consolidation part 1
DESCRIPTION
CONSOLIDATION PART 1. JOIN KHALID AZIZ. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870 - PowerPoint PPT PresentationTRANSCRIPT
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CONSOLIDATION
PART 1
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JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
• CONTACT:• 0322-3385752• 0312-2302870• R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.
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JOIN KHALID AZIZ
• FRESH CLASSES• ICAP module B & D
•FINANCIAL ACCOUNTING & COST ACCOUNTING
• INDIVIDUAL & GROUPS
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JOIN KHALID AZIZ
•NEW CLASSES OF MA-ECONOMICS-EXTERNAL
•PREVIOUS..MICRO AND STATISTICS
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A B C
1.
Acquires control of B’s net assets
Liquidates
2.
Acquires control of B’s net assets
Continues, holding shares in A
Type 1 and 2 are both ACQUISITIONS
Type 1 and 2 are both ACQUISITIONS
3.
Liquidates Liquidates A new entity (C) is formed
In Type 3, A and B have MERGED
In Type 3, A and B have MERGED
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Apart from these, a business combination may take another form
When 1 company acquires the shares of another company, rather than its net assets
Over the next 3 weeks, we will concentrate on business combinations involving acquisition of shares
Over the next 3 weeks, we will concentrate on business combinations involving acquisition of shares
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Learning Objectives
You will be able to1. Define an Economic Entity2. Explain the concept of Control3. Identify factors that indicate
Control4. Differentiate between pre & post
acquisition equity5. Explain the purpose of Elimination
Entries
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1.a Economic Entity
An economic entity (or group) includes
a controlling entity &
1 or more controlled entities,
operating together
to achieve objectives consistent with those of the controlling entity
Learning Objective 1Learning Objective 1
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1.a Economic Entity
Vodafone FijiTelecom Fiji
ATH
Example
Amalgamated Telecom Holdings Limited (ATH)
Domestic Telecommunications
Domestic Telecommunications
Cellular Mobile Telecommunications
Cellular Mobile Telecommunications
TelecommunicationsTelecommunications
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1.b Economic Entity
An economic entity constitutes a reporting entity.
Therefore,
1. An additional set of accounts must be prepared
Known as Consolidated Statements2. Using a Consolidation Worksheet
Not in the books of an individual company
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1.b Economic Entity
Statements of Telecom
Statements of FINTEL
Statements of Vodafone
Statements of Connect
Statements of Fiji Directories
Consolidated Statements of
ATH
Consolidation Worksheet
Consolidation Worksheet
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2. Control
What is meant by control?
In the context of consolidation
Learning Objective 2Learning Objective 2
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2.a Control Control exists, where one entity is able to influence decision-making of another
entity both financial & operating
to enable the controlled entity to operate with it in achieving its own objectives
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2.a Control Decision Rules
If one entity owns more than 50% of the shares in another other entity
Control is presumed to exist
Control may be Direct or Indirect
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2.b Direct & Indirect Control
Vodafone (51%)Telecom (100%)
ATH
FNPF (58.2%)
Direct Control (Parent) of ATH
Indirect Control of Telecom & FINTEL
Direct Control (Parent) of ATH
Indirect Control of Telecom & FINTEL
Direct Control (Parent) of Telecom & Vodafone Direct Control (Parent) of Telecom & Vodafone
Subsidiary of ATHSubsidiary of ATH Subsidiary of ATHSubsidiary of ATH
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3. Factors indicating Control
Can control exist when an entity owns less than 50% of the shares in another entity?
Yes, if certain factors are met
Learning Objective 3Learning Objective 3
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3. Factors indicating Control Does the entity have the capacity to
1. Dominate composition of Board of Directors?
2. Appoint or remove all or a majority of the Directors?
3. Cast the majority of votes at a meeting of the Board?
4. Control the casting of a majority of votes at a meeting of the Board?
Can you see why control is linked to Share Ownership?
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3. Factors indicating Control
Example
ATH does not own any shares in FINTEL51% owned by Fiji Government49% by Cable & Wireless
However, ATH has rights to manage Government’s shares
As such, it is able to cast a majority of votes
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JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
• CONTACT:• 0322-3385752• 0312-2302870• R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.
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4. Pre & Post Acquisition Equity
We are talking about equity of the subsidiary.At any time, equity can be divided into1. Pre-acquisition Equity2. Post-acquisition Equity
Learning Objective 4Learning Objective 4
What is the difference between them?
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4. Pre & Post acquisition Equity
Subsidiary’s Post-acquisition
Equity
Subsidiary’s Pre-acquisition
Equity
Date of Acquisition
Existing Capital,
Reserves & Retained Profits
Additional Capital,
Reserves & Retained Profits
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4. Pre & Post Acquisition Equity
The distinction is important because
1. Cost of acquisition is compared with pre-acquisition equity to determine goodwill
2. Treatment of dividends differs for pre & post acquisition equity
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Example 1On 1 April 2006, Tonga Ltd acquired all the shares of Nuku
Ltd for a cash payment of $225,000
On that date, the equity of Nuku Ltd consisted of
Share Capital $150,000 Reserves $ 30,000 Retained Profits $ 20,000
RequiredRecord the combination in the books of Tonga
Ltd
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Business Combinations
Calculate
Fair Value of Identifiable Net Assets Acquired
(FV of INA)
Calculate
Cost of Acquisition (COA)
Calculate
Goodwill or Negative Goodwill
Step 1
Step 2
Step 3
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Calculate Fair Valueof Identifiable Net Assets
Since A-L = OE
Fair value of identifiable net assets
Can also be calculated from the equity of the acquiree
Step 1
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Calculate Fair Valueof Identifiable Net Assets
Step 1
Equity Item AmountEquity Item Amount
Share Capital 150,000
Reserves 30,000
Retained Profits 20,000
Share Capital 150,000
Reserves 30,000
Retained Profits 20,000
Total $200,000Total $200,000
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Calculate Cost of Acquisition
Step 2
Immediate cash payment of $225,000
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Calculate GoodwillStep 3
Cost of Acquisition 225,000Cost of Acquisition 225,000
Less Fair Value of INA 200,000Less Fair Value of INA 200,000
Goodwill $ 25,000Goodwill $ 25,000
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Acquirer’s Entries at Date of Acquisition
Tonga Limited receives shares
Dr Shares in Nuku Limited 225,000Cr Cash 225,000
Goodwill to be recognised as part of elimination entry
Step 4
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Assumptions This week, we will work with the following
assumptions Consolidation occurs at time of
acquisition Only 1 Subsidiary in the Group Parent owns 100% of shares in
Subsidiary
We will introduce more advanced issues later
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5. Elimination Entries
What is an elimination entry?
Learning Objective 5Learning Objective 5
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IllustrationConsider a family of 3
Father (employed as a manager)Weekly take-home pay of $500
Mother (sells food parcels from home)Collects an average of $100/week Receives $150/week from husband for
housekeeping
1 child, Mere (full-time student)Receives $25/week as pocket-money from her
parentsReceives $15/week as allowance from her
sponsor
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Illustration
Family Member AmountFamily Member Amount
Father 500Father 500
Mother 100 + 150 = 250Mother 100 + 150 = 250
Mere 25 + 15 = 40Mere 25 + 15 = 40
Calculate how much each family member receives in a week
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Illustration
Family Member AmountFamily Member Amount
Father 500Father 500
Mother 100 + 150 – 150 = 100Mother 100 + 150 – 150 = 100
Mere 25 + 15 – 25 = 15Mere 25 + 15 – 25 = 15
Calculate how much the family receives in a week
Total $615Total $615
We must exclude or eliminate transactions within the family
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JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
• CONTACT:• 0322-3385752• 0312-2302870• R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.