) power to govern the financial and operating policies of the other
enterprise under a statute or an agreement;
(C) power to appoint or remove the majority of the members of the
board of directors; or
(D) power to cast the majority of votes at a meeting of the board of
directors.
What if the parent holds options or potential voting rights?
o IFRS 10 provides that if those options give the entity control, then this could
result in an entity being consolidated. For example, if the investee’s
management aways followed the wishes of the option holder, this may be
viewed as having control.
o The following is an extract from the BMW 2015 Annual Report”
Subsidiaries are those enterprises which, either directly or indirectly,
are under the uniform control of the management of BMWAG or in
which BMWAG, either directly or indirectly – holds the majority of the
voting rights – has the right to appoint or remove the majority of the
members of the Board of Management or equivalent governing body,
and in which BMWAG is at the same time (directly or indirectly) a
shareholder – has control (directly or indirectly - over another
enterprise on the basis of a control agreement or a provision in the
statutes of that enterprise.
What if a company has significant voting rights in comparison to other shareholders?
o If an investor is so powerful through their voting rights compared to others,
for example one investor has 40% while the other 60% is widely dispersed
between unconnected investors, this can also give control and result in the
investee being consolidated. Both of these areas will require directors to
exercise judgement in determining whether control exists.
Requirement to Use Fair Values:
o When one company acquires a controlling interest in another and the
combination is treated as an acquisition, the assets and liabilities of the
, subsidiary are recorded in the acquirer’s consolidated statement of financial
position at their fair value.
o On consolidation, if the acquirer has acquired less then 100% of the ordinary
shares, any differences (positive or negative) between the fair values of the
net assets and their book value are recognised in full and the parent and non-
controlling interests are credited or debited with their respective percentage
interests.
Fair Values
The fair value of the consideration paid to acquire an investment in a subsidiary is set
against the fair value of the identifiable net assets in the subsidiary at the date of
acquisition.
Fair Value of the Consideration:
o Consideration may be in the form of shares in the acquiring company. If these
are quoted, then the fair value is the market price of the shares. If the shares
are not quoted on an exchange, then they would need to be valued.
o Consideration may also be in cash or a combination of shares and cash. If the
cash element is deferred for more than a year the consideration is discounted
to its present value.
The difference is reported as an accrued finance charge.
o Under IFRS 3, acquisition costs (such as legal, accounting and valuation fees)
must be expensed and cannot be capitalised.
o If there is contingent consideration it will be accounted for as a provision
under IAS 37 and, if it falls to be paid more than one year later, it will be
necessary to review the amount and treat any changes as an error in
accordance with IAS 8 Accounting Policies, Accounting Estimates and Errors.
Fair Value of the Net Assets:
o The starting point is the book values in the subsidiary’s statement of financial
position. These are required to be re-stated at fair values when incorporating
into the consolidated accounts. First, each asset and liability is reviewed.
For example, land may be revalued to market value, raw materials to
replacement price, finished goods to selling price less estimated
profit, loans may be revalued if there has been a change in interest
rates that impacts on their value.
o In addition to the assets and liabilities in the accounts, it is necessary to
estimate a fair value for any contingent liabilities – if unable to value then
they are disclosed.
o If the investment is greater than the share of net assets then the difference is
regarded as the purchase of goodwill.
Illustration Where there is a Wholly Owned Subsidiary
The fair value of the parent company’s investment in a subsidiary is set against the fair value
of the identifiable net assets in the subsidiary at the date of acquisition. If the investment is
greater than the share of the net assets then the difference is regarded as the purchase of
goodwill.
Step 1:
o First, we calculate the goodwill.
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